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, 1999
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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 _____________________
For Quarter Ended June 30, 1999 Commission File Number 0-23702
--------------- ------------
STEVEN MADDEN, LTD.
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(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
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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 July 29, 1999
Common Stock 11,110,543
1
STEVEN MADDEN, LTD.
FORM 10-Q
QUARTERLY REPORT
JUNE 30, 1999
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements:
Consolidated Balance Sheets ................................... F3
Consolidated Statements of Operations ......................... F4
Consolidated Statement of Cash Flows .......................... F5
Notes to condensed consolidated financial statements .......... F6
ITEM 2. Management's discussion and analysis of financial
condition and results of operations .......................... 7
PART II - OTHER INFORMATION
ITEM 2. Legal Proceedings ............................................ 18
ITEM 4. Submission of Matters to a Vote of Security Holders ........... 18
2
STEVEN MADDEN, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
1999 1998
------------ ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 16,460,000 $ 14,642,000
Investments 499,000
Accounts receivable - net of allowances of $470,000 and $462,000 914,000 924,000
Due from factor - net of allowances of $495,000 and $351,000 15,183,000 9,357,000
Inventories 8,342,000 7,971,000
Prepaid advertising 428,000 896,000
Prepaid expenses and other current assets 3,590,000 2,091,000
Deferred taxes 534,000 534,000
------------ ------------
Total current assets 45,451,000 36,914,000
Property and equipment, net 10,682,000 8,991,000
Deferred taxes 293,000 293,000
Deposits and other 288,000 247,000
Cost in excess of fair value of net assets acquired - net of accumulated
amortization of $367,000 and $297,000 2,414,000 2,483,000
------------ ------------
$ 59,128,000 $ 48,928,000
============ ============
LIABILITIES
Current liabilities:
Current portion of lease payable $ 133,000 $ 106,000
Accounts payable and accrued expenses 8,475,000 3,181,000
------------ ------------
Total current liabilities 8,608,000 3,287,000
Deferred rent 569,000 385,000
Lease payable, less current portion 246,000 296,000
------------ ------------
9,423,000 3,968,000
------------ ------------
Contingencies (Note D)
STOCKHOLDERS' EQUITY
Common stock - $.0001 par value, 60,000,000 shares authorized, 11,108,068
and 10,940,643 issued and outstanding 1,000 1,000
Additional paid-in capital 38,058,000 36,601,000
Retained earnings 15,031,000 11,256,000
Unearned compensation (1,470,000) (1,661,000)
Treasury stock at cost - 345,204 and 270,204 shares (1,915,000) (1,237,000)
------------ ------------
49,705,000 44,960,000
------------ ------------
$ 59,128,000 $ 48,928,000
============ ============
See notes to financial statements
F-3
STEVEN MADDEN, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------- ---------------------------------
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
Net sales $ 38,056,000 $ 18,733,000 $ 64,787,000 $ 35,244,000
Cost of sales 21,888,000 11,200,000 37,677,000 20,685,000
--------------- --------------- --------------- ---------------
Gross profit 16,168,000 7,533,000 27,110,000 14,559,000
Commission and licensing fee income 802,000 779,000 1,493,000 1,543,000
Operating expenses (13,019,000) (6,681,000) (22,372,000) (13,132,000)
--------------- --------------- --------------- ---------------
Income from operations 3,951,000 1,631,000 6,231,000 2,970,000
Interest income (expense), net 158,000 (46,000) 332,000 (72,000)
--------------- --------------- --------------- ---------------
Income before provision for income taxes 4,109,000 1,585,000 6,563,000 2,898,000
Provision for income taxes 1,745,000 704,000 2,788,000 1,244,000
--------------- --------------- --------------- ---------------
NET INCOME $ 2,364,000 $ 881,000 $ 3,775,000 $ 1,654,000
=============== =============== =============== ===============
BASIC INCOME PER SHARE $0.22 $0.10 $0.35 $0.19
===== ===== ===== =====
DILUTED INCOME PER SHARE $0.19 $0.08 $0.31 $0.16
===== ===== ===== =====
Weighted average common shares
outstanding - basic income per share 10,683,291 8,671,875 10,677,596 8,544,971
Effect of potential common shares from exercise
of options and warrants 1,510,347 2,241,663 1,390,604 2,028,391
--------------- --------------- --------------- ---------------
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - DILUTED INCOME PER SHARE 12,193,638 10,913,538 12,068,200 10,573,362
=============== =============== =============== ===============
See notes to financial statements
F-4
STEVEN MADDEN, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED
JUNE 30
--------------------------------
1999 1998
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,775,000 $ 1,654,000
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Issuance of compensatory stock options 474,000 142,000
Depreciation and amortization 880,000 628,000
Deferred compensation 191,000 74,000
Provision for bad debts 152,000 97,000
Deferred rent expense 184,000 151,000
Changes in:
Accounts receivable - nonfactored 2,000 (55,000)
Due from factor (5,970,000) (1,858,000)
Inventories (371,000) (1,768,000)
Prepaid expenses and other assets (1,072,000) (186,000)
Accounts payable and accrued expenses 5,294,000 (1,616,000)
--------------- ---------------
Net cash provided by (used in) operating activities 3,539,000 (2,737,000)
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (2,502,000) (1,273,000)
Sale of investment securities 499,000 1,991,000
Payments in connection with acquisition of business (19,000)
--------------- ---------------
Net cash (used in) provided by investing activities (2,003,000) 699,000
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from options exercised 983,000 2,483,000
Purchase of treasury stock (678,000)
Payment of lease obligations (23,000) (35,000)
--------------- ---------------
Net cash provided by financing activities 282,000 2,448,000
--------------- ---------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,818,000 410,000
Cash and cash equivalents - beginning of quarter 14,642,000 3,887,000
--------------- ---------------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 16,460,000 $ 4,297,000
=============== ===============
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Issuance of common stock in connection with acquisition of business $ 668,000
See notes to financial statements
F-5
STEVEN MADDEN, LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999
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 June 30, 1999, and
the results of their operations and cash flows for the six month and three-month
periods then ended. The results of operations for the six month and three-month
periods ended June 30, 1999 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, 1998 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
On or about May 25, 1999, Magnum Fashions, Inc. ("Magnum"), a former licensee
for handbags and related products, commenced an arbitration proceeding against
the Company before the American Arbitration Association. Magnum alleges in its
Statement of Claim, inter alia, that it was fraudulently induced to enter into a
license agreement, dated as of February 1, 1997, with the Company as well as
fraudulent nondisclosure, negligent misrepresentation, mutual mistake, wrongful
termination, failure of consideration and defamation. Based on the allegations,
Magnum seeks to be released from its financial obligations to the Company under
the license agreement and seeks damages in an unstated amount. In addition to
denying the claims asserted by Magnum, the Company has asserted a claim against
Magnum for the balance of the minimum royalty due under the license agreement.
The Company believes that the claims asserted by Magnum are entirely without
merit, and intends to prosecute its claims vigorously.
On or about March 13, 1998, the Company and Stav Efrat were sued by Ooga
Associated Corp. ("Ooga"), a design and construction firm previously engaged by
the Company to design and construct certain of the Company's retail shoe stores.
In this action, which is pending in the Supreme Court of New York, County of New
York, Ooga principally alleges that (i) the Company breached an oral contract
pursuant to which it engaged Ooga to exclusively design and build the Company's
retail shoe stores, (ii) the Company induced Mr. Efrat, an officer and director
of Ooga, to breach his fiduciary duties to Ooga by improperly employing his
services, and (iii) the Company misappropriated Ooga's trade secrets by
impermissibly using store designs and concepts owned by Ooga. In its lawsuit,
Ooga seeks damages consisting of amounts based on its prospective earnings under
the alleged oral contract with the Company, its lost earnings on certain
projects it claims to have abandoned or forgone in reliance on the alleged oral
contract with the Company, and on the value of the designs and concepts
allegedly misappropriated by the Company and also seeks an injunction
prohibiting the Company from using Ooga's designs or other proprietary
information, from employing any Ooga employees or interfering with Ooga's
contractual relationships with its customers. On October 22, 1998, the Court
orally dismissed Ooga's breach of contract claims and on January 7, 1999, the
Court suspended the action based on the failure of Ooga to be present for a
mandatory court conference. The action is subject to being revived upon
application by Ooga within a one year period. The Company believes that Ooga's
claims are completely without merit, and intends to vigorously contest its
lawsuit.
F-6
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
SIX MONTHS ENDED
JUNE 30
CONSOLIDATED: 1999 1998
- ------------ ---- ----
Net Sales $64,787,000 100% $35,244,000 100%
Cost of Sales 37,677,000 58 20,685,000 59
Other Operating Income 1,493,000 2 1,543,000 4
Operating Expenses 22,372,000 35 13,132,000 37
Income from Operations 6,231,000 10 2,970,000 8
Interest Income (Expense) Net 332,000 1 (72,000) 0
Income Before Income Taxes 6,563,000 10 2,898,000 8
Net Income 3,775,000 6 1,654,000 5
7
PERCENTAGE OF NET REVENUES
SIX MONTHS ENDED
JUNE 30
By Segment 1999 1998
---- ----
WHOLESALE DIVISIONS:
- -------------------
STEVEN MADDEN, LTD.
Net Sales $30,133,000 100% $22,302,000 100%
Cost of Sales 18,691,000 62 13,790,000 62
Other Operating Income 328,000 1 175,000 1
Operating Expenses 10,055,000 33 6,840,000 31
Income from Operations 1,715,000 6 1,847,000 8
DIVA ACQUISITION CORP.
Net Sales $3,426,000 100% $2,849,000 100%
Cost of Sales 2,306,000 67 2,336,000 82
Operating Expenses 694,000 20 678,000 24
Income (Loss) from Operations 426,000 12 (165,000) (6)
l.e.i. FOOTWEAR:
Net Sales $11,759,000 100% --- --
Cost of sales 7,890,000 67 --- --
Operating Expenses 2,228,000 19 --- --
Income from Operations 1,641,000 14 --- --
STEVEN MADDEN RETAIL INC.:
- -------------------------
Net Sales $19,469,000 100% $10,093,000 100%
Cost of Sales 8,790,000 45 4,559,000 45
Operating Expenses 8,578,000 44 4,924,000 49
Income from Operations 2,101,000 11 610,000 6
ADESSO MADDEN INC.:
- ------------------
(FIRST COST)
Other Operating Income $1,165,000 100% $1,368,000 100%
Operating Expenses 817,000 70 690,000 50
Income from Operations 348,000 30 678,000 50
8
PERCENTAGE OF NET REVENUES
THREE MONTHS ENDED
JUNE 30
CONSOLIDATED: 1999 1998
- ------------ ---- ----
Net Sales $38,056,000 100% $18,733,000 100%
Cost of Sales 21,888,000 58 11,200,000 60
Other Operating Income 802,000 2 779,000 4
Operating Expenses 13,019,000 34 6,681,000 36
Income from Operations 3,951,000 10 1,631,000 9
Interest Income (Expense) Net 158,000 0 (46,000) 0
Income Before Income Taxes 4,109,000 11 1,585,000 8
Net Income 2,364,000 6 881,000 5
By Segment
WHOLESALE DIVISIONS:
STEVEN MADDEN, LTD.
Net Sales $17,877,000 100% $12,003,000 100%
Cost of Sales 10,985,000 61 7,615,000 63
Other Operating Income 187,000 1 94,000 1
Operating Expenses 6,200,000 35 3,254,000 27
Income from Operations 879,000 5 1,228,000 10
DIVA ACQUISITION CORP.
Net Sales $1,971,000 100% $920,000 100%
Cost of Sales 1,296,000 66 911,000 99
Operating Expenses 426,000 22 313,000 34
Income (Loss) from Operations 249,000 13 (304,000) (33)
l.e.i. FOOTWEAR:
Net Sales $6,381,000 100% --- --
Cost of sales 4,180,000 66 --- --
Operating Expenses 1,251,000 20 --- --
Income from Operations 950,000 15 --- --
9
PERCENTAGE OF NET REVENUES
THREE MONTHS ENDED
JUNE 30
By Segment (Continued) 1999 1998
---- ----
STEVEN MADDEN RETAIL INC.:
- -------------------------
Net Sales $11,827,000 100% $5,810,000 100%
Cost of Sales 5,427,000 46 2,674,000 46
Operating Expenses 4,760,000 40 2,741,000 47
Income (Loss) from Operations 1,640,000 14 395,000 7
ADESSO MADDEN INC.:
- ------------------
(FIRST COST)
Other Operating Income $615,000 100% $685,000 100%
Operating Expenses 382,000 62 373,000 54
Income from Operations 233,000 38 312,000 46
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1999 VS. SIX MONTHS ENDED JUNE 30, 1998
CONSOLIDATED:
Sales for the six month period ended June 30, 1999 were $64,787,000 or 84%
higher than the $35,244,000 recorded in the comparable period of 1998. The
increase in sales is due to several factors including additional wholesale
accounts, increased reorders, EDI size replenishment, increased retail sales due
to the opening of twelve additional stores and three outlet stores during 1998
which were not open full comparable period, three additional retail stores and
one additional outlet store in the first quarter of 1999 and two additional
retail stores in the second quarter of 1999. Also, the Company's new l.e.i.
Wholesale Division ("l.e.i. Wholesale") was launched in the third quarter of
1998 shipping to department stores throughout the country. l.e.i. Wholesale
generated revenue of $11,759,000 for the six month period ended June 30, 1999.
As a result of additional distribution, management feels that "Steve Madden" as
a brand name has increased in popularity nationwide. In turn, increased sales
have enabled the Company to expand its advertising and in store concept efforts,
all of which have contributed to the continuing increase in sales.
10
Gross profit as a percentage of sales increased from 41% in 1998 to 42% in 1999.
This increase was due to the changing product mix, balanced sourcing, inventory
management and EDI replenishment.
Selling, general and administrative (SG&A) expenses increased to $22,372,000 in
1999 from $13,132,000 in 1998. The increase in SG&A is due primarily to a 62%
increase in payroll, officers bonuses and payroll related expenses from
$5,382,000 in 1998 to $8,733,000 in 1999. Additionally, selling, designing and
licensing costs increased by 130% from $2,627,000 in 1998 to $6,048,000 in 1999.
This is due in part to an increase in sales in the current period and to the
Company's increased focus on selling, designing, and licensing activities. The
increase in the number of retail outlets and expanded office facilities resulted
in an increase in occupancy, telephone, utilities, computer, printing/supplies
and depreciation expenses by 57% from $2,854,000 in 1998 to $4,493,000 in 1999.
Income from operations for 1999 was $6,231,000 which represents an increase of
$3,261,000 or 110% over the income from operations of $2,970,000 in 1998. Net
income increased by 128% to $3,775,000 in 1999 from $1,654,000 in 1998.
WHOLESALE DIVISIONS:
Sales from the Steve Madden Wholesale Division ("Madden Wholesale"), accounted
for $30,133,000 or 47% and $22,302,000 or 63% of total sales in the six month
period ended June 30, 1999 and 1998, respectively. Gross profit as a percentage
of sales remains the same in the Madden Wholesale Division. Operating expenses
increased to $10,055,000 in 1999 from $6,840,000 in 1998. This increase is due
to an increase in payroll and payroll related expenses principally due to the
hiring of additional management personnel and an increase in occupancy expenses
due to additional warehouse space needed for expanding EDI size replenishment
inventory. Additionally, selling, designing and licensing costs increased due to
an increase in sales in the current period and to the Company's increased focus
on selling, designing, and licensing activities. Madden Wholesale income from
operations was $1,715,000 in 1999 compared to income from operations of
$1,847,000 in 1998.
Sales from the Diva Acquisition Corp. Wholesale Division ("Diva Wholesale")
which markets the "David Aaron" brand name in footwear accounted for $3,426,000
or 5%, and $2,849,000 or 8%, of total sales in the six month period ended June
30, 1999 and 1998, respectively. Gross profit as a percentage of sales increased
from 18% in 1998 to 33% in 1999 due to the changing product mix, balanced
sourcing and inventory management. Operating expenses increased to $694,000 in
1999 from $678,000 in 1998 due to increases in occupancy, computer, payroll and
payroll related expenses. Income from operations from Diva was $426,000 in 1999
compared to loss from operations of $165,000 in 1998.
11
The Company's new l.e.i. Wholesale Division ("l.e.i. Wholesale") commenced
shipping to department stores throughout the country in third quarter of 1998.
l.e.i. Wholesale generated revenue of $11,759,000 for the six month period ended
June 30, 1999. l.e.i has been well received during the first and second quarters
of 1999. l.e.i. is sold primarily in department stores, including Macy's - east
and west, Burdines, Rich's, Hecht's, Filene's, Foley's, Dayton Hudson, Belk and
Penney's. l.e.i is also being well received in specialty store chains such as
Wet Seal and Journey's. l.e.i now sells in over 2000 doors in the United States.
RETAIL DIVISION:
Sales from the Retail Division accounted for $19,469,000 or 30% and $10,093,000
or 29% of total revenues in 1999 and 1998, respectively. The increase in Retail
Division sales is primarily due to the Company's opening of twelve additional
stores and three outlet stores during 1998, three additional retail stores and
one additional outlet store during first quarter of 1999 and two additional
retail stores in the second quarter of 1999. Same store sales for the six month
period ended June 30, 1999 increased by 22% over the same period of 1998. This
increase in same store sales was driven our ability to reorder best selling
sandals, test new products including sandals in natural materials and wood
bottoms and new classifications such as, slippers. Also, during the first
quarter of 1999, the Company completed it's internet fulfillment site and
expanded the number of workstations at the Long Island City offices dedicated to
Internet sales. The actual number of hits were (7.1 million), unique users
(110,000) and the conversion rate (3.2%) during the first quarter and in the
second quarter the actual number of hits were (10.2 million), unique users
(138,000) and the conversion rate (3.2%). As the Company offers additional
styles through its stevenmadden.com site, business continues to grow.
Additionally, the Company announced during the second quarter of 1999 that the
Company signed an agreement with America Online, the world's leading interactive
service, to sell footwear and apparel through AOL's new shopping destination,
Shop @ AOL. The Company's e-commerce traffic and sales continue to outperform
internal expectations, with second quarter e-commerce sales results more than
100% above the previous quarter and the Company believes that this alliance with
AOL will further help to develop the Company into a dominant e-commerce player
in the footwear industry. Gross profit as a percentage of sales remains the same
in the Retail Division. Selling, general and administrative expenses for the
Retail Division increased to $8,578,000 in 1999 from $4,924,000 in 1998. This
increase is due to increases in payroll and related expenses, occupancy,
printing, computer and depreciation expenses as a result of opening twelve
additional stores and three outlet stores during 1998, four retail stores and
one retail outlet store in the first quarter of 1999 and two additional retail
stores in the second quarter of 1999. Income from operations from the retail
division was $2,101,000 in 1999 compared to income from operations of $610,000
in 1998.
12
ADESSO-MADDEN DIVISION:
Adesso-Madden, Inc., a wholly owned subsidiary of the Company, generated
commission revenues of $1,165,000 for the six month period ended June 30, 1999
which represents a decrease from the commission revenues of $1,368,000 in 1998
due to a shift by JC Penneys from ordering goods through Adesso Madden to
ordering goods from l.e.i. wholesale. However, Adesso-Madden, the Company's
first cost division, continues to expand its business by introducing additional
styles in Kmart and through Mel Disco and Target - as well as, our new first
cost brand Jordache. During the first quarter of 1999, the Company received
orders from Walmart for women and girls styles of the Jordache footwear
collection. The first shipments of Jordache shoes to be made in July of 1999.
Operating expenses increased to $817,000 in 1999 from $690,000 in 1998 due to
increases in occupancy, computer, payroll and payroll related expenses. Income
from operations from Adesso-Madden was $348,000 in 1999 compared to income from
operations of $678,000 in 1998.
THREE MONTHS ENDED JUNE 30, 1999 VS. THREE MONTHS ENDED JUNE 30, 1998
CONSOLIDATED:
Sales for the three month period ended June 30, 1999 were $38,056,000 or 103%
higher than the $18,733,000 recorded in the comparable period of 1998. The
increase in sales is due to several factors including additional wholesale
accounts, increased reorders, EDI size replenishment, increased retail sales due
to the opening of twelve additional stores and three outlet stores during 1998
which were not open full comparable period, three additional retail stores and
one additional outlet store in the first quarter of 1999 and two additional
retail stores in the second quarter of 1999. Also, the Company's new l.e.i.
Wholesale Division ("l.e.i. Wholesale") was launched in the third quarter of
1998 shipping to department stores throughout the country. l.e.i. Wholesale
generated revenue of $6,381,000 for the three month period ended June 30, 1999.
As a result of additional distribution, management feels that "Steve Madden" as
a brand name has increased in popularity nationwide. In turn, increased sales
have enabled the Company to expand its advertising and in store concept efforts,
all of which have contributed to the continuing increase in sales.
Gross profit as a percentage of sales increased from 40% in 1998 to 42% in 1999.
Increased sales volume has allowed the Company to purchase in larger volume,
resulting in a lower cost per pair. Also, the increase was due to balanced
sourcing, inventory management, EDI replenishment and the increase in l.e.i.
Wholesale Division sales.
Selling, general and administrative (SG&A) expenses increased to $13,019,000 in
1999 from $6,681,000 in 1998. The increase in SG&A is due primarily to a 76%
increase in payroll, officers bonuses and payroll related expenses from
$2,907,000 in 1998 to $5,105,000 in 1999. Additionally, selling, designing and
licensing costs increased by 271%
13
from 1,033,000 in 1998 to $3,834,000 in 1999. This is due in part to an increase
in sales in the current period and to the Company's increased focus on selling,
designing, and licensing activities. The increase in the number of retail
outlets and expanded office facilities resulted in an increase in occupancy,
telephone, utilities, computer, printing/supplies and depreciation expenses by
68% from $1,414,000 in 1998 to $2,369,000 in 1999.
Income from operations for 1999 was $3,951,000 which represents an increase of
$2,320,000 or 142% over the income from operations of $1,631,000 in 1998. Net
income increased by 168% to $2,364,000 in 1999 from $881,000 in 1998.
WHOLESALE DIVISIONS:
Sales from the Steve Madden Wholesale Division ("Madden Wholesale"), accounted
for $17,877,000 or 47% and $12,003,000 or 64% of total sales in the three month
period ended June 30, 1999 and 1998, respectively. Gross profit as a percentage
of sales increased from 37% in 1998 to 39% in 1999 in the Madden Wholesale
Division. Operating expenses increased to $6,200,000 in 1999 from $3,254,000 in
1998. This increase is due to an increase in payroll and payroll related
expenses principally due to the hiring of additional management personnel and an
increase in occupancy expenses due to additional warehouse space needed for
expanding EDI size replenishment inventory. Additionally, selling, designing and
licensing costs increased due to an increase in sales in the current period and
to the Company's increased focus on selling, designing, and licensing
activities. Madden Wholesale income from operations was $879,000 in 1999
compared to income from operations of $1,228,000 in 1998.
Sales from the Diva Acquisition Corp. Wholesale Division ("Diva Wholesale")
which markets the "David Aaron" brand name in footwear accounted for $1,971,000
or 5%, and $920,000 or 5%, of total sales in the three month period ended June
30, 1999 and 1998, respectively. Gross profit as a percentage of sales increased
from 1% in 1998 to 34% in 1999 due to the purchase of a higher percentage of
shoes from overseas suppliers, resulted in a lower cost per pair in 1999
compared to 1998. Operating expenses increased to $426,000 in 1999 from $313,000
in 1998 due to increases in occupancy, computer and payroll and payroll related
expenses. Income from operations from Diva was $249,000 in 1999 compared to loss
from operations of $304,000 in 1998.
The Company's new l.e.i. Wholesale Division ("l.e.i. Wholesale") commenced
shipping to department stores throughout the country in third quarter of 1998.
l.e.i. Wholesale generated revenue of $6,381,000 for the three month period
ended June 30, 1999. l.e.i has been well received during the first and second
quarters of 1999. l.e.i. is sold primarily in department stores, including
Macy's - east and west, Burdines, Rich's, Hecht's, Filene's, Foley's, Dayton
Hudson, Belk and Penney's. l.e.i is also being well received in specialty store
chains such as Wet Seal and Journey's. l.e.i now sells in over 2000 doors in the
United States.
14
RETAIL DIVISION:
Sales from the Retail Division accounted for $11,827,000 or 31% and $5,810,000
or 31% of total revenues in 1999 and 1998, respectively. The increase in Retail
Division sales is primarily due to the Company's opening of twelve additional
stores and three outlet stores during 1998, three additional retail stores and
one additional outlet store during first quarter of 1999 and two additional
retail stores in the second quarter of 1999. Same store sales for the three
month period ended June 30, 1999 increased by 30% over the same period of 1998.
This increase in same store sales was driven our ability to reorder best selling
sandals, test new products including sandals in natural materials and wood
bottoms and new classifications such as, slippers. In the first quarter of 1999,
the Company completed it's internet fulfillment site and expanded the number of
workstations at the Long Island City offices dedicated to Internet sales. The
actual number of hits were (7.1 million), unique users (110,000) and the
conversion rate (3.2%) during the first quarter and in the second quarter the
actual number of hits were (10.2 million), unique users (138,000) and the
conversion rate (3.2%). As the Company offers additional styles through its
stevenmadden.com site, business continues to grow. Additionally, the Company
announced during the second quarter of 1999 that the Company signed an agreement
with America Online, the world's leading interactive service, to sell footwear
and apparel through AOL's new shopping destination, Shop @ AOL. The Company's
e-commerce traffic and sales continue to outperform internal expectations, with
second quarter e-commerce sales results more than 100% above the previous
quarter and the Company believes that this alliance with AOL will further help
to develop into the dominant e-commerce player in the footwear industry. Gross
profit as a percentage of sales remains the same in the Retail Division.
Selling, general and administrative expenses for the Retail Division increased
to $4,760,000 in 1999 from $2,741,000 in 1998. This increase is due to increases
in payroll and related expenses, occupancy, printing, computer and depreciation
expenses as a result of opening twelve additional stores and three outlet stores
during 1998, four retail stores and one retail outlet store in the first quarter
of 1999 and two additional retail stores in the second quarter of 1999. Income
from operations from the retail division was $1,640,000 in 1999 compared to
income from operations of $395,000 in 1998.
ADESSO-MADDEN DIVISION:
Adesso-Madden, Inc., a wholly owned subsidiary of the Company, generated
commission revenues of $615,000 for the three month period ended June 30, 1999
which represents a decrease from the commission revenues of $685,000 in 1998 due
to a shift by JC Penneys from ordering goods through Adesso Madden to ordering
goods from l.e.i. wholesale. However, Adesso-Madden, the Company's first cost
division, continues to expand its business by introducing additional styles in
Kmart and through Mel Disco and Target - as well as, our new first cost brand
Jordache. During the first quarter of 1999, the Company received orders from
Walmart for women and girls styles of the Jordache footwear collection. The
first shipments of Jordache shoes to be made in July of 1999. Operating
15
expenses increased to $382,000 in 1999 from $373,000 in 1998 due to increases in
occupancy, computer and payroll and payroll related expenses. Income from
operations from Adesso-Madden was $233,000 in 1999 compared to income from
operations of $312,000 in 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $36,843,000 at June 30, 1999 which represents
an increase of $16,528,000 in working capital from June 30,1998.
The Company's customers purchasing shoes consist principally of department
stores and specialty stores, including shoe boutiques. Presently, the Company
sells approximately sixty percent (60%) of its products to department stores,
including Federated Department Stores (Bloomingdales, Bon Marche, Burdines,
Macy's and Rich's), May Department Stores (Famous Barr, Filene's, Foley's,
Hecht's, Kaufmann's, Meier & Frank and Robinsons May), Dillard's, Dayton-Hudson
and Nordstorm approximately forty percent (40%) to specialty stores, including
Journey's, Wet Seal and The Buckle and catalog retailers, including Victoria's
Secret and Fingerhut. Federated Department Stores and Nordstorm's presently
account for approximately twenty percent (20%) and seventeen percent (17%) of
the Company's Wholesale Division sales, respectively.
OPERATING ACTIVITIES
During the six month period ended June 30, 1999, cash provided by operating
activities was $3,539,000. Uses of cash arose principally from an increase in
accounts receivable factored of $5,970,000, an increase in inventory of $371,000
and an increase in prepaid expenses and other assets of $1,072,000. Cash was
provided principally by an increase in accounts payable and accrued expenses of
$5,294,000.
The Company has lease agreements for office, warehouse, and retail space,
expiring at various times through 2010. Future obligations under these lease
agreements total approximately $35,000,000.
The Company has employment agreements with various officers currently providing
for aggregate annual salaries of approximately $1,585,000, subject to annual
bonuses and annual increases as may be determined by the Company's Board of
Directors. In addition, as part of the employment agreements, the Company is
committed to pay incentive bonuses based on income before interest, depreciation
and taxes to certain officers.
The Company continues to increase its supply of products from foreign
manufacturers, the majority of which are located in Brazil and Mexico. Although
the Company has not entered into long-term manufacturing contracts with any of
these foreign companies, the Company believes that a sufficient number of
alternative sources exist outside of the United States for the manufacture of
its products if current suppliers need to be replaced. In addition, because
16
the Company deals with U.S. currency for all transactions and intends to
continue to do so, the Company believes there should be no foreign exchange
considerations.
INVESTING ACTIVITIES
During the six month period ended June 30, 1999, the Company used cash of
$2,502,000 to acquire computer equipment and make leasehold improvements on new
retail stores, warehouse space and office space.
FINANCING ACTIVITIES
During the six month period ended June 30, 1999, the Company received $983,000
from the exercise of options.
LICENSE AGREEMENTS
As of January 1, 1999, an affiliate of the Jordache organization became the
Company's new jeanswear and sportswear licensee and the first shipments of Steve
Madden sportswear and jeanswear collections were delivered in June 1999. By June
30, 1999, the Company had eight license partners covering ten product
categories. The Company is exploring additional licensing opportunities.
In addition, as of January 1, 1999, the Company entered into a license agreement
with the Jordache organization pursuant to which the Company was granted the
exclusive license to use the Jordache trademark on women and girls footwear in
the mass channels of distribution, such as Walmart. The Company hopes that this
license arrangement will increase the revenue of its Adesso Madden subsidiary
beginning July 1999.
YEAR 2000
The Company recognizes that a challenging problem exists in that many computer
systems worldwide do not have the capability of recognizing the year 2000 or the
years thereafter. As of July 1999, the Company believes it became year 2000
enabled with all systems. This "year 2000 Computer Problem" creates risk for the
Company from unforeseen problems in its own computer systems and from third
parties with whom the Company deals. Such failures of the Company and/or third
parties' computer systems could have a material adverse effect on the Company
and its business in the future.
INFLATION
The Company does not believe that inflation has had a material adverse effect on
sales or income during the past several years. Increases in supplies or other
operating costs could adversely affect the Company's operations; however, the
Company believes it could increase prices to offset increases in costs of goods
sold or other operating costs.
17
PART II
ITEM 1.
LEGAL PROCEEDINGS
On or about May 25, 1999, Magnum Fashions, Inc. ("Magnum"), a former licensee
for handbags and related products, commenced an arbitration proceeding against
the Company before the American Arbitration Association. Magnum alleges in its
Statement of Claim, inter alia, that it was fraudulently induced to enter into a
license agreement, dated as of February 1, 1997, with the Company as well as
fraudulent nondisclosure, negligent misrepresentation, mutual mistake, wrongful
termination, failure of consideration and defamation. Based on the allegations,
Magnum seeks to be released from its financial obligations to the Company under
the license agreement and seeks damages in an unstated amount. In addition to
denying the claims asserted by Magnum, the Company has asserted a claim against
Magnum for the balance of the minimum royalty due under the license agreement.
The Company believes that the claims asserted by Magnum are entirely without
merit, and intends to prosecute its claims vigorously.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On June 4, 1999, the Company held its Annual Meeting of Stockholders where the
stockholders of the Company approved the following proposals:
(a) ELECTION OF DIRECTORS: The following directors to the Board of Directors of
the Company were elected for a term of one (1) year, each receiving
8,826,974 votes in favor of his/her election (80.6% of the shares
outstanding): (i) Rhonda Brown; (ii) Steven Madden; (iii) Arvind Dharia;
(iv) John Basile; (v) Charles Koppelman; (vi) John L. Madden; (vii) Peter
Migliorini; and (viii) Les Wagner.
(b) 1999 STOCK PLAN: The Company's 1999 Stock Plan covering 400,000 shares of
Common Stock was approved by the stockholders of the Company (6,679,878
votes for, 2,140,064 votes against, and 12,182 votes withheld).
(c) APPOINTMENT OF AUDITORS: The appointment of Richard A Eisner & Company,
LLP, as independent auditors of the Company, for fiscal year 1999 was
approved by the stockholders of the Company (8,807,057 votes for, 21,400
votes against, and 3,667 votes withheld).
18
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report on Form 10-Q to be signed on its behalf
by the undersigned thereunto duly authorized.
STEVEN MADDEN, LTD
/s/ Arvind Dharia
-------------------------------
Arvind Dharia
Chief Financial Officer
DATE: August 2, 1999
19
5
0000913241
STEVEN MADDEN, LTD.
1
USD
6-MOS
DEC-31-1999
JAN-01-1999
JUN-30-1999
1
16,460,000
0
1,384,000
470,000
8,342,000
45,451,000
13,734,000
3,052,000
59,128,000
8,608,000
0
0
0
1,000
49,704,000
59,128,000
64,787,000
66,280,000
37,677,000
22,372,000
0
0
0
6,563,000
2,788,000
3,775,000
0
0
0
3,775,000
0.354
0.313
