ITEM 1 BUSINESS
Steven Madden, Ltd. (together with its subsidiaries, the "Company") designs, sources, markets and sells fashion-forward footwear brands for women, men and children. The Company distributes products through its retail stores, its e-commerce web sites, catalogs and department and specialty store locations in the United States and Canada. The Company's product line includes core products, which are sold year-round, complemented by a broad range of updated styles which are designed to establish or capitalize on market trends.
The Company's business is comprised of three (3) distinct segments (wholesale, retail and private label). The wholesale division includes five (5) brands: Steve Madden(R), David Aaron(R), l.e.i.(R), Stevies(R) and the Steve Madden Mens brand. Steven Madden Retail, Inc., the Company's wholly owned retail subsidiary, operates Steve Madden and David Aaron retail stores as well as the Company's outlet stores and e-commerce web sites. The Company's wholly owned private label subsidiary, Adesso-Madden, Inc., designs and sources footwear products under private labels for many of the country's largest mass merchandisers. The Company also licenses its Steve Madden(R) and Stevies(R) trademarks for several accessory and apparel categories.
Steven Madden, Ltd., was incorporated as a New York corporation on July 9, 1990 and reincorporated under the same name in Delaware in November 1998. The Company, which has established a reputation for its creative designs, popular styles and quality products at accessible price points, was founded and developed by Steven Madden, its principal designer, and former Chief Executive Officer and Chairman of the Board. The Company completed its initial public offering in December 1993 and its shares of Common Stock currently trade on The Nasdaq National Market under the symbol "SHOO".
The Company maintains its principal executive offices at 52-16 Barnett Avenue, Long Island City, NY 11104, telephone number (718) 446-1800.
STEVEN MADDEN - WHOLESALE DIVISION
The wholesale division sources, sells and markets the Company's Steve Madden(R) brand to major department stores, better specialty stores, and shoe stores throughout the United States and Canada. During the last few years the Steve Madden(R) product line has become a leading footwear brand in the fashion conscious junior marketplace. To serve its customers (primarily women ages 16 to 25), the wholesale division creates and markets fashion forward footwear designed to appeal to customers seeking exciting, new footwear designs at reasonable prices. In January 2001, the wholesale division expanded to include a men's footwear line which targets fashion conscious men ages 20 to 35.
As the Company's largest division, the Steve Madden(R) wholesale division accounted for $92,413,000 in sales in 2001, or approximately 38% of the Company's total sales. Many of the wholesale division's newly created styles are test marketed at the Company's retail stores. Within a few days, the Company can determine if a test product appeals to customers. This enables the Company to use its flexible sourcing model to rapidly respond to changing preferences which the Company believes is essential for success in the fashion footwear marketplace.
DIVA ACQUISITION CORP. - THE DAVID AARON(R) WHOLESALE DIVISION
Diva Acquisition Corp. ("Diva") designs and markets fashion footwear to women under the "David Aaron(R)" trademark through major department stores and better footwear specialty stores and two (2) Company owned retail shoe stores located in the Soho area of Manhattan and in Paramus, NJ. Priced a tier above the Steve Madden(R) brand, Diva's products are designed to appeal principally to fashion conscious women, ages 26 to 45, who shop at department stores and footwear boutiques. The Company recorded wholesale sales from the David Aaron(R) brand of $7,454,000 for the year ended December 31, 2001, or approximately 3% of the Company's total revenues. Revenues from the sale of David Aaron footwear increased by approximately 106% compared to the preceding year due to the repositioning and reorganization of the David Aaron brand.
l.e.i. (R) - WHOLESALE DIVISION
Pursuant to the Company's license agreement with R.S.V. Sport, Inc., the Company has the right to use the l.e.i.(R) trademark in connection with the sale and marketing of footwear. The l.e.i.(R) trademark is well known for jeanswear in the junior marketplace and nationally through department and specialty stores. The Company's l.e.i.(R) footwear products are targeted to attract girls and young women ages 6 to 20 years old, a majority of which are younger than the typical Steve Madden(R) brand customer. The l.e.i. Wholesale Division generated revenue of $42,592,000 for the year ended December 31, 2001, or approximately 17% of the Company's total revenues.
STEVIES INC. - WHOLESALE DIVISION
The Company's Stevies Wholesale Division ("Stevies Wholesale") generated revenue of $10,984,000 for the year ended December 31, 2001, or approximately 5% of the Company's total revenues. Stevies(R) now sells in store groups such as Nordstrom, Federated Department Stores, May Department Stores, Belk, Dillard's, Limited Too, as well as independent children's stores throughout the country.
STEVEN MADDEN RETAIL, INC. - RETAIL DIVISION
As of December 31, 2001, the Company owned and operated sixty-five (65) retail shoe stores under the Steve Madden(R) name, two (2) under the David Aaron(R) name, five (5) outlet stores and one (1) Internet store (through the www.stevemadden.com, www.stevies.com and www.stevemaddenmens.com web sites). In 2001, the Company opened ten (10) new stores and closed two (2) under-performing stores. Most of the Steve Madden stores are located in major shopping malls in California, Colorado, District of Columbia, Florida, Georgia, Illinois, Maryland, Massachusetts, Michigan, Minnesota, Nevada, New Jersey, New York, Ohio, Pennsylvania, Rhode Island, Texas and Virginia. The retail stores have been successful for the Company, generating annual sales in excess of $680 per square foot. Sales are primarily from the sale of the Company's Steve Madden(R) product line. Same store sales decreased 1% in 2001 over 2000 sales and total sales for the retail division were $79 million compared to $70 million for 2000. Sales from the retail division for the year ended December 31, 2001 were approximately 33% of the Company's total sales.
The Company believes that the Retail Division will continue to enhance overall sales and profits while building equity in the Steve Madden brand. It is for these reasons that the Company intends to add approximately ten (10) new retail stores during the 2002 calendar year. Additionally, the expansion of the Retail Division enables the Company to test and react to new products and classifications which strengthens the product development efforts of the Steve Madden wholesale division.
THE ADESSO-MADDEN, INC. - PRIVATE LABEL DIVISION
In September 1995, the Company incorporated Adesso-Madden, Inc. as a wholly owned subsidiary ("A-M"). A-M was formed to serve as a buying agent to mass market merchandisers, shoe store chains and other off-price retailers in connection with their purchase of private label shoes. As a buying agent, A-M arranges for shoe manufacturers in Asia and South America to manufacture private label shoes to the specifications of its clients. The Company believes that by operating in the private label, mass merchandising market, the Company is able to maximize additional non-branded sales opportunities. This leverages the Company's overall sourcing, design and distribution capabilities. Currently, this division serves as a buying agent for the procurement of women's footwear for large retailers including Sears, Payless, Wal-Mart and Target. A-M receives commissions in connection with the purchase of private label shoes by its clients. A-M also sources and sells footwear under the Soho Cobbler(R) brand name. The private label division generated commission revenue of $4,200,000 million for the year ended December 31, 2001.
LICENSING
As of December 31, 2001, the Company licensed the Steve Madden trademark for use in connection with the manufacturing, marketing and sale of outerwear (including leather outerwear), belts, handbags, sunglasses, eyewear and hosiery. Each license agreement requires the licensee to pay to the Company a royalty based on net sales, a minimum royalty in the event that net sales fail to reach specified targets and a percentage of sales for advertising of the Steve Madden(R) brand.
During 2001, the Company licensed the Stevies trademark for use in connection with manufacturing, marketing and sale of sportswear, outerwear, belts, handbags, sunglasses and hosiery, fashion accessories. In February 2001, the Company terminated existing licensing agreements for jewelry and hair accessories for the Steve Madden(R) and Stevies(R) brands, and sportswear for the Stevies(R) brand.
DESIGN
The Company has established a reputation for its creative designs, popular styles and quality products at accessible price points. The Company believes that its future success will depend in substantial part on its ability to continue to anticipate and react to changing consumer demands in a timely manner. To meet this objective, the Company has developed a unique design process that allows it to recognize and adapt quickly to changing consumer demands. The Company's design team works together to create designs which they believe fit the Company's image, reflect current or approaching trends and can be manufactured in a timely and cost-effective manner. Once the initial design is complete, a prototype is developed, which is reviewed and refined prior to the commencement of limited production. Most new Steve Madden designs are then tested in the Steve Madden(R) retail stores. Designs that prove popular are then scheduled for mass production overseas and wholesale and retail distribution nationwide. The Company believes that its unique design and testing process and flexible sourcing model is a significant competitive advantage allowing the Company to cut mass production lead times and avoid the costly production and distribution of unpopular designs.
PRODUCT SOURCING AND DISTRIBUTION
The Company sources each of its product lines separately based on the individual design, styling and quality specifications of such products. The Company does not own or operate any mass manufacturing facilities and sources its branded products through independently owned manufacturers in Brazil, China, Italy, Mexico, Spain, Taiwan and the United States. The Company has established relationships with a number of manufacturers in each country. The Company believes that this sourcing of footwear products minimizes its investment and inventory risk, and enables efficient and timely introduction of new product designs. Although the Company has not entered into any long-term manufacturing or supply contracts, the Company believes that a sufficient number of alternative sources exist for the manufacture of its products. The principal materials used in the Company's footwear are available from any number of sources, both within the United States and in foreign countries.
The Company's design and distribution processes are intended to be flexible, allowing the Company to respond to and accommodate changing consumer demand. The Company's production staff tracks warehouse inventory on a daily basis, monitors sell-through data and incorporates input on product demand from wholesale customers. The Company can use product feedback to adjust production or manufacture new products in as little as five weeks. Constant inventory tracking allows the Company to manage inventory on a continuous flow basis with the goal of optimizing inventory turns.
The Company distributes its products from two (2) third party distribution warehouse centers located in California and New Jersey and its own distribution facility located in Florida. The Company also distributes its Internet shipments from a third party fulfillment center located in Michigan. By utilizing distribution facilities that specialize in distributing products to certain customers (wholesale accounts, Steve Madden retail stores and Internet fulfillment), the Company believes that its customers are better served.
CUSTOMERS
The Company's customers purchasing shoes consist principally of department stores and specialty stores, including shoe boutiques. Presently, the Company sells approximately sixty-two percent (62%) of its products at wholesale to department stores, including Federated Department Stores (Bloomingdale's, Bon Marche, Burdines, Macy's and Rich's), May Department Stores (Famous Barr, Filene's, Foley's, Hecht's, Kaufmann's, Meier & Frank, Lord and Taylor and Robinsons May), Dillard's, Marshall Field's and Nordstrom; and approximately thirty-eight percent (38%) to specialty stores, including Journeys, Limited Too and Mandees; and catalog retailers, including Victoria's Secret and Fingerhut. For the year ended December 31, 2001, May Department Stores, Federated Department Stores and Nordstrom accounted for approximately twenty-one percent (21%), eighteen percent (18%) and eleven percent (11%) of the Company's wholesale sales, respectively.
DISTRIBUTION CHANNELS
The Company sells it products principally through its Company-owned retail stores, better department stores and specialty shoe stores in the United States and abroad. Retail stores and wholesale sales account for approximately thirty-three percent (33%) and sixty-seven percent (67%) of total sales, respectively. The following paragraphs describe each of these distribution channels:
STEVE MADDEN AND DAVID AARON RETAIL STORES
As of December 31, 2001, the Company operated sixty-five (65) Company-owned retail stores under the Steve Madden(R) name and two (2) under the David Aaron(R) name. The Company believes that its retail stores will continue to enhance overall sales, profitability, and its ability to react to changing consumer trends. The stores are used as a marketing tool which allows the Company to strengthen brand recognition and to showcase selected items from its full line of branded and licensed products. Furthermore, the retail stores provide the Company with a venue to test and introduce new products and merchandising strategies. Specifically, the Company often tests new designs at its Steve Madden(R) retail stores before scheduling them for mass production and wholesale distribution. In addition to these test marketing benefits, the Company has been able to leverage sales information gathered at Steve Madden(R) retail stores to assist its wholesale accounts in order placement and inventory management.
A typical Steve Madden(R) store is approximately 1,400 to 1,600 square feet and is located in malls and street locations which attract the highest concentration of the Company's core demographic -- style-conscious young women ages 16 to 25 years old. The David Aaron(R) store has a more sophisticated design and format styled to appeal to its more mature target audience. In addition to carefully analyzing mall demographics, the Company also sets profitability guidelines for each potential store site. Specifically, the Company targets sites at which the demographics fit the consumer profile, the positioning of the site is well trafficked and the projected fixed annual rent expense does not exceed a specified percentage of sales over the life of the lease. By setting these standards, the Company believes that each store will contribute to the Company's overall profits both in the near- and longer-terms.
OUTLET STORES
In May 1998, Shoe Biz, Inc., a wholly owned subsidiary of the Company ("Shoe Biz"), purchased certain assets from and assumed certain liabilities of, Daniel Scott, Inc. with respect to its Shoe Biz outlet store located in Mineola, New York. In connection with the transaction, the Company hired Robert Schmertz, the former President and sole stockholder of Daniel Scott, Inc., as the President of Shoe Biz. Shoe Biz operates the five (5) outlet stores in New Jersey and New York, three (3) of which operate under the Shoe Biz name and two (2) of which operate as Steve Madden Outlet stores. Shoe Biz sells many product lines, including Steve Madden, David Aaron, Stevies and l.e.i.(R) footwear, at lower prices than prices typically charged by other "full price" retailers.
DEPARTMENT STORES
The Company currently sells to over 2,500 locations of twenty (20) better department stores throughout the United States and Canada. The Company's top accounts include Federated Department Stores (Macy's, Bloomingdale's, Bon Marche, Burdine's and Rich's), May Department Stores (Filene's, Hecht's, Famous Barr, Foley's, Kaufmann's, Meier & Frank, Lord and Taylor and Robinsons May), Nordstrom, Dillard's and Marshall Field's.
Department store accounts are offered merchandising support which includes in-store fixtures and signage, supervision of displays and merchandising of the Company's various product lines. An important development in the Company's wholesale merchandising effort is the creation of in-store concept shops, where a broader collection of the Company's branded products are showcased. These in-store concept shops create an environment that is consistent with the Company's image and enable the retailer to display and stock a greater volume of the Company's products per square foot of retail space. In addition, these in-store concept shops encourage longer term commitment by the retailer to the Company's products and enhance consumer brand awareness.
In addition to merchandising support, the Company's customer service representatives maintain weekly communications with their accounts to guide them in placing orders and to assist them in managing inventory,
assortment and retail sales. The Company leverages its sell-through data gathered at its retail stores to assist department stores in allocating their open-to-buy dollars to the most popular styles in the product line and to phase out styles with weaker sell-throughs.
SPECIALTY STORES/CATALOG SALES
The Company currently sells to specialty store locations throughout the United States and Canada. The Company's top specialty store accounts include Journeys, Limited Too and Mandees. The Company offers its specialty store accounts the same merchandising, sell-through and inventory tracking support offered to its department store accounts. Sales of the Company's products are also made through various catalogs, such as Victoria's Secret.
INTERNET SALES
The Company operates three (3) Internet web sites: www.stevemadden.com, www.stevies.com and www.stevemaddenmens.com. Customers can purchase numerous styles of the Company's Steve Madden and Stevies footwear, accessory and clothing products. As a result of the Company's increased focus on e-commerce, sales in 2001 derived from its Internet store increased 37% to $4,900,000 from $3,500,000 in 2000.
As a result of the increased sales activity on the Company's web sites, the Company entered into an agreement with Progressive Distribution Services in April 2000. Under the terms of the Agreement, Progressive Distribution Services provides direct-to-customer and other fulfillment services for purchases made on the Company's web sites, including validation of customer credit, picking, packing and shipment of footwear products to customers of the Company.
MILLE 21 DISTRIBUTION AGREEMENT
On January 7, 2002, the Company and Mille 21, Inc. ("Mille 21") entered into a written agreement whereby the Company granted Mille 21 the exclusive right to develop Steve Madden retail stores and sell Steve Madden products in South Korea. Under the terms of the agreement, Mille 21 is obligated to open four (4) Steve Madden stores in South Korea in 2002 and is also obligated to purchase minimum amounts of Steve Madden products. The Company believes that establishing a presence in South Korea is a first step toward expanding into the pacific rim.
COMPETITION
The fashion footwear industry is highly competitive. The Company's competitors include specialty shoe companies as well as companies with diversified footwear product lines. The recent substantial growth in the sales of fashion footwear has encouraged the entry of many new competitors and increased competition from established companies. Most of these competitors, including Kenneth Cole, Nine West, DKNY, Skechers, Nike and Guess, may have significantly greater financial and other resources than the Company. The Company believes effective advertising and marketing, fashionable styling, high quality and value are the most important competitive factors and intends to continue to employ these elements as it develops its products.
In 2001, the Company launched the Steve Madden Mens brand which competes with several brands that are more established with greater consumer awareness, including Kenneth Cole, Skechers Collection, Tommy Hilfiger and Nautica.
MARKETING AND SALES
Prior to 1997, the Company's marketing plans relied heavily on its few Steve Madden(R) retail store locations and word-of-mouth referrals. In 1998, the Company continued to focus on creating a more integrated brand building program to establish Steve Madden as the leading designer of fashion footwear for style-conscious young women. As a result, the Company developed a national advertising campaign for lifestyle and fashion magazines which was also used in regional marketing programs such as radio advertisements, television commercials, outdoor media, college event sponsorship and live online chat forums. The Company also continues to promote its web sites (www.stevemadden.com, www.stevies.com and www.stevemaddenmens.com) where consumers can purchase Steve Madden(R), Stevies and Steve Madden Mens products and interact with both the Company and other customers.
The Company also increased the marketing of the Steve Madden brand to college students in 2001. The Company targeted universities for a series of lively promotions, many of them tied in with musical performances.
The Company commenced an aggressive marketing campaign for the Stevies brand with separate marketing, advertising, promotional events and in-store displays targeting the new Stevies customer. As for Steve Madden Mens, the Company supported the brand's roll-out with strategic marketing and advertising initiatives.
In order to service its wholesale accounts, the Company retains a sales force of fourteen independent sales representatives. These sales representatives work on a commission basis and are responsible for placing the Company's products with its principal customers, including better department and specialty stores. The sales representatives are supported by the Company's senior executives, a staff of twelve account executives, two merchandise coordinators and twenty five customer service representatives who continually cultivate relationships with wholesale customers. This staff assists accounts in merchandising and assessing customer preferences and inventory requirements, which ultimately serves to increase sales and profitability.
MANAGEMENT INFORMATION SYSTEMS (MIS) OPERATIONS
Sophisticated information systems are essential to the Company's ability to maintain its competitive position and to support continued growth. The Company operates on a dual AS/400 system which provides system support for all aspects of its business including manufacturing purchase orders; customer purchase orders; order allocations; invoicing; accounts receivable management; real time inventory management; quick response replenishment; point-of-sale support; and financial and management reporting functions. The Company has a PKMS bar coded warehousing system which is integrated with the wholesale system in order to provide accurate inventory positions and quick response size replenishment for its customers. In addition, the Company has installed an EDI system which provides a computer link between the Company and certain wholesale customers that enables both the customer and the Company to monitor purchases, shipments and invoicing. The EDI system also improves the Company's ability to respond to customer inventory requirements on a weekly basis.
In 2001, a new AS400 computer platform was implemented to support the Company's retail division. After the events of September 11, 2001, the Company reevaluated and implemented an enhanced business resumption plan. This plan insures that all mission critical business systems are available twenty four hours a day, seven days a week with a supporting redundant network infrastructure in place.
RECEIVABLES FINANCING; LINE OF CREDIT
Under the terms of a factoring agreement with Capital Factors, Inc., the Company is permitted to draw down 80% of its invoiced receivables at an interest rate of two points below the Prime Rate (as defined in such agreement). The agreement provides that Capital Factors is not required to purchase all the Company's receivables and requires the Company to pay an unused line fee of .25% of the average daily unused portion of the maximum amount of the credit line. On September 1, 1998, the Company and Capital Factors amended its Factoring Agreement to, among other things, provide the Company with a credit line of up to $15,000,000, subject to certain limitations. The Company has not recently borrowed funds under its credit line with Capital Factors. The agreement with Capital Factors was renewed as of December 31, 2001 for an additional one year term. Capital Factors maintains a lien on all of the Company's inventory and receivables and assumes the credit risk for all assigned accounts approved by it.
TRADEMARKS AND SERVICE MARKS
The STEVE MADDEN and STEVE MADDEN plus Design trademarks and service marks have been registered in numerous International Classes (Int'l Cl. 25 for clothing and footwear; Int'l Cl. 18 for leather goods, such as handbags and wallets; Int'l Cl. 9 for eyewear; Int'l Cl. 14 for jewelry; Int'l Cl. 3 for cosmetics and fragrances; Int'l Cl. 20 for picture frames and furniture; Int'l Cl. 16 for paper goods; Int'l Cl. 24 for bedding; and Int'l Cl. 35 for retail store services) in the United States. The Company also has trademark registrations in the United States for the marks EYESHADOWS BY STEVE MADDEN (Int'l Cl. 9 for eyewear), ICE TEA (Int'l Cl. 25 for clothing and footwear), SOHO COBBLER (Int'l. Cl. 9 for eyewear; and Int'l Cl. 25 for clothing and footwear), and SHOE BIZ By STEVE MADDEN (Int'l Cl. 25 for clothing and footwear; and Int'l Cl. 35 for retail store services).
The Company further owns registrations for the STEVE MADDEN and STEVE MADDEN plus Design trademarks and service marks in various International Classes in Argentina, Australia, Brazil, Canada, Chile, China, Colombia, Hong Kong, Israel, Italy, Japan, Korea, Mexico, Panama, Saudi Arabia, South Africa, Taiwan, the 15 cooperating countries of Europe and the Benelux countries and has pending applications for registration of the STEVE MADDEN and STEVE MADDEN plus Design trademarks and service marks in Bahrain, Kuwait, Malaysia, Oman, Peru, Qatar, the United Arab Emirates and Venezuela. There can be no assurance, however, that the Company will be able to effectively obtain rights to the STEVE MADDEN mark throughout all of the countries of the world. Moreover, no assurance can be given that others will not assert rights in, or ownership of, trademarks and other proprietary rights of the Company or that the Company will be able to successfully resolve such conflicts. The failure of the Company to protect such rights from unlawful and improper appropriation may have a material adverse effect on the Company's business and financial condition.
Additionally, the Company, through its Diva Acquisition Corp. subsidiary, owns registrations for the DAVID AARON trademark and service mark in various International Classes in the United States (Int'l Cl. 25 for clothing and footwear; Int'l Cl. 18 for leather goods, such as handbags and wallets; and Int'l Cl. 35 for retail store services), Australia, Canada, Hong Kong, Israel, Japan, South Africa and the 15 cooperating countries in Europe and for its D. AARON trademark in Spain. The Company further has a pending application for registration of the DAVID AARON trademark and service mark in Panama. The Company believes that the DAVID AARON trademark has a significant value and is important to the marketing of the Company's products.
The Company, through its Stevies, Inc. subsidiary, also owns several registrations for the STEVIES trademark and service mark in two International Classes in the United States (Int'l Cl. 18 for leather goods, such as handbags and wallets; and Int'l Cl. 9 for eyewear) and for its STEVIES plus Design mark for various goods in Hong Kong and the 15 cooperating countries in Europe. Additionally, Stevies, Inc. has several pending trademark and service mark applications for registration of the STEVIES and STEVIES plus Design marks in various International Classes in the United States (Int'l Cl. 25 for clothing and footwear; Int'l Cl. 18 for leather goods, such as handbags and wallets; Int'l Cl. 9 for eyewear; Int'l Cl. 14 for jewelry; Int'l Cl. 3 for cosmetics and fragrances; Int'l Cl. 16 for paper goods; Int'l Cl. 28 for toys; Int'l Cl. 26 for hair accessories; and Int'l Cl. 35 for retail store services) and in Argentina, Bahrain, Brazil, Canada, China, Colombia, Indonesia, Japan, Korea, Kuwait, Malaysia, Mexico, Oman, Panama, Peru, Qatar, Saudi Arabia, South Africa, Thailand, Taiwan, the United Arab Emirates and Venezuela. Finally, Stevies, Inc. also owns several pending trademark and service mark applications for registration of the STEVIES BY STEVE MADDEN mark in various International Classes in the United States (Int'l Cl. 25 for clothing and footwear; Int'l Cl. 14 for jewelry; Int'l Cl. 18 for leather goods, such as handbags and wallets; Int'l Cl. 16 for paper goods; Int'l Cl. 3 for cosmetics and fragrances; Int'l Cl. 9 for eyewear; Int'l Cl. 26 for hair accessories; Int'l Cl. 28 for toys; and Int'l Cl. 35 for retail store services).
EMPLOYEES
At March 18, 2002, the Company employed approximately 1,023 employees, of whom approximately 313 work on a full-time basis and approximately 710 work on a part-time basis. The management of the Company considers relations with its employees to be good.
ITEM 2
ITEM 2 PROPERTIES
The Company maintains approximately 25,000 square feet for its executive offices and sample production facilities at 52-16 Barnett Avenue, Long Island City, NY 11104. The lease for the Company's headquarters expires in June 2002.
The Company's showroom is located at 1370 Avenue of the Americas, New York, NY. All of the Company's brands are displayed for sale from this 3,762 square foot space. The lease for the Company's showroom expires in November 2002.
The Company's l.e.i.(R) showroom is located at 2300 Stemmons Freeway, Dallas, Texas. The Company's l.e.i. brands are displayed from this 1,080 square foot space. The lease for this showroom expires in September 2004.
The Company maintains a warehouse and distribution center in Port Everglades, Florida servicing wholesale and retail accounts. The lease for the Florida warehouse expires on January 31, 2003. In addition, the Company has engaged three independent distributors to warehouse and distribute its products.
All of the Company's retail stores are leased pursuant to leases that extend for terms which average ten years in length. A majority of the leases include clauses that provide for contingent rental payments if gross sales exceed certain targets. In addition, a majority of the leases enable the Company and/or the landlord to terminate the lease in the event that the Company's gross sales do not achieve certain minimum levels during a prescribed period. Many of the leases contain rent escalation clauses to compensate for increases in operating costs and real estate taxes.
The current terms of the Company's retail store leases expire as follows:
Years Lease Terms Expire Number of Stores ------------------------ ---------------- 2003 3 2004 3 2005 4 2006 2 2007 6 2008 13 2009 12 2010 11 2011 16 2012 2
ITEM 3
ITEM 3 LEGAL PROCEEDINGS
Except as set forth below, no material legal proceedings are pending to which the Company or any of its property is subject.
On June 20, 2000, Steven Madden, the Company's former Chairman and Chief Executive Officer, was indicted in the United States District Courts for the Southern District and Eastern District of New York. The indictments alleged 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 Exchange Act of 1934, as amended. On May 21, 2001, Steven Madden entered into a plea agreement with the U.S. Attorney's Office, pursuant to which he pled guilty to four of the federal charges filed against him. In addition, Mr. Madden reached a separate settlement agreement with the Securities and Exchange Commission regarding the allegations contained in its complaint. As a result, Mr. Madden resigned as the Company's Chief Executive Officer and as a member of the Company's Board of Directors effective July 1, 2001. Mr. Madden has agreed to serve as the Company's Creative and Design Chief, a non-executive position. It is expected that Mr. Madden will be sentenced in April 2002. Under the settlement agreement with the Securities and Exchange Commission, Mr. Madden has agreed to not serve as an officer or director of a publicly traded company for 7 years. Neither the indictments nor the Securities and Exchange Commission complaint allege any wrongdoing by the Company or its other officers and directors.
In December 2001, the Company purchased a loss mitigation policy to cover costs arising out of lawsuits related to the June 2000 federal indictment of Steve Madden, the Company's former Chief Executive Officer. The policy covers the Company's anticipated damages and legal costs in connection with such lawsuits. The Company is obligated to pay for damages and costs in excess of the policy limits. The cost of the policy was $6,950,000.
Class Action
Between June and August 2000, eight putative securities fraud class action lawsuits have been commenced in the United States District Court for the Eastern District of New York against the Company, Steven Madden and, in five of the actions, Rhonda J. Brown (the former President and a former director of the Company) and Arvind Dharia. 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); Fahey v. Steven Madden, Ltd., et al., 00 CV 4712 (filed August 11, 2000); Process Engineering Services, Inc. v. Steven Madden, Ltd., et al., 00 CV 5002 (filed August 22, 2000). By Order dated December 8, 2000, the Court consolidated these eight actions, appointed Process Engineering, Inc., Michael Fasci and Mark and Libby Adams as lead plaintiffs and approved their selection of lead counsel. On February 26, 2001, Plaintiffs served a Consolidated Amended Complaint. On or about October 31, 2001, plaintiffs filed a Second Consolidated Amended Class Action Complaint. The pleading names the Company, Steven Madden, Rhonda J. Brown and Arvind Dharia as defendants. It principally alleges 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 under the 1934 Act by issuing false and misleading statements, and failing to disclose material adverse information, generally relating to matters arising from Mr. Madden's June 2000 indictment. 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 during the period June 21, 1997 through June 20, 2000. On November 30, 2001, all of the defendants served motions to dismiss the Consolidated Amended Complaint. The motions were fully briefed on January 14, 2002. Since that time, a settlement in principle of these actions has been reached, subject to execution of definitive settlement documentation, notices to class members, a hearing and approval by the District Court. The tentative settlement is within the limits of the Company's insurance coverage.
Shareholder Derivative Actions
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 2000 indictment and to require him to disgorge certain profits, bonuses and stock option grants he received. On January 3, 2001, plaintiff filed an Amended Shareholder's Derivative Complaint. On February 2, 2001, both the Company and Mr. Madden filed motions to dismiss the Amended Complaint because of plaintiff's failure to make a pre-litigation demand upon the Company's board of directors. On October 1, 2001, plaintiff filed a Second Amended Complaint. On November 2, 2001, the Company filed a motion to dismiss this pleading on grounds that plaintiff had failed to make a pre-litigation demand upon the Company's board of directors. On February 7, 2002, the Magistrate Judge filed a Report recommending that the Company's motion to dismiss be denied. The Company filed its objections to the Report on March 4, 2002. The Company believes, after consultation with counsel, that its defense costs and certain attorneys fees in connection with this action will be subject to coverage by the Company's insurance as supplemented by the loss mitigation policy described above.
On or about November 28, 2001, a purported shareholder derivative complaint was filed in the United States District Court for the Eastern District of New York, captioned Herrera v. Karson, et al., 00 CV 7868. Named as defendants therein are the Company (as nominal defendant) and certain of the Company's present and/or former directors. The complaint alleges that the individual defendants breached their fiduciary duties to the Company in connection with a decision by the Board of Directors of the Company to enter into an employment agreement with Mr. Steven Madden in or about May 2001. The complaint seeks declaratory and other equitable relief, as well as an unspecified amount of compensatory damages, costs and expenses. On or about February 1, 2002, plaintiff filed an Amended Shareholder Derivative Complaint (the "Amended Complaint"). The Amended Complaint contains substantially the same allegations and names the same defendants as the original complaint. The Company believes, after consultation with counsel, that its defense costs and certain attorneys fees in connection with this action will be subject to coverage by the Company's insurance as supplemented by the loss mitigation policy described above.
SEC Investigation
On March 14, 2001, the Company became aware that the Securities and Exchange Commission had issued a formal order of investigation with respect to trading in the Company's securities.
Other Actions
On or about September 17, 2001, an action was commenced against the Company in the Supreme Court, Queens County, captioned Mitch Stewart v. Steven Madden, Ltd. Mr. Stewart is a former independent contractor
for the Company. The complaint seeks damages of approximately $1.3 million for breach of contract. On December 20, 2001, the Company answered the complaint, denying the allegations and asserting various affirmative defenses. On January 25, 2002, the plaintiff filed a motion for partial summary judgement, which is pending. The Company believes that it has substantial defenses to the claims asserted in the lawsuit.
On or about November 29, 2001, an action was commenced against the Company for breach of contract in the United States District Court, Eastern District of Texas, captioned Lina Enterprises v. Steven Madden, Ltd. Lina is a former independent contractor for the Company. The complaint seeks damages for breach of contract. The complaint does not specify the amount of damages being sought, but alleges that they are greater than $75,000. On March 13, 2002, the Company filed a motion to dismiss the complaint. The Company believes that it has substantial defenses to the claims asserted in the lawsuit.
ITEM 4
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
No matters were submitted to a vote of the holders of the Company's Common Stock during the last quarter of its fiscal year ended December 31, 2001.
On March 26, 2002, the final quoted price as reported by The Nasdaq National Market was $17.35 for each share of common stock. As of March 26, 2002, there were 12,365,216 shares of Common Stock outstanding, held of record by 73 record holders and approximately 3,402 beneficial owners.
Absence of Dividends. The Company anticipates that all of its earnings in the foreseeable future will be retained to finance the continued growth and expansion of its business and has no current intention to pay cash dividends.
YEAR ENDED DECEMBER 31, 2001 VS. YEAR ENDED DECEMBER 31, 2000
CONSOLIDATED: - -------------
Sales for the year ended December 31, 2001 were $243,391 or 19% higher than the $205,113 in the comparable period of 2000. The increase in sales is due to several factors, including (i) additional revenues of $10,461 from the Company's new Madden Mens Wholesale Division which commenced shipping in the first quarter of 2001 (ii) a 14% increase in retail sales due to the opening of additional retail stores, (iii) a 13% increase in sales from the l.e.i. Wholesale Division ("l.e.i. Wholesale"), (iv) a 79% increase in sales from the Stevies Wholesale Division ("Stevies Wholesale"), (v) a 106% increase in sales from the Diva Acquisition Corp. Wholesale Division ("Diva Wholesale"), (vi) the addition in wholesale accounts, and (vii) an increase in public awareness with respect to the Company's brands.
Consolidated gross profit as a percentage of sales decreased from 44% in 2000 to 41% in 2001. The decrease in gross margin resulted from greater promotional activity at retail this year due to sluggish July sales and the tragic events of September 11th and its aftermath. Margin pressures from wholesale large accounts prompted the Company to be early and aggressive with markdowns in a highly promotional retail climate. Finally, the decrease in the Company's higher margin retail business as a percentage of total sales contributed to the margin erosion.
Selling, general and administrative (SG&A) expenses increased to $79,472 in 2001 from $68,833 in 2000. The increase in SG&A expenses is due primarily to a 28% increase in payroll, officers' bonuses and payroll-related expenses from $24,268 in 2000 to $31,004 in 2001. Also, selling and designing expenses increased by 19% from $10,510 in 2000 to $12,499 in 2001. This is due in part to an increase in sales in the current period and to the Company's increased focus on selling and designing activities. The increase in the number of retail outlets and expanded corporate office facilities resulted in an increase in occupancy, telephone and utilities expenses by 19% from $9,208 in 2000 to $10,957 in 2001.
Income from operations for 2001 was $19,362, which represents a decrease of $6,270 over the income from operations of $25,632 in 2000 due to a non-recurring charge taken in the fourth quarter of 2001 as a result of the purchase of loss mitigation insurance coverage in the amount of $6,950. Net income decreased to $12,116 in 2001 from $16,043 in 2000 due to the factors mentioned above.
WHOLESALE DIVISIONS: - --------------------
Sales from the Steve Madden Women's Wholesale Division ("Madden Wholesale") accounted for $92,413 or 38%, and $87,977 or 43%, of total sales in 2001 and 2000, respectively. The increase in sales was driven by the sales of key styles including euro-sport casuals, pointed toe and Madden slippers. Also, sales were driven by an increase in reorders through open stock replenishment for late spring and fall items. Gross profit as a percentage of sales decreased from 38% in 2000 to 35% in 2001 due to margin pressures from Madden Wholesale large accounts which prompted the Company to be early and aggressive with markdowns in a highly promotional retail climate. Operating expenses decreased to $24,929 in 2001 from $25,422 in 2000 due to decreases in advertising and marketing expenses. Madden Wholesale income from operations decreased to $1,944 in 2001 compared to income from operations of $8,807 in 2000 due to a non-recurring charge taken in the fourth quarter of 2001 as a result of the purchase of loss mitigation insurance coverage in the amount of $6,950.
Sales from l.e.i. Wholesale accounted for $42,592 or 17%, and $37,741 or 18%, of total sales in 2001 and 2000, respectively. Revenues for the year ended December 31, 2001 increased 13% over the same period of 2000. The focus of the l.e.i. Wholesale expansion was in the department stores such as May Department Stores, and specialty store channels such as Journeys. Gross profit as a percentage of sales remained the same in 2000 and 2001. Operating expenses increased to $9,833 in 2001 from $7,652 in 2000 due to increases in payroll and payroll-related expenses. Additionally, selling and designing expenses increased due to an increase in sales in the current period. Income from operations for l.e.i. Wholesale was $5,900 in 2001 compared to income from operations of $6,432 in 2000.
The Company's new Madden Mens Wholesale Division ("Madden Mens Wholesale") commenced shipping in the first quarter of 2001. Madden Mens Wholesale generated revenues of $10,461 for the year ended December 31, 2001. The Company is pleased by the market's acceptance of the new mens line, particularly in the sport-casual classification.
Sales from Diva Wholesale accounted for $7,454 or 3%, and $3,616 or 2%, of total sales in 2001 and 2000, respectively. The Company believes that the increase in sales was driven by placements of its new product line in major department stores, specialty stores, and specialty catalogues. Gross profit as a percentage of sales remained the same in 2000 and 2001. Operating expenses increased to $1,796 in 2001 from $1,231 in 2000 due to increases in payroll and payroll-related expenses. Additionally, selling and related expenses increased due to an increase in sales in the current period. Income from operations for Diva Wholesale was $274 for the year ended December 31, 2001 which represents a 233% increase over loss from operations of $206 during the same period in 2000.
Sales from the Stevies Wholesale, which commenced shipping in the second quarter of 2000, accounted for 10,984 or 5%, and $6,147 or 3%, of total sales in 2001 and 2000, respectively. This increase was primarily due to a full year of operation and the growth in accounts such as Limited Too and Nordstrom. Gross profit as a percentage of sales decreased from 37% in 2000 to 36% in 2001 due to margin pressures from some of Stevies' large accounts which prompted the Company to be early and aggressive with markdowns in a highly promotional retail climate. Operating expenses increased to $2,626 in 2001 from $1,595 in 2000 due to increases in payroll and payroll-related expenses. Additionally, selling and designing expenses increased due to an increase in sales in the current period. Income from operations for Stevies Wholesale was $1,593 in 2001 compared to income from operations of $963 in 2000.
RETAIL DIVISION: - ----------------
Sales from the Retail Division accounted for $79,487 or 33% and $69,632 or 34% of total sales in 2001 and 2000, respectively. This increase in Retail Division sales is primarily due to the increase in the number of Steve Madden retail stores. During the year ended December 31, 2001, the Company closed two of its least productive stores located in Coconut Grove, Florida and in Mineola, New York. The Company is considering new sites with greater projected productivity. As of December 31, 2001, there were 73 Steve Madden retail stores compared to 65 stores as of December 31, 2000. Same store sales for the year ended December 31, 2001 decreased by 1% compared to the same store sales for 2000 due to sluggish consumer traffic in the aftermath of September 11th. Revenues from the Internet store for the year ended December 31, 2001 were in excess of $4,000, showing an increase of 37% over such revenues in 2000. Gross profit as a percentage of sales decreased from 56% in 2000 to 53% in 2001 due to
greater promotional activity at retail this year. Operating expenses for the Retail Division increased to $34,992 or 44% of sales in 2001 from $30,937 or 44% of sales in 2000. This increase in dollars was due to increases in payroll and payroll-related expenses and occupancy expenses as a result of opening ten additional stores since December 31, 2000. Income from operations for the Retail Division was $7,023 in 2001 compared to income from operations of $8,001 in 2000.
ADESSO-MADDEN DIVISION: - -----------------------
Adesso-Madden, Inc. generated commission revenues of $4,200 for the year ended December 31, 2001, which represents a 16% increase over commission revenues of $3,631 during the same period in 2000. This increase was primarily due to the growth in accounts such as Walmart and Target and the addition of children's products to the assortment mix. Operating expenses decreased to $1,956 in 2001 from $1,996 in 2000. Income from operations for Adesso-Madden was $2,244 in 2001 compared to income from operations of $1,635 in 2000.
YEAR ENDED DECEMBER 31, 2000 VS. YEAR ENDED DECEMBER 31, 1999
CONSOLIDATED: - -------------
Sales for the year ended December 31, 2000 were $205,113 or 26% higher than the $163,036 recorded in the comparable period of 1999. The increase in sales was due to several factors, including (i) the addition of new wholesale accounts, (ii) a 43% increase in retail sales due to the opening of additional Steve Madden retail stores during 2000 and an increase in same store sales, (iii) a 37% increase in sales from l.e.i. Wholesale, (iv) an increase in the number of Steve Madden concept shops located in major department stores and specialty stores, and (v) 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 of 2000, the Company introduced a new brand, Stevies(TM). Positioned as a fashion brand, Stevies(TM) targets girls ages 6-9 and "tweens" ages 10-12. The Company's new Stevies Wholesale commenced shipping to department stores throughout the country in the second quarter of 2000. Stevies Wholesale generated revenue of $6,147 for the year ended December 31, 2000. Also, during the year ended December 31, 2000, 11 licenses in 13 product classifications were signed for the Stevies(TM) brand. The web site for Stevies at www.stevies.com went live in March 2000 and commenced engaging in e-commerce transactions in July 2000.
Consolidated gross profit as a percentage of sales in 2000 increased to 44% as compared to 42% for 1999 due to increased retail sales which were at higher margins, a change in the product mix, balanced sourcing and improved inventory management.
Selling, general and administrative (SG&A) expenses increased to $68,833 in 2000 from $52,946 in 1999. The increase in SG&A was due primarily to a 27% increase in payroll, officers' bonuses and payroll related expenses from $19,147 in 1999 to $24,268 in 2000. Also, the Company focused its efforts on advertising and marketing by increasing those expenses by 38% from $5,046 in 1999 to $6,941 in 2000. Additionally, selling, designing and licensing costs increased by 21% from $8,702 in 1999 to $10,510 in 2000. This was 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 and warehouse facilities resulted in an increase in occupancy, telephone, utilities, warehouse, computer, printing/supplies and depreciation expenses of 47% from $12,162 in 1999 to $17,820 in 2000.
Income from operations for 2000 was $25,632, which represents an increase of $6,711 or 35% over the income from operations of $18,921 in 1999. Net income increased by 40% to $16,043 in 2000 from $11,466 in 1999.
WHOLESALE DIVISIONS: - --------------------
Sales from Steve Madden Women's Wholesale accounted for $87,977 or 43%, and $78,890 or 48%, of total sales in 2000 and 1999, respectively. This increase in sales was primarily due to the addition of new Madden Wholesale accounts 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 $25,422 in 2000 from $22,758 in 1999. This increase was due to an increase in
payroll and payroll related expenses principally due to the hiring of additional management personnel. Also, advertising and marketing expenses increased due to the Company's expanded marketing strategy. Additionally, selling, designing and licensing costs increased due to an increase in sales during 2000 and to the Company's increased focus on selling, designing, and licensing activities. Madden Wholesale income from operations was $8,807 in 2000 compared to income from operations of $7,169 in 1999.
Sales from l.e.i. Wholesale accounted for $37,741 or 18%, and $27,546 or 17%, of total sales in 2000 and 1999, respectively. The increase in sales was due to the addition of new l.e.i. Wholesale accounts and an increase in reorders from existing customers. The l.e.i. footwear was sold in over 3,500 doors in 2000 compared to 2,500 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, and in specialty store chains, such as Journeys and Mandees. Also, during the third quarter of 2000, l.e.i. Wholesale shipped shoes to Kohl's for the first time. Gross profit as a percentage of sales increased from 35% in 1999 to 37% in 2000 due to changes in product mix, balanced sourcing and improved inventory management. Operating expenses increased to $7,652 in 2000 from $5,856 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 due to the Company's increased focus on these activities. Income from operations for l.e.i. Wholesale was $6,432 in 2000 compared to income from operations of $3,834 in 1999.
Sales from the Diva Wholesale accounted for $3,616 or 2%, and $7,970 or 5%, of total sales in 2000 and 1999, respectively. The Company believes that the decrease in sales was due to the repositioning and reorganization of the David Aaron brand. The Company intentionally planned to reduce sales volume in 2000 enabling Diva Wholesale to use its two retail stores to test the popularity of new products. Gross profit as a percentage of sales decreased from 34% in 1999 to 28% in 2000 as under-performing carryover inventory was cleared at lower gross margins. Operating expenses decreased to $1,231 in 2000 from $1,547 in 1999 due to the decrease in sales commission expenses as a result of the decrease in sales and from decreases in selling and designing expenses. Loss from operations from Diva Wholesale was $206 in 2000 compared to income from operations of $1,127 in 1999.
Stevies Wholesale commenced shipping to department stores and specialty stores throughout the country in the second quarter of 2000. Stevies Wholesale generated revenue of $6,147 for the year ended December 31, 2000. Stevies sold in over 1,200 doors including store groups such as Nordstrom, Federated Department Stores, May Department Stores, Belk, Dillard's, Limited Too, as well as, children's independent shoe stores throughout the country. The Stevies brand ended the fourth quarter of 2000 with over 815 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 37% for the year ended December 31, 2000. Income from operations was $963 in 2000.
RETAIL DIVISION: - ----------------
Sales from the Retail Division accounted for $69,632 or 34% and $48,630 or 30% of total revenues in 2000 and 1999, respectively. This increase in Retail Division sales was primarily due to the increase in the number of Steve Madden retail stores. As of December 31, 2000, there were 65 Steve Madden retail stores compared to 49 stores as of December 31, 1999. Additionally, same store sales for the year ended December 31, 2000 increased 10% over the same period of 1999. This increase in same store sales was largely due to the Company's ability to track and quickly reorder bestsellers and it's strategy of testing and quickly reordering successful new products such as athletic inspired casuals, sneakers, boots and tailored shoes. Revenues from the Internet store for the year ended December 31, 2000 were $3,549 an increase of 196% over the same period of 1999. The Company's sales generated through its websites at www.stevemadden.com and www.stevies.com continued to increase as the Company made additional styles available for sale on its website and usage of the Internet continued to grow. Also, the web sites for the Madden Mens at www.stevemaddenmens.com was launched in February 2001. Gross profit as a percentage of sales remained the same in 1999 and 2000. Operating expenses increased to $30,937 or 44% of sales in 2000 from $21,106 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 16 additional stores since December 31, 1999. Income from operations from the Retail Division was $8,001 in 2000 compared to income from operations of $5,910 in 1999.
ADESSO-MADDEN DIVISION: - -----------------------
Adesso-Madden, Inc. generated commission revenues of $3,631 for the year ended December 31, 2000, which represented a 42% increase over commission revenues of $2,560 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 $1,996 in 2000 from $1,679 in 1999 primarily due to increases in payroll and payroll related expenses. Income from operations from Adesso-Madden was $1,635 in 2000 compared to income from operations of $881 in 1999.
LICENSE AGREEMENTS
Revenues from licensing increased by 41% to $1,711 for the year ended 2001 from $1,216 in 2000. This increase was primarily driven by increases in licensing income from leather sportswear and sunglasses. As of December 31, 2001, the Company had six license partners covering six product categories for its Steve Madden brand. Also, as of December 31, 2001, the Company had three license partners covering three product categories for its Stevies brand. The product categories include handbags, hosiery, sunglasses, eyewear, belts and outerwear.
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $82,633 at December 31, 2001 compared to $57,207 in working capital at December 31, 2000, representing an increase of $25,426, which was primarily due to the Company's net income and proceeds received from the exercise of options.
Under the terms of a factoring agreement with Capital Factors, Inc., the Company is permitted to draw down 80% of its invoiced receivables at an interest rate of two points below the Prime Rate (as defined in such agreement). The agreement with Capital Factors was renewed as of December 31, 2001 for an additional one year term. Capital Factors maintains a lien on all of the Company's inventory and receivables and assumes the credit risk for all assigned accounts approved by it.
OPERATING ACTIVITIES
During the year ended December 31, 2001, cash provided by operating activities was $9,393. Uses of cash arose principally from an increase in factored accounts receivable of $8,364 and an increase in prepaid expenses and other assets of $7,484 principally from prepaid income taxes. Cash was provided principally by net income of $12,116 and a decrease in accounts payables and accrued expenses of $4,054.
The Company leases office, showroom, warehouse and retail facilities under non-cancelable operating leases with terms expiring at various times through 2012. Future minimum annual lease payments under non-cancelable operating leases consist of the following at December 31:
2002 $ 7,172,000 2003 6,835,000 2004 6,742,000 2005 6,346,000 2006 6,329,000 Thereafter 15,834,000 --------------- $ 49,258,000 ===============
The Company has employment agreements with four key executives and its Creative Design Chief as of December 31, 2001 providing for aggregate annual salaries of approximately $1,625 subject to annual bonuses and annual increases as may be determined by the Company's Board of Directors. In addition, as part of four of the employment agreements, the Company is committed to pay incentive bonuses based on income before interest, depreciation and taxes.
A significant portion of the Company's product is supplied from foreign manufacturers, the majority of which are located in Brazil, China, Italy and Spain. Although the Company has not entered into any 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, the Company currently makes approximately ninety-five percent (95%) of its purchases in U.S. dollars.
CAPITAL IMPROVEMENT ACTIVITIES
During the year ended December 31, 2001, the Company used cash of $3,415 primarily for leasehold improvements on new retail stores and corporate office space and for a new point of sale computer system for the retail stores.
FINANCING ACTIVITIES
During the year ended December 31, 2001, the Company received $8,998 from the sale of its common stock in connection with the exercise of stock options. On February 29, 2000, the Company announced a 1,500,000 share repurchase program. As of December 31, 2000, the Company had repurchased 900,000 shares of the Company's common stock at a total cost of $6,076 under this program. The Company had a total of 600,000 shares remaining for repurchase as of September 24, 2001. On September 24, 2001 the Company announced that the share repurchase program was increased by 3 million shares. The Company did not repurchase any common stock during 2001.
OTHER CONSIDERATIONS
Dependence on Key Personnel. Although the Company has strengthened its senior management team, the Company is dependent, in particular, upon the services of Steven Madden, its current Creative and Design Chief and former Chairman and Chief Executive Officer. On June 20, 2000, Mr. Madden was indicted in the United States District Courts for the Southern District and Eastern District of New York. The indictments alleged 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 Exchange Act of 1934, as amended. On May 21, 2001, Steven Madden entered into a plea agreement with the U.S. Attorney's Office, pursuant to which he pled guilty to four of the federal charges filed against him. In addition, Mr. Madden reached a separate settlement agreement with the Securities and Exchange Commission regarding the allegations contained in its complaint. As a result, Mr. Madden resigned as the Company's Chief Executive Officer and as a member of the Company's Board of Directors effective July 1, 2001. Mr. Madden has agreed to serve as the Company's Creative and Design Chief, a non-executive position. It is expected that Mr. Madden will be sentenced in April 2002. Under the settlement agreement with the Securities and Exchange Commission, Mr. Madden has agreed to not serve as an officer or director of a publicly traded company for 7 years. Neither the indictments nor the Securities and Exchange Commission complaint allege any wrongdoing by the Company or its other officers and directors.
The Company maintains a key person life insurance policy on Mr. Madden with coverage in the amount of $10,000,000. The Company has an employment contract with Mr. Madden that expires on June 30, 2011. Under the terms of his employment contract, if Mr. Madden is terminated for other than cause, death or total disability, the Company will be required to pay the remaining base salary due under his contract, half of which must be paid upon termination. Mr. Madden is also entitled during the term of the contract to an annual $200,000 non-accountable expense account payable in monthly installments; however, the Company is not required to pay this non-accountable expense allowance for any month that Mr. Madden is not actively engaged in the duties of Creative and Design Chief. If, during the period commencing 120 days prior to a change of control and ending on the first anniversary of a change of control, Mr. Madden's employment is terminated by the Company (other than for cause) or by Mr. Madden for good reason, Mr. Madden will be entitled to receive a lump sum payment equal to three times his compensation for the preceding 12-month period ending December 31st.
The Company believes that Mr. Madden is integral to attracting talented shoe designers. Since Mr. Madden is involved in many material creative aspects of the Company's business, there can be no assurance that a suitable replacement for Mr. Madden could be found if he was unable to perform services for the Company. As a consequence, the loss of Mr. Madden or other key management personnel could have a material adverse effect upon the Company's business, results of operations and financial condition. In addition, the Company's ability to market
its products and to maintain profitability will depend, in large part, on its ability to attract and retain qualified personnel. Competition for such personnel is intense and there can be no assurance that the Company will be able to attract and retain such personnel. The inability of the Company to attract and retain such qualified personnel would have a material adverse effect on the Company's business, financial condition and results of operations.
Fashion Industry Risks. The success of the Company will depend in significant part upon its ability to anticipate and respond to product and fashion trends as well as to anticipate, gauge and react to changing consumer demands in a timely manner. There can be no assurance that the Company's products will correspond to the changes in taste and demand or that the Company will be able to successfully market products which respond to such trends. If the Company misjudges the market for its products, it may be faced with significant excess inventories for some products and missed opportunities with others. In addition, misjudgments in merchandise selection could adversely affect the Company's image with its customers and weak sales and resulting markdown requests from customers could have a material adverse effect on the Company's business, financial condition and results of operations.
The industry in which the Company operates is cyclical, with purchases tending to decline during recessionary periods when disposable income is low. Purchases of contemporary shoes and accessories tend to decline during recessionary periods and also may decline at other times. While the Company has fared well in recent years in a difficult retail environment, there can be no assurance that the Company will be able to maintain its historical rate of growth in revenues and earnings, or remain profitable in the future. A recession in the national or regional economies or uncertainties regarding future economic prospects, among other things, could affect consumer spending habits and have a material adverse effect on the Company's business, financial condition and results of operations.
In recent years, the retail industry has experienced consolidation and other ownership changes. In addition, some of the Company's customers have operated under the protection of the federal bankruptcy laws. In the future, retailers in the United States and in foreign markets may consolidate, undergo restructurings or reorganizations, or realign their affiliations, any of which could decrease the number of stores that carry the Company's products or increase the ownership concentration within the retail industry. While such changes in the retail industry to date have not had a material adverse effect on the Company's business or financial condition, there can be no assurance as to the future effect of any such changes.
Inventory Management. The fashion-oriented nature of the Company's industry and the rapid changes in customer preferences leave the Company vulnerable to an increased risk of inventory obsolescence. Thus, the Company's ability to manage its inventories properly is an important factor in its operations. Inventory shortages can adversely affect the timing of shipments to customers and diminish brand loyalty. Conversely, excess inventories can result in increased interest costs as well as lower gross margins due to the necessity of providing discounts to retailers. The inability of the Company to effectively manage its inventory would have a material adverse effect on the Company's business, financial condition and results of operations.
Dependence Upon Customers and Risks Related to Extending Credit to Customers. The Company's customers consist principally of department stores and specialty stores, including shoe boutiques. Certain of the Company's department store customers, including some under common ownership, account for significant portions of the Company's wholesale sales. Presently, the Company sells approximately sixty-two percent (62%) of its products at wholesale to department stores, including Federated Department Stores (Bloomingdale's, Bon Marche, Burdines, Macy's and Rich's), Dillard's, Nordstrom, Marshall Field's and May Department Stores (Famous Barr, Filene's, Foley's, Hecht's, Kaufmann's, Meier & Frank, Lord and Taylor and Robinsons May) and approximately thirty-eight (38%) percent of its products at wholesale to specialty stores, including shoe boutiques. The Company's largest customers, May Department Stores, Federated Department Stores, and Nordstrom, account for approximately twenty-one percent (21%), eighteen percent (18%) and eleven percent (11%) of the Company's wholesale sales, respectively.
The Company believes that a substantial portion of sales of the Company's licensed products by its domestic licensing partners are also made to the Company's largest department store customers. The Company generally enters into a number of purchase order commitments with its customers for each of its lines every season and does not enter into long-term agreements with any of its customers. Therefore, a decision by Federated Department Stores, May Department Stores, Nordstrom or any other significant customer, whether motivated by competitive
conditions, financial difficulties or otherwise, to decrease the amount of merchandise purchased from the Company or its licensing partners, or to change its manner of doing business could have a material adverse effect on the Company's business, financial condition and results of operations. The Company sells its products primarily to retail stores across the United States and extends credit based on an evaluation of each customer's financial condition, usually without requiring collateral. While various retailers, including some of the Company's customers, have experienced financial difficulties in the past few years which increased the risk of extending credit to such retailers, the Company's losses due to bad debts have been limited. Pursuant to the Factoring Agreement between Capital Factors and the Company, Capital Factors currently assumes the credit risk related to approximately 95% of the Company's accounts receivables. However, financial difficulties of a customer could cause the Company to curtail business with such customer or require the Company to assume more credit risk relating to such customer's receivables.
Impact of Foreign Manufacturers. Substantially all of the Company's products are currently sourced outside the United States through arrangements with a number of foreign manufacturers in four different countries. During the year ended December 31, 2001, approximately 90% of the Company's products were purchased from sources outside the United States, including China, Brazil, Italy and Spain.
Risks inherent in foreign operations include work stoppages, transportation delays and interruptions, changes in social, political and economic conditions which could result in the disruption of trade from the countries in which the Company's manufacturers or suppliers are located, the imposition of additional regulations relating to imports, the imposition of additional duties, taxes and other charges on imports, significant fluctuations of the value of the dollar against foreign currencies, or restrictions on the transfer of funds, any of which could have a material adverse effect on the Company's business, financial condition and results of operations. The Company does not believe that any such economic or political condition will materially affect the Company's ability to purchase products, since a variety of materials and alternative sources exist. The Company cannot be certain, however, that it will be able to identify such alternative sources without delay or without greater cost to the Company, if ever. The Company's inability to identify and secure alternative sources of supply in this situation would have a material adverse effect on the Company's business, financial condition and results of operations.
The Company's imported products are also subject to United States customs duties. The United States and the countries in which the Company's products are produced or sold may, from time to time, impose new quotas, duties, tariffs, or other restrictions, or may adversely adjust prevailing quota, duty or tariff levels, any of which could have a material adverse effect on the Company's business, financial condition and results of operations.
Possible Adverse Impact of Unaffiliated Manufacturers' Inability to Manufacture in a Timely Manner, to Meet Quality Standards or to Use Acceptable Labor Practices. As is common in the footwear industry, the Company contracts for the manufacture of a majority of its products to its specifications through foreign manufacturers. The Company does not own or operate any manufacturing facilities and is therefore dependent upon independent third parties for the manufacture of all of its products. The Company's products are manufactured to its specifications by both domestic and international manufacturers. The inability of a manufacturer to ship orders of the Company's products in a timely manner or to meet the Company's quality standards could cause the Company to miss the delivery date requirements of its customers for those items, which could result in cancellation of orders, refusal to accept deliveries or a reduction in purchase prices, any of which could have a material adverse effect on the Company's business, financial condition and results of operations.
Although the Company enters into a number of purchase order commitments each season specifying a time frame for delivery, method of payment, design and quality specifications and other standard industry provisions, the Company does not have long-term contracts with any manufacturer. As a consequence, any of these manufacturing relationships may be terminated, by either party, at any time. Although the Company believes that other facilities are available for the manufacture of the Company's products, both within and outside of the United States, there can be no assurance that such facilities would be available to the Company on an immediate basis, if at all, or that the costs charged to the Company by such manufacturers will not be greater than those presently paid.
The Company requires its licensing partners and independent manufacturers to operate in compliance with applicable laws and regulations. While the Company promotes ethical business practices and the Company's staff periodically visits and monitors the operations of its independent manufacturers, the Company does not control such manufacturers or their labor practices. The violation of labor or other laws by an independent manufacturer of the
Company or by one of the Company's licensing partners, or the divergence of an independent manufacturer's or licensing partner's labor practices from those generally accepted as ethical in the United States, could have a material adverse effect on the Company's business, financial condition and results of operations.
Intense Industry Competition. The fashionable footwear industry is highly competitive and barriers to entry are low. The Company's competitors include specialty companies as well as companies with diversified product lines. The recent substantial growth in the sales of fashionable footwear has encouraged the entry of many new competitors and increased competition from established companies. Most of these competitors, including Kenneth Cole, Nine West, DKNY, Skechers, Nike and Guess, may have significantly greater financial and other resources than the Company and there can be no assurance that the Company will be able to compete successfully with other fashion footwear companies. Increased competition could result in pricing pressures, increased marketing expenditures and loss of market share, and could have a material adverse effect on the Company's business, financial condition and results of operations. The Company believes effective advertising and marketing, fashionable styling, high quality and value are the most important competitive factors and plans to employ these elements as it develops its products. The Company's inability to effectively advertise and market its products could have a material adverse effect on the Company's business, financial condition and results of operations.
Expansion of Retail Business. The Company's continued growth depends to a significant degree on further developing the Steve Madden(R), David Aaron(R), Stevies, Steve Madden Mens and l.e.i.(R) brands, creating new product categories and businesses and operating Company-owned stores on a profitable basis. The Company plans to open approximately ten (10) Steve Madden retail stores in 2002. The Company's recent and planned expansion includes the opening of stores in new geographic markets as well as strengthening existing markets. New markets have in the past presented, and will continue to present, competitive and merchandising challenges that are different from those faced by the Company in its existing markets. There can be no assurance that the Company will be able to open new stores, and if opened, that such new stores will be able to achieve sales and profitability levels consistent with existing stores. The Company's retail expansion is dependent on a number of factors, including the Company's ability to locate and obtain favorable store sites, the performance of the Company's wholesale and retail operations, and the ability of the Company to manage such expansion and hire and train personnel. Past comparable store sales results may not be indicative of future results, and there can be no assurance that the Company's comparable store sales results will increase or not decrease in the future. In addition, there can be no assurance that the Company's strategies to increase other sources of revenue, which may include expansion of its licensing activities, will be successful or that the Company's overall sales or profitability will increase or not be adversely affected as a result of the implementation of such retail strategies.
The Company's growth has increased and will continue to increase demand on the Company's managerial, operational and administrative resources. The Company has recently invested significant resources in, among other things, its management information systems and hiring and training new personnel. However, in order to manage currently anticipated levels of future demand, the Company may be required to, among other things, expand its distribution facilities, establish relationships with new manufacturers to produce its products, and continue to expand and improve its financial, management and operating systems. There can be no assurance that the Company will be able to manage future growth effectively and a failure to do so could have a material adverse effect on the Company's business, financial condition and results of operations.
Seasonal and Quarterly Fluctuations. The Company's results may fluctuate quarter to quarter as a result of the timing of holidays, weather, the timing of larger shipments of footwear, market acceptance of the Company's products, the mix, pricing and presentation of the products offered and sold, the hiring and training of additional personnel, the timing of inventory write downs, the cost of materials, the mix between wholesale and licensing businesses, the incurrence of other operating costs and factors beyond the Company's control, such as general economic conditions and actions of competitors. In addition, the Company expects that its sales and operating results may be significantly impacted by (i) the opening of new retail stores and (ii) the introduction of new products. Accordingly, the results of operations in any quarter will not necessarily be indicative of the results that may be achieved for a full fiscal year or any future quarter.
Trademark and Service Mark Protection. The Company believes that its trademarks and service marks and other proprietary rights are important to its success and its competitive position. Accordingly, the Company devotes substantial resources to the establishment and protection of its trademarks on a worldwide basis. Nevertheless, there can be no assurance that the actions taken by the Company to establish and protect its trademarks and other
proprietary rights will be adequate to prevent imitation of its products by others or to prevent others from seeking to block sales of the Company's products as violative of the trademarks and proprietary rights of others. Moreover, no assurance can be given that others will not assert rights in, or ownership of, trademarks and other proprietary rights of the Company or that the Company will be able to successfully resolve such conflicts. In addition, the laws of certain foreign countries may not protect proprietary rights to the same extent as do the laws of the United States. The failure of the Company to establish and then protect such proprietary rights from unlawful and improper appropriation could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Trademarks and Service Marks".
Foreign Currency Fluctuations. The Company generally purchases its products in U.S. dollars. However, the Company sources substantially all of its products overseas and, as such, the cost of these products may be affected by changes in the value of the relevant currencies. Changes in currency exchange rates may also affect the relative prices at which the Company and foreign competitors sell their products in the same market. There can be no assurance that foreign currency fluctuations will not have a material adverse effect on the Company's business, financial condition and results of operations.
Outstanding Options. As of March 11, 2002, the Company had outstanding options to purchase an aggregate of approximately 2,089,514 shares of Common Stock. Holders of such options are likely to exercise them when, in all likelihood, the Company could obtain additional capital on terms more favorable than those provided by the options. Further, while its options are outstanding, they may adversely affect the terms in which the Company could obtain additional capital.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See financial statements following Item 14 of this Annual Report on Form 10-K.
ITEM 9 CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT OF THE REGISTRANT
Incorporated herein by reference from the Company's definitive proxy statement to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934.
ITEM 11 EXECUTIVE COMPENSATION
Incorporated herein by reference from the Company's definitive proxy statement to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference from the Company's definitive proxy statement to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference from the Company's definitive proxy statement to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934.
PART IV
ITEM 14 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
The following consolidated financial statements of Steven Madden, Ltd. and subsidiaries are included in Item 8:
STEVEN MADDEN, LTD. AND SUBSIDIARIES
CONTENTS
PAGE ---- CONSOLIDATED FINANCIAL STATEMENTS
Independent auditors' report
Balance sheets as of December 31, 2001 and 2000
Statements of operations for the years ended December 31, 2001, 2000 and 1999
Statements of changes in stockholders' equity for the years ended December 31, 2001, 2000 and 1999
Statements of cash flows for the years ended December 31, 2001, 2000 and 1999
Notes to financial statements
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders Steven Madden, Ltd. New York, New York
We have audited the accompanying consolidated balance sheets of Steven Madden, Ltd. and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements enumerated above present fairly, in all material respects, the consolidated financial position of Steven Madden, Ltd. and subsidiaries as of December 31, 2001 and 2000, and the consolidated results of their operations and their consolidated cash flows for each of the years in the three-year period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States.
Richard A. Eisner & Company, LLP
New York, New York February 22, 2002
With respect to Notes J[1] and J[2], March 4, 2002
See Notes to Financial Statements
See Notes to Financial Statements
See notes to financial statements
See notes to financial statements
STEVEN MADDEN, LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2001 AND 2000
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
[1] ORGANIZATION:
Steven Madden, Ltd., a Delaware corporation, designs and sources women's, girl's and men's shoes, for sale through its wholesale and retail channels under the Steve Madden, David Aaron, Stevies, Madden Mens and Lei (under license) brand names. Revenue is generated predominately through the sale of the Company's brand name merchandise and certain licensed products. At December 31, 2001 and 2000, the Company operated 73 and 65 retail stores (including its website as a store), respectively. Such revenues are subject to seasonal fluctuations. See Note K for operating segment information.
[2] PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of Steven Madden, Ltd. and its wholly owned subsidiaries Steven Madden Retail, Inc., Diva Acquisition Corp., Adesso-Madden, Inc. and Stevies, Inc. (collectively referred to as the "Company"). All significant intercompany balances and transactions have been eliminated.
[3] USE OF ESTIMATES:
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
[4] CASH AND CASH EQUIVALENTS:
Cash equivalents at December 31, 2001 and 2000, amounted to approximately $41,777,000 and $28,865,000, respectively, and consist of certificates of deposit and commercial paper. The Company considers all highly liquid instruments with an original maturity of three months or less to be cash equivalents.
[5] INVENTORIES:
Inventories, which consist of finished goods, are stated at the lower of cost (first-in, first-out method) or market.
[6] PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed utilizing the straight-line method based on estimated useful lives ranging from two to ten years. Leasehold improvements are amortized utilizing the straight-line method over the shorter of their estimated useful lives or the lease term. Depreciation and amortization include amounts relating to property and equipment under capital leases.
Impairment losses are recognized for long-lived assets, including certain intangibles, used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are not sufficient to recover the assets' carrying amount. Impairment losses are measured by comparing the fair value of the assets to their carrying amount. No impairment losses have been incurred for the years presented.
STEVEN MADDEN, LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2001 AND 2000
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[7] COST IN EXCESS OF FAIR VALUE OF NET ASSETS ACQUIRED:
Cost in excess of fair value of net assets acquired relates to two acquisitions and through December 31, 2001 is being amortized over 20 years (see Note A[14]).
[8] NET INCOME PER SHARE:
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 in-the-money options and the proceeds (including the amount of compensation cost, if any, attributed to future services and not yet recognized and the amount of tax benefits, if any, that would be credited to additional paid-in capital assuming exercise of the options) thereof were used to purchase treasury stock at the average market price during the period. For the years ended December 31, 2001 and 2000, options exercisable into approximately 265,000 and 300,000 shares of common stock, respectively have not been included in the calculation of diluted income per share as the result would have been antidilutive.
[9] ADVERTISING COSTS:
The Company expenses costs of print, radio and billboard advertisements as of the first date the advertisements take place. Advertising expense included in operating expenses amounted to approximately $6,596,000 in 2001, $6,941,000 in 2000, and $5,046,000 in 1999.
[10] FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying value of the Company's financial instruments approximate fair value due to their short-term nature or their underlying terms.
[11] STOCK-BASED COMPENSATION:
The Company has elected to continue to account for its stock-based compensation plans using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25 ("APB No. 25"), "Accounting for Stock Issued to Employees". Under the provisions of APB No. 25, employee compensation arising from the grant of stock options is measured as the excess, if any, of the quoted market price of the Company's common stock at the date of the grant over the amount an employee must pay to acquire the stock.
[12] REVENUE RECOGNITION:
Wholesale revenue, including commissions received in conjunction with private label footwear, is recognized upon shipment and transfer of title of products to customers. Allowances for estimated discounts and returns are recognized when sales are recorded. Retail sales are recognized when the payment is received from customers and are recorded net of returns. Licensing revenue is recognized on the basis of net sales reported by the licensee.
[13] RECLASSIFICATION:
Certain reclassifications have been made to the December 31, 2000 financial statements to conform to current year presentation.
STEVEN MADDEN, LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2001 AND 2000
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[14] RECENTLY ISSUED ACCOUNTING STANDARDS:
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements," which provides guidance related to revenue recognition and was effective the first fiscal quarter of fiscal years beginning after December 15, 1999, and requires companies to report any changes in revenue recognition as a cumulative change in an accounting principle at the time of implementation, in accordance with APB Opinion 20, "Accounting Changes." Subsequently, SAB Nos. 101A and 101B were issued to delay the implementation of SAB No. 101. Management believes that the adoption had no effect on the Company's revenue recognition policies. The Company adopted this pronouncement during the fiscal year ended December 31, 2000.
In 2000, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation," an interpretation of APB No. 25, "Stock Issued to Employees." Interpretation No. 44 clarifies the application of APB No. 25 for the definition of an employee for purposes of applying APB No. 25, the criteria for determining whether a plan qualifies as a non-compensatory plan, the accounting consequences of various modifications to the terms of previously granted stock options or awards, and the accounting for an exchange of stock compensation awards in a business combination. The application of this interpretation had no effect on the financial statements for the fiscal year ended December 31, 2000.
Also in 2000, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." The standard replaces SFAS No. 125 and requires additional disclosure. The adoption of this standard had no material effect on the financial statements.
In June 2001, the FASB issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting. It also specifies the types of acquired intangible assets that are required to be recognized and reported separately from goodwill. SFAS No. 142 will require that goodwill and intangibles with indeterminate lives will no longer be amortized, but instead tested for impairment. SFAS No. 142 is required to be applied starting with fiscal years beginning after December 15, 2001, with early application permitted in certain circumstances. The Company will adopt SFAS No. 142 in 2002 and does not expect any impairment of goodwill upon adoption.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. This statement supercedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The statement retains the previously existing accounting requirements related to the recognition and measurement of the impairment of long-lived assets to be held and used while expanding the measurement requirements of long-lived assets to be disposed of by sale to include discontinued operations. It also expands on the previously existing reporting requirements for discontinued operations to include a component of an entity that either has been disposed of or is classified as held for sale. The Company is required to implement SFAS No. 144 on January 1, 2002. management does not expect this statement to have a material impact on the Company's financial position or results of operations.
NOTE C - DUE FROM FACTOR
Under the terms of its factoring agreement, as amended, the Company may request advances from the factor up to 80 percent of aggregate receivables purchased by the factor at an interest rate of prime minus 2%. The Company also pays a fee equal to .70% of the gross invoice amount of each receivable purchased. In addition, the factor charges an annual unused line fee of .25% of the average daily unused portion of the maximum credit line which is $15,000,000. The Company sells and assigns a substantial portion of its receivables, principally without recourse, to the factor. At December 31, 2001 and 2000, $1,120,000 and $436,000 of factored receivables were sold by the Company with recourse. The factor assumes the credit risk of all assigned accounts approved by it, but maintains liens on all inventory, trade receivables (whether or not assigned) and the goods represented thereby. These transfers are recognized as sales of receivables.
NOTE D - STOCK OPTIONS
The Company established various stock option plans under which options to purchase shares of common stock may be granted to employees, directors, officers, agents, consultants and independent contractors. The plans provide that the option price shall not be less than the fair market value of the common stock on the date of grant and that no portion of the option may be exercised beyond ten years from that date. No incentive stock option can be granted for more than five years to a stockholder owning 10% or more of the Company's outstanding common stock. Options granted under the plans during the three years ended December 31, 2001 vest on the date of grant or up to three years from such date.
The Company has several stock option plans. The 1993 Incentive Stock Option Plan, the 1995 Stock Plan, The 1996 Stock Plan and the 1997 Stock Plan provide for options to be granted to employees and directors. Each plan provides that the option price shall not be less than the fair market value on the date of grant and that no portion of the option may be exercised beyond ten years from the date of grant. No incentive stock option can be granted to a stockholder owning 10% or more of the Company's outstanding common stock.
In June 1999, the Company adopted the 1999 Stock Plan under which the maximum number of shares to which awards may be granted was initially 400,000 shares. In May 2000, the stockholders approved an amendment to the 1999 Stock Plan to increase the maximum number of shares subject to the plan to 975,000 shares. In July 2001, the stockholders approved an amendment to the 1999 Stock Plan to increase the maximum number of shares subject to the plan to 1,600,000 shares. Terms of the 1999 Stock Plan are not materially different from the various existing stock option plans.
As set forth in Note A[11], the Company applies APB No. 25 in accounting for its employee/director stock option incentive plans and, accordingly, recognizes compensation expense for the difference between the fair value of the underlying common stock and the exercise price of the option at the date of grant. Pro forma information regarding net income and earnings per share is required by SFAS No. 123 "Accounting for Stock-Based Compensation" and has been determined as if the Company had accounted for its employee stock options under the fair value method of SFAS No.123. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options vesting period. Substantially all options granted in 2001, 2000 and 1999 vested on date of grant, and accordingly, the estimated fair value of such options were charged to expense in the year of grant for pro forma disclosures. The Company's pro forma information follows:
The weighted average fair value of options granted in 2001, 2000 and 1999 was approximately $9.44, $4.54 and $6.62, respectively, using the Black-Scholes option-pricing model with the following assumptions:
STEVEN MADDEN, LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2001 AND 2000
NOTE E - PREFERRED STOCK
The Company has authorized 5,000,000 shares of preferred stock. The Board of Directors have designated 60,000 shares of such preferred stock as Series A Junior Participating Preferred Stock ("Series A Preferred"). Holders of the shares of Series A Preferred are entitled to dividends equal to 1,000 times dividends declared or paid on the Company's common stock. Each share of Series A preferred entitles the holder to 1,000 votes on all matters submitted to the holders of common stock. The Series A Preferred has a liquidation preference of a $1,000 per share, and is not redeemable by the Company or the holder. No preferred shares have been issued.
NOTE F - RIGHTS AGREEMENT
On October 30, 2001, the Company declared a dividend distribution of one preferred stock purchase right (a "Right") for each outstanding share of common stock. Each Right entitles the holder to purchase from the Company one one-thousandth (1/1,000) of a share of Series A Preferred at a price of $75 per one one-thousandth (1/1,000) of a share. Initially, the Rights will not be exercisable and will automatically trade with the common stock. The Rights become exercisable, in general, ten days following the announcement of a person or group acquiring beneficial ownership of at least 15% of the outstanding voting stock of the Company.
NOTE G - TREASURY STOCK
On February 29, 2000, the Company announced that the Board of Directors authorized a share repurchase program to acquire up to 1,500,000 shares of the Company's common stock from time to time in open market transactions. In June and July 2000, the Company purchased 900,000 shares of common stock in connection with such program.
NOTE H - LEASES
[1] CAPITAL LEASES:
The Company leases certain equipment under capital leases. Future minimum lease payments consist of the following at December 31:
2002 $ 46,000 2003 14,000 -----------
Total minimum lease payments 60,000 Less amounts representing interest 3,000 -----------
Present value of minimum lease payments 57,000 Less current maturities 43,000 -----------
Capital lease obligation, less current maturities $ 14,000 ===========
The Company applies the liability method in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse.
The components of deferred tax assets and liabilities are as follows:
December 31, --------------------------- 2001 2000 ------------ ------------ Current deferred tax assets: Accounts receivable allowances $ 691,000 $ 617,000 Inventory 532,000 683,000 ------------ ------------
1,223,000 1,300,000 ------------ ------------ Non-current deferred tax assets: Depreciation 2,035,000 1,735,000 Nondeductible compensation 438,000 276,000 Deferred rent 546,000 451,000 ------------ ------------
3,019,000 2,462,000 ------------ ------------
Deferred tax assets $ 4,242,000 $ 3,762,000 ============ ============
NOTE J - COMMITMENTS, CONTINGENCIES AND OTHER
[1] CLASS ACTION LITIGATION:
Between June and August 2000 several class action lawsuits were commenced in the United States District Court for the Eastern District of New York against the Company, Steven Madden personally, and, in some of the actions, the Company's then President and its Chief Financial Officer.
On December 8, 2000, the court consolidated these actions and appointed a lead plaintiff. On October 31, 2001, the plaintiffs served a second consolidated amended class action complaint.
STEVEN MADDEN, LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2001 AND 2000
NOTE J - COMMITMENTS, CONTINGENCIES AND OTHER (CONTINUED)
[1] CLASS ACTION LITIGATION: (CONTINUED)
The amended complaint generally alleges 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 plaintiff seeks an unspecified amount of damages, costs and expenses on behalf of the plaintiff and all other purchasers of the Company's common stock during the period June 21, 1997 through June 20, 2000. In January 2002, motions to dismiss the complaint were fully briefed. Since that time, a settlement in principle of these actions has been reached, subject to execution of definitive settlement documentation, notices to class members, a hearing and approval by the District Court. The tentative settlement is within the limits of insurance coverage (see Note J[7]).
[2] DERIVATIVE ACTIONS:
On or about September 26, 2000, a 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. 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's June 20, 2000 indictment and to require him to disgorge certain profits, bonuses and stock option grants he received from the Company. On January 3, 2001, the plaintiff filed an amended complaint. On February 2, 2001, both the Company and Mr. Madden filed motions to dismiss the amended complaint because of the plaintiff's failure to make a pre-litigation demand upon the Company's Board of Directors. On October 1, 2001, plaintiff filed a second amended complaint. On November 2, 2001, the Company filed a motion to dismiss this pleading on the grounds that plaintiff had failed to make a pre-litigation demand upon the Company's board of directors. In February 2002, the magistrate judge filed a report recommending that the Company's motion to dismiss be denied. On March 4, 2002, the Company filed its objection to the Magistrate Judge's report. The Company believes, after consultation with counsel, that its defense costs and certain attorney fees in connection with this action will be subject to coverage by the Company's insurance as supplemented by the loss mitigation policy described below. The liability resulting from this derivative complaint, if any, cannot presently be determined.
In November 2001, a purported shareholder derivative complaint was filed in the United States District Court for the Eastern District of New York, captioned Herrera v. Karson, et al. Named as defendants therein are the Company (as nominal defendant) and certain of the Company's present and/or former directors. The complaint alleged that the individual defendants breached their fiduciary duties to the Company in connection with a decision by the Board of Directors of the Company to enter into an employment agreement with Mr. Steven Madden in May 2001. The complaint seeks declaratory and other equitable relief, as well as an unspecified amount of compensatory damages, costs and expenses. On or about February 1, 2002, plaintiff filed an Amended Shareholder Derivative Complaint (the "Amended Complaint"). The Amended Complaint contains substantially the same allegations and names the same defendants as the original complaint. The Company believes, after consultation with counsel, that its defense costs and certain attorney fees in connection with this action will be subject to coverage by the Company's insurance as supplemented by the loss mitigation policy described below. The liability resulting from this derivative complaint, if any, cannot presently be determined.
[3] OTHER MATTER:
In March 2001, the Company became aware that the SEC issued a formal order of investigation with respect to trading in the Company's securities. The SEC is investigating possible securities law violations. Certain officers and directors of the Company sold shares of the Company's common stock prior to Mr. Madden's indictment in June 2000, as previously disclosed on Form 4's filed with the SEC. The ultimate effects of this matter, if any, cannot reasonably be determined at this time.
STEVEN MADDEN, LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2001 AND 2000
NOTE J - COMMITMENTS, CONTINGENCIES AND OTHER (CONTINUED)
[4] BREACH OF CONTRACT SUITS:
On or about September 17, 2001, an action was commenced against the Company in the Supreme Court, Queens County, captioned Mitch Stewart v. Steven Madden, Ltd. Mr. Stewart is a former independent contractor for the Company. The complaint seeks damages of approximately $1.3 million for breach of contract. On December 20, 2001, the Company answered the complaint, denying the allegations and asserting various affirmative defenses. On January 25, 2002, the plaintiff filed a motion for partial summary judgement, which is pending. The Company believes that it has substantial defenses to the motions and the claims asserted in the lawsuit. The resulting liability, if any, cannot be presently determined.
On or about November 29, 2001, an action was commenced against the Company for breach of contract in the United States District Court, Eastern District of Texas, captioned Lina Enterprises v. Steven Madden, Ltd. Lina is a former independent contractor for the Company. The complaint seeks damages for breach of contract. The complaint does not specify the amount of damages being sought, but alleges that they are greater than $75,000. In March 2002, the Company filed a motion to dismiss the complaint. The Company believes that it has substantial defenses to the claims asserted in the lawsuit. The resulting liability, if any, cannot be presently determined.
[5] INDICTMENT:
On June 20, 2000, Steven Madden, the Company's former Chairman and Chief Executive Officer, was indicted in the United States District Courts for the Southern District and Eastern District of New York. The indictments alleged 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 Exchange Act of 1934, as amended. On May 21, 2001, Steven Madden entered into a plea agreement with the U.S. Attorney's Office, pursuant to which he pled guilty to four of the federal charges filed against him. In addition, Mr. Madden reached a separate settlement agreement with the Securities and Exchange Commission regarding the allegations contained in its complaint. As a result, Mr. Madden resigned as the Company's Chief Executive Officer and as a member of the Company's Board of Directors effective July 1, 2001. Mr. Madden has agreed to serve as the Company's Creative and Design Chief, a non-executive position. It is expected that Mr. Madden will be sentenced in April 2002. Under the settlement agreement with the Securities and Exchange Commission, Mr. Madden has agreed to not serve as an officer or director of a publicly traded company for 7 years. Neither the indictments nor the Securities and Exchange Commission complaint allege any wrongdoing by the Company or its other officers and directors.
[6] LITIGATION SETTLEMENTS:
Separate actions involving Magnum Fashions, Inc., WK Maxx Industries, Ltd. and Lee N' Gi were settled in 2000 for approximately $175,000 and have been included in operating expenses.
STEVEN MADDEN, LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2001 AND 2000
NOTE J - COMMITMENTS, CONTINGENCIES AND OTHER (CONTINUED)
[7] LOSS MITIGATION COVERAGE:
In December 2001, the Company purchased a loss mitigation policy to cover costs arising out of lawsuits related to the June 2000 federal indictment of Steve Madden, the Company's former Chief Executive Officer. The policy covers the Company's anticipated damages and legal costs in connection with such lawsuits. The Company is obligated to pay for damages and costs in excess of the policy limits. The cost of the policy was $6,950,000 and has been classified as cost of loss mitigation coverage on the accompanying statement of operations for the year ended December 31, 2001.
[8] EMPLOYMENT AGREEMENTS:
The Company has an employment agreement with Steve Madden, its former CEO and President to serve as the Company's Creative and Design Chief. The employment agreement, as amended, provides for an annual salary of $700,000 through June 30, 2011. The agreement also provides for an annual performance bonus, an annual option grant at exercise prices equal to market on the date of grant and a non-accountable expense allowance.
The Company has employment agreements with four other executives (the "executives") which expire between January 3, 2003 and December 31, 2005. These agreements provide for cash bonuses based upon earnings, option grants and non-accountable expense allowances as defined. Base salary commitment for these four executives, subject to increases, are as follows:
2000 $ 925,000 2003 658,000 2004 422,000 2005 240,000 ---------------
$ 2,245,000 ===============
In connection with their employment agreements, two of the executives received an aggregate of 20,000 shares of restricted common stock from the Company. The restricted shares vest over one year through July 2002. Accordingly, the Company has recorded a charge to operations in the amount of $188,000 for the 10,000 shares that vested during the year ended December 31, 2001 and will record a charge of $188,000 in 2002 for the grant of such restricted shares.
[9] LETTERS OF CREDIT:
At December 31, 2001 and 2000, the Company had open letters of credit for the purchase of imported inventories of approximately $6,252,000 and $6,142,000, respectively.
The following is a summary of cost in excess of fair value and related accumulated amortization for the years ended December 31,:
NOTE K - OPERATING SEGMENT INFORMATION
The Company's reportable segments are primarily based on methods used to distribute its products. The wholesale and retail segments derive revenue from sales of women's, men's and girl's footwear. The wholesale segment, through sales to department and specialty stores, and the retail segment through operation of its own retail stores, derive revenue from sales of branded women's, men's and girl's footwear. In addition, the wholesale segment has a licensing program that extends the Steve Madden and Stevies brands to accessories and ready-to-wear apparel. The other segment represents activities of a subsidiary which earns commissions for serving as a buying agent to mass-market merchandisers, shoe chains and other off-price retailers with respect to their purchase of private label shoes.
(a) Attributed to the United States, based on the location in which the sale originated. (b) All long-lived assets, consisting of property and equipment and cost in excess of fair value of net assets acquired, are located in the United States. (c) Loss mitigation coverage expense of $6,950,000 reflected in wholesale segment.
(a)(2) Financial Statement Schedules
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are not applicable and therefore, have been omitted.
(b) Reports on Form 8-K
(1) Report on Form 8-K dated September 21, 2001 filed with the Securities and Exchange Commission on October 5, 2001 with respect to Item 5.