UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
----------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission File Number 0-23702
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STEVEN MADDEN, LTD.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 13-3588231
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
52-16 Barnett Avenue, Long Island City, New York 11104
- -------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (718) 446-1800
- -------------------------------------------------------------------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No[ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ].
As of August 11, 2003, the latest practicable date, there were 13,055,155 shares
of common stock, $.0001 par value, outstanding.
1
STEVEN MADDEN, LTD.
FORM 10-Q
QUARTERLY REPORT
June 30, 2003
TABLE OF CONTENTS
PART I- FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements:
Consolidated Balance Sheets ....................................... 3
Consolidated Statements of Operations ............................. 4
Consolidated Statements of Cash Flows ............................. 5
Notes to condensed Consolidated Financial Statements .............. 6
ITEM 2. Management's Discussion and Analysis
Of Financial Condition and Results of Operations .................. 10
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk......... 25
ITEM 4. Controls and Procedures ........................................... 25
PART II- OTHER INFORMATION
ITEM 1. Legal Proceedings ................................................. 26
ITEM 5. Other Information.................................................. 27
ITEM 6. Exhibits and Reports on Form 8K ................................... 28
Signature ......................................................... 29
2
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands)
June 30, December 31, June 30,
2003 2002 2002
----------- ----------- -----------
(unaudited) (unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 25,172 $ 56,713 $ 25,332
Accounts receivable, net of allowances of $452,
$497 and $306 3,385 3,039 2,814
Due from factor, net of allowances of $1,903,
$1,718 and $1,593 35,401 22,373 43,404
Inventories 25,256 19,445 24,817
Marketable securities - available for sale 9,956 500 3,501
Prepaid expenses and other current assets 2,830 1,651 3,164
Deferred taxes 1,633 1,633 1,223
----------- ----------- -----------
Total current assets 103,633 105,354 104,255
Property and equipment, net 18,356 17,073 15,665
Deferred taxes 3,699 3,699 3,019
Deposits and other 295 298 297
Marketable securities - available for sale 34,257 22,010 12,671
Cost in excess of fair value of net assets acquired,
net of accumulated amortization of $714 2,066 2,066 2,066
----------- ----------- -----------
$ 162,306 $ 150,500 $ 137,973
=========== =========== ===========
LIABILITIES
Current liabilities:
Current portion of capital lease obligations $ 6 $ 14 $ 21
Accounts payable 6,119 9,044 13,337
Accrued expenses 7,889 7,134 5,434
Accrued incentive compensation 1,597 2,701 1,323
----------- ----------- -----------
Total current liabilities 15,611 18,893 20,115
Deferred rent 1,664 1,532 1,420
----------- ----------- -----------
17,275 20,425 21,535
----------- ----------- -----------
Commitments, contingencies and other
STOCKHOLDERS' EQUITY
Preferred stock - $.0001 par value, 5,000 shares authorized;
none issued; Series A Junior Participating preferred stock -
$.0001 par value, 60 shares authorized; none issued
Common stock - $.0001 par value, 60,000 shares authorized;
14,286, 14,016 and 13,939 shares issued; 13,041, 12,771 and
12,694 outstanding 1 1 1
Additional paid-in capital 75,081 70,683 66,351
Retained earnings 81,551 70,722 60,237
Unearned compensation (3,908) (3,476) (2,160)
Other comprehensive gain:
Unrealized gain on marketable securities 297 136
Treasury stock - 1,245 shares at cost (7,991) (7,991) (7,991)
----------- ----------- -----------
145,031 130,075 116,438
----------- ----------- -----------
$ 162,306 $ 150,500 $ 137,973
=========== =========== ===========
See notes to financial statements 3
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited)
(in thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- --------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Net sales:
Wholesale $ 63,335 $ 65,742 $ 120,927 $ 113,577
Retail 22,409 22,369 43,515 41,145
---------- ---------- ---------- ----------
85,744 88,111 164,442 154,722
---------- ---------- ---------- ----------
Cost of sales:
Wholesale 42,935 44,607 80,771 76,136
Retail 10,501 10,520 20,398 19,061
---------- ---------- ---------- ----------
53,436 55,127 101,169 95,197
---------- ---------- ---------- ----------
Gross profit:
Wholesale 20,400 21,135 40,156 37,441
Retail 11,908 11,849 23,117 22,084
---------- ---------- ---------- ----------
32,308 32,984 63,273 59,525
Commission and licensing fee income 2,145 1,574 3,835 2,818
Operating expenses (24,838) (25,602) (49,230) (46,534)
---------- ---------- ---------- ----------
Income from operations 9,615 8,956 17,878 15,809
Interest income, net 350 218 792 422
---------- ---------- ---------- ----------
Income before provision for income taxes 9,965 9,174 18,670 16,231
Provision for income taxes 4,185 3,912 7,841 6,876
---------- ---------- ---------- ----------
Net income $ 5,780 $ 5,262 $ 10,829 $ 9,355
========== ========== ========== ==========
Basic income per share $.45 $.42 $.84 $.75
==== ==== ==== ====
Diluted income per share $.41 $.38 $.77 $.68
==== ==== ==== ====
Basic weighted average common shares outstanding 12,927 12,571 12,858 12,464
Effect of dilutive securities - options 1,113 1,221 1,127 1,211
---------- ---------- ---------- ----------
Diluted weighted average common shares outstanding 14,040 13,792 13,985 13,675
========== ========== ========== ==========
See notes to financial statements 4
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
Six Months Ended
June 30,
-------------------------
2003 2002
---------- ----------
Cash flows from operating activities:
Net income $ 10,829 $ 9,355
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization 2,537 1,658
Non-cash compensation 1,427 966
Provision for bad debts 140 255
Deferred rent expense 132 121
Realized gain on marketable securities (35)
Changes in:
Accounts receivable (301) (791)
Due from factor (13,213) (20,827)
Inventories (5,811) (8,999)
Prepaid expenses and deposits (1,176) 5,533
Accounts payable and other accrued expenses (3,274) 1,951
---------- ----------
Net cash used in operating activities (8,745) (10,778)
---------- ----------
Cash flows from investing activities:
Purchase of property and equipment (3,820) (1,616)
Purchase of marketable securities (34,162) (16,173)
Sale/redemption of marketable securities 12,655
---------- ----------
Net cash used in investing activities (25,327) (17,789)
---------- ----------
Cash flows from financing activities:
Proceeds from options and warrants exercised 2,539 3,756
Repayment of lease obligations (8) (36)
---------- ----------
Net cash provided by financing activities 2,531 3,720
---------- ----------
Net decrease in cash and cash equivalents (31,541) (24,847)
Cash and cash equivalents - beginning of period 56,713 50,179
---------- ----------
Cash and cash equivalents - end of period $ 25,172 $ 25,332
========== ==========
See notes to financial statements 5
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Financial Statements
June 30, 2003
NOTE A - BASIS OF REPORTING
The accompanying unaudited financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
for interim financial information and pursuant to the rules and regulations of
the Securities and Exchange Commission (the "SEC"). Accordingly, they do not
include all of the information and footnotes required by accounting principles
generally accepted in the United States of America for complete financial
statements. In the opinion of management, such statements include all
adjustments (consisting only of normal recurring items) which are considered
necessary for a fair presentation of the financial position of Steven Madden,
Ltd. and subsidiaries (the "Company") as of June 30, 2003, and the results of
its operations and cash flows for the six and three-month periods then ended.
The results of operations for the six and three-month periods ended June 30,
2003 are not necessarily indicative of the operating results for the full year.
It is suggested that these financial statements be read in conjunction with the
financial statements and related disclosures for the year ended December 31,
2002 included in the Annual Report of Steven Madden, Ltd. on Form 10-K.
NOTE B - MARKETABLE SECURITIES
Marketable securities consist primarily of corporate bonds which have strong
credit ratings and maturities greater than three months and up to five years at
the time of purchase. These securities, which are classified as
available-for-sale, are carried at fair value, with unrealized gains and losses,
net of any tax effect, reported in shareholders' equity as accumulated other
comprehensive income (loss). Amortization of premiums and discounts are included
in interest income and are not material. The values of these securities may
fluctuate as a result of changes in market interest rates and credit risk.
NOTE C - INVENTORIES
Inventories, which consist of finished goods, are stated at the lower of cost
(first-in, first-out method) or market.
NOTE D - REVENUE RECOGNITION
Wholesale revenue is recognized upon shipment. Allowances for estimated
discounts and returns are recognized when sales are recorded. Commission revenue
is recognized when title of product transfers to the customer. Retail sales are
recognized when the payment is received from customers and are recorded net of
returns. Licensing revenue is recognized on the basis of net sales reported by
the licensee.
NOTE E - NET INCOME PER SHARE OF COMMON STOCK
Basic income per share is based on the weighted average number of common shares
outstanding during the year. Diluted income per share reflects the potential
dilution assuming common shares were issued upon the exercise of outstanding
options and the proceeds thereof were used to purchase outstanding common
shares. Diluted income per share also reflects the vested portion of shares
granted to employees, which have not yet been issued.
6
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Financial Statements
June 30, 2003
NOTE F - STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation" encourages the use of the fair value based method of
accounting for stock-based employee compensation. Alternatively, SFAS No. 123
allows entities to continue to apply the intrinsic value method prescribed by
Accounting Principles Board ("APB") Opinion 25, "Accounting for Stock Issued to
Employees", and related interpretations and to provide pro forma disclosures of
net income (loss) and earnings (loss) per share, as if the fair value based
method of accounting had been applied to employee awards. The Company has
elected to continue to apply the provisions of APB Opinion 25 and to provide the
disclosures required by SFAS No. 123 and SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure", which was released in
December 2002 as an amendment of SFAS No. 123. The following table illustrates
the effect on net income and earnings per share if the fair value based method
had been applied to all awards.
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Reported net income $ 5,780 $ 5,262 $ 10,829 $ 9,355
Stock-based employee compensation
included in
reported net income, net of tax 82 18 165 36
Stock-based employee compensation determined
under the fair value based method,
net of tax (690) (576) (1,254) (968)
---------- ---------- ---------- ----------
Pro forma net income $ 5,172 $ 4,704 $ 9,740 $ 8,423
---------- ---------- ---------- ----------
Basic income per share:
As reported $0.45 $0.42 $0.84 $0.75
Pro forma $0.40 $0.37 $0.76 $0.67
Diluted income per share:
As reported $0.41 $0.38 $0.77 $0.68
Pro forma $0.37 $0.34 $0.70 $0.62
NOTE G - COMMITMENTS, CONTINGENCIES AND OTHER
[1] Class action litigation:
Between June and August 2000 several class action lawsuits were commenced
in the United States District Court for the Eastern District of New York
against the Company, Steven Madden personally, and, in some of the actions,
the Company's Chief Financial Officer and its then President.
A settlement in principle of these actions has been reached, subject to
execution of definitive settlement documentation, notices to class members,
a hearing and approval by the District Court. The tentative settlement is
within the limits of the Company's insurance.
[2] Shareholder derivative actions:
On or about September 26, 2000, a shareholder derivative action was
commenced in the United States District Court for the Eastern District of
New York, captioned, Herrera v. Steven Madden and Steven Madden, Ltd. An
agreement in principle has been reached to resolve all claims in this
action, subject to notice to the Company's shareholders (if any) as may be
required by the District Court, and approval by the District Court.
7
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Financial Statements
June 30, 2003
NOTE G - COMMITMENTS, CONTINGENCIES AND OTHER
[2] Shareholder derivative actions: (continued)
The Company believes, after consultation with counsel, that its defense
costs and certain attorneys' fees in connection with this action will be
subject to coverage by the Company's insurance.
On or about November 28, 2001, a shareholder derivative complaint was filed
in the United States District Court for the Eastern District of New York,
captioned Herrera v. Karson, et al. Named as defendants therein are the
Company and certain of the Company's present and/or former officers and
directors. An agreement in principle has been reached to resolve all claims
in this action, subject to such notice to the Company's shareholders (if
any) as may be required by the District Court, and approval by the District
Court. The Company believes, after consultation with counsel, that its
defense costs and certain attorneys' fees in connection with this action
will be subject to coverage by the Company's insurance.
The Company and certain of the Company's present and/or former officers and
directors have been named in an action commenced in the United States
District Court for the Eastern District of New York by the Safeco Surplus
Lines Insurance Company 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.
[3] 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 4s filed with the SEC. The ultimate effects of
this matter, if any, cannot reasonably be determined at this time.
8
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Financial Statements
June 30, 2003
NOTE G - COMMITMENTS, CONTINGENCIES AND OTHER (CONTINUED)
[4] 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. Both cases were consolidated before a
single judge. Since that time, a settlement in principle of these
actions has been reached.
(b) On October 4, 2002, Skechers U.S.A., Inc. and Skechers U.S.A., Inc. II
("Skechers") 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. On June 30, 2003, the case was dismissed.
(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. The
plaintiff alleges a cause of action for breach of contract and seeks
unspecified monetary damages. On October 10, 2002, the Company answered
the complaint. Since that time, the parties have agreed to a settlement
and on August 11, 2003, the case was dismissed.
In connection with the above litigations, the Company has accrued $900,000.
Management, based on the advice of counsel, believes such provision is
adequate in the circumstances.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
The following discussion of the Company's financial condition and results of
operations should be read in conjunction with the Financial Statements and Notes
thereto appearing elsewhere in this document and the Company's Report on Form
10-K for 2002.
Statements in this "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and elsewhere in this document as well as statements
made in press releases and oral statements that may be made by the Company or by
officers, directors or employees of the Company acting on the Company's behalf
that are not statements of historical or current fact constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve known and
unknown risks, uncertainties and other unknown factors that could cause the
actual results of the Company to be materially different from the historical
results or from any future results expressed or implied by such forward-looking
statements. In addition to statements which explicitly describe such risks and
uncertainties, readers are urged to consider statements labeled with the terms
"believes", "belief", "expects", "intends", "anticipates" or "plans" to be
uncertain forward-looking statements. The forward-looking statements contained
herein are also subject generally to other risks and uncertainties that are
described from time to time in the Company's reports and registration statements
filed with the Securities and Exchange Commission.
The following table sets forth information on operations for the periods
indicated:
Selected Financial Information
------------------------------
Six Months Ended
----------------
June 30
-------
($ in thousands)
2003 2002
------------------- -------------------
Consolidated:
- -------------
Net Sales $ 164,442 100% $ 154,722 100%
Cost of Sales 101,169 62 95,197 62
Gross Profit 63,273 38 59,525 38
Other Operating Income 3,835 2 2,818 2
Operating Expenses 49,230 30 46,534 30
Income from Operations 17,878 10 15,809 10
Interest and Other Income Net 792 1 422 0
Income Before Income Taxes 18,670 11 16,231 10
Net Income 10,829 7 9,355 6
10
Selected Financial Information
------------------------------
Six Months Ended
----------------
June 30
-------
($ in thousands)
2003 2002
------------------------ ------------------------
By Segment
WHOLESALE DIVISIONS:
- --------------------
Steven Madden, Ltd. (Madden Women's)
- ------------------------------------
Net Sales $ 59,206 100% $ 54,213 100%
Cost of Sales 40,976 69 37,786 70
Gross Profit 18,230 31 16,427 30
Other Operating Income 1,252 2 660 1
Operating Expenses 14,329 24 13,350 24
Income from Operations 5,153 9 3,737 7
l.e.i. Footwear:
- ---------------
Net Sales $ 31,821 100% $ 26,557 100%
Cost of sales 19,948 63 17,232 65
Gross Profit 11,873 37 9,325 35
Operating Expenses 6,883 21 6,444 24
Income from Operations 4,990 16 2,881 11
Madden Men's:
- -------------
Net Sales $ 19,816 100% $ 20,614 100%
Cost of sales 12,890 65 13,237 64
Gross Profit 6,926 35 7,377 36
Operating Expenses 4,383 22 4,106 20
Income from Operations 2,543 13 3,271 16
Diva Acquisition Corp (Steven):
- -------------------------------
Net Sales $ 4,330 100% $ 5,185 100%
Cost of sales 3,158 73 3,467 67
Gross Profit 1,172 27 1,718 33
Operating Expenses 1,224 28 1,298 25
Income (Loss) from Operations (52) (1) 420 8
Stevies Inc.:
- -------------
Net Sales $ 5,754 100% $ 7,008 100%
Cost of sales 3,799 66 4,414 63
Gross Profit 1,955 34 2,594 37
Other Operating Income 9 0 38 0
Operating Expenses 1,140 20 1,491 21
Income from Operations 824 14 1,141 16
RETAIL DIVISION:
- ----------------
Steven Madden Retail Inc.:
- --------------------------
Net Sales $ 43,515 100% $ 41,145 100%
Cost of Sales 20,398 47 19,061 46
Gross Profit 23,117 53 22,084 54
Operating Expenses 20,081 46 18,712 46
Income from Operations 3,036 7 3,372 8
Number of Stores 82 74
11
Selected Financial Information
------------------------------
Six Months Ended
----------------
June 30
-------
($ in thousands)
2003 2002
------------------------ ------------------------
By Segment (Continued)
ADESSO MADDEN INC.:
- -------------------
(FIRST COST)
Other Operating Revenue $ 2,574 100% $ 2,120 100%
Operating Expenses 1,190 46 1,133 53
Income from Operations 1,384 54 987 47
12
Selected Financial Information
------------------------------
Three Months Ended
------------------
June 30
-------
($ in thousands)
2003 2002
------------------------ ------------------------
Consolidated:
- -------------
Net Sales $ 85,744 100% $ 88,111 100%
Cost of Sales 53,436 62 55,127 63
Gross Profit 32,308 38 32,984 37
Other Operating Income 2,145 2 1,574 2
Operating Expenses 24,838 29 25,602 29
Income from Operations 9,615 11 8,956 10
Interest and Other Income Net 350 1 218 0
Income Before Income Taxes 9,965 12 9,174 10
Net Income 5,780 7 5,262 6
By Segment:
WHOLESALE DIVISIONS:
- --------------------
Steven Madden, Ltd. (Madden Women's)
- ------------------------------------
Net Sales $ 30,311 100% $ 31,332 100%
Cost of sales 21,896 72 22,241 71
Gross Profit 8,415 28 9,091 29
Other Operating Income 689 2 339 1
Operating Expenses 7,486 25 7,347 23
Income from Operations 1,618 5 2,083 7
l.e.i. Footwear:
- ----------------
Net Sales $ 16,956 100% $ 14,982 100%
Cost of sales 10,428 62 9,731 65
Gross Profit 6,528 38 5,251 35
Operating Expenses 3,340 19 3,666 24
Income from Operations 3,188 19 1,585 11
Madden Mens:
- ------------
Net Sales $ 11,475 100% $ 13,165 100%
Cost of sales 7,317 64 8,534 65
Gross Profit 4,158 36 4,631 35
Operating Expenses 2,299 20 2,705 20
Income from Operations 1,859 16 1,926 15
Diva Acquisition Corp. (Steven):
- --------------------------------
Net Sales $ 1,874 100% $ 2,700 100%
Cost of sales 1,444 77 1,821 67
Gross Profit 430 23 879 33
Operating Expenses 563 30 763 28
Income (Loss) from Operations (133) (7) 116 5
Stevies Inc.:
- -------------
Net Sales $ 2,719 100% $ 3,563 100%
Cost of Sales 1,850 68 2,280 64
Gross Profit 869 32 1,283 36
Other Operating Income 0 0 29 1
Operating Expenses 512 19 746 21
Income from Operations 357 13 566 16
13
Selected Financial Information
------------------------------
Three Months Ended
------------------
June 30
-------
($ in thousands)
2003 2002
----------------------- ------------------------
By Segment (Continued)
Steven Madden Retail Inc.:
- --------------------------
Net Sales $ 22,409 100% $ 22,369 100%
Cost of Sales 10,501 47 10,520 47
Gross Profit 11,908 53 11,849 53
Operating Expenses 10,036 45 9,770 44
Income from Operations 1,872 8 2,079 9
Number of Stores 82 74
ADESSO MADDEN INC.:
- -------------------
(FIRST COST)
Other Operating Revenue $ 1,456 100% $ 1,206 100%
Operating Expenses 602 41 605 50
Income from Operations 854 59 601 50
RESULTS OF OPERATIONS
($ in thousands)
Six months Ended June 30, 2003 vs. Six Months Ended June 30, 2002
Consolidated:
- -------------
Total net sales for the six-month period ended June 30, 2003 increased by $9,720
or 6% to $164,442 as compared to $154,722 from the comparable period of 2002.
The increase in sales was partially due to a $5,264 or 20% increase in sales
from the l.e.i. Wholesale Division ("l.e.i"), as well as $4,993 or 9% gain in
the Company's Steve Madden Women's Wholesale Division and sales gains of $2,370
or 6% in the Retail Division. Sales gains can be attributed to greater
acceptance of the Company's product offerings, increased recognition of the
Company's brands and the addition of four retail stores during the six-month
period ended June 30, 2003. Gross profit as a percentage of sales remained the
same as last year at 38%.
Operating expenses increased to $49,230 in 2003 from $46,534 in 2002. Total
operating expenses when expressed as a percentage of sales remained at 30% in
2003, the same as 2002. The increase in dollars resulted from costs associated
with growth in the Company's overall business as well as provision for
management incentives. Licensing expenses also increased to $1,743 in 2003 from
$1,439 in 2002 because of the overall growth in sales and the Company's
increased concentration in its licensing areas. Additionally, remaining
operating expenses increased to $11,927 in 2003 from $9,349 partially because
the Company opened four (4) additional retail stores during the first six months
of 2003 and because of the growth in the Company's Steve Madden Women's and
l.e.i. Wholesale Divisions. Also, total legal expenses in 2003 increased to $932
from $526 in 2002 because of incremental legal and defense costs.
14
Income from operations for 2003 was $17,878, an increase of $2,069 or 13% from
$15,809 in 2002. Net income increased by 16% to $10,829 in 2003 from $9,355 in
2002. The increase in income resulted principally from a growth in sales.
Wholesale Divisions:
- --------------------
Steven Madden Ltd. (Madden Women's, l.e.i. Footwear and Madden Men's):
Sales from Madden Women's Wholesale Division ("Madden Women's") accounted for
$59,206 or 36%, and $54,213 or 35%, of total sales in 2003 and 2002,
respectively. The increase in sales was driven by first quarter sales of key
styles including the Hi-Jo boot and wood bottom sandals. Gross profit as a
percentage of sales increased to 31% in 2003 from 30% in 2002 primarily due to
changes in product mix and cost effective sourcing. Operating expenses increased
to $14,329 in 2003 from $13,350 in 2002 due to higher costs associated with the
growth in Madden Women's as well as the increase in management incentives.
Income from operations for Madden Women's increased by 38% to $5,153 in 2003
from $3,737 in 2002.
Sales from l.e.i. Footwear Wholesale Division ("l.e.i.") accounted for $31,821
or 19%, and $26,557 or 17%, of total sales in 2003 and 2002, respectively. The
increase in sales was primarily due to the addition of doors with existing
accounts such as Kohl's, Sears and Famous Footwear. Gross profit as a percentage
of sales increased to 37% in 2003 from 35% in 2002 primarily due to changes in
product mix and improved inventory management. Operating expenses increased to
$6,883 in 2003 from $6,444 in 2002 due to increased sales commissions, licensing
costs and employee performance incentives. Income from operations for l.e.i.
increased by 73% to $4,990 in 2003 from $2,881 in 2002.
Sales from Madden Men's Wholesale Division ("Madden Men's") accounted for
$19,816 or 12%, and $20,614 or 13%, of total sales in 2003 and 2002,
respectively. The sales decrease resulted from three primary factors. First, the
sandal selling time was reduced significantly because of the late start to the
spring season. Second, there was a strong downturn in the casual business, the
largest category of Madden Men's, as competitive looks appeared in the casual
space at every price point just as consumer demand and trends shifted more
toward dressy and dress casual classifications. Finally, the department stores
and specialty channels carrying Madden Men's footwear experienced lighter men's
traffic through the second quarter of 2003. Gross profit as a percentage of
sales decreased to 35% in 2003 from 36% in 2002 primarily due to an increase in
markdown allowances resulting from higher levels of promotional activities and
general softness in the economy in 2003. Operating expenses increased to $4,383
in 2003 from $4,106 in 2002 due to increases in payroll and other
payroll-related expenses. These increased payroll-related expenses were
primarily due to the hiring of additional management personnel in the second
half of last year. Income from operations for Madden Men's was $2,543 in 2003
compared to $3,271 in 2002.
Diva Acquisition Corp. ("Steven"):
Sales from Diva, including the Steven brand that was introduced in the third
quarter of 2002, accounted for $4,330 or 3%, and $5,185 or 3%, of total sales in
2003 and 2002, respectively. Sales decreased 16% in 2003 from 2002. This
decrease was caused by managements planned strategy to exit certain
under-performing doors in order to reposition the David Aaron business under the
Steven brand. Management believes this will provide Steven with a more
productive base of customers from which to launch. The exited doors have been
replaced with the addition
15
of several new retailers, including Dillards and Macy's West, which management
believes are qualified and equipped to showcase and service the new Steven
collection. Gross profit as a percentage of sales decreased to 27% in 2003 from
33% in 2002, primarily due to an increase in markdown allowances resulting from
higher levels of promotional activities in response to the general softness in
the economy in 2003. Operating expenses decreased to $1,224 in 2003 from $1,298
in 2002 due to lower selling expenses resulting from the decrease in sales. Loss
from operations for Steven was $52 in 2003 compared to income from operations of
$420 in 2002.
Stevies Inc. ("Stevies"):
Sales from Stevies accounted for $5,754 or 3%, and $7,008 or 5%, of total sales
in 2003 and 2002, respectively. The decrease in sales was partly anticipated
when Meldisco, the lease operator of the Federated Department Store children's
departments and a division of Footstar, experienced temporary credit issues
relating to its K-Mart business. This led to shipping delays and some
cancellations. Gross profit as a percentage of sales decreased to 34% in 2003
from 37% in 2002, primarily due to an increase in markdown allowances resulting
from higher levels of promotional activities in response to the general softness
in the economy in 2003. Operating expenses decreased to $1,140 in 2003 from
$1,491 in 2002 due to decreases in selling and related expenses. Income from
operations for Stevies was $824 in 2003 compared to $1,141 in 2002.
Retail Division:
- ----------------
Sales from the Retail Division accounted for $43,515 or 26% and $41,145 or 27%
of total sales in 2003 and 2002, respectively. This increase in sales was due to
the increase in the number of Steve Madden retail stores. During the first six
months of 2003, the Company opened four (4) new retail stores and closed two (2)
of its under-performing stores. As of June 30, 2003, there were 82 retail stores
compared to 74 retail stores as of June 30, 2002. Comparable store sales for the
six-month period ended June 30, 2003 decreased 4% over the same period of 2002.
This decrease was primarily due to unseasonably cool and rainy weather in the
northeast during the second quarter. Gross profit as a percentage of sales
decreased to 53% in 2003 from 54% in 2002, primarily due to higher levels of
promotional activities by the Company in response to the general softness in the
economy in 2003. Operating expenses for the Retail Division were $20,081 in 2003
and $18,712 in 2002. This increase was due to higher costs associated with the
opening of additional stores. Income from operations for the Retail Division was
$3,036 in 2003 compared to $3,372 in 2002.
Adesso-Madden Division:
- -----------------------
Adesso-Madden, Inc. ("Adesso-Madden") generated commission revenues of $2,574
for the six-month period ended June 30, 2003, which represents a 21% increase
over commission revenues of $2,120 for the same period in 2002. This increase
was primarily due to the growth in accounts such as Wal-Mart, Target, JC Penney
and Mervyn's and the addition of children's products to the assortment mix.
Operating expenses increased to $1,190 in 2003 from $1,133 in 2002 due to
increases in payroll and other payroll-related expenses. Income from operations
for Adesso-Madden was $1,384 in 2003 compared to $987 in 2002.
16
Three months Ended June 30, 2003 vs. Three Months Ended June 30, 2002
Consolidated:
- -------------
Total net sales for the three-month period ended June 30 2003 decreased by 3% to
$85,744 as compared to $88,111 from the comparable period of 2002. The decrease
in sales was primarily due to the cool and rainy spring weather and the
sustained promotional environment. The Company maintained the substantial sales
and market share gains that it achieved last year. In the second quarter of
2002, the Company generated a 48% increase in total net sales over prior year.
Total gross profit as a percentage of sales increased to 38% in 2003 from 37% in
2002. The increase was the result of cost effective sourcing and improved
inventory management. Additionally, the Retail Division, which has a higher
gross margin percentage, represented 26% of total net sales in 2003 compared to
25% in 2002.
Operating expenses decreased to $24,838 in 2003 from $25,602 in 2002. Total
operating expenses when expressed as a percentage of sales remained at 29% in
2003, the same as in 2002. During the second quarter, the Company was able to
manage its expense structure in keeping with its top line performance,
effectively leveraging its infrastructure while (i) continuing to sustain its
business, (ii) nurturing its newest brands, Unionbay (for young men) and
Candie's (for women and children), and (iii) taking steps to effect the
conversion of the David Aaron business into Steven for women.
Income from operations for 2003 was $9,615, an increase of $659 or 7% from
$8,956 in 2002. Net income increased by 10% to $5,780 in 2003 from $5,262 in
2002. The increase in income resulted from the growth in interest and other
income and managements ability to control expenses in line with the reduced
sales.
Wholesale Divisions:
- --------------------
Steven Madden Ltd. (Madden Women's, l.e.i. Footwear and Madden Men's):
Sales from Madden Women's accounted for $30,311 or 35%, and $31,332 or 36%, of
total sales in 2003 and 2002, respectively. The decrease in sales was a result
of price pressure emanating from the success of the inexpensive EVA flip-flop
classification. Additionally, wedges, which have been historically strong for
the Company in this period, did not gain traction with customers this spring.
Spring itself broke very late, with cool and rainy weather characterizing most
of the period between April and June, effectively shortening the full selling
price period at retail. As a result, projected reorders did not materialize and
prices eroded as competitive best sellers could be found at $29.99 and below.
Gross profit as a percentage of sales decreased to 28% in 2003 from 29% in 2002
primarily due to the general softness in the economy and poor weather
conditions, which caused the Company to increase the level of promotional
activity in the second quarter of 2003. Operating expenses increased to $7,486
in 2003 from $7,347 in 2002 due to the increase in management incentives. Income
from operations for Madden Women's decreased to $1,618 in 2003 from $2,083 in
2002.
Sales from l.e.i. accounted for $16,956 or 20%, and $14,982 or 17%, of total
sales in 2003 and 2002, respectively. The increase in sales was principally due
to new doors with retailers, particularly in the chain store segment, including
Stage Stores and Maurice's. While l.e.i.
17
experienced the same late spring, weather-related and fashion trend challenges
as the Company's other divisions, its opening price points helped to support its
sales performance. Gross profit as a percentage of sales increased to 38% in
2003 from 35% in 2002 primarily due to changes in product mix and improved
inventory management. Operating expenses decreased to $3,340 in 2003 from $3,666
in 2002 due to the leveraging of its infrastructure while continuing to sustain
its business. Income from operations for l.e.i. was $3,188 in 2003 compared to
$1,585 in 2002.
Sales from Madden Men's accounted for $11,475 or 13%, and $13,165 or 15%, of
total sales in 2003 and 2002, respectively. The sales decrease resulted from
three primary factors. First, the sandal selling time was reduced significantly
because of the late start to the spring season. Second, there was a strong
downturn in the casual business, the largest category of Madden Men's, as
competitive looks appeared in the casual space at every price point just as
consumer demand and trends shifted more toward dressy and dress casual
classifications. Finally, the department stores and specialty channels carrying
Madden Men's footwear experienced lighter men's traffic through the second
quarter of 2003. Gross profit as a percentage of sales increased to 36% in 2003
from 35% in 2002 due to changes in product mix and improved inventory
management. Operating expenses decreased to $2,299 in 2003 from $2,705 in 2002,
due to decreases in selling and related expenses. Income from operations for
Madden Men's was $1,859 in 2003 compared to $1,926 in 2002.
Diva Acquisition Corp. ("Steven"):
Sales from Diva, including the Steven brand that was introduced in the third
quarter of 2002 accounted for $1,874 or 2%, and $2,700 or 3%, of total sales in
2003 and 2002, respectively. Sales decreased by 31% in 2003 from 2002. This
decrease was caused by managements planned strategy to exit certain
under-performing doors in order to reposition the David Aaron business under the
Steven brand. Management believes this will provide Steven with a more
productive base of customers from which to launch. The exited doors have been
replaced with the addition of several new retailers, including Dillards and
Macy's West, which management believes are qualified and equipped to showcase
and service the new Steven collection. Gross profit as a percentage of sales
decreased to 23% in 2003 from 33% in 2002, primarily due to an increase in
markdown allowances resulting from higher levels of promotional activities and
the final clearance of fall David Aaron products. Operating expenses decreased
to $563 in 2003 from $763 in 2002 due to lower selling expenses resulting from
the decrease in sales. Loss from operations for Steven was $133 in 2003 compared
to income from operations of $116 in 2002.
Stevies Inc. ("Stevies"):
Sales from Stevies accounted for $2,719 or 3%, and $3,563 or 4%, of total sales
in 2003 and 2002, respectively. The decrease in sales was partly anticipated
when Meldisco, the lease operator of the Federated Department Store children's
departments and a division of Footstar, experienced temporary credit issues
relating to its K-Mart business. This led to shipping delays and some
cancellations. Gross profit as a percentage of sales decreased to 32% in 2003
from 36% in 2002, due to competitive pricing caused by the general softness in
the economy in 2003. Operating expenses decreased to $512 in 2003 from $746 in
2002 due to decreases in selling and related expenses. Income from operations
for Stevies was $357 in 2003 compared to $566 in 2002.
18
Retail Division:
- ----------------
Sales from the Retail Division accounted for $22,409 or 26% and $22,369 or 25%
of total sales in 2003 and 2002, respectively. During the second quarter of
2003, the Company opened two (2) new retail stores and closed two (2) of its
under-performing stores. As of June 30, 2003, there were 82 retail stores
compared to 74 retail stores as of June 30, 2002. Comparable store sales for the
three-month period ended June 30, 2003 decreased 10% over the same period of
2002. This decrease was primarily due to the unseasonably cool and rainy weather
in the northeast, where the Company's retail stores sales are disproportionately
concentrated. The sales decline in twenty-seven (27) of the Company's retail
stores located in the northeast comprised 64% of the comparable store sales
decline. Gross profit as a percentage of sales remained at 53% in 2003, the same
as in 2002. Operating expenses for the Retail Division were $10,036 in 2003 and
$9,770 in 2002. This increase was due to higher costs associated with the
opening of additional stores. Income from operations for the Retail Division was
$1,872 in 2003 compared to $2,079 in 2002.
Adesso-Madden Division:
- -----------------------
Adesso-Madden, Inc. generated commission revenues of $1,456 for the three-month
period ended June 30, 2003, which represents a 21% increase over commission
revenues of $1,206 for the same period in 2002. This increase was primarily due
to the growth in accounts such as Wal-Mart, Target, JC Penney and Mervyn's and
the addition of children's and men's products to the assortment mix. Operating
expenses decreased to $602 in 2003 from $605 in 2002. Income from operations for
Adesso-Madden was $854 in 2003 compared to $601 in 2002.
LICENSE AGREEMENTS
Revenues from licensing increased to $1,261 in the first of six months 2003 from
$698 in the first six months of 2002. As of June 30, 2003, the Company had six
license partners covering product categories of its Steve Madden brand. The
product categories include handbags, sunglasses, eyewear, belts, hosiery and
outerwear.
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $88,022 at June 30, 2003 compared to $86,461
of working capital at December 31, 2002, an increase of $1,561, primarily
contributed by the net income. The Company believes that based upon its current
financial position and available cash and marketable securities, it will meet
all of its financial commitments and operating needs for at least the next
twelve months.
Under the terms of a factoring agreement with Capital Factors, Inc., the Company
is eligible to draw down 80% of its invoiced receivables at an interest rate of
two points below the Prime Rate (as defined in such agreement). The agreement
with Capital Factors 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 the credit line during the first six
months of 2003.
19
The Company has invested approximately $44.2 million 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 six-month period ended June 30, 2003, net cash used for operating
activities was $8,745. Uses of cash arose primarily for an increase in factored
accounts receivable of $13,213 and an increase in inventories of $5,811. Sources
of cash were provided principally by net income of $10,829.
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 June 30:
2003 $ 8,773
2004 8,831
2005 8,524
2006 8,548
2007 8,072
Thereafter 22,682
---------
$ 65,430
=========
At June 30, 2003, the Company had un-negotiated open letters of credit for the
purchase of imported merchandise of approximately $10,639.
The Company has an agreement with its Chairman of the Board and employment
agreements with three key executives and its Creative and Design Chief, which
provide for the payment of compensation aggregating approximately $1,845 as of
June 30, 2003. In addition, such employment agreements provide for incentive
compensation based on various performance criteria as well as other benefits.
Significant portions of the Company's products are produced at overseas
locations, the majority of which are located in Brazil, China, Italy and Spain.
The Company has not entered into any long-term manufacturing or supply contracts
with any of these foreign companies. The Company believes that a sufficient
number of alternative sources exist outside of the United States for the
manufacture of its products. The Company currently makes approximately
ninety-five percent (95%) of its purchases in U.S. dollars.
INVESTING ACTIVITIES
During the six-month period ended June 30, 2003, the Company invested $21,507 in
marketable securities, net of maturities and sales of $12,655. In addition, the
Company incurred capital expenditures of $3,820 in leasehold improvements to its
corporate office space, the addition of four (4) new stores and upgrading its
computer systems.
FINANCING ACTIVITIES
During the six-month period ended June 30, 2003, the Company received $2,539
from the exercise of stock options.
20
OTHER CONSIDERATIONS
Fashion Industry Risks: The success of the Company will depend in significant
part upon its ability to anticipate and respond to product and fashion trends as
well as to anticipate, gauge and react to changing consumer demands in a timely
manner. There can be no assurance that the Company's products will correspond to
the changes in taste and demand or that the Company will be able to successfully
market products, which respond to such trends. If the Company misjudges the
market for its products, it may be faced with significant excess inventories for
some products and missed opportunities with others. In addition, misjudgments in
merchandise selection could adversely affect the Company's image with its
customers resulting in lower sales and increased markdown allowances for
customers which could have a material adverse effect on the Company's business,
financial condition and results of operations.
The industry in which the Company operates is cyclical, with purchases tending
to decline during recessionary periods when disposable income is low. Purchases
of contemporary shoes and accessories tend to decline during recessionary
periods and also may decline at other times. While the Company has fared well in
recent years in a difficult retail environment, there can be no assurance that
the Company will be able to maintain its historical rate of growth in revenues
and earnings, or remain profitable in the future. A recession in the national or
regional economies or uncertainties regarding future economic prospects, among
other things, could affect consumer-spending habits and have a material adverse
effect on the Company's business, financial condition and results of operations.
In recent years, the retail industry has experienced consolidation and other
ownership changes. In the future, retailers in the United States and in foreign
markets may consolidate, undergo restructurings or reorganizations, or realign
their affiliations, any of which could decrease the number of stores that carry
the Company's products or increase the ownership concentration within the retail
industry. While such changes in the retail industry to date have not had a
material adverse effect on the Company's business or financial condition, there
can be no assurance as to the future effect of any such changes.
Inventory Management: The fashion-oriented nature of the Company's products and
the rapid changes in customer preferences leave the Company vulnerable to an
increased risk of inventory obsolescence. Thus, the Company's ability to manage
its inventories properly is an important factor in its operations. Inventory
shortages can adversely affect the timing of shipments to customers and diminish
sales and brand loyalty. Conversely, excess inventories can result in lower
gross margins due to the excessive discounts and markdowns. The inability of the
Company to effectively manage its inventory would have a material adverse effect
on the Company's business, financial condition and results of operations.
Dependence Upon Customers and Risks Related to Extending Credit to Customers:
The Company's customers consist principally of department stores and specialty
stores, including shoe boutiques. Certain of the Company's department store
customers, including some under common ownership, account for significant
portions of the Company's wholesale business.
The Company generally enters into a number of purchase order commitments with
its customers for each of its lines every season and does not enter into
long-term agreements with any of its customers. Therefore, a decision by a
significant customer of the Company, whether motivated by competitive
conditions, financial difficulties or otherwise, to decrease the amount of
merchandise purchased from the Company or to change its manner of doing business
could have
21
a material adverse effect on the Company's business, financial condition and
results of operations. The Company sells its products primarily to retail stores
across the United States and extends credit based on an evaluation of each
customer's financial condition, usually without collateral. While various
retailers, including some of the Company's customers, have experienced financial
difficulties in the past few years which increased the risk of extending credit
to such retailers, the Company's losses due to bad debts have been limited.
Pursuant to the Factoring Agreement between Capital Factors and the Company,
Capital Factors currently assumes the credit risk related to approximately 95%
of the Company's accounts receivables. However, financial difficulties of a
customer could cause the Company to curtail business with such customer or
require the Company to assume more credit risk relating to such customer's
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
six-month period ended June 30, 2003, approximately 85% of the Company's
products were purchased from sources outside the United States, primarily from
China, Brazil, Italy and Spain.
Risks inherent in foreign operations include work stoppages, transportation
delays and interruptions, changes in social, political and economic conditions
which could result in the disruption of trade from the countries in which the
Company's manufacturers or suppliers are located, the imposition of additional
regulations relating to imports, the imposition of additional duties, taxes and
other charges on imports, significant fluctuations of the value of the dollar
against foreign currencies, or restrictions on the transfer of funds, any of
which could have a material adverse effect on the Company's business, financial
condition and results of operations. The Company does not believe that any such
economic or political condition will materially affect the Company's ability to
purchase products, since a variety of materials and alternative sources are
available. The Company cannot be certain, however, that it will be able to
identify such alternative sources without delay (if ever) or without greater
cost to the Company. The Company's inability to identify and secure alternative
sources of supply in this situation would have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company's imported products are also subject to United States customs
duties. The United States and the countries in which the Company's products are
produced or sold, from time to time, impose new quotas, duties, tariffs, or
other restrictions, or may adversely adjust prevailing quota, duty or tariff
levels, any of which could have a material adverse effect on the Company's
business, financial condition and results of operations.
Possible Adverse Impact of Unaffiliated Manufacturers' Inability to Manufacture
in a Timely Manner, Meet Quality Standards or to Use Acceptable Labor Practices:
As is common in the footwear industry, the Company contracts for the manufacture
of a majority of its products to its specifications through foreign
manufacturers. The Company does not own or operate any manufacturing facilities
and is therefore dependent upon independent third parties for the manufacture of
all of its products. The Company's products are manufactured to its
specifications by both domestic and international manufacturers. The inability
of a manufacturer to ship orders of the Company's products in a timely manner or
to meet the Company's quality standards could cause the Company to miss the
delivery date requirements of its customers for those items, which could result
in cancellation of orders, refusal to accept deliveries or a
22
reduction in purchase prices, any of which could have a material adverse effect
on the Company's business, financial condition and results of operations.
Although the Company enters into a number of purchase order commitments each
season specifying a time frame for delivery, method of payment, design and
quality specifications and other standard industry provisions, the Company does
not have long-term contracts with any manufacturer. As a consequence, any of
these manufacturing relationships may be terminated, by either party, at any
time. Although the Company believes that other facilities are available for the
manufacture of the Company's products, both within and outside of the United
States, there can be no assurance that such facilities would be available to the
Company on an immediate basis, if at all, or that the costs charged to the
Company by such manufacturers will not be greater than those presently paid.
The Company requires its licensing partners and independent manufacturers to
operate in compliance with applicable laws and regulations. While the Company
promotes ethical business practices and the Company's staff periodically visits
and monitors the operations of its independent manufacturers, the Company does
not control such manufacturers or their labor practices. The violation of labor
or other laws by an independent manufacturer of the Company or by one of the
Company's licensing partners, or the divergence of an independent manufacturer's
or licensing partner's labor practices from those generally accepted as ethical
in the United States, could have a material adverse effect on the Company's
business, financial condition and results of operations.
Intense Industry Competition: The fashion footwear industry is highly
competitive and barriers to entry are low. The Company's competitors include
specialty companies as well as companies with diversified product lines. The
recent market growth in the sales of fashionable footwear has encouraged the
entry of many new competitors and increased competition from established
companies. Most of these competitors, including Diesel, Kenneth Cole, Nine West,
DKNY, Skechers, Nike and Guess, may have significantly greater financial and
other resources than the Company and there can be no assurance that the Company
will be able to compete successfully with other fashion footwear companies.
Increased competition could result in pricing pressures, increased marketing
expenditures and loss of market share, and could have a material adverse effect
on the Company's business, financial condition and results of operations. The
Company believes effective advertising and marketing, fashionable styling, high
quality and value are the most important competitive factors and plans to
continually employ these elements as it develops its products. The Company's
inability to effectively advertise and market its products could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Expansion of Retail Business: The Company's continued growth depends to a
significant degree on further developing the Steve Madden(R), Stevies, Steven,
Steve Madden Men's, l.e.i.(R) , Unionbay(R) and Candies(R) brands, creating new
product categories and businesses and operating Company-owned stores on a
profitable basis. During the first six month of 2003 the Company opened four (4)
Steve Madden retail stores and has plans to open an additional four (4) stores
during the remainder of 2003. The Company's recent and planned expansion
includes the opening of stores in new geographic markets as well as
strengthening existing markets. New markets have in the past presented, and will
continue to present, competitive and merchandising challenges that are different
from those faced by the Company in its existing markets. There can be no
assurance that the Company will be able to open new stores, and if opened, that
such new stores will be able to achieve sales and profitability levels
consistent with management's
23
expectations. The Company's retail expansion is dependent on a number of
factors, including the Company's ability to locate and obtain favorable store
sites, the performance of the Company's wholesale and retail operations, and the
ability of the Company to manage such expansion and hire and train personnel.
Past comparable store sales results may not be indicative of future results, and
there can be no assurance that the Company's comparable store sales results will
increase or not decrease in the future. In addition, there can be no assurance
that the Company's strategies to increase other sources of revenue, which may
include expansion of its licensing activities, will be successful or that the
Company's overall sales or profitability will increase or not be adversely
affected as a result of the implementation of such retail strategies.
The Company's growth has increased and will continue to increase demand on the
Company's managerial, operational and administrative resources. The Company has
recently invested significant resources in, among other things, its management
information systems and hiring and training new personnel. However, in order to
manage currently anticipated levels of future demand, the Company may be
required to, among other things, expand its distribution facilities, establish
relationships with new manufacturers to produce its products, and continue to
expand and improve its financial, management and operating systems. There can be
no assurance that the Company will be able to manage future growth effectively
and a failure to do so could have a material adverse effect on the Company's
business, financial condition and results of operations.
Seasonal and Quarterly Fluctuations: The Company's results may fluctuate quarter
to quarter as a result of the timing of holidays, weather, the timing of larger
shipments of footwear, market acceptance of the Company's products, the mix,
pricing and presentation of the products offered and sold, the hiring and
training of additional personnel, inventory write downs, the cost of materials,
the mix products 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
24
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 August 5, 2003, the Company had outstanding options
to purchase an aggregate of approximately 2,640,000 shares of Common Stock.
Holders of such options are likely to exercise them when, in all likelihood, the
market price of the Company's stock is significantly higher than the exercise
price of the options. Further, while its options are outstanding, they may
adversely affect the terms on which the Company could obtain additional capital.
Economic and Political Risks: The present economic condition in the United
States and concern about uncertainties could significantly reduce the disposable
income available to the Company's customers, which purchase our products. In
addition, current unstable political conditions including, the potential or
actual conflicts in Iraq, North Korea or elsewhere, or the continuation or
escalation of terrorism, could have an adverse effect on the Company's business,
financial condition and results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not engage in the trading of market risk sensitive instruments
in the normal course of business. Financing arrangements for the Company are
subject to variable interest rates, primarily based on the prime rate. An
analysis of the Company's credit agreement with Capital Factors, Inc. can be
found in Note C. "Due From Factor" to the Consolidated Financial Statements
included in the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2002.
ITEM 4. CONTROLS AND PROCEDURES
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
quarterly 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.
25
Part II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
A description of the legal proceedings in which the Company is involved, both in
general and with respect to certain specific matters and types of matters, is
contained in the Company's Report on Form 10-K for 2002 and the Company's Report
on Form 10-Q for the first quarter of 2003. The following is limited to an
update on significant developments in previously reported matters and should be
read with reference to the Company's Report on Form 10-K for 2002 and the
Company's Report as updated on Form 10-Q for the first quarter of 2003. All
previously reported matters remain pending.
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. A settlement in principle of these actions has been
reached, subject to execution of definitive settlement documentation, notices to
the putative 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. An agreement
has been reached to resolve all claims in this action, subject to such notice to
the Company's shareholders (if any) as may be required by the District Court,
and approval by the District Court. The Company believes, after consultation
with counsel, that its defense costs and certain attorneys fees in connection
with this action will be subject to coverage by the Company's insurance.
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 officers and directors. An agreement has been reached to resolve all
claims in this action, subject to such notice to the Company's shareholders (if
any) as may be required by the District Court, and approval by the District
Court. The
26
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.
Other Actions
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, current fashion trends using two and four stripe designs, and Adidas'
prior acquiescence in allowing other footwear manufacturers sell shoes with two
and four stripe designs. The Company filed answers denying the allegations of
infringement in both cases, which were consolidated before a single judge. Since
that time, a settlement in principle of these actions has been reached.
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. On June 30, 2003, the
case was dismissed.
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
parties have agreed to a settlement and on August 11, 2003, the case was
dismissed.
Item 5. Other Information.
On May 12, 2003 the Company entered into a long-term license agreement with
Candie's, Inc. to design, manufacture, and distribute Candie's branded footwear
for women and children worldwide.
27
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
(31.1) Certification of Chief Executive Officer pursuant to Rule 13a-14
or 15d-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
(31.2) Certification of Chief Financial Officer pursuant to Rule 13a-14
or 15d-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
(32.1) Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
(32.2) Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
28
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report on Form 10-Q to be signed on its behalf
by the undersigned thereunto duly authorized.
DATE: August 13, 2003
STEVEN MADDEN, LTD.
/s/ JAMIESON A. KARSON
-----------------------------------------
Jamieson A. Karson
Chief Executive Officer
/s/ ARVIND DHARIA
-----------------------------------------
Arvind Dharia
Chief Financial Officer
29
STEVEN MADDEN, LTD.
FORM 10-Q
EXHIBIT INDEX
Exhibit No. Description of Exhibit
- ---------- ----------------------
31.1 Certification of Chief Executive Officer pursuant to Rule
13a-14 or 15d-14 of the Securities Exchange Act of 1934,
as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Rule
13a-14 or 15d-14 of the Securities Exchange Act of 1934,
as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
32.1 Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
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 quarterly report on Form 10-Q of Steven Madden
Ltd.;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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-15(e) and 15d-15(e) for the
registrant and we have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others with those entities, particularly during
the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
quarterly report based on such evaluation; and
c) disclosed in this quarterly report any change in the registrant's
internal control over financial reporting that occurred during
the period covered by the quarterly report that has been
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
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 and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; 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
Dated: August 13, 2003 /s/ JAMIESON KARSON
-------------------------------------
Jamieson Karson
Chief Executive Officer
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 quarterly report on Form 10-Q of Steven Madden
Ltd.;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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-15(e) and 15d-15(e) for the
registrant and we have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others with those entities, particularly during
the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
quarterly report based on such evaluation; and
c) disclosed in this quarterly report any change in the registrant's
internal control over financial reporting that occurred during
the period covered by the quarterly report that has been
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
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):
Dated: August 13, 2003 /s/ ARVIND DHARIA
-------------------------------------
Arvind Dharia
Chief Financial Officer
Exhibit 32.1
STEVEN MADDEN, LTD.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Steven Madden Ltd. (the
"Company") on Form 10-Q for the period ending June 30, 2003 (the "Report"), I,
Jamieson A. Karson, Chief Executive Officer of the Company, certify, pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that to the best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a)
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 result of
operations of the Company.
/s/ JAMIESON A. KARSON
-------------------------------------
Jamieson A. Karson
Chief Executive Officer
August 13, 2003
Exhibit 32.1
STEVEN MADDEN, LTD.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Steven Madden Ltd. (the
"Company") on Form 10-Q for the period ending June 30, 2003 (the "Report"), I,
Arvind Dharia, Chief Financial Officer of the Company, certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that to the best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a)
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 result of
operations of the Company.
/s/ ARVIND DHARIA
-------------------------------------
Arvind Dharia
Chief Financial Officer
August 13, 2003