UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
- - -------------------------------------------------------------------------------
(_) 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, 1997 Commission File Number 0-23702
---------------- ----------
STEVEN MADDEN, LTD.
- - -------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
NEW YORK 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
- - -------------------------------------------------------------------------------
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 August 13, 1997
Common Stock 8,021,573
1
<PAGE>
STEVEN MADDEN, LTD.
FORM 10-QSB
QUARTERLY REPORT
JUNE 30, 1997
TABLE OF CONTENTS
PART I- FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements:
Consolidated Balance sheet .............................. 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 ...................................... 7
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings ....................................... 16
ITEM 2. Signature ............................................... 17
2
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STEVEN MADDEN, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30,
1997
ASSETS
Current assets:
Cash and cash equivalents $ 6,485,000
Accounts receivable - nonfactored (net of allowance for
doubtful accounts of $331,000) 1,417,000
Due from factor (net of allowance for doubtful accounts
of $172,000) 4,599,000
Inventories 2,668,000
Prepaid advertising 416,000
Prepaid expenses and other current assets 528,000
Prepaid taxes 421,000
- - --------------------------------------------------------------------------------
Total current assets 16,534,000
- - --------------------------------------------------------------------------------
Property and equipment, net 3,241,000
- - --------------------------------------------------------------------------------
Other assets:
Prepaid advertising, less current portion 1,769,000
Deferred taxes 451,000
Deposits and other 105,000
Cost in excess of fair value of net assets acquired
(net of accumulated amortization of $121,000) 1,849,000
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Total other assets 4,174,000
- - --------------------------------------------------------------------------------
$23,949,000
================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of lease payable $ 84,000
Accounts payable and accrued expenses 1,175,000
Accrued bonuses 166,000
Other current liabilities 150,000
- - --------------------------------------------------------------------------------
Total current liabilities 1,575,000
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Lease payable, less current portion 417,000
- - --------------------------------------------------------------------------------
Commitments and contingencies
Stockholders' equity:
Common stock - $.0001 par value, 60,000,000 shares authorized,
8,011,573 issued and outstanding 1,000
Additional paid-in capital 18,795,000
Unearned compensation (248,000)
Retained earnings 3,866,000
Treasury stock at cost (101,800 shares) (457,000)
- - --------------------------------------------------------------------------------
Total stockholders' equity 21,957,000
- - --------------------------------------------------------------------------------
$23,949,000
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SEE NOTES TO FINANCIAL STATEMENTS
3
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STEVEN MADDEN, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1997 1996 1997 1996
===============================================================================================
<S> <C> <C> <C> <C>
NET SALES $12,270,000 $ 8,676,000 $25,488,000 $16,484,000
Cost of sales 7,409,000 6,609,000 16,016,000 10,936,000
- - -----------------------------------------------------------------------------------------------
GROSS PROFIT 4,861,000 2,067,000 9,472,000 5,548,000
Other revenue 492,000 265,000 854,000 459,000
Operating expenses (4,749,000) (3,121,000) (9,058,000) (5,544,000)
- - -----------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS 604,000 (789,000) 1,268,000 463,000
Interest income (expense), net (1,000) 74,000 4,000 174,000
- - -----------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE PROVISION (BENEFIT) FOR
INCOME TAXES 603,000 (715,000) 1,272,000 637,000
Provision (benefit) for income taxes 246,000 (284,000) 514,000 261,000
- - -----------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 357,000 $ (431,000) $ 758,000 $ 376,000
- - -----------------------------------------------------------------------------------------------
NET INCOME (LOSS) PER SHARE OF COMMON STOCK
PRIMARY $.04 $(.04) $.09 $.05
- - -----------------------------------------------------------------------------------------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 10,430,758 9,906,444 10,374,459 9,900,212
===============================================================================================
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
4
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STEVEN MADDEN, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
1997 1996
========================================================================================
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 758,000 $ 376,000
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 364,000 106,000
Deferred compensation 72,000 72,000
Provision for bad debts 178,000 185,000
Deferred rent expense 7,000
Changes in:
Accounts receivable - nonfactored (1,237,000) (1,752,000)
Due from factor 426,000 406,000
Inventories 89,000 222,000
Prepaid expenses and other assets 151,000 (818,000)
Accounts payable and accrued expenses 287,000 135,000
Accrued bonuses (267,000) (325,000)
Other current liabilities 58,000 (20,000)
Tax liability 202,000 (531,000)
- - ----------------------------------------------------------------------------------------
Net cash provided by (used in) operating 1,081,000 (1,937,000)
activities
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment (1,070,000) (106,000)
Acquisition of subsidiary (1,044,000)
- - ----------------------------------------------------------------------------------------
Net cash used in investing (1,070,000) (1,150,000)
- - ----------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from options exercised 381,000 6,342,000
Repayment of lease obligations (58,000)
Repayment of notes payable assumed in acquisition (476,000)
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Net cash provided by financing activities 323,000 5,866,000
- - ----------------------------------------------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 334,000 2,779,000
Cash and cash equivalents - beginning of year 6,151,000 4,123,000
- - ----------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 6,485,000 $ 6,902,000
========================================================================================
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Acquisition of leased assets $ 359,000
- - ----------------------------------------------------------------------------------------
Issuance of common stock for debt $ 645,000
========================================================================================
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
5
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STEVEN MADDEN, LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
June 30, 1997
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-QSB and Item 310(b) of Regulation S-B.
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 the Company at June 30, 1997, and
the results of its operations, changes in stockholders' equity and cash flows
for the six months then ended. The results of operations for the six months
ended June 30, 1997 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, 1996 included in the Steve Madden, Ltd. Form 10-KSB.
NOTE B. INVENTORY
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
Net income per share of common stock is computed based on the weighted average
number of shares outstanding during the period, utilizing the modified treasury
stock method. Common stock equivalents are included if their effect is dilutive.
6
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
- - --------------------------------------------------------------------------------
The following discussion of the Company's financial condition and results of
operations should be read in conjunction with the Financial Statements and Notes
thereto appearing elsewhere in this document.
Statements in this "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and elsewhere in this document as well as statements
made in press releases and oral statements that may be made by the Company or by
officers, directors or employee 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. 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: 1997 1996
- - ------------ ---- ----
Revenues $25,488,000 100% $16,484,000 100%
Cost of Revenues 16,016,000 62.8 10,936,000 66.3
Other Operating Income 854,000 3.3 459,000 2.8
Operating Expenses 9,058,000 35.5 5,544,000 33.6
Income from Operations 1,268,000 5.0 463,000 2.8
Interest Income (Expense) Net 4,000 0.0 174,000 1.1
Income Before Income Taxes 1,272,000 5.0 637,000 3.9
Net Income 758,000 3.0 376,000 2.3
7
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PERCENTAGE OF NET REVENUES
--------------------------
SIX MONTHS ENDED
----------------
JUNE 30
-------
By Segment 1997 1996
---- ----
WHOLESALE:
- - ----------
Revenues $17,588,000 100% $14,386,000 100%
Cost of Revenues 11,211,000 63.7 9,655,000 67.1
Other Operating Income 39,000 0.2 --- ---
Operating Expenses 5,856,000 33.3 4,285,000 29.8
Income from Operations 560,000 3.2 446,000 3.1
RETAIL:
- - -------
Revenues $3,645,000 100% $1,443,000 100%
Cost of Revenues 1,587,000 43.5 764,000 52.9
Operating Expenses 1,629,000 44.7 554,000 38.4
Income from Operations 429,000 11.8 125,000 8.7
DIVA ACQUISITION CORP.:
- - -----------------------
Revenues $3,034,000 100% $655,000 100%
Cost of Revenues 2,087,000 68.8 517,000 78.9
Operating Expenses 1,034,000 34.1 333,000 50.8
Income (Loss) from Operations -87,000 -2.9 -195,000 -29.7
ADESSO MADDEN INC.:
- - -------------------
(FIRST COST)
Revenues $1,221,000 --- --- ---
Cost of Revenues 1,131,000 --- --- ---
Gross Profit 90,000 --- --- ---
Other Operating Income 815,000 --- $459,000 ---
Total Operating Income 905,000 100% 459,000 100%
Operating Expenses 539,000 59.6 372,000 81.0
Income from Operations 366,000 40.4 87,000 19.0
8
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PERCENTAGE OF NET REVENUES
--------------------------
THREE MONTHS ENDED
------------------
JUNE 30
-------
CONSOLIDATED: 1997 1996
- - ------------ ---- ----
Revenues $12,270,000 100% $8,676,000 100%
Cost of Revenues 7,409,000 60.4 6,609,000 76.2
Other Operating Income 492,000 4.0 265,000 3.1
Operating Expenses 4,749,000 38.7 3,121,000 36.0
Income (Loss) from Operations 604,000 4.9 -789,000 -9.1
Interest Income (Expense) Net -1,000 0.0 74,000 0.9
Income (Loss) Before Income Taxes 603,000 4.9 -715,000 -8.2
Net Income (Loss) 357,000 2.9 -431,000 -5.0
By Segment
WHOLESALE:
- - ---------
Revenues $8,177,000 100% $7,231,000 100%
Cost of Revenues 5,156,000 63.1 5,631,000 77.9
Other Operating Income 24,000 0.3 --- ---
Operating Expenses 2,965,000 36.3 2,309,000 31.9
Income (Loss) from Operations 80,000 0.9 -709,000 -9.8
RETAIL:
- - -------
Revenues $2,091,000 100% $790,000 100%
Cost of Revenues 830,000 39.7 461,000 58.3
Operating Expenses 935,000 44.7 278,000 35.2
Income from Operations 326,000 15.6 51,000 6.5
9
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PERCENTAGE OF NET REVENUES
--------------------------
THREE MONTHS ENDED
------------------
JUNE 30
-------
1997 1996
---- ----
By Segment (Continued)
DIVA ACQUISITION CORP.:
- - ----------------------
Revenues $1,842,000 100% $655,000 100%
Cost of Revenues 1,274,000 69.2 517,000 78.9
Operating Expenses 572,000 31.0 333,000 50.8
Income (Loss) from Operations -4,000 -0.2 -195,000 -29.7
ADESSO MADDEN INC.:
- - ------------------
(FIRST COST)
Revenues $160,000 --- --- ---
Cost of Revenues 149,000 --- --- ---
Gross Profit 11,000 --- --- ---
Other Operating Income 468,000 --- $265,000 ---
Total Operating Income 479,000 100% 265,000 100%
Operating Expenses 277,000 57.8 201,000 75.8
Income from Operations 202,000 42.2 64,000 24.2
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 VS. SIX MONTHS ENDED JUNE 30, 1996
Revenues for the six months ended June 30, 1997 were $25,488,000, or 55% higher
than the $16,484,000 recorded in the comparable period of 1996. This increase in
product sales is due to several factors: additional wholesale accounts,
increased reorders, increased retail sales due to opening of two retail stores
in fourth quarter of 1996, two retail stores in second quarter of 1997 and
revenue from the David Aaron brand (acquired April 1996). As a result of
additional distribution , management feels that "Steve Madden" as a brand name
has increased in popularity nationwide. In turn, increased revenues have enabled
the Company to expand its advertising and promotional efforts, all of which have
contributed to the continuing increase in sales.
10
<PAGE>
Cost of revenues decreased 3% from 66% in 1996 to 63% in 1997, due to the
increase in sales which allowed the Company to purchase larger volume, which
resulted in a lower cost per pair and the purchase of a higher percentage of its
shoes from overseas suppliers at a lower cost per pair as compared to 1996.
Gross profit increased 3% from 34% in 1996 to 37% in 1997.
Selling, general and administrative (SG&A) expenses increased by 63% to
$9,058,000 in 1997 from $5,544,000 in 1996. The increase in the first and second
quarter of 1997 reflects the cost incurred in the Company's strategic
strengthening of the management team and infrastructure in 1996, thereby laying
the foundation for future growth. The increase in SG&A is due primarily to a 61%
increase in payroll, bonuses and related expenses from $1,935,000 in 1996 to
$3,124,000 in 1997. Additionally, the Company focused its efforts on selling,
advertising, marketing and designing thus increasing those expenses by 124% from
$1,381,000 in 1996 to $3,093,000 in 1997. Also, the increase in the number of
retail outlets and expanded office facilities resulted in an increase in
occupancy, telephone, utilities, computer and depreciation expenses by 106% from
$556,000 in 1996 to 1,146,000 in 1997.
Income from operations for 1997 was $1,268,000 which represents an increase of
$805,000 or 174% over the income from operations of $463,000 in 1996. The net
income for 1997 was $758,000 as compared to net income of $376,000 for the 1996.
Steve Madden wholesale division revenues, accounted for $17,588,00 or 69% and
$14,386,000 or 87% of total revenues in 1997 and 1996 respectively. Wholesale
Division cost of revenues as a percentage of sales has decreased by 3% from 67%
in 1996 to 64% in 1997. Operating expenses increased by 37%, from $4,285,000 in
1996 to $5,856,000 in 1997. This increase is due to an increase in payroll and
payroll related expenses due to the hiring of additional management personnel
and an increase in occupancy expenses due to additional warehouse space needed
for expanding inventory and expense to operate the New York City showroom.
Operating expenses have increased due to the development of a new line of
sneakers and the hiring of additional personnel to facilitate future growth of
footwear classifications/extensions. Wholesale income from operations was
$560,000 in 1997 compared to $446,000 in 1996.
Revenues from the Retail Division accounted for $3,645,000 or 14% and $1,443,000
or 9% of total revenues in 1997 and 1996, respectively. The comparable stores
sales for the first six months increased 22% over the same period of 1996. The
increase in Retail Division revenues is primarily due to the Company's opening
of retail stores in Roosevelt Field in Garden City, NY and Garden State Plaza in
Paramus, New Jersey, in the fourth quarter of 1996 and Queens Center Mall in
Elmhurst NY and Lenox Square Mall in Atlanta GA, in the second quarter of 1997
which generated aggregate revenues of $1,883,000. Selling, general and
administrative expenses for the Retail Division increased to $1,629,000 or 45%
of sales in 1997 from $554,000 or 38% of sales in 1996. This increase is due to
increases in payroll and related expenses, occupancy, printing, computer and
depreciation expenses as a result of opening four additional stores.
11
<PAGE>
Additionally, the Company hired a Director of Retail Operations, anticipating
increases in the number of retail stores. Income from operations from the retail
division was $429,000 in 1997 compared to income from operations of $125,000 in
1996.
Revenues from the Diva Acquisition Corp.(acquired April 1, 1996 which markets
the "David Aaron" brand name in footwear) wholesale division accounted for
$3,034,000 or 12%, and $655,000 or 4%, of total revenues in 1997 and 1996,
respectively. Gross profit for the six month period ended June 30,1997 was
$947,000 and loss from operations was $87,000.
Adesso-Madden , a wholly owned subsidiary of the Company, generated revenue of
$1,221,000 for the first six month period ended June 30, 1997. Additionally,
Adesso-Madden generated commission income of $815,000 for the first six months
of 1997 compared to commission income of $459,000 for the first six months of
1996.
THREE MONTHS ENDED JUNE 30, 1997 VS. THREE MONTHS ENDED JUNE 30, 1996
Revenues for the three months ended June 30, 1997 were $12,270,000, or 41%
higher than the $8,676,000 recorded in the comparable period of 1996. This
increase in product sales is due to several factors: new wholesale accounts,
increased reorders, increased retail sales due to opening of two retail stores
in fourth quarter of 1996 and two retail stores in second quarter of 1997 and
revenue from the David Aaron brand (acquired April 1996). As a result of
additional distribution , management feels that "Steve Madden" as a brand name
has increased in popularity nationwide. In turn, increased revenues have enabled
the Company to expand its advertising and promotional efforts, all of which have
contributed to the continuing increase in sales.
Cost of revenues decreased 16% from 76% in 1996 to 60% in 1997, due to the
increase in sales which allowed the Company to purchase larger volumes, which
resulted in a lower cost per pair and the purchase of a higher percentage of its
shoes from overseas suppliers at a lower cost per pair as compared to 1996.
Selling, general and administrative (SG&A) expenses increased by 52% to
$4,749,000 in 1997 from $3,121,000 in 1996. The increase in the second quarter
of 1997 reflects the cost incurred in the Company's strategic strengthening of
the management team and infrastructure in 1996, thereby laying the foundation
for future growth. The increase in SG&A is due primarily to a 70% increase in
payroll, bonuses and related expenses from $992,000 in 1996 to $1,684,000 in
1997. Additionally, the Company focused its efforts on selling, advertising,
marketing and designing thus increasing those expenses by 29% from $1,128,000 in
1996 to $1,454,000 in 1997. Also, the Company expanded its retail outlets and
office facilities thereby increasing occupancy, telephone, utilities, computer,
legal, printing/supplies and depreciation expenses by 146% from $404,000 in 1996
to $993,000 in 1997.
12
<PAGE>
Income from operations for 1997 was $604,000, which represents an increase of
$1,393,000 or 177% over the loss from operations of $789,000 in 1996. The net
income for 1997 was $357,000 as compared to net loss of $431,000 for the 1996.
Steve Madden wholesale division revenues, accounted for $8,177,000 or 67% and
$7,231,000 or 83% of total revenues in 1997 and 1996 respectively. Wholesale
Division cost of revenues as a percentage of sales decreased by 15% from 78% in
1996 to 63% in 1997. Operating expenses increased by 28%, from $2,309,000 in
1996 to $2,965,000 in 1997. This increase is due to an increase in payroll and
payroll related expenses due to the hiring of additional management personnel
and an increase in occupancy expenses due to additional warehouse space needed
for expanding inventory and expense to operate the New York City showroom.
Operating expenses have also increased due to the development of a new line of
sneakers and the hiring of additional personnel to facilitate future growth of
footwear classifications/extensions. Wholesale income from operations was
$80,000 in 1997 compared to a loss from operations of $709,000 in 1996.
Revenues from the Retail Division accounted for $2,091,000 or 17% and $790,000
or 9% of total revenues in 1997 and 1996, respectively. The comparable stores
sales for the three months increased 22% over the same period of 1996. The
increase in Retail Division revenues is primarily due to the Company's opening
of retail stores in Roosevelt Field in Garden City, NY and Garden State Plaza in
Paramus, New Jersey, in the fourth quarter of 1996 and Queens Center Mall in
Elmhurst NY and Lenox Square Mall in Atlanta GA, in the second quarter of 1997
which generated aggregate revenues of $1,128,000. Selling, general and
administrative expenses for the Retail Division increased to $935,000 or 45% of
sales in 1997 from $278,000 or 35% of sales in 1996. This increase is due to
increases in payroll and related expenses, occupancy, printing, computer and
depreciation expenses as a result of opening four additional stores.
Additionally, the Company hired a Director of Retail Operations, anticipating
increases in the number of retail stores. Income from operations from the retail
division was $326,000 in 1997 compared to income from operations $51,000 in
1996.
Revenues from the Diva Acquisition Corp. wholesale division accounted for
$1,842,000 or 15%, and $655,000 or 8%, of total revenues in 1997 and 1996,
respectively. Gross profit increased 10% from $138,000 or 21% in 1996 to
$568,000 or 31% in 1997. Operating expenses increased by 72% from $333,000 in
1996 to $572,000 in 1997 due to increases in payroll and payroll related
expenses, computer, printing, and depreciation expenses. Loss from operations
from Diva was $4,000 in 1997 compared to a loss of $195,000 in 1996.
Adesso-Madden , a wholly owned subsidiary of the Company, generated revenue of
$160,000 for the second quarter of 1997. Additionally, Adesso-Madden generated
commission income of $468,000 for the second quarter of 1997 compared to
commission income of $265,000 for the second quarter of 1996.
13
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has working capital of $14,959,000 at June 30, 1997 which represents
an increase of $526,000 in working capital from June 30,1996. In the first six
months of 1997 the Company received proceeds of $381,000 from the exercise of
options.
The Company's customers consist principally of department stores and specialty
stores, including shoe boutiques. Presently, the Company sells approximately
fifty percent (50%) of its products to department stores, including Federated
Department Stores (Bloomingdales, Burdines, Macy's East, Macy's West and Rich's)
May Department Stores, Dillards, Nordstorm's, Dayton Hudson and approximately
fifty percent (50%) to specialty stores, including shoe stores such as Edison
(Wild Pair, Precis, Bakers/Leeds) and junior clothing stores such as Urban
Outfitters. Federated Department Stores presently accounts for approximately 20%
of the Company's sales.
OPERATING ACTIVITIES
During the six month period ended June 30, 1997, operating activities provided
$1,081,000 of cash. The use of cash arose principally from an increase in
accounts receivable-non factored of $1,237,000, a decrease in accounts
receivable factored $426,000 and a decrease in inventories of $89,000.
Additionally, there was a decrease in prepaid expenses and other assets of
$151,000, an increase in income taxes of $202,000, an increase in accounts
payable and accrued expenses of $287,000, as well as increase in other current
liabilities of $58,000 and a decrease in accrued bonuses of $267,000.
The Company has lease agreements for office, warehouse, and retail space,
expiring at various times through 2007. Future obligations under these lease
agreements total $7,786,000 with annual lease commitment of $1,208,000.
The Company has employment agreements with various officers currently providing
for aggregate annual salaries of approximately $1,400,000, 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 sales, net income, or net income
before interest and taxes to three officers.
One of such officers, Steve Madden, Chairman, President and Chief Executive
Officer of the Company, has entered into an amended employment agreement which
eliminates the sales based bonus effective January, 1998. Mr. Madden's bonus, if
any, is left to the discretion of the Board of Directors. The amended employment
agreement provided a signing bonus of $200,000.
The amended employment agreement provides for a term of ten years, as opposed to
the previous six year term which would have expired in 1999, and commences on
January 1, 1998. In addition, Mr. Madden's base salary has been increased from
$250,000 per year
14
<PAGE>
to $275,000 per year for the first two years, increasing to $300,000 in 2000,
and then increasing by 10% each year thereafter.
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 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, 1997, the Company used cash of
$1,070,000 to acquire computer equipment and make leasehold improvements on new
office, retail stores and warehouse space.
FINANCING ACTIVITIES
During the six month period ending June 30, 1997, the Company received $381,000
from the exercise of options. In March 1997, the Company issued 85,979 shares of
common stock in payment of the note payable of $645,000 issued in connection
with the acquisition of Diva.
LICENSE AGREEMENTS
During the second quarter of 1997, the Company entered into three license
agreements for hosiery, jewelry and ready-to-wear, bringing the total number of
license agreements to five, including two license agreements entered into during
the first quarter of 1997 for handbags and sunglasses. Although such agreements
did not generate substantial revenue in the first six months ended June 30,
1997, the Company expects to receive royalties as early as the forth quarter of
1997.
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.
15
<PAGE>
LEGAL PROCEEDINGS
On December 2, 1993, Jordan Belfort, Daniel Porush and Kenneth Greene, who
were principal stockholders of Stratton Oakmont, entered into a Stock Purchase
Agreement with BOCAP Corp. ("BOCAP"), a Florida corporation (which previously
conducted no business operations and which Mr. Madden used for his personal
investment purposes), pursuant to which BOCAP purchased an aggregate of
1,284,816 shares (the "Shares") of Common Stock from Messrs. Belfort, Porush and
Greene. As consideration for such Shares, BOCAP delivered to each of Messrs.
Belfort, Porush and Greene a promissory note (each a "Note") in the principal
amount of $3,237,737, $1,387,601 and $513,926, respectively, bearing an interest
rate of four percent per annum and due and payable on December 2, 1995.
The Company has been advised by BOCAP that Jordan Belfort has demanded
repayment of his Note and the registration and sale by BOCAP of the Shares with
the proceeds of such sales to be applied to the payment of his Note. Belfort has
claimed that BOCAP is in default under his Note for failing to repay the
outstanding principal amount and accrued interest by December 2, 1996. Belfort
has asserted that he may cause the shares to be sold in order to satisfy the
sums due to him pursuant to the terms of a security and escrow agreement
purportedly entered into by BOCAP on or about August 2, 1995. BOCAP has advised
the Company that it disputes Belfort's claims and that the maturity date of his
Note was extended by mutual agreement until December 2, 1999. BOCAP has also
informed the Company that it disputes the enforceability of the security and
escrow agreement.
On June 3, 1997, Belfort commenced a lawsuit in the Supreme Court of the
State of New York, Nassau County against BOCAP, the Company, Steven Madden and
Farmstead Consulting, Inc. ("Farmstead"), a New York corporation and the
purported escrow agent with respect to the Shares, relating to the alleged
default on his Note. The relief sought against the Company is an order requiring
the Company to register the Shares under the Securities Act of 1933 and
requiring Farmstead to sell as many Shares as necessary to pay Belfort not less
than $4,135,395.
16
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report on Form 10-QSB to be signed on its behalf
by the undersigned thereunto duly authorized.
STEVE MADDEN, LTD
/s/ ARVIND DHARIA
---------------------------
Arvind Dharia
Chief Financial Officer
DATE: August 14, 1997
17
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