UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004 Commission File Number 0-23702
STEVEN MADDEN, LTD.
(Exact name of registrant as specified in its charter)
Delaware 13-3588231
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
52-16 Barnett Avenue, Long Island City, New York 11104
(Address of principal executive offices) (Zip Code)
(718) 446-1800
(Registrant's Telephone Number, Including Area Code)
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.0001 per share
Preferred Stock Purchase Rights
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [X] No [ ].
The aggregate market value of the common equity held by non-affiliates of the
registrant (assuming for these purposes, but without conceding, that all
executive officers and Directors are "affiliates" of the registrant) as of June
30, 2004, the last business day of the registrant's most recently completed
second fiscal quarter, was approximately $248,171,284 (based on the closing sale
price of the registrant's common stock on that date as reported on The Nasdaq
National Market).
The number of outstanding shares of the registrant's common stock as of March
14, 2005 was 13,255,617 shares.
DOCUMENTS INCORPORATED BY REFERENCE:
PART III INCORPORATES CERTAIN INFORMATION BY REFERENCE FROM THE REGISTRANT'S
DEFINITIVE PROXY STATEMENT FOR THE ANNUAL MEETING OF STOCKHOLDERS SCHEDULED TO
BE HELD ON OR ABOUT MAY 27, 2005.
TABLE OF CONTENTS
PART I
ITEM 1 BUSINESS...............................................................1
ITEM 2 PROPERTIES.............................................................8
ITEM 3 LEGAL PROCEEDINGS......................................................9
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....................9
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES...................10
ITEM 6 SELECTED FINANCIAL DATA...............................................11
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS...........................................11
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............26
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...........................26
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE............................................26
ITEM 9A CONTROLS AND PROCEDURES...............................................26
ITEM 9B OTHER INFORMATION.....................................................26
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT....................27
ITEM 11 EXECUTIVE COMPENSATION................................................27
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS..........................27
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................27
ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES................................27
PART IV
ITEM 15 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES............................27
PART I
ITEM 1 BUSINESS
Steven Madden, Ltd. (together with its subsidiaries, the "Company") designs,
sources, markets and sells fashion-forward footwear brands for women, men and
children. The Company distributes products through its retail stores, its
e-commerce website, department and specialty stores throughout the United States
and Canada and through special distribution arrangements in Europe, Central and
South America, Australia and Indonesia. The Company's product line includes core
products, which are sold year-round, complemented by a broad range of updated
styles which are designed to establish or capitalize on market trends.
The Company's business is comprised of three (3) distinct segments
(wholesale, retail and private label). The wholesale division includes seven (7)
brands: Steve Madden(R), Steven(R), l.e.i.(R), Candie's(R), Stevies(R),
Unionbay(R) and Steve Madden Mens. Steven Madden Retail, Inc., the Company's
wholly-owned retail subsidiary, operates Steve Madden, Steven and Shoe Biz
retail stores as well as the Company's outlet stores and e-commerce website. The
Company's wholly-owned private label subsidiary, Adesso-Madden, Inc., designs
and sources footwear products under private labels for many of the country's
large mass merchandisers. The Company also licenses its Steve Madden(R)
trademark for several accessory and apparel categories.
Steven Madden, Ltd., was incorporated as a New York corporation on July 9,
1990 and reincorporated under the same name in Delaware in November 1998. The
Company has established a reputation for its creative designs, popular styles
and quality products at accessible price points. The Company completed its
initial public offering in December 1993 and its shares of Common Stock
currently trade on The Nasdaq National Market under the symbol "SHOO".
The Company maintains its principal executive offices at 52-16 Barnett
Avenue, Long Island City, NY 11104, telephone number (718) 446-1800.
The Company's website is http://www.stevemadden.com. The Company makes
available free of charge on its website its Annual Reports on Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and any amendments
to such reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), as soon as
reasonably practicable after such material is electronically filed with, or
furnished to, the Securities and Exchange Commission (the "Commission"). The
Company will provide paper copies of such filings free of charge upon request.
Wholesale Divisions
Madden Womens Wholesale
The Steve Madden(R) Womens Wholesale Division ("Madden Womens Wholesale")
designs, produces, sources, sells and markets the Company's Steve Madden(R)
brand to major department stores, better specialty stores, and shoe stores
throughout the United States. The Steve Madden(R) product line has become a
leading footwear brand in the fashion conscious junior marketplace. To serve its
customers (primarily women ages 16 to 25), Madden Womens Wholesale creates and
markets fashion forward footwear designed to appeal to customers seeking
exciting, new footwear designs at affordable prices.
As the Company's largest division, Madden Womens Wholesale accounted for
$114,000,000 of net sales in 2004, or approximately 34% of the Company's total
net sales. Many newly created styles of Madden Womens Wholesale are test
marketed at the Company's retail stores. Within a few days, the Company can
determine if the test product appeals to customers. This enables the Company to
use its flexible sourcing model to rapidly respond to changing preferences which
the Company believes is essential for success in the fashion footwear
marketplace.
l.e.i.(R) - Wholesale Division
Pursuant to the Company's license agreement with Jones Investment Company,
Inc., the Company has the right to use the l.e.i.(R) trademark in connection
with the sale and marketing of footwear through September 30, 2006. The
l.e.i.(R) trademark is well known for jeanswear in the junior marketplace sold
nationally through department and
specialty stores. The Company's l.e.i.(R) footwear products are targeted to
attract girls and young women ages 6 to 20 years old, a majority of which are
younger than the typical Steve Madden(R) brand customer. The l.e.i. Wholesale
Division generated net sales of $38,000,000 for the year ended December 31,
2004, or approximately 11% of the Company's total net sales.
Madden Mens Wholesale
The Steve Madden Mens Wholesale Division ("Madden Mens Wholesale") markets a
full collection of directional young men's shoes through major department
stores, better specialty stores and independent shoe stores throughout the
United States. Price points range from $70 to $100 at retail, targeted at men
ages 18 to 44 years old.
Madden Mens Wholesale accounted for $31,000,000 of net sales in 2004, or
approximately 9% of the Company's total net sales. Madden Mens Wholesale, which
is primarily produced in China, maintains open stock inventory positions in
select patterns to serve the replenishment programs of its wholesale customers.
Candie's Footwear
Pursuant to the Company's license agreement with Candie's, Inc., ("Candie's")
the Company designs, manufactures, and distributes Candie's(R) branded footwear
for women and children worldwide through the Company's Candie's Wholesale
Division ("Candie's Wholesale Division"). The Candie's(R) Wholesale Division
generated net sales of $16,000,000 for the year ended December 31, 2004, or
approximately 5% of the Company's total net sales.
On December 6, 2004, the license agreement with Candie's was amended to
reflect Candie's decision to name Kohl's Corporation as the exclusive provider
of a new line of Candie's apparel. Pursuant to the amendment, commencing on
January 1, 2007, the Company will no longer have the exclusive right to market
Candie's branded footwear and will be permitted to sell Candie's branded
footwear only to Kohl's. Under the terms of the amendment, Candie's has
guaranteed that the Company will achieve minimum sales levels with Kohl's during
the term of the agreement. In the event such minimum sales levels are not
achieved, Candie's is required to compensate the Company in an amount based on a
percentage of the sales shortfall.
Diva Acquisition Corp. - Steven(R) Wholesale Division
Diva Acquisition Corp. ("Steven(R) Wholesale Division") designs and markets
women's fashion footwear under the "Steven(R)" trademark through major
department and better footwear specialty stores and one (1) Company-owned retail
shoe store located in New York City. Priced a tier above the Steve Madden(R)
brand, Steven(R) products are designed to appeal principally to fashion
conscious women, ages 26 to 45, who shop at department stores and footwear
boutiques. Steven(R) Wholesale Division generated net sales of $21,000,000 for
the year ended December 31, 2004, or approximately 6% of the Company's total net
sales.
Stevies Inc. - Wholesale Division
The Company's Stevies(R) wholesale division ("Stevies(R) Wholesale Division")
generated net sales of $10,000,000 for the year ended December 31, 2004, or
approximately 3% of the Company's total net sales. Stevies(R) products are
marketed through department stores such as May Department Stores, Belk, Limited
Too, as well as independent children's stores throughout the country.
Unionbay Men's Footwear
Pursuant to the Company's license agreement with Seattle Pacific Industries,
Inc., the Company has the right to use the Unionbay(R) trademark in connection
with the sale and marketing of footwear for men and boys. Unionbay(R) is known
for casual apparel in the young men, junior and children's marketplace and is
distributed nationally through department and specialty stores. The Company's
Unionbay(R) wholesale division generated net sales of $600,000 for the year
ended December 31, 2004, or approximately .2% of the Company's total net sales.
Steven Madden Retail, Inc. - Retail Division
As of December 31, 2004, the Company owned and operated eighty-five (85)
retail shoe stores under the Steve Madden(R) name, one (1) under the Steven(R)
name, four (4) outlet stores and one (1) Internet store (through the
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www.stevemadden.com website). In 2004, the Company opened ten (10) new stores
and closed two (2) under-performing stores. Most of the Steve Madden stores are
located in major shopping malls in Alabama, Arizona, California, Colorado,
Connecticut, Delaware, Florida, Georgia, Illinois, Kansas, Louisiana, Maryland,
Massachusetts, Michigan, Minnesota, Missouri, Nevada, New Jersey, New York,
North Carolina, Ohio, Pennsylvania, Puerto Rico, Rhode Island, Texas, Virginia,
Wisconsin and the District of Columbia. The retail stores generated annual sales
in excess of $694 per square foot. Sales are primarily from the sale of the
Company's Steve Madden(R) product line. Comparative store sales increased 8.2%
in 2004 compared to 2003 while growth in sales was generated by new stores. Net
sales for the retail division were $108,000,000 for 2004. Net sales from the
retail division for the year ended December 31, 2004 were approximately 32% of
the Company's total net sales.
The Company believes that the retail division will continue to enhance
overall sales and profits of the Company while building equity in the Steve
Madden brand. The Company plans to add twelve to fifteen (12 - 15) new retail
stores during 2005. The expansion of the retail division enables the Company to
test and react to new products and classifications which, in turn, strengthens
the product development efforts of the Steve Madden wholesale division.
The Adesso-Madden, Inc. - Private Label Division
In September 1995, the Company incorporated Adesso-Madden, Inc. as a wholly
owned subsidiary ("A-M"). A-M was formed to serve as a buying agent to mass
market merchandisers, shoe store chains and other value-priced retailers in
connection with their procurement of private label shoes. As a buying agent, A-M
arranges for shoe manufacturers to produce private label shoes to the
specifications of its clients. The Company believes that by operating in the
private label, mass merchandising market, the Company is able to maximize
additional non-branded sales opportunities. This leverages the Company's overall
sourcing and design capabilities. Currently, this division serves as a buying
agent for the procurement of women's, men's and children's footwear for large
retailers including Sears, Payless, Wal-Mart and Target. A-M receives buying
agent's commissions from its clients. The private label division generated
commission income of $4,500,000 for the year ended December 31, 2004.
Licensing
As of December 31, 2004, the Company licensed its Steve Madden trademark for
use in connection with the manufacturing, marketing and sale of outerwear
including leather outerwear, belts, sunglasses, eyewear and hosiery. Each
license agreement requires the licensee to pay to the Company a royalty based on
net sales, a minimum royalty in the event that specified net sales targets are
not achieved and a percentage of sales for advertising of the Steve Madden(R)
brand. Licensing income was $2,310,000 for the year ended December 31, 2004.
Design
The Company has established a reputation for its creative designs, popular
styles and quality products at affordable price points. The Company believes
that its future success will depend in substantial part on its ability to
continue to anticipate and react to changing consumer demands in a timely
manner. To meet this objective, the Company has developed a unique design
process that allows it to recognize and act quickly to changing consumer
demands. The Company's design team strives to create designs which it believes
fit the Company's image, reflect current or future trends and can be
manufactured in a timely and cost-effective manner. Once the initial design is
complete, a prototype is developed, which is reviewed and refined prior to the
commencement of limited production. Most new Steve Madden designs are then
tested in the Steve Madden(R) retail stores. Designs that prove popular are then
offered to wholesale and retail distribution nationwide. The Company believes
that its unique design and testing process and flexible sourcing model is a
significant competitive advantage allowing the Company to mitigate the risk of
the costly production and distribution of unpopular designs.
Product Sourcing and Distribution
The Company sources each of its product lines separately based on the
individual design, styling and quality specifications of the products in such
product lines. The Company does not own or operate manufacturing facilities;
rather, it sources its branded products through independently owned
manufacturers in Brazil, China, Italy, Mexico, Spain, Portugal and the United
States. The Company has established relationships with a number of manufacturers
in each of these countries. Although the Company has not entered into any
long-term manufacturing or supply contracts, the Company believes that a
sufficient number of alternative sources exist for the manufacture of its
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products. The principal materials used in the Company's footwear are available
from a number of sources, both within the United States and in foreign
countries.
The Company's design and distribution processes are intended to be flexible,
allowing the Company to respond to and accommodate changing consumer demand. The
Company's production staff tracks warehouse inventory on a regular basis,
monitors sell-through data and incorporates input on product demand from
wholesale customers. The Company can use product feedback to adjust production
or manufacture new products in as little as five weeks.
The Company distributes its products from two (2) third party distribution
warehouse centers located in California and New Jersey. The Company also
distributes its Internet shipments from a third party fulfillment center located
in Michigan. By utilizing distribution facilities that specialize in
distributing products to certain customers wholesale accounts, Steve Madden
retail stores and Internet fulfillment, the Company believes that its customers
are better served.
Customers
The Company's wholesale customers consist principally of department stores
and specialty stores, including shoe boutiques. Presently, the Company sells
approximately fifty-five percent (55%) of its products at wholesale to
department and specialty stores, including Federated Department Stores
(Bloomingdale's, Bon Marche, and Macy's), May Department Stores (Famous Barr,
Filene's, Foley's, Hecht's, Lord and Taylor and Robinsons May), Dillard's,
Marshall Field's and Nordstrom, Journeys, Limited Too and Mandees; and catalog
retailers, including Victoria's Secret and Fingerhut. For the year ended
December 31, 2004, May Department Stores and Federated Department Stores
accounted for approximately $35,000,000 (15%) and $40,000,000 (17%) of the
Company's wholesale net sales, respectively.
Distribution Channels
The Company sells its products principally through its Company-owned retail
stores and through department stores, specialty shoe stores and discount stores
in the United States and abroad. For the year 2004, net sales from the Company's
Retail Division and the Company's Wholesale Division accounted for approximately
$108,000,000 (32%) and $230,000,000 (68%) of the Company's total net sales,
respectively. The following paragraphs describe each of these distribution
channels.
Steve Madden and Steven Retail Stores
As of December 31, 2004, the Company operated eighty six (86) Company-owned
retail stores (including one Internet store) under the Steve Madden(R) name and
one (1) under the Steven(R) name. The Company believes that its retail stores
will continue to enhance overall sales, profitability, and its ability to react
to changing consumer trends. The stores are also a marketing tool which allows
the Company to strengthen brand recognition and to showcase selected items from
its full line of branded and licensed products. Furthermore, the retail stores
provide the Company with a venue to test and introduce new products and
merchandising strategies. Specifically, the Company often tests new designs at
its Steve Madden(R) retail stores before scheduling them for mass production and
wholesale distribution. In addition to these test marketing benefits, the
Company has been able to leverage sales information gathered at Steve Madden(R)
retail stores to assist its wholesale accounts in order placement and inventory
management.
A typical Steve Madden(R) store is approximately 1,400 to 1,600 square feet
and is located in malls and street locations which attract the highest
concentration of the Company's core demographic - style-conscious young women
ages 16 to 25 years old. The Steven(R) store has a more sophisticated design and
format styled to appeal to its more mature target audience. In addition to
carefully analyzing mall demographics, the Company also sets profitability
guidelines for each potential store site. Specifically, the Company targets well
trafficked sites at which the demographics fit the Company's consumer profile
and seeks to model new locations such that the projected fixed annual rent
expense does not exceed a specified percentage of projected sales over the life
of the lease. By setting these standards, the Company believes that each store
will contribute to the Company's overall profits both in the near- and
longer-terms.
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Outlet Stores
Shoe Biz, Inc., a wholly owned subsidiary of the Company ("Shoe Biz"),
operates three (3) outlet stores in New Jersey and New York, two (2) of which
operate under the Shoe Biz name and one (1) of which operates as a Steve Madden
Outlet store. Shoe Biz sells many product lines, including Steve Madden, Steven,
Stevies and l.e.i.(R) footwear, at a price lower than typically charged by other
"full price" retailers.
Department Stores
The Company currently sells to over 3,204 doors of twenty-two (22) department
stores throughout the United States and Canada. The Company's major accounts
include Federated Department Stores (Macy's, Bloomingdale's and Bon Marche), May
Department Stores (Filene's, Hecht's, Famous Barr, Foley's, Lord and Taylor and
Robinsons May and Marshall Fields'), Nordstrom and Dillard's.
The Company provides merchandising support to its department store customers
which includes in-store fixtures and signage, supervision of displays and
merchandising of the Company's various product lines. The Company's wholesale
merchandising effort includes the creation of in-store concept shops, where a
broader collection of the Company's branded products are showcased. These
in-store concept shops create an environment that is consistent with the
Company's image and enable the retailer to display and stock a greater volume of
the Company's products per square foot of retail space. In addition, these
in-store concept shops encourage longer term commitment by the retailer to the
Company's products and enhance consumer brand awareness.
In addition to merchandising support, the Company's key account executives
maintain weekly communications with their accounts to guide them in placing
orders and to assist them in managing inventory, assortment and retail sales.
The Company leverages its sell-through data gathered at its retail stores to
assist department stores in allocating their open-to-buy dollars to the most
popular styles in the product line and to phase out styles with weaker
sell-throughs.
Specialty Stores/Catalog Sales
The Company currently sells to specialty store locations throughout the
United States and Canada. The Company's major specialty store accounts include
Journeys, Mandees, Famous footwear and DSW. The Company offers its specialty
store accounts the same merchandising, sell-through and inventory tracking
support offered to its department store accounts. Sales of the Company's
products are also made through various catalogs, such as Victoria's Secret.
Internet Sales
The Company operates one (1) Internet website: www.stevemadden.com. Customers
can purchase numerous styles of the Company's Steve Madden(R), Steven and Steve
Madden Mens footwear, accessory and clothing products. Sales derived from the
Company's Internet website were $5,200,000 in 2004.
Distribution Agreements
In June 2002, the Company and Dabsan International, S.A. ("Dabsan") entered
into an agreement whereby the Company granted Dabsan the exclusive right to sell
Steve Madden products in certain Central and South American countries and the
right to develop Steve Madden retail stores in certain Central and South
American countries. Under the terms of the agreement, Dabsan was required to
purchase certain minimum amounts of Steve Madden shoes. Dabsan was also required
to open two (2) Steven Madden stores by October 31, 2004. However, in November
2004, Dabsan and the Company mutually agreed that it was not practicable to
enforce this requirement.
In February 2003, the Company and F.E.E.T. sas ("FEET") entered into a
distribution and license agreement whereby the Company granted FEET the
exclusive right to sell Steve Madden products in certain European countries with
a provision that expands the territory covered to include certain additional
European countries and North Africa. Under the terms of the agreement, FEET is
required to purchase certain minimum amounts of Steve Madden shoes. FEET is
currently in default of its minimum purchase requirements and the parties are in
discussion relating to the possible modification of the original terms of the
agreement.
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In May 2004, the Company and Les Importations Gelati Inc. ("Gelati") entered
into a retail sales agreement whereby the Company granted Gelati the exclusive
right to establish and operate Steve Madden retail stores in Canada. Under the
terms of the agreement Gelati is required to pay the Company a minimum annual
royalty for each store in operation in addition to a royalty for each pair of
footwear sold in the stores. Gelati is required to open one store per year in
2004, 2005 and 2006.
In June 2004, the Company and Steve Madden (Aust) Pty Ltd ("Madden
Australia") entered into a distribution agreement whereby the Company granted
Madden Australia the exclusive right to sell certain Steve Madden products in
Australia and New Zealand. Under the terms of the agreement, Madden Australia is
required to purchase certain minimum amounts of Steve Madden shoes and received
a right of first refusal with regard to the distribution of new licenses,
products or trademarks in the territory. The term of the contract is three years
(with an option to renegotiate certain terms after two years) plus one option
for an additional five (5) years if certain minimum purchase requirements are
met.
Competition
The fashion footwear industry is highly competitive. The Company's
competitors include specialty shoe companies as well as companies with
diversified footwear product lines. Many of these competitors, including Diesel,
Kenneth Cole, Nine West, DKNY, Skechers, Nike and Guess, may have greater
financial and other resources than the Company. The Company believes effective
advertising and marketing, fashionable styling, high quality and value are the
most important competitive factors and intends to continue to employ these
elements as it develops its products.
Marketing and Sales
The Company has focused on creating an integrated brand building program to
establish Steve Madden as the leading designer of fashion footwear for
style-conscious young women and men. As a result, the Company developed a
national advertising campaign for lifestyle and fashion magazines which was also
used in regional marketing programs such as radio advertisements, television
commercials, outdoor media, college event sponsorship and live online chat
forums. The Company also continues to promote its website (www.stevemadden.com)
where customers can purchase Steve Madden(R), Steven and Steve Madden Mens
products and interact with both the Company and other customers.
In order to service its wholesale accounts, the Company retains a sales force
of eighteen independent sales representatives. These sales representatives work
on a commission basis and are responsible for placing the Company's products
with its principal customers, including department and specialty stores. The
sales representatives are supported by the Company's senior executives, a staff
of twelve account executives, two merchandise coordinator and twenty customer
service representatives who continually cultivate relationships with wholesale
customers. This group of professionals assist accounts in merchandising and
assessing customer preferences and inventory requirements, which ultimately
serves to increase sales and profitability.
Management Information Systems (MIS) Operations
Sophisticated information systems are essential to the Company's ability to
maintain its competitive position and to support continued growth. The Company
operates on a dual AS/400 system which provides system support for all aspects
of its business including manufacturing purchase orders; customer purchase
orders; order allocations; invoicing; accounts receivable management; real time
inventory management; quick response replenishment; point-of-sale support; and
financial and management reporting functions. The Company has a PKMS bar coded
warehousing system which is integrated with the wholesale system in order to
provide accurate inventory positions and quick response size replenishment for
its customers. In addition, the Company has installed an EDI system which
provides a computer link between the Company and certain wholesale customers
that enables both the customer and the Company to monitor purchases, shipments
and invoicing. The EDI system also improves the Company's ability to respond to
customer inventory requirements on a weekly basis.
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Receivables Financing; Line of Credit
Under the terms of a factoring agreement with Capital Factors, Inc., the
Company is permitted to draw down 80% of its invoiced receivables at an interest
rate of one point below the Prime Rate (as defined in such agreement). The
agreement provides that Capital Factors is not required to purchase all the
Company's receivables and requires the Company to pay an unused line fee of .25%
of the average daily unused portion of the maximum amount of the credit line. On
September 1, 1998, the Company and Capital Factors amended its Factoring
Agreement to, among other things, provide the Company with a credit line of up
to $15,000,000, subject to certain limitations. The Company has not recently
borrowed funds under its credit line with Capital Factors. The agreement with
Capital Factors will continue in full force until terminated by either party
upon sixty days notice. Capital Factors maintains a lien on all of the Company's
receivables and assumes the credit risk for all assigned accounts approved by
it.
Trademarks and Service Marks
The STEVE MADDEN and STEVE MADDEN plus Design trademarks and service marks
have been registered in numerous International Classes (Int'l Cl. 25 for
clothing and footwear; Int'l Cl. 18 for leather goods, such as handbags and
wallets; Int'l Cl. 9 for eyewear; Int'l Cl. 14 for jewelry; Int'l Cl. 3 for
cosmetics and fragrances; Int'l Cl. 20 for picture frames and furniture; Int'l
Cl. 16 for paper goods; Int'l Cl. 24 for bedding; and Int'l Cl. 35 for retail
store services) in the United States. The Company also has trademark
registrations in the United States for the marks EYESHADOWS BY STEVE MADDEN
(Int'l Cl. 9 for eyewear), ICE TEE (Int'l Cl. 25 for clothing and footwear),
SHOE BIZ By STEVE MADDEN (Int'l Cl. 25 for clothing and footwear; and Int'l Cl.
35 for retail store services) and STEVEN M. (Int'l Class 25 for clothing and
footwear). Additionally, the Company has several pending trademark and service
mark applications in the United States for various marks, including a stylized
"H" Design (Int'l Cl. 25 for clothing and footwear), and STEVEN (Int'l Cl. 25
for clothing and footwear). The Company also has pending trademark and service
mark applications in China and the 25 cooperating countries in Europe for TORCH
STRIPE (Int'l Cl. 25 for footwear).
The Company further owns registrations for the STEVE MADDEN and STEVE MADDEN
plus Design trademarks and service marks in various International Classes in
Argentina, Australia, Bahrain, Brazil, Canada, Chile, China, Colombia, Hong
Kong, Israel, Italy, Japan, Korea, Mexico, Panama, Saudi Arabia, South Africa,
Taiwan, the 25 cooperating countries of Europe and the Benelux countries and has
pending applications for registration of the STEVE MADDEN and STEVE MADDEN plus
Design trademarks and service marks in Bahrain, Belize, Costa Rica, El Salvador,
Guatemala, Honduras, Korea, Kuwait, Lebanon, Malaysia, Oman, Peru, Qatar, Saudi
Arabia, Turkey, the United Arab Emirates and Venezuela. Additionally, the
Company owns registrations for the STEVEN trademark and service mark in various
International Classes in Hong Kong, Lebanon and Japan and has pending
applications for registration of the STEVEN trademark and service mark in China,
Israel, Italy, Japan, Korea, Malaysia, Oman, Qatar, South Africa, Saudi Arabia,
Taiwan, Thailand, Turkey, the United Arab Emirates and the United States. There
can be no assurance, however, that the Company will be able to effectively
obtain rights to the STEVE MADDEN mark throughout all of the countries of the
world. Moreover, no assurance can be given that others will not assert rights
in, or ownership of, trademarks and other proprietary rights of the Company or
that the Company will be able to successfully resolve such conflicts. The
failure of the Company to protect such rights from unlawful and improper
appropriation may have a material adverse effect on the Company's business and
financial condition.
Additionally, the Company, through its Diva Acquisition Corp. subsidiary,
owns registrations for the DAVID AARON trademark and service mark in various
International Classes in the United States (Int'l Cl. 25 for clothing and
footwear; Int'l Cl. 18 for leather goods, such as handbags and wallets; and
Int'l Cl. 35 for retail store services), Australia, Canada, Hong Kong, Japan,
Korea, South Africa and the 25 cooperating countries in Europe and for its D.
AARON trademark in Spain. Also, the Company own registrations for the DAVID
AARON trademark in International Class 3 for perfume and cosmetics;
International Class 9 for eyewear; International Class 14 for jewelry;
International Class 16 for paper goods; International Class 18 for bags;
International Class 24 for bed and bath products; International Class 25 for
clothing and footwear and International Class 26 hair accessories in Korea. The
Company believes that the DAVID AARON trademark has a significant value and is
important to the marketing of the Company's products.
The Company, through its Stevies, Inc. subsidiary, also owns various
registrations for the STEVIES and STEVIES plus Design trademark and service mark
in a number of International Classes in the United States (Int'l Cl. 18 for
7
leather goods, such as handbags and wallets; Int'l Cl. 9 for eyewear;
International Class 35 for retail store services and, International Class 26 for
hair accessories) and for its STEVIES plus Design mark for various goods in
Argentina, Bahrain, China, Hong Kong, Israel, Japan, Korea, Lebanon, Mexico,
Taiwan and the 25 cooperating countries in Europe. Additionally Stevies, Inc.
has several pending trademark and service mark applications for registration of
the STEVIES and STEVIES plus Design marks in various International Classes in
the United States (Int'l Cl. 25 for clothing and footwear; Int'l Cl. 14 for
jewelry; Int'l Cl. 28 for toys; Int'l Cl. 26 for hair accessories; International
Class 16 for paper goods; International Class 3 for perfume and cosmetics and,
International Class 9 for CDs and eyewear) and in Brazil, Canada, Colombia,
Indonesia, Kuwait, Malaysia, Mexico, Oman, Panama, Peru, Qatar, Saudi Arabia,
South Africa, Thailand, Turkey, the United Arab Emirates and Venezuela. Finally,
Stevies, Inc. also owns several pending trademark and service mark applications
for registration of the STEVIES BY STEVE MADDEN mark in various International
Classes in the United States (Int'l Cl. 25 for clothing and footwear; Int'l Cl.
14 for jewelry; Int'l Cl. 18 for leather goods, such as handbags and wallets;
Int'l Cl. 16 for paper goods; Int'l Cl. 3 for cosmetics and fragrances; Int'l
Cl. 9 for eyewear; Int'l Cl. 26 for hair accessories; Int'l Cl. 28 for toys; and
Int'l Cl. 35 for retail store services).
Employees
On February 17, 2005, the Company employed approximately 1,510 employees, of
whom approximately 490 work on a full-time basis and approximately 1,020 work on
a part-time basis. The management of the Company considers relations with its
employees to be good.
ITEM 2 PROPERTIES
The Company maintains approximately 33,000 square feet for its executive
offices and sample production facilities at 52-16 Barnett Avenue, Long Island
City, NY 11104. The lease for the Company's headquarters expires on June 30,
2008 and can be extended, at the option of the Company, through June 30, 2013.
The Company's showroom is located at 1370 Avenue of the Americas, New York,
NY. All of the Company's brands are displayed for sale from this 9,917 square
foot space. The lease for the Company's showroom expires on February 28, 2013.
The Company also maintains a 807 square foot showroom located at Fashion
Center Dallas in the World Trade Center, Dallas, Texas. The lease for this
showroom expires on April 30, 2007.
The Company also currently engages three independent distributors to
warehouse and distribute its products.
The Company's private label division, Adesso Madden, maintains approximately
3,120 square feet of office and showroom space at 99 Seaview Boulevard, Port
Washington, N.Y. The lease for Adesso Madden expires on May 31, 2006.
All of the Company's retail stores are leased pursuant to leases that under
their original term extend for an average of ten years in length. A majority of
the leases include clauses that provide for contingent rental payments if gross
sales exceed certain targets. In addition, a majority of the leases enable the
Company and/or the landlord to terminate the lease in the event that the
Company's gross sales do not achieve certain minimum levels during a prescribed
period. Many of the leases contain rent escalation clauses to compensate for
increases in operating costs and real estate taxes
8
The current terms of the Company's retail store leases expire as follows:
Years Lease Terms Expire Number of Stores
------------------------------- -----------------------
2005 4
2006 1
2007 6
2008 12
2009 11
2010 11
2011 14
2012 9
2013 11
2014 11
ITEM 3 LEGAL PROCEEDINGS
Except as set forth below, no material legal proceedings are pending to which
the Company or any of its property is subject.
On December 15, 2003, the Company commenced an action against La Rue
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 breach of the license agreement and trademark infringement by LaRue. On
January 20, 2004, LaRue served an answer and counterclaim alleging that the
license agreement was improperly terminated by the Company and seeking
$9,900,000 in compensatory damages, as well as additional punitive damages. The
parties have served cross-motions for summary judgment which were submitted to
the court on February 28, 2005. If either side prevails on its motion the court
will likely order an assessment of damages. If neither motion is granted, a
trial will be scheduled for later in 2005. The Company believes that it has
substantial defenses to the counterclaims asserted by LaRue. The Company has
retained an expert which has calculated the damages to LaRue, assuming LaRue
prevails on its claim of improper termination of the license agreement, to be
less than $1,000,000.
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 action.
Colors in Optics assumed responsibility for the defense of this action. The
matter was settled with no payment of money by Steven Madden. Steven Madden Ltd.
signed the settlement papers on or about February 10, 2005 and a dismissal
should be filed shortly.
On or about December 20, 2004, an action was filed in the United States
District Court for the Central District of California against the Company by
Global Brand Marketing Inc. (GBMI) for patent infringement, captioned Global
Brand Marketing Inc. v. Steven Madden Ltd., Case No. CV04-10339 (RJK-AJW (RZx)).
In the action GBMI claims infringement of a design patent in connection with a
shoe sold by Steven Madden referred to as the "Ronan." The parties are in the
process of discussing settlement. The Company believes that this action will not
have a material effect on the Company's financial position.
On April 26, 2004, the Commission sent the Company a letter requesting
information and documents relating to, among other things, Steven Madden's
employment with the Company. The Company has responded to this request.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the holders of the Company's Common
Stock during the last quarter of its fiscal year ended December 31, 2004.
9
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The Company's shares of common stock trade on The Nasdaq National Market. The
following table sets forth the range of high and low closing sales prices for
the Company's Common Stock during each fiscal quarter during the two-year period
ended December 31, 2004 as reported by The Nasdaq National Market. The quotes
represent inter-dealer prices without adjustment or mark-ups, mark-downs or
commissions and may not necessarily represent actual transactions. The trading
volume of the Company's securities fluctuates and may be limited during certain
periods. As a result, the liquidity of an investment in the Company's securities
may be adversely affected.
Common Stock
High Low High Low
---------- ---------- ---------- ----------
2004 2003
Quarter ended Quarter ended
March 31, March 31,
2004 21.61 17.75 2003 19.35 14.83
Quarter ended Quarter ended
June 30, June 30,
2004 20.70 17.66 2003 22.35 15.27
Quarter ended Quarter ended
September 30, September 30,
2004 20.24 15.59 2003 22.34 18.76
Quarter ended Quarter ended
December 31, December 31,
2004 19.79 15.79 2003 22.65 18.98
On March 14, 2005, the final quoted price as reported by The Nasdaq National
Market was $16.89 for each share of common stock. As of March 14, 2005, there
were 13,255,617 shares of Common Stock outstanding and 72 record holders.
Dividends. The Company did not declare or pay cash dividends during the
two-year period ended December 31, 2004. Pursuant to an agreement reached on
February 2, 2005 with an 8% shareholder, the Company has agreed to commit $25
million in 2005 and $10 million in 2006 to a combination of share repurchases
and/or dividends, such programs to be implemented at such time and such manner
as the board of directors shall determine in its sole discretion.
Equity Compensation Plans. Information regarding our equity compensation
plans as of December 31, 2004 is disclosed in Item 12. "Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder Matters."
Issuer Repurchases of Equity Securities. The following table provides
information as of December 31, 2004 with respect to the shares of common stock
repurchased by the Company during the fourth quarter of fiscal 2004:
Maximum Dollar
Total Number of Amount of Shares
Shares Purchased that May Yet Be
Total Number as Part of Publicly Purchased Under the
of Shares Average Price Announced Plans Plans or Programs
Period Purchased Paid per Share or Programs (1) (1)
- ------------------- ---------- -------------- ------------------- -------------------
10/1/04 - 10/31/04 116,800 17.23 116,800 $12,745,392
11/1/04 - 11/30/04 145,400 16.82 145,400 $10,299,846
12/1/04 - 12/31/04 0
---------- -------------- ------------------- -------------------
Total 262,200 17.00 262,200 $10,299,846
10
- -----------------
(1) The Company's previously announced share repurchase program, 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 6 SELECTED FINANCIAL DATA
The following selected financial data has been derived from the Company's
audited financial statements. The Income Statement Data relating to 2004, 2003,
2002, 2001 and 2000 and the Balance Sheet Data as of December 31, 2004, 2003,
2002, 2001 and 2000 should be read in conjunction with the Company's audited
consolidated financial statements and notes thereto appearing elsewhere herein.
Year Ended December 31,
---------------------------------------------------------------------------------
2004 2003 2002 2001 2000
------------- ------------- ------------- ------------- -------------
INCOME STATEMENT DATA:
Net sales $ 338,144,000 $ 324,204,000 $ 326,136,000 $ 243,391,000 $ 205,113,000
Cost of sales 215,475,000 198,185,000 199,453,000 143,518,000 115,495,000
Gross profit 122,669,000 126,019,000 126,683,000 99,873,000 89,618,000
Commissions and licensing fee 6,806,000 7,894,000 6,603,000 5,911,000 4,847,000
Operating expenses (110,494,000) (100,287,000) (100,074,000) (79,472,000) (68,833,000)
Cost of loss mitigation coverage (6,950,000)
Income from operations 18,981,000 33,626,000 33,212,000 19,362,000 25,632,000
Interest income 2,009,000 1,611,000 1,166,000 1,344,000 1,744,000
Interest expense (68,000) (54,000) (16,000) (66,000) (102,000)
Gain on sale of marketable
securities 32,000 136,000 66,000 71,000 230,000
Income before provision for income
taxes 20,954,000 35,319,000 34,428,000 20,711,000 27,504,000
Provision for income taxes 8,679,000 14,865,000 14,587,000 8,595,000 11,461,000
Net Income 12,275,000 20,454,000 19,841,000 12,116,000 16,043,000
Basic income per share $ 0.93 $ 1.58 $ 1.58 $ 1.04 $ 1.42
Diluted income per share $ 0.86 $ 1.45 $ 1.45 $ 0.94 $ 1.26
Basic weighted average common
shares outstanding 13,148,869 12,985,265 12,594,861 11,617,862 11,310,130
Effect of potential common
shares from exercise of
options and warrants 1,074,080 1,153,246 1,115,018 1,330,002 1,387,244
Diluted weighted average common
shares outstanding 14,222,949 14,138,511 13,709,879 12,947,864 12,697,374
BALANCE SHEET DATA
Total assets 186,430,000 177,870,000 150,500,000 121,862,000 91,733,000
Working capital 101,417,000 105,140,000 86,461,000 82,633,000 57,207,000
Noncurrent liabilities 2,088,000 1,828,000 1,532,000 1,313,000 1,130,000
Stockholders' equity 164,665,000 159,187,000 130,075,000 102,360,000 76,566,000
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of the Company's financial condition and results of
operations should be read in conjunction with the audited 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
11
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,"
"projects," 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.
Overview
($ in thousands, except retail sales data per square foot)
Several initiatives implemented by the Company during the past year helped to
solidify the Company's position as a major footwear resource for both retailers
and consumers. One such initiative was the diversification of the Company's core
brand. The evolution of the Steve Madden Womens brand from its traditional
casual base into broader categories (such as dress, tailored and at-once trend
items) resulted in improved sales performance for the division. Net sales for
Steve Madden Womens increased 4% to $113,879 in 2004 compared to $109,285 in
2003.
Another initiative of the Company was to broaden its demographic reach by
growing the Steven Shoes by Steve Madden label, and by the addition of two new
divisions. The Steven brand is priced a tier above the Steve Madden brand and is
designed to attract a new customer, principally fashion conscious women, ages 26
to 45, who shop at department stores and footwear boutiques. Net sales of that
division increased 68% to $21,039 in 2004 compared to $12,519 in 2003 while
income from operations increased 110% to $2,367 in 2004 compared to $1,128 in
2003. One of the Company's new licenses, Candie's footwear, is designed for
young women and girls who are generally younger than the typical Steve Madden
customer. In its first full year of operation, the Candie's division had net
sales of $15,584. The Unionbay Men's division, designed to give the Company
entry into the young men's market, first full year of operation proved to be
disappointing and resulted in net sales of $578.
Finally, the Company continued its strategy of growing the Retail Division by
opening ten new stores while closing two underperforming stores. Net sales in
the retail division increased 13% to $107,797 in 2004 from $95,518 in 2003. Same
store sales (sales in stores that were in operation throughout all of 2003 and
2004) increased 8% while sales per square foot increased to $694 per square foot
compared to $644 per square foot last year. The Company is planning to open
twelve to fifteen (12-15) new stores in 2005.
The Company faced many difficult challenges during the past year. Sales in
the l.e.i. division decreased 37% to $38,391 this year from $60,623 last year
while income from operations decreased 94% to $580 in 2004 from $8,949 in 2003.
The decrease in sales was due to a reduction in consumer demand for casual
styles and stiff wholesale customer resistance to the evolution of l.e.i. into a
sizeable dress shoe resource. Management anticipates that 2005 will continue to
present challenges for this division in sales volume.
The Company's gross profit decreased to 36% this year from 39% last year.
Several issues impact the Company's gross profit. The Company has expanded its
presence in several product classifications in which Steve Madden is not the
dominant brand. In those segments, the consumer price parameter is being set by
the broader market, forcing the Company to adapt its pricing strategy to remain
competitive, which frequently results in lower margins. The sluggish performance
of l.e.i. resulted in a decrease of gross profit in that division of $11,791,
which adversely affected the consolidated gross profit of the Company.
Additionally, a difficult markdown environment in 2004 depressed gross profit
margins by increasing markdowns and allowances as a percentage of sales by 1% of
gross sales. The Company expects gross profit margin pressure in both the
wholesale and retail businesses to continue throughout 2005.
The Company's inventory turnover decreased to 7.4 times in 2004 compared to
9.2 times in 2003, reflecting an increase in inventory levels to $34,384 this
year compared with $23,858 last year. The increase in inventory is partially due
to the broader assortment of SKUs required for new product classifications, the
additional inventory required to support Mens open stock, and the addition of
the Candie's division. Additionally, the retail inventory increased due to the
net addition of eight stores. The Company's accounts receivable average
collection days increased to 64 days from 52 days a year ago. The slowdown in
collecting receivables is due to an increase in business with mass merchant
retailers who typically receive extended payment terms.
12
As of December 31, 2004, the Company has approximately $79,977 in cash, cash
equivalents and investment securities, no short or long term debt, and total
stockholders equity of $164,665. Working capital decreased from $105,140 in 2003
to $101,417 in 2004, reflecting management's decision to move a portion of
excess cash into long-term marketable securities. The Company repurchased
545,100 shares of common stock this year in the total amount of $9,700,
reflecting management's continued confidence in the Company's long-term
prospects and its commitment to enhance shareholder value.
13
The following tables set forth information on operations for the periods
indicated:
Selected Financial Information
Years Ended
December 31
($ in thousands)
2004 2003 2002
---------------------- ---------------------- ---------------------
Consolidated:
- ------------
Net Sales $ 338,144 100% $ 324,204 100% $ 326,136 100%
Cost of Sales 215,475 64 198,185 61 199,453 61
Gross Profit 122,669 36 126,019 39 126,683 39
Other Operating Income 6,806 2 7,894 2 6,603 2
Operating Expenses 110,494 33 100,287 31 100,074 31
Income from Operations 18,981 5 33,626 10 33,212 10
Interest and Other 1,973 1 1,693 1 1,216 1
Income Net
Income Before Income 20,954 6 35,319 11 34,428 11
Taxes
Net Income 12,275 4 20,454 6 19,841 6
By Segment:
WHOLESALE DIVISIONS:
- -------------------
Steven Madden, Ltd. (Madden Womens):
- -----------------------------------
Net Sales $ 113,879 100% $ 109,285 100% $ 108,577 100%
Cost of Sales 82,414 72 77,313 71 75,080 69
Gross Profit 31,465 28 31,972 29 33,497 31
Other Operating Income 2,310 2 2,827 3 1,736 2
Operating Expenses 28,828 25 27,630 25 27,714 26
Income from Operations 4,947 5 7,169 7 7,519 7
l.e.i. Footwear:
- ---------------
Net Sales $ 38,391 100% $ 60,623 100% $ 55,665 100%
Cost of sales 27,575 72 38,016 63 35,368 64
Gross Profit 10,816 28 22,607 37 20,297 36
Operating Expenses 10,236 27 13,658 22 14,165 25
Income from Operations 580 1 8,949 15 6,132 11
Madden Mens:
- -----------
Net Sales $ 31,301 100% $ 34,881 100% $ 45,153 100%
Cost of sales 21,525 69 22,803 65 29,022 64
Gross Profit 9,776 31 12,078 35 16,131 36
Operating Expenses 8,742 28 8,277 24 10,330 23
Income from Operations 1,034 3 3,801 11 5,801 13
Candie's Footwear:
- -----------------
Net Sales $ 15,584 100% $ 938 100% -- --
Cost of sales 11,535 74 532 57 -- --
Gross Profit 4,049 26 406 43 -- --
Operating Expenses 4,357 28 748 80 -- --
Loss from Operations (308) (2) (342) (37) -- --
14
Selected Financial Information
Years Ended
December 31
($ in thousands)
2004 2003 2002
---------------------- ---------------------- ---------------------
By Segment (Continued)
WHOLESALE DIVISIONS (Continued):
- -------------------------------
Diva Acquisition Corp. (Steven):
- -------------------------------
Net Sales $ 21,039 100% $ 12,519 100% $ 11,194 100%
Cost of Sales 13,398 64 8,031 64 8,117 73
Gross Profit 7,641 36 4,488 36 3,077 27
Operating Expenses 5,274 25 3,360 27 2,645 23
Income from Operations 2,367 11 1,128 9 432 4
Stevies Inc.:
- ------------
Net Sales $ 9,575 100% $ 10,120 100% $ 13,664 100%
Cost of sales 6,623 69 6,611 65 8,777 64
Gross Profit 2,952 31 3,509 35 4,887 36
Other Operating Income -- -- 11 0 97 1
Operating Expenses 2,746 29 2,262 22 3,205 24
Income from Operations 206 2 1,258 13 1,779 13
Unionbay Men's Footwear:
- -----------------------
Net Sales $ 578 100% $ 320 100% -- --
Cost of Sales 528 91 213 67 -- --
Gross Profit 50 9 107 33 -- --
Operating Expenses 604 105 481 150 -- --
Loss from Operations (554) (96) (374) (117) -- --
RETAIL DIVISION:
- ---------------
Steven Madden Retail Inc.:
- -------------------------
Net Sales $ 107,797 100% $ 95,518 100% $ 91,883 100%
Cost of Sales 51,877 48 44,666 47 43,089 47
Gross Profit 55,920 52 50,852 53 48,794 53
Operating Expenses 47,489 44 41,719 44 39,793 43
Income from Operations 8,431 8 9,133 9 9,001 10
Number of Stores 91 83 80
ADESSO MADDEN INC.:
- ------------------
(FIRST COST)
Other Operating Revenue $ 4,496 100% $ 5,056 100% $ 4,770 100%
Operating Expenses 2,218 49 2,152 43 2,222 47
Income from Operations 2,278 51 2,904 57 2,548 53
15
RESULTS OF OPERATIONS
($ in thousands)
Year Ended December 31, 2004 vs. Year Ended December 31, 2003
Consolidated:
- ------------
Total net sales for the year ended December 31, 2004 increased by 4% to $338,144
in 2004 from $324,404 for the comparable period of 2003. Sales increases from
the Retail Division, the new Candie's Wholesale Division, Steven Wholesale
Division and the Madden Womens Wholesale Division were offset by declines in the
l.e.i., Madden Mens and Stevies Wholesale Divisions.
Gross profit as a percentage of sales decreased to 36% in 2004 from 39% in 2003.
This was primarily due to an increase in cost of sales due to higher inventory
costs associated with the utilization of product sourcing that provided shorter
delivery times combined with pricing pressure from our wholesale customers.
Additionally, the poor performance of the l.e.i. and Candie's Wholesale
Divisions at retail, necessitated high level inventory markdowns which resulted
in lower than expected margins. Finally, the liquidation of slow moving
inventory combined with heavy and persistent promotional activity throughout the
year negatively affected the Company's gross profit.
Operating expenses increased to $110,494 in 2004 from $100,287 in 2003. This
increase resulted from increased professional fees incurred by the Company in
complying with the rules and regulations adopted pursuant to the Sarbanes-Oxley
Act of 2002, higher payroll and payroll related expenses and occupancy expenses
associated with the operation of an additional eight retail stores (net), an
increase in advertising expenditures in support of the brand, a reclassification
of warehouse expenses and the costs associated with the launch of the Candie's
and Unionbay Wholesale Divisions.
Commission and licensing fee income was $6,806 in 2004 compared to $7,894 in
2003. Income from operations was $18,981 in 2004 compared to $33,626 in 2003.
Net income was $12,275 in 2004 compared to $20,454 in 2003. The decrease in
income was primarily due to the lower margins and increased expenses described
directly above.
Wholesale Divisions:
- -------------------
Steven Madden, Ltd. (Madden Womens, l.e.i. Footwear, Madden Mens and Candie's
Footwear):
Sales from the Madden Womens Wholesale Division ("Madden Womens") accounted for
$113,879 or 34%, and $109,285 or 34%, of total sales in 2004 and 2003,
respectively. Gross profit as a percentage of sales decreased to 28% in 2004
from 29% in 2003, primarily due to the liquidation of slow moving inventory and
an increase in markdowns and allowances caused by higher levels of promotional
activities at retail in the third and fourth quarters of 2004. Operating
expenses increased to $28,828 in 2004 from $27,630 in 2003, due to an increase
in advertising expenditures in support of the brand and increases in selling and
related expenses. Income from operations for Madden Womens was $4,947 in 2004
compared to $7,169 in 2003.
Sales from the l.e.i. Footwear Wholesale Division ("l.e.i.") accounted for
$38,391 or 11%, and $60,623 or 19%, of total sales in 2004 and 2003,
respectively. This decrease in sales resulted from a reduction in consumer
demand for casual classifications combined with a disappointing performance at
retail. Gross profit as a percentage of sales decreased to 28% in 2004 from 37%
in 2003, primarily due to the liquidation of slow moving inventory and higher
inventory markdowns and clearance at retail. Operating expenses decreased to
$10,236 in 2004 from $13,658 in 2003 due to decreases in payroll and payroll
related expenses and selling and marketing expenses. Income from operations for
l.e.i. was $580 in 2004 compared to $8,949 in 2003.
Sales from the Madden Mens Wholesale Division ("Madden Mens") accounted for
$31,301 or 9%, and $34,881 or 11%, of total sales in 2004 and 2003,
respectively. This sales decrease was the result of a downturn in the Men's
casual fashion footwear segment during the first half of the year. The Company
broadened and repositioned the fall line resulting in an increase in sales in
the fourth quarter of 2004 of 61% to $10,951 compared to $6,816 in the same
period of 2003. Gross profit as a percentage of sales decreased to 31% in 2004
from 35% in 2003, primarily due to the liquidation of slow moving inventory and
an increase in markdowns and allowances caused by higher levels of promotional
16
activities at retail. Operating expenses increased to $8,742 in 2004 from $8,277
in 2003. Income from operations for Madden Mens was $1,034 in 2004 compared to
$3,801 in 2003.
Sales from the Candie's Wholesale Division ("Candie's") which was launched in
the fourth quarter of 2003, generated net sales of $15,584 in 2004. Heavy
promotional activity combined with several challenges in product design resulted
in a lower than anticipated gross profit as a percentage of sales of 26%.
Operating expenses were $4,357 or 28% of net sales in 2004. Loss from operations
for Candie's was $308 in 2004 compared to $342 in 2003.
Diva Acquisition Corp. ("Steven"):
Sales from Steven accounted for $21,039 or 6%, and $12,519 or 4%, of total sales
in 2004 and 2003, respectively. This 68% 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 retailers to generate weekly reorders with improved turn and
profitability. Gross profit as a percentage of sales remained the same as last
year at 36%. Operating expenses increased to $5,274 in 2004 from $3,360 in 2003,
due to increases in selling, designing, marketing and advertising expenses.
Income from operations for Steven was $2,367 in 2004, compared to $1,128 in
2003.
Stevies Inc. ("Stevies"):
Sales from Stevies accounted for $9,575 or 3%, and $10,120 or 3%, of total sales
in 2004 and 2003, respectively. The decrease in sales was due to the
disappointing performance in boot, slipper and athletic classification in the
fourth quarter of 2004. Gross profit as a percentage of sales decreased to 31%
in 2004 from 35% in 2003, primarily due to pricing pressures and the liquidation
of slow moving inventory. Operating expenses increased to $2,746 in 2004 from
$2,262 in 2003 due to increases in payroll and payroll related expenses and
marketing and advertising expenses. Income from operations for Stevies was $206
in 2004 compared to $1,258 in 2003.
Unionbay Men's Footwear ("Unionbay"):
Unionbay, which launched in the fall of 2003, generated net sales of $578 for
the year 2004. The consumer acceptance of the fall 2003 line was less than
anticipated. As a result, the Company changed product direction, which caused
the Company to forgo shipments of spring 2004 Unionbay products.
Retail Division:
- ---------------
Sales from the Retail Division accounted for $107,797 or 32% and $95,518 or 29%
of total sales in 2004 and 2003, respectively. As of December 31, 2004, there
were 91 retail stores compared to 83 retail stores as of December 31, 2003.
Comparable store sales (sales of those stores that were open for all of 2003 and
2004) for the year ended December 31, 2004 increased 8% over the same period of
2003. This increase was achieved through management's immediate reaction to
at-once demand for boots early in the first quarter of 2004. 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 2004. Operating expenses for the Retail
Division were $47,489 in 2004 and $41,719 in 2003. This increase was primarily
due to increased payroll and payroll related expenses and higher occupancy
expenses associated with the operation of an additional eight stores (net) in
the current period and higher advertising expenditures in support of the brand.
Despite increases in sales, income from operations for the Retail Division
decreased to $8,431 in 2004 compared to $9,133 in 2003, due to the lower margins
and the Company's investment in the brand through higher advertising costs.
Adesso-Madden Division:
- ----------------------
Adesso-Madden, Inc. generated commission revenues of $4,496 in 2004, compared to
$5,056 in 2003. This decrease was the result of a major customer sharply
reducing its purchases in order to reduce inventory levels in its stores. Income
from operations for Adesso-Madden was $2,278 in 2004 compared to $2,904 in 2003.
17
Year Ended December 31, 2003 vs. Year Ended December 31, 2002
Consolidated:
- ------------
Total net sales for the year ended December 31, 2003, decreased to $324,204 from
$326,136 for the year ended December 31, 2002. The decrease was primarily due to
a decline in net sales from the Madden Mens and the Stevies, Inc., Wholesale
Divisions and the continued promotional environment. The Company maintained a
substantial portion of the sales and market share growth that it achieved in the
prior year. During the year 2002, the Company generated a 34% growth in total
net sales over 2001. Gross profit as a percentage of sales remained the same as
2002 at 39%.
Operating expenses remained virtually unchanged ($100,287 in 2003 as compared to
$100,074 in 2002). Total operating expenses as a percentage of sales remained at
31% in 2003, the same as 2002. The increase in operating expenses resulted from
the Company's opening of six additional retail stores and costs associated with
the addition of Candie's and Unionbay Wholesale Divisions as well as an increase
in licensing fees paid by the Company. These increases were partially offset by
various cost reductions.
Income from operations for 2003 was $33,626, which represents an increase of
$414 or 1% from $33,212 in 2002. Net income increased by 3% to $20,454 in 2003
from $19,841 in 2002. The increase in net income primarily resulted from the
increase in interest and other income.
Wholesale Divisions:
- -------------------
Steven Madden Ltd. (Madden Womens, l.e.i., Madden Mens and Candie's Footwear):
Sales from the Madden Womens Wholesale Division accounted for $109,285 or 34%,
and $108,577 or 33%, 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 decreased to
29% in 2003 from 31% in 2002, primarily due to the fourth quarter closeout of
slower moving styles and the support to our wholesale customers' initiatives to
clear products at retail. Operating expenses decreased to $27,630 in 2003 from
$27,714 in 2002. Income from operations for Madden Womens was $7,169 in 2003
compared to $7,519 in 2002.
Sales from the l.e.i. Footwear Wholesale Division accounted for $60,623 or 19%,
and $55,665 or 17%, 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 the Saks Group. Gross profit as a percentage of sales increased to 37% in
2003 from 36% in 2002 primarily due to changes in product mix and improved
inventory management. Operating expenses decreased to $13,658 in 2003 from
$14,165 in 2002 due to the Company successfully leveraging its infrastructure
while continuing to grow its business. Income from operations for l.e.i. was
$8,949 in 2003 compared to $6,132 in 2002.
Sales from the Madden Mens Wholesale Division accounted for $34,881 or 11%, and
$45,153 or 14%, 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 sports casual business which
created substantial inventory and margin challenges. Second, there was a strong
downturn in the casual business, the largest category of Madden Mens, as
consumer demand and trends shifted more toward dressy and dress casual
classifications. Gross profit as a percentage of sales decreased to 35% in 2003
from 36% in 2002, primarily due to an increase in markdown allowances caused by
higher levels of promotional activities at retail. Operating expenses decreased
to $8,277 in 2003 from $10,330 in 2002, due to decreases in selling and related
expenses. Income from operations for Madden Mens was $3,801 in 2003 compared to
$5,801 in 2002.
Candie's Footwear, which began shipping for the first time in the fourth quarter
of 2003, generated net sales of $938.
Diva Acquisition Corp. ("Steven"):
Sales from Steven accounted for $12,519 or 4%, and $11,194 or 3%, of total sales
in 2003 and 2002, respectively. 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 36% in 2003 from 27% in 2002, primarily
the result of cost effective sourcing and improved inventory management.
18
Operating expenses increased to $3,360 in 2003 from $2,645 in 2002 due to
increases in selling, designing, marketing and advertising expenses. Income from
operations for Steven was $1,128 in 2003 compared to $432 in 2002.
Stevies Inc. ("Stevies"):
Sales from Stevies accounted for $10,120 or 3%, and $13,664 or 4%, of total
sales in 2003 and 2002, respectively. The decrease in sales was due to
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 decreased to 35% in 2003
from 36% in 2002, primarily due to an increase in promotional activity.
Operating expenses decreased to $2,262 in 2003 from $3,205 in 2002 due to
decreases in selling and selling-related expenses. Income from operations for
Stevies was $1,258 in 2003 compared to $1,779 in 2002.
Unionbay Men's Footwear ("Unionbay"):
Unionbay Men's Footwear, generated net sales of $320 in the second half of 2003.
The product placed consisted primarily of test quantities.
Retail Division:
- ---------------
Sales from the Retail Division accounted for $95,518 or 29% and $91,883 or 28%
of total sales in 2003 and 2002, respectively. The increase in sales was due to
the increase in number of Steve Madden retail stores. During 2003, the Company
opened six (6) new retail stores and closed three (3) of its underperforming
stores. As of December 31, 2003, there were 83 retail stores, compared to 80
retail stores as of December 31, 2002. Comparable store sales for the year ended
December 31, 2003, decreased 4% over the same 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 $41,719 in 2003
and $39,793 in 2002. This increase was due to higher costs associated with the
opening of the six (6) additional stores during 2003. Income from operations for
the Retail Division was $9,133 in 2003 compared to $9,001 in 2002.
Adesso-Madden Division:
- ----------------------
Adesso-Madden, Inc. generated commission revenues of $5,056 for the year ended
December 31, 2003, which represented a 6% increase over commission revenues of
$4,770 for the same period in 2002. This increase was primarily the result of
growth in discount retail accounts. Income from operations for Adesso-Madden was
$2,904 in 2003 compared to $2,548 in 2002.
LICENSE AGREEMENTS
Revenues from licensing decreased to $2,310 in 2004 from $2,838 in 2003. This
decrease resulted from the termination by the Company of its handbag license
agreement with La Rue Distribution Inc. As of December 31, 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 $101,417 at December 31, 2004 compared to
$105,140 at December 31, 2003. The decrease was primarily the result of
management's decision to move a portion of excess cash into long-term marketable
securities, as well as the repurchase of 545,100 shares of common stock this
year in the total amount of $9,700, reflecting management's continued confidence
in the Company's long-term prospects and its commitment to enhance shareholder
value.
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
one point below the Prime Rate (as defined in such agreement). The agreement
19
with Capital Factors will continue in full force until terminated by either
party upon sixty days notice. 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 December 31, 2004 the Company did not use any portion of the
credit line.
As of December 31, 2004 the Company had invested $49,124 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 year ended December 31, 2004, net cash provided by operating
activities was $12,863. Usage of cash was caused primarily by an increase in
factored accounts receivable of $5,417, primarily caused by a sales increase to
mid-tier customers who typically have longer payment terms, an increase in
inventories of $10,526 partially due to the addition of eight retail stores
(net) during the current period and the working capital required by new
divisions. Sources of cash were provided principally by net income of $12,275, a
decrease in prepaid expenses, prepaid taxes, deposits and other assets of $3,507
and an increase in accounts payable and other accrued expenses of $2,870.
At December 31, 2004, the Company had un-negotiated open letters of credit for
the purchase of imported merchandise of approximately $9,808.
The Company has an employment agreement with Steve Madden, its Creative and
Design Chief, which provides for an annual base salary of $700 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 $1,060 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. The Company currently makes approximately 94% of
its purchases in U.S. dollars.
INVESTING ACTIVITIES
During the year ended December 31, 2004, the Company invested $27,779 in
marketable securities and received $9,708 from maturities and sales of
securities. In addition, the Company incurred capital expenditures of $7,387
principally for leasehold improvements for the ten additional retail stores that
were opened during the period and computer systems upgrades.
FINANCING ACTIVITIES
During the year ended December 31, 2004, the Company repurchased 545,100 shares
of the Company's common stock at a total cost of $9,700.
20
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.
CONTRACTUAL OBLIGATIONS
The Company's contractual obligations as of December 31, 2004 were as follows:
Payment due by period (in thousands)
Less than More than
Contractual Obligations Total 1 year 1-3 years 3-5 years 5 years
- ------------------------- ---------- ---------- ---------- ---------- ----------
Long-Term Debt
Obligations $ 0 $ 0 $ 0 $ 0 $ 0
Capital Lease Obligations 0 0 0 0 0
Operating Lease
Obligations 71,960 11,004 22,384 17,512 21,060
Purchase Obligations 9,808 9,808 0 0 0
Other Long-Term
Liabilities (future
minimum royalty
payments) 5,433 2,740 2,693 0 0
---------- ---------- ---------- ---------- ----------
Total $ 87,201 $ 23,552 $ 25,077 $ 17,512 $ 21,060
========== ========== ========== ========== ==========
CRITICAL ACCOUNTING POLICIES AND THE USE OF ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results of
Operations is based upon our audited consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires us
to make estimates and judgments that affect the reported amounts of assets,
liabilities, sales and expenses, and related disclosure of contingent assets and
liabilities. Estimates by their nature are based on judgments and available
information. The estimates that we make are based upon historical factors,
current circumstances and the experience and judgment of our management. We
evaluate our assumptions and estimates on an ongoing basis and may employ
outside experts to assist in our evaluations. Therefore, actual results could
materially differ from those estimates under different assumptions and
conditions. We believe the following critical accounting estimates are affected
by more significant judgments used in the preparation of our consolidated
financial statements: sales and accounts receivable valuation allowances,
inventory reserves, valuation of intangible assets and litigation reserves.
Allowances for bad debts, returns, and customer chargebacks. We provide reserves
against our trade accounts receivables for future customer chargebacks, co-op
advertising allowances, discounts, returns and other miscellaneous deductions
that relate to the current period. The reserve against our non-factored trade
receivables also includes estimated losses that may result from our customers'
inability to pay. We determine the amount of the reserve by analyzing our aged
receivables, current economic conditions, the prevailing retail environment and
historical dilution levels for customers. Failure to correctly estimate the
amount of the reserve could materially impact our results of operation and
financial position.
Inventory reserves. Inventories are stated at lower of cost or market, on a FIFO
basis. We review our inventory on a regular basis for excess and slow moving
inventory. Our review is based on an analysis of inventory on hand, prior sales,
and our expected net realizable value through future sales. Our analysis
21
includes a review of inventory quantities on hand at period-end in relation to
year-to-date sales and projections for sales in the foreseeable future. We
consider quantities on hand in excess of estimated future sales to be at risk
for market impairment. The net realizable value, or market value, is determined
based on our estimate of sales prices of such inventory through off-price or
discount store channels. The likelihood of any material inventory write-down is
dependent primarily on our expectation of future consumer demand for our
product. A misinterpretation or misunderstanding of future consumer demand for
our product or the economy, or other failure to estimate correctly, could result
in inventory valuation changes, either favorably or unfavorably, compared to the
valuation determined to be appropriate as of the balance sheet date.
Valuation of intangible assets. SFAS No. 142, which was adopted by the Company
on January 1, 2002, requires that goodwill and intangible assets with indefinite
lives no longer be amortized, but rather be tested for impairment at least
annually. This pronouncement also requires that intangible assets with finite
lives be amortized over their respective lives to their estimated residual
values, and reviewed for impairment in accordance with SFAS No. 144. In
accordance with SFAS No. 144, long-lived assets, such as property, equipment,
leasehold improvements and goodwill subject to amortization, are reviewed for
impairment annually or whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Recoverability of assets
to be held and used is measured by a comparison of the carrying amount of an
asset to the estimated undiscounted future cash flows expected to be generated
by the asset. If the carrying amount of an asset exceeds its estimated future
cash flows, an impairment charge is recognized by the amount by which the
carrying amount of the asset exceeds the fair value of the asset.
Litigation reserves. Estimated amounts for litigation claims that are probable
and can be reasonably estimated are recorded as liabilities in our consolidated
balance sheets. The likelihood of a material change in these estimated reserves
would be dependent on new claims as they may arise and the favorable or
unfavorable events of a particular litigation. As additional information becomes
available, we assess the potential liability related to our pending litigation
and revise our estimates. Such revisions in our estimates of the contingent
liability could materially impact our results of operations and financial
position.
Cost of Goods Sold. All costs incurred to bring finished products to our
warehouse are included in the cost of sales line item of the Company's
Consolidated Statement of Operations. These include purchase commissions, letter
of credit fees, f.o.b. costs, sample expenses, custom duty, inbound freight,
labels and product packaging. All warehouse and distribution costs are included
in the operating expenses line item of the Company's Consolidated Statement of
Operations. The Company classifies all shipping costs to customers as operating
expenses. The Company's gross margins may not be comparable to other companies
in the industry because some companies may include warehouse and distribution
costs as a component of cost of sales, while other companies may include them in
operating expenses.
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 for 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.
22
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.
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
twelve-month period ended December 31, 2004, approximately 87% 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
23
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 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 Steve Madden and
Steven stores on a profitable basis. During the year ended December 31, 2004,
the Company opened ten (10) Steve Madden retail stores and has plans to open
approximately twelve to fifteen (12-15) additional stores in the year 2005. 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
24
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 for obsolescence, 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 makes approximately 94% of its
purchases in U.S. dollars. However, the Company sources substantially all of its
products overseas and, as such, the cost of these products may be affected by
changes in the value of the relevant currencies. Changes in currency exchange
rates may also affect the relative prices at which the Company and foreign
competitors sell their products in the same market. There can be no assurance
that foreign currency fluctuations will not have a material adverse effect on
the Company's business, financial condition and results of operations.
Outstanding Options. As of March 10, 2005 there were outstanding options to
purchase an aggregate of approximately 2,013,003 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.
25
ITEM 7A 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 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,
2004. On December 31, 2004 and December 31, 2003, there were no direct
borrowings outstanding under the credit agreement.
As of December 31, 2004, the Company had investments in marketable securities
valued at $49,124,000 which consist principally of federal and state
obligations, corporate bonds and marketable equity securities that have various
maturities through December 2009. 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 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See financial statements following Item 15 of this Annual Report on Form 10-K.
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A CONTROLS AND PROCEDURES
Disclosure 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 year
covered by this annual 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 year covered by this annual report.
Changes in Internal Control Over Financial Reporting
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 fourth quarter of 2004 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 material change during the fourth quarter of 2004.
Management Report on Internal Controls
As permitted by Commission Release No. 50754, the Company will include the
information required by Items 308(a) and 308(b) of Regulation S-K in a Form
10-K/A to be filed within 45 days. The Company has spent considerable time and
resources analyzing, documenting and testing its system of internal controls,
but has not yet completed its evaluation. Currently, the Company is not aware of
any material weaknesses in its internal controls over financial reporting and
related disclosures.
ITEM 9B OTHER INFORMATION
None.
26
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The other information required to be furnished pursuant to this item will be
set forth in the Company's proxy statement for the 2005 Annual Meeting of
Stockholders, and is incorporated herein by reference.
ITEM 11 EXECUTIVE COMPENSATION
The information required to be furnished pursuant to this item will be set
forth in the Company's proxy statement for the 2005 Annual Meeting of
Stockholders, and is incorporated herein by reference.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
The information required to be furnished pursuant to this item will be set
forth in the Company's proxy statement for the 2005 Annual Meeting of
Stockholders, and is incorporated herein by reference.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required to be furnished pursuant to this item will be set
forth in the Company's proxy statement for the 2005 Annual Meeting of
Stockholders, and is incorporated herein by reference.
ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required to be furnished pursuant to this item will be set
forth in the Company's proxy statement for the 2005 Annual Meeting of
Stockholders, and is incorporated herein by reference.
PART IV
ITEM 15 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) Financial Statements
The following consolidated financial statements of Steven Madden, Ltd. and
subsidiaries are included in Item 8:
27
STEVE MADDEN, LTD. AND SUBSIDIARIES
Contents
Page
----
Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm F-2
Balance sheets as of December 31, 2004 and 2003 F-3
Statements of income for the years ended December 31, 2004, 2003
and 2002 F-4
Statements of changes in stockholders' equity for the years ended
December 31, 2004, 2003 and 2002 F-5
Statements of cash flows for the years ended December 31, 2004,
2003 and 2002 F-7
Notes to financial statements F-8
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Steven Madden, Ltd.
We have audited the accompanying consolidated balance sheets of Steven Madden,
Ltd. and subsidiaries (the "Company") as of December 31, 2004 and 2003, and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for each of the years in the three-year period ended December 31,
2004. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements enumerated above present fairly, in all
material respects, the consolidated financial position of Steven Madden, Ltd.
and subsidiaries as of December 31, 2004 and 2003, and the consolidated results
of their operations and their consolidated cash flows for each of the years in
the three-year period ended December 31, 2004 in conformity with accounting
principles generally accepted in the United States of America.
Eisner LLP
New York, New York
February 28, 2005
F-2
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31,
------------------------------
2004 2003
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 30,853,000 $ 53,073,000
Accounts receivable - net of allowances of $536,000 and $452,000 3,322,000 4,281,000
Due from factor - net of allowances of $2,379,000 and $1,926,000 33,711,000 28,748,000
Inventories 34,384,000 23,858,000
Marketable securities - available for sale 12,784,000 3,229,000
Prepaid expenses and other current assets 1,287,000 2,844,000
Prepaid taxes 2,255,000 4,270,000
Deferred taxes 2,498,000 1,692,000
------------- -------------
Total current assets 121,094,000 121,995,000
Property and equipment, net 20,715,000 18,391,000
Deferred taxes 5,780,000 5,618,000
Deposits and other 435,000 370,000
Marketable securities - available for sale 36,340,000 29,430,000
Cost in excess of fair value of net assets acquired - net of accumulated
amortization of $714,000 2,066,000 2,066,000
------------- -------------
$ 186,430,000 $ 177,870,000
============= =============
LIABILITIES
Current liabilities:
Accounts payable $ 13,450,000 $ 11,087,000
Accrued expenses 5,807,000 5,301,000
Accrued incentive compensation 420,000 467,000
------------- -------------
Total current liabilities 19,677,000 16,855,000
Deferred rent 2,088,000 1,828,000
------------- -------------
21,765,000 18,683,000
------------- -------------
Commitments, contingencies and other - see note J
STOCKHOLDERS' EQUITY
Preferred stock - $.0001 par value, 5,000,000 shares authorized; none issued
Series A Junior Participating preferred stock - $.0001 par value, 60,000
shares authorized; none issued
Common stock - $.0001 par value, 60,000,000 shares authorized, 14,608,081
and 14,459,109 shares issued, 12,817,777 and 13,213,905 shares
outstanding at December 31, 2004 and 2003, respectively 1,000 1,000
Additional paid-in capital 80,631,000 79,136,000
Retained earnings 103,451,000 91,176,000
Unearned compensation (703,000) (3,008,000)
Other comprehensive loss:
Unrealized loss on marketable securities (net of taxes) (1,024,000) (127,000)
Treasury stock - 1,790,304 and 1,245,204 shares at cost
at December 31, 2004 and 2003, respectively (17,691,000) (7,991,000)
------------- -------------
164,665,000 159,187,000
------------- -------------
$ 186,430,000 $ 177,870,000
============= =============
See notes to financial statements
F-3
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Consolidated Statements of Income
Year Ended December 31,
-----------------------------------------------
2004 2003 2002
------------- ------------- -------------
Net sales:
Wholesale $ 230,347,000 $ 228,686,000 $ 234,253,000
Retail 107,797,000 95,518,000 91,883,000
------------- ------------- -------------
338,144,000 324,204,000 326,136,000
------------- ------------- -------------
Cost of sales:
Wholesale 163,598,000 153,519,000 156,364,000
Retail 51,877,000 44,666,000 43,089,000
------------- ------------- -------------
215,475,000 198,185,000 199,453,000
------------- ------------- -------------
Gross profit 122,669,000 126,019,000 126,683,000
Commission and licensing fee income 6,806,000 7,894,000 6,603,000
Operating expenses (110,494,000) (100,287,000) (100,074,000)
------------- ------------- -------------
Income before other income (expenses) and provision for
income taxes 18,981,000 33,626,000 33,212,000
Other income (expenses):
Interest income 2,009,000 1,611,000 1,166,000
Interest expense (68,000) (54,000) (16,000)
Gain on sale of marketable securities 32,000 136,000 66,000
------------- ------------- -------------
Income before provision for income taxes 20,954,000 35,319,000 34,428,000
Provision for income taxes 8,679,000 14,865,000 14,587,000
------------- ------------- -------------
Net income $ 12,275,000 $ 20,454,000 $ 19,841,000
============= ============= =============
Basic income per share $ 0.93 $ 1.58 $ 1.58
============= ============= =============
Diluted income per share $ 0.86 $ 1.45 $ 1.45
============= ============= =============
Basic weighted average common shares outstanding 13,148,869 12,985,265 12,594,861
Effect of dilutive securities - options 1,074,080 1,153,246 1,115,018
------------- ------------- -------------
Diluted weighted average common shares outstanding 14,222,949 14,138,511 13,709,879
============= ============= =============
See notes to financial statements
F-4
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
Common Stock
--------------------------------- Additional Retained Unearned
Shares Amount Paid-in Capital Earnings Compensation
--------------- --------------- --------------- --------------- ---------------
Balance - December 31, 2001 13,439,020 $ 1,000 $ 60,643,000 $ 50,881,000 $ (1,174,000)
Exercise of stock options 567,039 4,364,000
Tax benefit from exercise of options 1,146,000
Deferred compensation in connection
with issuance of stock options
and restricted stock 3,930,000 (3,930,000)
Compensation in connection with
issuance of stock options 412,000
Compensation in connection with
issuance of restricted stock 10,000 188,000
Amortization of unearned
compensation 1,628,000
Unrealized holding gain on
marketable securities
(net of taxes)
Net income 19,841,000
Comprehensive income
--------------- --------------- --------------- --------------- ---------------
Balance - December 31, 2002 14,016,059 1,000 70,683,000 70,722,000 (3,476,000)
Exercise of stock options 443,050 4,805,000
Tax benefit from exercise of options 1,239,000
Deferred compensation in connection
with issuance of stock options
and restricted stock 2,409,000 (2,409,000)
Amortization of unearned
compensation 2,877,000
Unrealized holding loss on
marketable securities (net of
taxes of $190,000)
Net income 20,454,000
Comprehensive income
--------------- --------------- --------------- --------------- ---------------
Balance - December 31, 2003 14,459,109 1,000 79,136,000 91,176,000 (3,008,000)
Exercise of stock options 128,972 454,000
Tax benefit from exercise of options 1,004,000
Issuance of fully vested restricted
stock 20,000
Forfeiture of restricted stock (183,000) 121,000
Cash in lieu of restricted stock (378,000)
Deferred compensation in connection
with issuance of stock options
and restricted stock 598,000 (598,000)
Amortization of unearned
compensation 2,782,000
Unrealized holding loss on
marketable securities (net of
taxes of $741,000)
Net income 12,275,000
Comprehensive income
Balance - December 31, 2004 14,608,081 $ 1,000 $ 80,631,000 $ 103,451,000 $ (703,000)
=============== =============== =============== =============== ===============
See notes to financial statements
F-5
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity (Continued)
Accumulated
Other Treasury Stock Total
Comprehensive ----------------------------- Stockholders' Comprehensive
Gain (Loss) Shares Amount Equity Income
------------- ------------- ------------- ------------- -------------
Balance - December 31, 2001 1,245,204 $ (7,991,000) $ 102,360,000
Exercise of stock options 4,364,000
Tax benefit from exercise of options 1,146,000
Deferred compensation in connection with
issuance of stock options and
restricted stock 0
Compensation in connection with issuance
of stock options 412,000
Compensation in connection with issuance
of restricted stock 188,000
Amortization of unearned compensation 1,628,000
Unrealized holding gain on marketable
securities (net of taxes) $ 136,000 136,000 $ 136,000
Net income 19,841,000 19,841,000
-------------
Comprehensive income $ 19,977,000
------------- ------------- ------------- ------------- =============
Balance - December 31, 2002 136,000 1,245,204 (7,991,000) 130,075,000
Exercise of stock options 4,805,000
Tax benefit from exercise of options 1,239,000
Deferred compensation in connection with
issuance of stock options and
restricted stock
Amortization of unearned compensation 2,877,000
Unrealized holding loss on marketable
securities (net of taxes of $190,000) (263,000) (263,000) $ (263,000)
Net income 20,454,000 20,454,000
-------------
Comprehensive income $ 20,191,000
------------- ------------- ------------- ------------- =============
Balance - December 31, 2003 (127,000) 1,245,204 (7,991,000) 159,187,000
Exercise of stock options 454,000
Tax benefit from exercise of options 1,004,000
Issuance of fully vested restricted stock
Forfeiture of restricted stock (62,000)
Cash in lieu of restricted stock (378,000)
Deferred compensation in connection with
issuance of stock options and
restricted stock
Amortization of unearned compensation 2,782,000
Unrealized holding loss on marketable
securities (net of taxes of $741,000) (897,000) (897,000) (897,000)
Net income 12,275,000 12,275,000
-------------
Comprehensive income $ 11,378,000
=============
Common stock purchased for treasury 545,100 (9,700,000) (9,700,000)
------------- ------------- ------------- -------------
Balance - December 31, 2004 $ (1,024,000) 1,790,304 $ (17,691,000 $ 164,665,000
============= ============= ============= =============
See notes to financial statements
F-6
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Year Ended December 31,
--------------------------------------------
2004 2003 2002
------------ ------------ ------------
Cash flows from operating activities:
Net income $ 12,275,000 $ 20,454,000 $ 19,841,000
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity-based compensation 2,719,000 2,877,000 2,228,000
Depreciation and amortization 5,063,000 4,743,000 3,706,000
Deferred taxes (227,000) (1,978,000) (1,090,000)
Tax benefit from exercise of options 1,004,000 1,239,000 1,146,000
Provision for doubtful accounts and chargebacks 537,000 163,000 571,000
Deferred rent expense 260,000 296,000 233,000
Realized gain on sale of marketable securities (32,000) (136,000) (66,000)
Changes in:
Accounts receivable 876,000 (1,196,000) (1,207,000)
Due from factor (5,416,000) (6,583,000) 79,000
Inventories (10,526,000) (4,413,000) (3,627,000)
Prepaid expenses, prepaid taxes, deposits and other
assets 3,507,000 (5,535,000) 7,046,000
Accounts payable and accrued expenses 2,870,000 206,000 (1,556,000)
Accrued incentive compensation (47,000) (2,234,000) 2,289,000
------------ ------------ ------------
Net cash provided by operating activities 12,863,000 7,903,000 29,593,000
------------ ------------ ------------
Cash flows from investing activities:
Purchase of property and equipment (7,387,000) (6,061,000) (5,072,000)
Purchases of marketable securities (27,779,000) (47,059,000) (26,349,000)
Maturity/sale of marketable securities 9,708,000 36,785,000 4,041,000
------------ ------------ ------------
Net cash (used in) investing activities (25,458,000) (16,335,000) (27,380,000)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from exercise of stock options 454,000 4,805,000 4,364,000
Cash in lieu of restricted stock (378,000) 0 0
Common stock purchased for treasury (9,700,000) 0 0
Payments of lease obligations (1,000) (13,000) (43,000)
------------ ------------ ------------
Net cash (used in) provided by financing
activities (9,625,000) 4,792,000 4,321,000
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents (22,220,000) (3,640,000) 6,534,000
Cash and cash equivalents - beginning of year 53,073,000 56,713,000 50,179,000
------------ ------------ ------------
Cash and cash equivalents - end of year $ 30,853,000 $ 53,073,000 $ 56,713,000
============ ============ ============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 68,000 $ 54,000 $ 16,000
Income taxes $ 5,855,000 $ 18,700,000 $ 6,552,000
See notes to financial statements
F-7
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Financial Statements
December 31, 2004 and 2003
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
[1] Organization:
Steven Madden, Ltd., a Delaware corporation, designs and sources women's,
girl's and men's shoes, for sale through its wholesale and retail channels
under the Steve Madden, Steven, Stevies, Madden Mens, Lei (under license),
Candie's (under license) and Unionbay (under license) brand names. Revenue
is generated predominately through the sale of the Company's brand name
merchandise and certain licensed products. At December 31, 2004 and 2003,
the Company operated 91 and 83 retail stores (including its website as a
store), respectively. Such revenue is subject to seasonal fluctuations.
See Note K for operating segment information.
[2] Principles of consolidation:
The consolidated financial statements include the accounts of Steven
Madden, Ltd. and its wholly owned subsidiaries Steven Madden Retail, Inc.,
Diva Acquisition Corp., Adesso-Madden, Inc., Unionbay Men's Footwear, Inc.
and Stevies, Inc. (collectively referred to as the "Company"). All
significant intercompany balances and transactions have been eliminated.
[3] Use of estimates:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
[4] Cash equivalents:
Cash equivalents at December 31, 2004 and 2003, amounted to approximately
$16,428,000 and $44,829,000, respectively, and consist of money market
accounts, certificates of deposit and commercial paper. The Company
considers all highly liquid instruments with an original maturity of three
months or less when purchased to be cash equivalents.
[5] Marketable securities:
Marketable securities consist primarily of corporate bonds, U.S. treasury
notes and government asset-backed securities with maturities greater than
three months and up to five years at the time of purchase and marketable
equity securities. These securities, which are classified as available for
sale, are carried at fair value, with unrealized gains and losses net of
any tax effect, are reported in stockholders' equity as accumulated other
comprehensive income, and are held at an investment bank with the schedule
of maturities at December 31, 2004 as follows:
F-8
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Financial Statements
December 31, 2004 and 2003
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Maturities
-------------------------------
1 to 5
1 Year or Less Years
-------------- --------------
Schedule of maturities:
Municipal bonds $ 1,029,000 $ 19,205,000
US Government and Federal
agency bonds 4,523,000 6,657,000
Corporate bonds (domestic) 1,992,000 10,478,000
Corporate bonds(international) 1,018,000
-------------- --------------
8,562,000 36,340,000
Marketable equity securities 4,222,000
-------------- --------------
$ 12,784,000 $ 36,340,000
============== ==============
[6] Inventories:
Inventories, which consist of finished goods, are stated at the lower of
cost (first-in, first-out method) or market.
[7] Property and equipment:
Property and equipment are stated at cost less accumulated depreciation
and amortization. Depreciation is computed utilizing the straight-line
method based on estimated useful lives ranging from three to ten years.
Leasehold improvements are amortized utilizing the straight-line method
over the shorter of their estimated useful lives or the remaining lease
term. Depreciation and amortization include amounts relating to property
and equipment under capital leases.
Impairment losses are recognized for long-lived assets, including certain
intangibles, used in operations when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets
are not sufficient to recover the assets' carrying amount. Impairment
losses are measured by comparing the fair value of the assets to their
carrying amount. No impairment losses have been incurred for the years
presented.
[8] Cost in excess of fair value of net assets acquired:
Cost in excess of fair value of net assets acquired relates to two
acquisitions, and through December 31, 2001 was being amortized over 20
years.
During 2002, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets" ("FAS 142"). Amortization of indefinite lived
intangible assets was no longer allowed under FAS 142, however these
identified assets are subject to annual impairment tests. The Company has
determined that such goodwill is allocable to the wholesale segment and
the carrying amount of these assets is not impaired at December 31, 2004.
F-9
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Financial Statements
December 31, 2004 and 2003
[9] Net income per share:
Basic income per share is based on the weighted average number of common
shares outstanding during the year. Diluted income per share reflects the
potential dilution assuming common shares were issued upon the exercise of
outstanding in-the-money options and the proceeds (including the amount of
compensation cost, if any, attributed to future services and not yet
recognized and the amount of tax benefits, if any, that would be credited
to additional paid-in capital assuming exercise of the options) thereof
were used to purchase treasury stock at the average market price during
the period. For the years ended December 31, 2004 and 2003, options
exercisable into approximately 1,252,000 and 100,000 shares of common
stock, respectively, have not been included in the calculation of diluted
income per share as the result would have been antidilutive.
[10] Advertising costs:
The Company expenses costs of print, radio and billboard advertisements as
of the first date the advertisements take place. Advertising expense
included in operating expenses amounted to approximately $8,993,000 in
2004, $7,666,000 in 2003 and $7,451,000 in 2002.
[11] Fair value of financial instruments:
The carrying value of the Company's financial instruments approximates
fair value due to their short-term nature or their underlying terms.
Marketable securities are carried at quoted market prices which represent
fair value.
[12] Stock-based compensation:
At December 31, 2004, the Company had various stock option plans, which
are described more fully in Note D. The Company has elected to continue to
follow the intrinsic value method in accounting for its stock-based
employee compensation arrangements. The following table illustrates the
effect on net income and earnings per share if the company had applied the
fair value recognition provisions of SFAS No. 123 to stock-based employee
compensation.
Year Ended December 31,
--------------------------------------------------
2004 2003 2002
-------------- -------------- --------------
Reported net income $ 12,275,000 $ 20,454,000 $ 19,841,000
Stock-based employee compensation
included in reported net income, net
of tax 623,000 412,000 932,000
Stock-based employee compensation
determined under the fair value
based method, net of tax (3,861,000) (2,838,000) (2,663,000)
-------------- -------------- --------------
Pro forma net income $ 9,037,000 $ 18,028,000 $ 18,110,000
============== ============== ==============
Basic income per share:
As reported $ 0.93 $ 1.58 $ 1.58
Pro forma $ 0.69 $ 1.39 $ 1.44
Diluted income per share:
As reported $ 0.86 $ 1.45 $ 1.45
Pro forma $ 0.64 $ 1.28 $ 1.32
F-10
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Financial Statements
December 31, 2004 and 2003
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The weighted average fair value of options granted in 2004, 2003 and 2002
was approximately $9.77, $10.62 and $10.60, respectively, using the
Black-Scholes option-pricing model with the following assumptions:
2004 2003 2002
------------ ----------- ------------
Volatility 65% 71% 73%
Risk free interest rate 3.32% - 3.51% 2.18% - 3.0% 2.60% - 4.15%
Expected life in years 5 4 4
Dividend yield 0 0 0
[13] Revenue recognition:
The Company recognizes revenue on wholesale sales when products are
shipped which, pursuant to the Company's standard terms of FOB warehouse,
is when title passes to the customer. Allowances for anticipated discounts
and allowances are recognized when sales are recorded. Customers retain
the right to replacement of the product for poor quality or improper or
short shipments, which have historically been immaterial. Retail sales are
recognized when the payment is received from customers and are recorded
net of returns. The Company earns commission income as a buying agent
through its Adesso-Madden Division by arranging to produce private label
shoes to the specifications of its clients. Commission revenue is
recognized as earned when title of product transfers from the manufacturer
to the customer and is recorded on a net basis.
The Company licenses its Steve Madden trademark for use in connection with
the manufacturing, marketing and sale of outerwear, belts, sunglasses,
eyewear and hosiery. Each license agreement requires the licensee to pay
to the Company a royalty based on net sales, a minimum royalty in the
event that specified net sales targets are not achieved and a percentage
of sales for advertising of the Steve Madden brand. Licensing revenue is
recognized on the basis of net sales reported by the licensees or, if
greater, minimum guaranteed royalties when received and earned. In
substantially all of our license agreements, the minimum guaranteed
royalty is earned and payable (due in advance on the first day of the
quarter) on a quarterly basis.
[14] Sales Deductions:
The Company supports retailers' initiatives to maximize the sales of the
Company's products on the retail floor by subsidizing the co-op
advertising programs of such retailers, providing such retailers with
inventory markdown allowances and participating in various other marketing
initiatives of such retailers. Such expenses are reflected in the
financial statements as deductions to net sales. For the years ended
December 31, 2004 and 2003 the total deduction to net sales for these
expenses was $30,027,000 and $27,859,000 respectively.
[15] Cost of sales:
All costs incurred to bring finished products to our warehouse are
included in the cost of sales line item of the Company's Consolidated
Statements of Income. These include purchase commissions, letter of credit
fees, FOB costs, sample expenses, custom duty, inbound freight, labels and
product packaging. All warehouse and distribution costs are included in
the operating expenses line item of the Company's Consolidated Statements
of Income. The Company classifies all shipping costs to customers as
operating expenses. The Company's gross margins may not be comparable to
other companies in the industry because some companies may include
warehouse and distribution costs, as well as sample costs, as a component
of cost of sales, while other companies may include them in operating
expenses.
F-11
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Financial Statements
December 31, 2004 and 2003
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[16] Warehouse and Shipping Costs:
The Company includes all warehouse and distribution costs, including
internal transfer costs, in the Operating Expenses line in the
Consolidated Statements of Income. For the years ended December 31, 2004
and 2003, the total Warehouse and Distribution Costs included in Operating
Expenses was $5,819,000, and $3,510,000 respectively. The Company's
standard terms of sales are "FOB Steve Madden warehouse" and thus the
Company's wholesale customers absorb most shipping costs. Shipping costs
to wholesale customers incurred by the Company are not considered
significant and are included in the Operating Expense line in the
Consolidated Statements of Income.
[17] Impairment of long-lived assets:
During fiscal 2002, the Company adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("FAS 144"). If facts and
circumstances indicate that the Company's long-lived assets might be
impaired, the estimated future undiscounted cash flows associated with the
long-lived asset would be compared to its carrying amounts to determine if
a write-down to fair value is necessary. If a write-down is required, the
amount is determined by estimation of the present value of net discounted
cash flows in accordance with FAS 144.
[18] 401(k) Plan:
The Company maintains a tax-qualified, 401(k) plan which is available to
each of the Company's eligible employees who elect to participate after
meeting certain length-of-service requirements. The Company makes
discretionary matching contributions of 25% of employees' contributions up
to a maximum of 6% of employees' compensation, which vest to the employees
over a period of time. Total matching contributions to the plan for 2004,
2003 and 2002 were approximately $187,000, $162,000 and $142,000,
respectively.
[19] Recently issued accounting standards:
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 123R, "Share-Based
Payment" ("SFAS 123R"), which replaces SFAS No. 123, "Accounting for
Stock-Based Compensation," and supercedes APB Opinion No. 25, "Accounting
for Stock Issued to Employees." This statement requires that all
share-based payments to employees be recognized in the financial
statements based on their fair values on the date of grant. The Company
currently uses the intrinsic value method to measure compensation expense
for stock-based awards. Note A(12) entitled Stock-based compensation
provides a pro forma net income and earnings per share as if the Company
had used a fair-value based method provided by SFAS 123R to measure
stock-based compensation for 2004, 2003 and 2002. The Company is required
to adopt SFAS 123R in the third quarter of 2005. The Company is evaluating
the requirements of SFAS 123R and expects that its adoption will have a
material impact on the Company's results of operations and earnings per
share.
In November of 2004, the FASB issued SFAS No. 151, "Inventory Costs,"
which amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing,"
to clarify the accounting for abnormal amounts of idle facility expense,
freight, handling costs and wasted material (spoilage). This statement
requires that those items be recognized as current-period charges
regardless of whether they meet the criterion of "so abnormal" as stated
in ARB No. 43. Additionally, SFAS 151 requires that allocation of fixed
production overheads to the costs of conversion be based on the normal
capacity of the production facilities. The Company is required to adopt
the provision of SFAS No. 151 in the first quarter of 2006. The Company
does not expect SFAS 151 to have a material impact on its consolidated
results of operation or financial condition.
F-12
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Financial Statements
December 31, 2004 and 2003
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In December of 2004, the FASB issued SFAS No. 153, "Exchanges of
Nonmonetary Assets - An Amendment of APB Opinion No. 29" (SFAS 153). SFAS
153 eliminates the exception for nonmonetary exchanges of similar
productive assets and replaces it with a general exception for exchanges
of nonmonetary assets that do not have commercial substance. SFAS 153 is
effective for fiscal years beginning after June 15, 2005 and is required
to be adopted by the Company in the first quarter of 2006. The Company
does not believe that the adoption of SFAS 153 will have a material impact
on the Company's consolidated results of operation or financial condition.
FASB Interpretation No. 46, "Consolidation of Variable Interest Entities"
(FIN No. 46) was originally issued in January 2003 and was subsequently
revised in December 2003. FIN No. 46 attempts to clarify the application
of Accounting Research Bulletin No. 51 "Consolidated Financial
Statements," to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support. The Company does not believe
that it has any involvement with variable interest entities that are
required to be consolidated under FIN No. 46.
NOTE B - PROPERTY AND EQUIPMENT
The major classes of assets and accumulated depreciation and amortization
are as follows:
December 31,
----------------------------
2004 2003
------------ ------------
Leasehold improvements $ 27,754,000 $ 22,005,000
Machinery and equipment 799,000 730,000
Furniture and fixtures 4,673,000 3,885,000
Computer equipment 5,043,000 4,767,000
------------ ------------
38,269,000 31,387,000
Less accumulated depreciation and amortization (17,554,000) (12,996,000)
------------ ------------
Property and equipment - net $ 20,715,000 $ 18,391,000
============ ============
NOTE C - DUE FROM FACTOR
Under the terms of its factoring agreement, as amended, the Company may request
advances from the factor up to 80% of aggregate receivables purchased by the
factor at an interest rate of prime minus 2%. The Company also pays a fee equal
to 0.45% of the gross invoice amount of each receivable purchased. In addition,
the factor charges an annual unused line fee of .25% of the average daily unused
portion of the Company's $15,000,000 credit line. The Company sells and assigns
a substantial portion of its receivables, principally without recourse, to the
factor. At December 31, 2004 and 2003, $295,000 and $512,000 of factored
receivables, respectively, were sold by the Company with recourse. The factor
assumes the credit risk of all assigned accounts approved by it, but maintains
liens on all inventory, trade receivables (whether or not assigned) and the
goods represented thereby.
A "factored" sale (whether "with" or "without" recourse) is substantially the
same as a non-factored sale and the Company accounts for its factored
sales/receivables in the same manner as our non-factored sales/receivables. The
factor services the collection of the Company's accounts receivable. Funds
collected by the factor are applied against advances owed to the factor (if
any), and the balance is due and payable to the Company, net of any fees. The
allowance against "due from factor" is an estimated provision for markdowns,
allowances, discounts, advertising and other deductions that customers may
deduct against their payments.
F-13
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Financial Statements
December 31, 2004 and 2003
NOTE D - STOCK OPTIONS
The Company has established various stock option plans under which options to
purchase shares of common stock may be granted to employees, directors,
officers, agents, consultants and independent contractors. The plans provide
that the option price shall not be less than the fair market value of the common
stock on the date of grant and that no portion of the option may be exercised
beyond ten years from that date. No incentive stock option can be granted and
exercised beyond five years to a stockholder owning 10% or more of the Company's
outstanding common stock. Options granted under the plans during the three years
ended December 31, 2004 vest on the date of grant or up to three years from such
date.
The Company has several stock option plans. The 1993 Incentive Stock Option
Plan, The 1995 Stock Plan, The 1996 Stock Plan and The 1997 Stock Plan provide
for options to be granted to employees and directors.
The 1993 Incentive Stock Option Plan expired in 2003.
In June 1999, the Company adopted The 1999 Stock Plan which authorized the
issuance of up to 400,000 shares. In May 2000, the stockholders approved an
amendment to this Plan to increase the maximum number of shares to be issued
under the Plan to 975,000 shares. In July 2001, the stockholders approved an
amendment to this Plan to increase the maximum number of shares to be issued
under the Plan to 1,600,000 shares. In May 2002, the stockholders approved a
further amendment to this Plan to increase the maximum number of shares to be
issued under the Plan to 2,280,000. In 2003, the stockholders approved a further
amendment to this Plan to increase the maximum number of shares to be issued
under the Plan to 2,920,000. In May of 2004, the stockholders approved a further
amendment to this Plan to increase the maximum number of shares to be issued
under the plan to 3,220,000. Terms of the 1999 Stock Plan are not materially
different from the various existing stock option plans.
Through December 31, 2004, 3,011,000 options had been granted under The 1999
Stock Plan, as amended, and as of such date, 209,000 shares were available for
grant.
In connection with the amended employment agreement of the former Chief
Executive Officer ("CEO"), who is now the Company's Creative and Design Chief,
the Company issued options to purchase 500,000 shares of its common stock. The
options, which vested in August 1998, have an exercise price of $3.31 and are
exercisable over 10 years expiring in March 2005. Unearned compensation was
recorded in the amount of $1,345,000, which represented the difference between
the exercise price and the fair value of the stock on the date of grant, and was
classified as a component of stockholders' equity. Through December 31, 2003,
the unearned compensation was being amortized over the ten-year term of the
amended agreement. During the year ended December 31, 2004, the Company
reevaluated its policy on amortizing unearned compensation relating to the
issuance of stock options. The Company concluded that deferred compensation was
to be amortized over the shorter of the vesting period of the option or the term
of the employment agreement. Accordingly, the balance in unearned compensation
was expensed this year resulting in a charge to operations of $512,000 in 2004.
$128,000 was charged to operations for each of the years ended December 31, 2003
and 2002.
In connection with the Chief Operating Officer's employment agreement (the "COO
Agreement"), the Company issued options to purchase 75,000 shares of its common
stock. The options, which vested quarterly through December 31, 2001, have an
exercise price of $8.00. The market value of the stock on the date of grant was
$18.80 per share. Unearned compensation was recorded in the amount of $810,000,
which represented the difference between the exercise price and the fair value
of the stock on the date of grant, and was classified as a component of
stockholders' equity. The unearned compensation was amortized over the two-year
term of the employment agreement. Accordingly, $405,000 has been charged to
operations in each year 2002 and 2001. As an amendment to the COO Agreement
dated July 1, 2002, the Company issued 20,000 restricted shares of its common
stock, which vest quarterly through January 1, 2005. The market value of the
stock on the date of grant was $18.74 per share. Unearned compensation was
recorded in the amount of $375,000 and is classified as a component of
stockholders' equity. The unearned compensation is being amortized over the
vesting period of the stock. Accordingly, $150,000 and $225,000 have been
charged to operations in 2004 and 2003, respectively.
F-14
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Financial Statements
December 31, 2004 and 2003
NOTE D - STOCK OPTIONS (CONTINUED)
Activity relating to stock options granted under the Company's plans and outside
the plans during the three years ended December 31, 2004 is as follows:
2004 2003 2002
-------------------------- -------------------------- --------------------------
Weighted Weighted Weighted
Average Average Average
Number Exercise Number of Exercise Number of Exercise
of Shares Price Shares Price Shares Price
------------ ---------- ------------ ---------- ------------ ----------
Outstanding at January 1 2,274,000 $ 11.35 2,345,000 $ 10.14 2,231,000 $ 7.25
Granted 380,000 17.84 403,000 17.81 696,000 17.53
Exercised (129,000) 3.25 (443,000) 10.79 (567,000) 7.70
Cancelled (12,000) 19.00 (31,000) 11.87 (15,000) 16.71
------------ ------------ ------------
Outstanding at December 31 2,513,000 12.71 2,274,000 11.35 2,345,000 10.14
============ ============ ============
Exercisable at December 31 2,272,000 12.93 1,885,000 10.33 1,813,000 8.01
============ ============ ============
The following table summarizes information about stock options at December 31,
2004:
Options Outstanding Options Exercisable
---------------------------------------------- ---------------------
Weighted
Average Weighted
Remaining Weighted Average
Number Contractual Life Average Number Exercise
Range of Exercise Price Outstanding (in Years) Exercise Price Exercisable Price
- --------------------------- ----------- ---------------- -------------- ----------- -----
$1.75 to $3.31 720,000 1.2 $2.44 720,000 $2.44
$5.50 to $7.00 81,000 2.4 5.65 81,000 5.65
$8.00 to $9.12 125,000 6.4 8.97 125,000 8.97
$9.55 to $12.00 24,000 6.6 9.76 24,000 9.76
$13.50 to $16.85 311,000 8.4 14.17 261,000 14.29
$18.00 to $20.98 1,252,000 7.9 19.13 1,061,000 19.09
---------- ----------
2,513,000 5.8 12.71 2,272,000 12.13
========== ==========
The following table summarizes the amount of options authorized, the amount of
options granted (net of expired or cancelled options) and the amount of options
available for grant for each of the 1995 Plan, 1996 Plan, 1997 Plan and 1999
Plan:
1995 Plan 1996 Plan 1997 Plan 1999 Plan
--------- --------- --------- ---------
Options authorized 330,000 375,000 1,000,000 3,220,000
Options granted net of
expired or cancelled 288,000 373,700 997,200 3,011,000
--------- --------- --------- ---------
Available for grant as of
December 31, 2004 42,000 1,300 2,800 209,000
========= ========= ========= =========
F-15
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Financial Statements
December 31, 2004 and 2003
NOTE D - STOCK OPTIONS (CONTINUED)
In May 2003, the Company granted 100,000 options to Charles Koppelman, a
director, exercisable at $13.50 per share which vest over one year on a
quarterly basis. The difference between the market price of $19.00 per share and
the option exercise price has been reflected as unearned compensation to be
amortized over the one-year vesting period. In addition, the Company issued
303,000 options exercisable at the market price of the underlying common stock
on the date of grant which principally vest over one year. In May of 2004,
pursuant to a consulting agreement with this former director, the Company
granted 100,000 options exercisable at $13.50 per share which vest over one year
on a quarterly basis. The difference between the market price of $19.09 per
share and the option exercise price has been reflected as unearned compensation
to be amortized over the one-year vesting period. See note J(8) for a
description of the consulting agreement.
NOTE E - RESTRICTED STOCK AWARDS
Restricted stock awards have been granted to certain key executives in
management. These awards vest on various dates between January 2004 and January
2006. Awards of 101,000 shares and 190,000 shares were granted in 2003 and 2002,
respectively. The average market price on the date of grant for awards granted
in 2003 and 2002 was $18.41 and $17.15, respectively. Restricted stock
compensation charged to expense was $1,715,000, $842,000 and $871,000 for 2004,
2003 and 2002, respectively.
In July 2004, the Company and several of its salesmen mutually agreed to replace
restricted stock awards due to vest in January 2006 with cash awards to be paid
on the vesting date. No shares had been issued under the original award. The
cash awards, which total $183,000, are being charged to operations over the
vesting period and are equal to the value of the restricted stock when
originally issued. The transaction resulted in a reduction of Paid in Capital
equal to the vested award.
In August 2004, prior to his restricted stock becoming fully vested, an employee
of the Company was paid $378,000 in exchange for his restricted stock award. The
cash award which was charged to operations during the vesting period, was equal
to the value of the restricted stock when originally issued. No shares had been
issued under the original award. The transaction resulted in a reduction of Paid
in Capital equal to the vested award.
NOTE F - PREFERRED STOCK
The Company has authorized 5,000,000 shares of preferred stock. The Board of
Directors has designated 60,000 shares of such preferred stock as Series A
Junior Participating Preferred Stock ("Series A Preferred"). Holders of the
shares of Series A Preferred are entitled to dividends equal to 1,000 times
dividends declared or paid on the Company's common stock. Each share of Series A
preferred entitles the holder to 1,000 votes on all matters submitted to the
holders of common stock. The Series A Preferred has a liquidation preference of
$1,000 per share, and is not redeemable by the Company. No preferred shares have
been issued.
NOTE G - RIGHTS AGREEMENT
On October 30, 2001, the Company declared a dividend distribution of one
preferred stock purchase right (a "Right") for each outstanding share of common
stock. Each Right entitles the holder to purchase from the Company one
one-thousandth (1/1,000) of a share of Series A Preferred at a price of $75 per
one one-thousandth (1/1,000) of a share. Initially, the Rights will not be
exercisable and will automatically trade with the common stock. The Rights
become exercisable, in general, ten days following the announcement of a person
or group acquiring beneficial ownership of at least 15% of the outstanding
voting stock of the Company.
F-16
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Financial Statements
December 31, 2004 and 2003
NOTE H - OPERATING LEASES
The Company leases office, showroom and retail facilities under noncancelable
operating leases with terms expiring at various times through 2013. Future
minimum annual lease payments under noncancelable operating leases consist of
the following at December 31:
2005 $11,004,000
2006 11,354,000
2007 11,030,000
2008 9,483,000
2009 8,029,000
Thereafter 21,060,000
-----------
$71,960,000
===========
A majority of the retail store leases provide for contingent rental payments if
gross sales exceed certain targets. In addition, many of the leases contain rent
escalation clauses to compensate for increases in operating costs and real
estate taxes.
Rent expense for the years ended December 31, 2004, 2003 and 2002 was
approximately $13,520,000, $12,340,000 and $10,795,000, respectively. Included
in such amounts are contingent rents of $105,000, $99,000 and $151,000 in 2004,
2003 and 2002, respectively.
Pursuant to certain leases, rent expense charged to operations differs from rent
paid because of scheduled rent increases. Accordingly, the Company has recorded
deferred rent. Rent expense is calculated by allocating total rental payments,
including those attributable to scheduled rent increases, on a straight-line
basis, over the lease term.
NOTE I - INCOME TAXES
The income tax provision (benefit) consists of the following:
2004 2003 2002
------------ ------------ ------------
Current:
Federal $ 6,422,000 $ 12,183,000 $ 11,411,000
State and local 2,484,000 4,660,000 4,266,000
------------ ------------ ------------
8,906,000 16,843,000 15,677,000
------------ ------------ ------------
Deferred:
Federal (189,000) (1,648,000) (793,000)
State and local (38,000) (330,000) (297,000)
------------ ------------ ------------
(227,000) (1,978,000) (1,090,000)
------------ ------------ ------------
$ 8,679,000 $ 14,865,000 $ 14,587,000
============ ============ ============
A reconciliation between taxes computed at the federal statutory rate and the
effective tax rate is as follows:
December 31,
----------------------------
2004 2003 2002
------ ------ ------
Income taxes at federal statutory rate 35.0% 35.0% 35.0%
State income taxes - net of federal income
tax benefit 7.6 8.3 8.3
Nondeductible items 0.1 0.1 0.1
Other (1.3) (1.3) (1.0)
------ ------ ------
Effective rate 41.4% 42.1% 42.4%
====== ====== ======
F-17
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Financial Statements
December 31, 2004 and 2003
NOTE I - INCOME TAXES (CONTINUED)
The Company applies the liability method of accounting for income taxes. Under
this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that are expected to be in
effect when the differences are expected to reverse.
Realization of deferred tax assets depends on generating sufficient future
taxable income. Although realization is not assured, management believes it is
more likely than not that all of the deferred tax assets will be realized. The
amount of deferred tax assets considered realizable however could be reduced in
the near term if estimates of future taxable income are reduced.
The components of deferred tax assets and liabilities are as follows:
December 31,
---------------------------
2004 2003
------------ ------------
Current deferred tax assets:
Receivable allowances $ 1,232,000 $ 1,007,000
Inventory 918,000 685,000
Unrealized loss 286,000
Other 62,000
------------ ------------
2,498,000 1,692,000
------------ ------------
Non-current deferred tax assets:
Depreciation 2,195,000 3,169,000
Deferred compensation 2,253,000 1,682,000
Deferred rent 878,000 767,000
Unrealized loss 454,000
------------ ------------
5,780,000 5,618,000
------------ ------------
Deferred tax assets $ 8,278,000 $ 7,310,000
============ ============
F-18
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Financial Statements
December 31, 2004 and 2003
NOTE J - 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. 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.
F-19
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Financial Statements
December 31, 2004 and 2003
NOTE J - COMMITMENTS, CONTINGENCIES AND OTHER (CONTINUED)
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. The Company and certain of the
Company's present and/or former directors were named as defendants in this
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.
[4] Other actions:
(a) The Company and certain of the Company's present and/or former
directors have been named in an action commenced in the United
States District Court for the Eastern District of New York by the
Safeco Surplus Lines Insurance Company captioned Safeco Surplus
Lines Ins. Co. v. Steven Madden Ltd., et al., 02 CV 1151 (JG). The
complaint principally seeks rescission of the excess insurance
policy issued by Safeco to the Company for the February 4, 2000 to
June 13, 2001 period and an order declaring that Safeco does not owe
any indemnity obligation to the Company or any of its officers and
directors in connection with the putative shareholder class action
and derivative cases described in the Form 10-Q filed by the Company
for the quarter ended March 31, 2002. The parties agreed to resolve
Safeco's claims without any payment to Safeco and the case was
dismissed, with prejudice and without costs to any of the parties,
by stipulation, which stipulation was so ordered by the Court.
(b) 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.
(c) 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 an answer
denying any liability with respect to the counterclaim. The parties
submitted cross-motions for summary judgment on February 28, 2005.
If neither motion is granted, a trial will be scheduled for later in
2005. The Company believes that it has substantial defenses to the
counterclaims asserted by LaRue. Notwithstanding the Company's
assertion of its substantial defenses, the Company has retained an
expert which has calculated the damages to LaRue, assuming LaRue
prevails on its claim of improper termination of the license
agreement, to be less than $1,000,000.
(d) 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 action. Colors in Optics has assumed responsibility for the
defense of this action. The Company believes that this action will
not have a material effect on the Company's financial position. The
matter was settled with no payment of money by Steven Madden Ltd.
Steven Madden Ltd. signed the settlement papers on or about February
10th, and a dismissal should be filed shortly.
F-20
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Financial Statements
December 31, 2004 and 2003
NOTE J - COMMITMENTS, CONTINGENCIES AND OTHER (CONTINUED)
(e) On or about December 20, 2004, an action was filed in the United
States District Court for the Central District of California against
the Company by Global Brand Marketing Inc. for patent infringement,
captioned Global Brand Marketing Inc. v. Steven Madden Ltd., Case
No. CV 04-10339 (RJK-AJW (RZx)). In the action GBMI claims
infringement of a design patent in connection with a shoe sold by
Steven Madden referred to as the "Ronan." The parties are in the
process of discussing settlement. The Company believes that this
action will not have a material effect on the Company's financial
position.
(f) The Company has been named as a defendant in certain other lawsuits
in the normal course of business. In the opinion of management,
after consulting with legal counsel, the liabilities, if any,
resulting from these matters should not have a material effect on
the Company's financial position or results of operations. It is the
policy of management to disclose the amount or range of reasonably
possible losses in excess of recorded amounts.
[5] Employment agreements:
The Company has an employment agreement with Steve Madden, its former CEO
and President, to serve as the Company's Creative and Design Chief. The
employment agreement, as amended, provides for an annual salary of
$700,000 through June 30, 2011. The agreement also provides for an annual
performance bonus, an annual option grant at exercise prices equal to the
market price on the date of grant and a non-accountable expense allowance.
The Company has employment agreements with other executives (the
"executives") which expire between January 1, 2005 and June 30, 2006.
These agreements provide for cash bonuses based upon a percentage of year
to year increases in earnings before interest taxes depreciation and
amortization, option grants and non-accountable expense allowances as
defined. Base salary commitments for these executives are as follows:
2005 $1,060,000
2006 234,000
----------
$1,294,000
==========
In connection with their employment agreements, two executives are
entitled to receive an aggregate of 40,000 shares of restricted common
stock from the Company. The restricted shares vest equally each quarter
over the period of their employment agreements through December 2005.
Accordingly, the Company has recorded a charge to operations in the amount
of $254,000 and $324,000 for the 20,000 and 19,000 shares that vested
during the years ended December 31, 2004 and 2003, respectively. Further,
one executive received 100,000 stock options exercisable at $19.00 per
share, the market price on the date of grant. 20,000 of these options
vested on June 30, 2003 and the balance vest equally, each quarter,
through June 30, 2005.
In addition, the Company accrued an aggregate of approximately $155,000
for bonuses under these agreements for 2004.
[6] Letters of credit:
At December 31, 2004 and 2003, the Company had open letters of credit for
the purchase of imported merchandise of approximately $9,808,000 and
$7,458,000, respectively.
F-21
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Financial Statements
December 31, 2004 and 2003
NOTE J - COMMITMENTS, CONTINGENCIES AND OTHER (CONTINUED)
[7] Royalty agreements:
Pursuant to the Company's license agreement with Jones Investment Company,
Inc., the Company has the right to use the l.e.i. trademark in connection
with the sale and marketing of footwear. The agreement, which expires on
September 30, 2006, requires the Company to pay a royalty equal to a
percentage of net sales and a minimum royalty in the event that specified
net sales targets are not achieved.
On January 7, 2003, the Company entered into a long-term license agreement
with Seattle Pacific Industries, Inc., under which the Company has the
right to use the Unionbay trademark in connection with the sale and
marketing of footwear for men and boys. The initial term of the agreement
expires on December 31, 2006, with four 3-year renewal terms, the last of
which will expire on December 31, 2018. The agreement requires the Company
to make royalty and advertising payments equal to a percentage of net
sales and a minimum royalty and advertising payment in the event that
specified net sales targets are not achieved.
On May 12, 2003, the Company entered into a long-term license agreement
with Candie's, Inc. to design, manufacture, and distribute Candie's
branded footwear for women and children worldwide. That agreement provided
that the initial term of the agreement expired on December 31, 2009, with
four 3-year renewal terms, the last of which expired on December 31, 2021.
The agreement required the Company to make royalty and advertising
payments equal to a percentage of net sales of licensed products and a
minimum royalty and advertising payment in the event that specified net
sales targets are not achieved. On December 6, 2004, the agreement was
amended to reflect Candie's decision to name Kohl's Corporation the
exclusive provider of a new line of Candie's apparel. The amendment
extended the initial term of the agreement to December 31, 2010, and
eliminated the renewal term options. Pursuant to the amendment, commencing
on January 1, 2007, the Company will no longer have the exclusive right to
market Candie's branded footwear and will be permitted to sell Candie's
branded footwear only to Kohl's. Under the terms of the amendment,
Candie's guarantees that the Company will achieve minimum sales levels
with Kohl's during the term of the agreement. In the event such minimum
sales levels are not achieved, Candie's is required to compensate the
Company in an amount based on a percentage of the sales shortfall.
Effective January 1, 2005, all royalty and advertising payments will be
eliminated. As an inducement to execute the amendment, the Company is
required to pay Candie's a total of $3,000,000 payable in eight equal
quarterly installments.
Royalty expenses are included in the "operating expenses" section of the
Company's Consolidated Statements of Income. Aggregate minimum future
royalties under these agreements are as follows:
Year Ending
December 31,
2005 $ 2,740,000
2006 2,318,000
2007 375,000
------------
$ 5,433,000
============
[8] Related Party Transactions:
In January 2004, the Company entered into an agreement with JLM
Consultants, a company wholly-owned by John Madden, one of the Company's
directors. Under this agreement, Mr. Madden provided consulting services
with respect to the development of international sales of the Company.
Pursuant to this agreement, JLM Consultants received a fee of $252,000 in
2004, besides for Mr. Madden's fees received for service to the Company as
a director.
F-22
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Financial Statements
December 31, 2004 and 2003
NOTE J - COMMITMENTS, CONTINGENCIES AND OTHER (CONTINUED)
In July 2001, the Company entered into a consulting agreement with Peter
J. Solomon & Company, a financial advisory firm of which Marc Cooper, one
of the Company's directors, is a managing director. Under this agreement,
the firm provided financial advisory and investment banking services to
the Company. This agreement was amended in March 2004. Pursuant to this
agreement, the Company paid fees and expenses to Peter J. Solomon &
Company of $161,000, $33,000 and $150,000 for 2004, 2003 and 2002
respectively.
In July 2004, the Company entered into a consulting agreement with Charles
Koppelman, who served as a director of the Company from June 1998 through
May 2004 and as Chairman of the Board from July 2001 through May 2004.
Under this agreement, Mr. Koppelman provided consulting services that
included enhancing and promoting the Company's brands and seeking
licensing and acquisition opportunities. Pursuant to this agreement, Mr.
Koppelman received 100,000 stock options and a fee of $105,000 in 2004.
See Note D for a description of the options. This agreement expires on
June 30, 2005.
In October 2002, the Company entered into an agreement with Jeff Birnbaum,
one of the Company's directors. Under this agreement, Mr. Birnbaum
provided consulting services with respect to the designing and
manufacturing of shoes and general consulting services to the Company.
Pursuant to this agreement, Mr. Birnbaum received a fee of $250,000 in
2004 besides for fees received for service to the Company as a director.
Mr. Birnbaum has been the Product Development Manager of Dolphin Shoe
Company since August 1982. Dolphin Shoe Company is one of the Company's
domestic suppliers. In addition, Jeff Birnbaum's brother, Steven Birnbaum
owns a trading company, Bulls Eye Trading ("Bullseye") that acts as a
selling agent for the Company. Jeff Birnbaum does not own an interest in
Bullseye nor is he a director of Bullseye nor does Bullseye pay him any
compensation.
The Madden Mens division of the Company purchases a significant amount of
shoes from La Tandem International, Inc. Mr. James Chen, the brother of
Harry Chen, is the President of La Tandem International, Inc., and La
Tandem International, Inc. is owned or controlled by members of the Chen
family. Harry Chen is the chairman and lead designer of the Madden Mens
Division of the Company.
[9] Concentrations:
The Company maintains cash and cash equivalents with various major
financial institutions which at times are in excess of the amount insured.
In addition, the Company's marketable securities and a money account are
principally held at one brokerage company.
During the year ended December 31, 2004, the Company purchased
approximately 25% of its merchandise from a supplier in Brazil and 17% and
10% of its merchandise from two suppliers in China, respectively. Total
inventory purchases for the year ended December 31, 2004 from Brazil and
China were approximately 26% and 41%, respectively.
During the year ended December 31, 2003, the Company purchased
approximately 13% of its merchandise from a supplier in Brazil. Total
inventory purchases for the year ended December 31, 2003 from Brazil were
approximately 19%. The Company also purchased inventory during the year
ended December 31, 2003 from two vendors in China totaling approximately
32%.
During the year ended December 31, 2002, the Company purchased
approximately 29% of its merchandise from a supplier in Brazil and 18% and
16% of its merchandise from two suppliers in China, respectively. Total
inventory purchases for the year ended December 31, 2002 from Brazil and
China were approximately 30% and 54%, respectively.
Sales to two customers accounted for 10% and 9% of total net sales for the
year ended December 31, 2004. These customers each represented 13% of
accounts receivable at December 31, 2004.
F-23
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Financial Statements
December 31, 2004 and 2003
Sales to two customers accounted for 10% and 11% of total net sales for
the year ended December 31, 2003. These customers each represented 17% of
accounts receivable at December 31, 2003.
Sales to two customers accounted for 13% and 10% of total net sales for
the year ended December 31, 2002. These customers represented 17% and 10%
of accounts receivable at December 31, 2002, respectively.
Sales to such customers are included in the wholesale segment (see Note
K). Purchases are made primarily in United States dollars.
F-24
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Financial Statements
December 31, 2004 and 2003
NOTE J - COMMITMENTS, CONTINGENCIES AND OTHER (CONTINUED)
[10] Valuation and qualifying accounts:
The following is a summary of the allowance for doubtful accounts related
to accounts receivable and the allowance for chargebacks related to the
amount Due from Factor for the years ended December 31:
2004 2003 2002
------------ ------------ ------------
Balance at beginning of year $ 2,378,000 $ 2,215,000 $ 1,644,000
Charged to expense 537,000 163,000 630,000
Uncollectible accounts written off, net of recoveries (59,000)
------------ ------------ ------------
Balance at end of year $ 2,915,000 $ 2,378,000 $ 2,215,000
============ ============ ============
The following is a summary of the reserve for slow moving inventory for
the years ended December 31:
2004 2003 2002
------------ ------------ ------------
Balance at beginning of year $ 663,000 $ 877,000 $ 461,000
Charged to reserve 58,000 214,000 0
Increase to the reserve 0 0 416,000
------------ ------------ ------------
Balance at end of year $ 608,000 $ 663,000 $ 877,000
============ ============ ============
The following is a summary of property and equipment and the related
accounts of accumulated depreciation and amortization for the years ended
December 31:
2004 2003 2002
------------ ------------ ------------
Cost basis
Balance at beginning of year $ 31,387,000 $ 27,507,000 $ 27,512,000
Additions 7,387,000 6,061,000 5,072,000
Write-off of fully depreciated assets (505,000) (2,181,000) (5,077,000)
------------ ------------ ------------
Balance at end of year 38,269,000 31,387,000 27,507,000
------------ ------------ ------------
Accumulated depreciation and amortization
Balance at beginning of year 12,996,000 10,434,000 11,805,000
Depreciation and amortization 5,063,000 4,743,000 3,706,000
Write-off of fully depreciated assets (505,000) (2,181,000) (5,077,000)
------------ ------------ ------------
Balance at end of year 17,554,000 12,996,000 10,434,000
------------ ------------ ------------
Property and equipment, net $ 20,715,000 $ 18,391,000 $ 17,073,000
============ ============ ============
F-25
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Financial Statements
December 31, 2004 and 2003
NOTE J - COMMITMENTS, CONTINGENCIES AND OTHER (CONTINUED)
The following is a summary of cost in excess of fair value of net assets
acquired and the related accumulated amortization for the years ended
December 31:
2004 2003 2002
------------ ------------ ------------
Cost basis
Balance at beginning and end of year $ 2,780,000 $ 2,780,000 $ 2,780,000
------------ ------------ ------------
Accumulated amortization
Balance at beginning of year 714,000 714,000 714,000
------------ ------------ ------------
Cost in excess of fair value of net assets acquired $ 2,066,000 $ 2,066,000 $ 2,066,000
============ ============ ============
[11] Other:
Pursuant to an agreement reached on February 2, 2005 with an 8%
shareholder, the Company has agreed to commit $25 million in 2005 and $10
million in 2006 to a combination of share repurchases and/or dividends,
such programs to be implemented at such time and such manner as the board
of directors shall determine in its sole discretion. As of February 28,
2005, the Company has repurchased 177,000 shares for $3,316,000.
NOTE K - OPERATING SEGMENT INFORMATION
The Company's reportable segments are primarily based on methods used to
distribute its products. The wholesale and retail segments derive revenue from
sales of women's, men's, girl's and children's footwear. The wholesale segment,
through sales to department and specialty stores, and the retail segment,
through our operation of retail stores and our website, derive revenue from
sales of branded women's, men's, girl's and children's footwear. In addition,
the wholesale segment has a licensing program that extends the Steve Madden and
Stevies brands to accessories and ready-to-wear apparel. The other segment
represents activities of a subsidiary which earns commissions for serving as a
buying agent to mass-market merchandisers, shoe chains and other off-price
retailers with respect to their purchase of private label shoes.
F-26
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Financial Statements
December 31, 2004 and 2003
NOTE K - OPERATING SEGMENT INFORMATION (CONTINUED)
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The Company evaluates performance
based on profit or loss from operations before other income (expense) and the
provision for income taxes. The following is information for the Company's
reportable segments:
Wholesale Retail Other Consolidated
------------- ------------- ------------- -------------
Year ended December 31, 2004:
Net sales to external customers (a) $ 230,347,000 $ 107,797,000 $ 338,144,000
Gross profit 66,749,000 55,920,000 122,669,000
Commissions and licensing fees 2,310,000 $ 4,496,000 6,806,000
Income from operations 8,272,000 8,431,000 2,278,000 18,981,000
Depreciation and amortization 1,459,000 3,405,000 7,000 4,871,000
Other significant items:
Deferred compensation 2,782,000 2,782,000
Deferred rent expense 192,000 68,000 260,000
Provision for doubtful accounts 191,000 191,000
Segment assets (b) 135,362,000 44,048,000 891,000 180,301,000
Capital expenditures 1,965,000 5,414,000 8,000 7,387,000
Year ended December 31, 2003:
Net sales to external customers (a) $ 228,686,000 $ 95,518,000 $ 324,204,000
Gross profit 75,167,000 50,852,000 126,019,000
Commissions and licensing fees 2,838,000 $ 5,056,000 7,894,000
Income from operations 21,589,000 9,133,000 2,904,000 33,626,000
Depreciation and amortization 1,136,000 3,604,000 3,000 4,743,000
Other significant items:
Deferred compensation 2,877,000 2,877,000
Deferred rent expense (reversal) 33,000 262,000 1,000 296,000
Provision for doubtful accounts 163,000 163,000
Segment assets (b) 139,625,000 37,828,000 417,000 177,870,000
Capital expenditures 2,667,000 3,394,000 6,061,000
Year ended December 31, 2002:
Net sales to external customers (a) $ 234,253,000 $ 91,883,000 $ 326,136,000
Gross profit 77,889,000 48,794,000 126,683,000
Commissions and licensing fees 1,833,000 4,770,000 6,603,000
Income from operations 21,664,000 9,000,000 2,548,000 33,212,000
Depreciation and amortization 739,000 2,966,000 1,000 3,706,000
Other significant items:
Deferred compensation 2,228,000 2,228,000
Deferred rent expense (reversal) (14,000) 243,000 4,000 233,000
Provision for doubtful accounts 570,000 1,000 571,000
Segment assets (b) 113,477,000 36,166,000 857,000 150,500,000
Capital expenditures 1,246,000 3,826,000 5,072,000
(a) Attributed to the United States, based on the location in which the sale
originated.
(b) All long-lived assets, consisting of property and equipment and cost in
excess of fair value of net assets acquired, are located in the United
States.
F-27
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Financial Statements
December 31, 2004 and 2003
NOTE L - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly results of operations for the years
ended December 31, 2004 and 2003 (000's omitted):
March 31, June 30, September 30, December 31,
------------ ------------ ------------ ------------
2004:
Wholesale, net $ 55,067 $ 59,804 $ 64,851 $ 50,625
Retail, net 23,701 26,430 23,759 33,907
------------ ------------ ------------ ------------
Net sales 78,768 86,234 88,610 84,532
Cost of sales 47,496 53,522 57,160 57,297
------------ ------------ ------------ ------------
Gross profit 31,272 32,712 31,450 27,235
Commissions and licensing fee income 1,416 1,811 1,702 1,877
Net income 4,126 4,090 3,686 373
Net income per share:
Basic 0.31 0.31 0.28 0.03
Diluted 0.29 0.28 0.26 0.03
2003:
Wholesale, net $ 57,592 $ 63,335 $ 65,601 $ 42,158
Retail, net 21,106 22,409 23,062 28,941
------------ ------------ ------------ ------------
Net sales 78,698 85,744 88,663 71,099
Cost of sales 47,733 53,436 53,067 43,949
------------ ------------ ------------ ------------
Gross profit 30,965 32,308 35,596 27,150
Commissions and licensing fee income 1,690 2,145 2,205 1,854
Net income 5,049 5,780 7,073 2,552
Net income per share:
Basic 0.39 0.45 0.54 0.20
Diluted 0.36 0.41 0.50 0.18
F-28
(b) Exhibits.
3.01 Certificate of Incorporation of the Company (incorporated by reference
to Exhibit 1 to the Company's Current Report on Form 8-K filed with the
Commission on November 23, 1998).
3.02 Amended & Restated By-Laws of the Company (incorporated by reference to
Exhibit 3.02 to the Company's Annual Report on Form 10-K for its fiscal
year ended December 31. 2001).
4.01 Specimen Certificate for shares of Common Stock (incorporated by
reference to Exhibit 4.01 to the Company's Registration Statement on
Form SB-2/A filed with the Commission on September 29, 1993 (File No.
033-67162)).
4.02 Rights Agreement between the Company and American Stock Transfer and
Trust Company (incorporated by reference to Exhibit 4.1 to the
Company's Current Report on Form 8-K filed with the Commission on
November 16, 2001).
10.07 Employment Agreement of Arvind Dharia (incorporated by reference to
Exhibit 10.07 to the Company's Annual Report on Form 10-K for its
fiscal year ending December 31, 2000).
10.08 Employment Agreement of Richard Olicker (incorporated by reference to
Exhibit 10.08 to the Company's Annual Report on Form 10-K for its
fiscal year ending December 31, 2000).
10.09 Second Amended Employment Agreement between the Company and Steven
Madden (incorporated by reference to Exhibit 99.1 to the Company's
Quarterly Report on Form 10-Q for its fiscal quarter ending June 30,
2001).
10.10 Employment Agreement of Jamieson Karson (incorporated by reference to
Exhibit 99.3 to the Company's Quarterly Report on Form 10-Q for its
fiscal quarter ending June 30, 2001).
10.11 Amendment No. 1 to Employment Agreement of Arvind Dharia (incorporated
by reference to Exhibit 99.4 to the Company's Quarterly Report on Form
10-Q for its fiscal quarter ending June 30, 2001).
10.12 Employment Agreement between Adesso-Madden, Inc. and Gerald Mongeluzo
(incorporated by reference to Exhibit 99.5 to the Company's Quarterly
Report on Form 10-Q for its fiscal quarter ending June 30, 2001).
10.13 Employment Agreement between Steven Madden Retail, Inc. and Mark
Jankowski (incorporated by reference to Exhibit 99.6 to the Company's
Quarterly Report on Form 10-Q for its fiscal quarter ending June 30,
2001).
10.14 Amendment No. 1 to Employment Agreement of Richard Olicker
(incorporated by reference to Exhibit 10.15 to the Company's Quarterly
Report on Form 10-Q for its fiscal quarter ending September 30, 2002).
10.15 Amendment No. 2 to Employment Agreement of Arvind Dharia (incorporated
by reference to Exhibit 10.16 to the Company's Quarterly Report on Form
10-Q for its fiscal quarter ending September 30, 2002).
10.16 Amendment No. 1 to Employment Agreement of Jamieson Karson
(incorporated by reference to Exhibit 10.16 to the Company's Quarterly
Report on Form 10-Q for its fiscal quarter ending June 30, 2004).
21.01 Subsidiaries of Registrant (incorporated by reference to Exhibit 21.01
to the Company's Annual Report on Form 10-K for its fiscal year ending
December 31, 2000).
23.01 Consent of Eisner LLP.
31.01 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.
31.02 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.
32.01 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.
32.02 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.
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: New York, New York
March 16, 2005
STEVEN MADDEN, LTD.
By: /s/ JAMIESON KARSON
------------------------------------
Jamieson Karson
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities and on the dates indicated.
Signature Title Date
- --------------------------- ------------------------------ ------------------
/s/ JAMIESON KARSON Chairman and Chief Executive March 16, 2005
- --------------------------- Officer
Jamieson Karson
/s/ ARVIND DHARIA Chief Financial Officer March 16, 2005
- ---------------------------
Arvind Dharia
/s/ JEFFREY BIRNBAUM Director March 16, 2005
- ---------------------------
Jeffrey Birnbaum
/s/ MARC COOPER Director March 16, 2005
- ---------------------------
Marc Cooper
/s/ JOHN L. MADDEN Director March 16, 2005
- ---------------------------
John L. Madden
/s/ PETER MIGLIORINI Director March 16, 2005
- ---------------------------
Peter Migliorini
/s/ THOMAS H. SCHWARTZ Director March 16, 2005
- ---------------------------
Thomas H. Schwartz
/s/ AWADHESH SINHA Director March 16, 2005
- ---------------------------
Awadhesh Sinha
STEVEN MADDEN, LTD.
FORM 10-K
EXHIBIT INDEX
3.01 Certificate of Incorporation of the Company (incorporated by reference
to Exhibit 1 to the Company's Current Report on Form 8-K filed with the
Commission on November 23, 1998).
3.02 Amended & Restated By-Laws of the Company (incorporated by reference to
Exhibit 3.02 to the Company's Annual Report on Form 10-K for its fiscal
year ended December 31. 2001).
4.01 Specimen Certificate for shares of Common Stock (incorporated by
reference to Exhibit 4.01 to the Company's Registration Statement on
Form SB-2/A filed with the Commission on September 29, 1993 (File No.
033-67162)).
4.02 Rights Agreement between the Company and American Stock Transfer and
Trust Company (incorporated by reference to Exhibit 4.1 to the
Company's Current Report on Form 8-K filed with the Commission on
November 16, 2001).
10.07 Employment Agreement of Arvind Dharia (incorporated by reference to
Exhibit 10.07 to the Company's Annual Report on Form 10-K for its
fiscal year ending December 31, 2000).
10.08 Employment Agreement of Richard Olicker (incorporated by reference to
Exhibit 10.08 to the Company's Annual Report on Form 10-K for its
fiscal year ending December 31, 2000).
10.09 Second Amended Employment Agreement between the Company and Steven
Madden (incorporated by reference to Exhibit 99.1 to the Company's
Quarterly Report on Form 10-Q for its fiscal quarter ending June 30,
2001).
10.10 Employment Agreement of Jamieson Karson (incorporated by reference to
Exhibit 99.3 to the Company's Quarterly Report on Form 10-Q for its
fiscal quarter ending June 30, 2001).
10.11 Amendment No. 1 to Employment Agreement of Arvind Dharia (incorporated
by reference to Exhibit 99.4 to the Company's Quarterly Report on Form
10-Q for its fiscal quarter ending June 30, 2001).
10.12 Employment Agreement between Adesso-Madden, Inc. and Gerald Mongeluzo
(incorporated by reference to Exhibit 99.5 to the Company's Quarterly
Report on Form 10-Q for its fiscal quarter ending June 30, 2001).
10.13 Employment Agreement between Steven Madden Retail, Inc. and Mark
Jankowski (incorporated by reference to Exhibit 99.6 to the Company's
Quarterly Report on Form 10-Q for its fiscal quarter ending June 30,
2001).
10.14 Amendment No. 1 to Employment Agreement of Richard Olicker
(incorporated by reference to Exhibit 10.15 to the Company's Quarterly
Report on Form 10-Q for its fiscal quarter ending September 30, 2002).
10.15 Amendment No. 2 to Employment Agreement of Arvind Dharia (incorporated
by reference to Exhibit 10.16 to the Company's Quarterly Report on Form
10-Q for its fiscal quarter ending September 30, 2002).
10.16 Amendment No. 1 to Employment Agreement of Jamieson Karson
(incorporated by reference to Exhibit 10.16 to the Company's Quarterly
Report on Form 10-Q for its fiscal quarter ending June 30, 2004).
21.01 Subsidiaries of Registrant (incorporated by reference to Exhibit 21.01
to the Company's Annual Report on Form 10-K for its fiscal year ending
December 31, 2000).
23.01 Consent of Eisner LLP.
31.01 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.
31.02 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.
32.01 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.
32.02 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.