UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1999
- --------------------------------------------------------------------------------
(_) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to _____________________
For Quarter Ended September 30, 1999 Commission File Number 0-23702
------------------- --------
STEVEN MADDEN, LTD.
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 13-3588231
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
52-16 Barnett Avenue, Long Island City, New York 11104
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (718) 446-1800
- --------------------------------------------------------------------------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 of 15 (d) of the Securities and Exchange Act of 1934
during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Class Outstanding as of November 08, 1999
Common Stock 11,507,018
1
<PAGE>
STEVEN MADDEN, LTD.
FORM 10-Q
QUARTERLY REPORT
SEPTEMBER 30, 1999
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements:
Consolidated Balance Sheets.......................................F-3
Consolidated Statements of Operations.............................F-4
Consolidated Statement of Cash Flows..............................F-5
Notes to condensed consolidated
financial statements...........................................F-6
ITEM 2. Management's discussion and analysis
of financial condition and results of
operations.......................................................8
PART II - OTHER INFORMATION
ITEM 2. Legal Proceedings.................................................20
2
<PAGE>
STEVEN MADDEN, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(UNAUDITED)
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 18,423,000 $ 14,642,000
Investments 499,000
Accounts receivable - net of allowances of $599,000 and $462,000 1,297,000 924,000
Due from factor - net of allowances of $575,000 and $351,000 18,853,000 9,357,000
Inventories 11,580,000 7,971,000
Prepaid advertising 896,000
Prepaid expenses and other current assets 1,062,000 2,091,000
Deferred taxes 534,000 534,000
------------ ------------
Total current assets 51,749,000 36,914,000
Property and equipment, net 11,719,000 8,991,000
Deferred taxes 293,000 293,000
Deposits and other 270,000 247,000
Cost in excess of fair value of net assets acquired - net
of accumulated amortization of $401,000 and $297,000 2,379,000 2,483,000
------------ ------------
$ 66,410,000 $ 48,928,000
============ ============
LIABILITIES
Current liabilities:
Current portion of lease payable $ 130,000 $ 106,000
Accounts payable and accrued expenses 10,879,000 3,181,000
------------ ------------
Total current liabilities 11,009,000 3,287,000
Deferred rent 682,000 385,000
Lease payable, less current portion 219,000 296,000
------------ ------------
11,910,000 3,968,000
------------ ------------
Contingencies (Note D)
STOCKHOLDERS' EQUITY
Common stock - $.0001 par value, 60,000,000 shares authorized, 11,299,343
and 10,940,643 issued and outstanding 1,000 1,000
Additional paid-in capital 39,309,000 36,601,000
Retained earnings 18,479,000 11,256,000
Unearned compensation (1,374,000) (1,661,000)
Treasury stock at cost - 345,204 and 270,204 shares (1,915,000) (1,237,000)
------------ ------------
54,500,000 44,960,000
------------ ------------
$ 66,410,000 $ 48,928,000
============ ============
</TABLE>
F-3
<PAGE>
STEVEN MADDEN, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ -------------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 48,963,000 $ 23,991,000 $ 113,750,000 $ 59,235,000
Cost of sales 28,962,000 13,908,000 66,639,000 34,593,000
------------- ------------- ------------- -------------
Gross profit 20,001,000 10,083,000 47,111,000 24,642,000
Commission and licensing fee income 896,000 992,000 2,389,000 2,535,000
Operating expenses (15,014,000) (7,872,000) (37,386,000) (21,004,000)
------------- ------------- ------------- -------------
Income from operations 5,883,000 3,203,000 12,114,000 6,173,000
Interest income (expense), net 169,000 40,000 501,000 (32,000)
------------- ------------- ------------- -------------
Income before provision for income taxes 6,052,000 3,243,000 12,615,000 6,141,000
Provision for income taxes 2,604,000 1,363,000 5,392,000 2,607,000
------------- ------------- ------------- -------------
NET INCOME $ 3,448,000 $ 1,880,000 $ 7,223,000 $ 3,534,000
============= ============= ============= =============
BASIC INCOME PER SHARE $ .32 $ .19 $ 0.67 $ .39
============= ============= ============= =============
DILUTED INCOME PER SHARE $ .27 $ .17 $ 0.59 $ .33
============= ============= ============= =============
Weighted average common shares
outstanding - basic income per share 10,810,750 9,948,378 10,722,468 9,017,914
Effect of potential common shares from exercise
of options and warrants 1,803,687 1,409,624 1,548,571 1,781,127
------------- ------------- ------------- -------------
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - DILUTED INCOME PER SHARE 12,614,437 11,358,002 12,271,039 10,799,041
============= ============= ============= =============
</TABLE>
F-4
<PAGE>
STEVEN MADDEN, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
1999 1998
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 7,223,000 $ 3,534,000
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,393,000 959,000
Deferred compensation 287,000 196,000
Provision for bad debts 361,000 124,000
Issuance of compensatory stock options 474,000 142,000
Deferred rent expense 297,000 274,000
Changes in:
Accounts receivable (510,000) 180,000
Due from factor (9,720,000) (5,394,000)
Inventories (3,609,000) (878,000)
Prepaid expenses and other assets 1,902,000 497,000
Accounts payable and accrued expenses 7,698,000 (665,000)
------------ ------------
Net cash provided by (used in) operating activities 5,796,000 (1,031,000)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (4,017,000) (2,605,000)
Sale of investment securities 499,000 1,991,000
Payments in connection with acquisition of business (19,000)
------------ ------------
Net cash used in investing activities (3,518,000) (633,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from options and warrants exercised 2,234,000 13,075,000
Repayment of lease obligations (53,000) (61,000)
Purchase of treasury stock (678,000) (18,000)
------------ ------------
Net cash provided by financing activities 1,503,000 12,996,000
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 3,781,000 11,332,000
Cash and cash equivalents - beginning of period 14,642,000 3,887,000
------------ ------------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 18,423,000 $ 15,219,000
============ ============
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Issuance of common stock in connection with acquisition of business $ 668,000
</TABLE>
F-5
<PAGE>
STEVEN MADDEN, LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
NOTE A - BASIS OF REPORTING
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, such
statements include all adjustments (consisting only of normal recurring items)
which are considered necessary for a fair presentation of the financial position
of Steven Madden, Ltd. and subsidiaries (the "Company") as of September 30,
1999, and the results of their operations and cash flows for the nine month and
three-month periods then ended. The results of operations for the nine month and
three-month periods ended September 30, 1999 are not necessarily indicative of
the operating results for the full year. It is suggested that these financial
statements be read in conjunction with the financial statements and related
disclosures for the year ended December 31, 1998 included in the Annual Report
of Steven Madden, Ltd. on Form 10-K.
NOTE B - INVENTORIES
Inventories, which consist of finished goods, are stated at the lower of cost
(first-in, first-out method) or market.
NOTE C - NET INCOME PER SHARE OF COMMON STOCK
Basic income per share is based on the weighted average number of common shares
outstanding during the year. Diluted income per share reflects the potential
dilution assuming common shares were issued upon the exercise of outstanding
options and warrants and the proceeds thereof were used to purchase outstanding
common shares.
NOTE D - PENDING LITIGATION
On or about May 25, 1999, Magnum Fashion, Inc. ("Magnum"), a former licensee for
handbags and related products, commenced an arbitration proceeding against the
Company before the American Arbitration Association. Magnum alleges in its
Statement of Claim, inter alia, that it was fraudulently induced to enter into a
license agreement, dated as of February 1, 1997 with the Company, as well as
fraudulent nondisclosure, negligent misrepresentation, mutual mistake, wrongful
termination, failure of consideration and defamation. Based on the allegations,
Magnum seeks to be released from its financial obligations to the Company under
the license agreement and seeks damages in an unstated amount. In addition to
denying the claims asserted by Magnum, the Company has asserted a claim against
Magnum for the balance of the minimum royalty due under the license agreement.
The Company believes that the claims asserted by Magnum are entirely without
merit, and intends to prosecute its claims vigorously.
On or about March 13, 1998, the Company and Stav Efrat were sued by Ooga
Associated Corp. ("Ooga"), a design and construction firm previously engaged by
the Company to design and construct certain of the Company's retail shoe stores.
In this action, which is pending in the Supreme Court of New York, County of New
York, Ooga principally alleges that (i) the Company breached an oral contract
pursuant to which it engaged Ooga to exclusively design and build the Company's
retail shoe stores, (ii) the Company induced Mr. Efrat, an officer and director
of Ooga, to breach his fiduciary duties to Ooga by improperly employing his
services, and (iii) the Company misappropriated Ooga's trade secrets by
impermissibly using store designs and concepts owned by Ooga. In its lawsuit,
Ooga seeks damages consisting of amounts based on its prospective earnings under
the alleged oral contract with the Company, its lost earnings on certain
projects it claims to have abandoned or forgone in reliance on the alleged oral
contract with the Company, and on the value of the designs and concepts
allegedly misappropriated by the Company and also seeks an injunction
prohibiting the Company from using
F-6
<PAGE>
STEVEN MADDEN, LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
NOTE D - PENDING LITIGATION (CONTINUED)
Ooga's designs or other proprietary information, from employing any Ooga
employees or interfering with Ooga's contractual relationships with its
customers. On October 22, 1998, the Court orally dismissed Ooga's breach of
contract claims and on January 7, 1999, the Court suspended the action based on
the failure of Ooga to be present for a mandatory court conference. The action
is subject to being revived upon application by Ooga within a one year period.
The Company believes that Ooga's claims are completely without merit, and
intends to vigorously contest its lawsuit.
F-7
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
- --------------------------------------------------------------------------------
The following discussion of the Company's financial condition and results of
operations should be read in conjunction with the Financial Statements and Notes
thereto appearing elsewhere in this document.
Statements in this "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and elsewhere in this document as well as statements
made in press releases and oral statements that may be made by the Company or by
officers, directors or employees of the Company acting on the Company's behalf
that are not statements of historical or current fact constitute "forward
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. Such forward-looking statements involve known and unknown
risks, uncertainties and other unknown factors that could cause the actual
results of the Company to be materially different from the historical results or
from any future results expressed or implied by such forward-looking statements.
In addition to statements which explicitly describe such risks and
uncertainties, readers are urged to consider statements labeled with the terms
"believes", "belief", "expects", "intends", "anticipates" or "plans" to be
uncertain forward-looking statements. The forward looking statements contained
herein are also subject generally to other risks and uncertainties that are
described from time to time in the Company's reports and registration statements
filed with the Securities and Exchange Commission.
The following table sets forth information on operations for the periods
indicated:
PERCENTAGE OF NET REVENUES
NINE MONTHS ENDED
SEPTEMBER 30
CONSOLIDATED: 1999 1998
- ------------ ---- ----
Net Sales $113,750,000 100% $ 59,235,000 100%
Cost of Sales 66,639,000 59 34,593,000 58
Other Operating Income 2,389,000 2 2,535,000 4
Operating Expenses 37,386,000 33 21,004,000 35
Income from Operations 12,114,000 11 6,173,000 10
Interest Income (Expense) Net 501,000 0 (32,000) 0
Income Before Income Taxes 12,615,000 11 6,141,000 10
Net Income 7,223,000 6 3,534,000 6
8
<PAGE>
PERCENTAGE OF NET REVENUES
NINE MONTHS ENDED
SEPTEMBER 30
By Segment 1999 1998
---- ----
WHOLESALE DIVISIONS:
- --------------------
STEVEN MADDEN, LTD.
- -------------------
Net Sales $ 54,288,000 100% $ 37,506,000 100%
Cost of Sales 34,142,000 63 23,342,000 62
Other Operating Income 531,000 1 391,000 1
Operating Expenses 16,657,000 31 10,724,000 29
Income from Operations 4,020,000 7 3,831,000 10
DIVA ACQUISITION CORP.
- ----------------------
Net Sales $ 5,614,000 100% $ 3,726,000 100%
Cost of Sales 3,773,000 67 3,001,000 81
Operating Expenses 1,113,000 20 995,000 27
Income (Loss) from Operations 728,000 13 (270,000) (7)
L.E.I. FOOTWEAR:
- ----------------
Net Sales $ 21,293,000 100% $ 722,000 100%
Cost of sales 13,910,000 65 454,000 63
Operating Expenses 4,377,000 21 250,000 35
Income from Operations 3,006,000 14 18,000 2
STEVEN MADDEN RETAIL INC.:
- --------------------------
Net Sales $ 32,555,000 100% $ 17,281,000 100%
Cost of Sales 14,814,000 46 7,796,000 45
Operating Expenses 13,998,000 43 8,043,000 47
Income from Operations 3,743,000 11 1,442,000 8
ADESSO MADDEN INC.:
- -------------------
(FIRST COST)
Other Operating Income $ 1,858,000 100% $ 2,144,000 100%
Operating Expenses 1,241,000 67 992,000 46
Income from Operations 617,000 33 1,152,000 54
9
<PAGE>
PERCENTAGE OF NET REVENUES
THREE MONTHS ENDED
SEPTEMBER 30
CONSOLIDATED: 1999 1998
- ------------- ---- ----
Net Sales $ 48,963,000 100% $ 23,991,000 100%
Cost of Sales 28,962,000 59 13,908,000 58
Other Operating Income 896,000 2 992,000 4
Operating Expenses 15,014,000 31 7,872,000 33
Income from Operations 5,883,000 12 3,203,000 13
Interest Income (Expense) Net 169,000 0 40,000 0
Income Before Income Taxes 6,052,000 12 3,243,000 13
Net Income 3,448,000 7 1,880,000 8
By Segment
WHOLESALE DIVISIONS:
- --------------------
STEVEN MADDEN, LTD.
- -------------------
Net Sales $ 24,155,000 100% $ 15,204,000 100%
Cost of Sales 15,451,000 64 9,552,000 63
Other Operating Income 203,000 1 216,000 1
Operating Expenses 6,602,000 27 3,924,000 26
Income from Operations 2,305,000 10 1,944,000 13
DIVA ACQUISITION CORP.
- ----------------------
Net Sales $ 2,188,000 100% $ 877,000 100%
Cost of Sales 1,467,000 67 665,000 76
Operating Expenses 419,000 19 317,000 36
Income (Loss) from Operations 302,000 14 (105,000) (12)
L.E.I. FOOTWEAR:
- ----------------
Net Sales $ 9,534,000 100% $ 722,000 100%
Cost of sales 6,020,000 63 454,000 63
Operating Expenses 2,149,000 23 210,000 29
Income from Operations 1,365,000 14 58,000 8
10
<PAGE>
PERCENTAGE OF NET REVENUES
THREE MONTHS ENDED
SEPTEMBER 30
1999 1998
---- ----
By Segment (Continued)
STEVEN MADDEN RETAIL INC.:
- --------------------------
Net Sales $13,086,000 100% $ 7,188,000 100%
Cost of Sales 6,024,000 46 3,237,000 45
Operating Expenses 5,420,000 41 3,119,000 43
Income (Loss) from Operations 1,642,000 13 832,000 12
ADESSO MADDEN INC.:
- -------------------
(FIRST COST)
Other Operating Income $ 693,000 100% $ 776,000 100%
Operating Expenses 424,000 61 302,000 39
Income from Operations 269,000 39 474,000 61
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999 VS. NINE MONTHS ENDED SEPTEMBER 30, 1998
CONSOLIDATED:
- -------------
Sales for the nine month period ended September 30, 1999 were $113,750,000 or
92% higher than the $59,235,000 recorded in the comparable period of 1998. The
increase in sales is due to several factors including additional wholesale
accounts, increased reorders, EDI size replenishment, increased retail sales due
to the opening of twelve additional stores and three outlet stores during 1998
which were not open for the full comparable period and ten additional retail
stores and two additional outlet stores in 1999 and increased sales from l.e.i.
Wholesale Division ("l.e.i. wholesale"- was launched in the third quarter of
1998). Additionally, during third quarter of 1999 the Steven Madden Wholesale
Division increased its EDI open stock shipments by 155% versus third quarter
last year. Over 130,000 pairs of shoes were sold by replenishing best selling
styles by size every week. EDI replenishment accounted for 18% of the Steve
Madden wholesale business for the third quarter versus 7% last year. 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.
11
<PAGE>
Gross profit as a percentage of sales decreased from 42% in 1998 to 41% in 1999
due to rapid growth of Company's l.e.i. product line, which generally has lower
selling prices per pair and lower gross margin. Also, the decrease was due to a
change in the product mix in Madden Wholesale in 1999 compared to 1998.
Selling, general and administrative (SG&A) expenses increased to $37,386,000 in
1999 from $21,004,000 in 1998. The increase in SG&A is due primarily to a 60%
increase in payroll, officers bonuses and payroll related expenses from
$8,591,000 in 1998 to $13,704,000 in 1999. Additionally, selling, designing and
licensing costs increased by 140% from $10,365,000 in 1998 to $4,312,000 in
1999. This is due in part to an increase in sales in the current period and to
the Company's increased focus on selling, designing, and licensing activities.
The increase in the number of retail outlets and expanded office facilities
resulted in an increase in occupancy, telephone, utilities, computer, legal,
printing/supplies and depreciation expenses by 70% from $4,965,000 in 1998 to
$8,454,000 in 1999. In addition, in August 1999, the Company paid $600,000 to a
former principal of the underwriter of the Company's initial public offering.
Such payment was made in settlement of a dispute regarding an option issued in
connection with the Company's initial public offering in December 1993.
Income from operations for 1999 was $12,114,000 which represents an increase of
$5,941,000 or 96% over the income from operations of $6,173,000 in 1998. Net
income increased by 104% to $7,223,000 in 1999 from $3,534,000 in 1998.
WHOLESALE DIVISIONS:
- --------------------
Sales from the Steve Madden Wholesale Division ("Madden Wholesale"), accounted
for $54,288,000 or 48% and $37,506,000 or 63% of total sales in the nine month
period ended September 30, 1999 and 1998, respectively. Gross profit as a
percentage of sales decreased from 38% in 1998 to 37% in 1999 due to a change in
the product mix in Madden Wholesale in 1999 compared to 1998. Operating expenses
increased to $16,657,000 in 1999 from $10,724,000 in 1998. This increase is due
to an increase in payroll and payroll related expenses principally due to the
hiring of additional management personnel and an increase in occupancy expenses
due to additional warehouse space needed for expanding EDI size replenishment
inventory. Additionally, selling, designing and licensing costs increased due to
an increase in sales in the current period and to the Company's increased focus
on selling, designing, and licensing activities. Madden Wholesale income from
operations was $4,020,000 in 1999 compared to income from operations of
$3,831,000 in 1998.
Sales from the Diva Acquisition Corp. Wholesale Division ("Diva Wholesale")
which markets the "David Aaron" brand name in footwear accounted for $5,614,000
or 5%, and $3,726,000 or 6%, of total sales in the nine month period ended
September 30, 1999 and 1998, respectively. The increase in sales is due to
additional accounts and increased reorders in the third quarter of 1999. Gross
profit as a percentage of sales increased from 19% in 1998 to 33% in 1999 due to
a change in the product mix, balanced sourcing and
12
<PAGE>
inventory management. Operating expenses increased to $1,113,000 in 1999 from
$995,000 in 1998 due to increases in occupancy, computer, payroll and payroll
related expenses. Income from operations from Diva was $728,000 in 1999 compared
to a loss from operations of $270,000 in 1998.
Sales from the l.e.i. Wholesale Division ("l.e.i. Wholesale"- was launched in
the third quarter of 1998) accounted for $21,293,000 or 19%, and $722,000 or 1%,
of total sales in the nine month period ended September 30, 1999 and 1998,
respectively. l.e.i. is sold primarily in department stores, including Macy's -
east, Burdines, Rich's, Hecht's, Filene's, Foley's, Dayton Hudson, Belk and
Penney's. l.e.i. is also sold in specialty store chains such as Wet Seal and
Journey's. l.e.i now sells in over 2400 doors in the United States. Gross profit
as a percentage of sales decreased from 37% in 1998 to 35% in 1999 due to rapid
growth of l.e.i. product line, which generally has lower selling prices per pair
and lower gross margin. Operating expenses increased to $4,377,000 in 1999 from
$250,000 in 1998 due to increases in occupancy, computer, payroll and payroll
related expenses. Income from operations from l.e.i. was $3,006,000 in 1999
compared to income from operations of $18,000 in 1998.
RETAIL DIVISION:
- ----------------
Sales from the Retail Division accounted for $32,555,000 or 29 % and $17,281,000
or 29% of total revenues in 1999 and 1998, respectively. The increase in Retail
Division sales is primarily due to the Company's opening of twelve additional
stores and three outlet stores during 1998 and ten additional retail stores and
two additional outlet stores in 1999. Same store sales for the nine month period
ended September 30, 1999 increased by 23% over the same period of 1998. This
increase in same store sales was driven by the Company's ability to reorder best
sellers. While sneakers were a negative in most competitor's stores, the
Company's basic sneakers sales were strong and it was the Company's best style
during third quarter of 1999. Also, increases in same store sales were driven by
the Company's ability to continue to supply new styles in sandals during July
and August and actively testing new products including boots in animal prints.
Also, during the first quarter of 1999, the Company completed it's internet
fulfillment site and expanded the number of workstations at the Long Island City
offices dedicated to Internet sales. The actual number of hits were 31.9
million, unique users were 386,400 and the conversion rate was 2.4% for the nine
month period ended September 30, 1999. As the Company offers additional styles
through its stevenmadden.com site, business continues to grow. As previously
announced, the Company signed an agreement with America Online, to sell footwear
and apparel through AOL's new shopping destination, Shop @ AOL. The site for
apparel went live in mid August and for footwear went live at the end of
September. Since going live, the Company has experienced a 153% growth in hits
and a 14% growth in unique users. Gross profit as a percentage of sales
decreased from 55% in 1998 to 54% in 1999 was due to a change in the product mix
in the Retail Division in 1999 compared to 1998. Selling, general and
administrative expenses for the Retail Division increased to $13,998,000 in 1999
from $8,043,000 in 1998. This increase is due to increases in payroll and
related expenses,
13
<PAGE>
occupancy, printing, computer and depreciation expenses as a result of opening
twelve additional stores and three outlet stores during 1998 and ten additional
retail stores and two additional retail outlet stores in 1999. Income from
operations from the retail division was $3,743,000 in 1999 compared to income
from operations of $1,442,000 in 1998.
ADESSO-MADDEN DIVISION:
- -----------------------
Adesso-Madden, Inc., a wholly owned subsidiary of the Company, generated
commission revenues of $1,858,000 for the nine month period ended September 30,
1999 which represents a decrease from the commission revenues of $2,144,000 in
1998 due to a shift by JC Penneys from ordering goods through Adesso Madden to
ordering goods from l.e.i. wholesale. However, Adesso-Madden, the Company's
first cost division, continues to expand its business by introducing additional
styles in Kmart and through Mel Disco and Target as well as Jordache footwear,
the Company's new first cost brand. During the first quarter of 1999, the
Company received orders from Walmart for women and girls styles of the Jordache
footwear collection. The first shipments of Jordache footwear were delivered in
July 1999. Operating expenses increased to $1,241,000 in 1999 from $992,000 in
1998 due to increases in occupancy, computer, payroll and payroll related
expenses. Income from operations from Adesso-Madden was $617,000 in 1999
compared to income from operations of $1,152,000 in 1998.
THREE MONTHS ENDED SEPTEMBER 30, 1999 VS. THREE MONTHS ENDED SEPTEMBER 30,
1998
CONSOLIDATED:
- -------------
Sales for the three month period ended September 30, 1999 were $48,963,000 or
104% higher than the $23,991,000 recorded in the comparable period of 1998. The
increase in sales is due to several factors including additional wholesale
accounts, increased reorders, EDI size replenishment, increased retail sales due
to the opening of twelve additional stores and three outlet stores during 1998
which were not open for the full comparable period and ten additional retail
stores and two additional outlet stores in 1999 and increased sales from l.e.i.
Wholesale Division ("l.e.i. wholesale"- was launched in the third quarter of
1998). Additionally, during third quarter of 1999 the Steven Madden Wholesale
Division increased its EDI open stock shipments by155% versus third quarter last
year. Over 130,000 pairs of shoes were sold by replenishing best selling styles
by size every week. EDI replenishment accounted for 18% of the Steve Madden
wholesale business for the third quarter versus 7% last year. As a result of
additional distribution, management feels that "Steve Madden" as a brand name
has increased in popularity nationwide. In turn, increased sales have enabled
the Company to expand its advertising and in store concept efforts, all of which
have contributed to the continuing increase in sales.
Gross profit as a percentage of sales decreased from 42% in 1998 to 41% in 1999
due to a change in the product mix in Madden Wholesale in 1999 compared to 1998.
14
<PAGE>
Selling, general and administrative (SG&A) expenses increased to $15,014,000 in
1999 from $7,872,000 in 1998. The increase in SG&A is due primarily to a 55%
increase in payroll, officers bonuses and payroll related expenses from
$3,209,000 in 1998 to $4,971,000 in 1999. Additionally, selling, designing and
licensing costs increased by 156% from 1,684,000 in 1998 to $4,317,000 in 1999.
This is due in part to an increase in sales in the current period and to the
Company's increased focus on selling, designing, and licensing activities. The
increase in the number of retail outlets and expanded office facilities resulted
in an increase in occupancy, telephone, utilities, computer, legal,
printing/supplies and depreciation expenses by 101% from $1,841,000 in 1998 to
$3,699,000 in 1999. In addition, in August 1999, the Company paid $600,000 to a
former principal of the underwriter of the Company's initial public offering.
Such payment was made in settlement of a dispute regarding an option issued in
connection with the Company's initial public offering in December 1993.
Income from operations for 1999 was $5,883,000 which represents an increase of
$2,680,000 or 84% over the income from operations of $3,203,000 in 1998. Net
income increased by 83 % to $3,448,000 in 1999 from $1,880,000 in 1998.
WHOLESALE DIVISIONS:
- --------------------
Sales from the Steve Madden Wholesale Division ("Madden Wholesale"), accounted
for $24,155,000 or 49% and $15,204,000 or 63% of total sales in the three month
period ended September 30, 1999 and 1998, respectively. Gross profit as a
percentage of sales decreased from 37% in 1998 to 36% in 1999 due to a change in
the product mix in Madden Wholesale in 1999 compared to 1998. Operating expenses
increased to $6,602,000 in 1999 from $3,924,000 in 1998. This increase is due to
an increase in payroll and payroll related expenses principally due to the
hiring of additional management personnel and an increase in occupancy expenses
due to additional warehouse space needed for expanding EDI size replenishment
inventory. Additionally, selling, designing and licensing costs increased due to
an increase in sales in the current period and to the Company's increased focus
on selling, designing, and licensing activities. Madden Wholesale income from
operations was $2,305,000 in 1999 compared to income from operations of
$1,944,000 in 1998.
Sales from the Diva Acquisition Corp. Wholesale Division ("Diva Wholesale")
which markets the "David Aaron" brand name in footwear accounted for $2,188,000
or 4%, and $877,000 or 4%, of total sales in the three month period ended
September 30, 1999 and 1998, respectively. The increase in sales is due to
additional accounts and increased reorders in the third quarter of 1999. Gross
profit as a percentage of sales increased from 24% in 1998 to 33% in 1999 due to
the purchase of a higher percentage of shoes from overseas suppliers, resulted
in a lower cost per pair in 1999 compared to 1998. Operating expenses increased
to $419,000 in 1999 from $317,000 in 1998 due to increases in occupancy,
computer and payroll and payroll related expenses. Income from operations from
Diva was $302,000 in 1999 compared to loss from operations of $105,000 in 1998.
15
<PAGE>
Sales from the l.e.i. Wholesale Division ("l.e.i. Wholesale"- was launched in
the third quarter of 1998) accounted for $9,534,000 or 19%, and $722,000 or 3%,
of total sales in the three month period ended September 30, 1999 and 1998,
respectively. l.e.i. is sold primarily in department stores, including Macy's -
east, Burdines, Rich's, Hecht's, Filene's, Foley's, Dayton Hudson, Belk and
Penney's. l.e.i is also sold in specialty store chains such as Wet Seal and
Journey's. l.e.i now sells in over 2,400 doors in the United States. Gross
profit as a percentage of sales remains the same in l.e.i. Division. Operating
expenses increased to $2,149,000 in 1999 from $210,000 in 1998 due to increases
in occupancy, computer, payroll and payroll related expenses. Income from
operations from l.e.i. was $1,365,000 in 1999 compared to income from operations
of $58,000 in 1998.
RETAIL DIVISION:
- ----------------
Sales from the Retail Division accounted for $13,086,000 or 27% and $7,188,000
or 30% of total revenues in 1999 and 1998, respectively. The increase in Retail
Division sales is primarily due to the Company's opening of twelve additional
stores and three outlet stores during 1998 and ten additional retail stores and
two additional outlet stores in 1999. Same store sales for the three month
period ended September 30, 1999 increased by 25% over the same period of 1998.
This increase in same store sales was driven by the Company's ability to reorder
best sellers. While sneakers were a negative in most competitor's stores, the
Company's basic sneakers sales were strong and it was the Company's best style
during third quarter of 1999. Also, increases in same store sales was driven by
the Company's ability to continue to supply new styles in sandals during July
and August and actively testing new products including boots in animal prints.
In the first quarter of 1999, the Company completed it's internet fulfillment
site and expanded the number of workstations at the Long Island City offices
dedicated to Internet sales. The actual number of hits were over 14 million,
unique users were 138,400 and the conversion rate was 3.0% for the three month
period ended September 30, 1999. As the Company offers additional styles through
its stevenmadden.com site, business continues to grow. As previously announced,
the Company signed an agreement with America Online, the world's leading
interactive service, to sell footwear and apparel through AOL's new shopping
destination, Shop @ AOL. The site for apparel went live in mid August and for
footwear went live at the end of September. Since going live, the Company has
experienced a 153% growth in hits and a 14% growth in unique users. Gross profit
as a percentage of sales decreased from 55% in 1998 to 54% in 1999 was due to a
change in the product mix in the Retail Division in 1999 compared to 1998.
Selling, general and administrative expenses for the Retail Division increased
to $5,420,000 in 1999 from $3,119,000 in 1998. This increase is due to increases
in payroll and related expenses, occupancy, printing, computer and depreciation
expenses as a result of opening twelve additional stores and three outlet stores
during 1998 and ten retail stores and two additional retail outlet stores in
1999. Income from operations from the retail division was $1,642,000 in 1999
compared to income from operations of $832,000 in 1998.
16
<PAGE>
ADESSO-MADDEN DIVISION:
- -----------------------
Adesso-Madden, Inc., a wholly owned subsidiary of the Company, generated
commission revenues of $693,000 for the three month period ended September 30,
1999 which represents a decrease from the commission revenues of $776,000 in
1998 due to a shift by JC Penneys from ordering goods through Adesso Madden to
ordering goods from l.e.i. wholesale. However, Adesso-Madden, the Company's
first cost division, continues to expand its business by introducing additional
styles in Kmart and through Mel Disco and Target as well as jordache footwear,
the Company's new first cost brand. During the first quarter of 1999, the
Company received orders from Walmart for women and girls styles of the Jordache
footwear collection. The first shipments of Jordache footwear were delivered in
July 1999. Operating expenses increased to $424,000 in 1999 from $302,000 in
1998 due to increases in occupancy, computer and payroll and payroll related
expenses. Income from operations from Adesso-Madden was $269,000 in 1999
compared to income from operations of $474,000 in 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $40,740,000 and Stockholders' Equity of
$54,400,000 at September 30, 1999.
The Company's customers consist principally of department stores and specialty
stores, including shoe boutiques. Presently, the Company's Wholesale Division
sells approximately sixty percent (60%) of its products to department stores,
including Federated Department Stores (Bloomingdales, Bon Marche, Burdines,
Macy's and Rich's), May Department Stores (Famous Barr, Filene's, Foley's,
Hecht's, Kaufmann's, Meier & Frank and Robinsons May), Dillard's, Dayton-Hudson
and Nordstorm approximately forty percent (40%) to specialty stores, including
Journey's, Wet Seal and The Buckle and catalog retailers, including Victoria's
Secret and Fingerhut. Federated Department Stores and Nordstorm's presently
account for approximately twenty percent (20%) and seventeen percent (17%) of
the Company's Wholesale Division sales, respectively.
OPERATING ACTIVITIES
During the nine month period ended September 30, 1999, cash provided by
operating activities was $5,796,000. Uses of cash arose principally from an
increase in factored accounts receivable of $9,720,000 and an increase in
inventory of $3,609,000. Cash was provided principally by an increase in
accounts payable and accrued expenses of $7,698,000 and net income of
$7,223,000.
The Company has lease agreements for office, warehouse, and retail space,
expiring at various times through 2010. Future obligations under these lease
agreements total approximately $40,000,000.
17
<PAGE>
The Company has employment agreements with various officers currently providing
for aggregate annual salaries of approximately $1,600,000, subject to annual
bonuses and annual increases as may be determined by the Company's Board of
Directors. In addition, as part of the employment agreements, the Company is
committed to pay incentive bonuses based on income before interest, depreciation
and taxes to certain officers.
The Company continues to increase its supply of products from foreign
manufacturers, the majority of which are located in Brazil and Mexico. Although
the Company has not entered into long-term manufacturing contracts with any of
these foreign companies, the Company believes that a sufficient number of
alternative sources exist outside of the United States for the manufacture of
its products if current suppliers need to be replaced. In addition, because the
Company deals with U.S. currency for all transactions and intends to continue to
do so, the Company believes there should be no foreign exchange considerations.
INVESTING ACTIVITIES
- --------------------
During the nine month period ended September 30, 1999, the Company used cash of
$4,017,000 to acquire computer equipment and make leasehold improvements on new
retail stores, warehouse space and office space.
FINANCING ACTIVITIES
During the nine month period ended September 30, 1999, the Company received
$2,234,000 from the exercise of options.
LICENSE AGREEMENTS
As of January 1, 1999, an affiliate of Jordache became the Company's new
jeanswear and sportswear licensee and the first shipments of Steve Madden
sportswear and jeanswear collections were delivered in June 1999. As of
September 30, 1999, the Company had eight license partners covering ten product
categories. The Company is exploring additional licensing opportunities.
In addition, as of January 1, 1999, the Company entered into a license agreement
with the Jordache pursuant to which the Company was granted the exclusive
license to use the Jordache trademark on women and girls footwear in the mass
channels of distribution, such as Walmart. The first shipments of Jordache
footwear were delivered in July 1999.
YEAR 2000
The Company recognizes that a challenging problem exists in that many computer
systems worldwide do not have the capability of recognizing the year 2000 or the
years thereafter. As of July 1999, the Company believes it became year 2000
enabled with all systems. This "year 2000 Computer Problem" creates risk for the
Company from unforeseen problems in
18
<PAGE>
its own computer systems and from third parties with whom the Company deals.
Such failures of the Company and/or third parties' computer systems could have a
material adverse effect on the Company and its business in the future.
INFLATION
The Company does not believe that inflation has had a material adverse effect on
sales or income during the past several years. Increases in supplies or other
operating costs could adversely affect the Company's operations; however, the
Company believes it could increase prices to offset increases in costs of goods
sold or other operating costs.
19
<PAGE>
PART II
ITEM 1. LEGAL PROCEEDINGS
MAGNUM FASHIONS, INC. AND WK MAXY INDUSTRIES, LTD. V. STEVEN MADDEN, LTD.
- -------------------------------------------------------------------------
As disclosed in the Company's 10-Q for the quarter ending June 30, 1999, the
claimants in this pending arbitration seek to be released from their financial
obligations to the Company under a certain license agreement and related
guaranty. Magnum further seeks damages arising from its claims for, inter alia,
fraudulent inducement and breach of contract. In September 1999, Magnum
disclosed that it claims damages in the amount of $5 million.
The Company continues to believe that Magnum's claims are entirely without
merit, and that the license agreement at issue was breached by Magnum and not by
the Company. Accordingly, the Company intends to vigorously defend Magnum's
claims and to vigorously prosecute its claims for compensation against Magnum
and WK Maxy.
STEVEN MADDEN, LTD. V. LEE N' GI
- --------------------------------
On October 28, 1999, the Company commenced an action in the Supreme Court for
the State of New York against Lee N' Gi, a new York partnership, alleging that
Lee N' Gi wrongfully induced Magnum Fashions, Inc. to breach its obligations to
the Company under a certain license agreement relating to the use of the
Company's "Steven Madden" trademark in connection with the sale of handbags and
similar products. The Company seeks damages from Lee N' Gi for the lost profits
the Company would have derived from the Magnum license but for Magnum's breach.
The Company is in the process of obtaining jurisdiction over the defendant, and
intends to prosecute its claim vigorously.
20
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report on Form 10-Q to be signed on its behalf
by the undersigned thereunto duly authorized.
STEVEN MADDEN, LTD.
/s/ ARVIND DHARIA
-----------------------
Arvind Dharia
Chief Financial Officer
DATE: November 10, 1999
21
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