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 June 30, 2000
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(_) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to ___________________
For Quarter Ended JUNE 30, 2000 Commission File Number 0-23702
---------------- -----------
STEVEN MADDEN, LTD.
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(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
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (718) 446-1800
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Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 of 15 (d) of the Securities and Exchange Act of 1934
during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
----- -----
CLASS OUTSTANDING AS OF AUGUST 10, 2000
COMMON STOCK 12,298,259
1
<PAGE>
STEVEN MADDEN, LTD. AND SUBSIDIARIES
STEVEN MADDEN, LTD.
FORM 10-Q
QUARTERLY REPORT
JUNE 30, 2000
TABLE OF CONTENTS
PART I- FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements:
Consolidated Balance Sheets........................................ 3
Consolidated Statements of Operations.............................. 4
Consolidated Statement of Cash Flows............................... 5
Notes to condensed consolidated
financial statements............................................ 6
ITEM 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations.................................................... 8
PART II- OTHER INFORMATION
ITEM 1. Legal Proceedings.................................................. 20
2
<PAGE>
STEVEN MADDEN, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 21,787 $ 37,361
Investments 257
Accounts receivable - net of allowances of $925 and $886 2,261 1,207
Due from factor - net of allowances of $833 and $624 16,111 12,146
Inventories 16,427 10,158
Prepaid expenses and other current assets 2,231 867
Deferred taxes 800 800
------------ ------------
Total current assets 59,617 62,796
Property and equipment, net 14,931 11,114
Deferred taxes 1,612 1,612
Deposits and other 240 269
Cost in excess of fair value of net assets
acquired - net of accumulated amortization
of $506 and $436 2,275 2,344
------------ ------------
$ 78,675 $ 78,135
============ ============
LIABILITIES
Current liabilities:
Current portion of lease payable $ 114 $ 116
Accounts payable 7,674 6,542
Accrued expenses 2,804 2,528
Income tax payable 4,957
Accrued bonuses 517 577
------------ ------------
Total current liabilities 11,109 14,720
Deferred rent 897 777
Lease payable, less current portion 146 203
------------ ------------
12,152 15,700
------------ ------------
Contingencies (Note D)
STOCKHOLDERS' EQUITY
Common stock - $.0001 par value, 60,000 shares
authorized, 12,298 and 11,798 issued and outstanding 1 1
Additional paid-in capital 45,655 42,906
Retained earnings 29,646 22,722
Unearned compensation (1,088) (1,279)
Treasury stock at cost - 1,200 and 345 shares (7,691) (1,915)
------------ ------------
66,523 62,435
------------ ------------
$ 78,675 $ 78,135
============ ============
</TABLE>
See notes to financial statements
3
<PAGE>
STEVEN MADDEN, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share date)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $ 48,057 $ 38,056 $ 92,166 $ 64,787
Cost of sales 27,123 21,888 53,048 37,677
-------- -------- -------- --------
Gross profit 20,934 16,168 39,118 27,110
Commission and licensing fee income 1,130 802 2,134 1,493
Operating expenses (15,995) (13,019) (30,415) (22,372)
-------- -------- -------- --------
Income from operations 6,069 3,951 10,837 6,231
Interest income, net 471 158 1,007 332
Gain on sale of marketable securities 230
-------- -------- -------- --------
Income before provision for income taxes 6,540 4,109 12,074 6,563
Provision for income taxes 2,797 1,745 5,149 2,788
-------- -------- -------- --------
NET INCOME $ 3,743 $ 2,364 $ 6,925 $ 3,775
======== ======== ======== ========
BASIC INCOME PER SHARE $0.32 $0.22 $0.60 $0.35
===== ===== ===== =====
DILUTED INCOME PER SHARE $0.28 $0.19 $0.52 $0.31
===== ===== ===== =====
Weighted average common shares
outstanding - basic income per share 11,627 10,683 11,566 10,677
Effect of potential common shares from exercise
of options and warrants 1,593 1,511 1,658 1,391
-------- -------- -------- --------
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - DILUTED INCOME PER SHARE 13,220 12,194 13,224 12,068
======== ======== ======== ========
</TABLE>
See notes to financial statements
4
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<TABLE>
<CAPTION>
STEVEN MADDEN, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
SIX MONTHS ENDED
JUNE 30,
----------------------------
2000 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,925 $ 3,775
Adjustments to reconcile net income to
net cash (used in) provided by
operating activities:
Issuance of compensatory stock options 474
Depreciation and amortization 1,368 880
Deferred compensation 191 191
Provision for bad debts 248 152
Gain on sale of marketable securities (230)
Deferred rent expense 120 184
Changes in:
Accounts receivable (1,093) 2
Due from factor (4,174) (5,970)
Inventories (6,269) (371)
Prepaid expenses and other assets (1,334) (1,072)
Accounts payable and accrued expenses (3,610) 5,294
------------ ------------
Net cash (used in) provided by operating activities (7,858) 3,539
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (5,117) (2,502)
Sale/maturity of investment securities 487 499
------------ ------------
Net cash used in investing activities (4,630) (2,003)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from options and warrants exercised 2,749 983
Purchase of treasury stock (5,776) (678)
Repayment of lease obligations (59) (23)
------------ ------------
Net cash (used in) provided by financing activities (3,086) 282
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS (15,574) 1,818
Cash and cash equivalents - beginning of quarter 37,361 14,642
------------ ------------
CASH AND CASH EQUIVALENTS - END OF QUARTER $ 21,787 $ 16,460
============ ============
</TABLE>
See notes to financial statements
5
<PAGE>
STEVEN MADDEN, LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2000
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 June 30, 2000, and
the results of their operations and cash flows for the six month and three-month
periods then ended. The results of operations for the six month and three-month
periods ended June 30, 2000 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, 1999 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
[1] MAGNUM FASHIONS, INC.:
On or about May 25, 1999, Magnum Fashion, Inc. ("Magnum") and WK Maxy
Industries, Ltd. ("WK") commenced an arbitration proceeding (the
"Arbitration") against the Company. In the claim filed as part of the
arbitration, Magnum alleged, that it was fraudulently induced to enter
into a license agreement, dated as of February 1, 1997, with the
Company pursuant to which Magnum licensed the Company's "Steve Madden"
trademark for handbag and related products. WK alleged that it was
fraudulently induced into providing a guaranty of Magnum's obligations
under license. Based on this and other allegations, Magnum and WK have
sought to be released from their financial obligations to the Company
under the license and guaranty, respectively. Magnum is also seeking
damages that it has estimated to be in excess of $5,000,000.
On July 7, 1999, the Company submitted its answer to the claim and
filed a counterclaim. In addition to denying the claims asserted by
Magnum and WK, the Company asserted a claim against Magnum and WK for
the balance of the minimum royalty due under the license. The Company
also asserted additional claims against Magnum and WK based on improper
sales made during the term of the license and improper liquidation of
its inventory following termination of the license. Magnum and WK have
denied the counterclaims. Initial hearings were held in April 2000 and
additional hearings are scheduled through September 2000.
The Company believes that the Company has meritorious defenses against
the claims asserted by Magnum and WK. Accordingly, the Company intends
to vigorously contest Magnum's claims and to pursue its counterclaims.
6
<PAGE>
NOTE D - PENDING LITIGATION (CONTINUED)
[2] LEE N' GI:
On or about October 27, 1999, the Company commenced an action against
Lee N' Gi, the exclusive marketing and distribution agent for Magnum,
in which it claimed that Lee N' Gi had wrongfully induced Magnum to
breach its obligation under the aforementioned license between the
Company and Magnum. The Company is seeking damages of $3,000,000.
On or about December 14, 1999, Lee N' Gi served an answer denying the
allegations and counterclaimed that the Company had breached or
wrongfully terminated the license to its detriment. Lee N' Gi seeks
damages of $2,000,000 on its counterclaim. The Company answered the
counterclaim denying the allegations. The action is in preliminary
stages. The Company believes that it has meritorius defenses against
the Lee N' Gi counterclaim and intends to vigorously contest these
counterclaims.
[3] CLASS ACTION LITIGATION:
As of August 9, 2000, six putative class action lawsuits have been
commenced in the United States District Court for the Eastern District
of New York against the Company, Mr. Madden and, in three of the
actions, Rhonda J. Brown, the Company's President and Chief Operating
Officer, and Arvind Dharia, the Company's Chief Financial Officer.
These actions are captioned: WILNER v. STEVEN MADDEN, LTD., ET AL., 00
CV 3676 (filed June 21, 2000); CONNOR v. STEVEN MADDEN, ET AL., 00 CV
3709 (filed June 22, 2000); BLUMENTHAL v. STEVEN MADDEN, LTD., et al.,
00 CV 3709 (filed June 23, 2000); CURRY v. STEVEN MADDEN, LTD., et al.,
00 CV 3766 (filed June 26, 2000); DEMPSTER v. STEVEN MADDEN LTD., et
al., 00 CV 3702 (filed June 30, 2000); SALAFIA v. STEVEN MADDEN, LTD.,
et al., 00 CV 4289 (filed July 24, 2000). The complaints generally
allege that the Company and the individual defendants violated Sections
10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5
promulgated thereunder by issuing false and misleading statements, and
failing to disclose material adverse information relating, among other
things, to the matters and allegations concerning Mr. Madden. The
plaintiffs seek an unspecified amount of damages, costs and expenses on
behalf of themselves and all other purchasers of the Company's common
stock either during the period June 21, 1997 through June 20, 2000 or
the period November 3, 1999 through June 20, 2000 (depending upon the
particular action). Although the Company has not yet answered or
otherwise responded to these complaints, the Company believes that it
has substantial defenses to the claims.
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
SIX MONTHS ENDED
JUNE 30
($ in thousands)
<TABLE>
<CAPTION>
CONSOLIDATED: 2000 1999
------------ ---- ----
<S> <C> <C> <C> <C>
Net Sales $92,166 100% $64,787 100%
Cost of Sales 53,048 58 37,677 58
Other Operating Income 2,134 2 1,493 2
Operating Expenses 30,415 33 22,372 35
Income from Operations 10,837 12 6,231 10
Interest Income (Expense) Net 1,007 1 332 1
Gain on sale of Marketable Securities 230 0 --- --
Income Before Income Taxes 12,074 13 6,563 10
Net Income 6,925 8 3,775 6
</TABLE>
8
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<TABLE>
<CAPTION>
PERCENTAGE OF NET REVENUES
SIX MONTHS ENDED
JUNE 30
($ in thousands)
By Segment 2000 1999
---- ----
WHOLESALE DIVISIONS:
--------------------
<S> <C> <C> <C> <C>
STEVEN MADDEN, LTD.
Net Sales $43,206 100% $30,133 100%
Cost of Sales 27,132 63 18,691 62
Other Operating Income 564 1 328 1
Operating Expenses 11,697 27 10,055 33
Income from Operations 4,941 11 1,715 6
l.e.i. FOOTWEAR:
Net Sales $18,298 100% $11,759 100%
Cost of sales 11,806 65 7,890 67
Operating Expenses 3,423 19 2,228 19
Income from Operations 3,069 17 1,641 14
DIVA ACQUISITION CORP:
Net Sales $1,747 100% $3,426 100%
Cost of sales 1,266 72 2,306 67
Operating Expenses 523 30 694 20
Income (Loss) from Operations (42) (2) 426 12
STEVIES INC.:
Net Sales $1,416 100% --- --
Cost of sales 884 62 --- --
Other Operating Income 42 3 --- --
Operating Expenses 445 31 --- --
Income from Operations 130 9 --- --
STEVEN MADDEN RETAIL INC.:
--------------------------
Net Sales $27,500 100% $19,469 100%
Cost of Sales 11,961 44 8,790 45
Operating Expenses 13,353 49 8,578 44
Income from Operations 2,186 8 2,101 11
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF NET REVENUES
SIX MONTHS ENDED
JUNE 30
($ in thousands)
By Segment (Continued)
ADESSO MADDEN INC.: 2000 1999
------------------- ---- ----
(FIRST COST)
<S> <C> <C> <C> <C>
Other Operating Revenue $1,528 100% $1,165 100%
Operating Expenses 975 64 817 70
Income from Operations 553 36 348 30
</TABLE>
10
<PAGE>
PERCENTAGE OF NET REVENUES
THREE MONTHS ENDED
JUNE 30
($ in thousands)
<TABLE>
<CAPTION>
CONSOLIDATED: 2000 1999
------------ ---- ----
<S> <C> <C> <C> <C>
Net Sales $48,056 100% $38,056 100%
Cost of Sales 27,123 56 21,888 58
Other Operating Income 1,130 2 802 2
Operating Expenses 15,994 33 13,019 34
Income from Operations 6,069 13 3,951 10
Interest Income (Expense) Net 470 1 158 0
Gain on sale of Marketable Securities -- -- -- --
Income Before Income Taxes 6,540 14 4,109 11
Net Income 3,753 8 2,364 6
By Segment
WHOLESALE DIVISIONS:
--------------------
STEVEN MADDEN, LTD.
Net Sales $21,185 100% $17,877 100%
Cost of Sales 13,276 63 10,985 61
Other Operating Income 313 1 187 1
Operating Expenses 5,550 26 6,200 35
Income from Operations 2,672 13 879 5
l.e.i. FOOTWEAR:
Net Sales $8,566 100% $6,381 100%
Cost of sales 5,368 63 4,180 66
Operating Expenses 1,598 19 1,251 20
Income from Operations 1,600 19 950 15
DIVA ACQUISITION CORP:
Net Sales $667 100% $1,971 100%
Cost of sales 540 81 1,296 66
Operating Expenses 329 49 426 22
Income (Loss) from Operations (201) (30) 249 13
</TABLE>
11
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<TABLE>
<CAPTION>
PERCENTAGE OF NET REVENUES
THREE MONTHS ENDED
JUNE 30
($ in thousands)
By Segment (Continued) 2000 1999
---- ----
<S> <C> <C> <C> <C>
STEVIES INC.:
Net Sales $1,416 100% --- --
Cost of Sales 884 62 --- --
Other Operating Income 6 0 --- --
Operating Expenses 329 23 --- --
Income from Operations 209 15 --- --
STEVEN MADDEN RETAIL INC.:
--------------------------
Net Sales $16,222 100% $11,827 100%
Cost of Sales 7,056 44 5,427 46
Operating Expenses 7,682 47 4,760 40
Income from Operations 1,484 9 1,640 14
ADESSO MADDEN INC.:
-------------------
(FIRST COST)
Other Operating Revenue $811 100% $615 100%
Operating Expenses 506 62 382 62
Income from Operations 305 38 233 38
</TABLE>
RESULTS OF OPERATIONS
(# in thousands)
SIX MONTHS ENDED JUNE 30, 2000 VS. SIX MONTHS ENDED JUNE 30, 1999
CONSOLIDATED:
Sales for the six month period ended June 30, 2000 were $92,166 or 42% higher
than the $64,787 in the comparable period of 1999. The increase in sales is due
to several factors, including (i) the addition of new wholesale accounts, (ii)
an increase in reorders from existing customers, (iii) a 41% increase in retail
sales due to the opening of additional Steve Madden retail stores during first
and second quarters of 2000 and increases in same store sales, (iv) an increase
in sales from the l.e.i. Wholesale Division ("l.e.i. Wholesale"), and (v) an
increase in the number of Steve Madden concept shops located in major department
stores. In turn, increased sales have enabled the Company to expand its
advertising and in store concept efforts, all of which have generally
contributed to the expansion of public awareness of the Company's brands and the
continuing increase in sales. Also in the first quarter, the Company introduced
a new brand, Stevies(TM). Stevies(TM) is a fashion brand which targets girls
ages 6-9 and "tweens" ages 10-12. The Company's new Stevies Wholesale Division
("Stevies Wholesale") commenced shipping to department stores throughout the
country in the second quarter of 2000. Stevies Wholesale generated revenue of
$1,416 for the six month period ended June 30, 2000. Also as of second quarter
of 2000, seven licenses in 10 product classifications were signed for the
Stevies(TM) brand with shipments to begin for the back to school season. The web
site for Stevies at
12
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www.stevies.com went live in March of 2000.
Consolidated gross profit as a percentage of sales in first six months of 2000
increased to 42.4% as compared 41.8% for the first six months of 1999.
Selling, general and administrative (SG&A) expenses increased to $30,415 in 2000
from $22,372 in 1999. The increase in SG&A is due primarily to a 25% increase in
payroll and payroll related expenses from $8,733 in 1999 to $10,880 in 2000.
Also, selling, designing and licensing costs increased by 31% from $6,048 in
1999 to $7,947 in 2000. 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, printing/supplies and depreciation expenses by 46% from $4,493 in 1999
to $6,564 2000.
Income from operations for 2000 was $10,837 which represents an increase of
$4,606 or 74% over the income from operations of $6,231 in 1999. Net income
increased by 83% to $6,925 in 2000 from $3,775 in 1999.
WHOLESALE DIVISIONS:
Sales from the Steve Madden Wholesale Division ("Madden Wholesale") accounted
for $43,206 or 46.9%, and $30,133 or 46.5%, of total sales in 2000 and 1999,
respectively. This increase in sales is due to an increase in reorders from
existing customers and an increase in the number of Steve Madden concepts shops
located in major department stores. Gross profit as a percentage of sales
decreased from 38% in 1999 to 37% in 2000 due to higher than normal markdowns
experienced in the second quarter of 2000 plus we increased our testing of more
products such as sandals and boots. Operating expenses increased to $11,697 in
2000 from $10,055 in 1999. This increase is due to an increase in payroll and
payroll related expenses principally due to the hiring of additional management
personnel. 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 $4,941 in 2000 compared to income from operations of $1,715 in
1999.
Sales from the l.e.i. Wholesale ("l.e.i. Wholesale") accounted for $18,298 or
20%, and $11,759 or 18%, of total sales in 2000 and 1999, respectively. The
increase in sales is due to the addition of new "l.e.i. Wholesale" accounts and
an increase in reorders from existing customers. As of June 30, 2000, l.e.i
footwear sold in over 3000 doors, in the United States, primarily in department
stores, including Macy's East, Burdines, Rich's, Hecht's, Filene's, Foley's,
Dayton Hudson, Belk and JC Penney's, and in specialty store chains, such as
Journey's. Gross profit as a percentage of sales increased from 33% in 1999 to
35% in 2000 due to changes in product mix, balanced sourcing and improved
inventory management. Operating expenses increased to $3,423 in 2000 from $2,228
in 1999 due to increases in occupancy and payroll and payroll related expenses.
Additionally, sales commissions, 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. Income from
operations from l.e.i. Wholesale was $3,069 in 2000 compared to income from
operations of $1,641 in 1999.
Sales from the Diva Acquisition Corp. Wholesale Division ("Diva Wholesale")
which markets the "David Aaron" brand name in footwear accounted for $1,747 or
2%, and $3,426 or 5%, of total sales in 2000 and 1999, respectively. The Company
believes that the decrease in sales is primarily due to business being slow. The
Company also believes that the introduction of a new management team in the
second quarter of 2000 for Diva and the implementation of certain
13
<PAGE>
modifications to Diva's business will enhance operations in the future. Gross
profit as a percentage of sales decreased from 33% in 1999 to 28% in 2000 for
the reasons stated above. Operating expenses decreased to $523 in 2000 from $694
in 1999 due to the decrease in sales commission expenses as a result of the
decrease in sales and to decreases in selling and designing expenses. Loss from
operations from Diva was $42 in 2000 compared to income from operations of $426
in 1999.
The Company's new Stevies, Inc., Wholesale Division ("Stevies Wholesale")
commenced shipping to department stores throughout the country in the second
quarter of 2000. Stevies Wholesale generated revenue of $1,416 for the six
months period ended June 30, 2000. There have been substantial product reorders
and the Company is committed to the business going forward. Income from
operations was $209 in 2000.
RETAIL DIVISION:
Sales from the Retail Division accounted for $27,500 and $19,469 of total
revenues in 2000 and 1999, respectively. This increase in Retail Division sales
is primarily due to the increase in number of Steve Madden retail stores to 57
as of June 30, 2000 compared to 39 Steve Madden retail stores as of June30,
1999. Same store sales for the first six months ended June 30, 2000 increased
7.5% over the same period of 1999. This increase in same store sales is due to
the Company's ability to reorder bestsellers, test new products such as athletic
inspired casuals, sneakers, cork bottom sandals and wood bottom casuals.
Revenues from the internet store increased by 242% to $1,252 for six months
ended June 30, 2000 from $366 for six months ended June 30, 1999. The Company
expects sales generated through its website at www.stevenmadden.com to continue
to increase as the Company makes additional styles available for sale on its
website and usage of the internet continues to grow. Gross profit as a
percentage of sales increased from 54.9% in 1999 to 56.5% in 2000 primarily due
to changes in product mix, balanced sourcing and improved inventory management.
Operating expenses increased to $13,353 or 49% of sales in 2000 from $8,578 or
44% of sales in 1999. This increase was due to increases in payroll and payroll
related expenses such as incentive bonuses for store managers and the corporate
retail management team, marketing and operating expenses for the internet store,
occupancy, printing, computer and depreciation expenses as a result of opening
18 additional stores since June 30, 1999. Income from operations from the retail
division was $2,186 in 2000 compared to income from operations of $2,101 in
1999.
ADESSO-MADDEN DIVISION:
Adesso-Madden, Inc., a wholly owned subsidiary of the Company, generated
commission revenues of $1,528 for the period ended June 30, 2000 which
represents a 31.1% increase over commission revenues of $1,165 in 1999. This
increase was primarily due to the growth in accounts such as Walmart, Parade of
Shoes, Sears, Famous Footwear, Payless, Bass, MarMaxx, Bakers, and Target and
the growth in key classifications such as sandals, slides and dress shoes.
Operating expenses increased to $975 in 2000 from $817 in 1999 due to increases
in selling and designing expenses. Income from operations from Adesso-Madden was
$553 in 2000 compared to income from operations of $348 in 1999.
14
<PAGE>
THREE MONTHS ENDED JUNE 30, 2000 VS. THREE MONTHS ENDED JUNE 30, 1999
CONSOLIDATED:
Sales for the three months period ended June 30, 2000 were $48,056 or 26% higher
than the $38,056 in the comparable period of 1999. The increase in sales is due
to several factors, including (i) the addition of new wholesale accounts, (ii)
an increase in reorders from existing customers, (iii) a 37% increase in retail
sales due to the opening of additional Steve Madden retail stores during first
quarter and second quarters of 2000, (iv) an increase in sales from the l.e.i.
Wholesale Division ("l.e.i. Wholesale"), and (v) an increase in the number of
Steve Madden concept shops located in major department stores. In turn,
increased sales have enabled the Company to expand its advertising and in store
concept efforts, all of which have contributed to the continuing increase in
sales. Also in the first quarter, the Company introduced a new brand,
Stevies(TM). Stevies(TM) is a fashion brand which targets girls ages 6-9 and
"tweens" ages 10-12. The Stevies brand commenced shipping to department stores
throughout the country in the second quarter of 2000 and generated revenues of
$1,416 for the three months period ended June 30, 2000. Also as of second
quarter of 2000, seven licenses in 10 product classifications were signed for
the Stevies(TM) brand with shipments to begin for the back to school season. The
web site for Stevies at www.stevies.com went live in March of 2000.
Consolidated gross profit as a percentage of sales increased from 42.5% in 1999
to 43.6% in 2000 due to a change in the product mix, balanced sourcing and
improved inventory management.
Selling, general and administrative (SG&A) expenses increased to $15,994 in 2000
from $13,019 in 1999. The increase in SG&A is due primarily to a 12% increase in
payroll, officers' bonuses and payroll related expenses from $5,105 in 1999 to
$5,692 in 2000. Also, the increase in the number of retail outlets and expanded
office facilities resulted in an increase in occupancy, telephone, utilities,
computer, printing/supplies and depreciation expenses by 50% from $2,369 in 1999
to $3,553 in 2000. Selling, designing and licensing costs increased to
$4,012 in 2000 from $3,844 in 1999.
Income from operations for 2000 was $6,069 which represents an increase of
$2,118 or 54% over the income from operations of $3,951 in 1999. Net income
increased by 59% to $3,753 in 2000 from $2,364 in 1999.
WHOLESALE DIVISIONS:
Sales from the Steve Madden Wholesale Division ("Madden Wholesale") accounted
for $21,185 or 44%, and $17,877 or 47%, of total sales in 2000 and 1999,
respectively. This increase in sales is due to an increase in reorders from
existing customers and an increase in the number of Steve Madden concepts shops
located in major department stores. Gross profit as a percentage of sales
decreased from 39% in 1999 to 37% in 2000 due to a higher than normal markdown
experienced in the second quarter of 2000. Operating expenses decreased to
$5,550 in 2000 from $6,200 in 1999 due to decreases in selling, designing
marketing and advertising expenses. Madden Wholesale income from operations was
$2,672 in 2000 compared to income from operations of $879 in 1999.
Sales from the l.e.i. Wholesale ("l.e.i. Wholesale") accounted for $8,566 or
18%, and $6,381 or 17%, of total sales in 2000 and 1999, respectively. The
increase in sales is due to the addition of new "l.e.i. Wholesale" accounts and
an increase in reorders from existing customers. l.e.i footwear now sells in
over 3000 doors in the United States, primarily in department stores,
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including Macy's East, Burdines, Rich's, Hecht's, Filene's, Foley's, Dayton
Hudson, Belk and JC Penney's, and in specialty store chains, such as Journey's.
Gross profit as a percentage of sales increased from 34% in 1999 to 37% in 2000
due to changes in product mix, balanced sourcing and improved inventory
management. Operating expenses increased to $1,598 in 2000 from $1,251 in 1999
due to increases in licensing fees and payroll and payroll related expenses.
Additionally, selling and designing costs increased due to an increase in sales
in the current period and to the Company's increased focus on selling and
designing activities. Income from operations for l.e.i. Wholesale was $1,600 in
2000 compared to income from operations of $950 in 1999.
Sales from the Diva Acquisition Corp. Wholesale Division ("Diva Wholesale")
which markets the "David Aaron" brand name in footwear accounted for $667 or 1%,
and $1,971 or 5%, of total sales in 2000 and 1999, respectively. The Company
believes that the decrease in sales is primarily due to business being slow. The
Company also believes that the introduction of a new management team in the
second quarter of 2000 for Diva and the implementation of certain modifications
to Diva's business will enhance operations in the future. Gross profit as a
percentage of sales decreased from 34% in 1999 to 19% in 2000 for the reasons
stated above. Operating expenses decreased to $329 in 2000 from $426 in 1999 due
to the decrease in sales and to decreases in selling and designing expenses.
Loss from operations from Diva was $201 in 2000 compared to income from
operations of $249 in 1999.
The Company's new Stevies, Inc, Wholesale Division ("Stevies Wholesale")
commenced shipping to department stores throughout the country in the second
quarter of 2000. Stevies Wholesale generated revenue of $1,416 for the three
months period ended June 30, 2000. There have been substantial product reorders
and the Company is committed to the business going forward. Income from
operations was $209 in 2000.
RETAIL DIVISION:
Sales from the Retail Division accounted for $16,222 or 34% and $11,827 or 31%
of total revenues in 2000 and 1999, respectively. The increase in Retail
Division sales is primarily due to the increase in number of Steve Madden retail
stores to 57 in the second quarter of 2000 compared to 39 Steve Madden retail
stores in the second quarter of 1999. Same store sales for the quarter ended
June 30, 2000 increased by only 2% over the same period of 1999. (This 2%
increase in the second quarter of 2000 compared to the 7.5% increase in the six
months ended June 30, 2000 was due to the cooler than normal weather experienced
in the northeast region of our country during the months of May and June. The
northeast stores comprise over 65% of the Company's retail business). This
increase in same store sales was driven by our ability to reorder bestsellers,
test new products such as athletic inspired casuals, sneakers, cork bottom
sandals and wood bottom casuals. Revenues from the internet store increased by
163% to $652 in second quarter of 2000 from $248 in second quarter of 1999. The
Company expects sales generated through its website at www.stevenmadden.com to
continue to increase as the Company makes additional styles available for sale
on its website and usage of the internet continues to grow. Gross profit as a
percentage of sales increased from 54.1% in 1999 to 56.5% in 2000 primarily due
to changes in the product mix, balanced sourcing and improved inventory
management. Operating expenses for the Retail Division increased to $7,682 or
47% of sales in 2000 from $4,760 or 40% of sales in 1999. This increase is due
to increases in payroll and payroll related expenses such as incentive bonuses
for store managers and the corporate retail management team, marketing and
operating expenses for the internet store, occupancy, printing, computer and
depreciation expenses as a result of opening 18 additional stores since June 30,
1999 to June 30, 2000. Income from operations from the retail division was
$1,484 in 2000 compared to income from operations of $1,640 in 1999.
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ADESSO-MADDEN DIVISION:
Adesso-Madden, Inc., a wholly owned subsidiary of the Company, generated
commission revenues of $811 for the period ended June 30, 2000 which represents
a 31.9% increase over commission revenues of $615 in 1999. This increase was
primarily due to the growth in accounts such as Walmart, Parade of Shoes, Sears,
Famous Footwear, Payless, Bass, MarMaxx, Bakers and Target and the growth in key
classifications such as sandals, slides and dress shoes. Operating expenses
increased to $506 in 2000 from $382 in 1999 due to increases in payroll and
payroll related expenses. Income from operations from Adesso-Madden was $305 in
2000 compared to income from operations of $233 in 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $48,508 at June 30, 2000 compared to $36,843
in working capital from June 30, 1999. This represents an increase of $11,665.
This increase in working capital is primarily due to increases in cash and
inventories levels due to increases in revenues.
During the six months period ended June 30, 2000, the Company received $2,745
from the sale of its common stock in connection with exercise of stock options.
The Company also repurchased 855,000 shares of the Company's common stock at a
total cost of $5,776. On February 29, 2000, the Company announced a $1,500,000
stock repurchase program.
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, Lord & Taylor and Robinsons May), Dillard's,
Dayton-Hudson and Nordstorm and 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 May
Department Stores presently account for approximately twenty one percent (21%)
and fifteen percent (15%) of the Company's Wholesale Division sales,
respectively.
OPERATING ACTIVITIES
During the six month period ended June 30, 2000, cash used in operating
activities was $7,858. Uses of cash arose principally from an increase in
factored accounts receivable of $4,174, an increase in inventory of $6,269 and a
decrease in accounts payable and accrued expenses of $3,610. Cash was provided
principally by net income of $6,925.
The Company has lease agreements for office, warehouse, and retail space,
expiring at various times through 2011. Future obligations under these lease
agreements total approximately $45,500.
The Company has employment agreements with various officers currently providing
for aggregate annual salaries of approximately $1,700 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.
A significant portion of the Company's product is supplied from foreign
manufacturers, the majority of which are located in Brazil, China, Italy and
Mexico. Although the Company has not entered into long-term manufacturing
contracts with any of these foreign companies, the
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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.
CAPITAL IMPROVEMENT ACTIVITIES
During the six months period ended June 30, 2000, the Company used cash of
$5,117 to make leasehold improvements on new retail stores, office space and to
acquire the POS computer system for the retail stores.
STOCK OPTION AND REPURCHASE ACTIVITIES
During the six months period ended June 30, 2000, the Company received $2,749
from the sale of its common stock in connection with exercise of stock options.
The Company also repurchased 855,000 shares of the Company's common stocks at a
total cost of $5,776. On February 29, 2000, the Company announced a $1,500,000
stock repurchase program.
LICENSE AGREEMENTS
Revenues from licensing increased by 85% to $606 in the first six months of 2000
from $328 in first six months of 1999. This increase was driven by increases in
licensing income from leather sportswear, jewelry and sunglasses. As of June 30,
2000, the Company had 7 license partners covering 10 product categories for its
Steve Madden brand. Also during the first quarter of 2000, the Company initiated
7 licensing agreements in 10 product categories for its Stevies brand. The
product categories include handbags, hosiery, sunglasses, hair, fashion
accessories, belts and jewelry. The Company is exploring additional licensing
opportunities for both its Steve Madden and Stevies brands.
As of March 15, 2000, the Company and its sportswear licensee, Iron Will Group,
Inc. executed a Termination Agreement with respect to that certain License
Agreement dated as of January 1, 1999. Iron Will Group is an affiliate of
Jordache Enterprises. The Termination Agreement required that Iron Will
terminate its sale and distribution of Steve Madden Sportswear products on or
before June 15, 2000. The Company is currently focusing on its leather
sportswear which goods are produced and sold by its outerwear licensee. The
Company is actively pursuing the engagement of a new sportswear licensee and
continues to produce footwear products for the mass merchandise market under the
Jordache brand name pursuant to a separate license agreement with Jordache
Enterprises.
CERTAIN RECENT DEVELOPMENTS
On June 20, 2000, Steven Madden, the Company's former Chairman and
current Chief Executive Officer, was indicted in the Southern District and
Eastern District of New York. The indictments allege that Mr. Madden engaged in
securities fraud and money laundering activities. In addition, the Securities
and Exchange Commission filed a complaint in the United States District Court
for the Eastern District of New York alleging that Mr. Madden violated Section
17(a) of the Securities Act of 1933, as amended, and Section 10(b) of the
Securities Exchange Act of 1934, as amended.
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Neither the indictments nor the SEC complaint alleges any wrongdoing by
the Company or its other officers and directors. Mr. Madden has denied any
improper conduct and has advised the Company that he will vigorously defend
himself against any and all charges. See Part II, Legal Proceedings.
On June 21, 2000, Steven Madden temporarily resigned as Chairman of the
Board of Directors and the Company appointed Charles Koppelman as acting
Chairman of the Board. Mr. Koppelman has been a director of the Company since
June 1998. Mr. Madden continues to serve as the Company's Chief Executive
Officer.
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.
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PART II
ITEM 1. LEGAL PROCEEDINGS.
Except as set forth below, no material legal proceedings are pending to which
the Company or any of its property is subject.
MAGNUM FASHIONS INC., ET AL. V. STEVEN MADDEN, LTD. On or about May 25, 1999,
Magnum Fashions, Inc. ("Magnum") and WK Maxy Industries, Ltd. ("WK") commenced
an arbitration proceeding (the "Arbitration") against the Company before the
American Arbitration Association ("AAA"). In the Statement of Claim filed as
part of the Arbitration (and as subsequently amended on June 25, 1999), Magnum
has alleged, inter alia, that it was fraudulently induced to enter into a
license agreement, dated as of February 1, 1997, with the Company pursuant to
which Magnum licensed the Company's "Steve Madden" trademark for handbag and
related products (the "Handbag License"). Similarly, WK alleged that it was
fraudulently induced into providing a guaranty ("Guaranty") of Magnum's
obligations under the Handbag License. In addition to the fraudulent inducement
claim, Magnum asserted claims of fraudulent nondisclosure, negligent
misrepresentation, mutual mistake, wrongful termination, failure of
consideration and defamation. Based on those allegations, Magnum and WK have
sought to be released from their financial obligations to the Company under the
Handbag License and Guaranty, respectively, and Magnum has also sought damages
that it subsequently estimated to be in excess of $5 million.
On July 7, 1999, the Company submitted its Answer and Counterclaims in the
Arbitration. In addition to denying the claims asserted by Magnum and WK, the
Company asserted a claim against Magnum and WK for the balance of the minimum
royalty due under the Handbag License. The Company also asserted additional
claims against Magnum and WK based on improper sales made during the term of the
Handbag License and Magnum's improper liquidation of its inventory following
termination of the Handbag License. Magnum and WK have denied the Company's
counterclaims. Initial hearings were held in April 2000 and additional hearings
are scheduled in September and October 2000.
The Company believes that it has meritorius defenses to the the claims asserted
by Magnum and WK. Accordingly, the Company intends to vigorously contest
Magnum's positions in this proceeding and to pursue its claims in such actions.
STEVEN MADDEN, LTD. V. LEE 'N GI On or about October 27, 1999, the Company
commenced an action in the New York State Supreme Court, New York County
entitled STEVEN MADDEN, LTD. V. LEE N' GI, Index No. 121900/99 (the "Lee N' Gi
Action"), currently pending in the Supreme Court of the State of New York,
County of New York, in which it claimed that Lee N' Gi, the exclusive marketing
and distribution agent for Magnum Fashion, Inc. ("Magnum"), had wrongfully
induced Magnum to breach its obligations under the Handbag License between the
Company and Magnum. The Company is seeking damages of $3,000,000. On or about
December 14, 1999, Lee N' Gi served an Answer and Counterclaim in which it
denied the allegations in the Company's complaint and claimed that the Company
had breached or wrongfully terminated the Handbag License to its detriment. Lee
N' Gi seeks damages of $2,000,000 on its counterclaim. On or about December 21,
1999, the Company served a Reply to Counterclaim in which it denied Lee N' Gi's
allegations.
As of August 9, 2000, six putative class action lawsuits have been
commenced in the United States District Court for the Eastern District of New
York against the Company, Mr. Madden and, in three of the actions, Rhonda J.
Brown, the Company's President and Chief
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Operating Officer, and Arvind Dharia, the Company's Chief Financial Officer.
These actions are captioned: WILNER v. STEVEN MADDEN, LTD., ET AL., 00 CV 3676
(filed June 21, 2000); CONNOR v. STEVEN MADDEN, ET AL., 00 CV 3709 (filed June
22, 2000); BLUMENTHAL v. STEVEN MADDEN, LTD., ET AL., 00 CV 3709 (filed June 23,
2000); CURRY v. STEVEN MADDEN, LTD., ET AL., 00 CV 3766 (filed June 26, 2000);
DEMPSTER v. STEVEN MADDEN LTD., ET AL., 00 CV 3702 (filed June 30, 2000);
SALAFIA v. STEVEN MADDEN, LTD., ET AL., 00 CV 4289 (filed July 24, 2000). The
complaints generally allege that the Company and the individual defendants
violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and
Rule 10b-5 promulgated thereunder by issuing false and misleading statements,
and failing to disclose material adverse information relating, among other
things, to the matters and allegations concerning Mr. Madden. The plaintiffs
seek an unspecified amount of damages, costs and expenses on behalf of
themselves and all other purchasers of the Company's common stock either during
the period June 21, 1997 through June 20, 2000 or the period November 3, 1999
through June 20, 2000 (depending upon the particular action). Although the
Company has not yet answered or otherwise responded to these complaints, the
Company believes that it has substantial defenses to the claims. "See Part I,
Recent Developments."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On May 12, 2000, the Company held its Annual Meeting of Stockholders
where the stockholders of the Company approved the following proposals:
(a) ELECTION OF DIRECTORS. The following directors to the Board of
Directors of the Company were reelected for a term of one (1) year, each
receiving 9,525,856 votes in favor of his/her election (80.2% of the shares
outstanding): (i) Rhonda Brown; (ii) Steven Madden; (iii) Arvind Dharia; (iv)
John Basile; (v) Charles Koppelman; (vi) John L. Madden; (vii) Peter Migliorini;
and (viii) Les Wagner.
(b) 1999 STOCK PLAN. An amendment to the Company's 1999 Stock Plan was
approved by the stockholders of the Company (6,332,218 votes for, 3,584,658
votes against, and 4,435 votes withheld).
(c) APPOINTMENT OF AUDITORS. The appointment of Richard A. Eisner &
Company, LLP, as independent auditors of the Company, for fiscal year 2000 was
approved by the stockholders of the Company (9,891,536 votes for, 24,850 votes
against, and 4,925 votes withheld).
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(b) Reports on Form 8-K.
(1) Current Report on Form 8-K filed with the Securities and
Exchange Commission on June 28, 2000 with respect to Item 5.
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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: AUGUST 14, 2000
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