Steven Madden, Ltd.
1997 Annual Report
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COMPANY PROFILE.
Steven Madden, Ltd. is a leader in women's footwear.
One of the few national brands of women's footwear that reaches both Generation
Y and Generation X, Steve Madden(R) is identified by its unique style and
attitude. In 1997, through 6 licensing arrangements, the Company has extended
the brand into other products ranging from sportswear, jeanswear, and outerwear
to a variety of accessory categories.
Approximately 76% of the Company's Footwear sales were from shoes distributed on
a wholesale basis to more than 2,200 department and speciality stores. At year
end 1997, the Company operated 17 of its own retail stores, 16 under the Steve
Madden(R) brand and one under David Aaron(R).
In 1996 the Company acquired the David Aaron(R) brand of footwear, which is
targeted primarily to a more sophisticated woman age 25-44 and is distinguished
for its quality, fabrication and contemporary styling. In 1995, the Company
acquired Adesso Madden, its private label division that acts as a buying agent
to mass market and discount chains.
CONTENTS
Highlights 1 President's Letter 2 Review of Divisions 4 Financial Statements 13
Management's Discussion and Analysis 15 Independent Auditors' Report 19 Balance
Sheets 20 Statements of Operations 21 Stockholders' Equity 22 Cash Flows 23
Notes to Consolidated Statements 24 Store Locations 32 Officers & Directors and
Investor Information IBC.
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FINANCIAL HIGHLIGHTS
Years Ended December 31, 1997 1996 1995
(In thousands, except per share data)
Operating results data
Net sales $59,311 $45,823 $38,735
Gross profit $24,567 $14,480 $12,824
Operating income 4,626 1,433 5,751
Net income 2,700 1,059 3,757
Net income per share
Basic .33 .14 .66
Diluted .30 .13 .51
Average Shares Outstanding
Basic 8,065 7,690 5,675
Diluted 8,913 8,427 7,319
Summary of operations
Working capital $16,545 $13,720 $ 9,625
Total Assets 29,277 22,361 14,530
Total Current Liabilities 3,125 2,094 1,764
Stockholders' equity 25,793 20,101 12,765
Net Net Gross
Sales Income Profit
(in millions) (in millions) (in millions)
1997 $59.3 1997 $2.7 1997 $24.6
1996 $45.8 1996 $1.1 1996 $14.5
1995 $38.7 1995 $3.8 1995 $12.8
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DEAR SHAREHOLDERS,
Steven Madden, Ltd. entered 1997 with renewed enthusiasm, confident that we
could significantly improve our profit performance and overall operating
results. A strengthened infrastructure provided a solid foundation to
aggressively grow our strong brands, retail operations and, as a result,
stockholder value.
We set these improvements in motion during the pivotal year of 1996. During
1997, we made significant progress. We continued to strengthen our management
team, installed a new computer system, established marketing and licensing
programs, expanded our retail chain nationwide, continued to grow the wholesale
business and increased the overall equity in the Steve Madden(R) brand.
Our 1997 financial results reflected our progress. Net sales grew sharply,
increasing 29% to $59.3 million. Along with strong sales growth, we improved our
margins. And most importantly, compared with 1996, our net income rose 155% to
$2.7 million or $.30 per share.
We are also pleased to report that we successfully accomplished these
milestones:
o We opened 13 new retail stores during 1997, giving us 16 Steve
Madden(R) stores and one David Aaron(R) store. Thus, we had begun the
process of expanding our distribution channel that complements our
existing wholesale distribution. With above average retail sales
performance, we expect to add 10 new stores in 1998.
o Our wholesale business continued to expand, accounting for 76% of total
sales and growing by 12%. Our Company excels at anticipating and
reacting to fashion trends; our retail stores give us a platform to
test more than 200 patterns before we select about 40 to distribute to
department and speciality stores. We continued to build sales in 1997
by adding categories, such as sneakers and evening shoes, expanding the
in-store Steve Madden(R) concept shops to over 50 retail locations and
by strengthening our business with major department-store accounts
nationwide.
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o We extended the Steve Madden(R) brand through six license agreements,
in a variety of product categories, including sportswear and jeanswear.
Licensees' sales mirror our footwear distribution and product lines
will be shipped to major department and speciality stores during 1998.
o We saw continued growth of our David Aaron(R) brand by increased
distribution to major department stores.
o We implemented a flexible manufacturing model to allow us to make quick
in-season styling changes. The results are evident in our improving
margins.
o With the installation of our new computer system, the Company began its
EDI basic replenishment capabilities with key department store
accounts.
We are very optimistic about our future. We believe that Steven Madden, Ltd. is
well positioned to grow and prosper both short term as well as long term. As the
leading brand for young women, Steve Madden(R) is positioned for even further
growth. We continue to build on our unique understanding of our customers and
our ability to quickly react to their changing needs. Along the way, the Company
has gained recognition as a benchmark in the fashion industry.
We wish to thank our customers, employees, shareholders and suppliers for their
support and confidence during a year that saw Steven Madden, Ltd. move into a
new era of growth.
Sincerely,
/s/ STEVE MADDEN /s/ RHONDA J. BROWN
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Steven Madden Rhonda J. Brown
President and CEO Chief Operating Officer
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CONCEPT SHOP MACY'S WEST, UNION SQUARE, SAN FRANCISCO, CALIFORNIA.
[GRAPHIC OMITTED]
STEVE MADDEN WHOLESALE.
The Steve Madden Wholesale Division distributes and markets the Steve Madden(R)
brand to more than 2,200 department stores, better footwear and specialty stores
throughout the United States, Canada, Venezuela and Australia.
In 1997 the wholesale division accounted for more than 76% of the Company's
sales. The largest accounts include the Federated Department Stores such as
Bloomingdale's and Macy's, Nordstrom, Dillards, Dayton-Hudson and May Department
Stores such as Hechts. The top specialty store accounts included Edison
Brothers' stores such as Wild Pair, Bakers and Leed's, and junior ready-to-wear
stores such as Urban Outfitters, Gadzooks and Journey's.
The Company took steps to strengthen customer relations in an effort to spur
sales and increase brand equity. Within better department stores and speciality
stores, the Company has launched more than 50 in-store Concept Shops. These
signature environments showcase the Steve Madden(R) collection within department
and speciality stores enhancing the brand. The Company supervises the display
and merchandising of these shops, which feature a larger assortment of products
and receive the opportunity of first delivery of new styles. These in-store
shops have proven to increase sales and to strengthen commitment from wholesale
customers.
The Company also builds its product portfolio to manage fashion risk. About
one-third of Steve Madden(R) sales are from the "core" product line. These
include the classic styles that have sold well year-round - an example: the
"Alpha", "a classic loafer," after eight seasons in the Steve Madden(R) line,
remains among the top-five sellers.
In addition, the Company carefully organizes and tracks its shoe lines. It
begins with test marketing of retail styles and designs, followed by weekly
monitoring of sales. The Company's information systems enables the analyst staff
to analyze sales trends which in turn assists the production team to match
manufacturing orders to the changes in demand. Much of the Company's contract
manufacturing capacity is in Mexico; this proximity, backed by a just-in-time
approach, speeds the Company's responses to changes and allows lower inventory
levels.
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STEVE MADDEN'S GARDEN STATE PLAZA STORE BELOW.
STEVE MADDEN RETAIL STORE, SOHO, NEW YORK CITY RIGHT.
RETAIL
As a complement to its wholesale base, the Company has built its own retail
distribution channel. At year end 1997 the Company operated 16 stores under the
Steve Madden(R) brand, and one under the David Aaron(R) name.
The retail stores offer full collections of the Company's brands. With unique
signature environments, the stores are designed to strengthen the brands' image.
These stores carry large collections - up to 200 styles, from sneakers to
evening shoes. The Company tests many styles in advance of a season, the result:
a two-way "conversation" with style-conscious women.
The Company harnesses this retail information to reduce risks in its wholesale
channels. It uses this information to cull its shoe lines to those styles that
are most likely to sell well to fashionable young women. This information is
invaluable as it encourages wholesale buyers to carry promising new shoe styles.
After opening 13 new stores in 1997, management plans to open an additional 10
stores in 1998. It has currently identified about 50 potential sites.
Each store is located in mall and or street locations that are in sync with the
Company's target, demographics (women age 16-25) and fashion attitudes as well
as set the image for the Company. The Company at year end had, 7 stores in New
York, 3 in New Jersey, 2 in Florida, 2 in California and one each in
Massachusetts, Maryland and Georgia.
The retail stores in 1997 recorded a 17% increase, in same-store sales, and made
a significant contribution to the Company's sales and earnings during the year.
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DAVID AARON RETAIL STORE, SOHO, NEW YORK CITY BELOW.
DAVID AARON NATIONAL PRINT AD RIGHT.
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DAVID AARON FOOTWEAR.
David Aaron(R) footwear appeals to fashion-forward women ages 25 through 44.
This brand offers more expensive and sophisticated styles, thus allowing the
Company to broaden its customer base and better utilize the existing corporate
infrastructure. The Company gained this brand through the acquisition in 1996 of
Diva International.
The David Aaron(R) brand reflects the consumers' desire for stylish quality
footwear. The line includes dress shoes, tailored shoes, boots and casual
footwear. This brand is priced higher than the Steve Madden(R) brand.
Many of the same successful strategies that management developed for the Steve
Madden(R) brand have been applied to David Aaron(R). Most sales are through the
same wholesale channels of distribution: leading department stores and specialty
stores. In 1997, the Company opened its first David Aaron(R) retail store in
Manhattan's fashionable Soho area thus providing a showcase for the full
collection. The new David Aaron(R) store was well received; management intends
to build on this concept in other markets.
As we continue to build our David Aaron(R) brand, management plans additional
advertising and promotional campaigns to raise the awareness of the brand.
Although David Aaron(R) accounts for 11% of sales and 2% of operating income,
the Company is committed to initiatives that offer the prospect for developing
this brand performance.
ADESSO MADDEN, INC.
Adesso Madden was formed in 1995 to serve as a buying agent to mass-market
merchandisers, shoe chains and other off-price retailers.
In 1997, Adesso Madden customers included some of the leading names in
retailing, such as J.C. Penney and Sears.
This business allows the Company to gain greater value from its existing
corporate infrastructure and to deepen its relationships with contract
manufacturers from Asia to South America. The Company is in a position to gain
more competitive sourcing of raw materials and production - and to leverage the
Company's overall resources for sourcing, design, manufacturing and management.
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STEVE MADDEN EYEWEAR BY COLORS IN OPTICS, LTD. BELOW.
STEVE MADDEN RUNWAY SHOW, STUDIO 54, LAS VEGAS, NEVADA RIGHT.
[GRAPHIC OMITTED]
LICENSING
In 1997, management launched a comprehensive licensing program that extended the
Steve Madden(R) brand beyond footwear.
All our licensed products complement the Steve Madden(R) footwear, building on
the brand's attitude of "classics with a twist." An in-house team of product
specialists work with each licensee in order to insure consistency in quality,
taste level, pricing, positioning and image, reflecting the lifestyle of its
young female consumers.
The Company signed 6 license agreements in 1997 with established industry
leaders in a variety of product categories. Importantly, the Steve Madden(R)
brand was extended from footwear into accessories, and then into the lucrative
and image-building realm of ready-to-wear. The Steve Madden(R) Licensees are:
SPORTSWEAR & JEANS - Winer Industries, Inc. OUTERWEAR - Elliot Kastle, Inc.
HANDBAGS - Magnum Fashions, Inc. EYEWEAR - Colors in Optics, Ltd.
HOSIERY - Hosiery Sales, Inc. JEWELRY - C.O. International, Inc.
Each license agreement provides strict contractual terms and conditions that
insures that the integrity, image and quality of the Steve Madden(R) brand is
upheld. With the brand continuing to gain momentum with consumers and retailers,
management is seeking additional licensing opportunities that can help the
Company leverage the power of its brand.
The Company began testing new categories in 1997 in Steve Madden(R) retail
stores. In 1998, the licensed products will be distributed through the Company's
channels, including better department stores such as Bloomingdale's, Nordstrom,
Burdines and Macy's, better specialty stores and footwear boutiques nationwide.
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STEVE MADDEN NATIONAL PRINT AD.
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MARKETING
The Company launched a fully integrated marketing program that engaged
fashion-conscious young women age 16-25. During 1997, the Company advertised in
leading fashion and lifestyle magazines such as, Seventeen and Vogue. In
addition, it continued its "grass roots" marketing strategies that included
innovative outdoor and radio campaigns in markets such as New York, Atlanta and
Florida.
Publicity for Steve Madden(R), the man and the brand was at an all time high.
Press coverage included feature stories in newspapers including, USA Today and
The Wall Street Journal; fashion magazines such as Cosmopolitan and Seventeen;
television, including CNN, CNBC, ABC, NBC and MTV. Steve Madden(R) footwear was
also featured in movies such as Scream, and in leading trade journals such as
Woman's Wear Daily and Footwear News.
Its highly popular website (www.stevemadden.com) was introduced in 1997 and
features online shopping. The Company is launching other innovative marketing
and image programs. In 1998, it joined with Seventeen to test a "first" in
direct marketing: allowing the magazine's readers to order Steve Madden(R)
products through a special insert in Seventeen Magazine, which reaches half of
all American women ages 12-24.
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FINANCIAL STATEMENTS.
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THREE-YEAR FINANCIAL COMPARISONS
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Years Ended December 31, 1997 1996 1995
(In thousands, except per share data)
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FINANCIAL POSITION
Net sales $59,311 $45,823 $38,735
Gross profit 24,567 14,480 12,824
Operating income 4,626 1,433 5,751
Net income 2,700 1,059 3,757
Net income per share
Basic .33 .14 .66
Diluted .30 .13 .51
Average Shares Outstanding
Basic 8,065 7,690 5,675
Diluted 8,913 8,427 7,319
SUMMARY OF OPERATIONS
Working capital $16,545 $13,720 $ 9,625
Total Assets 29,277 22,361 14,530
Total Current Liabilities 3,125 2,094 1,764
Stockholders' equity 25,793 20,101 12,765
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION & 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. 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:
<TABLE>
<CAPTION>
PERCENTAGE OF NET REVENUES
1997 1996
<S> <C> <C> <C> <C>
CONSOLIDATED Years Ended December 31,
Net Sales $59,311,000 100% $45,823,000 100%
Cost of sales 34,744,000 59 31,343,000 68
Other Operating Income 2,321,000 4 951,000 2
Operating Expenses 22,262,000 38 13,998,000 31
Income from Operations 4,626,000 8 1,433,000 3
Interest Income (Expense) Net (27,000) 0 160,000 0
Income Before Income Taxes 4,599,000 8 1,593,000 3
Net Income 2,700,000 5 1,059,000 2
BY SEGMENT
WHOLESALE DIVISIONS:
Steve Madden, Ltd.
Net Sales $38,487,000 100% $36,464,000 100%
Cost of sales 23,385,000 61 24,887,000 68
Other Operating Income 129,0000 0 -- --
Operating Expenses 13,348,000 35 10,675,000 29
Income from Operations 1,883,000 5 902,000 3
Diva Acquisition Corp.
Net Sales $ 6,447,000 100% $ 3,013,000 100%
Cost of sales 4,086,000 63 2,241,000 74
Operating Expenses 2,207,000 34 1,147,000 38
Income (Loss) from Operations 154,000 2 (375,000) (12)
Steven Madden Retail, Inc.:
Net Sales $13,249,000 100% $ 3,805,000 100%
Cost of sales 6,143,000 46 1,871,000 49
Operating Expenses 5,501,000 42 1,385,000 36
Income from Operations 1,605,000 12 549,000 14
Adesso Madden, Inc.
(First Cost)
Net Sales $ 1,128,000 -- $ 2,541,000 --
Cost of sales 1,130,000 -- 2,344,000 --
Commission Revenue 2,192,000 -- 951,000 --
Total Operating Incoming 2,190,000 100% 1,148,000 100%
Operating Expenses 1,206,000 55 791,000 69
Income from Operations 984,000 45 357,000 31
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RESULTS OF OPERATIONS
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YEAR ENDED DECEMBER 31, 1997 VS. YEAR ENDED DECEMBER 31, 1996
CONSOLIDATED Sales for the year ended December 31, 1997 were $59,311,000, or 29%
higher than the $45,823,000 recorded in the comparable period of 1996. The
increase in sales is due to several factors including additional wholesale
accounts, increased reorders, increased retail sales due to the opening of two
retail stores in fourth quarter of 1996 and thirteen retail stores during 1997
and increased sales 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 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.
Cost of sales decreased 9% from 68% in 1996 to 59% in 1997. Increased sales
volume has allowed the Company to purchase in larger volume, resulting in a
lower cost per pair. Also, the purchase of a higher percentage of shoes from
overseas suppliers, resulted in a lower cost per pair as compared to 1996. Gross
profit as a percentage of sales increased 9% from 32% in 1996 to 41% in 1997.
Selling, general and administrative (SG&A) expenses increased by 59% to
$22,262,000 in 1997 from $13,998,000 in 1996. The increase in the year ended
December 31, 1997 reflects the costs incurred in implementing the Company's
strategic plan to strengthen its management team and infrastructure, thereby
laying the foundation for future growth. The increase in SG&A is due primarily
to a 67% increase in payroll, bonuses and related expenses from $5,010,000 in
1996 to $8,358,000 in 1997. Additionally, the Company focused its efforts on
selling, advertising, marketing and designing thus increasing those expenses by
61% from $4,660,000 in 1996 to $7,517,000 in 1997. Also, the increase in the
number of retail outlets and expanded office facilities resulted in an increase
in occupancy, telephone, utilities, computer, legal, printing/supplies and
depreciation expenses by 150% from $1,507,000 in 1996 to $3,763,000 in 1997.
Income from operations for 1997 was $4,626,000 which represents an increase of
$3,193,000 or 223% over the income from operations of $1,433,000 in 1996. Net
income increased by 155% to $2,700,000 in 1997 from $1,059,000 in 1996.
WHOLESALE DIVISIONS Sales from the Steve Madden Wholesale Division ("Madden
Wholesale"), accounted for $38,487,000 or 65% and $36,464,000 or 80% of total
sales in 1997 and 1996, respectively. Cost of sales as a percentage of sales has
decreased by 7% from 68% in 1996 to 61% in 1997 in Madden Wholesale. Gross
profit as a percentage of sales increased 7% from 32% in 1996 to 39% in 1997.
Operating expenses increased by 25%, from $10,675,000 in 1996 to $13,348,000 in
1997. This increase is due to an increase in advertising expenses, 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. 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 for the year ended
December 31, 1997 was $1,883,000 compared to income from operations of $902,000
for the year ended December 31, 1996.
Sales from the Diva Acquisition Corp. Wholesale Division ("Diva Wholesale" -
acquired April 1, 1996) which markets the "David Aaron" brand name in footwear
accounted for $6,447,000 or 11%, and $3,013,000 or 7%, of total sales in 1997
and 1996, respectively. Gross profit as a percentage of sales increased from 26%
in 1996 to 37% in 1997. Operating expenses increased by 92% from $1,147,000 in
1996 to $2,207,000 in 1997 due to increases in payroll and payroll related
expenses, computer, printing, and depreciation expenses. Income from operations
from Diva was $154,000 in 1997 compared to a loss of $375,000 in 1996.
RETAIL DIVISION Sales from the Retail Division accounted for $13,249,000 or 22%
and $3,805,000 or 8% of total revenues in 1997 and 1996, respectively. The
comparable stores sales for the year end increased 17% over the same period of
1996. The increase in Retail Division sales is primarily due to the Company's
opening of retail stores in Roosevelt Field in Garden City, NY and Garden State
Plaza in Paramus, NJ, in the fourth quarter of 1996, Queens Center Mall in
Elmhurst, NY and Lenox Square Mall in Atlanta, GA, in the second quarter of
1997, Willowbrook Mall in Wayne, NJ; Cherry Hill Mall in Cherry Hill, NJ; Staten
Island Mall in Staten Island, NY; Glendale Galeria in Glendale, CA and
Montgomery Mall in Bethesda MD, in the third quarter of 1997 and Southshore
Plaza in Braintree, MA; David Aaron in New York, NY; Smithhaven Mall in
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Lakegrove, NY; Coconut Grove Mall in Coconut Grove, FL; Broward Mall in
Plantation, FL; Valleyfair Shopping Center in Santa Clara, CA, in the fourth
quarter of 1997 all of which generated aggregate sales of $8,782,000. Selling,
general and administrative expenses for the Retail Division increased to
$5,501,000 or 42% of sales in 1997 from $1,385,000 or 36% 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 thirteen
additional stores in 1997 and the addition of a retail warehouse at 43-15 38th
Street, Long Island City, NY. Income from operations from the retail division
was $1,605,000 in 1997 compared to income from operations of $549,000 in 1996.
OTHER Adesso-Madden, a wholly owned subsidiary of the Company, generated sales
of $1,128,000 in 1997 compared to revenue of $2,541,000 in 1996. This decrease
in sales in the year ended December 31, 1997 reflects the change in how
Adesso-Madden sells its products or services, the private label business
provides designs and sourcing services to its customers and records commission
income. Adesso-Madden generated commission revenues of $2,192,000 for the year
ended December 31, 1997 which represents an increase of $1,241,000 or 130% over
the commission income of $951,000 in 1996. Operating expenses increased by 52%
from $791,000 in 1996 to $1,206,000 in 1997 due to increases in selling and
commission, payroll and payroll related expenses, and telephone expenses. Income
from operations from Adesso-Madden was $984,000 in 1997 compared to an income of
$357,000 in 1996.
LIQUIDITY AND CAPITAL RESOURCES
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The Company has working capital of $16,545,000 at December 31, 1997 which
represents an increase of $2,825,000 in working capital from December 31,1996.
During the year ended December 31, 1997 the Company received proceeds of
$1,339,000 from the exercise of options.
In November 1997, Steven Madden, Ltd., engaged Hambrecht & Quist, LLC as its
exclusive placement agent in connection with a potential private placement of
convertible securities. While Hambrecht & Quist has agreed to use their best
efforts to place the securities (which are expected to be convertible into the
Company's common stock at a premium to the current market price), there is no
commitment to provide financing to the Company and the engagement may be
terminated by either party. As of March 13, 1998 the Company has not received
any funds from the private placement of its securities.
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 16%
of the Company's sales.
OPERATING ACTIVITIES
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During the year ended December 31, 1997, cash provided by operating activities
was $2,405,000. Uses of cash arose principally from an increase in accounts
receivable of $966,000, an increase in inventories of $2,324,000 and an increase
in prepaid expenses and other assets of $680,000. Cash was provided principally
by an increase in accounts payable and accrued expenses of $1,144,000.
The Company has lease agreements for office, warehouse, and retail space,
expiring at various times through 2007. Future obligations under these lease
agreements total $17,355,000.
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.
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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
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During the year ended December 31, 1997, the Company used cash of $3,686,000 to
acquire computer equipment and make leasehold improvements on new retail stores,
warehouse space and office space.
FINANCING ACTIVITIES
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During the year ended December 31, 1997, the Company received $1,339,000 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 and subsequently issued 22,500 shares of common
stock as additional purchase price.
LICENSE AGREEMENTS
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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.
Although such agreements did not generate substantial revenue in the twelve
month period ended December 31, 1997, the Company expects to receive royalties
as early as the third quarter of 1998.
INFLATION
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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.
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<PAGE>
INDEPENDENT AUDITORS' REPORT,
- --------------------------------------------------------------------------------
To the Board of Directors and Stockholders
Steven Madden, Ltd.
New York, New York
- --------------------------------------------------------------------------------
We have audited the accompanying consolidated balance sheet of Steven Madden,
Ltd. and subsidiaries as of December 31, 1997, and the related consolidated
statements of operations, changes in stockholders' equity and cash flows for
each of the years in the two-year period then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements enumerated above present fairly, in all
material respects, the consolidated financial position of Steven Madden, Ltd.
and subsidiaries as of December 31, 1997, and the consolidated results of their
operations and their consolidated cash flows for each of the years in the
two-year period then ended in conformity with generally accepted accounting
principles.
/s/ Richard Eisner & Company, Ltd.
- ----------------------------------
New York, New York
February 6, 1998
- --------------------------------------------------------------------------------
Page 19
<PAGE>
CONSOLIDATED BALANCE SHEET
- --------------------------------------------------------------------------------
December 31, 1997
- --------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents (Note A[3]) $ 3,887,000
Investments(Note A[4]) 1,991,000
Accounts receivable - (net of allowances of $351,000) 1,127,000
Due from factor (net of allowances of $335,000)(Note C) 4,821,000
Inventories (Note A[5]) 5,081,000
Prepaid advertising (Note 1) 441,000
Prepaid expenses and other current assets 1,698,000
Prepaid taxes (Note E) 624,000
- --------------------------------------------------------------------------------
Total current assets 19,670,000
Property and equipment, net (Notes A[6] and B) 5,931,000
Prepaid advertising, less current portion (Note 1) 1,041,000
Deferred taxes (Note F) 401,000
Deposits and other 258,000
Cost in excess of fair value of net assets(net of accumulated
amortization of $170,000) (Note A[7]) 1,976,000
- --------------------------------------------------------------------------------
$ 29,277,000
- --------------------------------------------------------------------------------
LIABILITIES
Current liabilities:
Current portion of lease payable (Note E) $ 105,000
Accounts payable and accrued expenses 2,032,000
Accrued bonuses 593,000
Other current liabilities 395,000
- --------------------------------------------------------------------------------
Total current liabilities 3,125,000
Lease payable less current portion (Note E) 359,000
- --------------------------------------------------------------------------------
Commitments and contingencies (Note G) 3,484,000
- --------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY [NOTE D]
Common stock - $.0001 per value 60,000,000 shares authorized
8,429,073 issued and outstanding 1,000
Additional paid-in capital $ 21,721,000
Unearned compensation $ (1,281,000)
Retained earnings $ 5,809,000
Treasury stock at cost(101,800) $ (457,000)
- --------------------------------------------------------------------------------
$ 25,793,000
- --------------------------------------------------------------------------------
$ 29,277,000
- --------------------------------------------------------------------------------
Page 20
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
Year Ended December 31 1997 1996
- --------------------------------------------------------------------------------
Net sales $ 59,311,000 $ 45,823,000
Cost of sales 34,744,000 31,343,000
- --------------------------------------------------------------------------------
Gross profit 24,567,000 14,480,000
Other revenue 2,321,000 951,000
Operating expenses (22,262,000) (13,998,000)
- --------------------------------------------------------------------------------
Income from operations 4,626,000 1,433,000
Other income(expenses):
Interest income 312,000 322,000
Interest expense (339,000) (162,000)
- --------------------------------------------------------------------------------
Income before provision for income taxes 4,599,000 1,593,000
Provision for income taxes 1,899,000 534,000
- --------------------------------------------------------------------------------
Net income $ 2,700,000 $ 1,059,000
- --------------------------------------------------------------------------------
Basic income per share $ 0.33 $ 0.14
- --------------------------------------------------------------------------------
Diluted income per share 0.30 $ 0.13
- --------------------------------------------------------------------------------
Weighted average common shares outstanding-
basic income per share 8,064,604 7,689,848
Effect of potential common shares 848,462 737,232
- --------------------------------------------------------------------------------
Weighted average common shares outstanding-
diluted income per share 8,913,066 8,427,080
- --------------------------------------------------------------------------------
Page 21
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (NOTE D)
- -----------------------------------------------------------------------------------------------------------------------------------
Additional Total
Common Stock Paid-in Retained Treasury Stock Unearned Stockholders'
Shares Amount Capital Earnings Shares Amount Compensation Equity
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 6,415,776 $1,000 $ 11,179,000 $2,050,000 -- -- $ (464,000) $ 12,766,000
Exercise of stock options
and warrants 1,417,818 -- 6,342,000 -- -- -- -- 6,342,000
Common stock purchased
for treasury -- -- -- -- 101,800 $(457,000) -- (457,000)
Costs incurred in connection
with registration -- -- (40,000) -- -- -- -- (40,000)
Tax benefit from exercise
of options -- -- 288,000 -- -- -- -- 288,000
Net income -- -- -- 1,059,000 -- -- -- 1,059,000
Amortization of unearned
compensation -- -- -- -- -- -- 144,000 144,000
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 7,833,594 1,000 17,769,000 3,109,000 101,800 (457,000) (320,000) 20,102,000
Exercise of stock options 487,000 -- 1,339,000 -- -- -- 1,339,000
Common stock issued in
connection with
purchase of subsidiary 108,479 -- 809,000 -- -- -- 809,000
Compensation in connection
with issuance of stock options -- -- 39,000 -- -- -- 39,000
Tax benefit from exercise
of options -- -- 420,000 -- -- -- 420,000
Net income -- -- -- 2,700,000 -- -- 2,700,000
Unearned compensation
relating to issuance of
stock options -- -- 1,345,000 -- -- -- (1,345,000) 0
Amortization of unearned
compensation -- -- -- -- -- -- 384,000 384,000
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 8,429,073 $1,000 $ 21,721,000 $ 5,809,000 101,800 $(457,000) $ (1,281,000) $ 25,793,000
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Page 22
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------------------
Year Ended December 31, 1997 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $2,700,000 $1,059,000
Adjustments to reconcile net income to net cash
provided by (used) in operating activities:
Options issued for consulting services 39,000 --
Depreciation and amortization 774,000 368,000
Deferred taxes 50,000 (233,000)
Deferred compensation 384,000 144,000
Tax benefit from exercise of options 420,000 288,000
Provision for bad debts 361,000 714,000
Deferred rent expense -- (36,000)
Changes in:
Accounts receivable (966,000) 326,000
Due from factor 41,000 (876,000)
Inventories (2,324,000) (1,381,000)
Prepaid expenses and other assets (680,000) (199,000)
Accounts payable and accrued expenses 1,144,000 280,000
Accrued bonuses 160,000 (163,000)
Other current liabilities 303,000 (11,000)
Tax liability (1,000) (1,154,000)
- -------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 2,405,000 (874,000)
- -------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (3,686,000) (1,180,000)
Acquisition of lease rights (235,000) (200,000)
Acquisition of subsidiary -- (1,076,000)
Repayment of debt assumed in acquisition -- (476,000)
Purchase of investment securities (1,991,000) --
- -------------------------------------------------------------------------------------------
Net cash used in investing activities (5,912,000) (2,932,000)
- -------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from options and warrants exercised - net 1,339,000 6,302,000
Purchase of treasury stock -- (457,000)
Repayments of lease obligations (96,000) (11,000)
- -------------------------------------------------------------------------------------------
Net cash provided by financing activities 1,243,000 5,834,000
- -------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (2,264,000) 2,028,000
Cash and cash equivalents - beginning of year 6,151,000 4,123,000
- -------------------------------------------------------------------------------------------
Cash and cash equivalents - end of year $3,887,000 $ 6,151,000
- -------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Acquisition of leased assets $ 358,000 $ 194,000
Note issued in connection with acquisition $ -- $ 645,000
Common stock issued in payment of acquisition
note and additional acquisition cost $ 809,000 $ --
SUPPLEMENTAL DISCLOSURES
OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 339,000 $ 162,000
Income taxes $1,351,000 $ 1,116,000
- -------------------------------------------------------------------------------------------
</TABLE>
Page 23
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
DECEMBER 31, 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
1. ORGANIZATION: Steven Madden, Ltd. (the "Company") was incorporated on July 9,
1990, in the state of New York and is engaged primarily in the business of
designing, wholesaling and retailing women's shoes. Substantially all of the
Company's revenues are generated through wholesale and retail shoe sales.
Domestic retail revenues are generated predominately through the sale of the
Company's brand name merchandise. Such revenues are subject to seasonal
fluctuations.
2. USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
3. CASH AND CASH EQUIVALENTS: The Company considers all highly liquid
instruments with an original maturity of three months or less to be cash
equivalents. The Company purchases inventory utilizing letters of credit.
4. INVESTMENTS: Investments are stated at fair value and consist primarily of
corporate commercial paper with maturities of less than one year.
5. INVENTORIES: Inventories, which consist of finished goods, are stated at the
lower of cost (first-in, first-out method) or market.
6. PROPERTY AND EQUIPMENT: Property and equipment are stated at cost.
Depreciation is computed utilizing the straight-line method based on estimated
useful lives ranging from five to ten years. Leasehold improvements are
amortized utilizing the straight-line method over the shorter of their estimated
useful lives or the lease term. Depreciation and amortization include amounts
relating to property and equipment under capital leases.
7. COST IN EXCESS OF FAIR VALUE OF NET ASSETS ACQUIRED: Cost in excess of fair
value of net assets acquired (arising from the acquisition of Diva
International, Inc. ("DIVA"), is being amortized over 15 years.
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
121, "Accounting for the Impairment of Long-lived Assets and for Long-lived
Assets to be Disposed Of" ("SFAS 121") during the year ended December 31, 1996.
SFAS 121 establishes accounting standards for the impairment of long-lived
assets, certain identifiable assets, and goodwill related to those assets. There
was no effect of adoption of SFAS 121 on the financial statements.
8. NET INCOME PER SHARE OF COMMON STOCK: The Company adopted SFAS No. 128
"Earnings Per Share" in the period ended December 31, 1997 and has retroactively
applied the effects thereof for all periods presented. Accordingly, the
presentation of per share information includes calculations of basic and diluted
income per share. The impact on the per share amounts previously reported was
not significant.
9. CONCENTRATION OF CREDIT RISK: The Company has amounts on deposit with
financial institutions in excess of the amount insured.
The Company purchases approximately 35% of their inventory from two suppliers in
Brazil and Mexico.
- --------------------------------------------------------------------------------
Page 24
<PAGE>
- --------------------------------------------------------------------------------
The Company has sales to a customer which represents approximately 11% and 17%
of sales and 13% and 28% of accounts receivable at December 31, 1997 and 1996,
respectively.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying value of the Company's
financial instruments approximate fair value due to their short term nature or
their underlying terms.
11. STOCK-BASED COMPENSATION: In October 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 123
("SFAS 123"), "Accounting for Stock-Based Compensation." SFAS 123 encourages,
but does not require, companies to record compensation cost for stock-based
employee compensation plans at fair value. The Company has elected to continue
to account for its stock-based compensation plans using the intrinsic value
method prescribed by Accounting Principles Board Opinion No. 25 ("APB No. 25"),
"Accounting for Stock Issued to Employees" and disclose the pro forma effects on
net income and earnings per share had the fair value of options been expensed.
Under the provisions of APB No. 25, compensation arising from the grant of stock
options is measured as the excess, if any, of the quoted market price of the
Company's common stock at the date of the grant over the amount an employee must
pay to acquire the stock (see Note D[9]).
12. RECENT ACCOUNTING PRONOUNCEMENTS: In June 1997, the Financial Accounting
Standards Board issued Statements of Financial Accounting Standards No. 129,
"Disclosure of Information about Capital Structure", No. 130, "Reporting
Comprehensive Income," and No. 131, "Disclosure about Segments of an Enterprise
and Related Information." The Company believes that the above pronouncements
will not have a significant effect on the information presented in the financial
statements.
NOTE B - PROPERTY AND EQUIPMENT
- --------------------------------------------------------------------------------
The major classes of assets and accumulated depreciation and amortization at
December 31, 1997 are as follows:
Leasehold improvements $4,660,000
Machinery and equipment 323,000
Furniture and fixtures 325,000
Computer equipment 1,419,000
Equipment under capital lease 217,000
- --------------------------------------------------------------------------------
6,944,000
Less accumulated depreciation and amortization (1,013,000)
- --------------------------------------------------------------------------------
Property and equipment - net $5,931,000
- --------------------------------------------------------------------------------
NOTE C - DUE FROM FACTOR
- --------------------------------------------------------------------------------
Under the terms of a factoring agreement, the Company can borrow up to 80
percent of aggregate receivables purchased by the factor at an interest rate of
prime plus 1%.(The minimum interest rate cannot go below 6%). The Company also
pays a fee equal to .75% of the gross invoice amount of each receivable
purchased with a minimum annual fee of $150,000. The Company sells and assigns a
substantial portion of its receivables principally without recourse, to the
factor. The factor assumes the credit risk to all assigned accounts approved by
it, but maintains liens on all trade receivables (whether or not assigned) and
the goods represented thereby. Pursuant to accounting standards for transfer of
receivables without recourse, these transfers are recognized as sales.
NOTE D - STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
1. THE 1993 INCENTIVE STOCK OPTION PLAN: The Company has a 1993 Incentive Stock
Option Plan (the "1993 Plan") under which options to purchase up to 100,000
shares of common stock may be granted to key employees and directors. The plan
provides that the option price shall not be less than the fair market value of
the common stock on the date of grant and that no portion of the option may be
exercised beyond
- --------------------------------------------------------------------------------
Page 25
<PAGE>
- --------------------------------------------------------------------------------
ten years from that date. No option may be granted after August 2003, and no
incentive stock option can be granted for more than five years to a stockholder
owning 10% or more of the Company's outstanding common stock.
At December 31, 1997 and December 31, 1996, no shares were available for the
granting of additional options under the 1993 Plan.
2. THE 1995 STOCK PLAN: The Company has a 1995 Stock Plan (the "1995 Plan")
under which options to purchase up to 330,000 shares of common stock may be
granted to employees and directors. The plan provides that the option price
shall not be less than the fair market value of the common stock on the date of
grant and that no portion of the option may be exercised beyond ten years from
that date. No option may be granted after May 2005, and no incentive stock
option can be granted for more than five years to a stockholder owning 10% or
more of the Company's outstanding common stock.
During 1997 and 1996, 7,500 and 300,000 options were granted and at December 31,
1997 22,500 options were available for grant.
3. THE 1996 STOCK PLAN: The Company has a 1996 Stock Plan (the "1996 Plan")
under which options to purchase up to 375,000 shares of common stock may be
granted to employees and directors. The Plan provides that the option price
shall not be less than the fair market value of the common stock on the date of
grant and that no portion of the option may be exercised beyond ten years from
that date. No incentive stock option can be granted for more than five years to
a stockholder owning 10% or more of the Company's outstanding common stock.
During 1997, 375,000 options were granted and at December 31, 1997, no shares
were available for the granting of additional options under the 1996 Plan.
4. THE 1997 STOCK PLAN: The Company has a 1997 Stock Plan (the "1997 Plan")
under which options to purchase up to 1,000,000 shares of common stock may be
granted to employees and directors. The Plan provides that the option price
shall not be less than the fair market value of the common stock on the date of
grant and that no portion of the option may be exercised beyond ten years from
that date. No incentive stock option can be granted for more than five years to
a stockholder owning 10% or more of the Company's outstanding common stock.
During 1997, 990,000 options were granted and at December 31, 1997 10,000
options were available for grants.
5. OTHER STOCK OPTIONS: In March 1995, the Company issued options to purchase
1,000,000 shares of its common stock to a company wholly owned by the Company's
President, Chief Executive Officer and a stockholder. The options were
subsequently transferred to the President. The options which are fully
exercisable, have an exercise price of $1.75 and an exercise period of 10 years.
Unearned compensation was recorded in the amount of $575,000, which represented
the difference between the exercise price and the fair value of the stock on the
date of grant, and is classified as a component of stockholders' equity. The
unearned compensation was being amortized over four years, however, there was no
net charge to earnings since the amount which would otherwise have been recorded
as compensation reduced the President's bonus. If such bonus was not sufficient
to offset the amortization in any of the four years, the President was required
to pay to the Company an amount equal to the shortage. The unamortized portion
was charged to operations in the current year in connection with the President's
amended employment agreement (see Note G[1]).
In connection with the amended employment agreement the Company issued the
President options to purchase 500,000 shares of its common stock. The options,
which vest in August of 1998, have an exercise price of $3.31 and an exercise
period of 10 years. Unearned compensation was recorded in the amount of
- --------------------------------------------------------------------------------
Page 26
<PAGE>
- --------------------------------------------------------------------------------
$1,345,000 which represents the difference between the exercise price and the
fair value of the stock on the date of grant, and is classified as a component
of stockholders' equity. The unearned compensation is being amortized over the
ten year life of the amended agreement and charged to compensation expense.
The Company issued options to purchase 1,500,000 shares of its common stock to
its President in 1995 with an exercise price of $7.00 (market price on date of
grant) and an exercise period of 10 years. The options were to have vested
equally over a period of three years beginning January 1, 1997. No compensation
was recorded in connection with the issuance of these options. Subsequently, in
January 1996, these options were returned to the Company.
During 1995 the Company issued options to purchase 200,000 shares of its common
stock at $7.50 to a financial consultant.
6. STOCK OPTIONS: Information relating to stock options is as follows:
<TABLE>
<CAPTION>
1997 1996
Number Number
of Average of Average
Shares Exercise Price Shares Exercise Price
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Outstanding at January 1 1,718,500 $3.93 2,963,500 $5.06
Granted 1,152,500 $4.70 510,000 $5.86
Exercised (487,000) $2.75 (165,000) $2.37
Cancelled (84,000) $4.67 (1,590,000) $6.80
- -----------------------------------------------------------------------------------------------------
Outstanding at December 31 2,300,000 $4.54 1,718,500 $3.93
- -----------------------------------------------------------------------------------------------------
Shares exercisable 1,296,780 $4.53 1,718,500 $3.93
- -----------------------------------------------------------------------------------------------------
</TABLE>
7. WARRANTS: In connection with the initial public offering, the Company granted
to the underwriter an option to purchase an aggregate of 150,000 units
exercisable for four years commencing December 10, 1995 (one year after the
effective date) at an exercise price of $5.80 per unit. Each unit consists of
one share of common stock, one Class A warrant and one Class B warrant.
The Company has no outstanding Class A warrants and 1,875,000 Class B warrants
exercisable through December 10, 1998. Each Class B warrant entitles the holder
to purchase one share of common stock at a price of $5.50 per share. The
warrants are redeemable by the Company, under certain conditions. The Company
issued 1,252,818 and 616,472 shares of its common stock in 1996 and 1995
resulting from the exercise of Class A warrants. In connection therewith, the
Company received proceeds of approximately $5,950,000 and $2,928,000,
respectively.
The Company also has outstanding 150,000 Class C warrants issued in connection
with bridge financing. Each Class C warrant is exercisable through December 10,
1998 and entitles the holder to purchase one share of common stock at a price of
$15.00 per share.
8. STOCK-BASED COMPENSATION: The Company applies APB 25 in accounting for its
stock option incentive plan and, accordingly, recognizes compensation expense
for the difference between the fair value of the underlying common stock and the
grant price of the option at the date of grant. The effect of applying SFAS No.
123 on 1997 and 1996 pro forma net income as stated above is not necessarily
representative of the effects on reported net income for future years due to,
among other things (1) the vesting period of the stock options and (2) the fair
value of additional stock options in future years. The average fair value of
options granted in 1997 and 1996 was approximately $3.25 and $3.06,
respectively. The following pro forma information gives effect to the fair value
of the options on the date of grant using the Black-Scholes option-pricing model
with the following assumptions: dividend yield of 0%, volatility of 56% for 1997
and 73% for 1996, risk free interest rates of 5.80% - 6.17% for 1997 and 5.98% -
6.82% for 1996, and expected life of 3 to 5 years for 1997 and 1 1/2 to 5 years
for 1996
- --------------------------------------------------------------------------------
Page 27
<PAGE>
- --------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------
Net income:
As reported $ 2,700,000 $ 1,059,000
Pro forma 504,000 135,000
Basic income per share:
As reported .33 .14
Pro forma .06 .02
Diluted income per share:
As reported .30 .13
Pro forma .06 .02
- --------------------------------------------------------------------------------
NOTE E - LEASES
- --------------------------------------------------------------------------------
1. CAPITAL LEASES: The Company leases certain equipment under capital leases.
Future minimum lease payments consist of the following:
1998 $ 140,000
1999 140,000
2000 138,000
2001 131,000
2002 38,000
- --------------------------------------------------------------------------------
Total minimum lease payments 587,000
Less amounts representing interest 123,000
- --------------------------------------------------------------------------------
Present value of minimum lease payments 464,000
Less current maturities 105,000
- --------------------------------------------------------------------------------
Capital lease obligation, less current maturities $ 359,000
- --------------------------------------------------------------------------------
2. OPERATING LEASES: Future minimum annual lease payments under noncancelable
operating leases consist of the following at December 31, 1997:
1998 $ 2,249,000
1999 2,115,000
2000 1,915,000
2001 1,996,000
2002 2,035,000
Thereafter 7,045,000
- --------------------------------------------------------------------------------
$17,355,000
- --------------------------------------------------------------------------------
Rent expense for the years ended December 31, 1997 and 1996 was approximately
$1,434,000 and $626,000, respectively.
- --------------------------------------------------------------------------------
Page 28
<PAGE>
- --------------------------------------------------------------------------------
NOTE F - INCOME TAXES
- --------------------------------------------------------------------------------
The 1997 and 1996 income tax provisions consist of the following:
1997 1996
- --------------------------------------------------------------------------------
Current:
Federal $1,318,000 $ 510,000
State and city 531,000 257,000
- --------------------------------------------------------------------------------
1,849,000 767,000
- --------------------------------------------------------------------------------
Deferred:
Federal (16,000) (101,000)
State and city 66,000 (132,000)
- --------------------------------------------------------------------------------
50,000 (233,000)
- --------------------------------------------------------------------------------
$1,899,000 $ 534,000
- --------------------------------------------------------------------------------
A reconciliation between taxes computed at the federal statutory rate and the
effective tax rate is as follows:
December 31, 1997 1996
- --------------------------------------------------------------------------------
Income taxes at federal statutory rate 34.0% 34.0%
State income taxes - net of federal
income tax benefit 7.7 5.9
Nondeductible items 3.7 1.6
Net operating loss carryforward benefit (.4) (4.6)
Other (3.8) (3.4)
---- ----
Effective rate 41.2% 33.5%
==== ====
The Company applies the asset and liability method in accounting for income
taxes. Under this method, deferred tax assets and liabilities are determined
based on differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that are
expected to be in effect when the differences are expected to reverse.
The components of deferred taxes are as follows at December 31, 1997 and 1996:
1997 1996
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Accelerated depreciation $ (94,000) $ (22,000)
Deferred tax assets:
Accounts receivable allowances 356,000 169,000
Capitalization of inventory 139,000 --
Deferred compensation -- 230,000
Net operating loss benefit -- 74,000
- --------------------------------------------------------------------------------
$ 401,000 $ 451,000
- --------------------------------------------------------------------------------
NOTE G - COMMITMENTS AND CONTINGENCIES
- --------------------------------------------------------------------------------
1. EMPLOYMENT AGREEMENTS: The Company has an employment agreement with its
President/Chief Executive Officer which was amended in July 1997 to extend the
term through January 2008. The employment agreement provides for salary
commitments of $3,980,000 over the next ten years. Additionally, the agreement
provides for a discretionary bonus in cash, capital stock or other property as
the board may determine from time to time. The prior agreement provided for a
bonus plan based on graduated rates at specified levels of net revenue. The
bonus was payable in cash or in the Company's stock at the option of the
officer. Bonus payable in stock was to be based on 2/3 of the market price on
the date of election. Bonuses payable for the years ended December 31, 1997 and
1996 have each been reduced by $144,000 for the amortization of the unearned
compensation discussed in Note D[5].
- --------------------------------------------------------------------------------
Page 29
<PAGE>
- --------------------------------------------------------------------------------
In June 1994, the Company entered into a two-year employment agreement which
automatically extended for an additional one year period with its Director of
Operations. The agreement provided for an annual salary of $135,000 and a bonus
based on specified earnings. As of August 1996, the agreement was amended to
increase the salary to $250,000. The agreement has expired and the Company is
currently negotiating a new agreement.
In September 1996, the Company's newly formed wholly-owned subsidiary,
Adesso-Madden, Inc., entered into a two-year employment agreement with its
President which provides for an annual salary of $208,000 and a cash bonus based
on the subsidiary's pretax income.
In July 1997, the Company entered into a three-year employment agreement with
its Chief Operating Officer. The agreement provides for an annual salary of
$200,000 increasing by 10% each year and a bonus based upon the Company's
consolidated earnings before the payment of interest or taxes or deduction for
depreciation.
At December 31, 1997 and December 31, 1996, the Company accrued $593,000 and
$433,000, respectively, in bonuses to officers. For the years ended December 31,
1997 and 1996, the Company has included in its operating expenses, bonuses to
officers of approximately $1,146,000 and $552,000, respectively.
2. LETTERS OF CREDIT: Open letters of credit at December 31, 1997 and 1996
amounted to approximately $3,550,000.
3. PENDING LITIGATION:
(a) On or about March 13, 1998, the Company, its wholly owned
subsidiary, Diva Acquisition Corp. ("Diva"), and its Chief Executive
Officer were sued by Yves Levenson, the former President of Diva, as a
result of the termination of Mr. Levenson's employment on March 5,
1998. In this action, entitled YVES LEVENSON V. STEVE MADDEN, STEVEN
MADDEN, LTD. AND DIVA ACQUISITION CORP., which is pending in the
Supreme Court of New York, County of New York, Mr. Levenson alleges
that (i) Diva has breached the terms of his employment agreement by
improperly terminating his employment without cause, (ii) the
restrictive covenant contained in his employment contract should be
declared unenforceable because it improperly restricts his ability to
earn a living, and (iii) the Company and Steve Madden tortiously
interfered with Mr. Levenson's economic expectations. In his lawsuit,
Mr. Levenson seeks damages in an amount based on his prospective
compensation under his employment agreement, plus punitive damages and
an injunction barring Diva's enforcement of the restrictive covenant.
The Company believes that Mr. Levenson's claims are completely without
merit, and intends to vigorously contest his lawsuit.
(b) On or about March 13, 1998, the Company, its wholly owned
subsidiary, Steven Madden Retail, Inc., 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, entitled OOGA
ASSOCIATES CORP. V. STEVEN MADDEN, INC., STEVEN MADDEN RETAIL, INC.,
STEVEN MADDEN, LTD. AND STAV EFRAT, 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, of a material amount, 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. The Company
believes that Ooga's claims are completely without merit, and intends
to vigorously contest its lawsuit.
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Page 30
<PAGE>
- --------------------------------------------------------------------------------
These actions are in the preliminary stages. Therefore, the financial statements
do not include any provision with respect to these actions.
NOTE H - BUSINESS SEGMENT INFORMATION
- --------------------------------------------------------------------------------
The nature of products classified in the business segments presented herein is
described in Note A.
Intersegment sales are not material. "Other" includes revenues, expenses and
identifiable assets of the Company's wholly-owned subsidiary, Adesso-Madden,
Inc., which was formed in September 1995.
"Wholesale" includes the revenues, expenses and identifiable assets of Steven
Madden wholesale and Diva International, Inc. which was acquired in April 1996.
<TABLE>
<CAPTION>
Wholesale Retail Other Consolidated
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended December 31, 1997:
Net sales $44,934,000 $13,249,000 $1,128,000 $59,311,000
Operating earnings 1,946,000 1,605,000 1,075,000 4,626,000
Identifiable assets 20,424,000 8,341,000 512,000 29,277,000
Depreciation and amortization 371,000 401,000 2,000 774,000
Capital expenditures 640,000 3,038,000 8,000 3,686,000
Year ended December 31, 1996:
Net sales 39,477,000 3,805,000 2,541,000 45,823,000
Operating earnings 527,000 549,000 357,000 1,433,000
Identifiable assets 19,184,000 2,293,000 546,000 22,023,000
Depreciation and amortization 293,000 75,000 -- 368,000
Capital expenditures 379,000 795,000 6,000 1,180,000
</TABLE>
NOTE I - BARTER TRANSACTION
- --------------------------------------------------------------------------------
In 1995, the Company sold inventory (which had a cost of $1,560,000) in exchange
for advertising credits. The Company recorded a sale in the amount of $2,300,000
(the estimated fair market value of the merchandise sold) and accordingly,
recognized a gross profit of approximately $740,000 on the transaction. The
credits received may be applied towards future advertising at the rate of 60%;
the remaining 40% is to be paid by the Company. The advertising credits were to
expire in December 1998 but the agreement was extended through 1999. The Company
estimates that it will utilize the credits prior to their expiration.
NOTE J - SUBSEQUENT EVENT
- --------------------------------------------------------------------------------
LOAN GUARANTEE: The Company provided a short-term guarantee of a $2,900,000 loan
from the Company's factor to a company wholly-owned by the Company's president.
The loan is collateralized by the assets of the Company. The Board voted to
grant the corporate guarantee because (i) it would settle litigation that may be
negatively impacting the view of the Company by various securities analysts and
market makers, (ii) the shares of the Company's stock in the hands of the
company related to the President are the subject of the litigation which if
settled adversely could materially adversely affect the Company, and (iii) the
pending litigation has created an unwanted distraction for the Company's
Chairman of the Board, CEO and President. The guarantee was in effect until a
registration statement covering the sale of shares held by the President's
company was declared effective on March 5,1998.
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Page 31
<PAGE>
RETAIL STORE LOCATIONS.
- --------------------------------------------------------------------------------
FLAGSHIP STORE: 540 Broadway
New York, NY
150 East 86th Street
New York, NY
Roosevelt Field Mall
Garden City, NY
Queens Center
Elmhurst, NY
Staten Island Mall,
Staten Island, NY
Smithaven Mall,
Lake Grove, NY
Garden State Plaza,
Paramus, NJ
Willowbrook Mall,
Wayne, NJ
Cherry Hill Mall,
Cherry Hill, NJ
South Shore Plaza,
Braintree, MA
Valley Fair Shopping Center,
Santa Clara, CA
Glendale Galleria,
Glendale, CA
Montgomery Mall,
Bethesda, MD
Broward Mall,
Plantation, FL
340 Main Highway,
Coconut Grove, FL
Lenox Square Mall,
Atlanta, GA
NEW STORE OPENINGS
- --------------------------------------------------------------------------------
SPRING/SUMMER, 1998
Aventura Mall,
Miami, FL
Brea Mall
Brea, CA
Westside Pavillion
Los Angeles, CA
South Coast Plaza
Costa Mesa, CA
Woodbridge Mall
Woodbridge, NJ
DAVID AARON STORE
529 Broadway
New York, NY
- --------------------------------------------------------------------------------
Page 32
<PAGE>
BOARD OF DIRECTORS
Steven Madden
Chairman of the Board, President,
and Chief Executive Officer
Rhonda Brown
Chief Operating Officer
and Director
Arvind Dharia
Chief Financial Officer
and Director
John Basile
Executive Vice-President
and Director
John L. Madden
Director
Les Wagner
Director
Peter Migliorini
Director
EXECUTIVE OFFICERS
Steven Madden
President,
and Chief Executive Officer
Rhonda Brown
Chief Operating Officer
Arvind Dharia
Chief Financial Officer
John Basile
Executive Vice-President
Gerald Mongeluzo
President of Adesso Madden, Inc.
INDEPENDENT AUDITORS
Richard A. Eisner & Company, LLP
575 Madison Avenue
New York, NY 10022
GENERAL COUNSEL
Bernstein & Wasserman, LLP
950 Third Avenue
New York, NY 10022
ANNUAL MEETING
10:00 am
Friday, May 22, 1998
Marriott East Side
525 Lexington Avenue
New York, NY
INVESTOR RELATIONS COUNSEL
Kehoe, White, Savage & Company, Inc.
Long Beach, CA
(562) 437-0655
INVESTOR INFORMATION.
Market for Registrant's Common Equity and Related Stockholder Matters
The Company's shares of Common Stock, Class A Warrants and Class B Warrants were
quoted since December 10, 1993 on The Nasdaq SmallCap Market under the symbols
SHOO, SHOOW and SHOOZ, respectively. In January 1996, the Class A Warrants
ceased trading as a result of the Company's call for redemption of such
securities. In January 1997, the Company's shares of Common Stock and Class B
Warrants commenced trading on The Nasdaq National Market.
The following table sets forth the range of high and low bid quotations for the
Common Stock, Class A Warrants, Class B Warrants for the two year period ended
December 31, 1997 as reported by Nasdaq. The quotes represent inter-dealer
prices without adjustment or mark-ups, mark-downs or commissions and may not
necessarily represent actual transactions. The trading volume of the Company's
securities fluctuates and may be limited during certain periods. As a result,
the liquidity of an investment in the Company's securities may be adversely
affected.
QUARTER ENDED COMMON STOCK CLASS B WARRANTS
- ------------- ------------ ----------------
1997 HIGH LOW HIGH LOW
March 31, 1997 6 3/8 3 1/2 2 7/16 1 5/16
June 30, 1997 6 3/16 3 1/4 2 1 1 16
September 30, 1997 8 13/16 5 7/16 3 7/16 1 9/16
December 31, 1997 8 1/4 6 1/8 3 3/16 1 21/32
1996
March 31, 1996 8 3/8 5 5/8 3 15/16 2 3/8
June 30, 1996 7 3/4 4 9/16 3 1 3/8
September 30, 1996 4 13/16 2 7/8 1 5/16 1 5/16
December 31, 1996 5 13/16 3 1/4 1 11/16 1 1/8
On March 16, 1998, the final quoted prices as reported by The Nasdaq National
Market were $9.3125 for the Common Stock and $4.0625 for the Class B Warrants.
As of March 16, 1998, there were 8,571,073 shares of Common Stock outstanding,
held of record by approximately 89 record holders and 2,710 beneficial holders.
FORM 10-KSB
The financial statements and related notes which appear in this report are
included in the Company's Annual Report of Form 10-KSB for the fiscal year ended
December 31, 1997, which has been filed with the Securities and Exchange
Commission. A copy of the annual report on Form 10-KSB, including financial
statements but excluding exhibits, will be made available without charge to the
stockholders upon written request to the Company, sent to the attention of
Arvind Dharia, Chief Financial Officer, at the Company's Long Island City, NY
office.
<PAGE>
[GRAPHIC LOGO OMITTED]
Steven Madden, Ltd.
52-16 Barnett Avenue
Long Island City, NY 11104
(718) 466-1800
