UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003 Commission File Number 0-23702
STEVEN MADDEN, LTD.
(Exact name of registrant as specified in its charter)
Delaware 13-3588231
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
52-16 Barnett Avenue, Long Island City, New York 11104
(Address of principal executive offices) (Zip Code)
(718) 446-1800
(Registrant's Telephone Number, Including Area Code)
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.0001 per share
Preferred Stock Purchase Rights
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [X] No [ ].
The aggregate market value of the common equity held by non-affiliates of
the registrant (assuming for these purposes, but without conceding, that all
executive officers and Directors are "affiliates" of the registrant) as of June
30, 2003, the last business day of the registrant's most recently completed
second fiscal quarter, was approximately $281,283,263 (based on the closing sale
price of the registrant's common stock on that date as reported on The Nasdaq
National Market).
The number of outstanding shares of the registrant's common stock as of
March 9, 2004 was 13,323,905 shares.
DOCUMENTS INCORPORATED BY REFERENCE:
PART III INCORPORATES CERTAIN INFORMATION BY REFERENCE FROM THE
REGISTRANT'S DEFINITIVE PROXY STATEMENT FOR THE ANNUAL MEETING OF STOCKHOLDERS
SCHEDULED FOR MAY 21, 2004.
TABLE OF CONTENTS
Page
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ITEM 1 BUSINESS..........................................................1
ITEM 2 PROPERTIES........................................................8
ITEM 3 LEGAL PROCEEDINGS.................................................9
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..............10
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS........................ ...................10
ITEM 6 SELECTED FINANCIAL DATA..........................................12
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS......................................13
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.......24
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA......................24
ITEM 9 CHANGES IN AND DISAGREEMENTs WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE............................24
ITEM 9A CONTROLS AND PROCEDURES..........................................24
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...............25
ITEM 11 EXECUTIVE COMPENSATION...........................................25
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT and Related Stockholder Matters.....................25
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................25
ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES...........................25
PART IV
ITEM 15 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K......................................................25
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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 website, department and specialty stores throughout the United
States and Canada and through special distribution arrangements in Europe and in
Central and South America. 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 seven (7)
brands: Steve Madden(R), Steven(R), l.e.i.(R), Candie's(R), Stevies(R),
Unionbay(R) and the Steve Madden Mens brand. Steven Madden Retail, Inc., the
Company's wholly-owned retail subsidiary, operates Steve Madden, Steven and Shoe
Biz retail stores as well as the Company's outlet store and e-commerce website.
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 large mass merchandisers. The Company also licenses its Steve
Madden(R) trademark 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 has established a reputation for its creative designs, popular styles
and quality products at accessible price points. 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.
The Company's website is http://www.stevemadden.com. This website primarily
operates as an internet store where the Company's customers can purchase
numerous styles of the Company's Steve Madden and Steve Madden Mens footwear
products. At this time, the Company's Annual Reports on Form 10-K; Quarterly
Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to such
reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934, as amended, are not made available on the Company's
website because the website is not equipped to make such filings available. The
Company is looking into alternatives which will enable it to make such filings
available on its website. The Company will provide paper copies of such filings
free of charge upon request.
Wholesale Divisions
Madden Women's Wholesale
The Steve Madden(R) Women's Wholesale Division ("Madden Women's Wholesale")
designs, produces, 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. 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), Madden Women's Wholesale creates and
markets fashion forward footwear designed to appeal to customers seeking
exciting, new footwear designs at affordable prices.
As the Company's largest division, Madden Women's Wholesale accounted for
$109,285,000 of net sales in 2003, or approximately 34% of the Company's total
sales. Many newly created styles of Madden Women's Wholesale are test marketed
at the Company's retail stores. Within a few days, the Company can determine if
the 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.
l.e.i.(R) - Wholesale Division
Pursuant to the Company's license agreement with Jones Investment Company,
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
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known for jeanswear in the junior marketplace sold 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 net sales of $60,623,000 for the year ended December 31,
2003, or approximately 19% of the Company's total revenues.
Madden Men's Wholesale
The Steve Madden Men's Wholesale Division ("Madden Men's Wholesale")
markets a full collection of directional young men's shoes through major
department stores, better specialty stores and independent shoe stores
throughout the United States. Price points range from $70 to $100 at retail,
targeted at men ages 18 to 44 years old.
Madden Men's Wholesale accounted for $34,881,000 of net sales in 2003, or
approximately 11% of the Company's total sales. Madden Men's Wholesale, which is
primarily produced in China, maintains open stock inventory positions in select
patterns to serve the replenishment programs of its wholesale customers.
Candie's Footwear
On May 12, 2003 the Company entered into a long-term license agreement with
Candie's, Inc. to design, manufacture, and distribute Candie's(R) branded
footwear for women and children worldwide through the Company's Candie's(R)
division. The Candie's(R) footwear line has been an important resource for
fashion and casual footwear primarily for young women and girls for over two
decades. The Candie's(R) division, which began shipping product in the fourth
quarter of 2003, generated net sales of $938,000 for the year ended December 31,
2003.
Diva Acquisition Corp. - Steven(R) Wholesale Division
Diva Acquisition Corp. ("Steven") designs and markets women's fashion
footwear under the "Steven(R)" trademark through major department and better
footwear specialty stores and one (1) Company owned retail shoe store located in
New York, New York. Priced a tier above the Steve Madden(R) brand, Steven'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 Steven(R) brand of $12,519,000 for the year
ended December 31, 2003, or approximately 4% of the Company's total net sales.
Stevies Inc. - Wholesale Division
The Company's Stevies Wholesale Division ("Stevies Wholesale") generated
net sales of $10,120,000 for the year ended December 31, 2003, or approximately
3% of the Company's total net sales. Stevies(R) products are marketed through
department stores such as May Department Stores, Belk, Limited Too, as well as
independent children's stores throughout the country.
Unionbay Men's Footwear
On January 7, 2003, the Company entered into a long-term license with
Seattle Pacific Industries, Inc., under which the Company has the right to use
the Unionbay(R) trademark in connection with the sale and marketing of footwear
for men and boys. Unionbay(R) is known for casual apparel in the young men,
junior and children's marketplace and is distributed nationally through
department and specialty stores. The Unionbay(R) division, which began shipping
product in the third quarter of 2003, generated net sales of $320,000 for the
year ended December 31, 2003.
Steven Madden Retail, Inc. - Retail Division
As of December 31, 2003, the Company owned and operated seventy-six (76)
retail shoe stores under the Steve Madden(R) name, one (1) under the Steven(R)
name, five (5) outlet stores and one (1) Internet store (through the
www.stevemadden.com website). In 2003, the Company opened six (6) new stores and
closed three (3) under-performing stores. Most of the Steve Madden stores are
located in major shopping malls in Arizona, California, Colorado, Connecticut,
District of Columbia, Florida, Georgia, Illinois, Louisiana, Maryland,
Massachusetts,
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Michigan, Minnesota, Nevada, New Jersey, New York, Ohio, Pennsylvania, Puerto
Rico, Rhode Island, Texas, Virginia and Wisconsin. The retail stores generated
annual sales in excess of $644 per square foot. Sales are primarily from the
sale of the Company's Steve Madden(R) product line. Comparative store sales
decreased 4% in 2003 compared to 2002 while growth in sales was generated by new
stores. Total sales for the retail division were $95,518,000 for 2003. Sales
from the retail division for the year ended December 31, 2003 were approximately
29% of the Company's net sales.
The Company believes that the retail division will continue to enhance
overall sales and profits of the Company while building equity in the Steve
Madden brand. The Company plans to add eight to ten (8-10) new retail stores
during 2004. The expansion of the retail division enables the Company to test
and react to new products and classifications which, in turn, 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 value-priced retailers in
connection with their procurement of private label shoes. As a buying agent, A-M
arranges for shoe manufacturers to produce 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 and design capabilities. Currently, this division serves as a buying
agent for the procurement of women's, men's and children's footwear for large
retailers including Sears, Payless, Wal-Mart and Target. A-M receives buying
agent's commissions from its clients. The private label division generated
commission income of $5,056,000 for the year ended December 31, 2003.
Licensing
As of December 31, 2003, the Company licensed its Steve Madden trademark
for use in connection with the manufacturing, marketing and sale of outerwear
(including leather outerwear), belts, 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 specified net sales targets are
not achieved and a percentage of sales for advertising of the Steve Madden(R)
brand.
Design
The Company has established a reputation for its creative designs, popular
styles and quality products at affordable 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 act 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 future 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
offered to 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 mitigate the risk of
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 manufacturing facility 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. 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.
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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 regular
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. 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 consist principally of department stores and
specialty stores, including shoe boutiques. Presently, the Company sells
approximately forty-one percent (41%) 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, Lord and Taylor and Robinsons May), Dillard's, Marshall
Field's and Nordstrom; and approximately forty percent (40%) to specialty
stores, including Journeys, Limited Too and Mandees; and catalog retailers,
including Victoria's Secret and Fingerhut. For the year ended December 31, 2003,
May Department Stores and Federated Department Stores accounted for
approximately fourteen percent (14%) and thirteen percent (13%) of the Company's
wholesale sales, respectively.
Distribution Channels
The Company sells its products principally through its Company-owned retail
stores, department stores, specialty shoe stores and discount stores in the
United States and abroad. For the year 2003, retail stores and wholesale sales
accounted for approximately twenty-nine percent (29%) and seventy-one percent
(71%) of total sales, respectively. The following paragraphs describe each of
these distribution channels.
Steve Madden and Steven Retail Stores
As of December 31, 2003, the Company operated seventy-seven (77)
Company-owned retail stores (including one Internet store) under the Steve
Madden(R) name and one (1) under the Steven(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 also 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 Steven(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.
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Outlet Stores
Shoe Biz, Inc., a wholly owned subsidiary of the Company ("Shoe Biz"),
operates five (5) outlet stores in New Jersey and New York, four (4) of which
operate under the Shoe Biz name and one (1) of which operates as a Steve Madden
Outlet store. Shoe Biz sells many product lines, including Steve Madden, Steven,
Stevies and l.e.i.(R) footwear, at a price lower than typically charged by other
"full price" retailers.
Department Stores
The Company currently sells to over 2,750 doors of twenty-two (22)
department stores throughout the United States and Canada. The Company's major
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, Lord and Taylor and Robinsons May), Nordstrom, Dillard's and
Marshall Field's.
The Company provides merchandising support to its department store
customers which includes in-store fixtures and signage, supervision of displays
and merchandising of the Company's various product lines. The Company's
wholesale merchandising effort includes 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 senior account
executives 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 major 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 one (1) Internet website: www.stevemadden.com.
Customers can purchase numerous styles of the Company's Steve Madden, Steven and
Steve Madden Mens footwear, accessory and clothing products. Sales derived from
the Company's Internet store increased 8% to $5,200,000 in 2003 from $4,800,000
in 2002.
Distribution Agreements
In June 2002, the Company and Dabsan International, S.A. ("Dabsan") entered
into an agreement whereby the Company granted Dabsan the exclusive right to sell
Steve Madden products in certain Central and South American countries and the
right to develop Steve Madden retail stores in certain Central and South
American countries. Under the terms of the agreement, Dabsan is required to open
two (2) Steve Madden stores by October 31, 2004 and is also required to purchase
certain minimum amounts of Steve Madden shoes.
In February 2003, the Company and F.E.E.T. sas ("FEET") entered into a
distribution and license agreement whereby the Company granted FEET the
exclusive right to sell Steve Madden products in certain European countries with
a provision that expands the territory covered to include certain additional
European countries and in North Africa. Under the terms of the agreement, FEET
is required to purchase certain minimum amounts of Steve Madden shoes.
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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 Diesel, 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 Dr. Martin.
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 focused 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 website (www.stevemadden.com)
where consumers can purchase Steve Madden(R), Steven and Steve Madden Mens
products and interact with both the Company and other customers.
The Company commenced a marketing campaign for the Stevies brand with
separate marketing, advertising, promotional events and in-store displays
targeting the 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 eighteen 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 department and specialty
stores. The sales representatives are supported by the Company's senior
executives, a staff of fifteen account executives, one merchandise coordinator
and twenty-seven customer service representatives who continually cultivate
relationships with wholesale customers. This group of professionals assist
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.
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
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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 for the period beginning June 30, 2002 through
December 31, 2004. 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 TEE (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), SHOE BIZ By STEVE MADDEN (Int'l Cl. 25 for clothing and footwear; and
Int'l Cl. 35 for retail store services) and STEVEN M. (Int'l Class 25 for
clothing and footwear). Additionally, the Company has several pending trademark
and service mark applications in the United States for various marks, including
a stylized "H" Design (Int'l Cl. 25 for clothing and footwear), TEST & REACT
(Int'l Cl. 42 for services consisting of conducting market studies), STEVEN
(Int'l Cl. 25 for clothing and footwear) and TORCH STRIPE (Int'l Cl. 25 for
footwear). The Company also has pending trademark and service mark applications
in China and the 15 cooperating countries in Europe for TORCH STRIPE (Int'l Cl.
25 for footwear).
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, Bahrain, Brazil, Canada, Chile, China, Colombia, Hong
Kong, Israel, Italy, Japan, Korea, Lebanon, Mexico, the Netherlands, 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,
Belize, Costa Rica, El Salvador, Guatemala, Honduras, Korea, Kuwait, Lebanon,
Malaysia, Oman, Peru, Qatar, Saudi Arabia, Turkey, the United Arab Emirates and
Venezuela. Additionally, the Company owns registrations for the STEVEN trademark
and service mark in various International Classes in Hong Kong, Lebanon and
Japan and has pending applications for registration of the STEVEN trademark and
service mark in Canada, China, Israel, Italy, Japan, Korea, Malaysia, Oman,
Qatar, South Africa, Saudi Arabia, Taiwan, Thailand, Turkey, the United Arab
Emirates and the United States. 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, Japan,
South Africa and the 15 cooperating countries in Europe and for its D. AARON
trademark in Spain. Also, the Company own registrations for the DAVID AARON
trademark in International Class 3 for perfume and cosmetics; International
Class 9 for eyewear; International Class 14 for jewelry; International Class 16
for paper goods; International Class 18 for bags; International Class 24 for bed
and bath products; International Class 25 for clothing and footwear and
International Class 26 hair accessories in Korea. 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 various
registrations for the STEVIES and STEVIES plus Design trademark and service mark
in a number of International Classes in the United States (Int'l Cl. 18 for
leather goods, such as handbags and wallets; Int'l Cl. 9 for eyewear;
International Class 35 for retail store services and, International Class 26 for
hair accessories) and for its STEVIES plus Design mark for various goods in
Argentina, Bahrain, China, Hong Kong, Israel, Japan, Korea, Lebanon, Mexico,
Taiwan and the 15 cooperating countries in Europe. Additionally Stevies, Inc.
has several pending trademark and service mark applications for
-7-
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. 14 for jewelry; Int'l Cl. 28 for toys; Int'l Cl. 26 for hair
accessories; International Class 16 for paper goods; International Class 3 for
perfume and cosmetics and, International Class 9 for CDs and eyewear) and in
Brazil, Canada, Colombia, Indonesia, Kuwait, Malaysia, Mexico, Oman, Panama,
Peru, Qatar, Saudi Arabia, South Africa, Thailand, Turkey, 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
On March 4, 2004, the Company employed approximately 1,150 employees, of
whom approximately 500 work on a full-time basis and approximately 650 work on a
part-time basis. The management of the Company considers relations with its
employees to be good.
ITEM 2 PROPERTIES
The Company maintains approximately 33,000 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 on June 30,
2008.
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 on February 28, 2013.
The Company also maintains a 1,080 square foot showroom located at 2300
Stemmons Freeway, Dallas, Texas. The lease for this showroom expires on
September 30, 2004.
Currently, the Company engages three independent distributors to warehouse
and distribute its products.
The Company's private label division, Adesso Madden, maintains
approximately 3,120 square feet of office and showroom space at 99 Seaview
Boulevard, Port Washington, N.Y. The lease for Adesso Madden expires on May 31,
2006.
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
------------------------ ----------------
2004 2
2005 4
2006 2
2007 6
2008 12
2009 10
2010 11
2011 15
2012 9
2013 11
-8-
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.
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, an agreement has been reached to
resolve all claims in this action, subject to notices to the putative 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. On March 22, 2002, the District Judge entered an order adopting the
Magistrate Judge's report and recommendation in full. Since that time, an
agreement has been reached to resolve all claims in this action, subject to such
notice to the Company's shareholders (if any) as may be required by the District
Court, a hearing and approval by the District Court. 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.
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
-9-
Amended Shareholder Derivative Complaint (the "Amended Complaint"). The Amended
Complaint contains substantially the same allegations and names the same
defendants as the original complaint. Since that time, an agreement has been
reached to resolve all claims in this action, subject to such notice to the
Company's shareholders (if any) as may be required by the District Court, a
hearing and approval by the District Court. 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.
Other Actions
The Company and certain of the Company's present and/or former directors
have been named in an action commenced in the United States District Court for
the Eastern District of New York by the Safeco Surplus Lines Insurance Company
captioned, Safeco Surplus Lines Ins. Co. v. Steven Madden Ltd., et al., 02 CV
1151 (JG). The complaint principally seeks rescission of the excess insurance
policy issued by Safeco to the Company for the February 4, 2000 to June 13, 2001
period and an order declaring that Safeco does not owe any indemnity obligation
to the Company or any of its officers and directors in connection with the
putative shareholder class action and derivative cases described in the Form 10Q
filed by the Company for the quarter ended March 31, 2002. The parties have
agreed to a resolution of Safeco's claims, the implementation of which is
conditioned upon judicial approval of the settlements of the shareholder class
action and derivative claims discussed above.
On or about June 6, 2003, an action was commenced in the United States
District Court for the Central District of California, captioned Global Brand
Marketing, Inc. v. Steve Madden LTD., Case Number 03-4029. The complaint seeks
injunctive relief and unspecified monetary damages for infringement of two
separate patents. The Company believes it has substantial defenses to the claims
asserted in the lawsuit. The parties are currently involved in settlement
negotiations.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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, 2003.
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's shares of common stock trade on The Nasdaq National Market.
The following table sets forth the range of high and low bid quotations for the
Company's Common Stock for the two year period ended December 31, 2003 as
reported by The Nasdaq National Market. The quotes represent inter-dealer prices
without adjustment or mark-ups, mark-downs or commissions and may not
necessarily represent actual transactions. The trading volume of the Company's
securities fluctuates and may be limited during certain periods. As a result,
the liquidity of an investment in the Company's securities may be adversely
affected.
-10-
Common Stock
High Low High Low
------ ------ ------ ------
2003 2002
Quarter ended 19.35 14.83 Quarter ended 17.79 13.32
March 31, 2003 March 29, 2002
Quarter ended 22.35 15.27 Quarter ended 20.25 15.79
June 30, 2003 June 28, 2002
Quarter ended 22.34 18.76 Quarter ended 19.79 13.43
September 30, September 30,
2003 2002
Quarter ended 22.65 18.98 Quarter ended 18.85 13.59
December 31, December 31,
2003 2002
On March 10, 2004, the final quoted price as reported by The Nasdaq
National Market was $19.52 for each share of common stock. As of March 2, 2004,
there were 13,223,905 shares of Common Stock outstanding, held of record by 65
record holders and approximately 3,254 beneficial owners.
Absence of Dividends. The Company did not declare or pay cash dividends
during the two year period ended December 31, 2003. 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.
Equity Compensation Plans. Information regarding our equity compensation
plans as of December 31, 2003 is disclosed in Item 12. "Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder Matters."
-11-
ITEM 6 SELECTED FINANCIAL DATA
The following selected financial data has been derived from the Company's
audited financial statements. The Income Statement Data relating to 2003, 2002,
2001, 2000 and 1999 and the Balance Sheet Data as of December 31, 2003, 2002,
2001, 2000 and 1999 should be read in conjunction with the Company's audited
consolidated financial statements and notes thereto appearing elsewhere herein.
Year Ended December 31,
----------------------------------------------------------------------------
2003 2002 2001 2000 1999
------------ ------------ ------------ ------------ ------------
INCOME STATEMENT DATA:
Net sales $324,204,000 $326,136,000 $243,391,000 $205,113,000 $163,036,000
Cost of sales 198,185,000 199,453,000 143,518,000 115,495,000 94,536,000
Gross profit 126,019,000 126,683,000 99,873,000 89,618,000 68,500,000
Commissions and licensing fee 7,894,000 6,603,000 5,911,000 4,847,000 3,367,000
Operating expenses (100,287,000) (100,074,000) (79,472,000) (68,833,000) (52,946,000)
Cost of loss mitigation coverage (6,950,000)
Income from operations 33,626,000 33,212,000 19,362,000 25,632,000 18,921,000
Interest income 1,611,000 1,166,000 1,344,000 1,744,000 909,000
Interest expense (54,000) (16,000) (66,000) (102,000) (90,000)
Gain on sale of marketable
securities 136,000 66,000 71,000 230,000
Income before provision for
income taxes 35,319,000 34,428,000 20,711,000 27,504,000 19,740,000
Provision for income taxes 14,865,000 14,587,000 8,595,000 11,461,000 8,274,000
Net Income 20,454,000 19,841,000 12,116,000 16,043,000 11,466,000
Basic income per share $ 1.58 $ 1.58 $ 1.04 $ 1.42 $ 1.06
Diluted income per share $ 1.45 $ 1.45 $ 0.94 $ 1.26 $ 0.92
Basic weighted average common
shares outstanding 12,985,265 12,594,861 11,617,862 11,310,130 10,831,250
Effect of potential common shares
from exercise of options and
warrants 1,153,246 1,115,018 1,330,002 1,387,244 1,634,102
Diluted weighted average common
shares outstanding 14,138,511 13,709,879 12,947,864 12,697,374 12,465,352
BALANCE SHEET DATA
Total assets 177,870,000 150,500,000 121,862,000 91,733,000 78,135,000
Working capital 105,140,000 86,461,000 82,633,000 57,207,000 48,076,000
Noncurrent liabilities 1,828,000 1,532,000 1,313,000 1,130,000 980,000
Stockholders' equity 159,187,000 130,075,000 102,360,000 76,566,000 62,435,000
-12-
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of the Company's financial condition and results
of operations should be read in conjunction with the Financial Statements and
Notes thereto appearing elsewhere in this document.
Statements in this "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and elsewhere in this document as well as
statements made in press releases and oral statements that may be made by the
Company or by officers, directors or employees of the Company acting on the
Company's behalf that are not statements of historical or current fact
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve known and unknown risks, uncertainties and other unknown factors that
could cause the actual results of the Company to be materially different from
the historical results or from any future results expressed or implied by such
forward-looking statements. In addition to statements which explicitly describe
such risks and uncertainties, readers are urged to consider statements labeled
with the terms "believes", "belief", "expects", "intends", "anticipates" or
"plans" to be uncertain forward-looking statements. The forward-looking
statements contained herein are also subject generally to other risks and
uncertainties that are described from time to time in the Company's reports and
registration statements filed with the Securities and Exchange Commission.
The following table sets forth information on operations for the periods
indicated:
Selected Financial Information
------------------------------
Year Ended
----------
December 31
-----------
($ in thousands)
2003 2002 2001
--------------- --------------- ---------------
Consolidated:
- -------------
Net Sales $324,204 100% $326,136 100% $243,391 100%
Cost of Sales 198,185 61 199,453 61 143,518 59
Gross Profit 126,019 39 126,683 39 99,873 41
Other Operating Income 7,894 2 6,603 2 5,911 3
Operating Expenses 100,287 31 100,074 31 79,472 33
Cost of Loss Mitigation Coverage -- -- -- -- 6,950 3
Income from Operations 33,626 10 33,212 10 19,362 8
Interest and Other Income Net 1,693 1 1,216 1 1,349 1
Income Before Income Taxes 35,319 11 34,428 11 20,711 9
Net Income 20,454 6 19,841 6 12,116 5
-13-
Selected Financial Information
------------------------------
Year Ended
----------
December 31
-----------
($ in thousands)
2003 2002 2001
---------------- ---------------- ----------------
By Segment
WHOLESALE DIVISIONS:
- --------------------
Steven Madden, Ltd. (Madden Womens):
- ------------------------------------
Net Sales $ 109,285 100% $ 108,577 100% $ 92,413 100%
Cost of Sales 77,313 71 75,080 69 60,052 65
Gross Profit 31,972 29 33,497 31 32,361 35
Other Operating Income 2,827 3 1,736 2 1,462 2
Operating Expenses 27,630 25 27,714 26 24,929 27
Cost of Loss Mitigation Coverage -- -- -- -- 6,950 8
Income from Operations 7,169 7 7,519 7 1,944 2
l.e.i. Footwear:
- ----------------
Net Sales $ 60,623 100% $ 55,665 100% $ 42,592 100%
Cost of sales 38,016 63 35,368 64 26,859 63
Gross Profit 22,607 37 20,297 36 15,733 37
Operating Expenses 13,658 22 14,165 25 9,833 23
Income from Operations 8,949 15 6,132 11 5,900 14
Madden Mens:
- ------------
Net Sales $ 34,881 100% $ 45,153 100% $ 10,461 100%
Cost of sales 22,803 65 29,022 64 6,737 64
Gross Profit 12,078 35 16,131 36 3,724 36
Operating Expenses 8,277 24 10,330 23 3,340 32
Income from Operations 3,801 11 5,801 13 384 4
Candie's Footwear:
- ------------------
Net Sales $ 938 100% -- -- -- --
Cost of sales 532 57 -- -- -- --
Gross Profit 406 43 -- -- -- --
Operating Expenses 748 80 -- -- -- --
Loss from Operations (342) (37) -- -- -- --
Diva Acquisition Corp. (Steven):
- --------------------------------
Net Sales $ 12,519 100% $ 11,194 100% $ 7,454 100%
Cost of sales 8,031 64 8,117 73 5,384 72
Gross Profit 4,488 36 3,077 27 2,070 28
Operating Expenses 3,360 27 2,645 23 1,796 24
Income from Operations 1,128 9 432 4 274 4
Stevies Inc.:
- -------------
Net Sales $ 10,120 100% $ 13,664 100% $ 10,984 100%
Cost of sales 6,611 65 8,777 64 7,014 64
Gross Profit 3,509 35 4,887 36 3,970 36
Other Operating Income 11 0 97 1 249 2
Operating Expenses 2,262 22 3,205 24 2,626 24
Income from Operations 1,258 13 1,779 13 1,593 14
-14-
Selected Financial Information
------------------------------
Year Ended
----------
December 31
-----------
($ in thousands)
2003 2002 2001
--------------- --------------- ---------------
By Segment (Continued)
WHOLESALE DIVISIONS (Continued)
- -------------------------------
Unionbay Men's Footwear:
- ------------------------
Net Sales $ 320 100% -- -- -- --
Cost of Sales 213 67 -- -- -- --
Gross Profit 107 33 -- -- -- --
Operating Expenses 481 150 -- -- -- --
Loss from Operations (374) (117) -- -- -- --
STEVEN MADDEN RETAIL INC.:
- --------------------------
Net Sales $ 95,518 100% $ 91,883 100% $ 79,487 100%
Cost of Sales 44,666 47 43,089 47 37,472 47
Gross Profit 50,852 53 48,794 53 42,015 53
Operating Expenses 41,719 44 39,793 43 34,992 44
Income from Operations 9,133 9 9,001 10 7,023 9
Number of Stores 83 80 73
ADESSO MADDEN INC.:
- -------------------
(FIRST COST)
Other Operating Revenue $ 5,056 100% $ 4,770 100% $ 4,200 100%
Operating Expenses 2,152 43 2,222 47 1,956 47
Income from Operations 2,904 57 2,548 53 2,244 53
RESULTS OF OPERATIONS
($ in thousands)
Year Ended December 31, 2003 vs. Year Ended December 31, 2002
Consolidated:
-------------
Total net sales for the year ended December 31, 2003 decreased to $324,204
from $326,136 for the year ended December 31, 2002. The decrease was primarily
due to a decline in net sales from the Madden Men's and the Stevies, Inc.
Wholesale Divisions and the sustained promotional environment. The Company
maintained a substantial portion of the sales and market share gains that it
achieved in the prior year. During the year 2002, the Company generated a 34%
growth in total net sales over the previous year. Gross profit as a percentage
of sales remained the same as last year at 39%.
Operating expenses remained virtually unchanged ($100,287 in 2003 as
compared to $100,074 in 2002). Total operating expenses as a percentage of sales
remained at 31% in 2003, the same as 2002. The increase in dollars resulted from
the Company's opening of six additional retail stores and costs associated with
the addition of
-15-
Candie's and Unionbay Wholesale Divisions as well as an increase in licensing
fees paid by the Company. These increases were partially offset by various cost
reductions.
Income from operations for 2003 was $33,626, which represents an increase
of $414 or 1% from $33,212 in 2002. Net income increased by 3% to $20,454 in
2003 from $19,841 in 2002. The increase in net income primarily resulted from
the increase in interest and other income.
Wholesale Divisions:
--------------------
Steven Madden Ltd. (Madden Womens, l.e.i., Madden Mens and Candie's
Footwear):
Sales from the Madden Womens Wholesale Division ("Madden Womens") accounted
for $109,285 or 34%, and $108,577 or 33%, of total sales in 2003 and 2002,
respectively. The increase in sales was driven by first quarter sales of key
styles including the Hi-Jo boot and wood bottom sandals. Gross profit as a
percentage of sales decreased to 29% in 2003 from 31% in 2002 primarily due to
the fourth quarter closeout of slower moving styles and the support to our
wholesale customers' initiatives to clear products at retail. Operating expenses
decreased to $27,630 in 2003 from $27,714 in 2002. Income from operations for
Madden Womens was $7,169 in 2003 compared to $7,519 in 2002.
Sales from the l.e.i. Footwear Wholesale Division ("l.e.i.") accounted for
$60,623 or 19%, and $55,665 or 17%, of total sales in 2003 and 2002,
respectively. The increase in sales was principally due to additional doors with
retailers, such as Kohl's and the Saks Group. Gross profit as a percentage of
sales increased to 37% in 2003 from 36% in 2002 primarily due to changes in
product mix and improved inventory management. Operating expenses decreased to
$13,658 in 2003 from $14,165 in 2002 due to the Company successfully leveraging
its infrastructure while continuing to grow its business. Income from operations
for l.e.i. was $8,949 in 2003 compared to $6,132 in 2002.
Sales from the Madden Mens Wholesale Division ("Madden Mens") accounted for
$34,881 or 11%, and $45,153 or 14%, of total sales in 2003 and 2002,
respectively. The sales decrease resulted from two primary factors. First, the
downturn in sell-throughs at retail in the young men's fashion casual and sports
casual business created substantial inventory and margin challenges. Second,
there was a strong downturn in the casual business, the largest category of
Madden Mens, as consumer demand and trends shifted more toward dressy and dress
casual classifications. Gross profit as a percentage of sales decreased to 35%
in 2003 from 36% in 2002 primarily due to an increase in markdown allowances
caused by higher levels of promotional activities at retail. Operating expenses
decreased to $8,277 in 2003 from $10,330 in 2002, due to decreases in selling
and related expenses. Income from operations for Madden Mens was $3,801 in 2003
compared to $5,801 in 2002.
Candie's Footwear, which began shipping for the first time in the fourth
quarter of 2003, generated net sales of $938. The line was well received by both
retailers and consumers and the Company anticipates that the brand will continue
to infiltrate the market place during 2004.
Diva Acquisition Corp. ("Steven"):
Sales from Steven accounted for $12,519 or 4%, and $11,194 or 3%, of total
sales in 2003 and 2002, respectively. The increase in sales was principally due
to the addition of new retail doors, including Dillards and Macy's West. Gross
profit as a percentage of sales increased to 36% in 2003 from 27% in 2002,
primarily the result of cost effective sourcing and improved inventory
management. Operating expenses increased to $3,360 in 2003 from $2,645 in 2002
due to increases in selling, designing, marketing and advertising expenses.
Income from operations for Steven was $1,128 in 2003 compared to $432 in 2002.
Stevies Inc. ("Stevies"):
Sales from Stevies accounted for $10,120 or 3%, and $13,664 or 4%, of total
sales in 2003 and 2002, respectively. The decrease in sales was due to
diminished reorder demand. Also, the decrease in sales was partly anticipated
when Meldisco, the lease operator of the Federated Department Store children's
departments and a division of Footstar, experienced temporary credit issues
relating to its K-Mart business. This led to shipping delays and some
cancellations. Gross profit as a percentage of sales decreased to 35% in 2003
from 36% in 2002,
-16-
primarily due to an increase in promotional activity. Operating expenses
decreased to $2,262 in 2003 from $3,205 in 2002 due to decreases in selling and
selling-related expenses. Income from operations for Stevies was $1,258 in 2003
compared to $1,779 in 2002.
Unionbay Men's Footwear ("Unionbay"):
Unionbay Men's Footwear, the Company's new license generated net sales of
$320 in the second half of 2003. The product placed consists primarily of test
quantities.
Retail Division:
----------------
Sales from the Retail Division accounted for $95,518 or 29% and $91,883 or
28% of total sales in 2003 and 2002, respectively. The increase in sales was due
to the increase in number of Steve Madden retail stores. During 2003, the
Company opened six (6) new retail stores and closed three (3) of its
under-performing stores. As of December 31, 2003, there were 83 retail stores
compared to 80 retail stores as of December 31, 2002. Comparable store sales for
the year ended December 31, 2003 decreased 4% over the same period of 2002. This
decrease in sales was partially caused by the popularity of sneakers. These
offerings were available at $49.99 and below, pressuring the higher priced
casual closed shoe category. Gross profit as a percentage of sales remained at
53% in 2003, the same as in 2002. Operating expenses for the Retail Division
were $41,719 in 2003 and $39,793 in 2002. This increase was due to higher costs
associated with the opening of the six (6) additional stores during 2003. Income
from operations for the Retail Division was $9,133 in 2003 compared to $9,001 in
2002.
Adesso-Madden Division:
-----------------------
Adesso-Madden, Inc. generated commission revenues of $5,056 for the year
ended December 31, 2003, which represents a 6% increase over commission revenues
of $4,770 for the same period in 2002. This increase was primarily the result of
growth in discount retail accounts. Income from operations for Adesso-Madden was
$2,904 in 2003 compared to $2,548 in 2002.
Year Ended December 31, 2002 vs. Year Ended December 31, 2001
Consolidated:
-------------
Sales for the year ended December 31, 2002 were $326,136 or 34% higher than
the $243,391 for the year ended December 31, 2001. The increase in sales was due
in part to a $34,692 increase in sales from Madden Mens, double-digit percentage
gains in each of our other Wholesale Divisions and sales gains of $12,396 or 16%
in our Retail Division. Sales gains were attributable to greater acceptance of
the Company's product offerings and to an increase in the Company's brand
recognition as well as the Company's opening of ten additional retail stores.
Consolidated gross profit as a percentage of sales decreased to 39% in 2002
from 41% in 2001. The decrease was primarily due to sluggish business
conditions, which required increased markdowns, selling and advertising
allowances to facilitate sales in 2002 vs. 2001.
Total operating expenses increased to $100,074 in 2002 from $79,472 in
2001. Such increase resulted from expenses related to the first full year of
operations of Madden Mens, growth in other segments of business and provision
for management incentives. Advertising and marketing related expenses increased
to $7,451 in 2002 from $6,596 in 2001 because of the Company's increased focus
in this area. Selling, design and licensing expenses also increased to $18,346
in 2002 from $12,499 in 2001 because of overall growth in sales and the
Company's concentration in its design and licensing areas. Additionally,
remaining operating expenses increased to $20,007 in 2002 from $16,845 primarily
because the Company opened 10 additional retail stores during 2002. Also, total
legal expenses in 2002 increased to $2,650 from $922 in 2001 because of
incremental legal and defense costs.
Income from operations for 2002 was $33,212, which represents an increase
of $13,850 or 72% over income from operations of $19,362 in 2001. Net income
increased by 64% to $19,841 in 2002 from $12,116 in 2001. The increase in income
resulted from the growth in sales and absorption of overhead by the growth in
business. Also contributing to the increase in net income was the fact that in
2001, the Company had a non-recurring charge in the amount of $6,950 in
connection with the purchase of loss mitigation insurance coverage.
-17-
Wholesale Divisions:
--------------------
Steven Madden Ltd. (Madden Womens, l.e.i. and Madden Mens):
Sales from Madden Womens accounted for $108,577 or 33%, and $92,413 or 38%,
of total sales in 2002 and 2001, respectively. The increase in sales was driven
by the sales of key styles including euro casuals, open stock dress sandals and
classic platform round toe boots. Gross profit as a percentage of sales
decreased to 31% in 2002 from 35% in 2001 primarily due to earlier action by the
division to sell off slow moving styles to create open-to-buy for new best
sellers. In addition higher markdowns were taken by the division due to the
general softness in the economy. Operating expenses increased to $27,714 in 2002
from $24,929 in 2001 due to increases in employee incentives and performance
related expenses. Additionally, selling and designing expenses increased due to
an increase in sales in 2002. Income from operations for Madden Womens was
$7,519 in 2002 compared to $1,944 in 2001. Income from operations in 2001
included a pretax charge of $6,950 in connection with the purchase of a loss
mitigation policy.
Sales from l.e.i. accounted for $55,665 or 17%, and $42,592 or 17%, of
total sales in 2002 and 2001, respectively. The increase in sales was
principally due to the addition of new accounts with retailers including The Bon
Marche, Dayton Hudson, Stage Stores and Foot Action and higher sales of key
styles such as euro casual and lug bottom casuals. Gross profit as a percentage
of sales decreased to 36% in 2002 from 37% in 2001 primarily due to an increase
in markdown allowances caused by higher levels of promotional activities at
retail and general softness in the economy in the year 2002. Operating expenses
increased to $14,165 in 2002 from $9,833 in 2001 due to increased sales
commission, freight out and licensing costs as well as employee incentives and
performance related expenses. Income from operations for l.e.i. was $6,132 in
2002 compared to $5,900 in 2001.
Sales from Madden Mens, which commenced shipping in the first quarter of
2001, accounted for $45,153 or 14%, and $10,461 or 4%, of total sales in 2002
and 2001, respectively. The sales increase resulted from doubling the number of
Madden Mens doors and wider acceptance of Madden Mens products throughout the
department store distribution channels. Sales were driven by key styles
including euro casual and the sport-active look. Gross profit as a percentage of
sales remained at 36% in 2002, the same as 2001. Operating expenses increased to
$10,330 in 2002 from $3,340 in 2001 due to increases in payroll and other
payroll-related expenses, which were due to growth in the business, and the fact
that year 2002 was the first full year of operation for this product line.
Additionally, selling and designing expenses increased due to the increase in
sales in 2002. Madden Mens income from operations increased to $5,801 in 2002
compared to $384 in 2001.
Diva Acquisition Corp. ("Diva"):
Sales from Diva accounted for $11,194 or 3%, and $7,454 or 3%, of total
sales in 2002 and 2001, respectively. The increase in sales was achieved partly
through the third quarter inclusion of sales of products from the newly
introduced Steven brand (which had net sales of $860 in 2002) within the Diva
division. The increase in sales was also driven by key styles including pointy
toe dress shoes, sport active shoes, driving moccasins and mid-heel dress shoes.
Gross profit as a percentage of sales decreased to 27% in 2002 from 28% in 2001,
primarily due to an increase in markdown allowances, resulting from higher
levels of promotional activities caused by general softness in the economy in
2002. Operating expenses increased to $2,645 in 2002 from $1,796 in 2001 due to
increases in payroll and other payroll-related expenses due to the growth in the
business. Additionally, selling and related expenses increased due to the
increase in sales in 2002. Diva's income from operations increased to $432 in
2002 compared to $274 in 2001.
Stevies Inc.
Sales from Stevies accounted for $13,664 or 4%, and $10,984 or 5%, of total
sales in 2002 and 2001, respectively. The increase in sales was driven by the
addition of new accounts with retailers including Meldisco children's
departments, Zutopia, and the Wet Seals' children's division. This increase in
sales was also due to the growth in accounts such as Limited Too, Journey's
Kidz, Nordstrom and Filenes. Gross profit as a percentage of sales remained at
36% in 2002 same as 2001. Operating expenses increased to $3,205 in 2002 from
$2,626 in 2001 due to increases in payroll and other payroll-related expenses.
Additionally, selling and related expenses increased due to an increase in sales
in the current period. Stevies income from operations increased to $1,779 in
2002 compared to $1,593 in 2001.
-18-
Retail Division:
----------------
Sales from the Retail Division accounted for $91,883 or 28% and $79,487 or
33% of total sales in 2002 and 2001, respectively. This increase in sales was
due to the increase in the number of Steve Madden retail stores as well as an
increase in comparable store sales. During 2002, the Company opened ten (10) new
stores and closed three (3) of its low performing stores. As of December 31,
2002, there were 80 retail stores compared to 73 stores as of December 31, 2001.
Comparable store sales for the year ended December 31, 2002 increased 6% over
such sales in 2001. This increase was achieved through the early delivery of
fresh products to the Company's stores and the prompt replenishment of inventory
in season. Additionally the increase in sales was driven by key styles including
women's dress and casual shoes as well as an increase in the sale of men's
footwear in the Company's retail stores. Gross profit as a percentage of sales
remained at 53% in 2002, the same as 2001. Operating expenses for the Retail
Division increased to $39,793 or 43% of sales in 2002 from $34,992 or 44% of
sales in 2001. This increase primarily resulted from the addition of new stores.
Income from operations for the Retail Division was $9,001 in 2002 compared to
$7,023 in 2001.
Adesso-Madden Division:
-----------------------
Adesso-Madden, Inc. generated commission revenues of $4,770 for the year
ended December 31, 2002, which represents a 14% increase over commission
revenues of $4,200 in 2001. This increase was primarily due to the growth in
accounts such as Wal-Mart, Target, JC Penney and Mervyn's and the addition of
children's products to the assortment mix. Operating expenses increased to
$2,222 in 2002 from $1,956 in 2001 due to increases in payroll and other
payroll-related expenses. Income from operations for Adesso-Madden was $2,548 in
2002 compared to $2,244 in 2001.
LICENSE AGREEMENTS
Revenues from licensing increased to $2,838 in 2003 from $1,833 in 2002.
Revenue from the license product increased resulting in higher royalty income.
As of December 31, 2003, the Company had six license partners covering six
product categories of its Steve Madden brand. The product categories include
handbags, hosiery, sunglasses, eyewear, belts and outerwear.
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $105,140 at December 31, 2003 compared
to $86,461 of working capital at December 31, 2002, representing an increase of
$18,679. The Company's 2003 net income was the primary contributor to the
increase in working capital. The Company believes that based upon its financial
position and available cash and marketable securities, it will meet all of its
financial commitments and operating needs for at least the next twelve months.
Under the terms of a factoring agreement with Capital Factors, Inc., the
Company is eligible 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 expires December 31, 2004. 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 them. Under the agreement,
the Company has a credit line of $15 million dollars. The Company did not use
any portion of the credit line during 2003.
As of December 31, 2003 the Company had invested approximately $32,659 in
marketable securities consisting of corporate bonds, U.S. Treasury notes and
government asset-backed securities.
OPERATING ACTIVITIES
During the year ended December 31, 2003, net cash provided by operating
activities was $7,903. Uses of cash was caused primarily by an increase in
factored accounts receivable of $6,583, an increase in prepaid expenses, prepaid
taxes, deposits and others of $5,535 and a decrease in accrued incentive
compensation of $2,234. In addition, inventory increased by $4,413 principally
due to the early receipt of spring 2004 merchandise. Sources of cash were
provided principally by net income of $20,454.
-19-
At December 31, 2003, the Company had un-negotiated open letters of credit
for the purchase of imported merchandise of approximately $7,458.
The Company has an employment agreement with Steve Madden, its Creative and
Design Chief, which 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 the market price on the date of grant
and a non-accountable expense allowance.
The Company has employment agreements with certain executives, which
provide for the payment of compensation aggregating approximately $1,818 in
2004, $1,060 in 2005 and $234 in 2006. In addition, such employment agreements
provide for incentive compensation based on various performance criteria as well
as other benefits.
Significant portions of the Company's products are produced at overseas
locations, the majority of which are located in Brazil, China, Italy and Spain.
The Company has not entered into any long-term manufacturing or supply 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. In addition, the Company currently makes
approximately ninety-seven percent (97%) of its purchases in U.S. dollars.
INVESTING ACTIVITIES
During the year ended December 31, 2003, the Company invested $47,059 in
marketable securities and received $36,785 from maturities and sales of
securities. In addition, the Company incurred capital expenditures of $6,061
principally for leasehold improvements to its corporate office space, the
addition of six (6) new stores and computer systems upgrades.
FINANCING ACTIVITIES
During the year ended December 31, 2003, the Company received $4,805 in
connection with the exercise of stock options.
INFLATION
The Company does not believe that the relatively low rates of inflation
experienced over the last few years in the United States, where it primarily
competes, have had a significant effect on sales, expenses or profitability.
CONTRACTUAL OBLIGATIONS
The Company's contractual obligations as of December 31, 2003 were as
follows:
------------------------------------------------------
Payment due by period (in thousands)
- -----------------------------------------------------------------------------------------------------------------
Less than 1-3 3-5 More than
Contractual Obligations Total 1 year years years 5 years
- -----------------------------------------------------------------------------------------------------------------
Long-Term Debt Obligations $ 0 $ 0 $ 0 $ 0 $ 0
- -----------------------------------------------------------------------------------------------------------------
Capital Lease Obligations 1 1 0 0 0
- -----------------------------------------------------------------------------------------------------------------
Operating Lease Obligations 61,259 9,386 18,406 16,015 17,452
- -----------------------------------------------------------------------------------------------------------------
Purchase Obligations 7,458 7,458 0 0 0
- -----------------------------------------------------------------------------------------------------------------
Other Long-Term Liabilities (future minimum royalty payments) 23,030 240 9,490 8,750 4,550
- -----------------------------------------------------------------------------------------------------------------
Total $91,748 $17,085 $27,896 $24,765 $22,002
- -----------------------------------------------------------------------------------------------------------------
-20-
OTHER CONSIDERATIONS
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 that 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 resulting in lower sales and increased
markdown allowances for customers which 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 return to 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 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 products
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
sales and brand loyalty. Conversely, excess inventories can result in lower
gross margins due to the excessive discounts and markdowns that might be
necessary to reduce inventory levels. 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 business.
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 a
significant customer of the Company, whether motivated by competitive
conditions, financial difficulties or otherwise, to decrease the amount of
merchandise purchased from the Company 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 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 account receivable.
Impact of Foreign Manufacturers: Substantial portions of the Company's
products are currently sourced outside the United States through arrangements
with a number of foreign manufacturers in four different countries.
-21-
During the year ended December 31, 2003, approximately 85% of the Company's
products were purchased from sources outside the United States, primarily from
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 are
available. The Company cannot be certain, however, that it will be able to
identify such alternative sources without delay (if ever) or without greater
cost to the Company. 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, 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, 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 fashion 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 market 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 Diesel, 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, branding of the Steve
Madden name, fashionable styling, high quality and value are the most important
competitive factors and plans to continually
-22-
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), Stevies, Steven,
Steve Madden Mens, l.e.i.(R) , Unionbay(R) and Candie's(R) brands, creating new
product categories and businesses and operating Company-owned stores on a
profitable basis. During the year ended December 31, 2003 the Company opened six
(6) Steve Madden retail stores and has plans to open approximately eight to ten
(8-10) additional stores in the year 2004. 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 management's expectations. 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 can be maintained or will increase 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 operations have 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, inventory write downs, the cost of materials,
the product 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 the
opening of new retail stores and 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 on the
basis that they violate 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
utilization could have a material adverse effect on the Company's business,
financial condition and results of operations.
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
-23-
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 4, 2004 the Company had outstanding
options to purchase an aggregate of approximately 2,274,475 shares of Common
Stock. Holders of such options are likely to exercise them when, in all
likelihood, the market price of the Company's stock is significantly higher than
the exercise price of the options. Further, while its options are outstanding,
they may adversely affect the terms on which the Company could obtain additional
capital, if required.
Economic and Political Risks: The present economic condition in the United
States and concern about uncertainties could significantly reduce the disposable
income available to the Company's customers for the purchase of our products. In
addition, current unstable political conditions, including the potential or
actual conflicts in Iraq, North Korea or elsewhere, or the continuation or
escalation of terrorism, could have an adverse effect on the Company's business,
financial condition and results of operations.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not engage in the trading of market risk sensitive
instruments in the normal course of business. Financing arrangements for the
Company are subject to variable interest rates primarily based on the prime
rate. An analysis of the Company's credit agreement with Capital Factors, Inc.
can be found in Note C. "Due From Factor" to the Consolidated Financial
Statements included in the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 2003. On December 31, 2003 and December 31, 2002, there
were no direct borrowings outstanding under the credit agreement.
As of December 31, 2003, the Company had investments in marketable
securities valued at $32,659, which consists principally of federal and state
obligations. These obligations have various maturities through December 2008.
These investments are subject to interest rate risk and will decrease in value
if market interest rates increase. The Company currently has the ability to hold
these investments until maturity. Should there be a significant increase in
interest rates, the value of these investments would be negatively affected
unless they were held to maturity. In addition, any further decline in interest
rates would reduce the Company's interest income.
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See financial statements following Item 15 of this Annual Report on Form
10-K.
ITEM 9 CHANGES IN AND DISAGREEMENTs WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
ITEM 9A CONTROLS AND PROCEDURES
As required by Rule 13a-15(b) of the Securities Exchange Act of 1934 (the
"Exchange Act"), the Company's management, including the Company's Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of its disclosure controls and procedures as of the end of the fiscal year
covered by this annual report. Based on that evaluation, the Chief Executive
Officer and Chief Financial Officer have concluded that the Company's disclosure
controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act)
were effective as of the end of the fiscal year covered by this annual report.
As required by Rule 13a-15(d) under the Exchange Act, the Company's management,
including the Company's Chief Executive Officer and Chief Financial Officer, has
evaluated the Company's internal controls over financial reporting to determine
whether any changes occurred during the fourth quarter of 2003 that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting. Based on that evaluation,
there has been no such change during the fourth quarter of 2003.
-24-
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The other information required to be furnished pursuant to this item will
be set forth in the Company's proxy statement for the 2004 Annual Meeting of
Stockholders, and is incorporated herein by reference.
ITEM 11 EXECUTIVE COMPENSATION
The information required to be furnished pursuant to this item will be set
forth in the Company's proxy statement for the 2004 Annual Meeting of
Stockholders, and is incorporated herein by reference.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
The information required to be furnished pursuant to this item will be set
forth in the Company's proxy statement for the 2004 Annual Meeting of
Stockholders, and is incorporated herein by reference.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required to be furnished pursuant to this item will be set
forth in the Company's proxy statement for the 2004 Annual Meeting of
Stockholders, and is incorporated herein by reference.
ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required to be furnished pursuant to this item will be set
forth in the Company's proxy statement for the 2004 Annual Meeting of
Stockholders, and is incorporated herein by reference.
PART IV
ITEM 15 EXHIBITS, 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:
-25-
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Contents
Page
----
Consolidated Financial Statements
Independent auditors' report F-2
Balance sheets as of December 31, 2003 and 2002 F-3
Statements of income for the years ended December 31, 2003, 2002
and 2001 F-4
Statements of changes in stockholders' equity for the years
ended December 31, 2003, 2002 and 2001 F-5
Statements of cash flows for the years ended December 31,
2003, 2002 and 2001 F-7
Notes to financial statements F-8
F-1
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 (the "Company") as of December 31, 2003 and 2002, and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for each of the years in the three-year period ended December 31,
2003. 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 of America. 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, 2003 and 2002, 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, 2003 in conformity with accounting
principles generally accepted in the United States of America.
Eisner LLP
New York, New York
February 10, 2004
F-2
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31,
------------------------------
2003 2002
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 53,073,000 $ 56,713,000
Accounts receivable - net of allowances of $452,000 and $497,000 4,281,000 3,039,000
Due from factor - net of allowances of $1,926,000 and $1,718,000 28,748,000 22,373,000
Inventories 23,858,000 19,445,000
Marketable securities - available for sale 3,229,000 500,000
Prepaid expenses and other current assets 2,844,000 1,651,000
Prepaid taxes 4,270,000
Deferred taxes 1,692,000 1,633,000
------------- -------------
Total current assets 121,995,000 105,354,000
Property and equipment, net 18,391,000 17,073,000
Deferred taxes 5,618,000 3,699,000
Deposits and other 370,000 298,000
Marketable securities - available for sale 29,430,000 22,010,000
Cost in excess of fair value of net assets acquired - net of accumulated
amortization of $714,000 2,066,000 2,066,000
------------- -------------
$ 177,870,000 $ 150,500,000
============= =============
LIABILITIES
Current liabilities:
Capital lease obligations $ 1,000 $ 14,000
Accounts payable 11,087,000 9,044,000
Accrued expenses 5,300,000 7,134,000
Accrued incentive compensation 467,000 2,701,000
------------- -------------
Total current liabilities 16,855,000 18,893,000
Deferred rent 1,828,000 1,532,000
------------- -------------
18,683,000 20,425,000
------------- -------------
Commitments, contingencies and other
STOCKHOLDERS' EQUITY
Preferred stock - $.0001 par value, 5,000,000 shares authorized; none issued
Series A Junior Participating preferred stock - $.0001 par value, 60,000
shares authorized; none issued
Common stock - $.0001 par value, 60,000,000 shares authorized, 14,459,109
and 14,016,059 shares issued, 13,213,905 and 12,770,855 shares
outstanding at December 31, 2003 and 2002, respectively 1,000 1,000
Additional paid-in capital 79,136,000 70,683,000
Retained earnings 91,176,000 70,722,000
Unearned compensation (3,008,000) (3,476,000)
Other comprehensive gain (loss):
Unrealized (loss) gain on marketable securities (net of taxes) (127,000) 136,000
Treasury stock - 1,245,204 shares at cost (7,991,000) (7,991,000)
------------- -------------
159,187,000 130,075,000
------------- -------------
$ 177,870,000 $ 150,500,000
============= =============
See notes to financial statements
F-3
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Consolidated Statements of Income
Year Ended December 31,
-----------------------------------------------
2003 2002 2001
------------- ------------- -------------
Net sales:
Wholesale $ 228,686,000 $ 234,253,000 $ 163,904,000
Retail 95,518,000 91,883,000 79,487,000
------------- ------------- -------------
324,204,000 326,136,000 243,391,000
------------- ------------- -------------
Cost of sales:
Wholesale 153,519,000 156,364,000 106,046,000
Retail 4