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, 2001
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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For Quarter Ended March 31, 2001 Commission File Number 0-23702
STEVEN MADDEN, LTD.
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(Exact name of Registrant as specified in its charter)
Delaware 13-3588231
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
52-16 Barnett Avenue, Long Island City, New York 11104
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (718) 446-1800
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Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 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 9, 2001
COMMON STOCK 11,484,055
STEVEN MADDEN, LTD.
FORM 10-Q
QUARTERLY REPORT
MARCH 31, 2001
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,
2001 2000
----------- -----------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 25,654 $ 35,259
Accounts receivable - net of allowances of $898 and $774 1,273 2,417
Due from factor - net of allowances of $581 and $866 27,296 15,155
Inventories 16,344 15,824
Prepaid expenses and other current assets 1,281 1,289
Deferred taxes 1,300 1,300
----------- -----------
Total current assets 73,148 71,244
Property and equipment, net 15,457 15,600
Deferred taxes 2,462 2,462
Deposits and other 222 222
Cost in excess of fair value of net assets acquired - net of accumulated
amortization of $610 and $575 2,170 2,205
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$ 93,459 $ 91,733
=========== ===========
LIABILITIES
Current liabilities:
Current portion of lease payable $ 106 $ 128
Accounts payable 6,696 9,502
Accrued expenses 3,312 4,178
Accrued bonuses 117 229
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Total current liabilities 10,231 14,037
Deferred rent 1,136 1,074
Lease payable, less current portion 54 56
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11,421 15,167
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Contingencies (Note D)
STOCKHOLDERS' EQUITY
Common stock - $.0001 par value, 60,000 shares authorized, 12,537
and 12,307 issued and outstanding 1 1
Additional paid-in capital 48,478 46,688
Retained earnings 42,415 38,765
Unearned compensation (865) (897)
Treasury stock at cost - 1,245 shares (7,991) (7,991)
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82,038 76,566
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$ 93,459 $ 91,733
=========== ===========
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
March 31,
-----------------------
2001 2000
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Net sales $ 53,395 $ 44,109
Cost of sales 31,314 25,925
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Gross profit 22,081 18,184
Commission and licensing fee income 1,134 1,004
Operating expenses (17,415) (14,420)
---------- ----------
Income from operations 5,800 4,768
Interest income, net 501 536
Gain on sale of marketable securities 230
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Income before provision for income taxes 6,301 5,534
Provision for income taxes 2,651 2,352
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NET INCOME $ 3,650 $ 3,182
========== ==========
BASIC INCOME PER SHARE $ .33 $ .28
========== ==========
DILUTED INCOME PER SHARE $ .29 $ .24
========== ==========
Weighted average common shares outstanding - basic 11,160 11,505
Effect of dilutive securities - options and warrants 1,247 1,729
---------- ----------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - DILUTED 12,407 13,234
========== ==========
See notes to financial statements 4
STEVEN MADDEN, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
Three Months Ended
March 31
------------------------
2001 2000
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,650 $ 3,182
Adjustments to reconcile net income to net cash used in operating activities:
Issuance of compensatory stock options 110
Depreciation and amortization 781 701
Deferred compensation 32 96
Provision for bad debts (161) 174
Gain on sale of marketable securities (230)
Deferred rent expense 62 56
Changes in:
Accounts receivable 1,020 (545)
Due from factor (11,856) (8,441)
Inventories (520) 2,372
Prepaid expenses and other assets 8 329
Accounts payable and accrued expenses (3,784) (2,800)
---------- ----------
Net cash used in operating activities (10,658) (5,106)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (603) (2,930)
Sale/maturity of investment securities 487
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Net cash used in investing activities (603) (2,443)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from options and warrants exercised 1,680 285
Repayment of lease obligations (24) (32)
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Net cash provided by financing activities 1,656 253
---------- ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (9,605) (7,296)
Cash and cash equivalents - beginning of period 35,259 37,361
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CASH AND CASH EQUIVALENTS - END OF PERIOD $ 25,654 $ 30,065
========== ==========
See notes to financial statements 5
STEVEN MADDEN, LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2001
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, 2001,
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,
2001 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,
2000 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] CLASS ACTION LITIGATION:
On or about August 9, 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 President and its Chief Financial
Officer.
On December 8, 2000, the court consolidated these actions and appointed
a lead plaintiff and approved the plaintiff as lead counsel. On
February 26, 2001, the plaintiff served a consolidated amended
complaint.
The amended complaint generally alleges that the Company and the
individual defendants violated Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder
by issuing false and misleading statements, and failing to disclose
material adverse information relating, among other things, to certain
matters and allegations concerning Mr. Madden. The plaintiff seeks an
unspecified amount of damages, costs and expenses on behalf of the
plaintiff and all other purchasers of the Company's common stock during
the period June 21, 1997 through June 20, 2000. On April 19, 2001, all
of the defendants served motions to dismiss the consolidated amended
complaint. Briefing on the motions currently is scheduled to be
completed by July 3, 2001. The Company believes that it has substantial
defenses to the claims. The resulting liability, if any, cannot
presently be determined.
6
STEVEN MADDEN, LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2001
NOTE D - PENDING LITIGATION (CONTINUED)
[2] DERIVATIVE ACTION:
On or about September 26, 2000, a 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. The Company is named as a nominal defendant in the action. The
complaint seeks to recover alleged damages on behalf of the Company
from Mr. Madden's June 20, 2000 indictment and to require him to
disgorge certain profits, bonuses and stock option grants he received
from the Company. On January 3, 2001, the plaintiff filed an amended
complaint. On February 2, 2001, both the Company and Mr. Madden filed
motions to dismiss the amended complaint because of the plaintiff's
failure to make a prelitigation demand upon the Company's Board of
Directors. Briefing on the motions has been completed. The resulting
liability, if any cannot presently be determined.
[3] OTHER MATTERS:
On June 20, 2000, Steve Madden, the Company's former Chairman and Chief
Executive Officer, was indicted in the Southern District and Eastern
District of New York. The indictments allege that Mr. Madden engaged in
securities fraud and money laundering activities. In addition, the
Securities and Exchange Commission ("SEC") filed a complaint in the
United States District Court for the Eastern District of New York
alleging that Mr. Madden violated Section 17(a) of the Securities
Exchange Act of 1934, as amended. Neither the indictment nor the SEC
complaint alleges any wrongdoing by the Company or its other officers
or directors. Mr. Madden has denied any improper conduct and has
advised the Company that he will vigorously defend himself against any
and all charges.
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 officers and directors of the Company sold shares
of the Company's common stock during 1999 and the first half of 2000,
as previously disclosed on Form 4's filed with the Securities and
Exchange Commission. The ultimate effects of this matter if any, cannot
reasonably be determined at this time.
NOTE E - SUBSEQUENT EVENT
The Company announced on May 2, 2001 that Steve Madden is resigning as
Chief Executive Officer. He will become the Company's Chief Creative
Officer and has entered into a ten year employment agreement. Steve
Madden also entered into a cross-license agreement ensuring that the
Company retains exclusive rights to the use of the Madden name.
Jamieson Karson, a member of the Company's Board of Directors since
January 2001, will succeed Steve Madden as the Company's Chief
Executive Officer on July 1, 2001.
7
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
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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
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MARCH 31
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($ in thousands)
CONSOLIDATED: 2001 2000
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Net Sales $53,395 100% $44,109 100%
Cost of Sales 31,314 59 25,925 59
Other Operating Income 1,134 2 1,004 2
Operating Expenses 17,415 33 14,420 33
Income from Operations 5,800 11 4,768 11
Interest Income (Expense) Net 501 1 536 1
Gain on sale of Marketable Securities 0 0 230 1
Income Before Income Taxes 6,301 12 5,534 13
Net Income 3,650 7 3,182 7
8
PERCENTAGE OF NET REVENUES
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THREE MONTHS ENDED
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MARCH 31
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($ in thousands)
By Segment 2001 2000
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WHOLESALE DIVISIONS:
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Steven Madden, Ltd.
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Net Sales $23,076 100% $22,020 100%
Cost of Sales 14,668 64 13,856 63
Other Operating Income 222 1 287 1
Operating Expenses 6,307 27 6,262 28
Income from Operations 2,323 10 2,189 10
l.e.i. Footwear:
- ----------------
Net Sales $ 9,745 100% $ 9,732 100%
Cost of sales 6,336 65 6,438 66
Operating Expenses 1,873 19 1,825 19
Income from Operations 1,536 16 1,469 15
Madden Mens:
- ------------
Net Sales $ 910 100% -- --
Cost of sales 591 65 -- --
Operating Expenses 359 40 -- --
Loss from Operations (40) (4) -- --
Diva Acquisition Corp:
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Net Sales $ 1,779 100% $ 1,079 100%
Cost of sales 1,243 70 726 67
Operating Expenses 387 22 194 18
Income from Operations 149 8 159 15
Stevies Inc.:
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Net Sales $ 2,793 100% -- --
Cost of sales 1,775 64 -- --
Other Operating Income 104 4 -- --
Operating Expenses 565 20 -- --
Income from Operations 557 20 -- --
STEVEN MADDEN RETAIL INC.:
- --------------------------
Net Sales $15,092 100% $11,278 100%
Cost of Sales 6,701 44 4,905 44
Operating Expenses 7,572 50 5,671 50
Income from Operations 819 5 702 6
9
PERCENTAGE OF NET REVENUES
--------------------------
THREE MONTHS ENDED
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MARCH 31
--------
($ in thousands)
By Segment (Continued)
ADESSO MADDEN INC.: 2001 2000
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(FIRST COST)
Other Operating Revenue $ 808 100% $ 717 100%
Operating Expenses 352 44 468 65
Income from Operations 456 56 249 35
RESULTS OF OPERATIONS
($ in thousands)
THREE MONTHS ENDED MARCH 31, 2001 VS. THREE MONTHS ENDED MARCH 31, 2000
CONSOLIDATED:
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Sales for the three month period ended March 31, 2001 were $53,395 or 21% higher
than the $44,109 in the comparable period of 2000. The increase in sales is due
to several factors, including (i) the addition of new wholesale accounts, (ii) a
34% increase in retail sales and an increases in same store sales, (iii) a 65%
increase in sales from the Diva Acquisition Corp Wholesale Division ("Diva
Wholesale"), (iv) $2,793 in sales from the Company's new Stevies wholesale
division ("Stevies Wholesale"), which commenced shipping in the second quarter
of 2000, (v) the Company's New Madden Mens Wholesale Division ("Madden Mens
Wholesale") commenced shipping in the first quarter of 2001 and generated
revenue of $910 for the first three months of 2001, (vi) an increase in the
number of Steve Madden concept shops located in major department stores and
specialty stores, and (vii) an increase in public awareness with respect to the
Company's brands. 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. Consolidated gross profit as a percentage of
sales in first quarter of 2001 remains the same as first quarter of 2000.
Selling, general and administrative (SG&A) expenses increased to $17,415 in 2001
from $14,420 in 2000. The increase in SG&A is due primarily to a 25% increase in
payroll, officers' bonuses and payroll related expenses from $5,188 in 2000 to
$6,485 in 2001. Also, the Company focused its efforts on advertising and
marketing by increasing those expenses by 34% from $1,200 in 2000 to $1,609 in
2001. Additionally, selling and designing expenses increased by 13% from $1,527
in 2000 to $1,731 in 2001. This is due in part to an increase in sales in the
current period and to the Company's increased focus on selling and designing
activities. The increase in the number of retail outlets and expanded office and
warehouse facilities resulted in an increase in occupancy, telephone, utilities,
warehouse, printing/supplies and depreciation expenses by 36% from $3,093 in
2000 to $4,200 in 2001.
Income from operations for 2001 was $5,800 which represents an increase of
$1,032 or 22% over the income from operations of $4,768 in 2000. Net income
increased by 15% to $3,650 in 2001 from $3,182 in 2000.
10
WHOLESALE DIVISIONS:
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Sales from the Steve Madden Wholesale Division ("Madden Wholesale") accounted
for $23,076 or 43%, and $22,020 or 50%, of total sales in 2001 and 2000,
respectively. The increase in sales were driven by the expansion of our sneaker
classification with the continuation of platform bottom classics and the
addition of closed-toe open-back varieties. Also, sales were driven by the
addition of 350 concept shops in the first quarter of 2001, ending the quarter
with 1,210 concept shops compared to 860 in the first quarter of 2000, an
increase of 41%. Gross profit as a percentage of sales decreased from 37% in
2000 to 36% in 2001 due to higher markdowns experienced in the first quarter of
2001. Operating expenses increased to $6,307 in 2001 from $6,262 in 2000. This
increase resulted from an increase in advertising and marketing expenses
resulting from the Company's expanded marketing strategy. Madden Wholesale
income from operations was $2,323 in 2001 compared to income from operations of
$2,189 in 2000.
Sales from the l.e.i. Wholesale Division ("l.e.i. Wholesale") accounted for
$9,745 or 18%, and $9,732 or 22%, of total sales in 2001 and 2000, respectively.
During the first quarter of 2001, the l.e.i. Wholesale Division and the planning
department focused on key item flow by door with the ultimate goal of increasing
inventory turns and profitability. Additionally, l.e.i Wholesale turned its
attention toward the mid tier channel working with accounts such as Mervyns,
Kohl's and Penneys to restructure the flow and commitment behind key items. The
result of this effort caused revenues to be flat during the first quarter of
2001 compared to first quarter of 2000. Gross profit as a percentage of sales
increased from 34% in 2000 to 35% in 2001 due to changes in product mix,
balanced sourcing and improved inventory management. Operating expenses
increased to $1,873 in 2001 from $1,825 in 2000 due to increases in payroll and
payroll related expenses. Additionally, advertising and marketing expenses
increased due to the Company's expanded marketing strategy. Income from
operations for l.e.i. Wholesale was $1,536 in 2001 compared to income from
operations of $1,469 in 2000.
The Company's new Madden Mens Wholesale Division ("Madden Mens Wholesale")
commenced shipping in the first quarter of 2001. Madden Mens Wholesale generated
revenue of $910 for the first quarter of 2001. The Company is very excited by
the market's acceptance of the new Mens line, particularly in the sport-casual
classification. Key items have already been identified and for the third quarter
of 2001, the Company will be prepared to offer an EDI open stock replenishment
program on two best selling styles. The Company is also encouraged by the
response from key department stores, such as Lord and Taylor, Foleys, Hechts and
Filenes. After recording strong initial sales result, the Company believes that
these retailers will expand their door distribution. Madden Mens is planning its
concept shop program to roll out in the fall of 2001.
Sales from the Diva Acquisition Corp. Wholesale Division ("Diva Wholesale")
which markets the "David Aaron" brand name in footwear accounted for $1,779 or
3%, and $1,079 or 2%, of total sales in 2001 and 2000, respectively. The Company
believes that the increase in sales were driven by placements of its new product
line in major department stores, specialty stores, and specialty catalogues,
such as Bloomingdale's by Mail. Also, sales were driven by key styles include
bowling inspired casuals and casual loafers, including closed-toe open-back
styles. By implementing its own test and react model, David Aaron was out in
front of market delivering closed-up spring casuals to a strong reception, at a
time when competitors were delivering opened up footwear. Gross profit as a
percentage of sales decreased from 33% in 2000 to 30% in 2001 as under
performing carryover inventory was cleared at lower gross margins. Operating
expenses increased to $387 in 2001 from $194 in 2000 due to increases in payroll
and payroll related expenses. Additionally, selling and designing expenses
increased due to an increase in sales in the current period. Income from
operations from Diva Wholesale was $149 in 2001 compared to income from
operations of $159 in 2000.
11
The Company's new Stevies Wholesale Division ("Stevies Wholesale") commenced
shipping to department stores and specialty stores throughout the country in the
second quarter of 2000. Stevies is the Company's children's brand, targeted at
girls ages 6-9 and "tweens" 10-12. Stevies Wholesale generated revenue of $2,793
for the first quarter of 2001. Stevies now sells in over 1,500 doors including
the Limited Too, Journey's kids stores, Filenes, Foley's, Dillards and Macys, as
well as independent footwear stores, such as StrideRite and Jacobsons. As of
March 31, 2001 Stevies ended with more than 800 concept shops. Also, fueling the
brand for the future is the introduction of toddler girls. The Stevies toddler
line was introduced at the WSA show in February 2001 and the line was well
received by the existing customers. Gross profit as a percentage of sales was
36% for the period ended March 31, 2001. Income from operations was $557 in the
first quarter of 2001.
RETAIL DIVISION:
- ----------------
Sales from the Retail Division accounted for $15,092 or 28% and $11,278 or 26%
of total revenues in 2001 and 2000, respectively. This increase in Retail
Division sales is primarily due to the increase in the number of Steve Madden
retail stores. As of March 31, 2001, there were 65 Steve Madden retail stores
compared to 52 stores as of March 31, 2000. Additionally, same store sales for
the period ended March 31, 2001 increased 4% over the same period of 2000.
Colder weather in March dampened the momentum in the North East region which
comprises approximately 60% of Company's retail business. Revenues from the
internet store for the first quarter ended March 31, 2001 were in excess of
$1,000, showing an increase of 67% over the same period of 2000. The Company
expects sales generated through its websites at WWW.STEVEMADDEN.COM and
WWW.STEVIES.COM to continue to increase as the Company makes additional styles
available for sale and usage of the internet continues to grow. Also, the web
site for Madden Mens at WWW.STEVEMADDENMENS.COM launched in February 2001. Gross
profit as a percentage of sales remains the same in 2001 and 2000. Operating
expenses increased to $7,572 or 50% of sales in 2001 from $5,671 or 50% of sales
in 2000. This increase was due to increases in payroll and payroll related
expenses such as incentive bonuses for store managers and the corporate retail
management team, marketing and operating expenses for the internet store,
occupancy, printing, and depreciation expenses as a result of opening 13
additional stores since March 31, 2000. Income from operations from the retail
division was $819 in 2001 compared to income from operations of $702 in 2000.
ADESSO-MADDEN DIVISION:
- -----------------------
Adesso-Madden, Inc., a wholly owned subsidiary of the Company, generated
commission revenues of $808 for the period ended March 31, 2001 which represents
a 13% increase over commission revenues of $717 during the same period in 2000.
This increase was primarily due to the growth in accounts such as Walmart,
Target and Payless. Growth classifications included sandals and big unit bottom
casuals. The Company is pleased to announce that for the second time in four
years, Adesso-Madden received the `Vendor Award of Excellence" from Target.
Operating expenses decreased to $352 in 2001 from $468 in 2000 primarily due to
decreases in commission and related expenses. Income from operations from
Adesso-Madden was $456 in 2001 compared to income from operations of $249 in
2000.
LICENSE AGREEMENTS
Revenues from licensing increased by 14% to $326 in first quarter of 2001 from
$287 in 2000. This increase was primarily driven by increases in licensing
income from leather sportswear and sunglasses. As of March 31, 2001, the Company
had 6 license partners covering 6 product categories for its Steve Madden brand.
Also, as of March 31, 2001, the Company had 6 license partners covering 6
product categories for its Stevies brand. The product categories include
handbags, hosiery, sunglasses, hair, fashion accessories, belts, watches and
plush toys. In order to enhance the performance of the Company's licensing
business, in January 2001 the Company
12
engaged Jassin O'Rourke Group, LLC, a consulting firm specializing in marketing,
management and licensing for the apparel industry. In February 2001, the Company
signed termination agreements with respect to jewelry and hair accessories for
both the Steve Madden(R) and Stevies(TM) brands, and sportswear for the
Stevies(TM) brand. The Company expects that, with the assistance of Jassin
O'Rourke, it will be successful in finding new licensees.
As of March 15, 2000, the Company and its sportswear licensee, Iron Will Group,
Inc. 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 required 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 is produced and sold by its outerwear licensee.
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $62,917 at March 31, 2001 compared to $49,448
in working capital at March 31, 2000. This represents an increase of $13,469.
This increase in working capital is primarily due to the Company's net income
and proceeds received from options exercised.
OPERATING ACTIVITIES
During the three month period ended March 31, 2001, cash used by operating
activities was $10,658. Uses of cash arose principally from an increase in
factored accounts receivable of $11,856, an increase in inventory of $520 and a
decrease in accounts payable and accrued expenses of $3,784. Cash was provided
principally by net income of $3,650.
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 $47,000.
The Company has employment agreements with seven officers currently providing
for aggregate annual salaries of approximately $1,775 subject to annual bonuses
and annual increases as may be determined by the Company's Board of Directors.
In addition, as part of two of the employment agreements, the Company is
committed to pay incentive bonuses based on income before interest, depreciation
and taxes to certain officers.
The Company's customers consist principally of department stores and specialty
stores, including shoe boutiques. Presently, the Company's Wholesale Division
sells approximately sixty two percent (62%) 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 Nordstrom and approximately thirty eight percent
(38%) 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 eighteen percent (18%) of the Company's Wholesale
Division sales, respectively.
A significant portion of the Company's product is supplied from foreign
manufacturers, the majority of which are located in Brazil, China, Italy and
Mexico. Although the Company has not entered into any 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, the Company currently conducts approximately ninety five percent (95%)
of its transactions in U.S. currency.
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CAPITAL IMPROVEMENT ACTIVITIES
During the three month period ended March 31, 2001, the Company used cash of
$603 primarily for leasehold improvements on retail stores and office space and
for a new point of sale computer system for the retail stores.
FINANCING ACTIVITIES
During the three month period ended March 31, 2001, the Company received $1,680
from the sale of its common stock in connection with exercise of stock options.
On February 29, 2000, the Company announced a 1,500,000 stock repurchase
program. As of March 31, 2001, the Company repurchased 900,000 shares of the
Company's common stock at a total cost of $6,076 under this program.
INFLATION
The Company does not believe that inflation has had a material adverse effect on
sales or income during the past several years. Competitive pressures could limit
the extent to which such costs could be passed along in the form of increased
prices. As such, inflationary price increases in goods or operating costs could
adversely affect the profitability of the Company's operations.
RECENT DEVELOPMENTS
In May 2001, the Company announced the restructuring of several key management
positions designed to enhance the Company's executive management team and
creative design capabilities. Charles Koppelman, currently serving as the Acting
Chairman of the Board, will become an officer of the Company, adding the title
of Executive Chairman. As of July 1, 2001, Steve Madden will be resigning as
Chief Executive Officer and will become the Company's Chief Creative Officer. As
Chief Creative Officer, he will continue to be responsible for all creative and
design functions at the Company. The Company has entered into a 10-year
employment agreement with Mr. Madden as well as a cross-license agreement. The
license agreement will provide the Company with the exclusive right to the use
of the Steve Madden name for all current and related businesses of the Company
as well as an expanded group of potential product lines. Jamieson A. Karson, a
prominent attorney who joined the Company's Board of Directors in January 2001,
has been appointed to succeed Mr. Madden as the Company's Chief Executive
Officer. Mr. Karson will also hold the title of Vice Chairman. Mr. Karson is a
partner with Tannenbaum, Helpern Syracuse & Hirschtritt, LLP, a New York-based
law firm, where he serveS on the firm's Finance Committee. In addition, Mr.
Koppelman will also head a newly created Office of the Chairperson which will be
responsible for corporate policy and strategic planning. The Office of the
Chairperson will be comprised of the Executive Chairman, the Chief Executive
Officer, and the President of the Company. The Chief Creative Officer will also
be a non-voting member.
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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.
As of May 9, 2001, 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 and Arvind Dharia. These actions are captioned: WILNER v. STEVEN
MADDEN, LTD., ET AL., 00 CV 3676 (filed June 21, 2000); CONNOR v. STEVEN MADDEN,
ET al., 00 CV 3709 (filed June 22, 2000); BLUMENTHAL v. STEVEN MADDEN, LTD., ET
AL., 00 CV 3709 (filed June 23, 2000); CURRY v. STEVEN MADDEN, LTD., ET AL., 00
CV 3766 (filed June 26, 2000); DEMPSTER v. STEVEN MADDEN LTD., ET AL., 00 CV
3702 (filed June 30, 2000); SALAFIA v. STEVEN MADDEN, LTD., ET AL., 00 CV 4289
(filed July 24, 2000); FAHEY v. STEVEN MADDEN, LTD., ET AL., 00 CV 4712 (filed
August 11, 2000); PROCESS ENGINEERING SERVICES, INC. v. STEVEN MADDEN, LTD., ET
AL., 00 CV 5002 (filed August 22, 2000). By Order dated December 8, 2000, the
Court consolidated these eight actions, appointed Process Engineering, Inc.,
Michael Fasci and Mark and Libby Adams as lead plaintiffs and approved their
selection of lead counsel. On February 26, 2001, Plaintiffs served a
Consolidated Amended Complaint. The amended complaint principally alleges that
the Company and the individual defendants violated Sections 10(b) and 20(a) of
the Securities Exchange Act of 1934 and Rule 10b-5 promulgated under the 1934
Act by issuing false and misleading statements, and failing to disclose material
adverse information, generally relating to matters arising from Mr. Madden's
June 2000 indictment. The plaintiffs seek an unspecified amount of damages,
costs and expenses on behalf of themselves and all other purchasers of the
Company's common stock during the period June 21, 1997 through June 20, 2000.
The Company believes it has substantial defenses to the claims. On April 19,
2001, all of the defendants served motions to dismiss the Consolidated Amended
Complaint. Briefing on the motions currently is scheduled to be completed by
July 3, 2001.
On or about September 26, 2000, a putative shareholders derivative action was
commenced in the United States District Court for the Eastern District of New
York, captioned HERRERA v. STEVEN MADDEN AND STEVEN MADDEN, LTD., 00 CV 5803
(JG). The Company is named as a nominal defendant in the action. The complaint
seeks to recover alleged damages on behalf of the Company from Mr. Madden
arising from his June 2000 indictment and to require him to disgorge certain
profits, bonuses and stock option grants he received. On January 3, 2001,
plaintiff filed an Amended Shareholder's Derivative Complaint. On February 2,
2001, both the Company and Mr. Madden filed motions to dismiss the Amended
Complaint because of plaintiff's failure to make a pre-litigation demand upon
the Company's board of directors. Briefing on the motions has been completed.
On March 14, 2001, the Company became aware that the Securities and Exchange
Commission had issued a formal order of investigation with respect to trading in
the Company's securities. The Company has reason to believe that the Staff is
investigating possible securities law violations by persons trading in the
Company's securities prior to June 20, 2000 who may have been in possession of
alleged material, non-public information. As previously disclosed on Form 4's
filed with the Securities and Exchange Commission, certain officers and
directors of the Company sold shares of the Company's common stock during 1999
and the first half of 2000. Each of such officers and directors denies having
knowledge of any material, non-public information prior to engaging in such
transactions.
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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 14, 2001
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