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, 2002 Commission File Number 0-23702
STEVEN MADDEN, LTD.
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(Exact name of registrant as specified in its charter)
Delaware 13-3588231
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(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
52-16 Barnett Avenue, Long Island City, New York 11104
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(Address of principal executive offices) (Zip Code)
(718) 446-1800
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(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
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
28, 2002, the last business day of the registrant's most recently completed
second fiscal quarter, was $235,126,741 (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 18, 2003 was 12,783,355 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 FOR MAY 23, 2003.
TABLE OF CONTENTS
Page
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ITEM 1 BUSINESS............................................................1
ITEM 2 PROPERTIES..........................................................8
ITEM 3 LEGAL PROCEEDINGS...................................................8
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.................11
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS..............................................12
ITEM 6 SELECTED FINANCIAL DATA............................................13
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS........................................14
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.............................................................24
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................24
ITEM 9 CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE..............................24
PART III
ITEM 10 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
OF THE REGISTRANT................................................25
ITEM 11 EXECUTIVE COMPENSATION.............................................25
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.......................................................25
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.....................25
ITEM 14 CONTROLS AND PROCEDURES............................................25
ITEM 15 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.........................................................25
SIGNATURE..........................................................51
CERTIFICATIONS PURSUANT TO THE SARBANES-OXLEY ACT OF 2002..........53
-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 web site, catalogs and department and specialty store locations
in the United States and Canada and through special distribution arrangements in
Europe and in Central and South America. 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 five (5)
brands: Steve Madden(R), David Aaron(R), l.e.i.(R), Stevies(R) and the Steve
Madden Mens brand. Steven Madden Retail, Inc., the Company's wholly-owned retail
subsidiary, operates Steve Madden and David Aaron retail stores as well as the
Company's outlet stores and e-commerce web site. 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 largest mass
merchandisers. The Company also licenses its Steve Madden(R) and Stevies(R)
trademarks 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.
Wholesale Divisions
Madden Women's Wholesale
The Steve Madden(R) Women's Wholesale Division ("Madden Women's
Wholesale") 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 and Canada. During the last few years 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
Women's Wholesale creates and markets fashion forward footwear designed to
appeal to customers seeking exciting, new footwear designs at reasonable prices.
As the Company's largest division, Madden Women's Wholesale accounted for
$108,577,000 of net sales in 2002, or approximately 33% of the Company's total
sales. Many of Madden Women's Wholesale's newly created styles are test marketed
at the Company's retail stores. Within a few days, the Company can determine if
a 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. The l.e.i.(R)trademark is well known for
jeanswear in the junior marketplace and 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 $55,664,000 for the year ended December 31,
2002, or approximately 17% of the Company's total revenues.
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Madden Men's Wholesale
The Steve Madden Men's Wholesale Division ("Madden Men's Wholesale")
markets and sells a full collection of directional young men's shoes to major
department stores, better specialty stores and independent shoe stores
throughout the United States. Price points range from $70 to $100, targeted at
men ages 18 to 44 years old.
The Madden Men's Wholesale accounted for $45,153,000 of net sales in 2002,
or approximately 14% of the Company's total sales. Steve Madden Men's, which is
primarily sourced in China, takes open stock inventory positions in a variety of
patterns and colors to serve the replenishment programs of its wholesale
customers.
Diva Acquisition Corp. - The David Aaron(R) Wholesale Division
Diva Acquisition Corp. ("Diva") designs and markets fashion footwear to
women under the "David Aaron(R)" trademark through major department stores and
better footwear specialty stores and two (2) Company owned retail shoe stores
located in New York, New York and in Paramus, New Jersey. Priced a tier above
the Steve Madden(R) brand, Diva's products are designed to appeal principally to
fashion conscious women, ages 26 to 45, who shop at department stores and
footwear boutiques. The Company recorded wholesale sales from the David Aaron(R)
brand of $11,194,000 for the year ended December 31, 2002, or approximately 3%
of the Company's total net sales. Revenues from the sale of David Aaron footwear
increased by approximately 50% compared to the preceding year due to the
repositioning and reorganization of the David Aaron brand.
Stevies Inc. - Wholesale Division
The Company's Stevies Wholesale Division ("Stevies Wholesale") generated
net sales of $13,664,000 for the year ended December 31, 2002, or approximately
4% of the Company's total net sales. Stevies(R) now sells in store groups such
as Nordstrom, Federated Department Stores, May Department Stores, Belk,
Dillard's, Limited Too, as well as independent children's stores throughout the
country.
Steven Madden Retail, Inc. - Retail Division
As of December 31, 2002, the Company owned and operated seventy-two (72)
retail shoe stores under the Steve Madden(R) name, two (2) under the David
Aaron(R) name, five (5) outlet stores and one (1) Internet store (through the
www.stevemadden.com web site). In 2002, the Company elected to consolidate its
three websites into one for better productivity. In 2002, the Company opened ten
(10) new stores and closed three (3) under-performing stores. Most of the Steve
Madden stores are located in major shopping malls in Arizona, California,
Colorado, Connecticut, District of Columbia, Florida, Georgia, Illinois,
Maryland, Massachusetts, Michigan, Minnesota, Nevada, New Jersey, New York,
Ohio, Pennsylvania, Puerto Rico, Rhode Island, Texas, Virginia and Wisconsin.
The retail stores have been successful for the Company, generating annual sales
in excess of $716 per square foot. Sales are primarily from the sale of the
Company's Steve Madden(R) product line. Same store sales increased 6% in 2002
over 2001 sales and total sales for the retail division were $92,000,000
compared to $79,000,000 for 2001. Sales from the retail division for the year
ended December 31, 2002 were approximately 28% of the Company's net sales.
The Company believes that the Retail Division will continue to enhance
overall sales and profits while building equity in the Steve Madden brand. It is
for these reasons that the Company intends to add approximately eight to ten
(8-10) new retail stores during the 2003 calendar year. Additionally, the
expansion of the Retail Division enables the Company to test and react to new
products and classifications which 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 off-price retailers in
connection with their purchase of private label shoes. As a buying agent, A-M
arranges for shoe manufacturers in Asia and South America to manufacture 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, design and distribution capabilities. Currently,
this division serves as a buying agent for the procurement of women's, men's and
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children's footwear for large retailers including Sears, Payless, Wal-Mart and
Target. A-M receives commissions in connection with the purchase of private
label shoes by its clients. A-M also sources and sells footwear under the Soho
Cobbler(R) brand name. The private label division generated commission income of
$4,770,000 for the year ended December 31, 2002.
Licensing
As of December 31, 2002, the Company licensed the Steve Madden trademark
for use in connection with the manufacturing, marketing and sale of outerwear
(including leather outerwear), belts, handbags, 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 net sales fail to reach
specified targets and a percentage of sales for advertising of the Steve
Madden(R) brand.
During 2002, the Company licensed the Stevies trademark for use in
connection with manufacturing, marketing and sale of sportswear, outerwear,
belts, handbags, sunglasses and hosiery, fashion accessories.
Design
The Company has established a reputation for its creative designs, popular
styles and quality products at accessible 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 adapt quickly to changing consumer
demands. The Company's design team works together to create designs which they
believe fit the Company's image, reflect current or approaching 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
scheduled for mass production overseas and 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 cut mass production lead times and avoid 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 such products. The
Company does not own or operate any mass manufacturing facilities and sources
its branded products through independently owned manufacturers in Brazil, China,
Italy, Mexico, Spain, Taiwan and the United States. The Company has established
relationships with a number of manufacturers in each country. The Company
believes that this sourcing of footwear products minimizes its investment and
inventory risk, and enables efficient and timely introduction of new product
designs. 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 products. The principal
materials used in the Company's footwear are available from any 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 daily
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. Constant inventory
tracking allows the Company to manage inventory on a continuous flow basis with
the goal of optimizing inventory turns.
The Company distributes its products from two (2) third party distribution
warehouse centers located in California and New Jersey and its own distribution
facility located in Florida. 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.
3
Customers
The Company's customers purchasing shoes consist principally of department
stores and specialty stores, including shoe boutiques. Presently, the Company
sells approximately sixty-three percent (63%) of its products at wholesale to
department stores, including Federated Department Stores (Bloomingdale's, Bon
Marche, Burdines, Macy's and Rich's), May Department Stores (Famous Barr,
Filene's, Foley's, Hecht's, Kaufmann's, Meier & Frank, Lord and Taylor and
Robinsons May), Dillard's, Marshall Field's and Nordstrom; and approximately
thirty-four percent (34%) to specialty stores, including Journeys, Limited Too
and Mandees; and catalog retailers, including Victoria's Secret and Fingerhut.
For the year ended December 31, 2002, May Department Stores, Federated
Department Stores and Nordstrom accounted for approximately twenty-two percent
(22%), seventeen percent (17%) and ten percent (10%) of the Company's wholesale
sales, respectively.
Distribution Channels
The Company sells its products principally through its Company-owned
retail stores, better department stores and specialty shoe stores in the United
States and abroad. For the year 2002, retail stores and wholesale sales
accounted for approximately twenty-eight percent (28%) and seventy-two percent
(72%) of total sales, respectively. The following paragraphs describe each of
these distribution channels:
Steve Madden and David Aaron Retail Stores
As of December 31, 2002, the Company operated seventy-three (73)
Company-owned retail stores (including one Internet store) under the Steve
Madden(R) name and two (2) under the David Aaron(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 used as 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 David Aaron(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 sites at which the demographics fit the consumer profile, the
positioning of the site is well trafficked and the projected fixed annual rent
expense does not exceed a specified percentage of 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.
Outlet Stores
Shoe Biz, Inc., a wholly owned subsidiary of the Company ("Shoe Biz"),
operates five (5) outlet stores in New Jersey and New York, four (4) 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, David
Aaron, Stevies and l.e.i.(R) footwear, at lower prices than prices typically
charged by other "full price" retailers.
Department Stores
The Company currently sells to over 2,750 locations of twenty-two (22)
better department stores throughout the United States and Canada. The Company's
top accounts include Federated Department Stores (Macy's, Bloomingdale's, Bon
Marche, Burdine's and Rich's), May Department Stores (Filene's, Hecht's, Famous
Barr, Foley's, Kaufmann's, Meier & Frank, Lord and Taylor and Robinsons May),
Nordstrom, Dillard's and Marshall Field's.
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Department store accounts are offered merchandising support which includes
in-store fixtures and signage, supervision of displays and merchandising of the
Company's various product lines. An important development in the Company's
wholesale merchandising effort is 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 customer service
senior 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 top specialty store accounts include
Journeys, Limited Too and Mandees. 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 web site: www.stevemadden.com.
Customers can purchase numerous styles of the Company's Steve Madden and Stevies
footwear, accessory and clothing products. Sales derived from the Company's
Internet store decreased 2% to $4,800,000 in 2002 from $4,900,000 in 2001.
Distribution Agreements
In June 2002, the Company and Dabsan International, S.A. ("Dabsan")
entered into a written 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 is required to open two (2) Steve Madden stores by October 31, 2004 and
is also required to purchase minimum amounts of Steve Madden products.
In February 2003, the Company and F.E.E.T. sas ("FEET") entered into a
written 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 in North Africa. Under the terms of the agreement, FEET
is required to purchase minimum amounts of Steve Madden products.
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. The recent substantial growth in the sales
of fashion 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. 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.
In 2001, the Company launched the Steve Madden Mens brand which competes
with several brands that are more established with greater consumer awareness,
including Kenneth Cole, Skechers Collection, Tommy Hilfiger and Dr. Martin.
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Marketing and Sales
Prior to 1997, the Company's marketing plans relied heavily on its few
Steve Madden(R) retail store locations and word-of-mouth referrals. In 1998, the
Company continued to focus on creating a more integrated brand building program
to establish Steve Madden as the leading designer of fashion footwear for
style-conscious young women. 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 web site (www.stevemadden.com)
where consumers can purchase Steve Madden(R), Stevies and Steve Madden Mens
products and interact with both the Company and other customers.
The Company commenced an aggressive marketing campaign for the Stevies
brand with separate marketing, advertising, promotional events and in-store
displays targeting the new Stevies customer. As for Steve Madden Mens, the
Company supported the brand's roll-out with strategic marketing and advertising
initiatives.
In order to service its wholesale accounts, the Company retains a sales
force of sixteen 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 better department and specialty
stores. The sales representatives are supported by the Company's senior
executives, a staff of nine account executives, three merchandise coordinators
and twenty-six customer service representatives who continually cultivate
relationships with wholesale customers. This staff assists 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.
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 two points 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 was renewed for the period beginning June 30, 2002 through
December 31, 2004. Capital Factors maintains a lien on all of the Company's
inventory and receivables and assumes the credit risk for all assigned accounts
approved by 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),
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SOHO COBBLER (Int'l. Cl. 9 for eyewear; and Int'l Cl. 25 for clothing and
footwear), and SHOE BIZ By STEVE MADDEN (Int'l Cl. 25 for clothing and footwear;
and Int'l Cl. 35 for retail store services). Additionally, the Company has
several pending trademark and service mark applications the United States for
various marks, including a stylized "H" Design (Int'l Cl. 25 for clothing and
footwear); TEST & REACT (Int'l Cl. 42 for services consisting of conducting
market studies); STEVEN M. (Int'l Class 25 for clothing and footwear); and,
STEVEN (Int'l Cl. 25 for clothing and 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, Brazil, Canada, Chile, China, Colombia, Hong Kong,
Israel, Italy, Japan, Korea, Mexico, Panama, Saudi Arabia, South Africa, Taiwan,
the 15 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, Kuwait, Lebanon, Malaysia, Oman, Peru,
Qatar, Turkey, the United Arab Emirates and Venezuela. 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, Israel,
Japan, South Africa and the 15 cooperating countries in Europe and for its D.
AARON trademark in Spain. The Company further has a pending application for
registration of the DAVID AARON trademark and service mark in Panama. Also, the
Company has three pending applications for registration of 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
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 Hong
Kong, Israel, Mexico, Taiwan and the 15 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 in Argentina,
Bahrain, Brazil, Canada, China, Colombia, Indonesia, Japan, Korea, Kuwait,
Lebanon, Malaysia, Mexico, Oman, Panama, Peru, Qatar, Saudi Arabia, South
Africa, Thailand, Taiwan, 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
At March 10, 2003, the Company employed approximately 1081 employees, of
whom approximately 482 work on a full-time basis and approximately 599 work on a
part-time basis. The management of the Company considers relations with its
employees to be good.
7
ITEM 2 PROPERTIES
The Company maintains approximately 25,000 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 expired in June 2002;
management is currently negotiating a renewal of this lease. Management strongly
believes the Company will continue to remain on the same premesis.
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 3,762
square foot space. The lease for the Company's showroom expires on February 28,
2013.
The Company's l.e.i.(R) showroom is located at 2300 Stemmons Freeway,
Dallas, Texas. The Company's l.e.i. brands are displayed from this 1,080 square
foot space. The lease for this showroom expires in September 2004.
The Company maintains a warehouse and distribution center in Port
Everglades, Florida servicing wholesale and retail accounts. The lease for the
Florida warehouse expired on January 31, 2003; the Company is currently leasing
this space on a month-to-month basis. The Company is protected for its space
requirements for its warehousing and distribution center. Currently, the Company
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
extend for terms which average 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.
The current terms of the Company's retail store leases expire as follows:
Years Lease Terms Expire Number of Stores
------------------------ ----------------
2003 1
2004 3
2005 4
2006 2
2007 7
2008 12
2009 11
2010 11
2011 16
2012 9
2013 4
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 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
8
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. Mr. Madden began serving
his sentence in September of 2002. 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.
In December 2001, the Company purchased a loss mitigation policy to cover
costs arising out of lawsuits related to the June 2000 federal indictment of
Steve Madden, the Company's former Chief Executive Officer. The policy covers
the Company's anticipated damages and legal costs in connection with such
lawsuits. The Company is obligated to pay for damages and costs in excess of the
policy limits. The cost of the policy was $6,950,000.
Class Action
Between June and August 2000, eight putative securities fraud class action
lawsuits have been commenced in the United States District Court for the Eastern
District of New York against the Company, Steven Madden and, in five of the
actions, Rhonda J. Brown (the former President and a former director of the
Company) and Arvind Dharia. These actions are captioned: Wilner v. Steven
Madden, Ltd., et al., 00 CV 3676 (filed June 21, 2000); Connor v. Steven Madden,
et al., 00 CV 3709 (filed June 22, 2000); Blumenthal v. Steven Madden, Ltd., et
al., 00 CV 3709 (filed June 23, 2000); Curry v. Steven Madden, Ltd., et al., 00
CV 3766 (filed June 26, 2000); Dempster v. Steven Madden Ltd., et al., 00 CV
3702 (filed June 30, 2000); Salafia v. Steven Madden, Ltd., et al., 00 CV 4289
(filed July 24, 2000); Fahey v. Steven Madden, Ltd., et al., 00 CV 4712 (filed
August 11, 2000); Process Engineering Services, Inc. v. Steven Madden, Ltd., et
al., 00 CV 5002 (filed August 22, 2000). By Order dated December 8, 2000, the
Court consolidated these eight actions, appointed Process Engineering, Inc.,
Michael Fasci and Mark and Libby Adams as lead plaintiffs and approved their
selection of lead counsel. On February 26, 2001, Plaintiffs served a
Consolidated Amended Complaint. On or about October 31, 2001, plaintiffs filed a
Second Consolidated Amended Class Action Complaint. The pleading names the
Company, Steven Madden, Rhonda J. Brown and Arvind Dharia as defendants. It
principally alleges that the Company and the individual defendants violated
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5
promulgated under the 1934 Act by issuing false and misleading statements, and
failing to disclose material adverse information, generally relating to matters
arising from Mr. Madden's June 2000 indictment. The plaintiffs seek an
unspecified amount of damages, costs and expenses on behalf of themselves and
all other purchasers of the Company's common stock during the period June 21,
1997 through June 20, 2000. On November 30, 2001, all of the defendants served
motions to dismiss the Consolidated Amended Complaint. The motions were fully
briefed on January 14, 2002. Since that time, a settlement in principle of these
actions has been reached, subject to execution of definitive settlement
documentation, notices to class members, a hearing and approval by the District
Court. The tentative settlement is within the limits of the Company's insurance
coverage.
Shareholder Derivative Actions
On or about September 26, 2000, a putative shareholders derivative action
was commenced in the United States District Court for the Eastern District of
New York, captioned Herrera v. Steven Madden and Steven Madden, Ltd., 00 CV 5803
(JG). The Company is named as a nominal defendant in the action. The complaint
seeks to recover alleged damages on behalf of the Company from Mr. Madden
arising from his June 2000 indictment and to require him to disgorge certain
profits, bonuses and stock option grants he received. On January 3, 2001,
plaintiff filed an Amended Shareholder's Derivative Complaint. On February 2,
2001, both the Company and Mr. Madden filed motions to dismiss the Amended
Complaint because of plaintiff's failure to make a pre-litigation demand upon
the Company's board of directors. On October 1, 2001, plaintiff filed a Second
Amended Complaint. On November 2, 2001, the Company filed a motion to dismiss
this pleading on grounds that plaintiff had failed to make a pre-litigation
demand upon the Company's board of directors. On February 7, 2002, the
Magistrate Judge filed a Report recommending that the Company's motion to
9
dismiss be denied. The Company filed its objections to the Report on March 4,
2002. On March 22, 2002, the District Judge entered an order adopting the
Magistrate Judge's report and recommendation in full. Since that time, an
agreement in principle has been reached to resolve all claims in this action,
subject to execution of definitive documentation, such notice to the Company's
shareholders (if any) as may be required by the District Court, and approval by
the District Court. The Company believes, after consultation with counsel, that
its defense costs and certain attorneys fees in connection with this action will
be subject to coverage by the Company's insurance as supplemented by the loss
mitigation policy described above.
On or about November 28, 2001, a purported shareholder derivative
complaint was filed in the United States District Court for the Eastern District
of New York, captioned Herrera v. Karson, et al., 00 CV 7868. Named as
defendants therein are the Company (as nominal defendant) and certain of the
Company's present and/or former directors. The complaint alleges that the
individual defendants breached their fiduciary duties to the Company in
connection with a decision by the Board of Directors of the Company to enter
into an employment agreement with Mr. Steven Madden in or about May 2001. The
complaint seeks declaratory and other equitable relief, as well as an
unspecified amount of compensatory damages, costs and expenses. On or about
February 1, 2002, plaintiff filed an Amended Shareholder Derivative Complaint
(the "Amended Complaint"). The Amended Complaint contains substantially the same
allegations and names the same defendants as the original complaint. Since that
time, an agreement in principle has been reached to resolve all claims in this
action, subject to execution of definitive documentation, such notice to the
Company's shareholders (if any) as may be required by the District Court, and
approval by the District Court. The Company believes, after consultation with
counsel, that its defense costs and certain attorneys fees in connection with
this action will be subject to coverage by the Company's insurance as
supplemented by the loss mitigation policy described above.
SEC Investigation
On March 14, 2001, the Company became aware that the Securities and
Exchange Commission had issued a formal order of investigation with respect to
trading in the Company's securities. The Company has had no communications with
the SEC with regards to this matter since it filed its Annual Report on Form 10K
for 2001.
Other Actions
The Company and certain of the Company's present and/or former directors
have been named in an action commenced in the United States District Court for
the Eastern District of New York by the Safeco Surplus Lines Insurance Company
captioned, Safeco Surplus Lines Ins. Co. v. Steven Madden Ltd., et al., 02 CV
1151 (JG). The complaint principally seeks rescission of the excess insurance
policy issued by Safeco to the Company for the February 4, 2000 to June 13, 2001
period and an order declaring that Safeco does not owe any indemnity obligation
to the Company or any of its officers and directors in connection with the
putative shareholder class action and derivative cases described in the Form 10Q
filed by the Company for the quarter ended March 31, 2002. No subsequent
proceedings have occurred in this action as the parties are engaged in
discussions directed at resolving Safeco's claims.
On or about January 22, 2002, an action was commenced against the Company
in the United States District Court for the District of Oregon, captioned Adidas
America, Inc. and Adidas Salomon AG v. Steve Madden, Ltd. and Steve Madden
Retail, Inc., CA No. CV02-0057 HU. The Complaint seeks injunctive relief and
unspecified monetary damages for trademark infringement, trademark dilution,
unfair competition and deceptive trade practices arising from the Company's use
of four stripes as a design element on footwear which Adidas alleges infringes
on its registered Three Stripe Trademark. On or about September 3, 2002, Adidas
commenced a second action against the Company in the United States District
Court for the District of Oregon, captioned Adidas America, Inc. and Adidas
Salomon AG v. Steve Madden, Ltd. and Steve Madden Retail, Inc., CA No. CV
02-1191 KI. The second Complaint seeks the same injunctive relief and
unspecified monetary damages as the first lawsuit for various trademark
infringement claims arising from the Company's use of two stripes as a design
element on footwear. The Company believes it has substantial defenses to the
claims asserted in both lawsuits based on pervasive use of two and four stripes
as a design element by numerous other footwear manufacturers over the past three
decades. The Company filed answers denying the allegations of infringement in
both cases, which were consolidated before a single judge. Discovery is
continuing and trial is schedule to begin May 19, 2003. Court ordered
non-binding mediation is scheduled for a future date.
10
On October 4, 2002, Skechers U.S.A., Inc., and Skechers U.S.A., Inc. II,
filed suit against Steven Madden Ltd. and R.S.V. Sport, Inc. in the United
States District Court for the Central District of California, Case No. CV
02-0766. Skechers alleges claims for patent infringement, federal unfair
competition, federal antidilution violation, California unfair competition,
California antidilution violation, and common law unfair competition. Skechers
seeks unspecified monetary damages. Since that time, an agreement in principle
has been reached to resolve all claims in this action, subject to the parties'
approval of the written settlement documentation. While the Company believes
that it will finalize a settlement agreement with Skechers in the near future,
it further believes that it has substantial defenses to the claims asserted in
the lawsuit in the unlikely event that no final agreement is reached.
On September 6, 2002 Ron Owen filed an action against Steven Madden
Retail, Inc., which action is pending in the United States District Court for
the Northern District of Texas - Dallas Division, Civil Action No. 3-02 CV
2316-R. Plaintiff alleges a cause of action for breach of contract and seeks
unspecified monetary damages. On October 10, 2002, the Company answered the
complaint. The Company believes that it has substantial defenses to the claims
asserted in the lawsuit.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
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, 2002.
11
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's shares of common stock trade on The Nasdaq National Market.
The following table sets forth the range of high and low bid quotations for the
Company's Common Stock for the two year period ended December 31, 2002 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
------ ------ ------ ------
2002 2001
Quarter ended 17.790 13.320 Quarter ended 15.125 7.656
March 29, 2002 March 31, 2001
Quarter ended 20.250 15.790 Quarter ended 19.050 13.350
June 28, 2002 June 30, 2001
Quarter ended 19.790 13.430 Quarter ended 19.890 7.450
September 30, 2002 September 30, 2001
Quarter ended 18.850 13.590 Quarter ended 14.200 8.900
December 31, 2002 December 31, 2001
On March 25, 2003, the final quoted price as reported by The Nasdaq
National Market was $15.33 for each share of common stock. As of March 18, 2003,
there were 12,783,355 shares of Common Stock outstanding, held of record by 69
record holders and approximately 2,476 beneficial owners.
Absence of Dividends. The Company anticipates that all of its earnings in
the foreseeable future will be retained to finance the continued growth and
expansion of its business and has no current intention to pay cash dividends.
12
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 2002, 2001,
2000, 1999 and 1998 and the Balance Sheet Data as of December 31, 2002, 2001,
2000, 1999 and 1998 should be read in Conjunction with the Company's audited
consolidated financial statements and notes thereto appearing elsewhere herein.
Year Ended December 31,
----------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------ ------------ ------------ ------------ ------------
INCOME STATEMENT DATA:
Net sales 326,136,000 243,391,000 205,113,000 163,036,000 85,783,000
Cost of sales 199,453,000 143,518,000 115,495,000 94,536,000 49,893,000
Gross profit 126,683,000 99,873,000 89,618,000 68,500,000 35,890,000
Commissions and licensing fee 6,603,000 5,911,000 4,847,000 3,367,000 3,273,000
Operating expenses (100,074,000) (79,472,000) (68,833,000) (52,946,000) (29,949,000)
Cost of loss mitigation coverage (6,950,000)
Income from operations 33,212,000 19,362,000 25,632,000 18,921,000 9,214,000
Interest income 1,166,000 1,344,000 1,744,000 909,000 380,000
Interest expense (16,000) (66,000) (102,000) (90,000) (235,000)
Gain on sale of marketable securities 66,000 71,000 230,000
Income before provision for income
taxes 34,428,000 20,711,000 27,504,000 19,740,000 9,359,000
Provision for income taxes 14,587,000 8,595,000 11,461,000 8,274,000 3,912,000
Net Income 19,841,000 12,116,000 16,043,000 11,466,000 5,447,000
Basic income per share $ 1.58 $ 1.04 $ 1.42 $ 1.06 $ 0.58
Diluted income per share $ 1.45 $ 0.94 $ 1.26 $ 0.92 $ 0.50
Basic weighted average common shares
outstanding 12,594,861 11,617,862 11,310,130 10,831,250 9,436,798
Effect of potential common shares from
exercise of options and warrants 1,115,018 1,330,002 1,387,244 1,634,102 1,546,303
Diluted weighted average common shares
outstanding 13,709,879 12,947,864 12,697,374 12,465,352 10,983,101
BALANCE SHEET DATA
Total assets 150,500,000 121,862,000 91,733,000 78,135,000 48,928,000
Working capital 86,461,000 82,633,000 57,207,000 48,076,000 33,627,000
Noncurrent liabilities 1,532,000 1,313,000 1,130,000 980,000 681,000
Stockholders' equity 130,075,000 102,360,000 76,566,000 62,435,000 44,960,000
13
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 Financial Statements and
Notes thereto appearing elsewhere in this document.
Statements in this "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and elsewhere in this document as well as
statements made in press releases and oral statements that may be made by the
Company or by officers, directors or employees of the Company acting on the
Company's behalf that are not statements of historical or current fact
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve known and unknown risks, uncertainties and other unknown factors that
could cause the actual results of the Company to be materially different from
the historical results or from any future results expressed or implied by such
forward-looking statements. In addition to statements which explicitly describe
such risks and uncertainties, readers are urged to consider statements labeled
with the terms "believes", "belief", "expects", "intends", "anticipates" or
"plans" to be uncertain forward-looking statements. The forward-looking
statements contained herein are also subject generally to other risks and
uncertainties that are described from time to time in the Company's reports and
registration statements filed with the Securities and Exchange Commission.
The following table sets forth information on operations for the periods
indicated:
Selected Financial Information
------------------------------
Year Ended
----------
December 31
-----------
($ in thousands)
2002 2001 2000
-------------- -------------- --------------
Consolidated:
- ------------
Net Sales $326,136 100% $243,391 100% $205,113 100%
Cost of Sales 199,453 61 143,518 59 115,495 56
Gross Profit 126,683 39 99,873 41 89,618 44
Other Operating Income 6,603 2 5,911 3 4,847 2
Operating Expenses 100,074 31 79,472 33 68,833 34
Cost of Loss Mitigation Coverage -- -- 6,950 3 -- --
Income from Operations 33,212 10 19,362 8 25,632 12
Interest and Other Income Net 1,216 1 1,349 1 1,872 1
Income Before Income Taxes 34,428 11 20,711 9 27,504 13
Net Income 19,841 6 12,116 5 16,043 8
14
Selected Financial Information
------------------------------
Year Ended
----------
December 31
-----------
($ in thousands)
2002 2001 2000
-------------- -------------- --------------
By Segment
WHOLESALE DIVISIONS:
- -------------------
Steven Madden, Ltd. (Madden Womens)
- -----------------------------------
Net Sales $108,577 100% $ 92,413 100% $ 87,977 100%
Cost of Sales 75,080 69 60,052 65 54,707 62
Gross Profit 33,497 31 32,361 35 33,270 38
Other Operating Income 1,736 2 1,462 2 959 1
Operating Expenses 27,714 26 24,929 27 25,422 29
Cost of Loss Mitigation Coverage -- -- 6,950 8 -- --
Income from Operations 7,519 7 1,944 2 8,807 10
l.e.i. Footwear:
- ---------------
Net Sales $ 55,665 100% $ 42,592 100% $ 37,741 100%
Cost of sales 35,368 64 26,859 63 23,657 63
Gross Profit 20,297 36 15,733 37 14,084 37
Operating Expenses 14,165 25 9,833 23 7,652 20
Income from Operations 6,132 11 5,900 14 6,432 17
Madden Mens:
- -----------
Net Sales $ 45,153 100% $ 10,461 100% -- --
Cost of sales 29,022 64 6,737 64 -- --
Gross Profit 16,131 36 3,724 36
Operating Expenses 10,330 23 3,340 32 -- --
Income from Operations 5,801 13 384 4 -- --
Diva Acquisition Corp:
- ---------------------
Net Sales $ 11,194 100% $ 7,454 100% $ 3,616 100%
Cost of sales 8,117 73 5,384 72 2,591 72
Gross Profit 3,077 27 2,070 28 1,025 28
Operating Expenses 2,645 23 1,796 24 1,231 34
Income (Loss) from Operations 432 4 274 4 (206) (6)
Stevies Inc.:
- ------------
Net Sales $ 13,664 100% $ 10,984 100% $ 6,147 100%
Cost of sales 8,777 64 7,014 64 3,846 63
Gross Profit 4,887 36 3,970 36 2,301 37
Other Operating Income 97 1 249 2 257 4
Operating Expenses 3,205 24 2,626 24 1,595 26
Income from Operations 1,779 13 1,593 14 963 15
STEVEN MADDEN RETAIL INC.:
- -------------------------
Net Sales $ 91,883 100% $ 79,487 100% $ 69,632 100%
Cost of Sales 43,089 47 37,472 47 30,694 44
Gross Profit 48,794 53 42,015 53 38,938 56
Operating Expenses 39,793 43 34,992 44 30,937 44
Income from Operations 9,001 10 7,023 9 8,001 12
Number of Stores 80 73 65
15
Selected Financial Information
------------------------------
Year Ended
----------
December 31
-----------
($ in thousands)
2002 2001 2000
-------------- -------------- --------------
By Segment (Continued)
ADESSO MADDEN INC.: 2002 2001 2000
- ------------------ ---- ---- ----
(FIRST COST)
Other Operating Revenue $ 4,770 100% $ 4,200 100% $ 3,631 100%
Operating Expenses 2,222 47 1,956 47 1,996 55
Income from Operations 2,548 53 2,244 53 1,635 45
RESULTS OF OPERATIONS
($ in thousands)
Year Ended December 31, 2002 vs. Year Ended December 31, 2001
Consolidated:
- ------------
Sales for the year ended December 31, 2002 were $326,136 or 34% higher
than the $243,391 for the year ended December 31, 2001. The increase in sales
was partially due to a $34,692 increase in sales from the Madden Mens Wholesale
Division ("Madden Mens") and year 2002 was a full year of operations from this
division as well as double-digit percentage gains in each of our other Wholesale
Divisions and sales gains of 16% ($12,396) in our Retail Division. Sales gains
were attributable to greater acceptance of the Company's product offerings and
to an increase in the Company's brand recognition as well as the Company's
opening of ten additional stores.
Consolidated gross profit as a percentage of sales decreased to 39% in
2002 from 41% in 2001. The decrease was primarily due to sluggish business
conditions, which required increased markdowns, selling and advertising
allowances to facilitate sales in 2002 vs. 2001.
Total Operating expenses increased to $100,074 in 2002 from $79,472 in
2001. Such increase resulted from a first full year of operation for Madden Mens
division, cost associated with growth in other segments of business as well as
provision for management incentives. Advertising and marketing related expenses
increased to $7,451 in 2002 from $6,596 in 2001 because of the Company's
increased focus in this area. Selling, design and licensing expenses also
increased to $18,346 in 2002 from $12,499 in 2001 because of overall growth in
sales and the Company's concentration in its design and licensing areas.
Additionally, operating expenses increased to $20,007 in 2002 from $16,845
primarily because the Company opened 10 additional retail stores during 2002.
Also, total legal expenses in 2002 increased to $2,650 from $922 in 2001 because
of incremental legal and defense costs.
Income from operations for 2002 was $33,212, which represents an increase
of $13,850 or 72% over income from operations of $19,362 in 2001. Net income
increased by 64% to $19,841 in 2002 from $12,116 in 2001. The increase in income
resulted from growth in sales, decrease in operating expenses as a percentage of
sales as well as a $6,950 of expense in 2001 relating to a non-recurring charge
associated with the purchase of loss mitigation insurance coverage.
Wholesale Divisions:
- -------------------
Steven Madden Ltd. (Madden Women's, l.e.i. and Madden Mens):
Sales from Madden Women's Wholesale Division ("Madden Women's") accounted
for $108,577 or 33%, and $92,413 or 38%, of total sales in 2002 and 2001,
respectively. The increase in sales was driven by the sales of key styles
16
including euro casuals, open stock dress sandals and classic platform round toe
boots. Gross profit as a percentage of sales decreased to 31% in 2002 from 35%
in 2001 primarily due to earlier action by the division to sell off slow moving
styles by reducing selling prices to create open-to-buy for new best sellers and
the higher markdowns taken by the division because of the general softness in
the economy. Operating expenses increased to $27,714 in 2002 from $24,929 in
2001 due to increases in employee incentives and performance related expenses.
Additionally, selling and designing expenses increased due to an increase in
sales in 2002. Income from operations for Madden Women's was $7,519 in 2002
compared to $1,944 in 2001. Income from operations in 2001 included a pretax
charge of $6,950 in connection with the purchase of a loss mitigation policy.
Sales from l.e.i. ("l.e.i.") accounted for $55,665 or 17%, and $42,592 or
17%, of total sales in 2002 and 2001, respectively. The increase in sales was
principally due to the addition of new accounts with retailers including The Bon
Marche, Dayton Hudson, Stage Stores and Foot Action and higher sales of key
styles such as euro casual and lug bottom casuals. Gross profit as a percentage
of sales decreased to 36% in 2002 from 37% in 2001 primarily due to an increase
in markdown allowances caused by higher levels of promotional activities and
general softness in the economy in the year 2002. Operating expenses increased
to $14,165 in 2002 from $9,833 in 2001 due to increased sales commission, out
freight and licensing costs as well as employee incentives and performance
related expenses. Income from operations for l.e.i. was $6,132 in 2002 compared
to $5,900 in 2001.
Sales from Madden Mens ("Madden Mens"), which commenced shipping in the
first quarter of 2001, accounted for $45,153 or 14%, and $10,461 or 4%, of total
sales in 2002 and 2001, respectively. The sales increase resulted from doubling
the number of Madden Mens doors and wider acceptance of Madden Mens products
throughout the department store distribution channels. Sales were driven by key
styles including euro casual and the sport-active look. Gross profit as a
percentage of sales remained at 36% in 2002, the same as 2001. Operating
expenses increased to $10,330 in 2002 from $3,340 in 2001 due to increases in
payroll and other payroll-related expenses, which were due to growth in the
business, and year 2002 was the first full complete year for this product line.
Additionally, selling and designing expenses increased due to the increase in
sales in 2002. Madden Mens income from operations increased to $5,801 in 2002
compared to $384 in 2001.
Diva Acquisition Corp. ("Diva"):
Sales from Diva accounted for $11,194 or 3%, and $7,454 or 3%, of total
sales in 2002 and 2001, respectively. The increase in sales was achieved partly
through the third quarter inclusion of sales of products from the newly
introduced Steven brand (which had net sales of $860 in 2002) within the Diva
Division. The increase in sales was also driven by key styles including pointy
toe dress shoes, sport active shoes, driving moccasins and mid-heel dress shoes.
Gross profit as a percentage of sales decreased to 27% in 2002 from 28% in 2001,
primarily due to an increase in markdown allowances, resulting from higher
levels of promotional activities caused by general softness in the economy in
2002. Operating expenses increased to $2,645 in 2002 from $1,796 in 2001 due to
increases in payroll and other payroll-related expenses due to the growth in the
business. Additionally, selling and related expenses increased due to the
increase in sales in 2002. Diva's income from operations increased to $432 in
2002 compared to $274 in 2001.
Stevies Inc. ("Stevies"):
Sales from Stevies accounted for $13,664 or 4%, and $10,984 or 5%, of
total sales in 2002 and 2001, respectively. The increase in sales was driven by
the addition of new accounts with retailers including Meldisco children's
departments, Zutopia, and the Wet Seals' children's division. This increase in
sales was also due to the growth in accounts such as Limited Too, Journey's
Kidz, Nordstrom and Filenes. Gross profit as a percentage of sales remained at
36% in 2002 same as 2001. Operating expenses increased to $3,205 in 2002 from
$2,626 in 2001 due to increases in payroll and other payroll-related expenses.
Additionally, selling and related expenses increased due to an increase in sales
in the current period. Stevies income from operations increased to $1,779 in
2002 compared to $1,593 in 2001.
Retail Division:
- ---------------
Sales from the Retail Division accounted for $91,883 or 28% and $79,487 or
33% of total sales in 2002 and 2001, respectively. This increase in sales was
due to the increase in the number of Steve Madden retail stores as well as an
increase in comparable store sales. During 2002, the Company opened ten (10) new
stores and closed three (3) of its low performing stores. As of December 31,
17
2002, there were 80 retail stores compared to 73 stores as of December 31, 2001.
Comparable store sales for the year ended December 31, 2002 increased 6% over
such sales in 2001. This increase was achieved through the early delivery of
fresh products to the Company's stores and the prompt replenishment of inventory
in season. Additionally the increase in sales was driven by key styles including
women's dress and casual shoes as well as an increase in the sale of men's
footwear in the Company's retail stores. Gross profit as a percentage of sales
remained at 53% in 2002, the same as 2001. Operating expenses for the Retail
Division increased to $39,793 or 43% of sales in 2002 from $34,992 or 44% of
sales in 2001. This increase primarily resulted from the addition of new stores.
Income from operations for the Retail Division was $9,001 in 2002 compared to
$7,023 in 2001.
Adesso-Madden Division:
- ----------------------
Adesso-Madden, Inc. generated commission revenues of $4,770 for the year
ended December 31, 2002, which represents a 14% increase over commission
revenues of $4,200 in 2001. This increase was primarily due to the growth in
accounts such as Wal-Mart, Target, JC Penney and Mervyn's and the addition of
children's products to the assortment mix. Operating expenses increased to
$2,222 in 2002 from $1,956 in 2001 due to increases in payroll and other
payroll-related expenses. Income from operations for Adesso-Madden was $2,548 in
2002 compared to $2,244 in 2001.
Year Ended December 31, 2001 vs. Year Ended December 31, 2000
Consolidated:
- ------------
Sales for the year ended December 31, 2001 were $243,391 or 19% higher
than sales of $205,113 for the year ended December 31, 2000. The increase in
sales was due to several factors, including (i) additional revenues of $10,461
from the Company's new Madden Mens Wholesale Division, which commenced shipping
in the first quarter of 2001, (ii) a 14% increase in retail sales due to the
opening of additional retail stores, (iii) a 13% increase in sales from l.e.i.
Wholesale, (iv) a 79% increase in sales from Stevies Wholesale, (v) a 106%
increase in sales from Diva Wholesale, (vi) the addition in wholesale accounts,
and (vii) an increase in public awareness with respect to the Company's brands.
Consolidated gross profit as a percentage of sales decreased from 44% in
2000 to 41% in 2001. The decrease in gross margin resulted from greater
promotional activity at retail this year due to sluggish July 2001 sales and the
tragic events of September 11th and its aftermath. Margin pressures from
wholesale large accounts prompted the Company to be early and aggressive with
markdowns in a highly promotional retail climate. Finally, the decrease in the
Company's higher margin retail business as a percentage of total sales
contributed to the margin erosion.
Selling, general and administrative (SG&A) expenses increased to $79,472
in 2001 from $68,833 in 2000. The increase in SG&A expenses was due primarily to
a 28% increase in payroll, management incentives and payroll-related expenses
from $24,268 in 2000 to $31,004 in 2001. Also, selling and designing expenses
increased by 19% from $10,510 in 2000 to $12,499 in 2001. This was due in part
to an increase in sales in the current period and to the Company's increased
focus on selling and designing activities. The increase in the number of retail
outlets and expanded corporate office facilities resulted in an increase in
occupancy, telephone and utilities expenses by 19% from $9,208 in 2000 to
$10,957 in 2001.
Income from operations for 2001 was $19,362, which represented a decrease
of $6,270 from the income from operations of $25,632 in 2000 and was due to a
non-recurring charge taken in the fourth quarter of 2001 for the purchase of
loss mitigation insurance coverage in the amount of $6,950. Net income decreased
to $12,116 in 2001 from $16,043 in 2000 due to the factors mentioned above.
Wholesale Divisions:
- -------------------
Steven Madden Ltd (Madden Women's, l.e.i. and Madden Mens):
Sales from the Madden Women's Wholesale Division accounted for $92,413 or
38%, and $87,977 or 43%, of total sales in 2001 and 2000, respectively. The
increase in sales was driven by the sales of key styles including euro-sport
casuals, pointed toe and Madden slippers. Also, sales were driven by an increase
in reorders through open stock replenishment for late spring and fall items.
18
Gross profit as a percentage of sales decreased from 38% in 2000 to 35% in 2001
due to margin pressures from Madden Wholesale large accounts which prompted the
Company to be early and aggressive with markdowns in a highly promotional retail
climate. Operating expenses decreased to $24,929 in 2001 from $25,422 in 2000
due to decreases in advertising and marketing expenses. Madden Wholesale income
from operations decreased to $1,944 in 2001 compared to income from operations
of $8,807 in 2000 due to a non-recurring charge taken in the fourth quarter of
2001 as a result of the purchase of loss mitigation insurance coverage in the
amount of $6,950.
Sales from l.e.i. accounted for $42,592 or 17%, and $37,741 or 18%, of
total sales in 2001 and 2000, respectively. Revenues for the year ended December
31, 2001 increased 13% over the same period of 2000. The focus of the l.e.i.
Wholesale expansion was in department stores such as May Department Stores, and
specialty store channels such as Journeys. Gross profit as a percentage of sales
remained the same in 2000 and 2001. Operating expenses increased to $9,833 in
2001 from $7,652 in 2000 due to increases in payroll and payroll-related
expenses. Additionally, selling and designing expenses increased due to an
increase in sales in the current period. Income from operations for l.e.i. was
$5,900 in 2001 compared to income from operations of $6,432 in 2000.
Madden Mens commenced shipping in the first quarter of 2001. Madden Mens
generated revenues of $10,461 for the year ended December 31, 2001.
Sales from Diva accounted for $7,454 or 3%, and $3,616 or 2%, of total
sales in 2001 and 2000, respectively. The Company believes that the increase in
sales was driven by placements of its new product line in major department
stores, specialty stores, and specialty catalogues. Gross profit as a percentage
of sales remained the same in 2000 and 2001. Operating expenses increased to
$1,796 in 2001 from $1,231 in 2000 due to increases in payroll and
payroll-related expenses. Additionally, selling and related expenses increased
due to an increase in sales in the current period. Income from operations for
Diva was $274 for the year 2001 which represented a 233% increase over loss from
operations of $206 in 2000.
Sales from Stevies, which commenced shipping in the second quarter of
2000, accounted for 10,984 or 5%, and $6,147 or 3%, of total sales in 2001 and
2000, respectively. This increase was primarily due to a full year of operation
and growth in accounts such as Limited Too and Nordstrom. Gross profit as a
percentage of sales decreased from 37% in 2000 to 36% in 2001 due to margin
pressures from some of Stevies' large accounts, which prompted the Company to be
early and aggressive with markdowns in a highly promotional retail climate.
Operating expenses increased to $2,626 in 2001 from $1,595 in 2000 due to
increases in payroll and payroll-related expenses. Additionally, selling and
designing expenses increased due to an increase in sales in the current period.
Income from operations for Stevies Wholesale was $1,593 in 2001 compared to
income from operations of $963 in 2000.
Retail Division:
- ---------------
Sales from the Retail Division accounted for $79,487 or 33% and $69,632 or
34% of total sales in 2001 and 2000, respectively. This increase in Retail
Division sales was primarily due to the increase in the number of Steve Madden
retail stores. During the year ended December 31, 2001, the Company closed two
of its least productive stores located in Coconut Grove, Florida and in Mineola,
New York. As of December 31, 2001, there were 73 Steve Madden retail stores
compared to 65 stores as of December 31, 2000. Same store sales for the year
ended December 31, 2001 decreased by 1% compared to the same store sales for
2000 due to sluggish consumer traffic in the aftermath of September 11th.
Revenues from the Internet store for the year ended December 31, 2001 were in
excess of $4,000, showing an increase of 37% over such revenues in 2000. Gross
profit as a percentage of sales decreased from 56% in 2000 to 53% in 2001 due to
greater promotional activity at retail in 2001. Operating expenses for the
Retail Division increased to $34,992 or 44% of sales in 2001 from $30,937 or 44%
of sales in 2000. This increase in dollars was due to increases in payroll and
payroll-related expenses and occupancy expenses as a result of opening ten
additional stores in 2001. Income from operations for the Retail Division was
$7,023 in 2001 compared to income from operations of $8,001 in 2000.
Adesso-Madden Division:
- ----------------------
Adesso-Madden, Inc. generated commission revenues of $4,200 for the year
ended December 31, 2001, which represented a 16% increase over commission
revenues of $3,631 in 2000. This increase was primarily due to the growth in
19
accounts such as Walmart and Target and the addition of children's products to
the assortment mix. Operating expenses decreased to $1,956 in 2001 from $1,996
in 2000. Income from operations for Adesso-Madden was $2,244 in 2001 compared to
income from operations of $1,635 in 2000.
LICENSE AGREEMENTS
Revenues from licensing increased to $1,833 in 2002 from $1,711 in 2001.
As of December 31, 2002, the Company had six license partners covering six
product categories of its Steve Madden brand. Also, as of December 31, 2002, the
Company had two license partners covering two product categories of its Stevies
brand. The product categories include handbags, hosiery, sunglasses, eyewear,
belts and outerwear.
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $86,461 at December 31, 2002 compared
to $82,633 of working capital at December 31, 2001, representing an increase of
$3,828, which was primarily due to the Company's net income and proceeds
received from the exercise of stock options. The Company believes that based
upon its financial position and its ability to generate cash flow from
operations, it expects to meet all of its financial commitments and operating
needs through December 31, 2003.
Under the terms of a factoring agreement with Capital Factors, Inc., the
Company is permitted to draw down 80% of its invoiced receivables at an interest
rate of two points below the Prime Rate (as defined in such agreement). The
agreement with Capital Factors was renewed for the period beginning June 30,
2002 through December 31, 2004. Capital Factors maintains a lien on all of the
Company's inventory and receivables and assumes the credit risk for all assigned
accounts approved by them. Under the agreement, the Company has a credit line of
$15,000. The Company did not use any portion of credit line during 2002.
The Company has invested in marketable securities consisting of corporate
bonds, U.S. Treasury notes and government asset-backed securities. The
securities mature on various dates through 2007.
OPERATING ACTIVITIES
During the year ended December 31, 2002, cash provided from operating
activities was $29,593. Uses of cash arose principally from an increase in
non-factored accounts receivable of $1,207 and an increase in inventories of
$3,627. Sources of cash were provided principally by net income of $19,841 and a
decrease in prepaid expenses and other assets of $7,046.
The Company leases office, showroom, warehouse and retail facilities under
non-cancelable operating leases with terms expiring at various times through
2013. Future minimum annual lease payments under non-cancelable operating leases
consist of the following at December 31:
2003 $ 8,653
2004 8,582
2005 8,236
2006 8,256
2007 7,716
Thereafter 21,786
---------
$ 63,229
=========
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 certain executives, which
provide for the payment of compensation aggregating approximately $1,639 in
2003, $1,545 in 2004 and $641 in 2005. In addition, such employment agreements
provide for incentive compensation based on various performance criteria as well
as other benefits.
20
Significant portions of the Company's products are produced at overseas
locations, the majority of which are located in Brazil, China, Italy and Spain.
The Company has not entered into any long-term manufacturing or supply contracts
with any of these foreign companies. The Company believes that a sufficient
number of alternative sources exist outside of the United States for the
manufacture of its products. In addition, the Company currently makes
approximately ninety-five percent (95%) of its purchases in U.S. dollars.
INVESTING ACTIVITIES
During the year ended December 31, 2002, the Company invested $22,308 in
marketable securities, net of maturities and sales of $4,041. In addition, the
Company invested $5,072 on leasehold improvements to its corporate office space,
the cost of opening of ten (10) new stores and upgrading its computer system.
FINANCING ACTIVITIES
During the year ended December 31, 2002, the Company received $4,364 in
connection with the exercise of stock options.
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 or profitability.
OTHER CONSIDERATIONS
Fashion Industry Risks. The success of the Company will depend in
significant part upon its ability to anticipate and respond to product and
fashion trends as well as to anticipate, gauge and react to changing consumer
demands in a timely manner. There can be no assurance that the Company's
products will correspond to the changes in taste and demand or that the Company
will be able to successfully market products which respond to such trends. If
the Company misjudges the market for its products, it may be faced with
significant excess inventories for some products and missed opportunities with
others. In addition, misjudgments in merchandise selection could adversely
affect the Company's image with its customers resulting in weak 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 maintain its historical rate of
growth in revenues and earnings, or remain profitable in the future. A recession
in the national or regional economies or uncertainties regarding future economic
prospects, among other things, could affect consumer spending habits and have a
material adverse effect on the Company's business, financial condition and
results of operations.
In recent years, the retail industry has experienced consolidation and
other ownership changes. In addition, some of the Company's customers have
operated under the protection of the federal bankruptcy laws. In the future,
retailers in the United States and in foreign markets may consolidate, undergo
restructurings or reorganizations, or realign their affiliations, any of which
could decrease the number of stores that carry the Company's products or
increase the ownership concentration within the retail industry. While such
changes in the retail industry to date have not had a material adverse effect on
the Company's business or financial condition, there can be no assurance as to
the future effect of any such changes.
Inventory Management. The fashion-oriented nature of the Company's
industry and the rapid changes in customer preferences leave the Company
vulnerable to an increased risk of inventory obsolescence. Thus, the Company's
ability to manage its inventories properly is an important factor in its
operations. Inventory shortages can adversely affect the timing of shipments to
customers and diminish brand loyalty. Conversely, excess inventories can result
in lower gross margins due to the necessity of providing discounts to retailers.
21
The inability of the Company to effectively manage its inventory would have a
material adverse effect on the Company's business, financial condition and
results of operations.
Dependence Upon Customers and Risks Related to Extending Credit to
Customers. The Company's customers consist principally of department stores and
specialty stores, including shoe boutiques. Certain of the Company's department
store customers, including some under common ownership, account for significant
portions of the Company's wholesale sales.
The Company 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 requiring collateral.
While various retailers, including some of the Company's customers, have
experienced financial difficulties in the past few years which increased the
risk of extending credit to such retailers, the Company's losses due to bad
debts have been limited. Pursuant to the Factoring Agreement between Capital
Factors and the Company, Capital Factors currently assumes the credit risk
related to approximately 95% of the Company's accounts receivables. However,
financial difficulties of a customer could cause the Company to curtail business
with such customer or require the Company to assume more credit risk relating to
such customer's receivables.
Impact of Foreign Manufacturers. Substantial 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
year ended December 31, 2002, approximately 80% of the Company's products were
purchased from sources outside the United States, including China, Brazil, Italy
and Spain.
Risks inherent in foreign operations include work stoppages,
transportation delays and interruptions, changes in social, political and
economic conditions which could result in the disruption of trade from the
countries in which the Company's manufacturers or suppliers are located, the
imposition of additional regulations relating to imports, the imposition of
additional duties, taxes and other charges on imports, significant fluctuations
of the value of the dollar against foreign currencies, or restrictions on the
transfer of funds, any of which could have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
does not believe that any such economic or political condition will materially
affect the Company's ability to purchase products, since a variety of materials
and alternative sources are available. The Company cannot be certain, however,
that it will be able to identify such alternative sources without delay (if
ever) or without greater cost to the Company. The Company's inability to
identify and secure alternative sources of supply in this situation would have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company's imported products are also subject to United States customs
duties. The United States and the countries in which the Company's products are
produced or sold, from time to time, impose new quotas, duties, tariffs, or
other restrictions, or may adversely adjust prevailing quota, duty or tariff
levels, any of which could have a material adverse effect on the Company's
business, financial condition and results of operations.
Possible Adverse Impact of Unaffiliated Manufacturers' Inability to
Manufacture in a Timely Manner, Meet Quality Standards or to Use Acceptable
Labor Practices. As is common in the footwear industry, the Company contracts
for the manufacture of a majority of its products to its specifications through
foreign manufacturers. The Company does not own or operate any manufacturing
facilities and is therefore dependent upon independent third parties for the
manufacture of all of its products. The Company's products are manufactured to
its specifications by both domestic and international manufacturers. The
inability of a manufacturer to ship orders of the Company's products in a timely
manner or to meet the Company's quality standards could cause the Company to
miss the delivery date requirements of its customers for those items, which
could result in cancellation of orders, refusal to accept deliveries or a
reduction in purchase prices, any of which could have a material adverse effect
on the Company's business, financial condition and results of operations.
Although the Company enters into a number of purchase order commitments
each season specifying a time frame for delivery, method of payment, design and
quality specifications and other standard industry provisions, the Company does
22
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 substantial growth in the sales of fashionable footwear has encouraged
the entry of many new competitors and increased competition from established
companies. Most of these competitors, including Diesel, Kenneth Cole, Nine West,
DKNY, Skechers, Nike and Guess, may have significantly greater financial and
other resources than the Company and there can be no assurance that the Company
will be able to compete successfully with other fashion footwear companies.
Increased competition could result in pricing pressures, increased marketing
expenditures and loss of market share, and could have a material adverse effect
on the Company's business, financial condition and results of operations. The
Company believes effective advertising and marketing, fashionable styling, high
quality and value are the most important competitive factors and plans to
continually employ these elements as it develops its products. The Company's
inability to effectively advertise and market its products could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Expansion of Retail Business. The Company's continued growth depends to a
significant degree on further developing the Steve Madden(R), David Aaron(R),
Stevies, Steven, Steve Madden Mens and l.e.i. (R) brands, creating new product
categories and businesses and operating Company-owned stores on a profitable
basis. During the year ended December 31, 2002 the Company opened ten (10) Steve
Madden retail stores and has plans to open approximately eight to ten (8-10)
Steve Madden retail stores in the year 2003. The Company's recent and planned
expansion includes the opening of stores in new geographic markets as well as
strengthening existing markets. New markets have in the past presented, and will
continue to present, competitive and merchandising challenges that are different
from those faced by the Company in its existing markets. There can be no
assurance that the Company will be able to open new stores, and if opened, that
such new stores will be able to achieve sales and profitability levels
consistent with existing stores. The Company's retail expansion is dependent on
a number of factors, including the Company's ability to locate and obtain
favorable store sites, the performance of the Company's wholesale and retail
operations, and the ability of the Company to manage such expansion and hire and
train personnel. Past comparable store sales results may not be indicative of
future results, and there can be no assurance that the Company's comparable
store sales results will increase or not decrease in the future. In addition,
there can be no assurance that the Company's strategies to increase other
sources of revenue, which may include expansion of its licensing activities,
will be successful or that the Company's overall sales or profitability will
increase or not be adversely affected as a result of the implementation of such
retail strategies.
The Company's growth has increased and will continue to increase demand on
the Company's managerial, operational and administrative resources. The Company
has recently invested significant resources in, among other things, its
management information systems and hiring and training new personnel. However,
in order to manage currently anticipated levels of future demand, the Company
may be required to, among other things, expand its distribution facilities,
establish relationships with new manufacturers to produce its products, and
continue to expand and improve its financial, management and operating systems.
There can be no assurance that the Company will be able to manage future growth
effectively and a failure to do so could have a material adverse effect on the
Company's business, financial condition and results of operations.
Seasonal and Quarterly Fluctuations. The Company's results may fluctuate
quarter to quarter as a result of the timing of holidays, weather, the timing of
larger shipments of footwear, market acceptance of the Company's products, the
mix, pricing and presentation of the products offered and sold, the hiring and
23
training of additional personnel, the timing of inventory write downs, the cost
of materials, the mix between wholesale and licensing businesses, the incurrence
of other operating costs and factors beyond the Company's control, such as
general economic conditions and actions of competitors. In addition, the Company
expects that its sales and operating results may be significantly impacted by
the opening of new retail stores and the introduction of new products.
Accordingly, the results of operations in any quarter will not necessarily be
indicative of the results that may be achieved for a full fiscal year or any
future quarter.
Trademark and Service Mark Protection. The Company believes that its
trademarks and service marks and other proprietary rights are important to its
success and its competitive position. Accordingly, the Company devotes
substantial resources to the establishment and protection of its trademarks on a
worldwide basis. Nevertheless, there can be no assurance that the actions taken
by the Company to establish and protect its trademarks and other proprietary
rights will be adequate to prevent imitation of its products by others or to
prevent others from seeking to block sales of the Company's products on the
basis that they violate the trademarks and proprietary rights of others.
Moreover, no assurance can be given that others will not assert rights in, or
ownership of, trademarks and other proprietary rights of the Company or that the
Company will be able to successfully resolve such conflicts. In addition, the
laws of certain foreign countries may not protect proprietary rights to the same
extent as do the laws of the United States. The failure of the Company to
establish and then protect such proprietary rights from unlawful and improper
appropriation could have a material adverse effect on the Company's business,
financial condition and results of operations.
Foreign Currency Fluctuations. The Company generally purchases its
products in U.S. dollars. However, the Company sources substantially all of its
products overseas and, as such, the cost of these products may be affected by
changes in the value of the relevant currencies. Changes in currency exchange
rates may also affect the relative prices at which the Company and foreign
competitors sell their products in the same market. There can be no assurance
that foreign currency fluctuations will not have a material adverse effect on
the Company's business, financial condition and results of operations.
Outstanding Options. As of March 17, 2003, the Company had outstanding
options to purchase an aggregate of approximately 2,342,425 shares of Common
Stock. Holders of such options are likely to exercise them when, in all
likelihood, the Company could obtain additional capital on terms more favorable
than those provided by the options. Further, while its options are outstanding,
they may adversely affect the terms in which the Company could obtain additional
capital.
Economic and Political Risks. The present economic condition in the United
States and concern about uncertainties could significantly reduce the disposable
income available to the Company's customers which purchase our products. In
addition, current unstable political conditions including, the potential or
actual conflicts in Iraq, North Korea or elsewhere, or the continuation or
escalation of terrorism, could have an adverse effect on the Company's business,
financial condition and results of operations.
ITEM 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 primarily based on the prime
rate. An analysis of the credit agreement can be found in Note C. "Due From
Factor" to the Consolidated Financial Statements included in this report. On
December 31, 2002 and December 31, 2001, there were no direct borrowings
outstanding under the credit agreement.
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 DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
24
PART III
ITEM 10 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT OF THE REGISTRANT
Incorporated herein by reference from the Company's definitive proxy
statement to be filed pursuant to Regulation 14A under the Securities Exchange
Act of 1934.
ITEM 11 EXECUTIVE COMPENSATION
Incorporated herein by reference from the Company's definitive proxy
statement to be filed pursuant to Regulation 14A under the Securities Exchange
Act of 1934.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference from the Company's definitive proxy
statement to be filed pursuant to Regulation 14A under the Securities Exchange
Act of 1934.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference from the Company's definitive proxy
statement to be filed pursuant to Regulation 14A under the Securities Exchange
Act of 1934.
ITEM 14 CONTROLS AND PROCEDURES
Under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, the Company has evaluated the effectiveness of the design and operation
of its disclosure controls and procedures within 90 days of the filing date of
this annual report, and, based on their evaluation, the Chief Executive Officer
and Chief Financial Officer have concluded that these disclosure controls and
procedures are effective. There were no significant changes in our internal
controls or in other factors that could significantly affect these controls
subsequent to the date of their evaluation.
ITEM 15 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
The following consolidated financial statements of Steven Madden, Ltd. and
subsidiaries are included in Item 8:
25
Steven Madden, Ltd. and Subsidiaries
CONTENTS
Page
----
CONSOLIDATED FINANCIAL STATEMENTS
Independent auditors' report F-2
Balance sheets as of December 31, 2002 and 2001 F-3
Statements of income for the years ended December 31, 2002, 2001
and 2000 F-4
Statements of changes in stockholders' equity for the years ended
December 31, 2002, 2001 and 2000 F-5
Statements of cash flows for the years ended December 31, 2002,
2001 and 2000 F-8
Notes to financial statements F-9
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Steven Madden, Ltd.
New York, New York
We have audited the accompanying consolidated balance sheets of Steven Madden,
Ltd. and subsidiaries as of December 31, 2002 and 2001, 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, 2002.
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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits 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, 2002 and 2001, 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, 2002 in conformity with accounting
principles generally accepted in the United States of America.
Eisner LLP
New York, New York
February 12, 2003
F-2
Steven Madden, Ltd. and Subsidiaries
Consolidated Balance Sheets
December 31,
------------------------------
2002 2001
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 56,713,000 $ 50,179,000
Accounts receivable - net of allowances of $497,000 and $257,000 3,039,000 2,072,000
Due from factor - net of allowances of $1,718,000 and $1,387,000 22,373,000 22,783,000
Inventories 19,445,000 15,818,000
Marketable securities - available for sale 500,000
Prepaid expenses and other current assets 1,651,000 836,000
Prepaid taxes 7,911,000
Deferred taxes 1,633,000 1,223,000
------------- -------------
Total current assets 105,354,000 100,822,000
Property and equipment, net 17,073,000 15,707,000
Deferred taxes 3,699,000 3,019,000
Deposits and other 298,000 248,000
Marketable securities - available for sale 22,010,000
Cost in excess of fair value of net assets acquired - net of accumulated
amortization of $714,000 2,066,000 2,066,000
------------- -------------
$ 150,500,000 $ 121,862,000
============= =============
LIABILITIES
Current liabilities:
Current portion of capital lease obligations $ 14,000 $ 43,000
Accounts payable 9,044,000 6,836,000
Accrued expenses 7,134,000 10,898,000
Accrued incentive compensation 2,701,000 412,000
------------- -------------
Total current liabilities 18,893,000 18,189,000
Deferred rent 1,532,000 1,299,000
Capital lease obligations, less current portion 14,000
------------- -------------
20,425,000 19,502,000
------------- -------------
Commitments, contingencies and other
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, 14,016,059
and 13,439,020 shares issued, 12,770,855 and 12,193,816 shares
outstanding 1,000 1,000
Additional paid-in capital 70,683,000 60,643,000
Retained earnings 70,722,000 50,881,000
Unearned compensation (3,476,000) (1,174,000)
Other comprehensive gain:
Unrealized gain on marketable securities 136,000
Treasury stock - 1,245,204 shares at cost (7,991,000) (7,991,000)
------------- -------------
130,075,000 102,360,000
------------- -------------
$ 150,500,000 $ 121,862,000
============= =============
See Notes to Financial Statements
F-3
Steven Madden, Ltd. and Subsidiaries
Consolidated Statements of Income
Year Ended December 31,
-----------------------------------------------
2002 2001 2000
------------- ------------- -------------
Net sales:
Wholesale $ 234,253,000 $ 163,904,000 $ 135,481,000
Retail 91,883,000 79,487,000 69,632,000
------------- ------------- -------------
326,136,000 243,391,000 205,113,000
------------- ------------- -------------
Cost of sales:
Wholesale 156,364,000 106,046,000 84,801,000
Retail 43,089,000 37,472,000 30,694,000
------------- ------------- -------------
199,453,000 143,518,000 115,495,000
------------- ------------- -------------
Gross profit 126,683,000 99,873,000 89,618,000
Commission and licensing fee income 6,603,000 5,911,000 4,847,000
Operating expenses (100,074,000) (79,472,000) (68,833,000)
Cost of loss mitigation coverage (6,950,000)
------------- ------------- -------------
Income before other income (expenses) and provision
for income taxes 33,212,000 19,362,000 25,632,000
Other income (expenses):
Interest income 1,166,000 1,344,000 1,744,000
Interest expense (16,000) (66,000) (102,000)
Gain on sale of marketable securities 66,000 71,000 230,000
------------- ------------- -------------
Income before provision for income taxes 34,428,000 20,711,000 27,504,000
Provision for income taxes 14,587,000 8,595,000 11,461,000
------------- ------------- -------------
Net income $ 19,841,000 $ 12,116,000 $ 16,043,000
============= ============= =============
Basic income per share $ 1.58 $ 1.04 $ 1.42
============= ============= =============
Diluted income per share $ 1.45 $ 0.94 $ 1.26
============= ============= =============
Basic weighted average common shares outstanding 12,594,861 11,617,862 11,310,130
Effect of dilutive securities - options 1,115,018 1,330,002 1,387,244
------------- ------------- -------------
Diluted weighted average common shares 13,709,879 12,947,864 12,697,374
outstanding ============= ============= =============
See Notes to Financial Statements
F-4
Steven Madden, Ltd. and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
Common Stock Additional
----------------------- Paid-in Retained Unearned
Shares Amount Capital Earnings Compensation
---------- ---------- ------------ ------------ ------------
Balance - December 31, 1999 11,797,793 $ 1,000 $ 42,906,000 $ 22,722,000 $ (1,279,000)
Exercise of stock options 508,891 2,807,000
Tax benefit from exercise of options 975,000
Net income 16,043,000
Amortization of unearned compensation 382,000
Common stock purchased for treasury
---------- ---------- ------------ ------------ ------------
Balance - December 31, 2000 12,306,684 1,000 46,688,000 38,765,000 (897,000)
Exercise of stock options 1,122,336 8,998,000
Tax benefit from exercise of options 2,765,000
Compensation in connection with issuance of
stock options 2,004,000 (810,000)
Compensation in connection with issuance of
restricted stock 10,000 188,000
Net income 12,116,000
Amortization of unearned compensation 533,000
---------- ---------- ------------ ------------ ------------
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 income 19,841,000
Comprehensive income
---------- ---------- ------------ ------------ ------------
Balance - December 31, 2002 14,016,059 $ 1,000 $ 70,683,000 $ 70,722,000 $ (3,476,000)
========== ========== ============ ============ ============
See Notes to Financial Statements
F-5
Steven Madden, Ltd. and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity (cont.)
Accumulated
Other Treasury Stock
Comprehensive -------------------------
Gain Shares Amount
----------- ----------- -----------
Balance - December 31, 1999 345,204 $(1,915,000)
Exercise of stock options
Tax benefit from exercise of options
Net income
Amortization of unearned compensation
Common stock purchased for treasury 900,000 (6,076,000)
----------- -----------
Balance - December 31, 2000 1,245,204 (7,991,000)
Exercise of stock options
Tax benefit from exercise of options
Compensation in connection with issuance of
stock options
Compensation in connection with issuance of
restricted stock
Net income
Amortization of unearned compensation
----------- -----------
Balance - December 31, 2001 1,245,204 (7,991,000)
Exercise of stock options
Tax benefit from exercise of options
Deferred compensation in connection with
issuance of stock options and restricted stock
Compensation in connection with issuance of
stock options
Compensation in connection with issuance of
restricted stock
Amortization of unearned compensation
Unrealized holding gain on marketable securities $ 136,000
Net income
Comprehensive income
----------- ----------- -----------
Balance - December 31, 2002 $ 136,000 1,245,204 $(7,991,000)
=========== =========== ===========
See Notes to Financial Statements
F-6
Consolidated Statements of Changes in Stockholders' Equity (cont.)
Total
Stockholders' Comprehensive
Equity Income
------------- -------------
Balance - December 31, 1999 $ 62,435,000
Exercise of stock options 2,807,000
Tax benefit from exercise of options 975,000
Net income 16,043,000
Amortization of unearned compensation 382,000
Common stock purchased for treasury (6,076,000)
-------------
Balance - December 31, 2000 76,566,000
Exercise of stock options 8,998,000
Tax benefit from exercise of options 2,765,000
Compensation in connection with issuance of stock
options 1,194,000
Compensation in connection with issuance of
restricted stock 188,000
Net income 12,116,000
Amortization of unearned compensation 533,000
-------------
Balance - December 31, 2001 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 136,000 $ 136,000
Net income 19,841,000 19,841,000
-------------
Comprehensive income $ 19,977,000
------------- =============
Balance - December 31, 2002 $ 130,075,000
=============
See Notes to Financial Statements
F-7
Steven Madden, Ltd. and Subsidiaries
Consolidated Statements of Cash Flows
Year Ended December 31,
--------------------------------------------
2002 2001 2000
------------ ------------ ------------
Cash flows from operating activities:
Net income $ 19,841,000 $ 12,116,000 $ 16,043,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Non-cash compensation 2,228,000 1,915,000 382,000
Depreciation and amortization 3,706,000 3,447,000 3,586,000
Deferred taxes (1,090,000) (480,000) (1,350,000)
Tax benefit from exercise of options 1,146,000 2,765,000 975,000
Provision for doubtful accounts and chargebacks 571,000 219,000 506,000
Deferred rent expense 233,000 225,000 297,000
Realized gain on sale of marketable securities (66,000) (71,000) (230,000)
Changes in:
Accounts receivable (1,207,000) 862,000 (1,474,000)
Due from factor 79,000 (8,364,000) (3,251,000)
Inventories (3,627,000) 6,000 (5,666,000)
Prepaid expenses, prepaid taxes and other assets 7,046,000 (7,484,000) (375,000)
Accounts payable and accrued expenses (1,556,000) 4,054,000 4,610,000
Accrued incentive compensation 2,289,000 183,000 (348,000)
Income tax payable (4,957,000)
------------ ------------ ------------
Net cash provided by operating activities 29,593,000 9,393,000 8,748,000
------------ ------------ ------------
Cash flows from investing activities:
Purchase of property and equipment (5,072,000) (3,415,000) (7,933,000)
Purchases of marketable securities (26,349,000) (54,000)
Maturity/sale of marketable securities 4,041,000 125,000 487,000
------------ ------------ ------------
Net cash used in investing activities (27,380,000) (3,344,000) (7,446,000)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from exercise of stock options 4,364,000 8,998,000 2,807,000
Purchase of treasury stock (6,076,000)
Payments of lease obligations (43,000) (127,000) (135,000)
------------ ------------ ------------
Net cash provided by (used in) financing activities 4,321,000 8,871,000 (3,404,000)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 6,534,000 14,920,000 (2,102,000)
Cash and cash equivalents - beginning of year 50,179,000 35,259,000 37,361,000
------------ ------------ ------------
Cash and cash equivalents - end of year $ 56,713,000 $ 50,179,000 $ 35,259,000
============ ============ ============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 16,000 $ 66,000 $ 102,000
Income taxes $ 6,522,000 $ 14,389,000 $ 16,172,000
See Notes to Financial Statements
F-8
Steven Madden, Ltd. and Subsidiaries
Notes to Financial Statements
December 31, 2002 and 2001
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, David Aaron, Stevies, Madden
Mens and Lei (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, 2002 and 2001, the
Company operated 80 and 73 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. 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, 2002 and 2001, amounted to
approximately $46,024,000 and $41,770,000, 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 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 up to 5 years at the time of purchase. These
securities, which are classified as available for sale, are carried at
fair value, with unrealized gains and losses, net of any tax effect,
reported in shareholders' equity as accumulated other comprehensive
income.
[6] Inventories:
Inventories, which consist of finished goods, are stated at the lower
of cost (first-in, first-out method) or market.
F-9
Steven Madden, Ltd. and Subsidiaries
Notes to Financial Statements
December 31, 2002 and 2001
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[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 the carrying amount of these assets is not impaired
at December 31, 2002. Diluted earnings per share without the impact of
amortization would have been $0.95 and $1.27 for 2001 and 2000,
respectively.
[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, 2002 and 2001, options exercisable into approximately
741,000 and 265,000 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 $7,451,000 in
2002, $6,596,000 in 2001 and $6,941,000 in 2000.
[11] Fair value of financial instruments:
The carrying value of the Company's financial instruments approximate
fair value due to their short-term nature or their underlying terms.
Marketable securities are carried at quoted market prices which
represent fair value.
F-10
Steven Madden, Ltd. and Subsidiaries
Notes to Financial Statements
December 31, 2002 and 2001
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[12] Stock-based compensation:
At December 31, 2002, the Company had various stock option plans, which
are described more fully in Note D. As permitted under SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure,"
which amended SFAS No. 123, "Accounting for Stock-Based Compensation,"
the Company has elected to continue to follow the intrinsic value
method in accounting for its stock-based employee compensation
arrangements as defined by Accounting Principles Board Opinion ("APB")
No. 25, "Accounting for Stock Issued to Employees," and related
interpretations including Financial Accounting Standards Board
Interpretation No. 44, "Accounting for Certain Transactions Involving
Stock Compensation," an interpretation of APB No. 25. 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,
--------------------------------------------------
2002 2001 2000
-------------- -------------- --------------
Reported net income $ 19,841,000 $ 12,116,000 $ 16,043,000
Stock-based employee compensation included in
reported net income, net of tax 932,000 935,000 223,000
Stock-based employee compensation determined
under the fair value based method, net of tax (2,663,000) (2,272,000) (1,678,000)
-------------- -------------- --------------
Pro forma net income $ 18,110,000 $ 10,779,000 $ 14,588,000
============== ============== ==============
Basic income per share:
As reported $ 1.58 $ 1.04 $ 1.42
Pro forma $ 1.44 $ 0.93 $ 1.29
Diluted income per share:
As reported $ 1.45 $ 0.94 $ 1.26
Pro forma $ 1.32 $ 0.83 $ 1.15
The weighted average fair value of options granted in 2002, 2001 and
2000 was approximately $10.60, $9.44 and 4.54, respectively, using the
Black-Scholes option-pricing model with the following assumptions:
2002 2001 2000
------------- ------------- -------------
Volatility 73% 75% 60%
Risk free interest rate 2.60% - 4.15% 3.56% - 4.98% 5.97% - 6.30%
Expected life in years 4 4 4
Dividend yield 0 0 0
[13] Revenue recognition:
Wholesale revenue is recognized upon shipment. Allowances for estimated
discounts and allowances are recognized when sales are recorded.
Commission revenue is recognized when title of product transfers to the
customer. Retail sales are recognized when the payment is received from
customers and are recorded net of returns. Licensing revenue is
recognized on the basis of net sales reported by the licensees.
F-11
Steven Madden, Ltd. and Subsidiaries
Notes to Financial Statements
December 31, 2002 and 2001
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[14] 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.
[15] Reclassification:
Certain reclassifications have been made to the statements of cash
flows for the years ended December 31, 2001 and 2000 to conform to the
current year presentation.
NOTE B - PROPERTY AND EQUIPMENT
The major classes of assets and accumulated depreciation and
amortization are as follows:
December 31,
----------------------------
2002 2001
------------ ------------
Leasehold improvements $ 19,478,000 $ 18,180,000
Machinery and equipment 719,000 890,000
Furniture and fixtures 3,157,000 3,297,000
Computer equipment 3,959,000 4,928,000
Equipment under capital lease 194,000 217,000
------------ ------------
27,507,000 27,512,000
Less accumulated depreciation and amortization (10,434,000) (11,805,000)
------------ ------------
Property and equipment - net $ 17,073,000 $ 15,707,000
============ ============
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 percent of aggregate receivables purchased by
the factor at an interest rate of prime minus 2%. The Company also pays a fee
equal to 0.6% 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, 2002 and 2001, $865,000 and $1,120,000
of factored receivables 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.
F-12
Steven Madden, Ltd. and Subsidiaries
Notes to Financial Statements
December 31, 2002 and 2001
NOTE D - STOCK OPTIONS
The Company 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, 2002 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.
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. Terms of the 1999 Stock Plan are not
materially different from the various existing stock option plans.
Through December 31, 2002, 2,250,000 options had been granted under The 1999
Stock Plan, as amended, and as of such date 30,000 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. 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 is classified as a component
of stockholders' equity. The unearned compensation is being amortized over the
ten-year term of the amended agreement. Accordingly, $128,000 has been charged
to operations for 2002, 2001 and 2000.
In connection with the Chief Operating Officer's employment 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 $10.80 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 is 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
2002 and 2001.
The Company granted options to an executive employee, who resigned in December
2000, to purchase 250,000 shares of the Company's common stock at $7.50 per
share in 1998. The market value of the stock on the date of grant was $10.125
per share. The Company recorded approximately $656,000 as unearned compensation
relating to such options, of which the remaining unamortized portion of
approximately $254,000, was charged to operations during the year ended December
31, 2000.
F-13
Steven Madden, Ltd. and Subsidiaries
Notes to Financial Statements
December 31, 2002 and 2001
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, 2002 is as follows:
2002 2001 2000
----------------------- ----------------------- -----------------------
Number Weighted Number Weighted Number Weighted
of Exercise of Exercise of Exercise
Shares Price Shares Price Shares Price
---------- ---------- ---------- ---------- ---------- ----------
Outstanding at January 1 2,231,000 $ 7.25 2,749,000 $ 6.36 2,720,000 $ 5.85
Granted 696,000 17.53 614,000 12.68 550,000 9.09
Exercised (567,000) 7.70 (1,122,000) 8.02 (509,000) 5.52
Cancelled (15,000) 16.71 (10,000) 9.98 (12,000) 6.34
---------- ---------- ----------
Outstanding at December 31 2,345,000 10.14 2,231,000 7.25 2,749,000 6.36
========== ========== ==========
Exercisable at December 31 1,813,000 8.01 2,131,000 7.22 2,575,000 6.06
========== ========== ==========
The following table summarizes information about stock options at December 31,
2002:
Options Outstanding Options Exercisable
---------------------------------- ----------------------
Weighted
Average
Remaining Weighted Weighted
Contractual Average Average
Number Life Exercise Number Exercise
Range of Exercise Price Outstanding (in Years) Price Exercisable Price
- ----------------------- ----------- ----------- --------- ----------- ---------
$1.50 to $3.31 820,000 3.1 $ 2.36 820,000 $ 2.36
$5.50 to $6.00 99,000 4.6 5.52 99,000 5.52
$6.57 to $7.00 138,000 8.0 6.91 138,000 6.91
$8.00 to $9.12 160,000 8.3 8.81 160,000 8.81
$9.55 to $10.25 110,000 7.3 9.94 110,000 9.94
$11.81 to $12.00 67,000 6.8 11.84 67,000 11.84
$13.50 to $17.41 243,000 9.5 14.99 50,000 15.11
$18.00 to $20.80 708,000 9.0 19.01 369,000 18.99
--------- ---------
2,345,000 6.5 10.14 1,813,000 8.01
========= =========
NOTE E - RESTRICTED STOCK AWARDS
Restricted stock awards have been granted to certain key executive management.
These awards vest on various dates between January 2004 and January 2006. Awards
of 190,000 shares and 20,000 shares were granted in 2002 and 2001, respectively.
The average market price on the date of grant for awards granted in 2002 and
2001 were $17.15 and $18.80, respectively. Restricted stock compensation charged
to expense was $871,000 and $188,000 for 2002 and 2001, respectively.
F-14
Steven Madden, Ltd. and Subsidiaries
Notes to Financial Statements
December 31, 2002 and 2001
NOTE F - PREFERRED STOCK
The Company has authorized 5,000,000 shares of preferred stock. The Board of
Directors have 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
a $1,000 per share, and is not redeemable by the Company or the holder. 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.
NOTE H - OPERATING LEASES
The Company leases office, showroom, warehouse 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:
2003 $ 8,653,000
2004 8,582,000
2005 8,236,000
2006 8,256,000
2007 7,716,000
Thereafter 21,786,000
------------
$ 63,229,000
============
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, 2002, 2001 and 2000 was
approximately $10,795,000, $9,142,000 and $7,604,000, respectively. Included in
such amounts are contingent rents of $151,000, $125,000 and $122,000 in 2002,
2001 and 2000, 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.
F-15
Steven Madden, Ltd. and Subsidiaries
Notes to Financial Statements
December 31, 2002 and 2001
NOTE I - INCOME TAXES
The income tax provision (benefit) consists of the following:
2002 2001 2000
------------ ------------ ------------
Current:
Federal $ 11,411,000 $ 6,899,000 $ 9,787,000
State and local 4,266,000 2,176,000 3,024,000
------------ ------------ ------------
15,677,000 9,075,000 12,811,000
------------ ------------ ------------
Deferred:
Federal (793,000) (365,000) (1,031,000)
State and local (297,000) (115,000) (319,000)
------------ ------------ ------------
(1,090,000) (480,000) (1,350,000)
------------ ------------ ------------
$ 14,587,000 $ 8,595,000 $ 11,461,000
============ ============ ============
A reconciliation between taxes computed at the federal statutory rate and the
effective tax rate is as follows:
December 31,
----------------------
2002 2001 2000
---- ---- ----
Income taxes at federal statutory rate 35.0% 35.0% 35.0%
State income taxes - net of federal
income tax benefit 8.3 6.5 6.4
Nondeductible items 0.1 .3 0.3
Other (1.0) (0.3)
---- ---- ----
Effective rate 42.4% 41.5% 41.7%
==== ==== ====
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.
The components of deferred tax assets and liabilities are as follows:
December 31,
-----------------------
2002 2001
---------- ----------
Current deferred tax assets:
Receivable allowances $ 930,000 $ 691,000
Inventory 703,000 532,000
---------- ----------
1,633,000 1,223,000
---------- ----------
Non-current deferred tax assets:
Depreciation 2,242,000 2,035,000
Deferred compensation 813,000 438,000
Deferred rent 644,000 546,000
---------- ----------
3,699,000 3,019,000
---------- ----------
Deferred tax assets $5,332,000 $4,242,000
========== ==========
F-16
Steven Madden, Ltd. and Subsidiaries
Notes to Financial Statements
December 31, 2002 and 2001
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 in principle of these actions has been reached, subject to
execution of definitive settlement documentation, notices to class
members, a hearing and approval by the District Court. The tentative
settlement is within the limits of insurance coverage described above.
[3] Shareholder derivative actions:
On or about September 26, 2000, a shareholder derivative action was
commenced in the United States District Court for the Eastern District
of New York, captioned, Herrera v. Steven Madden and Steven Madden,
Ltd. An agreement in principle has been reached to resolve all claims
in this action, subject to execution of definitive documentation, such
notice to the Company's shareholders (if any) as may be required by the
District Court, and approval by the District Court. The Company
believes, after consultation with counsel, that its defense costs and
certain attorneys' fees in connection with this action will be subject
to coverage by the Company's insurance as supplemented by the loss
mitigation policy described above.
F-17
Steven Madden, Ltd. and Subsidiaries
Notes to Financial Statements
December 31, 2002 and 2001
NOTE J - COMMITMENTS, CONTINGENCIES AND OTHER (CONTINUED)
[3] Shareholder derivative actions: (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. Named as defendants
therein are the Company and certain of the Company's present and/or
former directors. An agreement in principle has been reached to resolve
all claims in this action, subject to execution of definitive
documentation, such notice to the Company's shareholders (if any) as
may be required by the District Court, and approval by the District
Court. The Company believes, after consultation with counsel, that its
defense costs and certain attorneys' fees in connection with this
action will be subject to coverage by the Company's insurance as
supplemented by the loss mitigation policy described above.
The Company and certain of the Company's present and/or former
directors have been named in an action commenced in the United States
District Court for the Eastern District of New York by the Safeco
Surplus Lines Insurance Company captioned, Safeco Surplus Lines Ins.
Co. v. Steven Madden Ltd., et al. The complaint principally seeks
rescission of the excess insurance policy issued by Safeco to the
Company for the February 4, 2000 to June 13, 2001 period and an order
declaring that Safeco does not owe any indemnity obligation to the
Company or any of its officers and directors in connection with the
shareholder class action and derivative cases referred to above. The
ultimate outcome of this matter cannot presently be determined.
[4] SEC investigation:
In March 2001, the Company became aware that the SEC issued a formal
order of investigation with respect to trading in the Company's
securities. The SEC is investigating possible securities law
violations. Certain current and former officers and directors of the
Company sold shares of the Company's common stock prior to Mr. Madden's
indictment in June 2000, as previously disclosed on Form 4's filed with
the SEC. The ultimate effects of this matter, if any, cannot reasonably
be determined at this time.
[5] Other actions:
(a) On or about January 22, 2002, an action was commenced against
the Company in the United States District Court for the
District of Oregon, captioned Adidas America, Inc. and Adidas
Salomon AG v. Steven Madden, Ltd. and Steven Madden Retail,
Inc. The complaint seeks injunctive relief and unspecified
monetary damages for trademark infringement, trademark
dilution, unfair competition and deceptive trade practices
arising from the Company's use of four stripes as a design
element on footwear. On or about September 3, 2002, Adidas
commenced a second action against the Company in the United
States District Court for the District of Oregon, captioned
Adidas America, Inc. and Adidas Salomon AG v. Steven Madden,
Ltd. and Steven Madden Retail, Inc. The second complaint seeks
the same injunctive relief and unspecified monetary damages
for various trademark infringement claims arising from the
Company's use of two stripes as a design element on footwear.
The Company believes it has substantial defenses to the claims
asserted in both lawsuits and has filed answers denying the
allegations of infringement in both cases. The Company is
seeking to have both cases consolidated before a single judge.
Discovery is continuing and trial is scheduled to begin in May
2003. Court ordered non-binding mediation is scheduled for a
future date. The ultimate outcome of this matter cannot be
presently determined.
F-18
Steven Madden, Ltd. and Subsidiaries
Notes to Financial Statements
December 31, 2002 and 2001
NOTE J - COMMITMENTS, CONTINGENCIES AND OTHER (CONTINUED)
[5] Other actions: (continued)
(b) On October 4, 2002, Skechers U.S.A., Inc. and Skechers U.S.A.,
Inc. II, filed suit against Steven Madden Ltd. and R.S.V.
Sport, Inc. in the United States District Court for the
Central District of California. Skechers alleges claims for
patent infringement, federal unfair competition, federal
antidilution violation, California unfair competition,
California antidilution violation, and common law unfair
competition. Skechers seeks unspecified monetary damages. The
Company has not yet answered or otherwise responded to the
complaint, but believes that it has substantial defenses to
the claims asserted in the lawsuit. The ultimate outcome of
this matter cannot presently be determined.
(c) On September 6, 2002, Ron Owen filed an action against Steven
Madden Retail, Inc., which action is pending in the United
States District Court for the Northern District of Texas -
Dallas Division. Plaintiff alleges a cause of action for
breach of contract and seeks unspecified monetary damages. On
October 10, 2002, the Company answered the complaint. The
Company believes that it has substantial defenses to the
claims asserted in the lawsuit. The ultimate outcome of this
matter cannot presently be determined.
In connection with the above litigations, the Company has accrued
$1,200,000. Management, based on the advice of counsel, believes such
provision is adequate in the circumstances.
[6] 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 market 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 3, 2003 and December 31,
2005. 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:
2003 $ 1,639,000
2004 1,545,000
2005 641,000
-----------
$ 3,825,000
===========
In connection with their employment agreements, two executives received
an aggregate of 20,000 shares of restricted common stock from the
Company. The restricted shares vested over one year through July 2002.
Accordingly, the Company has recorded a charge to operations in the
amount of $188,000 for the 10,000 shares that vested during the year
ended December 31, 2002 and 2001.
[7] Letters of credit:
At December 31, 2002 and 2001, the Company had open letters of credit
for the purchase of imported merchandise of approximately $10,066,000
and $6,252,000, respectively.
F-19
Steven Madden, Ltd. and Subsidiaries
Notes to Financial Statements
December 31, 2002 and 2001
[8] Concentrations:
The Company maintains cash and cash equivalents with various major
financial institutions which at times are in excess of the amount
insured.
During the year ended December 31, 2002, the Company purchased
approximately 29% of their merchandise from a supplier in Brazil and
18% and 16% of their 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.
F-20
Steven Madden, Ltd. and Subsidiaries
Notes to Financial Statements
December 31, 2002 and 2001
NOTE J - COMMITMENTS, CONTINGENCIES AND OTHER (CONTINUED)
[8] Concentrations: (continued)
During the year ended December 31, 2001, the Company purchased
approximately 28% and 21% of their inventory from a supplier in China
and Brazil, respectively. Total inventory purchases for the year ended
December 31, 2001 from Brazil and China were approximately 28% and 53%,
respectively.
During the year ended December 31, 2000, the Company purchased
approximately 50% and 27% of their inventory from suppliers in China
and Brazil, respectively.
Sales to two customers accounted for 13% and 10% of 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 two customers accounted for 13% and 11% of net sales for the
year ended December 31, 2001. These customers represented 18% and 15%
of accounts receivable at December 31, 2001, respectively.
Sales to two customers accounted for 14% and 12% of net sales for the
year ended December 31, 2000. These customers represented 22% and 21%
of accounts receivable at December 31, 2000, respectively. One other
customer represented 12% of accounts receivable at December 31, 2000.
Sales to such customers are included in the wholesale segment (see Note
K). Purchases are made primarily in United States dollars.
[9] Consulting agreement:
The Company had a consulting agreement with a financial advisory firm
of which one of the Company's Board members is a managing director. The
agreement provided for a fee of $150,000 over the one year agreement
which expired in June 2002. The firm provided financial advisory and
investment banking services to the Company. The Company recorded a
charge to operations in the amount of $75,000 in each of the years
ended December 31, 2002 and 2001 in connection with the agreement.
[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,:
2002 2001 2000
----------- ----------- -----------
Balance at beginning of year $ 1,644,000 $ 1,640,000 $ 1,510,000
Charged to expense 630,000 219,000 506,000
Uncollectible accounts written off, net of recoveries (59,000) (215,000) (376,000)
----------- ----------- -----------
Balance at end of year $ 2,215,000 $ 1,644,000 $ 1,640,000
=========== =========== ===========
F-21
Steven Madden, Ltd. and Subsidiaries
Notes to Financial Statements
December 31, 2002 and 2001
NOTE J - COMMITMENTS, CONTINGENCIES AND OTHER (CONTINUED)
[10] Valuation and qualifying accounts: (continued)
The following is a summary of property and equipment and the related
accounts of accumulated depreciation and amortization for the years
ended December 31,:
2002 2001 2000
------------ ------------ ------------
Cost basis
Balance at beginning of year $ 27,512,000 $ 24,097,000 $ 16,164,000
Additions 5,072,000 3,415,000 7,933,000
Write-off of fully depreciated assets (5,077,000)
------------ ------------ ------------
Balance at end of year 27,507,000 27,512,000 24,097,000
------------ ------------ ------------
Accumulated depreciation and amortization
Balance at beginning of year 11,805,000 8,497,000 5,050,000
Depreciation and amortization 3,706,000 3,308,000 3,447,000
Write-off of fully depreciated assets (5,077,000)
------------ ------------ ------------
Balance at end of year 10,434,000 11,805,000 8,497,000
------------ ------------ ------------
Property and equipment, net $ 17,073,000 $ 15,707,000 $ 15,600,000
============ ============ ============
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:
2002 2001 2000
------------ ------------ ------------
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 714,000 575,000 436,000
Amortization 0 139,000 139,000
------------ ------------ ------------
Balance at end of year 714,000 714,000 575,000
------------ ------------ ------------
Cost in excess of fair value of net assets acquired $ 2,066,000 $ 2,066,000 $ 2,205,000
============ ============ ============
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 and girl's footwear. The wholesale segment, through
sales to department and specialty stores, and the retail segment, through
operation of its own retail stores, derive revenue from sales of branded
women's, men's and girl'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-22
Steven Madden, Ltd. and Subsidiaries
Notes to Financial Statements
December 31, 2002 and 2001
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, 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
Year ended December 31, 2001:
Net sales to external customers (a) 163,904,000 79,487,000 243,391,000
Gross profit 57,858,000 42,015,000 99,873,000
Commissions and licensing fees 1,711,000 4,200,000 5,911,000
Income from operations (c) 10,095,000 7,023,000 2,244,000 19,362,000
Depreciation and amortization 869,000 2,577,000 1,000 3,447,000
Other significant items:
Deferred compensation 533,000 533,000
Deferred rent expense (reversal) (21,000) 249,000 (3,000) 225,000
Provision for doubtful accounts 219,000 219,000
Segment assets (b) 90,061,000 30,922,000 879,000 121,862,000
Capital expenditures 551,000 2,864,000 3,415,000
Year ended December 31, 2000:
Net sales to external customers (a) 135,481,000 69,632,000 205,113,000
Gross profit 50,680,000 38,938,000 89,618,000
Commissions and licensing fees 1,216,000 3,631,000 4,847,000
Income from operations 15,996,000 8,001,000 1,635,000 25,632,000
Depreciation and amortization 1,000,000 2,581,000 5,000 3,586,000
Other significant items:
Deferred compensation 382,000 382,000
Deferred rent expense (reversal) (13,000) 310,000 297,000
Provision for doubtful accounts 463,000 43,000 506,000
Segment assets (b) 60,740,000 30,215,000 778,000 91,733,000
Capital expenditures 1,044,000 6,889,000 7,933,000
(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.
(c) Loss mitigation coverage expense of $6,950,000 is reflected in the
wholesale segment.
F-23
Steven Madden, Ltd. and Subsidiaries
Notes to Financial Statements
December 31, 2002 and 2001
NOTE L - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly results of operations for the years
ended December 31, 2002 and 2001 (000's omitted):
March 31 June 30 September 30 December 31
------------ ------------ ------------ ------------
2002:
Net sales $ 66,611 $ 88,111 $ 93,018 $ 78,396
Cost of sales 40,070 55,127 56,763 47,493
Gross profit 26,541 32,984 36,255 30,903
Commissions and licensing fee income 1,244 1,574 1,819 1,966
Net income 4,093 5,262 6,268 4,218
Net income per share:
Basic 0.33 0.42 0.49 0.33
Diluted 0.30 0.38 0.46 0.31
2001:
Net sales 53,395 59,563 70,245 60,188
Cost of sales 31,314 34,245 40,517 37,442
Gross profit 22,081 25,318 29,728 22,746
Commissions and licensing fee income 1,134 1,235 1,637 1,905
Net income (loss) 3,650 4,423 5,367 (1,324)
Net income (loss) per share:
Basic 0.33 0.38 0.46 (0.11)
Diluted 0.29 0.34 0.41 (0.11)
F-24
(b) Reports on Form 8-K
None.
(c) Exhibits.
EXHIBITS
3.01* Certificate of Incorporation of the Company.
3.02 *Amended & Restated By-Laws of the Company.
4.01* Specimen Certificate for shares of Common Stock.
4.02* Rights Agreement between the Company and American Stock Transfer
and Trust Company.
10.07* Employment Agreement of Arvind Dharia.
10.08* Employment Agreement of Richard Olicker.
10.09* Second Amended Employment Agreement between the Company and
Steven Madden.
10.10* Employment Agreement of Charles Koppelman.
10.11* Employment Agreement of Jamieson Karson.
10.12* Amendment No. 1 to Employment Agreement of Arvind Dharia.
10.13* Employment Agreement between Adesso-Madden, Inc. and Gerald
Mongeluzo.
10.14* Employment Agreement between Steven Madden Retail, Inc. and Mark
Jankowski.
10.15* Amendment No. 1 to Employment Agreement of Richard Olicker.
10.16* Amendment No. 2 to Employment Agreement of Arvind Dharia.
21.01* Subsidiaries of Registrant.
23.01 Consent of Eisner LLP.
* Previously filed with the Securities and Exchange Commission.
50
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 27, 2003
STEVEN MADDEN, LTD.
By: /s/ JAMIESON KARSON
-----------------------
Jamieson Karson
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/ CHARLES KOPPELMAN Executive Chairman of the Board March 27, 2003
- ------------------------------
Charles Koppelman
/s/ JAMIESON KARSON Chief Executive Officer and Vice Chairman of the Board March 27, 2003
- ------------------------------
Jamieson Karson
/s/ ARVIND DHARIA Chief Financial Officer and Director March 27, 2003
- ------------------------------
Arvind Dharia
/s/ GERALD MONGELUZO Director March 27, 2003
- ------------------------------
Gerald Mongeluzo
/s/ JOHN L. MADDEN Director March 27, 2003
- ------------------------------
John L. Madden
/s/ PETER MIGLIORINI Director March 27, 2003
- ------------------------------
Peter Migliorini
/s/ HEYWOOD WILANSKY Director March 27, 2003
- ------------------------------
Heywood Wilansky
/s/ MARC COOPER Director March 27, 2003
- ------------------------------
Marc Cooper
51
/s/ AWADHESH SINHA Director March 27, 2003
- ------------------------------
Awadhesh Sinha
/s/ ROGER GLADSTONE Director March 27, 2003
- ------------------------------
Roger Gladstone
52
CERTIFICATION PURSUANT TO RULE 13A-14 OR 15D-14 OF THE SECURITIES
EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Jamieson Karson, certify that:
1. I have reviewed this annual report on Form 10-K of Steven Madden,
Ltd.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Dated: March 27, 2003
By: /s/ JAMIESON KARSON
-----------------------
Jamieson Karson
Chief Executive Officer
53
CERTIFICATION PURSUANT TO RULE 13A-14 OR 15D-14 OF THE SECURITIES
EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Arvind Dharia, certify that:
1. I have reviewed this annual report on Form 10-K of Steven Madden,
Ltd.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Dated: March 27, 2003
By: /s/ ARVIND DHARIA
-----------------------
Arvind Dharia
Chief Financial Officer
54
STEVEN MADDEN, LTD.
FORM 10-K
EXHIBIT INDEX
Exhibit No Description
---------- -----------
99.1 Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
99.2 Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
55
INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in the Registration Statements of Steven Madden, Ltd. on Form S-8 (333-68712), Form S-8 (333-40924), Form S-3 (333-91127), Form S-8 (333-86903), Form S-8 (333-59995), Form S-3/A (333-59295), Form S-3/A (333-46441), Form S-8 (333-39335), Form S-8 (333-16381), Form S-8 (333-05773) and Form S-8 (333-98067) of our report dated February 12, 2003 on our audit of the consolidated financial statements of Steven Madden, Ltd. and subsidiaries included in its 2002 Annual Report on Form 10-K. We also consent to the reference to our firm in the Registration Statements on Form S-3 under the caption experts. Eisner LLP New York, New York March 25, 2003
Exhibit 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Steven Madden, Ltd. (the "Company") on
Form 10-K for the year ending December 31, 2002, as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), I, Jamieson A.
Karson, Chief Executive Officer of the Company, certify, pursuant to Section 18
U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that to my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
/s/ JAMIESON A. KARSON
- -----------------------------------
Jamieson A. Karson
Chief Executive Officer
March 27, 2003
56
Exhibit 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Steven Madden, Ltd. (the "Company") on
Form 10-K for the year ending December 31, 2002, as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), I, Arvind Dharia,
Chief Financial Officer of the Company, certify, pursuant to Section 18 U.S.C.
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that
to my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
/s/ ARVIND DHARIA
- -----------------------------------
Arvind Dharia
Chief Financial Officer
March 27, 2003
57