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, 2000
(_) 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, 2000 Commission File Number 0-23702
--------------------- -------
STEVEN MADDEN, LTD.
--------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
DELAWARE 13-3588231
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(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
--------------------------------------------------------------------------------
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 06, 2000
COMMON STOCK 11,058,555
1
<PAGE>
STEVEN MADDEN, LTD. AND SUBSIDIARIES
STEVEN MADDEN, LTD.
FORM 10-Q
QUARTERLY REPORT
SEPTEMBER 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>
<TABLE>
<CAPTION>
STEVEN MADDEN, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------ -----------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 24,219 $ 37,361
Investments 257
Accounts receivable - net of allowances of $952 and $886 2,989 1,207
Due from factor - net of allowances of $894 and $624 18,142 12,146
Inventories 17,436 10,158
Prepaid expenses and other current assets 1,373 867
Deferred taxes 800 800
------------ ----------
Total current assets 64,959 62,796
Property and equipment, net 16,021 11,114
Deferred taxes 1,612 1,612
Deposits and other 246 269
Cost in excess of fair value of net assets acquired - net
of accumulated amortization of $540 and $436 2,240 2,344
------------ ----------
$ 85,078 $ 78,135
============ ==========
LIABILITIES
Current liabilities:
Current portion of lease payable $ 111 $ 116
Accounts payable 8,252 6,542
Accrued expenses 3,816 2,528
Income tax payable 98 4,957
Accrued bonuses 755 577
------------ ----------
Total current liabilities 13,032 14,720
Deferred rent 984 777
Lease payable, less current portion 114 203
------------ ----------
14,130 15,700
------------ ----------
Contingencies (Note D)
STOCKHOLDERS' EQUITY
Common stock - $.0001 par value, 60,000,000 shares
authorized, 12,300 and 11,798 issued and outstanding 1 1
Additional paid-in capital 45,669 42,906
Retained earnings 34,247 22,722
Unearned compensation (992) (1,279)
Treasury stock at cost - 1,245 and 345 shares (7,977) (1,915)
------------ ----------
70,948 62,435
------------ ----------
$ 85,078 $ 78,135
============ ==========
</TABLE>
See notes to financial statements. 3
<PAGE>
<TABLE>
<CAPTION>
STEVEN MADDEN, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share data)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $ 60,108 $ 48,963 $ 152,274 $ 113,750
Cost of sales 33,620 28,962 86,668 66,639
---------- ---------- ---------- ----------
Gross profit 26,488 20,001 65,606 47,111
Commission and licensing fee income 1,233 896 3,367 2,389
Operating expenses (20,022) (15,014) (50,437) (37,386)
---------- ---------- ---------- ----------
Income from operations 7,699 5,883 18,536 12,114
Interest income, net 219 169 1,226 501
Gain on sale of marketable securities 230
---------- ---------- ---------- ----------
Income before provision for income taxes 7,918 6,052 19,992 12,615
Provision for income taxes 3,318 2,604 8,467 5,392
---------- ---------- ---------- ----------
NET INCOME $ 4,600 $ 3,448 $ 11,525 $ 7,223
========== ========== ========== ==========
BASIC INCOME PER SHARE $0.42 $0.32 $1.01 $0.67
===== ===== ===== =====
DILUTED INCOME PER SHARE $0.38 $0.27 $0.89 $0.59
===== ===== ===== =====
Weighted average common shares
outstanding - basic 11,056 10,811 11,395 10,722
Effect of potential common shares from exercise
of options and warrants 921 1,804 1,504 1,549
---------- ---------- ---------- ----------
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - DILUTED 11,977 12,615 12,899 12,271
========== ========== ========== ==========
</TABLE>
See notes to financial statements. 4
<PAGE>
<TABLE>
<CAPTION>
STEVEN MADDEN, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
2000 1999
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 11,525 $ 7,223
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Issuance of compensatory stock options 474
Depreciation and amortization 2,576 1,393
Deferred compensation 287 287
Provision for bad debts 336 361
Gain on sale of marketable securities (230)
Deferred rent expense 207 297
Changes in:
Accounts receivable (1,848) (510)
Due from factor (6,266) (9,720)
Inventories (7,278) (3,609)
Prepaid expenses and other assets (483) 1,902
Accounts payable and accrued expenses (1,683) 7,698
---------- ----------
Net cash (used in) provided by operating activities (2,857) 5,796
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (7,379) (4,017)
Sale/maturity of investment securities 487 499
---------- ----------
Net cash used in investing activities (6,892) (3,518)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from options and warrants exercised 2,763 2,234
Purchase of treasury stock (6,062) (678)
Repayment of lease obligations (94) (53)
---------- ----------
Net cash (used in) provided by financing activities (3,393) 1,503
---------- ----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (13,142) 3,781
Cash and cash equivalents - beginning of period 37,361 14,642
---------- ----------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 24,219 $ 18,423
</TABLE>
See notes to financial statements. 5
<PAGE>
STEVEN MADDEN, LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 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 September 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 nine month and
nine-month periods ended September 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] CLASS ACTION LITIGATION:
As of August 9, 2000, six class action lawsuits were 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.
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 certain 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
6
<PAGE>
STEVEN MADDEN, LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
NOTE D - PENDING LITIGATION (CONTINUED)
[2] DERIVATIVE ACTION:
On or about September 26, 2000, a putative shareholders derivative
action was commenced in the United States District Court for the
Eastern District of New York, captioned, HERRERA V. STEVEN MADDEN AND
STEVEN MADDEN, LTD., 00 CV 5803 (JG). The Company is named as a nominal
defendant in the action. The complaint seeks to recover alleged damages
on behalf of the Company from Mr. Madden arising from his June 20, 2000
indictment and to require him to disgorge certain profits, bonuses and
stock option grants he received from the Company.
[3] LITIGATION SETTLEMENTS:
The actions involving Magnum Fashions, Inc. and Lee N' Gi were settled
in September 2000 for a nominal amount.
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:
<TABLE>
<CAPTION>
PERCENTAGE OF NET REVENUES
NINE MONTHS ENDED
SEPTEMBER 30
($ in thousands)
CONSOLIDATED: 2000 1999
------------ ---- ----
<S> <C> <C> <C> <C>
Net Sales $152,274 100% $113,750 100%
Cost of Sales 86,668 57 66,639 59
Other Operating Income 3,367 2 2,389 2
Operating Expenses 50,437 33 37,386 33
Income from Operations 18,536 12 12,114 11
Interest Income (Expense) Net 1,226 1 501 0
Gain on sale of Marketable Securities 230 0 -- --
Income Before Income Taxes 19,992 13 12,615 11
Net Income 11,525 8 7,223 6
</TABLE>
8
<PAGE>
PERCENTAGE OF NET REVENUES
NINE MONTHS ENDED
SEPTEMBER 30
($ in thousands)
By Segment 2000 1999
---- ----
WHOLESALE DIVISIONS:
--------------------
STEVEN MADDEN, LTD
Net Sales $ 69,331 100% $ 54,288 100%
Cost of Sales 43,208 62 34,142 63
Other Operating Income 704 1 531 1
Operating Expenses 19,629 28 16,657 31
Income from Operations 7,198 10 4,020 7
l.e.i. FOOTWEAR:
Net Sales $ 28,575 100% $ 21,293 100%
Cost of sales 18,183 64 13,910 65
Operating Expenses 5,431 19 4,377 21
Income from Operations 4,961 17 3,006 14
DIVA ACQUISITION CORP:
Net Sales $ 2,980 100% $ 5,614 100%
Cost of sales 2,070 69 3,773 67
Operating Expenses 951 32 1,113 20
Income (Loss) from Operations (41) (1) 728 13
STEVIES INC.:
Net Sales $ 4,678 100% -- --
Cost of sales 2,908 62 -- --
Other Operating Income 151 3 -- --
Operating Expenses 1,144 25 -- --
Income from Operations 777 17 -- --
STEVEN MADDEN RETAIL INC.:
--------------------------
Net Sales $ 46,710 100% $ 32,555 100%
Cost of Sales 20,299 43 14,814 46
Operating Expenses 21,914 47 13,998 43
Income from Operations 4,497 10 3,743 11
9
<PAGE>
PERCENTAGE OF NET REVENUES
NINE MONTHS ENDED
SEPTEMBER 30
($ in thousands)
By Segment (Continued)
ADESSO MADDEN INC.: 2000 1999
------------------- ---- ----
(FIRST COST)
Other Operating Revenue $2,512 100% $1,858 100%
Operating Expenses 1,368 54 1,241 67
Income from Operations 1,144 46 617 33
10
<PAGE>
PERCENTAGE OF NET REVENUES
THREE MONTHS ENDED
SEPTEMBER 30
($ in thousands)
CONSOLIDATED: 2000 1999
------------ ---- ----
Net Sales $60,108 100% $48,963 100%
Cost of Sales 33,620 56 28,962 59
Other Operating Income 1,233 2 896 2
Operating Expenses 20,022 33 15,014 31
Income from Operations 7,699 13 5,883 12
Interest Income (Expense) Net 219 0 169 0
Income Before Income Taxes 7,918 13 6,052 12
Net Income 4,600 8 3,448 7
By Segment
WHOLESALE DIVISIONS:
--------------------
STEVEN MADDEN, LTD
Net Sales $26,125 100% $24,155 100%
Cost of Sales 16,076 62 15,451 64
Other Operating Income 140 1 203 1
Operating Expenses 7,932 30 6,602 27
Income from Operations 2,257 9 2,305 10
l.e.i. FOOTWEAR:
Net Sales $10,277 100% $ 9,534 100%
Cost of sales 6,377 62 6,020 63
Operating Expenses 2,008 20 2,149 23
Income from Operations 1,892 18 1,365 14
DIVA ACQUISITION CORP:
Net Sales $ 1,233 100% $ 2,188 100%
Cost of sales 804 65 1,467 67
Operating Expenses 428 35 419 19
Income from Operations 1 0 302 14
11
<PAGE>
PERCENTAGE OF NET REVENUES
THREE MONTHS ENDED
SEPTEMBER 30
($ in thousands)
By Segment (Continued) 2000 1999
---- ----
STEVIES INC.:
Net Sales $ 3,263 100% -- --
Cost of Sales 2,025 62 -- --
Other Operating Income 109 3 -- --
Operating Expenses 700 21 -- --
Income from Operations 647 20 -- --
STEVEN MADDEN RETAIL INC.:
--------------------------
Net Sales $19,210 100% $13,086 100%
Cost of Sales 8,338 43 6,024 46
Operating Expenses 8,561 45 5,420 41
Income from Operations 2,311 12 1,642 13
ADESSO MADDEN INC.:
-------------------
(FIRST COST)
Other Operating Revenue $ 984 100% $ 693 100%
Operating Expenses 393 40 424 61
Income from Operations 591 60 269 39
RESULTS OF OPERATIONS
($ in thousands)
NINE MONTHS ENDED SEPTEMBER 30, 2000 VS. NINE MONTHS ENDED SEPTEMBER 30, 1999
CONSOLIDATED:
Sales for the nine month period ended September 30, 2000 were $152,274 or 34%
higher than the $113,750 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 43% increase in
retail sales due to the opening of additional Steve Madden retail stores during
first, second and third 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"),
(v) an increase in the number of Steve Madden concept shops located in major
department stores and specialty stores, and (vi) an increase in public awareness
with respect to the Company's brands. 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 Company's new Stevies
Wholesale Division ("Stevies Wholesale")
12
<PAGE>
commenced shipping to department stores throughout the country in the second
quarter of 2000. Stevies Wholesale generated revenue of $4,678 for the nine
month period ended September 30, 2000. Also, during the nine month period ended
September 30, 2000, 10 licenses in 12 product classifications were signed for
the Stevies(TM) brand. The web site for Stevies at WWW.STEVIES.COM went live in
March of 2000.
Consolidated gross profit as a percentage of sales in first nine months of 2000
increased to 43% as compared 41% for the first nine months of 1999 due to a
change in the product mix, balanced sourcing and improved inventory management.
Selling, general and administrative (SG&A) expenses increased to $50,437 in 2000
from $37,886 in 1999. The increase in SG&A is due primarily to a 28% increase in
payroll, officers' bonuses, payroll related expenses and professional and
consulting fees from $13,850 in 1999 to $17,747 in 2000. Also, selling,
designing and licensing costs increased by 29% from $10,365 in 1999 to $13,342
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 48% from $7,441 in 1999 to
$11,042 in 2000.
Income from operations for 2000 was $18,536 which represents an increase of
$6,422 or 53% over the income from operations of $12,114 in 1999. Net income
increased by 60% to $11,525 in 2000 from $7,223 in 1999.
WHOLESALE DIVISIONS:
Sales from the Steve Madden Wholesale Division ("Madden Wholesale") accounted
for $69,331 or 46%, and $54,288 or 48%, 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 and specialty stores throughout the country.
Gross profit as a percentage of sales increased from 37% in 1999 to 38% in 2000
due to a change in the product mix, balanced sourcing and improved inventory
management. Operating expenses increased to $19,629 in 2000 from $16,657 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 $7,198 in 2000 compared to income from operations of $4,020 in
1999.
Sales from the l.e.i. Wholesale ("l.e.i. Wholesale") accounted for $28,575 or
19%, and $21,293 or 19% 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 3,200 doors in 2000 compared to 2,400 doors in 1999, in the United States,
primarily in department stores, including Macy's East, Burdines, Rich's,
Hecht's, Filene's, Foley's, Kohl's, Belk and JC Penney's, and in specialty store
chains, such as Journey's and Mandees. Also, during the third quarter, l.e.i.
Wholesale division shipped shoes to Kohl's for the first time. Gross profit as a
percentage of sales increased from 35% in 1999 to 36% in 2000 due to changes in
product mix, balanced sourcing and improved inventory management. Operating
expenses increased to $5,431 in 2000 from $4,377 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 for l.e.i. Wholesale
was $4,961 in 2000 compared to income from operations of $3,006 in 1999.
13
<PAGE>
Sales from the Diva Acquisition Corp. Wholesale Division ("Diva Wholesale")
which markets the "David Aaron" brand name in footwear accounted for $2,980 or
2%, and $5,614 or 5%, of total sales in 2000 and 1999, respectively. The Company
believes that the decrease in sales is primarily due to the introduction of a
new management team for Diva in the second quarter of 2000. Gross profit as a
percentage of sales decreased from 33% in 1999 to 31% in 2000 for the reasons
stated above. Operating expenses decreased to $951 in 2000 from $1,113 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 $41 in 2000 compared to income from operations of $728 in 1999.
The Company's new Stevies Wholesale Division ("Stevies Wholesale") commenced
shipping to department stores and specialty stores throughout the country in the
second quarter of 2000. Stevies Wholesale generated revenue of $4,678 for the
nine month period ended September 30, 2000. Stevies now sells in over 1000 doors
including store groups such as Nordstorms, Federated Department stores, May
Company, Belk, Dillards, Limited Too, as well as, childrens' independent shoe
stores throughout the country. The Stevies brand ended the third quarter with
over 800 Stevies concept shop locations and over 500 Stevies accessories concept
shop locations. Stevies accessory concept shops house Stevies licensed
accessories and slippers. Gross profit as a percentage of sales was 38% for the
nine month period ended September 30, 2000. Income from operations was $777 in
2000.
RETAIL DIVISION:
Sales from the Retail Division accounted for $46,710 or 31% and $32,555 or 29%
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 64 as of September 30, 2000 compared to 45 Steve Madden retail stores
as of September 30, 1999. Same store sales for the first nine months ended
September 30, 2000 increased 9% 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, boots and tailored
shoes. Revenues from the internet store for the quarter ended September 30, 2000
increased by 260% over the same period of 1999. The Company expects sales
generated through its websites at WWW.STEVEMADDEN.COM and WWW.STEVIES.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% in 1999 to 57% in 2000 primarily due to
changes in product mix, balanced sourcing and improved inventory management.
Operating expenses increased to $21,914 or 47% of sales in 2000 from $13,998 or
43% 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
19 additional stores since September 30, 1999. Income from operations from the
retail division was $4,497 in 2000 compared to income from operations of $3,743
in 1999.
ADESSO-MADDEN DIVISION:
Adesso-Madden, Inc., a wholly owned subsidiary of the Company, generated
commission revenues of $2,512 for the nine month period ended September 30, 2000
which represents a 35% increase over commission revenues of $1,858 during the
same period 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 kids. Operating expenses increased to $1,368 in 2000
from $1,241 in 1999 primarily due to increases in payroll and payroll related
expenses. Income from operations from Adesso-Madden was $1,144 in 2000 compared
to income from operations of $617 in 1999.
14
<PAGE>
THREE MONTHS ENDED SEPTEMBER 30, 2000 VS. THREE MONTHS ENDED SEPTEMBER 30, 1999
CONSOLIDATED:
Sales for the three month period ended September 30, 2000 were $60,108 or 23%
higher than the $48,963 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 47% increase in
retail sales due to the opening of additional Steve Madden retail stores during
first quarter, second and third 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"), (v) an increase in the number of Steve Madden concept shops located
in major department stores and specialty stores, and (vi) an increase in public
awareness with respect to the Company's brands. 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 $3,263 for the three month
period ended September 30, 2000. Also as of third quarter of 2000 10 licenses in
12 product classifications were signed for the Stevies(TM) brand. 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 41% in 1999 to
44% in 2000. Higher margin classifications drove the gross profit as a
percentage of sales. Such classifications were athletic, boots and tailored
shoes. In addition, retail which had higher margin accounted for 32% of total
revenues in 2000 compared to 27% of total revenues in 1999.
Selling, general and administrative (SG&A) expenses increased to $20,022 in 2000
from $15,014 in 1999. The increase in SG&A is due primarily to a 35% increase in
payroll, officers' bonuses, payroll related expenses and professional and
consulting fees from $5,005 in 1999 to $6,736 in 2000. Additionally, the Company
focused its efforts on marketing and advertising thus increasing those expenses
by 85% from $1,383 in 1999 to $2,561 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 52% from $2,948 in 1999 to $4,479 in 2000.
Income from operations for 2000 was $7,699 which represents an increase of
$1,816 or 31% over the income from operations of $5,883 in 1999. Net income
increased by 33% to $4,600 in 2000 from $3,448 in 1999.
WHOLESALE DIVISIONS:
Sales from the Steve Madden Wholesale Division ("Madden Wholesale") accounted
for $26,125 or 44%, and $24,155 or 49%, 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 and specialty stores throughout the country.
Gross profit as a percentage of sales increased from 36% in 1999 to 38% in 2000
due to a change in the product mix, balanced sourcing and improved inventory
management. Operating expenses increased to $7,932 in 2000 from $6,602 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,
the Company focused its efforts on marketing and advertising thus increasing
those expenses. Madden Wholesale income from operations was $2,257 in 2000
compared to income from operations of $2,305 in 1999.
Sales from the l.e.i. Wholesale ("l.e.i. Wholesale") accounted for $10,277 or
17%, and $9,534 or 20%, 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
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footwear now sells in over 3200 doors in 2000 compared to 2,400 doors in 1999,
in the United States, primarily in department stores, including Macy's East,
Burdines, Rich's, Hecht's, Filene's, Foley's, Kohl's, Belk and JC Penney's, and
in specialty store chains, such as Journey's Mandees. Also, during the third
quarter, l.e.i. Wholesale shipped shoes to Kohl's for the first time. Gross
profit as a percentage of sales increased from 37% in 1999 to 38% in 2000 due to
changes in product mix, balanced sourcing and improved inventory management.
Operating expenses increased to $2,008 in 2000 from $2,149 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 $1,892 in
2000 compared to income from operations of $1,365 in 1999.
Sales from the Diva Acquisition Corp. Wholesale Division ("Diva Wholesale")
which markets the "David Aaron" brand name in footwear accounted for $1,233 or
2%, and $2,188 or 11%, of total sales in 2000 and 1999, respectively. The
Company believes that the decrease in sales is primarily due to the introduction
of a new management team for Diva in the second quarter of 2000. 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 $428 in 2000 from $419 in 1999 due to increases in payroll
and payroll related expenses. Income from operations from Diva was $1 in 2000
compared to income from operations of $302 in 1999.
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 $3,263 for the three month period
ended September 30, 2000. Stevies now sells in over 1000 doors including store
groups such as Nordstorms, Federated Department stores, May Company, Belk,
Dillards, Limited Too, as well as, childrens' independent shoe stores throughout
the country. The Stevies shoe brand ended the third quarter with over 800
Stevies concept shop locations and over 500 Stevies accessories concept shop
locations. Stevies accessory concept shops house Stevies licensed accessories
and slippers. Gross profit as a percentage of sales was 38% for the three month
period ended September 30, 2000. Income from operations was $647 in 2000.
RETAIL DIVISION:
Sales from the Retail Division accounted for $19,210 or 32% and $13,086 or 27%
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 64 in the third quarter of 2000 compared to 45 Steve Madden retail
stores in the third quarter of 1999. Same store sales for the quarter ended
September 30, 2000 increased by 12% over the same period of 1999. This increase
in same store sales was driven by our ability to reorder bestsellers, test new
products such as key sport booties, European influenced athletic casuals shoes,
basic sneakers, sandals and casual loafers. Revenues from the internet store for
the quarter ended September 30, 2000 increased by 268% over the same period of
1999. The Company expects sales generated through its websites at
WWW.STEVEMADDEN.COM and WWW.STEVEIES.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% in 1999 to 57% in 2000 primarily due to changes in the product mix, balanced
sourcing and improved inventory management. Operating expenses for the Retail
Division increased to $8,561 or 45% of sales in 2000 from $5,420 or 41% 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
19 additional stores since September 30, 1999. Income from operations from the
retail division was $2,311 in 2000 compared to income from operations of $1,642
in 1999.
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ADESSO-MADDEN DIVISION:
Adesso-Madden, Inc., a wholly owned subsidiary of the Company, generated
commission revenues of $984 for the three month period ended September 30, 2000
which represents a 42% increase over commission revenues of $693 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 Kids.
Operating expenses decreased to $393 in 2000 from $424 in 1999 due to decreases
in selling and designing expenses. Income from operations from Adesso-Madden was
$591 in 2000 compared to income from operations of $269 in 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $51,927 at September 30, 2000 compared to
$40,740 in working capital from September 30, 1999. This represents an increase
of $11,187. This increase in working capital is primarily due to increases in
accounts receivables and inventories levels due to increases in revenues and
additional retail stores.
During the nine month period ended September 30, 2000 the Company received
$2,763 from the sale of its common stock in connection with exercise of stock
options. On February 29, 2000, the Company announced a 1,500,000 shares
repurchase program. As of September 30, 2000 the Company has repurchased 900,000
shares of the Company's common stock at a total cost of $6,062.
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 Nordstrom 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 nine month period ended September 30, 2000, cash used in operating
activities was $2,857. Uses of cash arose principally from an increase in
factored accounts receivable of $6,266 an increase in inventory of $7,278. Cash
was provided principally by net income of $11,525.
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 $51,300.
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 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,
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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 nine month period ended September 30, 2000, the Company used cash of
$7,379 to make leasehold improvements on new retail stores, office space and to
acquire the point of sale computer system for the retail stores.
STOCK OPTION AND REPURCHASE ACTIVITIES
During the nine month period ended September 30, 2000, the Company received
$2,763 from the sale of its common stock in connection with exercise of stock
options. On February 29, 2000, the Company announced a 1,500,000 shares
repurchase program. As of September 30, 2000 the Company has repurchased 900,000
shares of the Company's common stock at a total cost of $6,062.
LICENSE AGREEMENTS
Revenues from licensing increased by 61% to $855 in the first nine months of
2000 from $531 in first nine months of 1999. This increase was driven by
increases in licensing income from leather sportswear, jewelry and sunglasses.
As of September 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 10 licensing agreements in 12 product categories for its
Stevies brand. The product categories include handbags, hosiery, sunglasses,
hair, fashion accessories, belts, jewelry, sportswear and watches. 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 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.
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.
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On June 21, 2000, Steven Madden 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. and WK Maxy Industries, Ltd. commenced an arbitration
proceeding against the Company before the America Arbitration Association. In
September 2000, the parties settled all claims and the action was terminated.
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. In September
2000, the parties settled all claims and the action was terminated.
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.
"See Part I, Recent Developments."
On or about September 26, 2000, a putative shareholders derivative action was
commenced in the United States District Court for the Eastern District of New
York, captioned, HERRERA V. STEVEN MADDEN AND STEVEN MADDEN, LTD., 00 CV 5803
(JG). The Company is named as a nominal defendant in the action. The complaint
seeks to recover alleged damages on behalf of the Company from Mr. Madden
arising from his June 20, 2000 indictment and to require him to disgorge certain
profits, bonuses and stock option grants he received from the Company.
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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: November 8, 2000
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