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 September 30, 1998
- --------------------------------------------------------------------------------
(_) 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 September 30, 1998 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
- --------------------------------------------------------------------------------
(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 November 05, 1998
Common Stock 10,876,893
1
<PAGE>
STEVEN MADDEN, LTD.
FORM 10-Q
QUARTERLY REPORT
SEPTEMBER 30, 1998
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................................................ 19
ITEM 2. Changes in Securities and Use of Proceeds........................ 20
2
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<TABLE>
<CAPTION>
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, December 31,
1998 1997
------------ ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 15,219,000 $ 3,887,000
Investments 1,991,000
Accounts receivable - nonfactored (net of allowances for doubtful accounts of
$460,000 at September 30, 1998 and $351,000 at December 31, 1997) 838,000 1,127,000
Due from factor (net of allowances for doubtful accounts of $350,000
at September 30, 1998 and $335,000 at December 31, 1997) 10,200,000 4,821,000
Inventories 6,133,000 5,081,000
Prepaid advertising 278,000 441,000
Prepaid expenses and other current assets 1,512,000 1,698,000
Prepaid taxes 686,000 624,000
------------ ------------
Total current assets 34,866,000 19,670,000
------------ ------------
Property and equipment, net 7,701,000 5,931,000
------------ ------------
Other assets:
Prepaid advertising, less current portion 945,000 1,041,000
Deferred taxes 401,000 401,000
Deposits and other 206,000 258,000
Cost in excess of fair value of net assets acquired (net of accumulated
amortization of $263,000 at September 30, 1998 and $170,000 at
December 31, 1997) 2,501,000 1,976,000
------------ ------------
Total other assets 4,053,000 3,676,000
------------ ------------
$ 46,620,000 $ 29,277,000
============ ============
LIABILITIES
Current liabilities:
Current portion of lease payable $ 99,000 $ 105,000
Accounts payable and accrued expenses 2,282,000 2,032,000
Accrued bonuses 194,000 593,000
Other current liabilities 351,000 395,000
------------ ------------
Total current liabilities 2,926,000 3,125,000
------------ ------------
Lease payable, less current portion 304,000 359,000
------------ ------------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Common stock - $.0001 par value, 60,000,000 shares authorized, 10,876,393 issued
and outstanding at September 30, 1998 and 8,429,073 issued and
outstanding at December 31, 1997 1,000 1,000
Additional paid-in capital 36,262,000 21,721,000
Unearned compensation (1,741,000) (1,281,000)
Retained earnings 9,343,000 5,809,000
Treasury stock at cost (104,700 shares at September 30, 1998 and 101,800 shares
at December 31, 1997) (475,000) (457,000)
------------ ------------
43,390,000 25,793,000
------------ ------------
$ 46,620,000 $ 29,277,000
============ ============
</TABLE>
See notes to financial statements
3
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STEVEN MADDEN, LTD. AND SUBSIDIARIES
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 23,991,000 $ 18,055,000 $ 59,235,000 $ 43,542,000
Cost of sales 13,908,000 10,192,000 34,593,000 26,208,000
------------ ------------ ------------ ------------
Gross profit 10,083,000 7,863,000 24,642,000 17,334,000
Other revenue 992,000 748,000 2,535,000 1,601,000
Operating expenses (7,872,000) (7,108,000) (21,004,000) (16,159,000)
------------ ------------ ------------ ------------
Income from operations 3,203,000 1,503,000 6,173,000 2,776,000
Interest income (expense), net 40,000 (25,000) (32,000) (27,000)
------------ ------------ ------------ ------------
Income before provision for income taxes 3,243,000 1,478,000 6,141,000 2,749,000
Provision for income taxes 1,363,000 597,000 2,607,000 1,111,000
------------ ------------ ------------ ------------
Net income $ 1,880,000 $ 881,000 $ 3,534,000 $ 1,638,000
============ ============ ============ ============
Basic income per share $ .19 $ .11 $ .39 $ .21
============ ============ ============ ============
Diluted income per share $ .17 $ .10 $ .33 $ .17
============ ============ ============ ============
Weighted average common shares outstanding -
basic income per share 9,948,378 8,020,846 9,017,914 7,976,312
Effect of potential common shares 1,409,624 529,176 1,781,127 1,931,990
------------ ------------ ------------ ------------
Weighted average common shares outstanding -
diluted income per share 11,358,002 8,550,022 10,799,041 9,908,302
============ ============ ============ ============
</TABLE>
See notes to financial statements
4
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STEVEN MADDEN, LTD. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,534,000 $ 1,638,000
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 959,000 907,000
Deferred compensation 196,000 127,000
Provision for bad debts 124,000 181,000
Options issued for consulting services 142,000 23,000
Excess of fair market value over option price on stock option grant 16,000
Deferred rent expense 274,000
Changes in:
Accounts receivable - nonfactored 180,000 (201,000)
Due from factor (5,394,000) (2,919,000)
Inventories (878,000) (100,000)
Prepaid expenses and other assets 497,000 411,000
Accounts payable and accrued expenses 114,000 1,122,000
Accrued bonuses (399,000) 95,000
Other current liabilities (318,000) 317,000
Tax liability (62,000) 837,000
------------ ------------
Net cash provided by (used in) operating activities (1,031,000) 2,454,000
------------ ------------
Cash flows from investing activities:
Purchase of property and equipment (2,605,000) (2,752,000)
Sale of investment securities 1,991,000
Payments in connection with acquisition of business (19,000)
------------ ------------
Net cash used in investing activities (633,000) (2,752,000)
------------ ------------
Cash flows from financing activities:
Proceeds from options and warrants exercised 13,075,000 381,000
Repayment of lease obligations (61,000) (80,000)
Purchase of treasury stock (18,000)
------------ ------------
Net cash provided by financing activities 12,996,000 301,000
------------ ------------
Net increase in cash and cash equivalents 11,332,000 3,000
Cash and cash equivalents - beginning of period 3,887,000 6,151,000
------------ ------------
Cash and cash equivalents - end of period $ 15,219,000 $ 6,154,000
============ ============
Supplemental disclosures of noncash investing and financing activities:
Acquisition of leased assets $ 359,000
Issuance of common stock for debt $ 645,000
Issuance of stock options in connection with employment agreement $ 1,345,000
Issuance of common stock in connection with acquisition of business $ 668,000
</TABLE>
See notes to financial statements
5
<PAGE>
STEVEN MADDEN, LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
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 September 30,
1998, and the results of its operations, changes in stockholders' equity and
cash flows for the nine and three-month periods then ended. The results of
operations for the nine and three-month periods ended September 30, 1998 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,
1997 included in the Steve Madden, Ltd. Form 10-KSB.
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
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings Per Share" ("Statement No. 128"). Statement No. 128 replaced the
calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share exclude any dilutive effects of options, warrants and convertible
securities. Dilutive earnings per share is very similar to the previously
reported fully diluted earnings per share. The Company adopted Statement No. 128
and has retroactively applied the effects thereof for all periods presented. The
impact on the per share amounts previously reported was not significant.
NOTE D - PENDING LITIGATION
[1] Levenson and Siskin v. Diva Acquisition Corp., et al:
This lawsuit, brought by the former President and the former Vice
President of Design of Diva Acquisition Corp., a wholly owned subsidiary
of the Company, principally alleges that those individuals were fired
without cause, remains in the discovery phase.
The Company continues to believe that Mr. Levenson's claims and Mr.
Siskin's claims are without merit and is, accordingly, contesting those
claims vigorously.
6
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STEVEN MADDEN, LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
NOTE D - PENDING LITIGATION (CONTINUED)
[2] Ooga v. Steven Madden, Ltd., et al.:
On September 23, 1998, the plaintiff in this lawsuit, Ooga Associates
Corp. ("Ooga"), (i) applied for a preliminary injunction to enjoin, inter
alia, the Company's use of certain designs and drawings claimed to be
proprietary to Ooga, and (ii) sought leave to amend its complaint to add
claims against the Company's Chief Executive Officer and an architectural
firm, the Tricarico Group, retained by the Company to prepare
construction drawings for certain of the Company's retail stores. At a
hearing held on October 22, 1998, the Court denied Ooga's application for
a preliminary injunction and reserved decision on the remainder of its
motion.
On October 22, 1998, the Court further indicated its intention to dismiss
Ooga's claim that the Company had breached an oral agreement to use Ooga
exclusively to design and build the Company's retail stores. Accordingly,
upon entry of the Court's order, Ooga's claims against the Company and
certain of its subsidiaries will arise solely from its allegations that
the Company made false representations regarding the alleged agreement,
misappropriated allegedly proprietary designs belonging to Ooga, and
improperly induced Stav Efrar, now an employee of the Company, to breach
fiduciary duties that he allegedly owed to Ooga. Discovery on those
claims (and the claims against the other defendants) will likely commence
in the coming weeks and must be concluded by April 22, 1999.
The Company believes that Ooga's remaining claims are without merit and
its damages, if any, are nominal in nature. The Company intends to
contest Ooga's lawsuit vigorously.
[3] Diva Acquisition Corp. v. D. Aaron, Inc., et al:
Defendants' motion to dismiss this lawsuit, as disclosed in the Company's
Form 10-Q for the quarter ended June 30, 1998, was denied by the Court on
September 16, 1998. Accordingly, the parties are currently engaged in
discovery, and Diva continues to prosecute its claims vigorously.
7
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
- --------------------------------------------------------------------------------
The following discussion of the Company's financial condition and results of
operations should be read in conjunction with the Financial Statements and Notes
thereto appearing elsewhere in this document.
Statements in this "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and elsewhere in this document as well as statements
made in press releases and oral statements that may be made by the Company or by
officers, directors or employees of the Company acting on the Company's behalf
that are not statements of historical or current fact constitute "forward
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. Such forward-looking statements involve known and unknown
risks, uncertainties and other unknown factors that could cause the actual
results of the Company to be materially different from the historical results or
from any future results expressed or implied by such forward-looking statements.
In addition to statements which explicitly describe such risks and
uncertainties, readers are urged to consider statements labeled with the terms
"believes", "belief", "expects", "intends", "anticipates" or "plans" to be
uncertain forward-looking statements. The forward looking statements contained
herein are also subject generally to other risks and uncertainties that are
described from time to time in the Company's reports and registration statements
filed with the Securities and Exchange Commission.
The following table sets forth information on operations for the periods
indicated:
PERCENTAGE OF NET REVENUES
NINE MONTHS ENDED
SEPTEMBER 30
Consolidated: 1998 1997
- ------------ ---- ----
Net Sales $ 59,235,000 100% $ 43,542,000 100%
Cost of Sales 34,593,000 58 26,208,000 60
Other Operating Income 2,535,000 4 1,601,000 4
Operating Expenses 21,004,000 35 16,159,000 37
Income from Operations 6,173,000 10 2,776,000 7
Interest Income (Expense) Net (32,000) 0 (27,000) 0
Income Before Income Taxes 6,141,000 10 2,749,000 7
Net Income 3,534,000 6 1,638,000 4
8
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PERCENTAGE OF NET REVENUES
NINE MONTHS ENDED
SEPTEMBER 30
By Segment 1998 1997
---- ----
WHOLESALE DIVISIONS:
- --------------------
Steven Madden, Ltd.
- -------------------
Net Sales $ 37,506,000 100% $ 29,104,000 100%
Cost of Sales 23,342,000 62 17,955,000 62
Other Operating Income 391,000 1 62,000 0
Operating Expenses 10,724,000 29 10,211,000 35
Income from Operations 3,831,000 10 1,000,000 3
Diva Acquisition Corp.
- ----------------------
Net Sales $ 3,726,000 100% $ 5,090,000 100%
Cost of Sales 3,001,000 81 3,307,000 65
Operating Expenses 995,000 27 1,821,000 36
Income (Loss) from Operations (270,000) (7) (38,000) (1)
L.E.I. Footwear:
- ----------------
Net Sales $ 722,000 100% -- --
Cost of sales 454,000 63 -- --
Operating Expenses 250,000 35 -- --
Income from Operations 18,000 2 -- --
STEVEN MADDEN RETAIL INC.:
- --------------------------
Net Sales $ 17,281,000 100% $ 8,129,000 100%
Cost of Sales 7,796,000 45 3,815,000 47
Operating Expenses 8,043,000 47 3,285,000 40
Income from Operations 1,442,000 8 1,029,000 13
ADESSO MADDEN INC.:
- -------------------
(FIRST COST)
Net Sales -- -- $ 1,219,000 --
Cost of Sales -- -- 1,131,000 --
Commission Revenue -- -- 1,539,000 --
Total Operating Revenue $ 2,144,000 100% 1,627,000 100%
Operating Expenses 992,000 46 842,000 52
Income from Operations 1,152,000 54 785,000 48
9
<PAGE>
PERCENTAGE OF NET REVENUES
THREE MONTHS ENDED
SEPTEMBER 30
Consolidated: 1998 1997
- ------------ ---- ----
Net Sales $ 23,991,000 100% $ 18,055,000 100%
Cost of Sales 13,908,000 58 10,192,000 57
Other Operating Income 992,000 4 748,000 4
Operating Expenses 7,872,000 33 7,108,000 39
Income from Operations 3,203,000 13 1,503,000 8
Interest Income (Expense) Net 40,000 0 (25,000) 0
Income Before Income Taxes 3,243,000 13 1,478,000 8
Net Income 1,880,000 8 881,000 5
By Segment
WHOLESALE DIVISIONS:
- --------------------
Steven Madden, Ltd.
- -------------------
Net Sales $ 15,204,000 100% $ 11,515,000 100%
Cost of Sales 9,552,000 63 6,744,000 58
Other Operating Income 216,000 1 24,000 0
Operating Expenses 3,924,000 26 4,355,000 38
Income from Operations 1,944,000 13 440,000 4
Diva Acquisition Corp.
- ----------------------
Net Sales $ 877,000 100% $ 2,056,000 100%
Cost of Sales 665,000 76 1,220,000 59
Operating Expenses 317,000 36 788,000 38
Income (Loss) from Operations (105,000) (12) 48,000 3
L.E.I. Footwear
- ---------------
Net Sales $ 722,000 100% -- --
Cost of Sales 454,000 63 -- --
Operating Expenses 210,000 29 -- --
Income from Operations 58,000 8 -- --
10
<PAGE>
PERCENTAGE OF NET REVENUES
THREE MONTHS ENDED
SEPTEMBER 30
By Segment (Continued)
STEVEN MADDEN RETAIL INC.: 1998 1997
- -------------------------- ----- ----
Net Sales $7,188,000 100% $4,484,000 100%
Cost of Sales 3,237,000 45 2,228,000 50
Operating Expenses 3,119,000 43 1,663,000 37
Income from Operations 832,000 12 593,000 13
ADESSO MADDEN INC.:
- -------------------
(FIRST COST)
Other Operating Income $ 776,000 100% $ 724,000 100%
Operating Expenses 302,000 39 302,000 42
Income from Operations 474,000 61 422,000 58
RESULTS OF OPERATIONS
Nine months Ended September 30, 1998 vs. Nine Months Ended September 30, 1997
CONSOLIDATED:
Sales for the nine months ended September 30, 1998 were $59,235,000 or 36%
higher than the $43,542,000 recorded in the comparable period of 1997. 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 thirteen retail stores during 1997, one retail store in the
first quarter of 1998, three retail stores and an outlet store in the second
quarter of 1998 and four retail stores and one additional outlet store in the
third quarter of 1998. 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. Also, the Company's new LEI Wholesale Division ("LEI Wholesale") was
launched in the third quarter of 1998 shipping to department stores throughout
the country. LEI Wholesale generated revenue of $722,000 for the three month
period ended September 30,1998.
11
<PAGE>
Cost of sales as a percentage of sales decreased 2% from 60% in 1997 to 58% in
1998. Increased sales volume has allowed the Company to purchase in larger
volume, resulting in a lower cost per pair. Gross profit as a percentage of
sales increased 2% from 40% in 1997 to 42% in 1998.
Selling, general and administrative (SG&A) expenses increased by 30% to
$21,004,000 in 1998 from $16,159,000 in 1997. The increase in SG&A is due
primarily to a 55% increase in payroll, bonuses and related expenses from
$5,536,000 in 1997 to $8,591,000 in 1998. Also, the increase in the number of
retail outlets and expanded office facilities resulted in an increase in
occupancy, telephone, utilities, computer, legal, printing/supplies and
depreciation expenses by 89% from $2,633,000 in 1997 to $4,965,000 in 1998.
Income from operations for 1998 was $6,173,000 which represents an increase of
$3,397,000 or 123% over the income from operations of $2,776,000 in 1997. Net
income increased by 116% to $3,534,000 in 1998 from $1,638,000 in 1997.
WHOLESALE DIVISIONS:
Sales from the Steve Madden Wholesale Division ("Madden Wholesale"), accounted
for $37,506,000 or 63% and $29,104,000 or 67% of total sales in 1998 and 1997,
respectively. Cost of sales as a percentage of sales and gross margin as
percentage of sales remains the same in Madden Wholesale. Operating expenses
increased by 5%, from $10,211,000 in 1997 to $10,724,000 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. Madden Wholesale income from operations for the nine
month period ended September 30, 1998 was $3,831,000 compared to income from
operations of $1,000,000 for the nine month period ended September 30, 1997.
Sales from the Diva Acquisition Corp. Wholesale Division ("Diva Wholesale")
which markets the "David Aaron" brand name in footwear accounted for $3,726,000
or 6%, and $5,090,000 or 12%, of total sales in 1998 and 1997, respectively. The
Company believes that the decrease in sales is primarily due to the introduction
of a new management team in the first quarter of 1998 for Diva and the
implementation of certain modifications to Diva's business which the Company
expects will enhance operations in the future. Cost of sales as a percentage of
sales has increased from 65% in 1997 to 81% in Diva Wholesale, primarily as a
result of a higher markdowns experienced in the second and third quarters of
1998. Gross profit as a percentage of sales decreased from 35% in 1997 to 19% in
1998 due to the same reason mentioned above. Operating expenses decreased by 45%
from $1,821,000 in 1997 to $995,000 in 1998 due to decreases in administrative
payroll, selling and designing expenses. Loss from operations from Diva was
$270,000 in 1998 compared to loss from operations of $38,000 in 1997.
The Company's new LEI Wholesale Division ("LEI Wholesale") was launched shipping
to department stores throughout the country in the third quarter of 1998. LEI
Wholesale
12
<PAGE>
generated revenue of $722,000 for the three month period ended September 30,
1998. There have been substantial product reorders and the Company is committed
to the business going forward.
RETAIL DIVISION:
Sales from the Retail Division accounted for $17,281,000 or 29% and $8,129,000
or 19% of total revenues in 1998 and 1997, respectively. The increase in Retail
Division sales is primarily due to the Company's opening two additional retail
stores in the second quarter of 1997, five in the third quarter of 1997, six in
the fourth quarter of 1997, one in the first quarter of 1998, three retail
stores and an outlet store in the second quarter of 1998, four retail stores and
one additional outlet store in the third quarter of 1998 all of which generated
aggregate sales of $8,993,000. Same store sales for the first nine months
increased by 2% over the same period of 1997. This increase in same store sales
is due to Company's ability to fill into best sellers by size. Gross profit as a
percentage of sales has increased by 2% from 53% in 1997 to 55% in 1998.
Selling, general and administrative expenses for the Retail Division increased
to $8,043,000 or 47% of sales in 1998 from $3,285,000 or 40% of sales in 1997.
This increase is due to increases in payroll and related expenses, occupancy,
printing, computer and depreciation expenses as a result of opening thirteen
additional stores in 1997, eight additional stores and two outlet stores during
the nine month period ended September 30, 1998 and the addition of a retail
warehouse at 43-15 38th Street, Long Island City, NY. Income from operations
from the retail division was $1,442,000 in 1998 compared to income from
operations of $1,029,000 in 1997.
FIRST COST DIVISION:
Adesso-Madden, Inc., a wholly owned subsidiary of the Company, generated
commission revenues of $2,144,000 for the first nine months of 1998 which
represents an increase of $517,000 or 32% over the commission revenues of
$1,627,000 in 1997 due to having additional accounts. Operating expenses
increased by 18% from $842,000 in 1997 to $992,000 in 1998 due to increases in
sales commissions, payroll and payroll related expenses, and telephone expenses.
Income from operations from Adesso-Madden was $1,152,000 in 1998 compared to
income from operations of $785,000 in 1997.
Three months Ended September 30, 1998 vs. Three Months Ended September 30,
1997
CONSOLIDATED:
Sales for the three months ended September 30, 1998 were $23,991,000 or 33%
higher than the $18,055,000 recorded in the comparable period of 1997. 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 thirteen retail stores during 1997, one retail store in the
first quarter of 1998, three retail stores, one outlet store in the second
quarter of 1998, four retail stores and one additional outlet store in the third
quarter of 1998.
13
<PAGE>
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. Also, the
Company's new LEI Wholesale Division ("LEI Wholesale") was launched in the third
quarter of 1998 - shipping to department stores throughout the country. LEI
Wholesale generated revenue of $722,000 for the three month period ended
September 30,1998.
Cost of sales as a percentage of sales increase from 57% in 1997 to 58%,
primarily as a result of markdowns experienced in the third quarter of 1998.
Gross profit as a percentage of sales decreased from 43% in 1997 to 42% in 1998
due to the same reason mentioned above.
Selling, general and administrative (SG&A) expenses increased by 11% to
$7,872,000 in 1998 from $7,108,000 in 1997. The increase in SG&A is due
primarily to a 41% increase in payroll, bonuses and related expenses from
$2,281,000 in 1997 to $3,209,000 in 1998. Also, the increase in the number of
retail outlets and expanded office facilities resulted in an increase in
occupancy, telephone, utilities, printing/supplies and depreciation expenses by
86% from $854,000 in 1997 to $1,585,000 in 1998.
Income from operations for 1998 was $3,203,000 which represents an increase of
$1,700,000 or 113% over the income from operations of $1,503,000 in 1997. Net
income increased by 113% to $1,880,000 in 1998 from $881,000 in 1997.
WHOLESALE DIVISIONS:
Sales from the Steve Madden Wholesale Division ("Madden Wholesale"), accounted
for $15,204,000 or 63% and $11,515,000 or 64% of total sales in 1998 and 1997,
respectively. Cost of sales as a percentage of sales increased from 58% in 1997
to 63% in 1998. Gross profit as a percentage of sales decreased from 42% in 1997
to 37% in 1998 in Madden Wholesale. Operating expenses decreased by 10%, from
$4,355,000 in 1997 to $3,924,000 in 1998, primarily as a result of decrease in
selling, marketing and advertising expenses. Madden Wholesale income from
operations for the three month period ended September 30, 1998 was $1,944,000
compared to income from operations of $440,000 for the three month period ended
September 30, 1997.
Sales from the Diva Acquisition Corp. Wholesale Division ("Diva Wholesale")
which markets the "David Aaron" brand name in footwear accounted for $877,000 or
4%, and $2,056,000 or 11%, of total sales in 1998 and 1997, respectively. The
Company believes that the decrease in sales is primarily due to the introduction
of a new management team in the first quarter of 1998 for Diva and the
implementation of certain modifications to Diva's business which the Company
expects will enhance operations in the future. Cost of sales as a percentage of
sales has increased from 59% in 1997 to 76% in Diva Wholesale, primarily as a
result of a higher markdowns experienced in the third quarter of 1998. Gross
profit as a percentage of sales decreased from 42% in 1997 to 25% in 1998 due
the same reason
14
<PAGE>
mentioned above. Operating expenses decreased by 60% from $788,000 in 1997 to
$317,000 in 1998 due to decreases in administrative payroll, selling and
designing expenses. Loss from operations from Diva was $105,000 in 1998 compared
to income from operations of $48,000 in 1997.
The Company's new LEI Wholesale Division ("LEI Wholesale") was launched shipping
to department stores throughout the country in the third quarter of 1998. LEI
Wholesale generated revenue of $722,000 for the three month period ended
September 30,1988. There have been substantial product reorders and the Company
is committed to the business going forward.
RETAIL DIVISION:
Sales from the Retail Division accounted for $7,188,000 or 30% and $4,484,000 or
25% of total revenues in 1998 and 1997, respectively. The increase in Retail
Division sales is primarily due to the Company's opening five additional retail
stores in the third quarter of 1997, six in the fourth quarter of 1997, one in
the first quarter of 1998, three retail stores and an outlet store in the second
quarter of 1998, four retail stores and one additional outlet store in the third
quarter of 1998 all of which generated aggregate sales of $3,269,000. Same store
sales for the three month period ended September 30, 1998 decreased 4% over the
same period of 1997. The Company's same store sales consist of eleven stores
nine of which are stores located in the Northeast. These nine stores were
affected by the warmer than normal weather causing a shift in the
classifications of product being sold. The business shifted from boots last year
at an average price of $99 to sandals this year at an average price of $58.
Sandals comprised 27% of the business this year in same store sales versus 12%
last year. Gross profit as a percentage of sales has increased by 5% from 50% in
1997 to 55% in 1998. Selling, general and administrative expenses for the Retail
Division increased to $3,119,000 or 43% of sales in 1998 from $1,663,000 or 37%
of sales in 1997. This increase is due to increases in payroll and related
expenses, occupancy, printing, computer and depreciation expenses as a result of
opening thirteen additional stores in 1997, eight additional retail stores and
two outlet stores during nine month period ended September 30, 1998 and the
addition of a retail warehouse at 43-15 38th Street, Long Island City, NY.
Income from operations from the retail division was $832,000 in 1998 compared to
income from operations of $593,000 in 1997.
FIRST COST DIVISION:
Adesso-Madden, Inc., a wholly owned subsidiary of the Company, generated
commission revenues of $776,000 for the three month period ended September 30,
1998 which represents an increase of $52,000 or 7% over the commission revenues
of $724,000 in 1997 due to sales from having additional accounts. Operating
expenses remains the same in 1998 over the same period of 1997. Income from
operations from Adesso-Madden was $474,000 in 1998 compared to income from
operations of $422,000 in 1997.
15
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has working capital of $31,940,000 at September 30, 1998 which
represents an increase of $16,795,000 in working capital from September 30,1997.
As of July 9, 1998, the Board of Directors of the Company approved the
redemption of all of the Company's outstanding Class B Redeemable Common Stock
Purchase Warrants (the "Class B Warrants). Warrantholders had until the close of
business on August 13, 1998 to exercise their Class B warrants for the purchase
of shares of Common Stock at an exercise price of $5.50 per share. If a
Warrantholder failed to exercise the Class B Warrants held thereby by such date,
the Company had the right to redeem them by paying $.05 for each outstanding
Class B Warrant. The Company redeemed 15,310 Class B Warrants. During the nine
month period ended September 30,1998, the Company received net proceeds of
$10,826,000 from the exercise of Class B Warrants.
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, Bakers/Leeds) and junior clothing stores such as Urban Outfitters.
Federated Department Stores presently accounts for approximately 16% of the
Company's sales.
OPERATING ACTIVITIES
During the nine month period ended September 30, 1998, cash used by operating
activities was $1,031,000. Uses of cash arose principally from an increase in
accounts receivable factored of $5,394,000 and an increase in inventories of
$878,000, a decrease in accrued bonuses of $399,000 and a decrease in other
current liabilities of $318,000.
The Company has lease agreements for office, warehouse, and retail space,
expiring at various times through 2009. Future obligations under these lease
agreements total approximately $25,000,000.
The Company has employment agreements with various officers currently providing
for aggregate annual salaries of approximately $1,327,000, 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 the 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
16
<PAGE>
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 nine month period ended September 30, 1998, the Company used cash of
$2,605,000 to acquire computer equipment and make leasehold improvements on new
retail stores, warehouse space and office space. The Company also sold
investment securities resulting in proceeds of $1,991,000.
FINANCING ACTIVITIES
During the nine month period ended September 30, 1998, the Company received
$13,075,000 from the exercise of options and warrants.
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 six, including three license agreements entered into
during the year ended December 31, 1997 for handbags, sunglasses and outerwear.
The Company added its seventh license, Van Mar, Inc. for Steve Madden intimates
which contract commenced on April 1, 1998 and the Company also extended its
agreement with CO International to include hair accessories in Canada due to
requests from customers. The Company is pleased to announce that as of third
quarter Mirage Apparel Group, LTD., will now be the Company's sportswear
licensee. The previous license agreement with Winer Industries was mutually
ended and product will no longer be shipped by them after December 31, 1998.
Also, in October 1, 1998 the Company entered into a license agreement with
Daniel M. Friedman Associates, Inc., for belts. The Company is exploring
additional licensing opportunities.
On April 21, 1998 the Company signed a License Agreement R.S.V. Sport, Inc.,
pursuant to which the Company has the right to use the l.e.i. trademark in
connection with the sale of women and girls footwear. R.S.V. Sport, Inc., is a
$130 million jeanswear company and is among the most popular jean brands for
young women ages 12 to 20. This provides the Company with the opportunity to
market shoes to a different customer base than those customers presently
targeted by the Steve Madden brand. The line will be offered at lower retail
prices than the Steve Madden brand.
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. No easy technological "quick fix" has yet been developed for
this problem. The Company is expending approximately $200,000 to assure that its
computer systems are reprogrammed
17
<PAGE>
in time to effectively deal with transactions in the year 2000 and beyond. 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.
18
<PAGE>
Part II
Item 1.
Legal Proceedings
LEVENSON AND SISKIN v. DIVA ACQUISITION CORP., ET. AL.
This lawsuit, brought by the former President and the former Vice President of
Design of Diva Acquisition Corp., a wholly owned subsidiary of the Company,
principally alleges that those individuals were fired without cause, remains in
the discovery phase.
The Company continues to believe that Mr. Levenson's claims and Mr. Siskin's
claims are without merit and is, accordingly, contesting those claims
vigorously.
OOGA v. STEVEN MADDEN, LTD., ET. AL.
On September 23, 1998, the plaintiff in this lawsuit, Ooga Associates Corp.
("Ooga"), (i) applied for a preliminary injunction to enjoin, inter alia, the
Company's use of certain designs and drawings claimed to be proprietary to Ooga,
and (ii) sought leave to amend its complaint to add claims against the Company's
Chief Executive Officer and an architectural firm, the Tricarico Group, retained
by the Company to prepare construction drawings for certain of the Company's
retail stores. At a hearing held on October 22, 1998, the Court denied Ooga's
application for a preliminary injunction and reserved decision on the remainder
of its motion.
On October 22, 1998, the Court further indicated its intention to dismiss Ooga's
claim that the Company had breached an oral agreement to use Ooga exclusively to
design and build the Company's retail stores. Accordingly, upon entry of the
Court's order, Ooga's claims against the Company and certain of its subsidiaries
will arise solely from its allegations that the Company made false
representations regarding the alleged agreement, misappropriated allegedly
proprietary designs belonging to Ooga, and improperly induced Stav Efrat, now an
employee of the Company, to breach fiduciary duties that he allegedly owed to
Ooga. Discovery on those claims (and the claims against the other defendants)
will likely commence in the coming weeks and must be concluded by April 22,
1999.
The Company believes that Ooga's remaining claims are without merit and its
damages, if any, are nominal in nature. The Company intends to contest Ooga's
lawsuit vigorously.
DIVA ACQUISITION CORP. v. D. AARON, INC., ET. AL.
Defendants motion to dismiss this lawsuit, as disclosed in the Company's Form
10-Q for the quarter ended June 30, 1998, was denied by the Court on September
16, 1998. Accordingly, the parties are currently engaged in discovery, and Diva
continues to prosecute its claims vigorously.
19
<PAGE>
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
As of May 1, 1998, the Company's wholly owned subsidiary, Shoe Biz, Inc.,
formerly known as Steven Madden Outlets, Inc., acquired certain assets and
assumed certain liabilities of Daniel Scott, Inc., a footwear retailer. In
exchange for the assets, the Company issued 64,520 shares of its Common Stock
which shares were issued pursuant to Section 4(2) of the Securities Act of 1933.
Subsequently, the Company filed with the Securities and Exchange Commission a
registration statement on Form S-3 covering such shares. On July 27, 1998, the
registration statement was declared effective by the Commission.
As of July 9, 1998, the Board of Directors of the Company approved the
redemption of all of the Company's outstanding Class B Redeemable Common Stock
Purchase Warrants (the "Class B Warrants"). A Notice of Redemption was mailed to
all Class B Warrantholders to advise them under the terms of the Warrant
Agreement between the Company and the American Stock Transfer and Trust Company,
as warrant agent, that the Company was exercising its right to redeem and cancel
all of the Company's Class B Warrants. Accordingly, warrantholders had until the
close of business on August 13, 1998 to exercise their Class B Warrants for the
purchase of shares of Common Stock at an exercise price of $5.50 per share. If a
warrantholder failed to exercise the Class B Warrants held thereby by such date,
the Company had the right to redeem them by paying $.05 for each outstanding
Class B Warrant.
20
<PAGE>
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: November 10, 1998
21
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