SEC Filing | Steven Madden Ltd

UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2000 - -------------------------------------------------------------------------------- [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________________ to _____________________ For Quarter Ended March 31, 2000 Commission File Number 0-23702 ---------------- ---------- STEVEN MADDEN, LTD. - -------------------------------------------------------------------------------- (Exact name of Registrant as specified in its charter) DELAWARE 13-3588231 ------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 52-16 Barnett Avenue, Long Island City, New York 11104 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (718) 446-1800 - -------------------------------------------------------------------------------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 of 15 (d) of the Securities and Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Class Outstanding as of May 8, 2000 Common Stock 11,909,309 1

STEVEN MADDEN, LTD. FORM 10-Q QUARTERLY REPORT MARCH 31, 2000 TABLE OF CONTENTS PART I- FINANCIAL INFORMATION ITEM 1. Condensed Consolidated Financial Statements: Consolidated Balance Sheets........................................ 3 Consolidated Statements of Operations.............................. 4 Consolidated Statement of Cash Flows............................... 5 Notes to condensed consolidated financial statements............... 6 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................. 8 PART II - OTHER INFORMATION ITEM 1. Legal Proceedings.................................................. 15 2

STEVEN MADDEN, LTD. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands) MARCH 31, DECEMBER 31, 2000 1999 --------- ------------ (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 30,065 $ 37,361 Investments 0 257 Accounts receivable - net of allowances of $896 and $886 1,742 1,207 Due from factor - net of allowances of $788 and $624 20,423 12,146 Inventories 7,786 10,158 Prepaid expenses and other current assets 558 867 Deferred taxes 800 800 -------- -------- Total current assets 61,374 62,796 Property and equipment, net 13,380 11,114 Deferred taxes 1,612 1,612 Deposits and other 249 269 Cost in excess of fair value of net assets acquired - net of accumulated amortization of $471 and $436 2,309 2,344 -------- -------- $ 78,924 $ 78,135 ======== ======== LIABILITIES Current liabilities: Current portion of lease payable $ 122 $ 116 Accounts payable 7,141 6,542 Accrued expenses 3,325 2,528 Income tax payable 1,064 4,957 Accrued bonuses 274 577 -------- -------- Total current liabilities 11,926 14,720 Deferred rent 833 777 Lease payable, less current portion 165 203 -------- -------- 12,924 15,700 -------- -------- Contingencies (Note D) STOCKHOLDERS' EQUITY Common stock - $.0001 par value, 60,000,000 shares authorized, 11,864 And 11,798 issued and outstanding 1 1 Additional paid-in capital 43,191 42,906 Retained earnings 25,906 22,722 Unearned compensation (1,183) (1,279) Treasury stock at cost - 345 shares (1,915) (1,915) -------- -------- 66,000 62,435 -------- -------- $ 78,924 $ 78,135 ======== ======== SEE NOTES TO FINANCIAL STATEMENTS 3

STEVEN MADDEN, LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share information) THREE MONTHS ENDED MARCH 31, -------------------- 2000 1999 -------- -------- Net sales $ 44,109 $ 26,731 Cost of sales 25,925 15,789 -------- -------- Gross profit 18,184 10,942 Commission and licensing fee income 1,004 691 Operating expenses (14,420) (9,353) -------- -------- Income from operations 4,768 2,280 Interest income (expense), net 536 174 Gain on sale of marketable securities 230 0 -------- -------- Income before provision for income taxes 5,534 2,454 Provision for income taxes 2,352 1,043 -------- -------- NET INCOME $ 3,182 $ 1,411 ======== ======== BASIC INCOME PER SHARE $ .28 $ .13 ======== ======== DILUTED INCOME PER SHARE $ .24 $ .12 ======== ======== Weighted average common shares outstanding - basic income per share 11,505 10,672 Effect of potential common shares from exercise of options and warrants 1,729 1,175 -------- -------- WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - DILUTED INCOME PER SHARE 13,234 11,847 ======== ======== SEE NOTES TO FINANCIAL STATEMENTS 4

STEVEN MADDEN, LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) THREE MONTHS ENDED MARCH 31, -------------------- 2000 1999 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 3,182 $ 1,411 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 701 396 Deferred compensation 96 96 Provision for bad debts 174 77 Gain on sale of marketable securities (230) 0 Deferred rent expense 56 91 Changes in: Accounts receivable (545) 33 Due from factor (8,441) (4,854) Inventories 2,372 928 Prepaid expenses and other assets 329 (401) Accounts payable and accrued expenses (2,800) 1,704 -------- -------- Net cash used in operating activities (5,106) (519) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (2,930) (1,017) Sale/maturity of investment securities 487 499 -------- -------- Net cash used in investing activities (2,443) (518) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from options and warrants exercised 285 24 Repayment of lease obligations (32) (26) Purchase of treasury stock 0 (47) -------- -------- Net cash provided by (used in ) financing activities 253 (49) -------- -------- NET DECREASE IN CASH AND CASH EQUIVALENTS (7,296) (1,086) Cash and cash equivalents - beginning of period 37,361 14,642 -------- -------- CASH AND CASH EQUIVALENTS - END OF PERIOD $ 30,065 $ 13,556 ======== ======== SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Acquisition of leased assets $ 32 SEE NOTES TO FINANCIAL STATEMENTS 5

STEVEN MADDEN, LTD. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS MARCH 31, 2000 NOTE A - BASIS OF REPORTING The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, such statements include all adjustments (consisting only of normal recurring items) which are considered necessary for a fair presentation of the financial position of Steven Madden, Ltd. and subsidiaries (the "Company") as of March 31, 2000, and the results of their operations and cash flows for the three-month period then ended. The results of operations for the three-month period ended March 31, 2000 are not necessarily indicative of the operating results for the full year. It is suggested that these financial statements be read in conjunction with the financial statements and related disclosures for the year ended December 31, 1999 included in the Annual Report of Steven Madden, Ltd. on Form 10-K. NOTE B - INVENTORIES Inventories, which consist of finished goods, are stated at the lower of cost (first-in, first-out method) or market. NOTE C - NET INCOME PER SHARE OF COMMON STOCK Basic income per share is based on the weighted average number of common shares outstanding during the year. Diluted income per share reflects the potential dilution assuming common shares were issued upon the exercise of outstanding options and warrants and the proceeds thereof were used to purchase outstanding common shares. NOTE D - PENDING LITIGATION [1] MAGNUM FASHIONS, INC.: On or about May 25, 1999, Magnum Fashions, Inc. ("Magnum") and WK Maxy Industries, Ltd. ("WK") commenced an arbitration proceeding against the Company. In the claim filed as part of the arbitration, Magnum alleged that it was fraudulently induced to enter into a license agreement, dated as of February 1, 1997, with the Company pursuant to which Magnum licensed the Company's "Steve Madden" trademark for handbags and related products. WK alleged that it was fraudulently induced into providing a guaranty of Magnum's obligations under the license. Based on this and other allegations, Magnum and WK have sought to be released from their financial obligations to the Company under the license and guaranty, respectively. Magnum is also seeking damages that it has estimated to be in excess of $5,000,000. On July 7, 1999 the Company submitted its answer to the claim and filed a counterclaim. In addition to denying the claims asserted by Magnum and WK, the Company asserted a claim against Magnum and WK for the balance of the minimum royalty due under the license. The Company also asserted additional claims against Magnum and WK based on improper sales made during the term of the license and improper liquidation of its inventory following termination of the licenses. Magnum and WK have denied the counterclaims. Initial hearings were held in April 2000 and additional hearings are scheduled through September 2000. The Company believes that the claims asserted by Magnum and WK are meritless, and that the Company's counterclaims have substantial merit. Accordingly, the Company intends to vigorously contest Magnum's positions in this proceeding. 6

STEVEN MADDEN, LTD. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS MARCH 31, 2000 NOTE D - PENDING LITIGATION (CONTINUED) [2] LEE N' GI: On or about October 27, 1999, the Company commenced an action against Lee N' Gi, the exclusive marketing and distribution agent for Magnum, in which it claimed that Lee N' Gi had wrongfully induced Magnum to breach its obligation under the aforementioned license between the Company and Magnum. The Company is seeking damages of $3,000,000. On or about December 14, 1999, Lee N' Gi served an answer denying the allegations and counterclaimed that the Company had breached or wrongfully terminated the license to its detriment. Lee N' Gi seeks damages of $2,000,000 on its counterclaim. The Company answered the counterclaim denying the allegations. The action is in preliminary stages. The Company believes that the Lee N' Gi counterclaim is without merit and intends to vigorously contest this matter. Discovery in this proceeding has been stayed until June 2, 2000. 7

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. - -------------------------------------------------------------------------------- The following discussion of the Company's financial condition and results of operations should be read in conjunction with the Financial Statements and Notes thereto appearing elsewhere in this document. Statements in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this document as well as statements made in press releases and oral statements that may be made by the Company or by officers, directors or employees of the Company acting on the Company's behalf that are not statements of historical or current fact constitute "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other unknown factors that could cause the actual results of the Company to be materially different from the historical results or from any future results expressed or implied by such forward-looking statements. In addition to statements which explicitly describe such risks and uncertainties, readers are urged to consider statements labeled with the terms "believes", "belief", "expects", "intends", "anticipates" or "plans" to be uncertain forward-looking statements. The forward looking statements contained herein are also subject generally to other risks and uncertainties that are described from time to time in the Company's reports and registration statements filed with the Securities and Exchange Commission. The following table sets forth information on operations for the periods indicated: PERCENTAGE OF NET REVENUES THREE MONTHS ENDED MARCH 31 -------- ($ in thousands) CONSOLIDATED: 2000 1999 - ------------ --------- --------- Net Sales $ 44,109 100% $ 26,731 100% Cost of Sales 25,925 59 15,789 59 Other Operating Income 1,004 2 691 3 Operating Expenses 14,420 33 9,353 35 Income from Operations 4,768 11 2,280 9 Interest Income (Expense) Net 536 1 174 1 Gain on sale of Marketable Securities 230 1 -- -- Income Before Income Taxes 5,534 13 2,454 9 Net Income 3,182 7 1,411 5 8

PERCENTAGE OF NET REVENUES THREE MONTHS ENDED MARCH 31 -------- ($ in thousands) By Segment 2000 1999 ------- ------- WHOLESALE DIVISIONS: STEVEN MADDEN, LTD Net Sales $22,020 100% $12,256 100% Cost of Sales 13,856 63 7,706 63 Other Operating Income 287 1 141 1 Operating Expenses 6,262 28 3,855 31 Income from Operations 2,189 10 836 7 L.E.I. FOOTWEAR: Net Sales $ 9,732 100% $ 5,378 100% Cost of sales 6,438 66 3,710 69 Operating Expenses 1,825 19 977 18 Income from Operations 1,469 15 691 13 DIVA ACQUISITION CORP: Net Sales $ 1,079 100% $ 1,455 100% Cost of sales 726 67 1,010 69 Operating Expenses 194 18 268 18 Income from Operations 159 15 177 12 STEVEN MADDEN RETAIL INC.: Net Sales $11,278 100% $ 7,642 100% Cost of Sales 4,905 44 3,363 44 Operating Expenses 5,671 50 3,818 50 Income from Operations 702 6 461 6 ADESSO MADDEN INC.: (FIRST COST) Other Operating Revenue $ 717 100% $ 550 100% Operating Expenses 468 65 435 79 Income from Operations 249 35 115 21 9

RESULTS OF OPERATIONS ($ in thousands) THREE MONTHS ENDED MARCH 31, 2000 VS. THREE MONTHS ENDED MARCH 31, 1999 CONSOLIDATED: Sales for the three month period ended March 31, 2000 were $44,109 or 65% higher than the $26,731 in the comparable period of 1999. The increase in sales is due to several factors, including (i) the addition of new wholesale accounts, (ii) an increase in reorders from existing customers, (iii) a 47% increase in Electronic Data Interchange (EDI) size replenishment program, (iv) a 48% increase in retail sales due to the opening of additional Steve Madden retail stores during first quarter of 2000 and increases in same store sales, (v) an increase in sales from the l.e.i. Wholesale Division ("l.e.i. Wholesale"), (vi) an increase in the number of Steve Madden concept shops located in major department stores, and (vii) an increase in public awareness with respect to the Company's brands. As a result, management feels that "Steve Madden" and "l.e.i. footwear" as brand names have increased in popularity nationwide. In turn, increased sales have enabled the Company to expand its advertising and in store concept efforts, all of which have contributed to the continuing increase in sales. Also in the first quarter, the Company introduced a new brand, Stevies(TM). Stevies(TM) is a fashion brand which targets girls ages 6-9 and "tweens" ages 10-12. Initial shipments of the Stevies(TM) brand will commence in June 2000. Also as of first quarter of 2000, seven licenses in 10 product classifications were signed for the Stevies(TM) brand with shipments to begin for the Back To School season. The web site for Stevies at WWW.STEVIES.COM went live in March of 2000. Gross profit as a percentage of sales in first quarter of 2000 remains the same as first quarter of 1999. Selling, general and administrative (SG&A) expenses increased to $14,420 in 2000 from $9,353 in 1999. The increase in SG&A is due primarily to a 43% increase in payroll, officers' bonuses and payroll related expenses from $3,628 in 1999 to $5,188 in 2000. Also, the Company focused its efforts on advertising and marketing by increasing those expenses by 61% from $746 in 1999 to $1,200 in 2000. Additionally, selling, designing and licensing costs increased by 96% from $1,387 in 1999 to $2,715 in 2000. This is due in part to an increase in sales in the current period and to the Company's increased focus on selling, designing, and licensing activities. The increase in the number of retail outlets and expanded office facilities resulted in an increase in occupancy, telephone, utilities, computer, printing/supplies and depreciation expenses by 34% from $2,242 in 1999 to $3,010 in 2000. Income from operations for 2000 was $4,768 which represents an increase of $2,488 or 109% over the income from operations of $2,280 in 1999. Net income increased by 126% to $3,182 in 2000 from $1,411 in 1999. WHOLESALE DIVISIONS: Sales from the Steve Madden Wholesale Division ("Madden Wholesale"), accounted for 10

$22,020 or 50%, and $12,256 or 46%, of total sales in 2000 and 1999, respectively. The increase in sales is due to an increase in reorders from existing customers, 47% increase in Electronic Data Interchange (EDI) size replenishment program and an increase in the number of Steve Madden concepts shops located in major department stores. Gross profit as a percentage of sales remains the same. Operating expenses increased to $6,262 in 2000 from $3,855 in 1999. This increase is due to an increase in payroll and payroll related expenses principally due to the hiring of additional management personnel and an increase in occupancy expenses due to additional warehouse space needed for expanding EDI size replenishment inventory. Additionally, selling, designing and licensing costs increased due to an increase in sales in the current period and to the Company's increased focus on selling, designing, and licensing activities. Madden Wholesale income from operations was $2,189 in 2000 compared to income from operations of $836 in 1999. Sales from the l.e.i. Wholesale ("l.e.i. Wholesale") accounted for $9,732 or 22%, and $5,378 or 20%, of total sales in 2000 and 1999, respectively. The increase in sales is due to the addition of new "l.e.i. Wholesale" accounts and an increase in reorders from existing customers. l.e.i footwear now sells in over 2600 doors, in the United States, primarily in department stores, including Macy's East, Burdines, Rich's, Hecht's, Filene's, Foley's, Dayton Hudson, Belk and JC Penney's, and to a lesser extent in specialty store chains, such as Wet Seal and Journey's. Gross profit as a percentage of sales increased from 31% in 1999 to 34% in 2000 due to a change in the product mix, balanced sourcing and improved inventory management. Operating expenses increased to $1,825 in 2000 from $977 in 1999 due to increases in occupancy, computer and payroll and payroll related expenses. Additionally, selling, designing and licensing costs increased due to an increase in sales in the current period and to the Company's increased focus on selling, designing, and licensing activities. Income from operations from l.e.i. Wholesale was $1,469 in 2000 compared to income from operations of $691 in 1999. Sales from the Diva Acquisition Corp. Wholesale Division ("Diva Wholesale") which markets the "David Aaron" brand name in footwear accounted for $1,079 or 2%, and $1,455 or 5%, of total sales in 2000 and 1999, respectively. Gross profit as a percentage of sales increased from 31% in 1999 to 33% in 2000 due to a change in the product mix, balanced sourcing and improved inventory management. Operating expenses decreased to $194 in 2000 from $268 in 1999 due to decreases in selling and designing expenses. Income from operations from Diva was $159 in 2000 compared to income from operations of $177 in 1999. RETAIL DIVISION: Sales from the Retail Division accounted for $11,278 or 26% and $7,642 or 29% of total revenues in 2000 and 1999, respectively. The increase in Retail Division sales is primarily due to the increase in number of Steve Madden retail stores to fifty-two in the first quarter of 2000 compared to thirty-seven Steve Madden retail stores in the first quarter of 1999. Same store sales for the quarter ended March 31, 2000 increased by 19% over the same period of 1999. This increase in same store sales was driven by the strengthening of the sneaker classification, replenishment of core items by size and an 11

increase in the sandal business. Also, increases in same store sales were driven by the accessory business which doubled during first quarter of 2000 and replenishment of inventory was enhanced by the addition of the new warehouse facility in New Jersey. Revenues from the internet store increased by 400% to $600 in 2000 from $118 in 1999. As the Company offers additional styles through its web site at www.stevenmadden.com, business continues to grow. Gross profit as a percentage of sales remains the same. Selling, general and administrative expenses for the Retail Division increased to $5,671 in 2000 from $3,818 in 1999. This increase is due to increases in payroll and related expenses, occupancy, printing, computer and depreciation expenses as a result of opening three additional stores during first quarter of 2000. Income from operations from the retail division was $702 in 2000 compared to income from operations of $461 in 1999. ADESSO-MADDEN DIVISION: Adesso-Madden, Inc., a wholly owned subsidiary of the Company, generated commission revenues of $717,000 for the period ended March 31, 2000 which represents an increase from the commission revenues of $550,000 in 1999. This increase was primarily due to the additional doors for the Jordache brand now up to 1000 Walmart doors, the growth in accounts such as Parade of Shoes, Sears, Famous Footwear, Payless, Bass, MarMax and Target and the growth in key classifications such as sandals and big unit bottom casuals. Operating expenses increased to $468 in 2000 from $435 in 1999 due to increases in selling and designing expenses. Income from operations from Adesso-Madden was $249 in 2000 compared to income from operations of $115 in 1999. LIQUIDITY AND CAPITAL RESOURCES The Company had working capital of $49,448 at March 31, 2000 which represents an increase of $14,927 in working capital from March 31, 1999. The increase in working capital is primarily due to an increase in profitability. The Company's customers consist principally of department stores and specialty stores, including shoe boutiques. Presently, the Company's Wholesale Division sells approximately sixty percent (60%) of its products to department stores, including Federated Department Stores (Bloomingdales, Bon Marche, Burdines, Macy's and Rich's), May Department Stores (Famous Barr, Filene's, Foley's, Hecht's, Kaufmann's, Meier & Frank, Lord & Taylor and Robinsons May), Dillard's, Dayton-Hudson and Nordstorm and approximately forty percent (40%) to specialty stores, including Journey's, Wet Seal and The Buckle and catalog retailers, including Victoria's Secret and Fingerhut. Federated Department Stores and May Department Stores presently account for approximately twenty one percent (21%) and fifteen percent (15%) of the Company's Wholesale Division sales, respectively. OPERATING ACTIVITIES During the three month period ended March 31, 2000, cash used by operating activities was $5,106. Uses of cash arose principally from an increase in factored accounts 12

receivable of $8,441 and a decrease in accounts payable and accrued expenses of $2,800. Cash was provided principally by a decrease in inventory of $2,372 and net income of $3,182. The Company has lease agreements for office, warehouse, and retail space, expiring at various times through 2011. Future obligations under these lease agreements total approximately $40,771. The Company has employment agreements with various officers currently providing for aggregate annual salaries of approximately $1,700 subject to annual bonuses and annual increases as may be determined by the Company's Board of Directors. In addition, as part of the employment agreements, the Company is committed to pay incentive bonuses based on income before interest, depreciation and taxes to certain officers. A significant portion of the Company's product is supplied from foreign manufacturers, the majority of which are located in Brazil, China and Mexico. Although the Company has not entered into long-term manufacturing contracts with any of these foreign companies, the Company believes that a sufficient number of alternative sources exist outside of the United States for the manufacture of its products if current suppliers need to be replaced. In addition, because the Company deals with U.S. currency for all transactions and intends to continue to do so, the Company believes there should be no foreign exchange considerations. INVESTING ACTIVITIES During the three month period ended March 31, 2000, the Company used cash of $2,930 to make leasehold improvements on new retail stores, warehouse space and office space and to acquire computer equipment. FINANCING ACTIVITIES During the three month period ended March 31, 2000, the Company received $285 from the exercise of stock options. LICENSE AGREEMENTS Revenues from licensing increased by 104% to $287 in first quarter of 2000 from $141 in first quarter of 1999. This increase was driven by increases in licensing fees from leather sportswear and sunglasses. As of March 31, 2000, the Company had eight license partners covering ten product categories for its Steve Madden brand. Also during the first quarter of 2000, the Company initiated 7 licensing arrangements in 10 product classifications for its Stevies brand. The product categories include handbags, hosiery, sunglasses, hair, fashion accessories, belts and jewelry. The Company is exploring additional licensing opportunities for both its Steve Madden and Stevies brands. As of March 15, 2000, the Company and its sportswear licensee, Iron Will Group, Inc. 13

executed a Termination Agreement with respect to that certain License Agreement dated as of January 1, 1999. Iron Will Group is an affiliate of Jordache Enterprises. The Termination Agreement requires that Iron Will terminate its sale and distribution of Steve Madden Sportswear products on or before June 15, 2000. The Company is currently focusing on its leather sportswear which goods are produced and sold by its outerwear licensee. The Company is actively pursuing the engagement of a new sportswear licensee and continues to produce footwear products for the mass merchandise market under the Jordache brand name pursuant to a separate license agreement with Jordache Enterprises. INFLATION The Company does not believe that inflation has had a material adverse effect on sales or income during the past several years. Increases in supplies or other operating costs could adversely affect the Company's operations; however, the Company believes it could increase prices to offset increases in costs of goods sold or other operating costs. 14

PART II ITEM 1. LEGAL PROCEEDINGS Except as set forth below, no material legal proceedings are pending to which the Company or any of its property is subject. MAGNUM FASHIONS INC., ET AL. V. STEVEN MADDEN, LTD. On or about May 25, 1999, Magnum Fashions, Inc. ("Magnum") and WK Maxy Industries, Ltd. ("WK") commenced an arbitration proceeding (the "Arbitration") against the Company before the American Arbitration Association ("AAA"). In the Statement of Claim filed as part of the Arbitration (and as subsequently amended on June 25, 1999), Magnum has alleged, inter alia, that it was fraudulently induced to enter into a license agreement, dated as of February 1, 1997, with the Company pursuant to which Magnum licensed the Company's "Steve Madden" trademark for handbag and related products (the "Handbag License"). Similarly, WK alleged that it was fraudulently induced into providing a guaranty ("Guaranty") of Magnum's obligations under the Handbag License. In addition to the fraudulent inducement claim, Magnum asserted claims of fraudulent nondisclosure, negligent misrepresentation, mutual mistake, wrongful termination, failure of consideration and defamation. Based on those allegations, Magnum and WK have sought to be released from their financial obligations to the Company under the Handbag License and Guaranty, respectively, and Magnum has also sought damages that it subsequently estimated to be in excess of $5 million. On July 7, 1999, the Company submitted its Answer and Counterclaims in the Arbitration. In addition to denying the claims asserted by Magnum and WK, the Company asserted a claim against Magnum and WK for the balance of the minimum royalty due under the Handbag License. The Company also asserted additional claims against Magnum and WK based on improper sales made during the term of the Handbag License and Magnum's improper liquidation of its inventory following termination of the Handbag License. Magnum and WK have denied the Company's counterclaims. Initial hearings were held in April 2000 and additional hearings are scheduled through September 2000. The Company believes that the claims asserted by Magnum and WK are meritless, and that the Company's counterclaims have substantial merit. Accordingly, the Company intends to vigorously contest Magnum's positions in this proceeding. STEVEN MADDEN, LTD. V. LEE 'N GI On or about October 27, 1999, the Company commenced an action in the New York State Supreme Court, New York County entitled STEVEN MADDEN, LTD. V. LEE N' GI, Index No. 121900/99 (the "Lee N' Gi Action"), currently pending in the Supreme Court of the State of New York, County of New York, in which it claimed that Lee N' Gi, the exclusive marketing and distribution agent for Magnum Fashion, Inc. ("Magnum"), had wrongfully induced Magnum to breach its obligations under the Handbag License between the Company and Magnum. The 15

Company is seeking damages of $3,000,000. On or about December 14, 1999, Lee N' Gi served an Answer and Counterclaim in which it denied the allegations in the Company's complaint and claimed that the Company had breached or wrongfully terminated the Handbag License to its detriment. Lee N' Gi seeks damages of $2,000,000 on its counterclaim. On or about December 21, 1999, the Company served a Reply to Counterclaim in which it denied Lee N' Gi's allegations. Discovery in this proceeding has been stayed until June 2, 2000. 16

SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report on Form 10-Q to be signed on its behalf by the undersigned thereunto duly authorized. STEVEN MADDEN, LTD /s/ ARVIND DHARIA ---------------------------- Arvind Dharia Chief Financial Officer DATE: MAY 12, 2000 17

5 0000913241 STEVEN MADDEN, LTD. 1 USD 3-MOS DEC-31-2000 JAN-01-2000 MAR-31-2000 1 30,065,000 0 2,638,000 896,000 7,786,000 61,374,000 19,096,000 5,716,000 78,924,000 11,926,000 0 0 0 1,000 65,999,000 78,924,000 44,109,000 45,113,000 25,925,000 14,420,000 0 0 0 5,534,000 2,352,000 3,182,000 0 0 0 3,182,000 0.280 0.240