UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 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 March 31, 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 May 12, 1998
Common Stock 8,736,985
1
<PAGE>
STEVEN MADDEN, LTD.
FORM 10-QSB
QUARTERLY REPORT
MARCH 31, 1998
TABLE OF CONTENTS
PART I- FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements:
Consolidated Balance sheet ...................................... 3
Consolidated Statements of Operations ........................... 4
Consolidated Statement of Cash Flows ............................ 5
Notes to condensed consolidated
financial statements ........................................ 6
ITEM 2. Management's discussion and analysis
of financial condition and results of
operations .................................................. 9
PART II- OTHER INFORMATION
ITEM 1. Legal Proceedings ............................................... 16
2
<PAGE>
STEVEN MADDEN, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,608,000 $ 3,887,000
Investments 1,487,000 1,991,000
Accounts receivable - nonfactored (net of allowances for doubtful accounts of
$397,000 at March 31, 1998 and $351,000 at December 31, 1997 1,844,000 1,127,000
Due from factor (net of allowances for doubtful accounts of $345,000
at March 31, 1998 and $335,000 at December 31, 1997) 5,915,000 4,821,000
Inventories 6,109,000 5,081,000
Prepaid advertising 295,000 441,000
Prepaid expenses and other current assets 1,448,000 1,698,000
Prepaid taxes 148,000 624,000
----------- -----------
Total current assets 20,854,000 19,670,000
----------- -----------
Property and equipment, net 6,487,000 5,931,000
----------- -----------
Other assets:
Prepaid advertising, less current portion 1,041,000 1,041,000
Deferred taxes 401,000 401,000
Deposits and other 148,000 258,000
Cost in excess of fair value of net assets acquired (net of accumulated
amortization of $196,000 at March 31, 1998 and $170,000 at
December 31, 1997) 1,949,000 1,976,000
----------- -----------
Total other assets 3,539,000 3,676,000
----------- -----------
$30,880,000 $29,277,000
=========== ===========
LIABILITIES
Current liabilities:
Current portion of lease payable $ 101,000 $ 105,000
Accounts payable and accrued expenses 2,268,000 2,032,000
Accrued bonuses 181,000 593,000
Other current liabilities 158,000 395,000
----------- -----------
Total current liabilities 2,708,000 3,125,000
----------- -----------
Lease payable, less current portion 351,000 359,000
----------- -----------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Common stock - $.0001 par value, 60,000,000 shares authorized, 8,649,773
issued and outstanding at March 31, 1998 and 8,429,073 issued and
outstanding at December 31, 1997 1,000 1,000
Additional paid-in capital 22,938,000 21,721,000
Unearned compensation (1,244,000) (1,281,000)
Retained earnings 6,583,000 5,809,000
Treasury stock at cost (101,800 shares) (457,000) (457,000)
----------- -----------
Total stockholders' equity 27,821,000 25,793,000
----------- -----------
$30,880,000 $29,277,000
=========== ===========
</TABLE>
See Notes To Financial Statements
3
<PAGE>
STEVEN MADDEN, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------
1998 1997
----------- -----------
<S> <C> <C>
Net sales $16,511,000 $13,218,000
Cost of sales 9,485,000 8,608,000
----------- -----------
Gross profit 7,026,000 4,610,000
Other revenue 764,000 362,000
Operating expenses (6,451,000) (4,309,000)
----------- -----------
Income from operations 1,339,000 663,000
Interest income (expense), net (26,000) 6,000
----------- -----------
INCOME BEFORE PROVISION FOR INCOME TAXES 1,313,000 669,000
Provision for income taxes 540,000 268,000
----------- -----------
NET INCOME $ 773,000 $ 401,000
=========== ===========
BASIC INCOME PER SHARE $ 0.09 $ 0.05
=========== ===========
DILUTED INCOME PER SHARE $ 0.08 $ 0.05
=========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - BASIC INCOME PER SHARE 8,411,770 7,895,504
Effect of potential common shares 1,772,241 531,701
----------- -----------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - DILUTED INCOME PER SHARE 10,184,011 8,427,205
=========== ===========
</TABLE>
See Notes To Financial Statements
4
<PAGE>
STEVEN MADDEN, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 773,000 $ 401,000
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 297,000 170,000
Deferred compensation 37,000 36,000
Provision for bad debts 56,000 32,000
Deferred rent expense 71,000
Changes in:
Accounts receivable - nonfactored (763,000) (1,087,000)
Due from factor (1,104,000) 300,000
Inventories (1,028,000) 408,000
Prepaid expenses and other assets 506,000 163,000
Accounts payable and accrued expenses 166,000 277,000
Accrued bonuses (412,000) (390,000)
Other current liabilities (237,000) 32,000
Tax liability 476,000 173,000
----------- -----------
Net cash provided by (used in) operating activities (1,162,000) 515,000
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (826,000) (165,000)
Sale of investment securities 504,000
----------- -----------
Net cash used in investing activities (322,000) (165,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from options exercised 1,217,000 381,000
Repayment of lease obligations (12,000) (37,000)
----------- -----------
Net cash provided by financing activities 1,205,000 344,000
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (279,000) 694,000
Cash and cash equivalents - beginning of quarter 3,887,000 6,151,000
----------- -----------
CASH AND CASH EQUIVALENTS - END OF QUARTER $ 3,608,000 $ 6,845,000
=========== ===========
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Acquisition of leased assets $ 359,000
Issuance of common stock for debt $ 645,000
</TABLE>
See Notes To Financial Statements
5
<PAGE>
STEVEN MADDEN, LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 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") at March 31, 1998, and
the results of its operations, changes in stockholders' equity and cash flows
for the three months then ended. The results of operations for the three months
ended March 31, 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 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] 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 convenant 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 convenant.
On April 21, 1998, the Company and its Chief Executive Officer moved to
dismiss Mr. Levenson's complaint as to them on the ground that his
complaint failed to set forth a viable legal cause of action. That motion
is presently pending. Also on April 21, Diva filed an answer denying Mr.
Levenson's claims in their entirety. Pursuant to applicable rules, Mr.
Levenson and Diva have commenced discovery.
6
<PAGE>
STEVEN MADDEN, LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998
NOTE D - PENDING LITIGATION (CONTINUED)
[1] (continued)
On May 11, 1998, Mr. Levenson served an amended complaint which, in
addition to the claims asserted in his initial complaint, he has asserted
two additional claims: (i) a claim against the Company as guarantor of
Diva's financial obligations under Mr. Levenson's employment contract,
and (ii) a claim against Diva under the New York Labor Law for unpaid
wages. Pursuant to his amended complaint, Mr. Levenson seeks lost
earnings under his employment agreement, punitive damages, attorneys'
fees and legal costs.
The Company believes that Mr. Levenson's claims are completely without
merit, and intends to vigorously contest his lawsuit.
[2] 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.
[3] On April 29, 1998, the Company and Diva were sued by David Siskin, Diva's
former Vice President of Design, as a result of the termination of Mr.
Siskin's employment on March 5, 1998. In this action, entitled DAVID
AARON SISKIN V. DIVA ACQUISITION CORP. AND STEVEN MADDEN, LTD., which is
pending in the Supreme Court of New York, County of New York, Mr. Siskin
alleges that (i) Diva breached the terms of his employment agreement,
(ii) Diva and the Company violated the New York Labor Law by failing to
pay compensation due him under his employment agreement, (iii) Diva and
the Company fraudulently induced Plaintiff to enter into his employment
agreement, (iv) Diva and the Company breached their purported fiduciary
duties to Mr. Siskin, (v) Diva and the Company wrongfully misappropriated
property belonging to Mr. Siskin, (vi) Diva and the Company wrongfully
interfered with Mr. Siskin's ability to earn a bonus under his employment
agreement, (vii) Diva and the Company have been unjustly enriched by
virtue of their conduct towards Mr. Siskin, and (viii) the restrictive
covenant contained in Mr. Siskin's employment agreement is unenforceable
as a matter of law and Diva should be permanently enjoined from enforcing
it. In addition to the injunctive relief sought, Mr. Siskin seeks damages
in an amount based on his prospective compensation under his employment
agreement, plus an additional 25% alleged to be due under the Labor Law,
punitive damages, attorneys' fees, interest and costs. The Company
believes that Mr. Siskin's claims are completely without merit, and
intends to vigorously contest his lawsuit.
7
<PAGE>
STEVEN MADDEN, LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998
NOTE D - PENDING LITIGATION (CONTINUED)
[4] On May 11, 1998, Diva commenced an action in federal district court
against D. Aaron, Inc., Nadine & Co., Yves Levenson, David Siskin, Mr.
Siskin's wife, Nadine Levenson, Mr. Siskin's father, Abraham Siskin and
Mr. Levenson's father, David Levenson, alleging that the Defendants have
violated federal trademark law, have engaged in unfair competition and
have breached various contractual, fiduciary and common law duties owed
to Diva. In this action, entitled DIVA ACQUISITION CORP. V. D. AARON,
INC., ET AL., which is pending in the United States District Court for
the Southern District of New York, the Company seeks, INTER ALIA, an
injunction barring the defendants from using the name "D. Aaron" or any
other name confusing similar to Diva's "David Aaron" trademark and trade
name, injunctive relief barring Nadine Levenson and Yves Levenson from
soliciting business from Diva's customers, disgorgement of certain moneys
wrongfully obtained by the defendants, compensatory damages, punitive
damages, attorneys' fees and costs.
These actions are in the preliminary stages. Therefore, the financial
statements do not include any provision with respect to these actions.
8
<PAGE>
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. The forward looking statements contained herein are
also subject generally to other risks and uncertainties that are described from
time to time in the Company's reports and registration statements filed with the
Securities and Exchange Commission.
The following table sets forth information on operations for the periods
indicated:
Percentage of Net Revenues
--------------------------
Three Months Ended
------------------
March 31
--------
CONSOLIDATED: 1998 1997
- - ------------- ---- ----
Net Sales $ 16,511,000 100% $ 13,218,000 100%
Cost of Sales 9,485,000 57 8,608,000 65
Other Operating Income 764,000 5 362,000 3
Operating Expenses 6,451,000 39 4,309,000 33
Income from Operations 1,339,000 8 663,000 5
Interest Income (Expense) Net (26,000) 0 6,000 0
Income Before Income Taxes 1,313,000 8 669,000 5
Net Income 773,000 5 401,000 3
9
<PAGE>
Percentage of Net Revenues
--------------------------
Three Months Ended
------------------
March 31
--------
By Segment 1998 1997
---- ----
WHOLESALE DIVISIONS:
STEVEN MADDEN, LTD.
Net Sales $10,299,000 100% $9,411,000 100%
Cost of Sales 6,175,000 60 6,055,000 64
Other Operating Income 81,000 1 15,000 0
Operating Expenses 3,586,000 35 2,891,000 31
Income from Operations 619,000 6 480,000 5
DIVA ACQUISITION CORP.
Net Sales $ 1,929,000 100% $1,193,000 100%
Cost of Sales 1,425,000 74 813,000 68
Operating Expenses 365,000 19 462,000 39
Income (Loss) from Operations 139,000 7 (82,000) (7)
STEVEN MADDEN RETAIL INC.:
Net Sales $ 4,283,000 100% $1,555,000 100%
Cost of Sales 1,885,000 44 758,000 49
Operating Expenses 2,183,000 51 694,000 45
Income from Operations 215,000 5 103,000 7
ADESSO MADDEN INC.:
(FIRST COST)
Net Sales -- -- $1,059,000 --
Cost of Sales -- -- 982,000 --
Commission Revenue $ 683,000 -- 347,000 --
Total Operating Revenue 683,000 100% 424,000 100%
Operating Expenses 317,000 46 262,000 62
Income from Operations 366,000 54 162,000 38
10
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 VS. THREE MONTHS ENDED MARCH 31, 1997
CONSOLIDATED:
Sales for the three months ended March 31, 1998 were $16,511,000, or 25% higher
than the $13,218,000 recorded in the comparable period of 1997. The increase in
sales is due to several factors including additional wholesale accounts,
increased reorders, increased retail sales due to the opening of thirteen retail
stores during 1997 and increased sales from the David Aaron brand. 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 as a percentage of sales decreased 8% from 65% in 1997 to 57% in
1998. 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 1997. Gross profit as a percentage of sales increased 8% from 35%
in 1997 to 43% in 1998.
Selling, general and administrative (SG&A) expenses increased by 50% to
$6,451,000 in 1998 from $4,309,000 in 1997. The increase in the first quarter of
1998 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 64% increase in
payroll, bonuses and related expenses from $1,508,000 in 1997 to $2,475,000 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 146% from $622,000 in 1997
to $1,533,000 in 1998.
Income from operations for 1998 was $1,339,000 which represents an increase of
$676,000 or 102% over the income from operations of $663,000 in 1997. Net income
increased by 93% to $773,000 in 1998 from $401,000 in 1997.
WHOLESALE DIVISIONS:
Sales from the Steve Madden Wholesale Division ("Madden Wholesale"), accounted
for $10,299,000 or 62% and $9,411,000 or 71% of total sales in 1998 and 1997,
respectively. Cost of sales as a percentage of sales has decreased by 4% from
64% in 1997 to 60% in 1998 in Madden Wholesale. Gross profit as a percentage of
sales increased 4% from 36% in 1997 to 40% in 1998. Operating expenses increased
by 24%, from $2,891,000 in 1997 to $3,586,000 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
11
<PAGE>
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 three month period ended March 31, 1998 was
$619,000 compared to income from operations of $480,000 for the three month
period ended March 31, 1997.
Sales from the Diva Acquisition Corp. Wholesale Division ("Diva Wholesale")
which markets the "David Aaron" brand name in footwear accounted for $1,929,000
or 12%, and $1,193,000 or 9%, of total sales in 1998 and 1997, respectively.
Cost of sales as a percentage of sales has increased by 6% from 68% in 1997 to
74% in Diva Wholesale. Gross profit as a percentage of sales decreased from 32%
in 1997 to 26% in 1998. Operating expenses decreased by 21% from $462,000 in
1997 to $365,000 in 1998 due to decreases in selling and designing expenses.
Income from operations from Diva was $139,000 in 1998 compared to a loss of
$82,000 in 1997.
RETAIL DIVISION:
Sales from the Retail Division accounted for $4,283,000 or 26% and $1,555,000 or
12% of total revenues in 1998 and 1997, respectively. The comparable stores
sales for the three months increased 1% over the same period of 1997. The
increase in Retail Division sales is primarily due to the Company's opening of
retail stores in 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, Southshore Plaza in Braintree, MA; David Aaron in New
York, NY; Smithhaven Mall in 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 and Aventura Mall in Aventura, FL, in the
first quarter of 1998 all of which generated aggregate sales of $2,709,000.
Gross profit as a percentage of sales has increased by 5% from 51% in 1997 to
56% in 1998. Selling, general and administrative expenses for the Retail
Division increased to $2,183,000 or 51% of sales in 1998 from $694,000 or 45% 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, one additional store in first
quarter of 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
$215,000 in 1998 compared to income from operations of $103,000 in 1997.
OTHER:
Adesso-Madden, a wholly owned subsidiary of the Company, generated commission
revenues of $683,000 for the first three months of 1998 which represents an
increase of $336,000 or 97% over the commission revenues of $347,000 in 1997.
Operating expenses
12
<PAGE>
increased by 21% from $262,000 in 1997 to $317,000 in 1998 due to increases in
selling and commission, payroll and payroll related expenses, and telephone
expenses. Income from operations from Adesso-Madden was $366,000 in 1998
compared to an income of $162,000 in 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company has working capital of $18,146,000 at March 31, 1998 which
represents an increase of $2,995,000 in working capital from March 31,1997.
During the first three months of 1998 the Company received proceeds of
$1,217,000 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. In May 1998 the Company terminated the engagement of
Hambrecht & Quist.
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
During the three month period ended March 31, 1998, cash used by operating
activities was $1,162,000. Uses of cash arose principally from an increase in
accounts receivable non factored of $763,000, an increase in accounts receivable
factored of $1,104,000 and an increase in inventories of $1,028,000. Cash was
provided principally by a decrease in prepaid expenses and other assets of
$506,000, an increase in accounts payable and accrued expenses of $166,000 and
decrease in prepaid taxes of $476,000.
The Company has lease agreements for office, warehouse, and retail space,
expiring at various times through 2007. Future obligations under these lease
agreements total $18,434,000.
The Company has employment agreements with various officers currently providing
for aggregate annual salaries of approximately $1,145,000, 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.
13
<PAGE>
One of such officers, Steve Madden, Chairman, President and Chief Executive
Officer of the Company, has entered into an amended employment agreement which
eliminates the sales based bonus effective January, 1998. Mr. Madden's bonus, if
any, is left to the discretion of the Board of Directors. The amended employment
agreement provided a signing bonus of $200,000.
The Company continues to increase its supply of products from foreign
manufacturers, the majority of which are located in Brazil and Mexico. Although
the Company has not entered into long-term manufacturing contracts with any of
these foreign companies, the Company believes that a sufficient number of
alternative sources exist outside of the United States for the manufacture of
its products if current suppliers need to be replaced. In addition, because the
Company deals with U.S. currency for all transactions and intends to continue to
do so, the Company believes there should be no foreign exchange considerations.
INVESTING ACTIVITIES
During the three month period ended March 31, 1998, the Company used cash of
$826,000 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 $504,000.
FINANCING ACTIVITIES
During the three month period ended March 31, 1998, the Company received
$1,217,000 from the exercise of options and warrants. 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
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.
We have also added our seventh license, Van Mar, Inc. for Steve Madden intimates
whose contract begin April 1, 1998 and the Company also extended its agreement
with CO International to include hair accessories in Canada due to the
overwhelming request from our Eatons and Bay customers. The Company is exploring
additional licensing opportunities.
On April 21, 1998 the Company, Steven Madden, LTD signed a license to market Lei
Footwear, which fits into our revenue and profit growth strategy. LEI is a $130
million jeanswear company and is among the most popular jean brands to young
women 12-20.
14
<PAGE>
This affords us the opportunity to reach a broader distribution channel than
Steve Madden brand. The line will be geared to key items at a lower price than
the Steve Madden brand.
INFLATION
The Company does not believe that inflation has had a material adverse effect on
sales or income during the past several years. Increases in supplies or other
operating costs could adversely affect the Company's operations; however, the
Company believes it could increase prices to offset increases in costs of goods
sold or other operating costs.
15
<PAGE>
Part II
ITEM 1.
LEGAL PROCEEDINGS
LEVENSON V. DIVA, ET AL.
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, Steve Madden, Ltd. and Diva Acquisition Corp., which is pending
in the Supreme Court of New York, Mr. Levenson alleged 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 contract and/or his economic
expectations.
On April 21, 1998, the Company and its Chief Executive Officer moved to dismiss
Mr. Levenson's complaint as to them on the ground that his complaint failed to
set forth a viable legal cause of action. That motion is presently pending. Also
on April 21, Diva filed an answer denying Mr. Levenson's claims in their
entirety. Pursuant to applicable rules, Mr. Levenson and Diva have commenced
discovery.
On May 11, 1998, Mr. Levenson served an amended complaint in which, in addition
to the claims asserted in his initial complaint, he has asserted two additional
claims: (i) a claim against the Company as guarantor of Diva's financial
obligations under Mr. Levenson's employment contract, and (ii) a claim against
Diva under the New York Labor Law for unpaid wages. Pursuant to his amended
complaint, Mr. Levenson seeks lost earnings under his employment agreement,
punitive damages, attorneys' fees and legal costs.
The Company continues to believe that Mr. Levenson's claims are without merit,
and intends to vigorously contest his lawsuit.
OOGA V. STEVEN MADDEN, LTD., ET AL.
On or about March 13, 1998, the Company, its wholly owned subsidiaries, Steven
Madden Retail, Inc. and Steven Madden, Inc., and Stav Efrat were sued by Ooga
Associates Corp. ("Ooga"), a design and constuction 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
16
<PAGE>
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.
Since the commencement of Ooga's lawsuit, the Company and Ooga have engaged in
extensive discussions concerning a potential future business relationship as a
means of amicably resolving Ooga's claims. Pending completion of those
discussions, the parties have agreed to defer the active prosecution of Ooga's
lawsuit.
In the event that settlement discussions prove unsuccessful, the Company intends
to vigorously contest Ooga's claims, which the Company believes to be completely
meritless.
SISKIN V. DIVA AND STEVEN MADDEN, LTD.
On April 29, 1998, the Company and Diva were sued by David Siskin, Diva's former
Vice President of Design, as a result of the termination of Mr. Siskin's
employment on March 5, 1998. In this action, entitled DAVID AARON SISKIN V. DIVA
ACQUISITION CORP. AND STEVEN MADDEN, LTD., which is pending in the Supreme Court
of New York, County of New York, Mr. Siskin alleges that (i) Diva breached the
terms of his employment agreement, (ii) Diva and the Company violated the New
York Labor Law by failing to pay compensation due him under his employment
agreement, (iii) Diva and the Company fraudulently induced Plaintiff to enter
into his employment agreement, (iv) Diva and the Company breached their
purported fiduciary duties to Mr. Siskin, (v) Diva and the Company wrongfully
misappropriated properly belonging to Mr. Siskin, (vi) Diva and the Company
wrongfully interfered with Mr. Siskin's ability to earn a bonus under his
employment agreement, (vii) Diva and the Company have been unjustly enriched by
virtue of their conduct towards Mr. Siskin, and (viii) the restrictive covenant
contained in Mr. Siskin's employment agreement is unenforceable as a matter of
law and diva should be permanently enjoined from enforcing it. In addition to
the injunctive relief sought, Mr. Siskin seeks damages in an amount based on his
prospective compensation under his employment agreement, plus an additional 25%
alleged to be due under the Labor Law, punitive damages, attorneys' fees,
interest and costs.
Diva and the Company have not yet responded to Mr. Siskin's allegations.
However, both Diva and the Company believe his claims to be completely without
merit and intend to vigorously contest his lawsuit.
DIVA V. D. AARON
On May 11, 1998, Diva commenced an action in federal district court against D.
Aaron, Inc., Nadine & Co., Yves Levenson, David Siskin, Mr. Siskin's wife,
Nadine Levenson, Mr. Siskin's father, Abraham Siskin and Mr. Levenson's father,
David Levenson, alleging that the Defendants have violated federal trademark
law, have engaged in unfair competition and have breached various contractual,
fiduciary and common law duties owed to
17
<PAGE>
Diva. In this action, entitled DIVA ACQUISITION CORP. V. D. AARON, INC., ET AL.,
which is pending in the United States District Court for the Southern District
of New York, the Company seeks, inter alia, an injunction barring the defendants
from using the name "D. Aaron" or any other name confusingly similar to Diva's
"David Aaron" trademark and trade name, injunctive relief barring Nadine
Levenson and Yves Levenson from soliciting business from Diva's customers,
disgorgement of certain moneys wrongfully obtained by the defendants,
compensatory damages, punitive damages, attorneys' fees and costs.
Diva is in the process of serving the defendants, who have not yet responded to
the allegations set forth in Diva's complaint.
18
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report on Form 10-QSB to be signed on its behalf
by the undersigned thereunto duly authorized.
STEVEN MADDEN, LTD.
/s/ ARVIND DHARIA
---------------------------
Arvind Dharia
Chief Financial Officer
DATE: May 14, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
</LEGEND>
<CIK> 0000913241
<NAME> Steven Madden, Ltd.
<MULTIPLIER> 1
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 3,608,000
<SECURITIES> 1,487,000
<RECEIVABLES> 2,241,000
<ALLOWANCES> 397,000
<INVENTORY> 6,109,000
<CURRENT-ASSETS> 20,854,000
<PP&E> 6,487,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 30,880,000
<CURRENT-LIABILITIES> 2,708,000
<BONDS> 0
0
0
<COMMON> 1,000
<OTHER-SE> 27,820,000
<TOTAL-LIABILITY-AND-EQUITY> 30,880,000
<SALES> 16,511,000
<TOTAL-REVENUES> 17,275,000
<CGS> 9,485,000
<TOTAL-COSTS> 6,451,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,313,000
<INCOME-TAX> 540,000
<INCOME-CONTINUING> 773,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 773,000
<EPS-PRIMARY> 0.092
<EPS-DILUTED> 0.076
</TABLE>
