UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2004
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
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Commission File Number 0-23702
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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
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (718) 446-1800
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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 August 2, 2004, the latest practicable date, there were 13,237,405
shares of common stock, $.0001 par value, outstanding.
STEVEN MADDEN, LTD.
FORM 10-Q
QUARTERLY REPORT
June 30, 2004
TABLE OF CONTENTS
PART I- FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements (Unaudited):
Consolidated Balance Sheets.................................. 3
Consolidated Statements of Operations........................ 4
Consolidated Statements of Cash Flows........................ 5
Notes to Unaudited Condensed Consolidated Financial
Statements................................................... 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 10
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk... 23
ITEM 4. Controls and Procedures...................................... 23
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings............................................ 24
ITEM 2. Changes in Securities, Use of Proceeds and Issuer Purchases
of Equity Securities......................................... 25
ITEM 4. Submission of Matters to a Vote of Security Holders.......... 25
ITEM 5. Other Information............................................ 26
ITEM 6. Exhibits and Reports on Form 8-K............................. 26
Signature.................................................... 28
2
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands)
June 30, December 31, June 30,
2004 2003 2003
------------ ------------ ------------
(unaudited) (unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 16,287 $ 53,073 $ 25,172
Accounts receivable, net of allowances of $688, $452 and $452 6,143 4,281 3,385
Due from factor, net of allowances of $1,973, $1,926 and $1,903 42,013 28,748 35,401
Inventories 29,251 23,858 25,256
Marketable securities - available for sale 10,486 3,229 9,956
Prepaid expenses and other current assets 3,050 2,844 2,830
Prepaid taxes 2,839 4,270
Deferred taxes 2,437 1,692 1,633
------------ ------------ ------------
Total current assets 112,506 121,995 103,633
Property and equipment, net 19,444 18,391 18,356
Deferred taxes 5,618 5,618 3,699
Deposits and other 431 370 295
Marketable securities - available for sale 40,508 29,430 34,257
Cost in excess of fair value of net assets acquired 2,066 2,066 2,066
------------ ------------ ------------
$ 180,573 $ 177,870 $ 162,306
============ ============ ============
LIABILITIES
Current liabilities:
Current portion of capital lease obligations $ 1 $ 6
Accounts payable $ 7,538 11,087 6,119
Accrued expenses 4,642 5,767 9,486
------------ ------------ ------------
Total current liabilities 12,180 16,855 15,611
Deferred rent 1,996 1,828 1,664
------------ ------------ ------------
14,176 18,683 17,275
------------ ------------ ------------
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, 14,582,
14,459 and 14,286 shares issued, 13,252, 13,214 and
13,041 outstanding 1 1 1
Additional paid-in capital 79,896 79,136 75,081
Retained earnings 99,392 91,176 81,551
Unearned compensation (2,271) (3,008) (3,908)
Other comprehensive gain:
Unrealized gain (loss) on marketable securities (1,029) (127) 297
Treasury stock - 1,330, 1,245 and 1,245 shares at cost (9,592) (7,991) (7,991)
------------ ------------ ------------
166,397 159,187 145,031
------------ ------------ ------------
$ 180,573 $ 177,870 $ 162,306
============ ============ ============
See accompanying notes to consolidated financial statements - unaudited 3
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited)
(in thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Net sales:
Wholesale $ 59,804 $ 63,335 $ 114,871 $ 120,927
Retail 26,430 22,409 50,131 43,515
---------- ---------- ---------- ----------
86,234 85,744 165,002 164,442
---------- ---------- ---------- ----------
Cost of sales:
Wholesale 41,175 42,935 76,843 80,771
Retail 12,347 10,501 24,175 20,398
---------- ---------- ---------- ----------
53,522 53,436 101,018 101,169
---------- ---------- ---------- ----------
Gross profit:
Wholesale 18,629 20,400 38,028 40,156
Retail 14,083 11,908 25,956 23,117
---------- ---------- ---------- ----------
32,712 32,308 63,984 63,273
Commission and licensing fee income 1,811 2,145 3,227 3,835
Operating expenses (27,947) (24,838) (54,055) (49,230)
---------- ---------- ---------- ----------
Income from operations 6,576 9,615 13,156 17,878
Interest and other income, net 475 350 1,009 792
---------- ---------- ---------- ----------
Income before provision for income taxes 7,051 9,965 14,165 18,670
Provision for income taxes 2,961 4,185 5,949 7,841
---------- ---------- ---------- ----------
Net income $ 4,090 $ 5,780 $ 8,216 $ 10,829
========== ========== ========== ==========
Basic income per share $ 0.31 $ 0.45 $ 0.62 $ 0.84
========== ========== ========== ==========
Diluted income per share $ 0.28 $ 0.41 $ 0.57 $ 0.77
========== ========== ========== ==========
Basic weighted average common shares outstanding 13,299 12,927 13,276 12,858
Effect of dilutive securities - options/warrants/restricted stock 1,092 1,113 1,106 1,127
---------- ---------- ---------- ----------
Diluted weighted average common shares outstanding 14,391 14,040 14,382 13,985
---------- ---------- ---------- ----------
See accompanying notes to consolidated financial statements - unaudited 4
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
Six Months Ended
June 30,
------------------------
2004 2003
---------- ----------
Cash flows from operating activities:
Net income $ 8,216 $ 10,829
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization 2,451 2,537
Noncash compensation 1,275 1,427
Provision for bad debts 284 140
Deferred rent expense 168 132
Realized loss (gain) on marketable securities (14) (35)
Changes in:
Accounts receivable (2,099) (301)
Due from factor (13,312) (13,213)
Inventories (5,393) (5,811)
Prepaid expenses, prepaid taxes, deposits and other assets 1,164 (1,176)
Accounts payable and other accrued expenses (4,674) (3,274)
---------- ----------
Net cash used in operating activities (11,934) (8,745)
---------- ----------
Cash flows from investing activities:
Purchase of property and equipment (3,504) (3,820)
Purchase of marketable securities (24,006) (34,162)
Sale/redemption of marketable securities 4,038 12,655
---------- ----------
Net cash used in investing activities (23,472) (25,327)
---------- ----------
Cash flows from financing activities:
Proceeds from options and warrants exercised 222 2,539
Purchase of treasury stock (1,601)
Repayment of lease obligations (1) (8)
---------- ----------
Net cash (used in) provided by financing activities (1,380) 2,531
---------- ----------
Net decrease in cash and cash equivalents (36,786) (31,541)
Cash and cash equivalents - beginning of period 53,073 56,713
---------- ----------
Cash and cash equivalents - end of period $ 16,287 $ 25,172
---------- ----------
See accompanying notes to consolidated financial statements - unaudited 5
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Unaudited
June 30, 2004
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") and the results of its operations and cash
flows for the periods presented. The results of its operations for the six and
three-month periods ended June 30, 2004 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, 2003 included in the Annual Report
of Steven Madden, Ltd. on Form 10-K filed with the SEC on March 12, 2004.
NOTE B - MARKETABLE SECURITIES
Marketable securities consist substantially of municipal and 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. In
addition, the Company invests in equity securities and mutual funds.
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 allowances 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 period. 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 unvested and un-issued shares
promised to employees which have a dilutive effect. For the three months and six
months ended June 30, 2004, approximately 100,000 stock options have been
excluded from the calculation because inclusion of such shares would be
anti-dilutive, as compared to approximately 695,000 and 801,000 shares,
respectively, for the three and six months ended June 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 provide pro forma disclosures of net
income and earnings 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 provide the disclosures required by
SFAS No. 123 and SFAS No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure", which was released in
6
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Unaudited
June 30, 2004
December 2003 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 Six Months Ended
June 30, June 30,
------------------------ ------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Reported net income $ 4,090 $ 5,780 $ 8,216 $ 10,829
Stock-based employee compensation included in
reported net income, net of tax 99 82 197 165
Stock-based employee compensation determined
under the fair value based method, net of tax (705) (690) (1,518) (1,254)
---------- ---------- ---------- ----------
Pro forma net income $ 3,484 $ 5,172 $ 6,895 $ 9,740
========== ========== ========== ==========
Basic income per share:
As reported $ 0.31 $ 0.45 $ 0.62 $ 0.84
Pro forma $ 0.26 $ 0.40 $ 0.52 $ 0.76
Diluted income per share:
As reported $ 0.28 $ 0.41 $ 0.57 $ 0.77
Pro forma $ 0.24 $ 0.37 $ 0.48 $ 0.70
In May 2004, the Company issued to the retiring Chairman of the Board of
Directors 100,000 options to acquire common stock of the Company for $13.50 a
share in accordance with the terms of his agreement with the Company.
Subsequently, the Company entered into a consulting agreement with this
individual, which among other things extended the exercise life of May 21, 2004
options through June 30, 2005. The Company recognized approximately $46 of
compensation expense in the second quarter of 2004 and will amortize an
additional $570 of $616 of compensation expense under the fair value based
method over the one- year vesting period of these options.
NOTE G - COMPREHENSIVE INCOME
Comprehensive income for the three and six month periods ended June 30, 2004,
after considering other comprehensive income including unrealized (loss) on
marketable securities of $(886) and $(902) was $3,204 and $7,314 respectively.
For the comparable periods ended June 30, 2003, after considering other
comprehensive gains on marketable securities of $170 and $161, comprehensive
income is $5,950 and $10,990 respectively.
NOTE H - COMMITMENTS, CONTINGENCIES AND OTHER
[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.
7
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Unaudited
June 30, 2004
NOTE H - COMMITMENTS, CONTINGENCIES AND OTHER (CONTINUED)
[1] Indictment: (continued)
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 Steven Madden described above. 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 of these actions was reached and, on May 25, 2004, the Court
entered a Final Order and Judgment pursuant to which the Court dismissed
these actions in accordance with the settlement agreement. The settlement
amounts did not have a material effect on the Company's financial
position.
[3] 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. The
Company is named as a nominal defendant in the action. A settlement of
these actions was reached and, on June 1, 2004, the Court entered an
Amended Order and Final Judgment of Derivative Action pursuant to which
the Court dismissed these actions in accordance with the settlement
agreement. The settlement amounts did not have a material effect on the
Company's financial position.
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 directors.
A settlement of these actions was reached and, on June 1, 2004, the Court
entered an Amended Order and Final Judgment of Derivative Action pursuant
to which the Court dismissed these actions in accordance with the
settlement agreement. The settlement amounts did not have a material
effect on the Company's financial position.
8
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Unaudited
June 30, 2004
NOTE H - COMMITMENTS, CONTINGENCIES AND OTHER (CONTINUED)
[4] Other actions:
(a) 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. On April
13, 2004 the parties agreed to a settlement of this action. The
settlement amount did not have a material effect on the Company's
financial position or result of operations. A stipulation of
dismissal of this action has been executed by the parties and filed
with the District Court. On April 15, 2004, the Court dismissed this
action.
(b) On December 15, 2003, the Company commenced an action against LaRue
Distributors, Inc. ("LaRue") in the United States District Court for
the Southern District of New York. The Company seeks a declaratory
judgment that the Company properly terminated a license agreement
with LaRue and monetary damages for breaches of the license
agreement and trademark infringement by LaRue. Subsequently, LaRue
served an answer and counterclaim alleging that the license
agreement was improperly terminated by the Company and sought
compensatory and punitive damages. The Company believes that it has
substantial defenses to the counterclaim asserted by LaRue.
(c) On or about July 9, 2004, an action was filed in the United States
District Court for the Southern District of New York against Steve
Madden, Ltd. by Robert Marc for trademark infringement. In the
action Robert Marc claims trademark infringement in connection with
a "bar and dot" design on the sides of certain eyewear. The alleged
infringing eyeglasses are manufactured and sold by Steve Madden,
Ltd.'s licensee for eyewear, Colors in Optics, which is also a
defendant in the suit. The case has been referred by the Judge to a
Magistrate for a settlement conference. In any event it is not
expected to have a material effect on the Company's financial
position.
(d) The Company has been named as a defendant in various other lawsuits
in the normal course of business. In the opinion of management,
after consulting with legal counsels, the liabilities, if any,
resulting from these matters should not have a material effect on
the Company's financial position or results of operations.
[5] SEC request for information:
On April 26, 2004, the SEC sent the Company a letter requesting
information and documents relating to, among other things, Steven Madden's
employment with the Company. The Company intends to fully comply with the
SEC's request.
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 unaudited 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 tables set forth information on operations for the periods
indicated:
Selected Financial Information
------------------------------
Six Months Ended
----------------
June 30
-------
($ in thousands)
2004 2003
---------------- ----------------
Consolidated:
- ------------
Net Sales $165,002 100% $164,442 100%
Cost of Sales 101,018 61 101,169 62
Gross Profit 63,984 39 63,273 38
Other Operating Income 3,227 2 3,835 2
Operating Expenses 54,055 33 49,230 30
Income from Operations 13,156 8 17,878 10
Interest and Other Income Net 1,009 1 792 1
Income Before Income Taxes 14,165 9 18,670 11
Net Income 8,216 5 10,829 7
10
Selected Financial Information
------------------------------
Six Months Ended
----------------
June 30
-------
($ in thousands)
2004 2003
------------------- --------------------
By Segment
WHOLESALE DIVISIONS:
- --------------------
Steven Madden, Ltd.
- -------------------
Madden Womens:
- --------------
Net Sales $ 56,498 100% $ 59,206 100%
Cost of Sales 38,083 67 40,976 69
Gross Profit 18,415 33 18,230 31
Other Operating Income 1,240 2 1,252 2
Operating Expenses 14,312 25 14,329 24
Income from Operations 5,343 10 5,153 9
l.e.i. Footwear:
- ----------------
Net Sales $ 21,728 100% $ 31,821 100%
Cost of sales 14,583 67 19,948 63
Gross Profit 7,145 33 11,873 37
Operating Expenses 5,989 28 6,883 21
Income from Operations 1,156 5 4,990 16
Madden Mens:
- ------------
Net Sales $ 13,021 100% $ 19,816 100%
Cost of sales 9,097 70 12,890 65
Gross Profit 3,924 30 6,926 35
Operating Expenses 3,590 28 4,383 22
Income from Operations 334 2 2,543 13
Candie's Footwear:
- ------------------
Net Sales $ 6,951 100% -- --
Cost of sales 4,717 68 -- --
Gross Profit 2,234 32 -- --
Operating Expenses 1,889 27 -- --
Income from Operations 345 5 -- --
Diva Acquisition Corp. (Steven):
- --------------------------------
Net Sales $ 11,091 100% $ 4,330 100%
Cost of sales 6,461 58 3,158 73
Gross Profit 4,630 42 1,172 27
Operating Expenses 2,463 22 1,224 28
Income (Loss) from Operations 2,167 20 (52) (1)
Stevies Inc.:
- -------------
Net Sales $ 5,488 100% $ 5,754 100%
Cost of sales 3,751 68 3,799 66
Gross Profit 1,737 32 1,955 34
Other Operating Income -- -- 9 0
Operating Expenses 1,386 25 1,140 20
Income from Operations 351 7 824 14
11
Selected Financial Information
------------------------------
Six Months Ended
----------------
June 30
-------
($ in thousands)
2004 2003
-------------------- -------------------
By Segment (Continued)
WHOLESALE DIVISIONS (Continued)
- -------------------------------
Unionbay Men's Footwear:
- ------------------------
Net Sales $ 94 100% -- --
Cost of Sales 151 161 -- --
Gross Loss (57) (61) -- --
Operating Expenses 338 359 -- --
Loss from Operations (395) (420) -- --
RETAIL DIVISION:
- ----------------
Steven Madden Retail Inc.:
- --------------------------
Net Sales $ 50,131 100% $ 43,515 100%
Cost of Sales 24,175 48 20,398 47
Gross Profit 25,956 52 23,117 53
Operating Expenses 22,911 46 20,081 46
Income from Operations 3,045 6 3,036 7
Number of Stores 83 82
ADESSO MADDEN INC.:
- -------------------
(FIRST COST)
Other Operating Revenue $ 1,987 100% $ 2,574 100%
Operating Expenses 1,177 59 1,190 46
Income from Operations 810 41 1,384 54
12
Selected Financial Information
------------------------------
Three Months Ended
------------------
June 30
-------
($ in thousands)
2004 2003
------------------- --------------------
Consolidated:
- -------------
Net Sales $ 86,234 100% $ 85,744 100%
Cost of Sales 53,522 62 53,436 62
Gross Profit 32,712 38 32,308 38
Other Operating Income 1,811 2 2,145 2
Operating Expenses 27,947 32 24,838 29
Income from Operations 6,576 8 9,615 11
Interest and Other Income Net 475 0 350 1
Income Before Income Taxes 7,051 8 9,965 12
Net Income 4,090 5 5,780 7
By Segment
WHOLESALE DIVISIONS:
- --------------------
Steven Madden, Ltd.
- -------------------
Madden Womens:
- --------------
Net Sales $ 30,964 100% $ 30,311 100%
Cost of Sales 21,380 69 21,896 72
Gross Profit 9,584 31 8,415 28
Other Operating Income 720 2 689 2
Operating Expenses 7,488 24 7,486 25
Income from Operations 2,816 9 1,618 5
l.e.i. Footwear:
- ----------------
Net Sales $ 10,603 100% $ 16,956 100%
Cost of sales 7,263 68 10,428 62
Gross Profit 3,340 32 6,528 38
Operating Expenses 3,079 29 3,340 19
Income from Operations 261 3 3,188 19
Madden Mens:
- ------------
Net Sales $ 6,452 100% $ 11,475 100%
Cost of sales 4,689 73 7,317 64
Gross Profit 1,763 27 4,158 36
Operating Expenses 1,756 27 2,299 20
Income from Operations 7 0 1,859 16
Candie's Footwear:
- ------------------
Net Sales $ 3,735 100% -- --
Cost of sales 2,609 70 -- --
Gross Profit 1,126 30 -- --
Operating Expenses 930 25 -- --
Income from Operations 196 5 -- --
Diva Acquisition Corp. (Steven):
- --------------------------------
Net Sales $ 5,842 100% $ 1,874 100%
Cost of sales 3,541 61 1,444 77
Gross Profit 2,301 39 430 23
Operating Expenses 1,414 24 563 30
Income (Loss) from Operations 887 15 (133) (7)
13
Selected Financial Information
------------------------------
Three Months Ended
------------------
June 30
-------
($ in thousands)
2004 2003
-------------------- -------------------
By Segment (Continued)
WHOLESALE DIVISIONS (Continued)
- -------------------------------
Stevies Inc.:
- -------------
Net Sales $ 2,163 100% $ 2,719 100%
Cost of sales 1,598 74 1,850 68
Gross Profit 565 26 869 32
Operating Expenses 703 32 512 19
Income (Loss) from Operations (138) (6) 357 13
Unionbay Men's Footwear:
- ------------------------
Net Sales $ 45 100% -- --
Cost of Sales 95 211 -- --
Gross Loss (50) (111) -- --
Operating Expenses 175 389 -- --
Loss from Operations (225) (500) -- --
RETAIL DIVISION:
- ----------------
Steven Madden Retail Inc.:
- --------------------------
Net Sales $ 26,430 100% $ 22,409 100%
Cost of Sales 12,347 47 10,501 47
Gross Profit 14,083 53 11,908 53
Operating Expenses 11,807 45 10,036 45
Income from Operations 2,276 8 1,872 8
Number of Stores 83 82
ADESSO MADDEN INC.:
- -------------------
(FIRST COST)
Other Operating Revenue $ 1,091 100% $ 1,456 100%
Operating Expenses 595 55 602 41
Income from Operations 496 45 854 59
RESULTS OF OPERATIONS
($ in thousands)
Six Months Ended June 30, 2004 vs. Six Months Ended June 30, 2003
Consolidated:
- -------------
Total net sales for the six-month period ended June 30, 2004 remained virtually
unchanged ($165,002 in 2004 as compared to $164,442 in 2003). Sales increases
from the Retail Division, the Steven Wholesale Division and contribution from
the new Candie's Wholesale Division were offset by declines in the Madden
Womens, l.e.i., Madden Mens and Stevies Wholesale Divisions.
14
Gross profit as a percentage of sales increased to 39% in 2004 from 38% in 2003,
primarily due to the sales mix change between the Wholesale and Retail
Divisions. The Retail Division, which has a higher gross margin percentage,
represented 30% of total net sales in 2004 compared to 26% in 2003.
Operating expenses increased to $54,055 in 2004 from $49,230 in 2003. The
increase resulted from the Company's increased advertising expenditures in
support of the brand, higher occupancy expenses, a reclassification of warehouse
expense and the costs associated with the addition of Candie's and Unionbay
Wholesale Divisions.
Income from operations was $13,156 in 2004 compared to $17,878 in 2003. Net
income was $8,216 in 2004 compared to $10,829 in 2003, primarily because of
additional expenses resulting from the initiatives taken by the Company as
described in the previous paragraph.
Wholesale Divisions:
- --------------------
Steven Madden, Ltd. (Madden Womens, l.e.i., Madden Mens and Candie's Footwear):
Sales from the Madden Womens Wholesale Division ("Madden Womens") accounted for
$56,498 or 34%, and $59,206 or 36%, of total sales in 2004 and 2003,
respectively. This decrease in sales occurred during the first quarter of 2004
and was the result of more conservative initial spring buying patterns among the
Company's wholesale customers. Gross profit as a percentage of sales increased
to 33% in 2004 from 31% in 2003, primarily due to cost effective sourcing and
improved inventory management. Operating expenses remained virtually unchanged
at $14,312 in 2004 compared to $14,329 in 2003. Income from operations for
Madden Womens was $5,343 in 2004 compared to $5,153 in 2003.
Sales from the l.e.i. Footwear Wholesale Division ("l.e.i.") accounted for
$21,728 or 13%, and $31,821 or 19%, of total sales in 2004 and 2003,
respectively. The decrease in sales resulted from a reduction in the casual
business. Gross profit as a percentage of sales decreased to 33% in 2004 from
37% in 2003 primarily due to an increase in markdown allowances caused by higher
levels of promotional activities at retail. Operating expenses decreased to
$5,989 in 2004 from $6,883 in 2003 due to decreases in selling and related
expenses. Income from operations for l.e.i. was $1,156 in 2004 compared to
$4,990 in 2003.
Sales from the Madden Mens Wholesale Division ("Madden Mens") accounted for
$13,021 or 8%, and $19,816 or 12%, of total sales in 2004 and 2003,
respectively. The sales decrease was the result of a downturn in the Men's
casual fashion footwear segment and close-out of slow moving inventory. Gross
profit as a percentage of sales decreased to 30% in 2004 from 35% in 2003
primarily due to an increase in markdown allowances caused by higher levels of
promotional activities at retail. Operating expenses decreased to $3,590 in 2004
from $4,383 in 2003, due to decreases in selling and related expenses. Income
from operations for Madden Mens was $334 in 2004 compared to $2,543 in 2003.
Candie's Footwear, (which began shipping in the fourth quarter of 2003)
generated net sales of $6,951 or 4% of total sales in the first six months of
2004. Its customers are comprised of major department and specialty stores,
including Belk, Macy's West, Rich's, Bon Marche, Robinson's, Filene's, Carson's
and Nordstrom. The initial Candie's line was well received by both retailers and
consumers and the Company anticipates that the brand will continue to gain
market share during 2004.
Diva Acquisition Corp. ("Steven"):
Sales from Steven accounted for $11,091 or 7%, and $4,330 or 3%, of total sales
in 2004 and 2003, respectively. The 156% increase in sales was principally due
to the success of key styles including woods, jeweled sandals and dress mocs.
Also, Steven added new retail doors, including Dillards, Macy's West and
Parisians and initiated a replenishment program during the first quarter of
2004, enabling customers to generate weekly reorders with improved turn and
profitability. Gross profit as a percentage of sales increased to 42% in 2004
from 27% in 2003, primarily the result of cost effective sourcing, and a
reduction in close-out inventory. Operating expenses increased to $2,463 in 2004
from $1,224 in 2003 due to increases in selling, designing, marketing and
advertising expenses. Income from operations for Steven was $2,167 in 2004
compared to loss from operation of $52 in 2003.
15
Stevies Inc. ("Stevies"):
Sales from Stevies accounted for $5,488 or 3%, and $5,754 or 3%, of total sales
in 2004 and 2003, respectively. The Company reacted to the decrease in sales by
putting in place new management, sales and design teams during the middle of the
second quarter of 2004. Gross profit as a percentage of sales decreased to 32%
in 2004 from 34% in 2003, primarily due to an increase in promotional activity.
Operating expenses increased to $1,386 in 2004 from $1,140 in 2003 due to
increases in payroll and payroll related expenses. Income from operations for
Stevies was $351 in 2004 compared to $824 in 2003.
Unionbay Men's Footwear ("Unionbay"):
Unionbay, which launched in the fall of 2003, generated net sales of $94 in the
first six months of 2004. The consumer acceptance of the fall 2003 line was less
than expected. As a result, the Company changed product direction and changed
the division's executive management team in the fourth quarter of 2003 which led
the Company to bypass shipments of spring 2004 Unionbay products. While
prospects for the fall of 2004 are somewhat improved, management is cautious in
its outlook on Unionbay's contribution during the remainder of 2004.
Retail Division:
- ----------------
Sales from the Retail Division accounted for $50,131 or 30% and $43,515 or 26%
of total sales in 2004 and 2003, respectively. As of June 30, 2004, there were
83 retail stores compared to 82 retail stores as of June 30, 2003. Comparable
store sales for the six-month period ended June 30, 2004 increased 12% over the
same period of 2003. The increase was achieved through management's immediate
reaction to at-once demand for boots early in the first quarter of 2004.
Additionally the increase was the result of a combination of higher unit sales
and higher average selling prices, particularly in the Company's core women's
footwear category. Gross profit as a percentage of sales decreased to 52% in
2004 from 53% in 2003, primarily due to an increase in promotional activity in
the first quarter of 2004. Operating expenses for the Retail Division were
$22,911 in 2004 and $20,881 in 2003. This increase was primarily due to
increased incentive compensation associated with increased sales, higher
occupancy expenses and higher advertising expenditures. Income from operations
for the Retail Division was relatively unchanged ($3,045 in 2004 compared to
$3,036 in 2003) inspite of increases in sales, due to the Company's investment
in the brand through higher advertising costs and store images.
Adesso-Madden Division:
- -----------------------
Adesso-Madden, Inc. generated commission revenues of $1,987 in 2004, compared to
commission revenues of $2,574 in 2003. This decrease was primarily the result of
the popularity of inexpensive "flip flops" which were not part of
Adesso-Madden's core product offerings. Income from operations for Adesso-Madden
was $810 in 2004 compared to $1,384 in 2003.
Three Months Ended June 30, 2004 vs. Three Months Ended June 30, 2003
Consolidated:
- -------------
Total net sales for the three-month period ended June 30, 2004 increased by 1%
to $86,234 in 2004 from $85,744 for the comparable period of 2003. Sales
increases from the Retail Division, the Steven Wholesale Division, Madden
Women's Wholesale Division and contribution from the new Candie's Wholesale
Division were offset by declines in the l.e.i., Madden Mens and Stevies
Wholesale Divisions. Gross profit as a percentage of sales remained at 38% in
2004, the same as in 2003.
Operating expenses increased to $27,947 in 2004 from $24,838 in 2003. The
increase resulted from the Company's increased advertising expenditures in
support of the brand, higher occupancy expenses, a reclassification of warehouse
expense and the costs associated with the addition of Candie's and Unionbay
Wholesale Divisions.
16
Income from operations was $6,576 in 2004 compared to $9,615 in 2003. Net income
was $4,090 in 2004 compared to $5,780 in 2003 primarily the result of the
initiatives taken by the Company as described in the previous paragraph.
Wholesale Divisions:
- --------------------
Steven Madden, Ltd. (Madden Womens, l.e.i., Madden Mens and Candie's Footwear):
Sales from Madden Womens accounted for $30,964 or 36%, and $30,311 or 35%, of
total sales in 2004 and 2003, respectively. This increase in sales was the
result of improved sell-through and reorders that materialized during the second
quarter on a variety of styles. Gross profit as a percentage of sales increased
to 31% in 2004 from 28% in 2003, primarily due to cost effective sourcing and
improved inventory management. Operating expenses remained virtually unchanged
at $7,488 in 2004 compared to $7,486 in 2003. Income from operations for Madden
Womens was $2,816 in 2004 compared to $1,618 in 2003.
Sales from l.e.i. accounted for $10,603 or 12%, and $16,956 or 20%, of total
sales in 2004 and 2003, respectively. The decrease in sales resulted from a
migration of mid- tier customers away from casual "closed up" styles and the
consumers' resistance to the evolution of l.e.i. into better trending
categories. Gross profit as a percentage of sales decreased to 32% in 2004 from
38% in 2003 primarily due to an increase in markdown allowances caused by higher
levels of promotional activities at retail. Operating expenses decreased to
$3,079 in 2004 from $3,340 in 2003 due to decreases in selling and related
expenses. Income from operations for l.e.i. was $261 in 2004 compared to $3,188
in 2003.
Sales from Madden Mens accounted for $6,452 or 7%, and $11,475 or 13%, of total
sales in 2004 and 2003, respectively. The sales decrease was the result of the
disappointing performance of the fall line and the downturn in the fashion
casual space that led to reduction in orders from some large customers. Gross
profit as a percentage of sales decreased to 27% in 2004 from 36% in 2003
primarily due to an increase in markdown allowances caused by higher levels of
promotional activities at retail. Operating expenses decreased to $1,756 in 2004
from $2,299 in 2003, due to decreases in selling and related expenses. Income
from operations for Madden Mens was $7 in 2004 compared to $1,859 in 2003.
Candie's Footwear, (which began shipping in the fourth quarter of 2003)
generated net sales of $3,735 in the second quarter of 2004. Its customers are
comprised of major department and specialty stores, including Belk, Macy's West,
Rich's, Bon Marche, Robinson's, Filene's, Carson's and Nordstrom. The initial
Candie's line was well received by both retailers and consumers and the Company
anticipates that the brand will continue to gain market share during 2004.
Diva Acquisition Corp. ("Steven"):
Sales from Steven accounted for $5,842 or 7%, and $1,874 or 2%, of total sales
in 2004 and 2003, respectively. The 212% increase in sales was principally due
to the success of key styles including woods, jeweled sandals and dress mocs.
Gross profit as a percentage of sales increased to 39% in 2004 from 23% in 2003,
primarily the result of cost effective sourcing, and lower levels of close out
inventory. Operating expenses increased to $1,414 in 2004 from $563 in 2003 due
to increases in selling, designing, marketing and advertising expenses. Income
from operations for Steven was $887 in 2004 compared to loss from operation of
$133 in 2003.
Stevies Inc. ("Stevies"):
Sales from Stevies accounted for $ 2,163 or 3%, and $2,719 or 3%, of total sales
in 2004 and 2003, respectively. The Company reacted to the decrease in sales by
putting in place new management, sales and design teams during the middle of the
second quarter of 2004. Gross profit as a percentage of sales decreased to 26%
in 2004 from 32% in 2003, primarily due to an increase in promotional activity.
Operating expenses increased to $703 in 2004 from $512 in 2003 due to increases
in payroll and payroll related expenses. Loss from operations for Stevies was
$138 in 2004 compared to income from operations of $357 in 2003.
17
Unionbay Men's Footwear ("Unionbay"):
Unionbay, which launched in the fall of 2003, generated net sales of $45 in the
second quarter of 2004. The consumer acceptance of the fall 2003 line was less
than expected. As a result, the Company changed product direction and changed
the division's executive management team in the fourth quarter of 2003 which led
the Company to bypass shipments of spring 2004 Unionbay products. While
prospects for the fall of 2004 are somewhat improved, management is cautious in
its outlook on Unionbay's contribution during the remainder of 2004.
Retail Division:
- ----------------
Sales from the Retail Division accounted for $26,430 or 31% and $22,409 or 26%
of total sales in 2004 and 2003, respectively. As of June 30, 2004, there were
83 retail stores compared to 82 retail stores as of June 30, 2003. Comparable
store sales for the three-month period ended June 30, 2004 increased 15% over
the same period of 2003. The increase was achieved through a combination of
higher unit sales and higher average selling prices, particularly in the
Company's core women's footwear category. Gross profit as a percentage of sales
remained at 53% in 2004, the same as in 2003. Operating expenses for the Retail
Division were $11,807 in 2004 and $10,036 in 2003. This increase was primarily
due to increased incentive compensation associated with increased sales, higher
occupancy expenses and higher advertising expenditures. Income from operations
for the Retail Division was $2,276 in 2004 compared to $1,872 in 2003.
Adesso-Madden Division:
- -----------------------
Adesso-Madden, Inc. generated commission revenues of $1,091 in 2004, compared to
commission revenues of $1,456 in 2003. This decrease was primarily the result of
the popularity of inexpensive "flip flops" which were not part of
Adesso-Madden's core product offerings. Income from operations for Adesso-Madden
was $496 in 2004 compared to $854 in 2003.
LICENSE AGREEMENTS
Revenue generated from licensing was $1,240 in the first six months of 2004
compared to $1,261 in 2003. As of June 30, 2004, the Company had five license
partners covering five product categories of its Steve Madden brand. The product
categories include, hosiery, sunglasses, eyewear, belts and outerwear.
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $100,326 at June 30, 2004 compared to
$105,140 at December 31, 2003. The decrease was the result of management's
decision to move a portion of excess cash into long-term marketable securities.
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 expires December 31, 2004. Capital Factors maintains a lien
on all of the Company's receivables and assumes the credit risk for all assigned
accounts approved by them. Under the agreement, the Company has a credit line of
$15 million. As of June 30, 2004 the Company did not use any portion of the
credit line.
As of June 30, 2004 the Company had invested $50,994 in marketable securities
consisting of corporate bonds, U.S. Treasury notes, government asset-backed
securities and equities.
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.
OPERATING ACTIVITIES
During the six-month period ended June 30, 2004, net cash used by operating
activities was $11,934. Uses of cash was caused primarily by the following; an
increase in non-factored accounts receivable of $2,099; an increase in factored
accounts receivable of $13,312 caused by a sales increase to mid-tier customers
who typically have longer
18
terms; an increase in inventories of $5,393 due to the addition of new divisions
and the early receipt of fall inventory; and a decrease in accounts payable and
other accrued expenses of $4,674. Sources of cash were provided principally by
net income of $8,216 and decrease in prepaid expenses, prepaid taxes, deposits
and other assets of $1,164.
Future minimum annual lease payments (for leases of office, showroom and retail
facilities) under non-cancelable operating leases consist of the following at
June 30:
2004 $ 9,815
2005 10,338
2006 10,417
2007 10,001
2008 8,512
Thereafter 25,690
---------
$ 74,773
=========
At June 30, 2004, the Company had un-negotiated open letters of credit for the
purchase of imported merchandise of approximately $21,679.
The Company has an employment agreement with Steve Madden, its Creative and
Design Chief, which provides for an annual base salary of $700,000 through June
30, 2011. Mr. Madden is entitled to receive base salary payments during periods
that he is not actively engaged in the duties of Creative and Design Chief. The
agreement also provides for an annual performance bonus, an annual option grant
at exercise prices equal to the market price on the date of grant and a
non-accountable expense allowance, however, the Company is not required to pay
the bonus for any fiscal year that Mr. Madden is not actively engaged in the
duties of Creative and Design Chief for at least six months, the Company is not
required to grant an annual option if Mr. Madden is not actively engaged in the
duties of Creative and Design Chief for at least six months out of the twelve
months immediately preceding the grant date for such annual option and the
Company is not required to pay the expense allowance for any month during which
Mr. Madden is not actively engaged in the duties of Creative and Design Chief.
The Company has employment agreements with certain executives, which provide for
the payment of compensation aggregating approximately $1,818 in 2004, $1,060 in
2005 and $234 in 2006. 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. In addition, the Company currently makes
approximately ninety-eight percent (98%) of its purchases in U.S. dollars.
INVESTING ACTIVITIES
During the six-month period ended June 30, 2004, the Company invested $24,006 in
marketable securities and received $4,038 from maturities and sales of
securities. In addition, the Company incurred capital expenditures of $3,504
principally for leasehold improvements to its corporate office space and
computer systems upgrades.
FINANCING ACTIVITIES
During the six-month period ended June 30, 2004, the Company repurchased 85,200
shares of the Company's common stock at a total cost of $1,601.
19
INFLATION
The Company does not believe that the relatively low rates of inflation
experienced over the last few years in the United States, where it primarily
competes, have had a significant effect on sales, expenses or profitability.
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 that 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.
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 return to 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
six-month period ended June 30, 2004, approximately 90% 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.
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, branding of the Steve
Madden name, fashionable styling, high quality and value are the most important
competitive factors and plans to continually
21
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 Mens, l.e.i.(R) , Unionbay(R) and Candie's(R) brands, creating new
product categories and businesses and operating Company-owned stores on a
profitable basis. During the first the first six months of 2004 the Company
opened two (2) Steve Madden retail stores and has plans to open approximately
eight to ten (8-10) additional stores during the remainder of 2004. 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 can be maintained or will
increase 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 operations have increased and will continue to increase demand on
the Company's managerial, operational and administrative resources. The Company
has recently invested significant resources in, among other things, its
management information systems and hiring and training new personnel. However,
in order to manage currently anticipated levels of future demand, the Company
may be required to, among other things, expand its distribution facilities,
establish relationships with new manufacturers to produce its products, and
continue to expand and improve its financial, management and operating systems.
There can be no assurance that the Company will be able to manage future growth
effectively and a failure to do so could have a material adverse effect on the
Company's business, financial condition and results of operations.
Seasonal and Quarterly Fluctuations: The Company's results may fluctuate quarter
to quarter as a result of the timing of holidays, weather, the timing of larger
shipments of footwear, market acceptance of the Company's products, the mix,
pricing and presentation of the products offered and sold, the hiring and
training of additional personnel, 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 utilization 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
22
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 August 3, 2004 there were outstanding options to
purchase an aggregate of approximately 2,549,475 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, if
required.
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 for the purchase of 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 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, 2003. On December 31, 2003 and December 31, 2002, there were no
direct borrowings outstanding under the credit agreement.
As of June 30, 2004, the Company had investments in marketable securities valued
at $50,994, which consists principally of federal and state obligations. These
obligations have various maturities through December 2008. These investments are
subject to interest rate risk and will decrease in value if market interest
rates increase. The Company currently has the ability to hold these investments
until maturity. Should there be a significant increase in interest rates, the
value of these investments would be negatively affected unless they were held to
maturity. In addition, any further decline in interest rates would reduce the
Company's interest income.
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 fiscal quarter
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 fiscal quarter 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 controls 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.
23
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 included in the Company's Annual
Report on Form 10-K for the year ended December 31, 2003; Part I, Item 3, of the
Company's Annual Report on Form 10-K for the year ended December 31, 2003; and
Part II, Item 1, of the Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 2004. 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.
Class Action
Between June and August 2000, eight putative securities fraud class action
lawsuits were commenced in the United States District Court for the Eastern
District of New York against the Company, Steven Madden and, in five of the
actions, Rhonda J. Brown (the former President and a former director of the
Company) and Arvind Dharia. These actions were captioned: Wilner v. Steven
Madden, Ltd., et al., 00 CV 3676 (filed June 21, 2000); Connor v. Steven Madden,
et al., 00 CV 3709 (filed June 22, 2000); Blumenthal v. Steven Madden, Ltd., et
al., 00 CV 3709 (filed June 23, 2000); Curry v. Steven Madden, Ltd., et al., 00
CV 3766 (filed June 26, 2000); Dempster v. Steven Madden Ltd., et al., 00 CV
3702 (filed June 30, 2000); Salafia v. Steven Madden, Ltd., et al., 00 CV 4289
(filed July 24, 2000); Fahey v. Steven Madden, Ltd., et al., 00 CV 4712 (filed
August 11, 2000); Process Engineering Services, Inc. v. Steven Madden, Ltd., et
al., 00 CV 5002 (filed August 22, 2000). By Order dated December 8, 2000, the
Court consolidated these eight actions, appointed Process Engineering, Inc.,
Michael Fasci and Mark and Libby Adams as lead plaintiffs and approved their
selection of lead counsel. A settlement of these actions was reached and, on May
25, 2004, the Court entered a Final Order and Judgment pursuant to which the
Court dismissed these actions in accordance with the settlement agreement.
Shareholder Derivative Actions
On or about September 26, 2000, a putative shareholders derivative action was
commenced in the United States District Court for the Eastern District of New
York, captioned Herrera v. Steven Madden and Steven Madden, Ltd., 00 CV 5803
(JG). The Company is named as a nominal defendant in the action. A settlement of
these actions was reached and, on June 1, 2004, the Court entered an Amended
Order and Final Judgment of Derivative Action pursuant to which the Court
dismissed these actions in accordance with the settlement agreement.
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. A settlement of these actions was reached and, on June 1,
2004, the Court entered an Amended Order and Final Judgment of Derivative Action
pursuant to which the Court dismissed these actions in accordance with the
settlement agreement.
Other Actions
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. On April 13, 2004 the parties
agreed to a settlement of this action. The settlement amount did not have a
material effect on the Company's financial position or result of operations. A
stipulation of dismissal of this action has been executed by the parties and
filed with the District Court. On April 15, 2004, the Court dismissed this
action.
On December 15, 2003, the Company commenced an action against LaRue
Distributors, Inc. ("LaRue") in the United States District Court for the
Southern District of New York. The Company seeks a declaratory judgment that the
Company properly terminated a license agreement with LaRue and monetary damages
for breaches of the license agreement and trademark infringement by LaRue.
Subsequently, LaRue served an answer and counterclaim alleging that the license
agreement was improperly terminated by the Company and seeking compensatory and
punitive damages. The Company filed a reply denying any liability with respect
to the counterclaim. The Company believes that it has substantial defenses to
the counterclaim asserted by LaRue.
24
On or about July 9, 2004, an action was filed in the United States District
Court for the Southern District of New York against the Company by Robert Marc
for trademark infringement, captioned Robert Marc v. Steve Madden, Ltd. Case No.
04 CV 5354 (JGK). In the action Robert Marc claims trademark infringement in
connection with a "bar and dot" design on the sides of certain eyewear. The
alleged infringing eyeglasses are manufactured and sold by the Company's
licensee for eyewear, Colors in Optics, which is also a defendant in the suit
The case has been referred by the Judge to a Magistrate for a settlement
conference. In any event this case is not expected to have a material effect on
the Company's financial position.
SEC Request for Information
On April 26, 2004, the Securities and Exchange Commission (the "SEC") sent the
Company a letter requesting information and documents relating to, among other
things, Steven Madden's employment with the Company. The Company intends to
fully comply with the SEC's request.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
The following table provides information as of June 30, 2004 with respect to the
shares of common stock repurchased by the Company during the second quarter of
fiscal 2004:
- --------------------------------------------------------------------------------
Period Total Average Total Number of Maximum dollar amount of
Number of Price Paid Shares Purchased as Shares that May Yet Be
Shares per Share Part of Publicly Puchased Under the Plans
Purchased Announced Plans or or Programs
Programs (1)
- --------------------------------------------------------------------------------
4/1/04 - 0 0 0 $20,000,000
4/30/04
- --------------------------------------------------------------------------------
5/1/04 - 74,900 $18.76 74,900 $18,594,783
5/31/04
- --------------------------------------------------------------------------------
6/1/04 - 10,300 $19.00 10,300 $18,399,083
6/30/04
- --------------------------------------------------------------------------------
Total 85,200 $18.79 85,200 $18,399,083
- --------------------------------------------------------------------------------
(1) The Board of Directors of the Company recently amended the Company's
previously announced share repurchase program. The amended share repurchase
program, which is effective as of January 1, 2004, provides for share
repurchases in the aggregate amount of $20 million and has no set
expiration or termination date.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of the Company held on May 21, 2004 (the "Annual
Meeting"), the stockholders of the Company approved an amendment to the
Company's 1999 Stock Plan to increase the number of shares subject to awards
granted under the 1999 Stock Plan. The stockholders of the Company also ratified
the appointment of Eisner LLP as independent auditors of the Company for fiscal
year 2004. In addition, at the Annual Meeting the stockholders of the Company
elected seven directors to serve until the next Annual Meeting of Stockholders
or until their successors are duly elected and qualified.
The affirmative vote of the holders of a majority of the total votes cast was
required to approve the amendment to the 1999 Stock Plan and to ratify the
appointment of Eisner LLP and the affirmative vote of a plurality of the votes
cast by holders of shares of common stock was required to elect the directors.
25
With respect to the approval of the amendment to the 1999 Stock Plan and the
appointment of Eisner LLP, set forth below is information on the results of
the votes cast at the Annual Meeting.
For Against Abstained
--- ------- ---------
Amendment to the 1999
Stock Plan 6,105,620 3,478,535 1,462,913
Appointment of Eisner LLP 12,620,219 276,825 950
With respect to the election of directors, set forth below is information with
respect to the nominees elected as directors of the Company at the Annual
Meeting and the votes cast and/or withheld with respect to each such nominee.
Nominees For Withheld
------------------------- -------------- --------------
Jamieson A. Karson 10,362,772 2,535,222
Jeffrey Birnbaum 10,330,121 2,567,873
Marc S. Cooper 10,343,121 2,554,873
John L. Madden 10,329,505 2,568,489
Peter Migliorini 12,182,554 715,440
Thomas H. Schwartz 12,564,589 333,405
Awadhesh Sinha 12,182,554 715,440
ITEM 5. OTHER INFORMATION.
On July 22, 2004 at a regularly scheduled meeting of the Board of Directors of
the Company, Jamieson Karson, the Company's Chief Executive Officer, was
appointed Chairman of the Board of Directors.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
(10.16) Amendment No. 1 to Employment Agreement of Jamieson Karson.
(10.17) Consulting Agreement between the Company and Charles Koppelman.
(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
(b) Reports on Form 8-K
During the quarter, the Company filed the following Current Reports on
Form 8-K.
(i) A Current Report on Form 8-K dated April 27, 2004 and filed on
April 29, 2004 announcing the Company's financial results for
the first quarter of 2004.
(ii) A Current Report on Form 8-K dated May 20, 2004 and filed on
May 21, 2004 reporting that the Company had sent a letter to
FMR Corp., one of the Company's stockholders, providing that
the Company's management would request that the board of
directors consider amending the Company's 1999 stock plan.
27
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report on Form 10-Q to be signed on its behalf
by the undersigned thereunto duly authorized.
DATE: August 6, 2004
STEVEN MADDEN, LTD.
/s/ JAMIESON A. KARSON
------------------------------------
Jamieson A. Karson
Chairman and Chief Executive Officer
/s/ ARVIND DHARIA
------------------------------------
Arvind Dharia
Chief Financial Officer
28
Exhibit No Description
---------- -----------
10.16 Amendment No. 1 to Employment Agreement of Jamieson
Karson.
10.17 Consulting Agreement between the Company and Charles
Koppelman.
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.