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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, 2003
- --------------------------------------------------------------------------------
[ ] 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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ].
As of November 10, 2003, the latest practicable date, there were 13,109,655
shares of common stock, $.0001 par value, outstanding.
STEVEN MADDEN, LTD.
FORM 10-Q
QUARTERLY REPORT
September 30, 2003
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
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk......... 24
ITEM 4. Controls and Procedures............................................ 24
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings.................................................. 25
ITEM 6. Exhibits and Reports on Form 8K.................................... 26
Signature.......................................................... 27
2
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands)
September 30, December 31, September 30,
2003 2002 2002
------------ ------------ ------------
(Unaudited) (Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 34,180 $ 56,713 $ 44,896
Accounts receivable, net of allowances of $452, $497 and $421 6,747 3,039 2,974
Due from factor, net of allowance of $1,909, $1,718 and $1,658 32,256 22,373 33,799
Inventories 22,983 19,445 24,827
Marketable securities - available for sale 7,969 500 5,013
Prepaid expenses and other current assets 3,776 1,651 839
Deferred taxes 1,633 1,633 1,223
------------ ------------ ------------
Total current assets 109,544 105,354 113,571
Property and equipment, net 18,403 17,073 16,020
Deferred taxes 3,699 3,699 3,019
Deposits and other 366 298 297
Marketable securities - available for sale 36,440 22,010 9,650
Cost in excess of fair value of net assets acquired, net of
accumulated amortization of $714 2,066 2,066 2,066
------------ ------------ ------------
$ 170,518 $ 150,500 $ 144,623
============ ============ ============
LIABILITIES
Current liabilities:
Current portion of capital lease obligations $ 3 $ 14 $ 16
Accounts payable 8,524 9,044 8,740
Accrued expenses 5,928 7,134 8,570
Accrued incentive compensation 951 2,701 2,328
------------ ------------ ------------
Total current liabilities 15,406 18,893 19,654
Deferred rent 1,714 1,532 1,483
------------ ------------ ------------
17,120 20,425 21,137
------------ ------------ ------------
Commitments, contingencies and other
STOCKHOLDERS' EQUITY
Preferred stock - $.0001 par value, 5,000 shares authorized;
none issued; Series A Junior Participating preferred stock -
$.0001 par value, 60 shares authorized; none issued
Common stock - $.0001 par value, 60,000 shares authorized;
14,355, 14,016 and 13,962 shares issued; 13,110, 12,771 and
12,717 outstanding 1 1 1
Additional paid-in capital 76,359 70,683 68,771
Retained earnings 88,624 70,722 66,504
Unearned compensation (3,690) (3,476) (3,748)
Other comprehensive gain (loss):
Unrealized gain (loss) on marketable securities 95 136 (51)
Treasury stock - 1,245 shares at cost (7,991) (7,991) (7,991)
------------ ------------ ------------
153,398 130,075 123,486
------------ ------------ ------------
$ 170,518 $ 150,500 $ 144,623
============ ============ ============
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,
------------------- -------------------
2003 2002 2003 2002
-------- -------- -------- --------
Net sales:
Wholesale $ 65,601 $ 70,742 $186,528 $184,319
Retail 23,062 22,276 66,577 63,421
-------- -------- -------- --------
88,663 93,018 253,105 247,740
-------- -------- -------- --------
Cost of sales:
Wholesale 42,252 46,403 123,023 122,539
Retail 10,815 10,360 31,213 29,421
-------- -------- -------- --------
53,067 56,763 154,236 151,960
-------- -------- -------- --------
Gross profit:
Wholesale 23,349 24,339 63,505 61,780
Retail 12,247 11,916 35,364 34,000
-------- -------- -------- --------
35,596 36,255 98,869 95,780
-------- -------- -------- --------
Commission and licensing fee income 2,205 1,819 6,040 4,637
Operating expenses 26,094 27,572 75,324 74,106
-------- -------- -------- --------
Income from operations 11,707 10,502 29,585 26,311
Interest income, net 426 348 1,218 770
-------- -------- -------- --------
Income before provision for income taxes 12,133 10,850 30,803 27,081
Provision for income taxes 5,060 4,582 12,901 11,458
-------- -------- -------- --------
Net income $ 7,073 $ 6,268 $ 17,902 $ 15,623
======== ======== ======== ========
Basic income per share $ .54 $ .49 $ 1.38 $ 1.25
======== ======== ======== ========
Diluted income per share $ .50 $ .46 $ 1.27 $ 1.14
======== ======== ======== ========
Basic weighted average common shares
outstanding 13,073 12,706 12,930 12,544
Effect of dilutive securities - options 1,194 1,057 1,131 1,134
-------- -------- -------- --------
Diluted weighted average common shares
outstanding 14,267 13,763 14,061 13,678
======== ======== ======== ========
See notes to financial statements
4
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
Nine Months Ended
September 30,
--------------------
2003 2002
-------- --------
Cash flows from operating activities:
Net income $ 17,902 $ 15,623
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 3,666 2,624
Non-cash compensation 2,195 1,617
Provision for bad debts 146 435
Deferred rent expense 182 184
Realized gain on marketable securities (56) (37)
Changes in:
Accounts receivable (3,663) (1,066)
Due from factor (10,074) (11,287)
Inventories (3,538) (9,009)
Prepaid expenses and deposits (2,193) 7,860
Accounts payable and other accrued expenses (3,476) 1,491
-------- --------
Net cash provided by operating activities 1,091 8,435
-------- --------
Cash flows from investing activities:
Purchase of property and equipment (4,996) (2,937)
Purchases of marketable securities (41,840) (16,718)
Sale/redemption of marketable securities 19,956 2,041
-------- --------
Net cash used in investing activities (26,880) (17,614)
-------- --------
Cash flows from financing activities:
Proceeds from options and warrants exercised 3,267 3,937
Repayment of lease obligations (11) (41)
-------- --------
Net cash provided by financing activities 3,256 3,896
-------- --------
Net decrease in cash and cash equivalents (22,533) (5,283)
Cash and cash equivalents - beginning of period 56,713 50,179
-------- --------
Cash and cash equivalents - end of period $ 34,180 $ 44,896
======== ========
See notes to financial statements
5
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Financial Statements
September 30, 2003
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 (the "SEC"). Accordingly, they do not
include all of the information and footnotes required by accounting principles
generally accepted in the United States of America 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, 2003 and 2002, and the
results of its 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, 2003 and 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, 2002 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 five 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 is recognized upon shipment. Allowances for estimated
discounts and returns are recognized when sales are recorded. Commission revenue
is recognized when title of product transfers to the customer. 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 periods presented. 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, 2003
NOTE F - STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation," encourages the use of the fair value based method of
accounting for stock-based employee compensation. Alternatively, SFAS No. 123
allows entities to continue to apply the intrinsic value method prescribed by
Accounting Principles Board ("APB") Opinion 25, "Accounting for Stock Issued to
Employees," and related interpretations and to provide pro forma disclosures of
net income (loss) and earnings (loss) per share, as if the fair value based
method of accounting had been applied to employee awards. The Company has
elected to continue to apply the provisions of APB Opinion 25 and to provide the
disclosures required by SFAS No. 123 and SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure," which was released in
December 2002 as an amendment of SFAS No. 123. The following table illustrates
the effect on net income and earnings per share if the fair value based method
had been applied to all awards.
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
2003 2002 2003 2002
-------- -------- -------- --------
Reported net income $ 7,073 $ 6,268 $ 17,902 $ 15,623
Stock-based employee compensation included
in reported net income, net of tax 149 784 314 820
Stock-based employee compensation
determined under the fair value based
method, net of tax (748) (802) (2,002) (1,770)
-------- -------- -------- --------
Pro forma net income $ 6,474 $ 6,250 $ 16,214 $ 14,673
======== ======== ======== ========
Basic income per share:
As reported $ 0.54 $ 0.49 $ 1.38 $ 1.25
Pro forma $ 0.50 $ 0.49 $ 1.25 $ 1.17
Diluted income per share:
As reported $ 0.50 $ 0.46 $ 1.27 $ 1.14
Pro forma $ 0.45 $ 0.45 $ 1.15 $ 1.07
NOTE G - COMMITMENTS, CONTINGENCIES AND OTHER
[1] Class action litigation:
Between June and August 2000, several class action lawsuits were
commenced in the United States District Court for the Eastern District
of New York against the Company, Steven Madden personally, and, in some
of the actions, the Company's Chief Financial Officer and its then
President.
A settlement in principle of these actions has been reached, subject to
execution of definitive settlement documentation, notices to class
members, a hearing and approval by the District Court. The tentative
settlement is within the limits of the Company's insurance.
7
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Financial Statements
September 30, 2003
NOTE G - COMMITMENTS, CONTINGENCIES AND OTHER (CONTINUED)
[2] Shareholder derivative actions:
On or about September 26, 2000, a 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.
An agreement in principle has been reached to resolve all claims in
this action, subject to 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.
On or about November 28, 2001, a shareholder derivative complaint was
filed in the United States District Court for the Eastern District of
New York, captioned Herrera v. Karson, et al. Named as defendants
therein are the Company and certain of the Company's present and/or
former officers and directors. An agreement in principle has been
reached to resolve all claims in this action, subject to 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.
[3] Other actions:
(a) The Company and certain of the Company's present and /or
former officers and 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 ("SAFECO"), 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 shareholder class action and derivative
cases referred to above. Since that time, the parties have
agreed to a resolution of Safeco's claims, the implementation
of which is conditioned upon judicial approval of the
settlements of the shareholder class action and derivative
claims discussed above.
(b) 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 Steven Madden Retail,
Inc. This action was dismissed on August 27, 2003.
(c) On or about June 6, 2003, an action was commenced in the
United States District Court for the Central District of
California, captioned Global Brand Marketing, Inc. v. Steve
Madden LTD., Case Number 03-4029. The complaint seeks
injunctive relief and unspecified monetary damages for
infringement of two separate patents. The Company believes it
has substantial defenses to the claims asserted in the
lawsuit. The parties are currently involved in settlement
negotiations.
In connection with the above litigations, the Company has accrued $900,000.
Management, based on advice of counsel, believes such provision is adequate in
the circumstances.
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 and the Company's Report on Form
10-K for 2002.
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:
Selected Financial Information
------------------------------
Nine Months Ended
-----------------
September 30
------------
($ in thousands)
2003 2002
---------------- ----------------
Consolidated:
- ------------
Net Sales $253,105 100% $247,740 100%
Cost of Sales 154,236 61 151,960 61
Gross Profit 98,869 39 95,780 39
Other Operating Income 6,040 3 4,637 2
Operating Expenses 75,324 30 74,106 30
Income from Operations 29,585 12 26,311 11
Interest and Other Income Net 1,218 0 770 0
Income Before Income Taxes 30,803 12 27,081 11
Net Income 17,902 7 15,623 6
9
Selected Financial Information
------------------------------
Nine Months Ended
-----------------
September 30
------------
($ in thousands)
2003 2002
---------------- ----------------
By Segment
WHOLESALE DIVISIONS:
- -------------------
Steven Madden, Ltd. (Madden Women's):
- ------------------------------------
Net Sales $ 91,449 100% $ 87,539 100%
Cost of Sales 62,631 68 59,954 68
Gross Profit 28,818 32 27,585 32
Other Operating Income 2,024 2 1,207 1
Operating Expenses 22,271 24 21,557 25
Income from Operations 8,571 10 7,235 8
l.e.i. Footwear:
- ---------------
Net Sales $ 49,371 100% $ 41,824 100%
Cost of Sales 30,638 62 26,648 64
Gross Profit 18,733 38 15,176 36
Operating Expenses 10,428 21 10,304 24
Income from Operations 8,305 17 4,872 12
Madden Men's:
- ------------
Net Sales $ 28,065 100% $ 35,462 100%
Cost of Sales 18,206 65 22,796 64
Gross Profit 9,859 35 12,666 36
Operating Expenses 6,205 22 7,441 21
Income from Operations 3,654 13 5,225 15
Diva Acquisition Corp (Steven):
- ------------------------------
Net Sales $ 8,695 100% $ 8,572 100%
Cost of Sales 5,735 66 6,230 73
Gross Profit 2,960 34 2,342 27
Operating Expenses 2,185 25 1,946 23
Income from Operations 775 9 396 4
Stevies Inc.:
- ------------
Net Sales $ 8,656 100% $ 10,922 100%
Cost of Sales 5,626 65 6,911 63
Gross Profit 3,030 35 4,011 37
Other Operating Income 11 0 71 0
Operating Expenses 1,814 21 2,431 22
Income from Operations 1,227 14 1,651 15
Unionbay Men's Footwear:
- -----------------------
Net Sales $ 292 100% -- --
Cost of Sales 187 64 -- --
Gross Profit 105 36 -- --
Operating Expenses 325 111 -- --
Loss from Operations (220) (75) -- --
10
Selected Financial Information
------------------------------
Nine Months Ended
-----------------
September 30
------------
($ in thousands)
2003 2002
---------------- ----------------
By Segment (Continued)
RETAIL DIVISION:
- ---------------
Steven Madden Retail Inc.:
- -------------------------
Net Sales $ 66,577 100% $ 63,421 100%
Cost of Sales 31,213 47 29,421 46
Gross Profit 35,364 53 34,000 54
Operating Expenses 30,371 46 28,720 45
Income from Operations 4,993 7 5,280 9
Number of Stores 82 77
ADESSO MADDEN INC.:
- ------------------
(FIRST COST)
Other Operating Revenue $ 4,005 100% $ 3,359 100%
Operating Expenses 1,725 43 1,707 51
Income from Operations 2,280 57 1,652 49
11
Selected Financial Information
------------------------------
Three Months Ended
------------------
September 30
------------
($ in thousands)
2003 2002
---------------- ----------------
Consolidated:
- ------------
Net Sales $ 88,663 100% $ 93,018 100%
Cost of Sales 53,067 60 56,763 61
Gross Profit 35,596 40 36,255 39
Other Operating Income 2,205 2 1,819 2
Operating Expenses 26,094 29 27,572 30
Income from Operations 11,707 13 10,502 11
Interest and Other Income Net 426 1 348 0
Income Before Income Taxes 12,133 14 10,850 11
Net Income 7,073 8 6,268 7
By Segment:
WHOLESALE DIVISIONS:
- -------------------
Steven Madden, Ltd. (Madden Women's):
- ------------------------------------
Net Sales $ 32,243 100% $ 33,326 100%
Cost of Sales 21,655 67 22,168 67
Gross Profit 10,588 33 11,158 33
Other Operating Income 772 3 547 2
Operating Expenses 7,942 25 8,207 25
Income from Operations 3,418 11 3,498 10
l.e.i. Footwear:
- ---------------
Net Sales $ 17,550 100% $ 15,267 100%
Cost of Sales 10,690 61 9,416 62
Gross Profit 6,860 39 5,851 38
Operating Expenses 3,545 20 3,860 25
Income from Operations 3,315 19 1,991 13
Madden Mens:
- -----------
Net Sales $ 8,249 100% $ 14,848 100%
Cost of sales 5,316 64 9,559 64
Gross Profit 2,933 36 5,289 36
Operating Expenses 1,822 22 3,335 23
Income from Operations 1,111 14 1,954 13
Diva Acquisition Corp. (Steven):
- -------------------------------
Net Sales $ 4,365 100% $ 3,387 100%
Cost of Sales 2,577 59 2,763 82
Gross Profit 1,788 41 624 18
Operating Expenses 961 22 648 19
Income (Loss) from Operations 827 19 (24) (1)
Stevies Inc.:
- ------------
Net Sales $ 2,902 100% $ 3,914 100%
Cost of Sales 1,827 63 2,497 64
Gross Profit 1,075 37 1,417 36
Other Operating Income 2 0 33 1
Operating Expenses 674 23 939 24
Income from Operations 403 14 511 13
12
Selected Financial Information
------------------------------
Three Months Ended
------------------
September 30
-------------
($ in thousands)
2003 2002
---------------- ----------------
By Segment (Continued)
WHOLESALE DIVISIONS (Continued):
- -------------------------------
Unionbay Men's Footwear:
- -----------------------
Net Sales $ 292 100% -- --
Cost of Sales 187 64 -- --
Gross Profit 105 36 -- --
Operating Expenses 325 111 -- --
Loss from Operations (220) (75) -- --
RETAIL DIVISION:
- ---------------
Steven Madden Retail Inc.:
- -------------------------
Net Sales $ 23,062 100% $ 22,276 100%
Cost of Sales 10,815 47 10,360 47
Gross Profit 12,247 53 11,916 53
Operating Expenses 10,290 45 10,008 45
Income from Operations 1,957 8 1,908 8
Number of Stores 82 77
ADESSO MADDEN INC.:
- ------------------
(FIRST COST)
Other Operating Revenue $ 1,431 100% $ 1,239 100%
Operating Expenses 535 37 574 46
Income from Operations 896 63 665 54
RESULTS OF OPERATIONS
($ in thousands)
Nine Months Ended September 30, 2003 vs. Nine Months Ended September 30, 2002
Consolidated:
- ------------
Total net sales for the nine-month period ended September 30, 2003 increased by
$5,365 or 2% to $253,105 as compared to $247,740 from the comparable period of
2002. The increase in sales was due to a $7,547 or 18% increase in sales from
the l.e.i. Wholesale Division ("l.e.i."), a $3,910 or 4% gain in the Company's
Steve Madden Women's Wholesale Division ("Madden Women's"), and sales gains of
$3,156 or 5% in the Retail Division. Sales gains can be attributed to greater
acceptance of the Company's product offerings, increased recognition of the
Company's brands and the addition of five retail stores during the nine-month
period ended September 30, 2003. Gross profit as a percentage of sales remained
the same as last year at 39%.
Operating expenses increased to $75,324 in 2003 from $74,106 in 2002. Total
operating expenses, as a percentage of sales remained at 30% in 2003, the same
as 2002. The increase in
13
dollars resulted from costs associated with growth in the Company's overall
business as well as an increase in the provision for management incentives.
Income from operations for 2003 was $29,585, an increase of $3,274 or 12% from
$26,311 in 2002. Net income increased by 15% to $17,902 in 2003 from $15,623 in
2002. The increase in income resulted from a growth in sales and higher interest
as well as royalty income.
Wholesale Divisions:
- -------------------
Steven Madden Ltd. (Madden Women's, l.e.i. Footwear and Madden Men's):
Sales from Madden Women's accounted for $91,449 or 36%, and $87,539 or 35%, of
total sales in 2003 and 2002, respectively. The increase in sales was driven by
first quarter sales of key styles including the Hi-Jo boot and wood bottom
sandals. Gross profit as a percentage of sales remained the same as last year at
32%. Operating expenses increased to $22,271 in 2003 from $21,557 in 2002 due to
higher costs associated with the growth in Madden Women's as well as an increase
in management incentives. Income from operations for Madden Women's increased by
18% to $8,571 in 2003 from $7,235 in 2002.
Sales from l.e.i. accounted for $49,371 or 20%, and $41,824 or 17%, of total
sales in 2003 and 2002, respectively. The increase in sales was primarily due to
the addition of doors with existing accounts such as Kohl's, Sears and Famous
Footwear. Gross profit as a percentage of sales increased to 38% in 2003 from
36% in 2002 primarily due to changes in product mix and improved inventory
management. The increase in sales and gross margin caused the income from
operations for l.e.i. to increase by 70% to $8,305 in 2003 from $4,872 in 2002.
Sales from Madden Men's Wholesale Division ("Madden Men's") accounted for
$28,065 or 11%, and $35,462 or 14%, of total sales in 2003 and 2002,
respectively. The sales decrease resulted from three primary factors. First, the
sandal selling time was reduced significantly because of the late start to the
spring season. Second, there was a strong downturn in the casual business, the
largest category of Madden Men's. Trends shifted more toward dressy and dress
casual classifications and finally, the department stores and specialty channels
carrying Madden Men's footwear experienced lighter men's traffic through the
second and third quarters of 2003. Gross profit as a percentage of sales
decreased to 35% in 2003 from 36% in 2002 primarily due to an increase in
markdown allowances resulting from higher levels of promotional activities and
general softness in the economy in 2003. Operating expenses decreased to $6,205
in 2003 from $7,441 in 2002 due to decreases in selling and selling related
expenses. Income from operations for Madden Men's was $3,654 in 2003 compared to
$5,225 in 2002.
Diva Acquisition Corp. ("Steven"):
Sales from Steven (the Steven brand was introduced in the third quarter of
2002), accounted for $8,695 or 3%, and $8,572 or 3%, of total sales in 2003 and
2002, respectively. Management has repositioned the David Aaron business under
the Steven brand by exiting certain under-performing doors and replacing them
with several new retailers, including Dillards and Macy's West. Management
believes these new customers are qualified and equipped to showcase and service
the new Steven collections. Gross profit as a percentage of sales increased to
34% in 2003 from 27% in 2002, primarily due to the result of cost effective
sourcing and improved inventory management. Operating expenses increased to
$2,185 in 2003 from $1,946 in 2002 due to increases in selling, marketing and
advertising expenses. Income from operations for
14
Steven increased by 96% to $775 in 2003 from $396 in 2002, primarily caused by
improved gross margin.
Stevies Inc. ("Stevies"):
Sales from Stevies accounted for $8,656 or 3%, and $10,922 or 4%, of total sales
in 2003 and 2002, respectively. The decrease in sales was partly anticipated
when Meldisco, the lease operator of the Federated Department Store children's
departments and a division of Footstar, experienced temporary credit issues
relating to its K-Mart business. This led to shipping delays and some
cancellations. Also, the children's back-to-school season began later than in
past years, diminishing reorder demand. Additionally, the decrease in sales was
due to the decision by Kids R Us to shift its resources to private label
business. Gross profit as a percentage of sales decreased to 35% in 2003 from
37% in 2002, primarily due to an increase in markdown allowances resulting from
higher levels of promotional activities in response to the general softness in
the economy in 2003. Operating expenses decreased to $1,814 in 2003 from $2,431
in 2002 due to decreases in selling and related expenses. Income from operations
for Stevies was $1,227 in 2003 compared to $1,651 in 2002.
Unionbay Men's Footwear ("Unionbay"):
Unionbay young men's, the Company's new license contributed net sales of $292 in
its first shipping season. The product placed consists primarily of test
quantities from which a more meaningful assortment is anticipated in 2004.
Retail Division:
- ---------------
Sales from the Retail Division accounted for $66,577 or 26% and $63,421 or 26%
of total sales in 2003 and 2002, respectively. This increase in sales was due to
the increase in the number of Steve Madden retail stores. During the first nine
months of 2003, the Company opened five (5) new retail stores and closed three
(3) of its under-performing stores. As of September 30, 2003, there were 82
retail stores compared to 77 retail stores as of September 30, 2002. Comparable
store sales for the nine-month period ended September 30, 2003 decreased 4% over
the same period of 2002. This decrease was primarily due to unseasonably cool
and rainy weather in the northeast during the second quarter. Gross profit as a
percentage of sales decreased to 53% in 2003 from 54% in 2002, primarily due to
higher levels of promotional activities by the Company in response to the
general softness in the economy in 2003. Operating expenses for the Retail
Division were $30,371 in 2003 and $28,720 in 2002. This increase was due to
additional stores opened during this period. Income from operations for the
Retail Division was $4,993 in 2003 compared to $5,280 in 2002.
Adesso-Madden Division:
- ----------------------
Adesso-Madden, Inc. ("Adesso-Madden") generated commission revenues of $4,005
for the nine-month period ended September 30, 2003, which represents a 19%
increase over commission revenues of $3,359 for the same period in 2002. This
increase was primarily due to the growth in accounts such as Wal-Mart, Target,
JC Penney and Mervyn's. Income from operations for Adesso-Madden was $2,280 in
2003 compared to $1,652 in 2002.
15
Three months Ended September 30, 2003 vs. Three Months Ended September 30, 2002
Consolidated:
- ------------
Total net sales for the three-month period ended September 30 2003 decreased by
5% to $88,663 from $93,018 for the comparable period of 2002. The decrease in
sales was primarily due to a decline in net sales from the Men's Wholesale
Division and the sustained promotional environment. The Company maintained a
substantial portion of the sales and market share gains that it achieved last
year. In the third quarter of 2002, the Company generated a 32% increase in
total net sales over the previous year.
Total gross profit as a percentage of sales increased to 40% in 2003 from 39% in
2002. The increase was attributable to lower sales deductions this year as well
as cost effective sourcing and improved inventory management. Additionally, the
Retail Division, which has a higher gross margin percentage, represented 26% of
total net sales in 2003 compared to 24% in 2002.
Operating expenses decreased to $26,094 in 2003 from $27,572 in 2002. Total
operating expenses as a percentage of sales decreased to 29% in 2003 from 30% in
2002. During the third quarter, the Company was able to manage its expense
structure in keeping with its top line performance, effectively leveraging its
infrastructure while (i) continuing to sustain its business, (ii) nurturing its
newest brands, Unionbay (for young men) and Candie's (for women and children),
and (iii) taking steps to effect the conversion of the David Aaron business into
Steven for women.
Income from operations for 2003 was $11,707, an increase of $1,205 or 11% from
$10,502 in 2002. Net income increased by 13% to $7,073 in 2003 from $6,268 in
2002. The increase in income resulted from the growth in interest and other
income as well as ability to control expenses in line with the reduced sales.
Wholesale Divisions:
- -------------------
Steven Madden Ltd. (Madden Women's, l.e.i. Footwear and Madden Men's):
Sales from Madden Women's accounted for $32,243 or 36%, and $33,326 or 36%, of
total sales in 2003 and 2002, respectively. The decrease in sales resulted from
disappointing early sell-throughs, particularly in the euro-casual
classification. Furthermore, customers favored the sneaker category over the
casual brown shoe category during this year's back-to-school selling season.
Sneaker sales at retail of $49.99 and below pressured higher priced categories,
including many Steve Madden offerings. Gross profit as a percentage of sales
remained the same as last year at 33%. Operating expenses decreased to $7,942 in
2003 from $8,207 in 2002 due to decreases in selling and selling related
expenses. Income from operations for Madden Women's decreased to $3,418 in 2003
from $3,498 in 2002.
Sales from l.e.i. accounted for $17,550 or 20%, and $15,267 or 16%, of total
sales in 2003 and 2002, respectively. The increase in sales was principally due
to additional doors with retailers, such as Kohl's and Saks Group. The increase
in sales was also driven by the sales of key styles including lower profile
closed casuals and tailored looks. Gross profit as a percentage of sales
increased to 39% in 2003 from 38% in 2002 primarily due to changes in product
mix and improved inventory management. Operating expenses decreased to $3,545 in
2003 from $3,860
16
in 2002 due to the Company successfully leveraging its infrastructure while
continuing to grow its business. Income from operations for l.e.i. was $3,315 in
2003 compared to $1,991 in 2002.
Sales from Madden Men's accounted for $8,249 or 9%, and $14,848 or 16%, of total
sales in 2003 and 2002, respectively. The sales decrease resulted from two
primary factors. First, the downturn in sell-throughs at retail in the young
men's fashion casual and sport casual business created substantial inventory and
margin challenges to the Company's wholesale shipments. Second, there was a
strong downturn in the casual business, the largest category of Madden Men's, as
competitive looks appeared in the casual space at every price point just as
consumer demand and trends shifted more toward dressy and dress casual
classifications. Gross profit as a percentage of sales remained the same as last
year at 36%. Operating expenses decreased to $1,822 in 2003 from $3,335 in 2002,
due to decreases in selling and related expenses. Income from operations for
Madden Men's was $1,111 in 2003 compared to $1,954 in 2002.
Diva Acquisition Corp. ("Steven"):
Sales from Steven, accounted for $4,365 or 5%, and $3,387 or 4%, of total sales
in 2003 and 2002, respectively. Sales increased by 29% in 2003 from 2002. The
increase in sales was principally due to the addition of new retail doors,
including Dillards and Macy's West. Gross profit as a percentage of sales
increased to 41% in 2003 from 18% in 2002, primarily resulted from cost
effective sourcing and improved inventory management. Operating expenses
increased to $961 in 2003 from $648 in 2002 due to increases in payroll and
payroll related expenses. Income from operations for Steven was $827 in 2003
compared to a loss from operations of $24 in 2002.
Stevies Inc. ("Stevies"):
Sales from Stevies accounted for $2,902 or 3%, and $3,914 or 4%, of total sales
in 2003 and 2002, respectively. The decrease in sales was due to a late-breaking
back-to-school season, which resulted in diminished reorder demand. Also, the
decrease in sales was partly anticipated when Meldisco, the lease operator of
the Federated Department Store children's departments and a division of
Footstar, experienced temporary credit issues relating to its K-Mart business.
This led to shipping delays and some cancellations. Gross profit as a percentage
of sales increased to 37% in 2003 from 36% in 2002, primarily due to improved
inventory management. Operating expenses decreased to $674 in 2003 from $939 in
2002 due to decreases in selling and related expenses. Income from operations
for Stevies was $403 in 2003 compared to $511 in 2002.
Unionbay Men's Footwear ("Unionbay"):
Unionbay young men's, the Company's new license contributed net sales of $292 in
its first shipping season. The product placed consists primarily of test
quantities from which a more meaningful assortment is anticipated in 2004.
Retail Division:
- ---------------
Sales from the Retail Division accounted for $23,062 or 26% and $22,276 or 24%
of total sales in 2003 and 2002, respectively. During the third quarter of 2003,
the Company opened one (1) new retail store and closed one (1) of its
under-performing stores. As of September 30, 2003, there were 82 retail stores
compared to 77 retail stores as of September 30, 2002. Comparable store sales
for the three-month period ended September 30, 2003 decreased 5% over the same
17
period of 2002. This decrease in sales was partially caused by the popularity of
sneakers. These offerings were available at $49.99 and below, pressuring the
higher priced casual closed shoe category. Gross profit as a percentage of sales
remained at 53% in 2003, the same as in 2002. Operating expenses for the Retail
Division were $10,290 in 2003 and $10,008 in 2002. This increase was due to
higher costs associated with the opening of the five (5) additional stores since
last year. Income from operations for the Retail Division was $1,957 in 2003
compared to $1,908 in 2002.
Adesso-Madden Division:
- ----------------------
Adesso-Madden, Inc. generated commission revenues of $1,431 for the three-month
period ended September 30, 2003, which represents a 15% increase over commission
revenues of $1,239 for the same period in 2002. This increase was primarily
result of the growth in discount retail accounts. Income from operations for
Adesso-Madden was $896 in 2003 compared to $665 in 2002.
LICENSE AGREEMENTS
Revenues from licensing increased to $2,035 in the first nine months 2003 from
$1,278 in the first nine months of 2002. As of September 30, 2003, the Company
had six license partners covering product categories of its Steve Madden brand.
The product categories include handbags, sunglasses, eyewear, belts, hosiery and
outerwear.
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $94,138 at September 30, 2003 compared to
$86,461 at December 31, 2002, an increase of $7,677, primarily contributed by
the net income. The Company believes that based upon its current financial
position and available cash and marketable securities, it will meet all of its
financial commitments and operating needs for at least the next twelve months.
Under the terms of a factoring agreement with Capital Factors, Inc., the Company
is eligible 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 runs through December 31, 2004. 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 them. Under the agreement, the
Company has a credit line of $15,000. The Company did not use any portion of the
credit line during the first nine months of 2003.
As of September 30, 2003 the Company had invested approximately $44,400 in
marketable securities consisting of corporate bonds, U.S. Treasury notes and
government asset-backed securities.
OPERATING ACTIVITIES
During the nine-month period ended September 30, 2003, net cash provided by
operating activities was $1,091. Uses of cash caused primarily by an increase in
factored accounts receivable of $10,074, an increase in inventories of $3,538,
an increase in prepaid expenses of $2,193 and decrease in accounts payable and
other accrued expenses of 3,476. Sources of cash were provided principally by
net income of $17,902.
18
The Company leases office, showroom, warehouse and retail facilities under
non-cancelable operating leases with terms expiring at various times through
2013. Future minimum annual lease payments under non-cancelable operating leases
consist of the following at September 30:
2003 $ 8,977
2004 9,482
2005 9,030
2006 9,280
2007 8,848
Thereafter 24,471
---------
$ 70,088
=========
At September 30, 2003, the Company had un-negotiated open letters of credit for
the purchase of imported merchandise of approximately $8,530.
The Company has employment agreements with three key executives and its Creative
and Design Chief, which provide for the payment of compensation aggregating
approximately $1,800 as of September 30, 2003. In addition, such employment
agreements provide for incentive compensation based on various performance
criteria as well as other benefits.
Significant portions of the Company's products are produced at overseas
locations, the majority of which are located in Brazil, China, Italy and Spain.
The Company has not entered into any long-term manufacturing or supply 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. 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, 2003, the Company invested
$41,840 in marketable securities and received $19,956 from maturities and sales
of these securities. In addition, the Company incurred capital expenditures of
$4,996 in leasehold improvements to its corporate office space, the addition of
five (5) new stores and the computer systems upgrades.
FINANCING ACTIVITIES
During the nine-month period ended September 30, 2003, the Company received
$3,267 from 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 resulting in lower sales and increased markdown allowances for
customers which could have a material adverse effect on the Company's business,
financial condition and results of operations.
19
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 the future, retailers in the United States and in foreign
markets may consolidate, undergo restructurings or reorganizations, or realign
their affiliations, any of which could decrease the number of stores that carry
the Company's products or increase the ownership concentration within the retail
industry. While such changes in the retail industry to date have not had a
material adverse effect on the Company's business or financial condition, there
can be no assurance as to the future effect of any such changes.
Inventory Management: The fashion-oriented nature of the Company's products 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
sales and brand loyalty. Conversely, excess inventories can result in lower
gross margins due to the excessive discounts and markdowns that might be
necessary to reduce inventory levels. 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 business.
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 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 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 account receivable.
20
Impact of Foreign Manufacturers: Substantial portions 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 ended September 30, 2003, approximately 85% of the Company's
products were purchased from sources outside the United States, primarily from
China, Brazil, Italy and Spain.
Risks inherent in foreign operations include work stoppages, transportation
delays and interruptions, changes in social, political and economic conditions
which could result in the disruption of trade from the countries in which the
Company's manufacturers or suppliers are located, the imposition of additional
regulations relating to imports, the imposition of additional duties, taxes and
other charges on imports, significant fluctuations of the value of the dollar
against foreign currencies, or restrictions on the transfer of funds, any of
which could have a material adverse effect on the Company's business, financial
condition and results of operations. The Company does not believe that any such
economic or political condition will materially affect the Company's ability to
purchase products, since a variety of materials and alternative sources are
available. The Company cannot be certain, however, that it will be able to
identify such alternative sources without delay (if ever) or without greater
cost to the Company. 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, 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, 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.
21
The Company requires its licensing partners and independent manufacturers to
operate in compliance with applicable laws and regulations. While the Company
promotes ethical business practices and the Company's staff periodically visits
and monitors the operations of its independent manufacturers, the Company does
not control such manufacturers or their labor practices. The violation of labor
or other laws by an independent manufacturer of the Company or by one of the
Company's licensing partners, or the divergence of an independent manufacturer's
or licensing partner's labor practices from those generally accepted as ethical
in the United States, could have a material adverse effect on the Company's
business, financial condition and results of operations.
Intense Industry Competition: The fashion 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 market 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 Diesel, 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
continually 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), Stevies, Steven,
Steve Madden Men's, l.e.i.(R) , Unionbay(R) and Candies(R) brands, creating new
product categories and businesses and operating Company-owned stores on a
profitable basis. During the first nine month of 2003 the Company opened five
(5) Steve Madden retail stores and has plans to open one (1) additional store
during the remainder of 2003. 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 management's expectations. 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
22
significant resources in, among other things, its management information systems
and hiring and training new personnel. However, in order to manage currently
anticipated levels of future demand, the Company may be required to, among other
things, expand its distribution facilities, establish relationships with new
manufacturers to produce its products, and continue to expand and improve its
financial, management and operating systems. There can be no assurance that the
Company will be able to manage future growth effectively and a failure to do so
could have a material adverse effect on the Company's business, financial
condition and results of operations.
Seasonal and Quarterly Fluctuations: The Company's results may fluctuate quarter
to quarter as a result of the timing of holidays, weather, the timing of larger
shipments of footwear, market acceptance of the Company's products, the mix,
pricing and presentation of the products offered and sold, the hiring and
training of additional personnel, inventory write downs, the cost of materials,
the product 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 the
opening of new retail stores and 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 November 10, 2003, the Company had outstanding
options to purchase an aggregate of approximately 2,371,000 shares of Common
Stock. Holders of such options are likely to exercise them when, in all
likelihood, the market price of the Company's stock is significantly higher than
the exercise price of the options. Further, while its options are outstanding,
they may adversely affect the terms on which the Company could obtain additional
capital.
23
Economic and Political Risks: The present economic condition in the United
States and concern about uncertainties could significantly reduce the disposable
income available to the Company's customers, which purchase our products. In
addition, current unstable political conditions including, the potential or
actual conflicts in Iraq, North Korea or elsewhere, or the continuation or
escalation of terrorism, could have an adverse effect on the Company's business,
financial condition and results of operations.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not engage in the trading of market risk sensitive instruments
in the normal course of business. Financing arrangements for the Company are
subject to variable interest rates, primarily based on the prime rate. An
analysis of the Company's credit agreement with Capital Factors, Inc. can be
found in Note C. "Due From Factor" to the Consolidated Financial Statements
included in the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2002.
ITEM 4.
CONTROLS AND PROCEDURES
As required by Rule 13a-15(b) of the Securities Exchange Act of 1934 (the
"Exchange Act"), the Company's management, including the Company's Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of its disclosure controls and procedures as of the end of the period covered by
this quarterly report. Based on that evaluation, the Chief Executive Officer and
Chief Financial Officer have concluded that the Company's disclosure controls
and procedures (as defined in Rule 13a-15(e) under the Exchange Act) were
effective as of the end of the period covered by this quarterly report. As
required by Rule 13a-15(d) under the Exchange Act, the Company's management,
including the Company's Chief Executive Officer and Chief Financial Officer, has
evaluated the Company's internal control over financial reporting to determine
whether any changes occurred during the quarter covered by this quarterly report
that have materially affected, or are reasonably likely to materially affect,
the Company's internal control over financial reporting. Based on that
evaluation, there has been no such change during the quarter covered by this
quarterly report.
24
Part II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Certain legal proceedings in which the Company is involved are discussed in Note
J to the consolidated financial statements in the Company's 2002 Annual Report
to Shareholders; Part I, Item 3, of the Company's Annual Report on Form 10-K for
the year ended December 31, 2002; and Part II, Item 1, of the Company's
Quarterly Reports on Form 10-Q for the quarter ended March 31, 2003 and the
quarter ended June 30, 2003. The following discussion is limited to recent
developments concerning certain of the Company's legal proceedings and should be
read in conjunction with those earlier Reports. Unless otherwise indicated, all
proceedings discussed in those earlier Reports remain outstanding.
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. This action was dismissed on August 27, 2003.
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 parties have agreed to a resolution of Safeco's claims, the
implementation of which is conditioned upon judicial approval of the settlements
of the shareholder class action and derivative claims discussed in Note J to the
consolidated financial statements in the Company's 2002 Annual Report to
Shareholders, Part I, Item 3, of the Company's Annual Report on Form 10-K for
the year ended December 31, 2002 and Part II, Item 1, of the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2003.
On or about June 6, 2003, an action was commenced in the United States District
Court for the Central District of California, captioned Global Brand Marketing,
Inc. v. Steve Madden LTD., Case Number 03-4029. The complaint seeks injunctive
relief and unspecified monetary damages for infringement of two separate
patents. The Company believes it has substantial defenses to the claims asserted
in the lawsuit. The parties are currently involved in settlement negotiations.
25
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
(31.1) Certification of Chief Executive Officer 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.
(31.2) Certification of Chief Financial Officer 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.
(32.1) 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
(32.2) 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
26
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 13, 2003
STEVEN MADDEN, LTD.
/s/ JAMIESON A. KARSON
-----------------------
Jamieson A. Karson
Chief Executive Officer
/s/ ARVIND DHARIA
-----------------------
Arvind Dharia
Chief Financial Officer
27
STEVEN MADDEN, LTD.
FORM 10-Q
EXHIBIT INDEX
Exhibit No Description
- ---------- -----------
31.1 Certification of Chief Executive Officer 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.
31.2 Certification of Chief Financial Officer 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.
32.1 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
32.2 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