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+10-K
+1
+file001.txt
+FORM 10-K
+================================================================================
+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, 2000 Commission File Number 0-23702
+STEVEN MADDEN, LTD.
+------------------------------------------------------
+(Exact name of registrant as specified in its charter)
+Delaware 13-3588231
+---------------------------- ----------------
+(State or other jurisdiction (I.R.S. employer
+of incorporation or organization) identification no.)
+52-16 Barnett Avenue, Long Island City, New York 11104
+------------------------------------------------ -----
+(Address of principal executive offices) (Zip Code)
+REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (718) 446-1800
+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
+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. [ ]
+The aggregate market value of the voting stock held by non-affiliates of
+the registrant as of March 20, 2001 was approximately $155,995,392.
+The number of outstanding shares of the registrant's common stock as of
+March 20, 2001 was 12,526,109 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 25, 2001.
+================================================================================
+TABLE OF CONTENTS
+BUSINESS.......................................................................2
+PROPERTIES....................................................................20
+LEGAL PROCEEDINGS.............................................................21
+SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS............................22
+MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.........23
+SELECTED FINANCIAL DATA.......................................................24
+MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
+AND RESULTS OF OPERATIONS.....................................................25
+QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK....................34
+FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...................................34
+CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING
+AND FINANCIAL DISCLOSURE......................................................34
+DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
+COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT OF THE REGISTRANT...........34
+EXECUTIVE COMPENSATION........................................................34
+SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................35
+CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................35
+EXHIBITS AND FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K............35
+PART I
+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 websites, catalogs and department and specialty store locations
+in the United States and Canada. The Company's product line includes core
+products, which are sold year-round, complemented by a broad range of updated
+styles which are designed to establish or capitalize on market trends.
+The Company's business is comprised of three (3) distinct segments. The
+wholesale division includes five (5) brands: Steve Madden(R), David Aaron(R),
+l.e.i.(R), Stevies(TM) and the recently introduced Steve Madden Mens brand.
+Steven Madden Retail, Inc., the Company's wholly owned retail subsidiary,
+operates Steve Madden and David Aaron retail stores as well as the Company's
+outlet stores and e-commerce web sites. The Company's wholly owned private label
+subsidiary, Adesso-Madden, Inc., designs and sources footwear products under
+private labels for many of the country's largest mass merchandisers. The Company
+also licenses its Steve Madden(R) and Stevies(TM) trademarks for several
+accessory and apparel categories.
+Steven Madden, Ltd., was incorporated as a New York corporation on July
+9, 1990 and reincorporated under the same name in Delaware in November 1998. The
+Company was founded and developed by Steven Madden, its principal designer, and
+Chief Executive Officer and former Chairman of the Board, which 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".
+RECENT DEVELOPMENTS
+In January 2000, the Company announced the launch of its new
+Stevies(TM) brand which is marketed to girls ages 6 to 12 years old. The new
+footwear line mirrors some of the design concepts and attitudes present in the
+Steve Madden(R) brand and is distributed through moderate and better department
+stores and footwear specialty stores. The Company commenced shipping Stevies'
+products in time for the most recent back-to-school season.
+During the Spring and Summer of 2000, the Company also licensed the
+Stevies(TM) trademark for additional product categories and launched the
+e-commerce website, WWW.STEVIES.COM. In light of the fact that the Company
+believed that licensing opportunities were not being fully exploited, in January
+2001 the Company engaged Jassin O'Rourke Group, LLC, a consulting firm, to
+enhance the Company's licensing efforts. In February 2001, the Company
+terminated existing licensing agreements for jewelry and hair accessories for
+the Steve Madden(R) and Stevies(TM) brands, and sportswear for the Stevies(TM)
+brand. The Company expects that, with the assistance of Jassin O'Rourke, it will
+be successful in improving its licensed product business.
+2
+On October 2, 2000, the Company announced the engagement of Bear
+Stearns & Company as financial advisor to the Company. Bear Stearns was engaged
+to explore strategic alternatives for the Company.
+In November 2000, the Company announced its plans to launch the Steve
+Madden Mens footwear line. The line is managed by the Company's wholesale
+division and is designed and marketed with the signature Steve Madden(R) brand
+name. A preview of the new line debuted at the FFANY Shoe Show in December 2000
+and select styles were shipped to retail customers for the Spring 2001 selling
+season. The full collections were unveiled in February 2001 at the MAGIC and WSA
+Shoe Shows in Las Vegas. The new men's collection is targeted towards stylish
+male consumers between the ages of 20 and 35. The line incorporates similar
+design themes present in the Steve Madden women's footwear collection with
+retail price points ranging from $79-$99 a pair.
+The Company maintains its principal executive offices at 52-16 Barnett
+Avenue, Long Island City, NY 11104, telephone number (718) 446-1800.
+STEVEN MADDEN - WHOLESALE DIVISION
+The wholesale division sources, sells and markets the Company's Steve
+Madden(R) brand to major department stores, better specialty stores, and shoe
+stores throughout the country and Canada. During the last few years the Steve
+Madden(R) product line has become a leading footwear brand in the fashion
+conscious junior marketplace. By the end of 2000, the Steve Madden brand was
+sold in approximately 3,000 doors throughout the country. To serve its customers
+(primarily women ages 16 to 25), the wholesale division creates and markets
+fashion forward footwear designed to appeal to customers seeking exciting, new
+footwear designs at reasonable prices. In November 2000, the wholesale division
+expanded its marketing plan to include a men's footwear line which targets
+fashion conscious men ages 20 to 35.
+As the Company's largest division, the Steve Madden(R) wholesale
+division accounted for $87,977,000 in sales in 2000, or approximately 43% of the
+Company's total revenues. Many of the wholesale division's newly created styles
+are test marketed at the Company's retail stores. Within a few days, the Company
+can determine if a test product appeals to customers. This enables the Company
+to use its flexible sourcing model to rapidly respond to changing preferences
+which the Company believes is essential for success in the fashion footwear
+marketplace.
+DIVA ACQUISITION CORP. - THE DAVID AARON(R) WHOLESALE DIVISION
+Diva Acquisition Corp. ("Diva") designs and markets fashion footwear to
+women under the "David Aaron(R)" trademark through major department stores and
+better footwear specialty stores and two (2) Company owned retail shoe stores
+located in the Soho area of Manhattan and in Paramus, NJ. Priced a tier above
+the Steve Madden(R) brand, Diva's products are designed to appeal principally to
+fashion conscious women, ages 26 to 45, who shop at department stores and
+footwear boutiques. As of December 31, 2000, the David Aaron brand was sold in
+approximately 652 doors across the country. The Company recorded sales from the
+David Aaron(R) brand of $3,616,000 for the year ended December 31, 2000, or
+approximately 1.8% of the Company's total revenues. Revenues from the sale of
+3
+David Aaron footwear decreased by approximately 55% compared to the preceding
+year due to the repositioning and reorganization of the David Aaron brand. The
+Company intentionally planned to reduce its volume in 2000 enabling the David
+Aaron Division to use its two retail stores to test the popularity of new
+products. The Company intends to sell its most successful David Aaron products
+at wholesale beginning in Spring 2001.
+l.e.i. (R) - WHOLESALE DIVISION
+In September, 2000, the Company renewed its license agreement with
+R.S.V. Sport, Inc. pursuant to which the Company continues to have the right to
+use the l.e.i.(R) trademark in connection with the sale and marketing of
+footwear. The l.e.i.(R) trademark is well known for jeanswear in the junior
+marketplace and nationally through department and specialty stores. The
+Company's l.e.i.(R) footwear products were targeted to attract girls ages 6 to
+11 years old and young women ages 12 to 20 years old, a majority of which are
+younger than the typical Steve Madden(R) brand customer. At year end, l.e.i.
+footwear products were sold in major department shores and footwear specialty
+shops (approximately 3,500 doors ) across the country, an increase of 40% over
+the year ending December 31, 1999. The l.e.i. Wholesale Division generated
+revenue of $37,741,000 for the year ended December 31, 2000, or approximately
+18.4% of the Company's total revenues.
+STEVIES INC. - WHOLESALE DIVISION
+In the first quarter, the Company introduced a new brand, Stevies(TM).
+Stevies(TM) is a fashion brand which targets girls ages 6-9 and "tweens" ages
+10-12. The Company's new Stevies Wholesale Division ("Stevies Wholesale")
+commenced shipping to department stores throughout the country in the second
+quarter of 2000. Stevies Wholesale generated revenue of $6,147,000 for the year
+ended December 31, 2000, or approximately 3% of the Company's total revenues.
+Stevies(TM) now sells in over 1,000 doors, including store groups such as
+Nordstroms, Federated Department Stores, May Company stores, Belks, Dillards,
+Limited Too, as well as independent children's stores throughout the country.
+The Stevies(TM) brand ended the year with over 800 Stevies(TM) concept shop
+locations and over 500 Stevies(TM) accessories concept locations which display
+accessories and slippers. The web site for Stevies (TM) at www.stevies.com went
+live in March of 2000 and commenced e-commerce operation in July 2000.
+STEVEN MADDEN RETAIL, INC. - RETAIL DIVISION
+As of December 31, 2000, the Company owned and operated fifty-six (56)
+retail shoe stores under the Steve Madden(R) name, two (2) under the David
+Aaron(R) name, six (6) outlet stores and one (1) Internet store (through the
+www.stevemadden.com, www.stevies.com, and www.stevemaddenmens.com) web sites.
+Most of the Steve Madden stores are located in major shopping malls in
+California, Colorado, District of Columbia, Florida, Georgia, Illinois,
+Maryland, Massachusetts, Michigan, Minnesota, Nevada, New Jersey, New York,
+Ohio, Pennsylvania, Rhode Island, Texas and Virginia. Each of the Steve
+Madden(R) stores has been designed to appeal to young fashion conscious women by
+creating a "nightclub" type atmosphere. The retail stores have been very
+successful for the Company, generating annual sales in excess of $700 per square
+foot. Sales are primarily from the sale of the Company's Steve Madden(R) product
+line. Same store sales increased 10% in 2000 over 1999 sales and total sales for
+4
+the retail division were $70 million compared to $49 million for 1999. Sales
+from the retail division for year ended December 31, 2000 were approximately 34%
+of the Company's total sales.
+The Company believes that the Retail Division will continue to enhance
+overall sales and profits while building equity in the Steve Madden brand. It is
+for these reasons that the Company intends to add approximately ten (10) new
+retail stores during the 2001 calendar year. Additionally, the expansion of the
+Retail Division enables the Company to test and react to new products and
+classifications which strengthens the product development efforts of the Steve
+Madden wholesale division.
+THE ADESSO-MADDEN, INC. - PRIVATE LABEL DIVISION
+In September 1995, the Company incorporated Adesso-Madden, Inc. as a
+wholly owned subsidiary ("A-M"). A-M was formed to serve as a buying agent to
+mass market merchandisers, shoe store chains and other off-price retailers in
+connection with their purchase of private label shoes. As a buying agent, A-M
+arranges with shoe manufacturers in Asia and South America for them to
+manufacture private label shoes to the specifications of its clients. The
+Company believes that by operating in the private label, mass merchandising
+market, the Company is able to maximize additional non-branded sales
+opportunities. This leverages the Company's overall sourcing, design and
+distribution capabilities. Currently, this division serves as a buying agent for
+the procurement of women's footwear for large retailers including J.C. Penny,
+Sears, Mervyn's, Payless, Wal-Mart and Target. A-M receives commissions in
+connection with the purchase of private label shoes by its clients. A-M also
+sources and sells footwear under the Soho Cobbler(R) brand name. The private
+label division generated commission revenue of $3.6 million for the year ended
+December 31, 2000.
+PRODUCTS AND LICENSING
+The Company's products emphasize youthful styling and contemporary
+design and are marketed at moderate to better price points. The Company's
+primary products include Steve Madden(R), l.e.i.(R), Stevies (TM) and David
+Aaron(R) branded footwear, and in 2001, Steve Madden Mens. In addition, the
+Company has a private label shoe operation, Adesso-Madden, Inc., and has also
+entered into strategic licensing agreements for Steve Madden(R) and Stevies
+branded products.
+STEVE MADDEN(R)
+Steve Madden(R) branded products are designed to appeal to style
+conscious consumers in the junior market (ages 16 to 25 years). The Steve
+Madden(R) line emphasizes up-to-date fashion and includes a wide range of
+women's footwear including boots, sneakers, evening shoes, slippers, casual and
+tailored shoes and sandals. Steve Madden(R) brand shoes sell at retail price
+points generally ranging from $48 to $70 for shoes and up to $99 for boots.
+In order to reduce the impact of changes in fashion trends on the Steve
+Madden(R) brand product sales, the Company designs and classifies its product
+line into three categories: Core, Core-plus, and Fashion. The Company's Core
+line is available year round and consists of classic products which have proven
+to be consistent sellers over several seasons. The Core line currently includes
+eight (8) style/color combinations each of which can be reordered using the
+Company's EDI system and shipped to retailers within one to two weeks. This
+5
+results in rapid replenishment of the most popular Steve Madden styles. The
+Company's Core-plus line consists of basic styles whose patterns and colors are
+updated each season to keep pace with changing trends. Finally, the Company's
+Fashion line consists of styles that are designed close to or in season and
+capitalize on the Company's ability to design, test, manufacture and market
+products quickly. Core and Core-plus products account for a majority of Steve
+Madden(R) brand sales.
+STEVE MADDEN MENS
+After announcing the launch of Steve Madden Mens in November 2000, the
+Company's new men's footwear line of products met with enthusiastic responses
+from buyers at tradeshows in November, 2000 and February, 2001. The Steve Madden
+Men's footwear products will be designed to capitalize on the Company's success
+for designing, sourcing and marketing popular fashion forward footwear. Many of
+the men's products will be built in the same spirit as present in the Steve
+Madden women's footwear line. With retail price points ranging from $79 to $99 a
+pair, the Company expects to sell Steve Madden Mens to department store and
+footwear specialty stores throughout the country. In order to enhance sales, the
+Company expects to have at least 50 men's concept shops located in major
+department stores by year end. By using appropriate signs, logos and display
+fixtures, the Company has created concept shops located in department stores,
+specialty stores and independent shoe stores that segregate and distinguish the
+Company's products from other footwear brands.
+DAVID AARON(R)
+The Company acquired the David Aaron(R) brand in 1996, and David
+Aaron(R) products are marketed through the Company's Diva subsidiary. David
+Aaron(R) branded products are designed to appeal to more sophisticated, career
+and fashion oriented consumers (ages 26 to 45 years) in the better market
+segment. David Aaron(R) products are priced at a tier above the Steve Madden(R)
+brand and have retail price points generally ranging from $70 to $85 for shoes
+and up to $150 for boots. Similar to the Steve Madden(R) line, the Company's
+David Aaron(R) line is organized into Core, Core-plus, and Fashion categories
+with Core and Core-plus products accounting for a large majority of David
+Aaron(R) brand sales.
+l.e.i.(R)
+In September 2000, the Company renewed its license agreement with
+R.S.V. Sport, Inc. pursuant to which the Company has the right to use the
+l.e.i.(R)trademark in connection with the sale and marketing of footwear in
+exchange for which the Company is required, among other things, to make periodic
+royalty payments based on its net sales of l.e.i.(R)footwear. The
+l.e.i.(R)trademark is well known for jeanswear in the junior marketplace and
+l.e.i.(R)jeans are sold in department and specialty stores nationwide. The
+Company's l.e.i.(R)footwear products were targeted to attract girls ages 6 to 11
+years old and young women ages 12 to 20 years old, the majority of which are
+younger than the typical Steve Madden(R)brand customer. Despite having only
+started selling l.e.i.(R) products at retail in August, 1998, sales of
+l.e.i.(R)products increased considerably in 1999 and 2000. By December 31, 2000,
+l.e.i. footwear products were sold in approximately 3,500 doors nationwide, an
+increase of approximately 40% over 1999.
+6
+STEVIES(TM)
+Stevies(TM) is a fashion brand which targets girls ages 6-9 and
+"tweens" ages 10-12. The Stevies footwear line mirrors some of the design
+concepts and attitude present in the Steve Madden(R) brand and is distributed
+through moderate and better department stores and footwear specialty stores. The
+Company commenced shipping Stevies' products in time for the most recent
+back-to-school season. By year end Stevies(TM) sold in over 1,200 doors across
+the country, including store groups such as Nordstroms, Federated Department
+Stores, May Company stores, Belk, Dillards, Limited Too, as well as children's
+independent stores throughout the country. In addition, Stevies concept shops
+have been established in approximately 815 department stores, and the Company
+expects approximately 1000 Steve's concept shops to be installed by the end of
+2001.
+LICENSING
+The Company believes that strategic licensing will enhance the Steve
+Madden and Stevies(R) brands, leverage brand equity and increase customer
+loyalty. During 1997, the Company began to license the Steve Madden(R) trademark
+selectively while attempting to maintain strict design, merchandising and
+marketing control over its licensees. In 2000, the Company commenced licensing
+the Stevies trademark shortly after announcing the launch of the Stevies
+footwear brand.
+As of December 31, 2000, the Company licensed the Steve Madden
+trademark for use in connection with the manufacturing, marketing and sale of
+outerwear (including leather sportswear), belts, handbags, sunglasses, hosiery,
+hair accessories and jewelry. Each license agreement requires the licensee to
+pay to the Company a royalty based on net sales, a minimum royalty in the event
+that net sales fail to reach specified targets and a percentage of sales for
+advertising of the Steve Madden(R) brand.
+As of March 15, 2000, the Company and its sportswear licensee, Iron
+Will Group, Inc. executed a Termination Agreement with respect to that certain
+License Agreement dated as of January 1, 1999. Iron Will Group is an affiliate
+of Jordache enterprises. The Termination Agreement required that Iron Will
+terminate its sale and distribution of Steve Madden Sportswear products on or
+before June 15, 2000.
+During 2000, the Company licensed the Stevies trademark for use in
+connection with manufacturing marketing and sale of sportswear; outerwear,
+belts, handbags, sunglasses, hosiery, fashion accessories, jewelry, hair
+accessories. In February 2001, the Company terminated existing licensing
+agreements for jewelry and hair accessories for the Steve Madden(R) and
+Stevies(TM) brands, and sportswear for the Stevies(TM) brand.
+In order to enhance the performance of the Company's licensing
+business, in January 2001 the Company engaged Jassin O'Rourke Group, LLC, a
+consulting firm specializing in marketing, management and licensing for the
+apparel industry.
+7
+DESIGN
+The Company has established a reputation for its creative designs,
+popular styles and quality products at accessible price points. Steve Madden has
+been involved in the footwear industry for over twenty (20) years and is
+responsible for the Company's overall fashion direction, maintaining direct,
+day-to-day supervision of the Company's eleven (11) person product design and
+development team.
+The Company believes that its future success will depend in substantial
+part on its ability to continue to anticipate and react to changing consumer
+demands in a timely manner. To meet this objective, the Company has developed a
+unique design process that allows it to recognize and adapt quickly to changing
+consumer demands. The Company's design team works together to create designs
+which they believe fit the Company's image, reflect current or approaching
+trends and can be manufactured in a timely and cost-effective manner. Once the
+initial design is complete, a prototype is developed, which is reviewed and
+refined prior to the commencement of limited production. Most new Steve Madden
+designs are then tested in the Steve Madden(R) retail stores. Designs that prove
+popular are then scheduled for mass production overseas and wholesale and retail
+distribution nationwide. The Company believes that its unique design and testing
+process and flexible sourcing model is a significant competitive advantage
+allowing the Company to cut mass production lead times and avoid the costly
+production and distribution of unpopular designs.
+PRODUCT SOURCING AND DISTRIBUTION
+The Company sources each of its product lines separately based on the
+individual design, styling and quality specifications of such products. The
+Company does not own or operate any mass manufacturing facilities and sources
+its branded products directly or indirectly through independently owned
+manufacturers in Brazil, China, Italy, Mexico, Spain, Taiwan and the United
+States. The Company has established relationships with a number of manufacturers
+in each country. The Company believes that this sourcing of footwear products
+minimizes its investment and inventory risk, and enables efficient and timely
+introduction of new product designs. Although the Company has not entered into
+any long-term manufacturing or supply contracts, the Company believes that a
+sufficient number of alternative sources exist for the manufacture of its
+products. The principal materials used in the Company's footwear are available
+from any number of sources, both within the United States and in foreign
+countries.
+The Company's design and distribution processes are intended to be
+flexible, allowing the Company to respond to and accommodate changing consumer
+demand. The Company's production staff tracks warehouse inventory on a daily
+basis, monitors sell through data and incorporates input on product demand from
+wholesale customers. The Company can use product feedback to adjust production
+or manufacture new products in as little as five weeks. Constant inventory
+tracking allows the Company to manage inventory on a continuous flow basis with
+the goal of optimizing inventory turns. More specifically, all inventory is
+classified into three categories: Core products, which are sold year round,
+Core-plus products which are in-season styles that are experiencing unusually
+strong sell through, and Fashion products. The Company strives to only have
+reorder inventory in selected Core and Core-plus products that are proven
+best-sellers.
+8
+The Company distributes its products primarily from three (3) third
+party distribution warehouse centers located in California, Michigan and New
+Jersey and its own distribution facility located in Florida. 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.
+In 1999, the Company expanded its use of electronic data interchange
+("EDI") quick replenishment system to its department store accounts on
+designated Core items and offered EDI to all of its significant wholesale
+accounts. Sales resulting from EDI replenishment remained unchanged during 2000
+compared to 1999. The Company believes that its flexible product introduction
+schedule and perpetual inventory control system are competitive advantages in an
+industry that is subject to high fashion risks.
+CUSTOMERS
+The Company's customers purchasing shoes consist principally of
+department stores and specialty stores, including shoe boutiques. Presently, the
+Company sells approximately sixty two percent (62%) of its products to
+department stores, including Federated Department Stores (Bloomingdales, Bon
+Marche, Burdines, Macy's and Rich's), May Department Stores (Famous Barr,
+Filene's, Foley's, Hecht's, Kaufmann's, Meier & Frank, Lord and Taylor and
+Robinsons May), Dillard's, Dayton-Hudson and Nordstrom; and approximately thirty
+eight percent (38%) to specialty stores, including Journey's, Limited Too and
+Mandees; and catalog retailers, including Victoria's Secret and Fingerhut.
+Federated Department Stores, May Department Stores and Nordstrom presently
+account for approximately twenty one percent (21%), and eighteen percent (18%)
+and eleven percent (11%) of the Company's wholesale sales, respectively.
+DISTRIBUTION CHANNELS
+The Company sells it products principally through its Company-owned
+retail stores, better department stores and specialty shoe stores in the United
+States and abroad. Retail stores and wholesale sales account for approximately
+thirty four percent (34%) and sixty six percent (66%) of total sales,
+respectively. The following paragraphs describe each of these distribution
+channels:
+STEVE MADDEN AND DAVID AARON RETAIL STORES
+As of December 31, 2000, the Company operated fifty six (56)
+Company-owned retail stores under the Steve Madden(R) name and two (2) under the
+David Aaron(R) name. The Company believes that its retail stores will continue
+to enhance overall sales, profitability, and its ability to react to changing
+consumer trends. The design, format and environment of the Steve Madden(R)
+retail stores resemble a nightclub type atmosphere which has become a popular
+destination and gathering place for young women. The David Aaron(R) store has a
+more sophisticated design and format styled to appeal to its more mature target
+audience. These stores are used as a marketing tool which allow the Company to
+strengthen brand recognition and to showcase certain of 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
+9
+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. In addition to carefully analyzing mall demographics,
+the Company also sets profitability guidelines for each potential store site.
+Specifically, the Company targets sites at which the demographics fit the
+consumer profile, the positioning of the site is well trafficked and the
+projected fixed annual rent expense does not exceed a specified percentage of
+sales over the life of the lease. By setting these standards, the Company
+believes that each store will contribute to the Company's overall profits both
+in the near- and longer-terms.
+OUTLET STORES
+In May 1998, Shoe Biz, Inc. (formerly known as Steven Madden Outlets,
+Inc.) a wholly owned subsidiary of the Company ("Shoe Biz"), purchased certain
+assets from and assumed certain liabilities of, Daniel Scott, Inc. with respect
+to its Shoe Biz outlet store located in Mineola, New York. In connection with
+the transaction, the Company hired Robert Schmertz, the former President and
+sole stockholder of Daniel Scott, as the President of Shoe Biz. Shoe Biz
+operates the six (6) outlet stores in New Jersey and New York, four (4) of which
+operate under the Shoe Biz name and two (2) of which operate as Steve Madden
+Outlet stores. Shoe Biz sells many product lines, including Steve Madden, David
+Aaron, Stevies and l.e.i.(R) footwear, at significantly lower prices than prices
+typically charged by other "full price" retailers.
+DEPARTMENT STORES
+The Company currently sells to over 2,500 locations of twenty (20)
+better department stores throughout the United States and Canada. The Company's
+top accounts include Federated Department Stores (Bloomingdale's, Bon Marche,
+Burdine's, Macy's and Rich's), May Department Stores (Hecht's, Famous Barr,
+Filene's, Foley's, Kaufmann's, Meier & Frank, Lord and Taylor and Robinson's
+May), Dillard's, Dayton-Hudson and Nordstrom.
+Department store accounts are offered merchandising support which
+includes in-store fixtures and signage, supervision of displays and
+merchandising of the Company's various product lines. An important development
+in the Company's wholesale merchandising effort is the creation of in-store
+concept shops, where a broader collection of the Company's branded products are
+showcased. These in-store concept shops create an environment that is consistent
+with the Company's image and enable the retailer to display and stock a greater
+volume of the Company's products per square foot of retail space. In addition,
+these in-store concept shops encourage longer term commitment by the retailer to
+the Company's products and enhance consumer brand awareness. As of December 31,
+2000, the Steve Madden(R) and Stevies brands were featured in over 1,200 and 815
+in-store concept shops, respectively, in leading department and specialty
+stores.
+In addition to merchandising support, the Company's customer service
+representatives maintain weekly communications with their accounts to guide them
+in placing orders and to assist them in managing inventory, assortment and
+10
+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 poor
+sales records. In addition to this account order support, the Company has
+implemented an electronic data interchange ("EDI") program which allows top
+accounts rapid size replenishment of eight (8) style/color combinations of
+certain core products within one to two weeks. EDI replenishment of key core
+styles is offered to all of the Company's retail customer accounts.
+INTERNET SALES
+In 2000, the Company updated its web site, www.stevemadden.com, and
+introduced its Stevies web site www.stevies.com in March 2000. Customers can
+purchase numerous styles of the Company's Steve Madden and Stevies footwear,
+accessory and clothing products. As a result of the Company's increased focus on
+e-commerce, sales in 2000 derived from www.stevemadden.com increased 196%
+compared with sales in 1999. For the year ended December 31, 2000, the Company's
+stevemadden.com web site recorded 156.3 million hits, 866,000 unique users and a
+sales conversions rate of approximately 7%. In August 1999, the Company signed
+an agreement with America Online pursuant to which the Company has a significant
+presence in the Shop AOL area of AOL, specifically in the footwear areas.
+As a result of the increased sales activity on the Company's web sites,
+[the Company] entered an agreement with Progressive Distribution in April 2000.
+Under the terms of the Agreement, Progressive Distribution provides
+direct-to-customer and other fulfillment services the Company's web sites
+customers, including validation of customer credit, picking, packing and
+shipment of footwear products to customers of the Company.
+In February 2001, the Company launched the SteveMaddenMens.com web
+site. Already e-commerce enabled, this newest Madden web site allows customers
+to view Steve Madden Mens products three dimensionally simply by moving a
+computer mouse.
+SPECIALTY STORES/CATALOG SALES
+The Company currently sells to specialty store locations throughout the
+United States and Canada. The Company's top specialty store accounts include
+Journey's, Limited Too and Mandees. The Company offers 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 Fingerhut and Victoria's Secret.
+COMPETITION
+The fashionable 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 fashionable footwear has encouraged the entry of many new competitors and
+increased competition from established companies. Most of these competitors,
+including Kenneth Cole, Nine West, DKNY, Skechers, Nike and Guess, may have
+significantly greater financial and other resources than the Company. The
+Company believes effective advertising and marketing, fashionable styling, high
+11
+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 will
+compete with several brands that are more established with greater consumer
+awareness, including Kenneth Cole Reaction, Skechers Collection, Tommy Hilfiger
+and Nautica.
+MARKETING AND SALES
+Prior to 1997, the Company's marketing plans relied heavily on its few
+Steve Madden(R) retail store locations and word-of-mouth referrals. In 1998, the
+Company continued to focus on creating a more integrated brand building program
+to establish Steve Madden as the leading designer of fashion footwear for
+style-conscious young women. As a result, the Company developed a national
+advertising campaign for lifestyle and fashion magazines which was also used in
+regional marketing programs such as radio advertisements, television
+commercials, outdoor media, college event sponsorship and live online chat
+forums. The Company also continues to promote its web sites (WWW.STEVEMADDEN.COM
+and WWW.STEVIES.COM) where consumers can purchase Steve Madden(R) and Stevies
+products and interact with both the Company and other customers.
+In 2000, the Company reinforced the link between Steve Madden footwear
+and the hip young music scene by joining with Atlantic Records, Sam Goody and
+Glamour magazine for the first annual Girl Band Search: a major cross-marketing
+campaign with retail stores and wholesale partners to crown the next hot girl
+band. The Company assisted in marketing this year's winner, Jill Joia, who
+publicized her Steve Madden affiliation on the David Letterman Show, and
+performed the opening act at the launch party for Steve Madden Mens in Las Vegas
+in February 2001. For the second year running, the Company also co-sponsored the
+2000 Music Video Awards.
+The Company also increased the marketing of the Steve Madden brand to
+college students in 2000. The Company targeted universities for a series of
+lively promotions, many of them tied in with musical performances, and the
+Company was one of seven vendors visiting top ten universities in the Glamour
+magazine sponsored "Venus Tour". Other promotional initiatives reached 40
+universities.
+The Company commenced an aggressive marketing campaign for the Stevies
+brand with separate marketing, advertising, promotional events and in-store
+displays targeting the new Stevies customer. In August, 2000, the Company
+initiated a nationwide, three month Stevies Model Search featuring a six-city
+mall tour and in-store promotions with Filene's, Foley, Hecht's, FAO Schwartz
+and Macy's East. Supported by strong advertising and on-line promotions, these
+in-store events featured Stevies fashion shows, Radio Disney personality
+appearances, and performances by such crowd-drawers as the boyband, DreamStreet.
+The 11-year old winner of the model search will be the subject of the 2001 ad
+campaign for consumer and trade publications, and will be featured on the
+Stevies website. 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 twelve independent sales representatives. These sales representatives
+work on a commission basis and are responsible for placing the Company's
+products with its principal customers, including better department and specialty
+stores. The sales representatives are supported by the Company's Vice President,
+12
+a staff of twelve account executives, four merchandise coordinators and twenty
+five customer service representatives who continually cultivate relationships
+with wholesale customers. This staff assists accounts in merchandising and
+assessing customer preferences and inventory requirements, which ultimately
+serves to increase sales and profitability.
+MANAGEMENT INFORMATION SYSTEMS (MIS) OPERATIONS
+Sophisticated information systems are essential to the Company's
+ability to maintain its competitive position and to support continued growth.
+The Company operates on a dual AS/400 system which provides system support for
+all aspects of its business including manufacturing purchase orders; customer
+purchase orders; order allocations; invoicing; accounts receivable management;
+real time inventory management; quick response replenishment; point-of-sale
+support; and financial and management reporting functions. The Company has a
+PKMS bar coded warehousing system which is integrated with the wholesale system
+in order to provide accurate inventory positions and quick response size
+replenishment for its customers. In addition, the Company has installed an EDI
+system which provides a computer link between the Company and certain wholesale
+customers that enables both the customer and the Company to monitor purchases,
+shipments and invoicing. The EDI system also improves the Company's ability to
+respond to customer inventory requirements on a weekly basis.
+In 2000, a new AS400 computer platform was implemented to support the
+Company's wholesale division, and at the retail division , a new system was
+installed by Applied Digital Solutions, formally STR. This in-store
+point-of-sale system is a fully functional system governing a broad range of
+transactions including layaway, gift certificates, store credit, customer
+profiles, and preferred customer packages. The Company also installed a loss
+prevention system named "Trade Watch", and a retail marketing system, Corema,
+which is fully integrated into the in-store POS system. A new retail inventory
+management system was also installed to support the Company's just-in-time
+inventory flow.
+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 one point below the Prime Rate (as defined). The agreement
+provides that Capital Factors is not required to purchase all the Company's
+receivables and requires that the Company to pay an unused line fee of .25% of
+the average daily unused portion of the maximum amount of the credit line. On
+September 1, 1998, the Company and Capital Factors amended its Factoring
+Agreement to, among other things, provide the Company with a credit line of up
+to $15,000,000, subject to certain limitations. The Company has not recently
+borrowed funds under its credit line with Capital Factors. The agreement with
+Capital Factors was renewed as of December 31, 2000 for an additional one year
+term. Capital Factors maintains a lien on all of the Company's inventory and
+receivables and assumes the credit risk for all assigned accounts approved by
+it.
+TRADEMARKS AND SERVICE MARKS
+The STEVE MADDEN and STEVE MADDEN plus Design trademarks/service marks
+have been registered in numerous International Classes (25 clothing and shoes;
+18 leather goods, such as handbags and wallets; 9 eye wear; 14 jewelry; 3
+cosmetics and perfume; 20 picture frames and furniture; 16, paper goods; 24
+13
+bedding; and, 35 retail store services) in the United States. The Company also
+has trademark registrations in the U.S. for the marks EYESHADOWS BY STEVE MADDEN
+(Int'l Cl. 9 eye wear), ICE TEA (Int'l Cl. 25 clothing), SOHO COBBLER (Int. Cl.
+9; eye wear; and, 25 clothing and shoes), SHOE BIZ By STEVE MADDEN (Int'l Cls.
+25 for shoes and clothing; and, Int'l Cl.
+35 for retail store services)
+The Company further owns registrations for the STEVE MADDEN and STEVE
+MADDEN plus Design trademarks/service marks in various International Classes in
+Argentina, Australia, Brazil, Canada, Chile, China, Colombia, Hong Kong, Israel,
+Italy, Japan, Korea, Mexico, Panama, South Africa, Taiwan, the 15 cooperating
+countries of Europe and the Benelux countries and has pending applications for
+registration for the STEVE MADDEN and STEVE MADDEN plus Design
+trademarks/service marks in Malaysia, Peru, Saudi Arabia, Thailand and
+Venezuela. There can be no assurance, however, that the Company will be able to
+effectively obtain rights to the STEVE MADDEN mark throughout all of the
+countries of the world. Moreover, no assurance can be given that others will not
+assert rights in, or ownership of, trademarks and other proprietary rights of
+the Company or that the Company will be able to successfully resolve such
+conflicts. The failure of the Company to protect such rights from unlawful and
+improper appropriation may have a material adverse effect on the Company's
+business and financial condition.
+Additionally, the Company through its Diva Acquisition Corp. subsidiary
+owns registrations for the DAVID AARON trademark and service mark in various
+International Classes in the United States (Int'l Cl. 25 clothes, shoes; 18
+leather goods, handbags, wallets; and, 35 retail store services), Australia,
+Canada, Hong Kong, Israel, Japan, South Africa, Spain and the 15 cooperating
+countries in Europe. The Company further has pending application for
+registration of the DAVID AARON trademark and service mark in Panama. The
+Company believes that the DAVID AARON trademark has a significant value and is
+important to the marketing of the Company's products.
+The Company through its Stevies, Inc. subsidiary also has several
+pending trademark and service mark applications for registration of the STEVIES
+and STEVIES plus Design marks in various International Classes in the United
+States (Int'l Cl. 25 clothes, shoes, 18 leather goods, handbags, wallets; 9 eye
+wear; 14 jewelry; and, 35 retail store services) and in Canada, Mexico and the
+15 cooperating countries of Europe.
+EMPLOYEES
+At March 9, 2001, the Company employed approximately 1,017 employees,
+of whom approximately 394 work on a full-time basis and approximately 623 work
+on a part-time basis. The management of the Company considers relations with its
+employees to be good.
+RISK FACTORS
+In addition to other information in this Annual Report on Form 10-K,
+the following important factors should be carefully considered in evaluating the
+Company and its business because such factors currently have a significant
+impact on the Company's business, prospects, financial condition and results of
+operations.
+14
+Dependence on Key Personnel. Although the Company has strengthened its
+senior management team, the Company is dependent, in particular, upon the
+services of Steven Madden, its Chief Executive Officer and chief designer, and
+Rhonda Brown, its President. In June 2000, Mr. Madden was indicted in the
+Southern District and Eastern District of New York for his alleged involvement
+in securities fraud and money laundering activities. If Mr. Madden is convicted
+of, or pleads guilty to, these charges (or related offenses), and/or is required
+to devote a substantial portion of his time and attention to the defense of the
+allegations contained in the indictments, the Company may be deprived of his
+services for an extended period of time. In addition, the Securities and
+Exchange Commission filed a complaint against Mr. Madden alleging securities law
+violations and seeking certain remedies against Mr. Madden, including an
+injunction prohibiting him from serving as an officer or director of a public
+company. The action initiated by the Securities and Exchange Commission has been
+stayed pending resolution of the indictments. If Mr. Madden is prohibited from
+serving as an officer or director of the Company, the Company may be deprived of
+certain or all of Mr. Madden's services. If Mr. Madden or Ms. Brown are unable
+to provide services to the Company for whatever reason, the Company's business,
+prospects and financial condition may be adversely affected.
+The Company maintains a key person life insurance policy on Mr. Madden
+with coverage in the amount of $10,000,000; however, the Company does not
+maintain a policy on Ms. Brown. The Company has employment contracts with each
+of Mr. Madden and Ms. Brown that expire on December 31, 2009 and December 31,
+2003, respectively. Under the terms of their respective employment contracts, if
+Mr. Madden or Ms. Brown are terminated for other than cause, death or total
+disability, the Company will be required to pay the remaining salary due under
+the contract, half of which must be paid upon termination. Mr. Madden is also
+entitled during the term of the contract to an annual $50,000 non-accountable
+expense account. In the event of a change in control, Mr. Madden and Ms. Brown
+may choose to continue their employment with the Company or terminate employment
+and receive the remaining salary under their respective contracts.
+Since Mr. Madden and Ms. Brown are involved in many material aspects of
+the Company's business, there can be no assurance that a suitable replacement
+for either Mr. Madden or Ms. Brown could be found if either were unable to
+perform services for the Company. As a consequence, the loss of Mr. Madden, Ms.
+Brown or other key management personnel could have a material adverse effect
+upon the Company's business, results of operations and financial condition. In
+addition, the Company's ability to market its products and to maintain
+profitability will depend, in large part, on its ability to attract and retain
+qualified personnel. Competition for such personnel is intense and there can be
+no assurance that the Company will be able to attract and retain such personnel.
+The inability of the Company to attract and retain such qualified personnel
+would have a material adverse effect on the Company's business, financial
+condition and results of operations.
+Fashion Industry Risks. The success of the Company will depend in
+significant part upon its ability to anticipate and respond to product and
+fashion trends as well as to anticipate, gauge and react to changing consumer
+demands in a timely manner. There can be no assurance that the Company's
+products will correspond to the changes in taste and demand or that the Company
+will be able to successfully market products which respond to such trends. If
+the Company misjudges the market for its products, it may be faced with
+significant excess inventories for some products and missed opportunities with
+others. In addition, misjudgments in merchandise selection could adversely
+affect the Company's image with its customers and weak sales and resulting
+15
+markdown requests from customers could have a material adverse effect on the
+Company's business, financial condition and results of operations.
+The industries in which the Company operates are cyclical, with
+purchases tending to decline during recessionary periods when disposable income
+is low. Purchases of contemporary shoes and accessories tend to decline during
+recessionary periods and also may decline at other times. While the Company has
+fared well in recent years in a difficult retail environment, there can be no
+assurance that the Company will be able to maintain its historical rate of
+growth in revenues and earnings, or remain profitable in the future. A recession
+in the national or regional economies or uncertainties regarding future economic
+prospects, among other things, could affect consumer spending habits and have a
+material adverse effect on the Company's business, financial condition and
+results of operations.
+In recent years, the retail industry has experienced consolidation and
+other ownership changes. In addition, some of the Company's customers have
+operated under the protection of the federal bankruptcy laws. In the future,
+retailers in the United States and in foreign markets may consolidate, undergo
+restructurings or reorganizations, or realign their affiliations, any of which
+could decrease the number of stores that carry the Company's products or
+increase the ownership concentration within the retail industry. While such
+changes in the retail industry to date have not had a material adverse effect on
+the Company's business or financial condition, there can be no assurance as to
+the future effect of any such changes.
+Inventory Management. The Company's ability to manage its inventories
+properly is an important factor in its operations. Inventory shortages can
+adversely affect the timing of shipments to customers and diminish brand
+loyalty. Conversely, excess inventories can result in increased interest costs
+as well as lower gross margins due to the necessity of providing discounts to
+retailers. The inability of the Company to effectively manage its inventory
+would have a material adverse effect on the Company's business, financial
+condition and results of operations.
+Dependence Upon Customers and Risks Related to Extending Credit to
+Customers. The Company's customers purchasing shoes 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 net sales.
+Presently, the Company sells approximately sixty two percent (62%) of its
+products to department stores, including Federated Stores (Bloomingdales,
+Burdines, Macy's and Bullocks), Dillards, Nordstrom, Dayton Hudson and May
+Department Stores (Famous Barr, Filene's, Foley's, Hecht's, Kaufmann's, Meier &
+Frank, Lord and Taylor and Robinson's May) and approximately [thirty eight
+(38%)] percent to specialty stores, including shoe boutiques. The Company's
+largest customers, Federated Stores, May Department Stores, account for
+approximately twenty one percent (21%), eighteen percent (18%) and eleven
+percent (11%) of the Company's wholesale sales, respectively.
+The Company believes that a substantial portion of sales of the
+Company's licensed products by its domestic licensing partners are also made to
+the Company's largest department store customers. The Company generally enters
+into a number of purchase order commitments with its customers for each of its
+lines every season and does not enter into long-term agreements with any of its
+customers. Therefore, a decision by Federated Stores, Nordstrom or any other
+significant customer, whether motivated by competitive conditions, financial
+difficulties or otherwise, to decrease the amount of merchandise purchased from
+16
+the Company or its licensing partners, or to change its manner of doing business
+could have a material adverse effect on the Company's business, financial
+condition and results of operations. The Company sells its products primarily to
+retail stores across the United States and extends credit based on an evaluation
+of each customer's financial condition, usually without requiring collateral.
+While various retailers, including some of the Company's customers, have
+experienced financial difficulties in the past few years which increased the
+risk of extending credit to such retailers, the Company's losses due to bad
+debts have been limited. However, financial difficulties of a customer could
+cause the Company to curtail business with such customer or require the Company
+to assume more credit risk relating to such customer's receivables.
+Pending Litigation. In connection with the indictments filed against
+Mr. Madden in June 2000, certain class action lawsuits were commenced against
+the Company, Mr. Madden, the Company's Chief Executive Officer, Rhonda Brown,
+the Company's President, and Arvind Dharia, the Company's Chief Financial
+Officer. The complaint alleges that the Company and the individual defendants
+issued false and misleading statements and failed to disclose material adverse
+information relating to matters arising from Mr. Madden's indictment. In the
+event that resolution of this action exceeds coverage available under the
+Company's directors and officers insurance policy, the Company's business,
+prospects and financial condition could be materially and adversely affected.
+Impact of Foreign Manufacturers. Substantially all of the Company's
+products are currently sourced outside the United States through arrangements
+with a number of foreign manufacturers in four different countries. During the
+year ended December 31, 2000, approximately [90%] of the Company's products were
+purchased from sources outside the United States, including Mexico, 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 conditions will materially
+affect the Company's ability to purchase products, since a variety of materials
+and alternative sources exist. The Company cannot be certain, however, that it
+will be able to identify such alternative sources without delay or without
+greater cost to the Company, if ever. The Company's inability to identify and
+secure alternative sources of supply in this situation would have a material
+adverse effect on the Company's business, financial condition and results of
+operations.
+The Company's imported products are also subject to United States
+customs duties. The United States and the countries in which the Company's
+products are produced or sold may, from time to time, impose new quotas, duties,
+tariffs, or other restrictions, or may adversely adjust prevailing quota, duty
+or tariff levels, any of which could have a material adverse effect on the
+Company's business, financial condition and results of operations.
+Possible Adverse Impact of Unaffiliated Manufacturers' Inability to
+Manufacture in a Timely Manner, to Meet Quality Standards or to Use Acceptable
+Labor Practices. As is common in the footwear industry, the Company contracts
+17
+for the manufacture of a majority of its products to its specifications through
+foreign manufacturers. The Company does not own or operate any manufacturing
+facilities and is therefore dependent upon independent third parties for the
+manufacture of all of its products. The Company's products are manufactured to
+its specifications by both domestic and international manufacturers. The
+inability of a manufacturer to ship orders of the Company's products in a timely
+manner or to meet the Company's quality standards could cause the Company to
+miss the delivery date requirements of its customers for those items, which
+could result in cancellation of orders, refusal to accept deliveries or a
+reduction in purchase prices, any of which could have a material adverse effect
+on the Company's business, financial condition and results of operations.
+Although the Company enters into a number of purchase order commitments
+each season specifying a time frame for delivery, method of payment, design and
+quality specifications and other standard industry provisions, the Company does
+not have long-term contracts with any manufacturer. As a consequence, any of
+these manufacturing relationships may be terminated, by either party, at any
+time. Although the Company believes that other facilities are available for the
+manufacture of the Company's products, both within and outside of the United
+States, there can be no assurance that such facilities would be available to the
+Company on an immediate basis, if at all, or that the costs charged to the
+Company by such manufacturers will not be greater than those presently paid.
+The Company requires its licensing partners and independent
+manufacturers to operate in compliance with applicable laws and regulations.
+While the Company promotes ethical business practices and the Company's staff
+periodically visits and monitors the operations of its independent
+manufacturers, the Company does not control such manufacturers or their labor
+practices. The violation of labor or other laws by an independent manufacturer
+of the Company or by one of the Company's licensing partners, or the divergence
+of an independent manufacturer's or licensing partner's labor practices from
+those generally accepted as ethical in the United States, could have a material
+adverse effect on the Company's business, financial condition and results of
+operations.
+Intense Industry Competition. The fashionable footwear industry is
+highly competitive and barriers to entry are low. The Company's competitors
+include specialty companies as well as companies with diversified product lines.
+The recent substantial growth in the sales of fashionable footwear has
+encouraged the entry of many new competitors and increased competition from
+established companies. Most of these competitors, including Kenneth Cole, Nine
+West, DKNY, Skechers, Nike and Guess, may have significantly greater financial
+and other resources than the Company and there can be no assurance that the
+Company will be able to compete successfully with other fashion footwear
+companies. Increased competition could result in pricing pressures, increased
+marketing expenditures and loss of market share, and could have a material
+adverse effect on the Company's business, financial condition and results of
+operations. The Company believes effective advertising and marketing,
+fashionable styling, high quality and value are the most important competitive
+factors and plans to employ these elements as it develops its products. The
+Company's inability to effectively advertise and market its products could have
+a material adverse effect on the Company's business, financial condition and
+results of operations.
+Expansion of Retail Business. The Company's continued growth depends to
+a significant degree on further developing the Steve Madden(R), David Aaron(R),
+Stevies and l.e.i.(R) brands, creating new product categories and businesses and
+operating Company-owned stores on a profitable basis. The Company plans to open
+18
+approximately ten (10) Steve Madden retail stores in 2001. The Company's recent
+and planned expansion includes the opening of stores in new geographic markets
+as well as strengthening existing markets. New markets have in the past
+presented, and will continue to present, competitive and merchandising
+challenges that are different from those faced by the Company in its existing
+markets. There can be no assurance that the Company will be able to open new
+stores, and if opened, that such new stores will be able to achieve sales and
+profitability levels consistent with existing stores. The Company's retail
+expansion is dependent on a number of factors, including the Company's ability
+to locate and obtain favorable store sites, the performance of the Company's
+wholesale and retail operations, and the ability of the Company to manage such
+expansion and hire and train personnel. Past comparable store sales results may
+not be indicative of future results, and there can be no assurance that the
+Company's comparable store sales results will increase or not decrease in the
+future. In addition, there can be no assurance that the Company's strategies to
+increase other sources of revenue, which may include expansion of its licensing
+activities, will be successful or that the Company's overall sales or
+profitability will increase or not be adversely affected as a result of the
+implementation of such retail strategies.
+The Company's growth has increased and will continue to increase demand
+on the Company's managerial, operational and administrative resources. The
+Company has recently invested significant resources in, among other things, its
+management information systems and hiring and training new personnel. However,
+in order to manage currently anticipated levels of future demand, the Company
+may be required to, among other things, expand its distribution facilities,
+establish relationships with new manufacturers to produce its products, and
+continue to expand and improve its financial, management and operating systems.
+There can be no assurance that the Company will be able to manage future growth
+effectively and a failure to do so could have a material adverse effect on the
+Company's business, financial condition and results of operations.
+Seasonal and Quarterly Fluctuations. The Company's quarterly results
+may fluctuate quarter to quarter as a result of the timing of holidays, weather,
+the timing of larger shipments of footwear, market acceptance of the Company's
+products, the mix, pricing and presentation of the products offered and sold,
+the hiring and training of additional personnel, the timing of inventory write
+downs, the cost of materials, the mix between wholesale and licensing
+businesses, the incurrence of other operating costs and factors beyond the
+Company's control, such as general economic conditions and actions of
+competitors. In addition, the Company expects that its sales and operating
+results may be significantly impacted by (i) the opening of new retail stores,
+(ii) the introduction of new products and (iii) the commencement of the
+Company's new Mens brand. 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/service marks and other proprietary rights are important to its
+success and its competitive position. Accordingly, the Company devotes
+substantial resources to the establishment and protection of its trademarks on a
+worldwide basis. Nevertheless, there can be no assurance that the actions taken
+by the Company to establish and protect its trademarks and other proprietary
+rights will be adequate to prevent imitation of its products by others or to
+prevent others from seeking to block sales of the Company's products as
+violative of the trademarks and proprietary rights of others. Moreover, no
+assurance can be given that others will not assert rights in, or ownership of,
+trademarks and other proprietary rights of the Company or that the Company will
+be able to successfully resolve such conflicts. In addition, the laws of certain
+19
+foreign countries may not protect proprietary rights to the same extent as do
+the laws of the United States. The failure of the Company to establish and then
+protect such proprietary rights from unlawful and improper appropriation could
+have a material adverse impact on the Company's business, financial condition
+and results of operations. See "Business - Trademarks and Service Marks".
+Foreign Currency Fluctuations. The Company generally purchases its
+products in U.S. dollars. However, the Company sources substantially all of its
+products overseas and, as such, the cost of these products may be affected by
+changes in the value of the relevant currencies. Changes in currency exchange
+rates may also affect the relative prices at which the Company and foreign
+competitors sell their products in the same market. There can be no assurance
+that foreign currency fluctuations will not have a material adverse impact on
+the Company's business, financial condition and results of operations.
+Absence of Dividends. The Company anticipates that all of its earnings
+in the foreseeable future will be retained to finance the continued growth and
+expansion of its business and has no current intention to pay cash dividends.
+Outstanding Options. As of March 1, 2001, the Company had outstanding
+options to purchase an aggregate of approximately 2,592,900 shares of Common
+Stock. Holders of such options are likely to exercise them when, in all
+likelihood, the Company could obtain additional capital on terms more favorable
+than those provided by the options. Further, while its options are outstanding,
+they may adversely affect the terms in which the Company could obtain additional
+capital.
+Item 2. PROPERTIES.
+The Company maintains approximately 25,000 square feet for its
+executive offices and sample production facilities at 52-16 Barnett Avenue, Long
+Island City, NY 11104. The lease for the Company's headquarters expires in June,
+2002.
+The Company's showroom is located at 1370 Avenue of the Americas, New
+York, NY. All of the Company's brands are displayed for sale from this 3,762
+square foot space. The lease for the Company's showroom expires in November,
+2002.
+All of the Company's retail stores are leased pursuant to leases that
+extend for terms which average ten years in length. A majority of the leases
+include clauses that provide for contingent rental payments if gross sales
+exceed certain targets. In addition, a majority of the leases enable the Company
+and/or the landlord to terminate the lease in the event that the Company's gross
+sales do not achieve certain minimum levels during a prescribed period. Many of
+the leases contain rent escalation clauses to compensate for increases in
+operating costs and real estate taxes.
+The current terms of the Company's retail store leases expire as
+follows:
+Years Lease Terms Expire Number of Stores
+-------------------------------------------------------------------
+2003 4
+2004 4
+2005 4
+2006 1
+2007 7
+2008 13
+2009 12
+2010 11
+2011 8
+20
+The Company maintains a warehouse and distribution center in Port
+Everglades, Florida servicing wholesale and retail accounts. The lease for the
+Florida warehouse expires on October 31, 2001. In addition, the Company has
+engaged three independent distributors to warehouse and distribute its products.
+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.
+As of March 14, 2001, 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 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. The amended complaint 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. The defendants have until April 12, 2001 to answer, move or
+otherwise respond to the Consolidated Amended Complaint. Although the Company
+has not responded to the complaint, it believes it has substantial defenses to
+the claims.
+On June 20, 2000, Steven Madden, the Company's former Chairman and
+current Chief Executive Officer, was indicted in the Southern District and
+Eastern District of New York. The indictments allege that Mr. Madden engaged in
+securities fraud and money laundering activities. In addition, the Securities
+and Exchange Commission filed a complaint in the United States District Court
+for the Eastern District of New York alleging that Mr. Madden violated Section
+17(a) of the Securities Exchange Act of 1934, as amended.
+Neither the indictments nor the SEC complaint alleges any wrongdoing by
+the Company or its other officers and directors. Mr. Madden has denied any
+improper conduct and has advised the Company that he will vigorously defend
+himself against any and all charges.
+On June 21, 2000, Steven Madden resigned as Chairman of the Board of
+Directors and the Company appointed Charles Koppelman acting Chairman of the
+Board. Mr. Koppelman has been a director of the Company since June 1998. Mr.
+Madden continues to serve as the Company's Chief Executive Officer.
+21
+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. Briefing on the motions currently
+is scheduled to be completed by March 21, 2001.
+On March 14, 2001, the Company became aware that the Securities and
+Exchange Commission had issued a formal order of investigation with respect to
+trading in the Company's securities. The Company has reason to believe that the
+Staff is investigating possible securities law violations by persons trading in
+the Company's securities prior to June 20, 2000 who may have been in possession
+of alleged material, non-public information. As previously disclosed on Form 4's
+filed with the Securities and Exchange Commission, certain officers and
+directors of the Company sold shares of the Company's common stock during 1999
+and the first half of 2000. Each of such officers and directors denies having
+knowledge of any material, non-public information prior to engaging in such
+transactions.
+Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.
+No matters were submitted to a vote of the holders of the Company's
+Common Stock during the last quarter of its fiscal year ended December 31, 2000.
+22
+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, 2000
+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.
+COMMON STOCK
+HIGH LOW HIGH LOW
+---- --- ---- ---
+2000 1999
+---- ----
+Quarter ended Quarter ended
+March 31, 2000 19 12 1/2 March 31, 1999 9 7/16 7 1/8
+Quarter ended Quarter ended
+June 30, 2000 22 7/16 6 9/16 June 30, 1999 14 7 7/8
+Quarter ended Quarter ended
+September 30, 2000 12 11/16 6 13/16 September 30, 1999 14 1/8 11 1/8
+Quarter ended Quarter ended
+December 31, 2000 8 15/32 7 December 31, 1999 19 1/16 11 15/16
+On March 20, 2001, the final quoted price as reported by The Nasdaq
+National Market was $13.94 for each share of common stock. As of March 20, 2001,
+there were 12,526,109 shares of Common Stock outstanding, held of record by 4
+record holders and approximately 3,786 beneficial owners.
+23
+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 2000, 1999
+and 1998 and the Balance Sheet Data as of December 31, 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,
+---------------------------------------------------------------------------------
+2000 1999 1998 1997 1996
+------------- ------------- ------------- ------------- -------------
+Income Statement Data:
+Net sales $ 205,113,000 $ 163,036,000 $ 85,783,000 $ 59,311,000 $ 45,823,000
+Cost of sales 115,495,000 94,536,000 49,893,000 34,744,000 31,343,000
+------------- ------------- ------------- ------------- -------------
+Gross profit 89,618,000 68,500,000 35,890,000 24,567,000 14,480,000
+Commissions and licensing fees 4,847,000 3,367,000 3,273,000 2,321,000 951,000
+Operating expenses (68,833,000) (52,946,000) (29,949,000) (22,262,000) (13,998,000)
+------------- ------------- ------------- ------------- -------------
+Income from operations 25,632,000 18,921,000 9,214,000 4,626,000 1,433,000
+Interest income 1,744,000 909,000 380,000 312,000 322,000
+Interest expense (102,000) (90,000) (235,000) (339,000) (162,000)
+Gain on sale of marketable securities 230,000
+------------- ------------- ------------- ------------- -------------
+Income before provision for income taxes 27,504,000 19,740,000 9,359,000 4,599,000 1,593,000
+Provision for income taxes 11,461,000 8,274,000 3,912,000 1,899,000 534,000
+============= ------------- ------------- ------------- -------------
+Net Income $ 16,043,000 $ 11,466,000 $ 5,447,000 $ 2,700,000 $ 1,059,000
+============= ============= ============= ============= =============
+Basic income per share $ 1.42 $ 1.06 $ 0.58 $ 0.33 $ 0.14
+============= ============= ============= ============= =============
+Diluted income per share $ 1.26 $ 0.92 $ 0.50 $ 0.30 $ 0.13
+============= ============= ============= ============= =============
+Weighted average common shares outstanding-
+basic income per share 11,310,130 10,831,250 9,436,798 8,064,604 7,689,848
+Effect of potential common shares from
+exercise of options and warrants 1,387,244 1,634,102 1,546,303 848,462 737,232
+------------- ------------- ------------- ------------- -------------
+Weighted average common shares outstanding-
+diluted income per share 12,697,374 12,465,352 10,983,101 8,913,066 8,427,080
+============= ============= ============= ============= =============
+Balance Sheet Data
+Total assets $ 91,733,000 $ 78,135,000 $ 48,928,000 $ 29,277,000 $ 22,361,000
+Working capital 57,207,000 48,076,000 33,627,000 16,545,000 13,719,000
+Noncurrent liabilities 1,130,000 980,000 681,000 359,000 166,000
+Stockholders' equity 76,566,000 62,435,000 44,960,000 25,793,000 20,101,000
+24
+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:
+PERCENTAGE OF NET REVENUES
+TWELVE MONTHS ENDED
+DECEMBER 31
+-----------
+($ in thousands)
+CONSOLIDATED: 2000 1999 1998
+------------ ---- ---- ----
+Net Sales $205,113 100% $163,036 100% $85,783 100%
+Cost of Sales 115,495 56 94,536 58 49,893 58
+Other Operating Income 4,847 2 3,367 2 3,273 4
+Operating Expenses 68,833 34 52,946 32 29,949 35
+Income from Operations 25,632 12 18,921 12 9,214 11
+Interest Income Net 1,642 1 819 1 145 0
+Gain on sale of marketable securities 230 0 -- -- -- --
+Income Before Income Taxes 27,504 13 19,740 12 9,359 11
+Net Income 16,043 8 11,466 7 5,447 6
+25
+PERCENTAGE OF NET REVENUES
+TWELVE MONTHS ENDED
+DECEMBER 31
+($ in thousands)
+By Segment 2000 1999 1998
+---- ---- ----
+WHOLESALE DIVISIONS:
+STEVEN MADDEN, LTD
+Net Sales $ 87,977 100% $ 78,890 100% $ 49,891 100%
+Cost of Sales 54,707 62 49,770 63 31,201 63
+Other Operating Income 959 1 807 1 594 1
+Operating Expenses 25,422 29 22,758 29 14,549 29
+Income from Operations 8,807 10 7,169 9 4,735 9
+l.e.i. FOOTWEAR
+Net Sales $ 37,741 100% $ 27,546 100% $ 3,483 100%
+Cost of Sales 23,657 63 17,856 65 2,200 63
+Operating Expenses 7,652 20 5,856 21 828 24
+Income from Operations 6,432 17 3,834 14 455 13
+DIVA ACQUISITION CORP:
+Net Sales $ 3,616 100% $ 7,970 100% $ 5,846 100%
+Cost of sales 2,591 72 5,296 66 4,421 76
+Operating Expenses 1,231 34 1,547 19 1,489 25
+Income (Loss) from Operations (206) 6 1,127 14 (64) (1)
+STEVIES INC.:
+Net Sales $ 6,147 100% -- -- -- --
+Cost of sales 3,846 63 -- -- -- --
+Other Operating Income 257 4
+Operating Expenses 1,595 26 -- -- -- --
+Income from Operations 963 16 -- -- -- --
+STEVEN MADDEN RETAIL INC.:
+Net Sales $ 69,632 100% $ 48,630 100% $ 26,563 100%
+Cost of Sales 30,694 44 21,614 44 12,071 45
+Operating Expenses 30,937 44 21,106 43 11,751 44
+Income from Operations 8,001 12 5,910 12 2,741 10
+ADESSO MADDEN INC.:
+(FIRST COST)
+Other Operating Revenue $ 3,631 100% $ 2,560 100% $ 2,679 100%
+Operating Expenses 1,996 55 1,679 66 1,332 50
+Income from Operations 1,635 45 881 34 1,347 50
+26
+RESULTS OF OPERATIONS
+($ in thousands)
+YEAR ENDED DECEMBER 31, 2000 VS. YEAR ENDED DECEMBER 31, 1999
+CONSOLIDATED:
+Sales for the year ended December 31, 2000 are $205,113 or 26% higher than the
+$163,036 in the comparable period of 1999. The increase in sales is due to
+several factors, including (i) the addition of new wholesale accounts, (ii) a
+43% increase in retail sales due to the opening of additional Steve Madden
+retail stores during 2000 and an increases in same store sales, (iii) a 37%
+increase in sales from the l.e.i. Wholesale Division ("l.e.i. Wholesale"), (iv)
+an increase in the number of Steve Madden concept shops located in major
+department stores and specialty stores, and (v) an increase in public awareness
+with respect to the Company's brands. In turn, increased sales have enabled the
+Company to expand its advertising and in store concept efforts, all of which
+have contributed to the continuing increase in sales. Also in the first quarter
+of 2000, the Company introduced a new brand, Stevies(TM). Positioned as a
+fashion brand, Stevies(TM) targets girls ages 6-9 and "tweens" ages 10-12. The
+Company's new Stevies Wholesale Division ("Stevies Wholesale") commenced
+shipping to department stores throughout the country in the second quarter of
+2000. Stevies Wholesale generated revenue of $6,147 for the year ended December
+31, 2000. Also, during the year ended December 31, 2000, 11 licenses in 13
+product classifications were signed for the Stevies(TM) brand. The web site for
+Stevies at WWW.STEVIES.COM went live in March of 2000 and commence engaging in
+e-commerce transactions in July 2000.
+Consolidated gross profit as a percentage of sales in 2000 increased to 44% as
+compared 42% for 1999 due to increased retail sales which are at higher margins,
+a change in the product mix, balanced sourcing and improved inventory
+management.
+Selling, general and administrative (SG&A) expenses increased to $68,833 in 2000
+from $52,946 in 1999. The increase in SG&A is due primarily to a 27% increase in
+payroll, officers' bonuses and payroll related expenses from $19,147 in 1999 to
+$24,268 in 2000. Also, the Company focused its efforts on advertising and
+marketing by increasing those expenses by 38% from $5,046 in 1999 to $6,941 in
+2000. Additionally, selling, designing and licensing costs increased by 21% from
+$8,702 in 1999 to $10,510 in 2000. This is due in part to an increase in sales
+in the current period and to the Company's increased focus on selling,
+designing, and licensing activities. The increase in the number of retail
+outlets and expanded office and warehouse facilities resulted in an increase in
+occupancy, telephone, utilities, warehouse, computer, printing/supplies and
+depreciation expenses by 47% from $12,162 in 1999 to $17,820 in 2000.
+27
+Income from operations for 2000 was $25,632 which represents an increase of
+$6,711 or 35% over the income from operations of $18,921 in 1999. Net income
+increased by 40% to $16,043 in 2000 from $11,466 in 1999.
+WHOLESALE DIVISIONS:
+Sales from the Steve Madden Wholesale Division ("Madden Wholesale") accounted
+for $87,977 or 43%, and $78,890 or 48%, of total sales in 2000 and 1999,
+respectively. This increase in sales is primarily due to the addition of new
+"Madden Wholesale" accounts and an increase in the number of Steve Madden
+concepts shops located in major department stores and specialty stores
+throughout the country. Gross profit as a percentage of sales increased from 37%
+in 1999 to 38% in 2000 due to a change in the product mix, balanced sourcing and
+improved inventory management. Operating expenses increased to $25,422 in 2000
+from $22,758 in 1999. This increase is due to an increase in payroll and payroll
+related expenses principally due to the hiring of additional management
+personnel. Also, advertising and marketing expenses increased due to the
+Company's expanded marketing strategy. Additionally, selling, designing and
+licensing costs increased due to an increase in sales in the current period and
+to the Company's increased focus on selling, designing, and licensing
+activities. Madden Wholesale income from operations was $8,807 in 2000 compared
+to income from operations of $7,169 in 1999.
+Sales from the l.e.i. Wholesale Division ("l.e.i. Wholesale") accounted for
+$37,741or 18%, and $27,546 or 17%, of total sales in 2000 and 1999,
+respectively. The increase in sales is due to the addition of new "l.e.i.
+Wholesale" accounts and an increase in reorders from existing customers. l.e.i
+footwear now sells in over 3,500 doors in 2000 compared to 2,500 doors in 1999,
+in the United States, primarily in department stores, including Macy's East,
+Burdines, Rich's, Hecht's, Filene's, Foley's, Kohl's, Belk and JC Penney's, and
+in specialty store chains, such as Journey's and Mandees. Also, during the third
+quarter, the l.e.i. Wholesale division shipped shoes to Kohl's for the first
+time. Gross profit as a percentage of sales increased from 35% in 1999 to 37% in
+2000 due to changes in product mix, balanced sourcing and improved inventory
+management. Operating expenses increased to $7,652 in 2000 from $5,856 in 1999
+due to increases in occupancy and payroll and payroll related expenses.
+Additionally, sales commissions, selling, designing and licensing costs
+increased due to an increase in sales in the current period and due to the
+Company's increased focus on these activities. Income from operations for l.e.i.
+Wholesale was $6,432 in 2000 compared to income from operations of $3,834 in
+1999.
+Sales from the Diva Acquisition Corp. Wholesale Division ("Diva Wholesale")
+which markets the "David Aaron" brand name in footwear accounted for $3,616 or
+2%, and $7,970 or 5%, of total sales in 2000 and 1999, respectively. The Company
+believes that the decrease in sales is due to the repositioning and
+reorganization of the David Aaron brand. The Company intentionally planned to
+reduce sales volume in 2000 enabling the Diva Wholesale Division to use its two
+retail stores to test the popularity of new products. Gross profit as a
+percentage of sales decreased from 34% in 1999 to 28% in 2000 as under
+performing carryover inventory was cleared at lower gross margins. Operating
+expenses decreased to $1,231 in 2000 from $1,547 in 1999 due to the decrease in
+sales commission expenses as a result of the decrease in sales and from
+decreases in selling and designing expenses. Loss from operations from Diva
+Wholesale was $206 in 2000 compared to income from operations of $1,127 in 1999.
+28
+The Company's new Stevies Wholesale Division ("Stevies Wholesale") commenced
+shipping to department stores and specialty stores throughout the country in the
+second quarter of 2000. Stevies Wholesale generated revenue of $6,147 for the
+year ended December 31, 2000. Stevies now sells in over 1,200 doors including
+store groups such as Nordstorms, Federated Department stores, May Company, Belk,
+Dillards, Limited Too, as well as, childrens' independent shoe stores throughout
+the country. The Stevies brand ended the fourth quarter with over 815 Stevies
+concept shop locations and over 500 Stevies accessories concept shop locations.
+Stevies accessory concept shops house Stevies licensed accessories and slippers.
+Gross profit as a percentage of sales was 37% for the year ended December 31,
+2000. Income from operations was $963 in 2000.
+RETAIL DIVISION:
+Sales from the Retail Division accounted for $69,632 or 34% and $48,630 or 30%
+of total revenues in 2000 and 1999, respectively. This increase in Retail
+Division sales is primarily due to the increase in number of Steve Madden retail
+store. As of December 31, 2000, there were 65 Steve Madden retail stores
+compared to 49 stores as of December 31, 1999. Additionally, same store sales
+for the year ended December 31, 2000 increased 10% over the same period of 1999.
+This increase in same store sales is largely due to the Company's ability to
+track and quickly reorder bestsellers and it's strategy of testing and quickly
+reordering successful new products such as athletic inspired casuals, sneakers,
+boots and tailored shoes. Revenues from the internet store for the year ended
+December 31, 2000 were $3,549 an increase of 196% over the same period of 1999.
+The Company expects sales generated through its websites at WWW.STEVEMADDEN.COM
+and WWW.STEVIES.COM to continue to increase as the Company makes additional
+styles available for sale on its website and usage of the internet continues to
+grow. Also, the web site for the Madden Mens at WWW.STEVEMADDENMENS.COM launched
+in February 2001. Gross profit as a percentage of sales remained the same in
+1999 and 2000. Operating expenses increased to $30,937 or 44% of sales in 2000
+from $21,106 or 43% of sales in 1999. This increase was due to increases in
+payroll and payroll related expenses such as incentive bonuses for store
+managers and the corporate retail management team, marketing and operating
+expenses for the internet store, occupancy, printing, computer and depreciation
+expenses as a result of opening 16 additional stores since December 31, 1999.
+Income from operations from the retail division was $8,001 in 2000 compared to
+income from operations of $5,910 in 1999.
+ADESSO-MADDEN DIVISION:
+Adesso-Madden, Inc., a wholly owned subsidiary of the Company, generated
+commission revenues of $3,631 for the year ended December 31, 2000 which
+represents a 42% increase over commission revenues of $2,560 during the same
+period in 1999. This increase was primarily due to the growth in accounts such
+as Walmart, Parade of Shoes, Sears, Famous Footwear, Payless, Bass, MarMaxx,
+Bakers, and Target kids. Operating expenses increased to $1,996 in 2000 from
+$1,679 in 1999 primarily due to increases in payroll and payroll related
+expenses. Income from operations from Adesso-Madden was $1,635 in 2000 compared
+to income from operations of $881 in 1999.
+29
+YEAR ENDED DECEMBER 31, 1999 VS. YEAR ENDED DECEMBER 31, 1998
+CONSOLIDATED:
+Sales for the year ended December 31, 1999 were $163,036 or 90% higher than the
+$85,783 recorded in the comparable period of 1998. The increase in sales was due
+to several factors, including (i) the addition of new wholesale accounts, (ii)
+an increase in reorders from existing customers, (iii) an 86% increase in
+Electronic Data Interchange (EDI) size replenishment program, (iv) an 83%
+increase in retail sales due to the opening of additional Steve Madden retail
+stores during 1999 and increases in same store sales, (v) a full year of sales
+from the l.e.i. Wholesale Division ("l.e.i. Wholesale") which was launched in
+the third quarter of 1998, (vi) an increase in the number of Steve Madden
+concepts shops located in major department stores, (vii) an expansion in the
+number of products offered by the Company, (viii) an increase in the number of
+retail locations offering the Company's products and (ix) increased public
+awareness in the Company's brands. As a result, management feels that "Steve
+Madden" and "l.e.i. footwear" as a brand name has increased in popularity
+nationwide. In turn, increased sales have enabled the Company to expand its
+advertising and in store concept efforts, all of which have contributed to the
+continuing increase in sales. Gross profit as a percentage of sales in 1999
+remained the same as 1998.
+Selling, general and administrative (SG&A) expenses increased to $52,946 in 1999
+from $29,949 in 1998. The increase in SG&A was due primarily to a 60% increase
+in payroll, officers' bonuses and payroll related expenses from $11,948 in 1998
+to $19,147 in 1999. Also, the Company focused its efforts on advertising and
+marketing by increasing those expenses by 101% from $2,515 in 1998 to $5,046 in
+1999. Additionally, selling, designing and licensing costs increased by 149%
+from $3,488 in 1998 to $8,702 in 1999. This was due in part to an increase in
+sales in the current period and to the Company's increased focus on selling,
+designing, and licensing activities. The increase in the number of retail
+outlets and expanded office facilities resulted in an increase in occupancy,
+telephone, utilities, legal, computer, printing/supplies and depreciation
+expenses by 88% from $6,920 in 1998 to $13,031 in 1999. In addition, in August
+1999, the Company paid $600 to a former principal of the underwriter of the
+Company's initial public offering. Such payment was made in settlement of a
+dispute regarding an option issued in connection with the Company's initial
+public offering in December 1993.
+Income from operations for 1999 was $18,921, which represents an increase of
+$9,707 or 105% over the income from operations of $9,214 in 1998. Net income
+increased by 111% to $11,466 in 1999 from $5,447 in 1998.
+WHOLESALE DIVISIONS:
+Sales from the Steve Madden Wholesale Division ("Madden Wholesale"), accounted
+for $78,890 or 48% and $49,891 or 58% of total sales in 1999 and 1998,
+respectively. The increase in sales was due to the addition of new "Madden
+Wholsale" accounts, an increase in reorders from existing customers and an 86%
+increase in Electronic Data Interchange (EDI) size replenishment program. Gross
+profit as a percentage of sales remained the same. Operating expenses increased
+to $22,758 in 1999 from $14,549 in 1998. This increase was due to an increase in
+payroll and payroll related expenses principally due to the hiring of additional
+management personnel and an increase in occupancy expenses due to additional
+warehouse space needed for expanding EDI size replenishment inventory.
+Additionally, selling, designing and licensing costs increased due to an
+increase in sales in the current period and to the Company's increased focus on
+selling, designing, and licensing activities. Madden Wholesale income from
+operations was $7,169 in 1999 compared to income from operations of $4,735 in
+1998.
+30
+Sales from the l.e.i. Wholesale ("l.e.i. Wholesale") accounted for $27,546 or
+17%, and $3,483 or 4%, of total sales in 1999 and 1998, respectively. The
+increase in sales was due to the addition of new "l.e.i. Wholesale" accounts and
+an increase in reorders from existing customers. l.e.i footwear sold in over
+2400 doors in the United States, primarily in department stores, including
+Macy's - east, Burdines, Rich's, Hecht's, Filene's, Foley's, Dayton Hudson, Belk
+and JC Penney's, and to a lesser extent in specialty store chains, such as Wet
+Seal and Journey's. Gross profit as a percentage of sales decreased from 37% in
+1998 to 35% in 1999, primarily as a result of a higher markdowns experienced in
+the first quarter of 1999. Operating expenses increased to $5,856 in 1999 from
+$828 in 1998. Increases in sales and operating expenses are attributable to a
+full year of operations ("l.e.i Wholesale" - was launched in the third quarter
+of 1998). Income from operations from l.e.i. Wholesale was $3,834 in 1999
+compared to income from operations of $455 in 1998.
+Sales from the Diva Acquisition Corp. Wholesale Division ("Diva Wholesale")
+which markets the "David Aaron" brand name in footwear accounted for $7,970 or
+5%, and $5,846 or 7%, of total sales in 1999 and 1998, respectively. The
+increase in sales was due to the addition of new "Diva wholesale" accounts and
+an increase in reorders from existing customers. Gross profit as a percentage of
+sales increased from 24% in 1998 to 34% in 1999 due to a change in the product
+mix, balanced sourcing and improved inventory management. Operating expenses
+increased to $1,547 in 1999 from $1,489 in 1998 due to increases in occupancy,
+computer, payroll and payroll related expenses. Income from operations from Diva
+was $1,127 in 1999 compared to a loss from operations of $64 in 1998.
+RETAIL DIVISION:
+Sales from the Retail Division accounted for $48,630 or 30 % and $26,563 or 31%
+of total revenues in 1999 and 1998, respectively. The increase in Retail
+Division sales was primarily due to the Company's opening of thirteen additional
+Steve Madden retail stores and three additional outlet stores in 1999. Same
+store sales for the year ended December 31, 1999 increased by 26% over the same
+period of 1998. This increase in same store sales was driven by the
+strengthening of the boot classification, the addition of the slipper
+classification (known as the "Fuzzy"), the timely conversion of our warm weather
+stores, EDI basic replenishment and the addition of our West Coast warehouse
+facility. Also, increases in same store sales were driven by strengthening of
+the Company's buying and store support staff, a revised compensation package and
+a stronger marketing effort that included Mall posters, radio promotion and
+in-store events. Also, during the first quarter of 1999, the Company completed
+it's internet fulfillment center and expanded the number of workstations at the
+Long Island City offices dedicated to Internet sales. Revenues from the internet
+store increased by 700% to $1,200 in 1999 from $150 in 1998. As the Company
+offered additional styles through its web site at www.stevenmadden.com, business
+continued to grow. The Company signed an agreement with America Online, to sell
+footwear and apparel through AOL's new shopping destination, Shop @ AOL. The
+site for apparel went live in mid August and the site for footwear went live at
+the end of September. Since going live, the Company's web site has experienced a
+153% growth in hits and a 14% growth in unique users. The increase in gross
+profit as a percentage of sales from 55% in 1998 to 56% in 1999 was due to the
+high margin classification such as boots and slippers and strong upfront
+marketing plans. Selling, general and administrative expenses for the Retail
+Division increased to $21,106 in 1999 from $11,751 in 1998. This increase was
+due to increases in payroll and related expenses, occupancy, printing, computer
+and depreciation expenses as a result of opening thirteen additional stores and
+three outlet stores during 1999. Income from operations from the retail division
+was $5,910 in 1999 compared to income from operations of $2,741 in 1998.
+31
+ADESSO-MADDEN DIVISION:
+Adesso-Madden, Inc., a wholly owned subsidiary of the Company, generated
+commission revenues of $2,560 for the year ended December 31, 1999 which
+represents a decrease from the commission revenues of $2,679 in 1998. This
+decrease was primarily due to the closing of certain key accounts and a shift to
+purchasing the l.e.i. brand from their private label brand by accounts such as
+JC Penny, Sears and Mervyns. However, in the fourth quarter private label
+division revenue increased by 31% to $702 in 1999 compared to $535 in 1998. The
+increase in sales in the fourth quarter was due to the addition of new accounts
+and an increase in reorders from existing customers. Also, Adesso-Madden
+expanded its business by introducing additional styles in Jordache footwear, a
+trademark licensed by the Company, in Kmart and Target. The first shipments of
+Jordache footwear were delivered in July 1999. Operating expenses increased to
+$1,679,000 in 1999 from $1,332,000 in 1998 due to increases in occupancy,
+payroll and payroll related expenses. Income from operations from Adesso-Madden
+was $881 in 1999 compared to income from operations of $1,347 in 1998.
+LICENSE AGREEMENTS
+Revenues from licensing increased by 51% to $1,216 in 2000 from $807 in 1999.
+This increase was primarily driven by increases in licensing income from leather
+sportswear and sunglasses. As of December 31, 2000, the Company had 8 license
+partners covering 11 product categories for its Steve Madden brand. Also, during
+the year 2000, the Company initiated 11 licensing agreements in 13 product
+categories for its Stevies brand. The product categories include handbags,
+hosiery, sunglasses, hair, fashion accessories, belts, jewelry, sportswear,
+watches and plush toy. In order to enhance the performance of the Company's
+licensing business, in January 2001 the Company engaged Jassin O'Rourke Group,
+LLC, a consulting firm specializing in marketing, management and licensing for
+the apparel industry. In February 2001, the Company signed termination
+agreements with respect to jewelry and hair accessories for both the Steve
+Madden(R) and Stevies(TM) brands, and sportswear for the Stevies(TM) brand. The
+Company expects that, with the assistance of Jassin O'Rourke, it will be
+successful in finding new licensee for such product categories.
+As of March 15, 2000, the Company and its sportswear licensee, Iron Will Group,
+Inc. executed a Termination Agreement with respect to that certain License
+Agreement dated as of January 1, 1999. Iron Will Group is an affiliate of
+Jordache Enterprises. The Termination Agreement required that Iron Will
+terminate its sale and distribution of Steve Madden Sportswear products on or
+before June 15, 2000. The Company is currently focusing on its leather
+sportswear which goods are produced and sold by its outerwear licensee.
+32
+LIQUIDITY AND CAPITAL RESOURCES
+The Company had working capital of $57,207 at December 31, 2000 compared to
+$48,076 in working capital at December 31, 1999. This represents an increase of
+$9,131. This increase in working capital is primarily due to increased net
+income which offsets the increase in accounts receivables and inventories.
+OPERATING ACTIVITIES
+During the year ended December 31, 2000, cash provided by operating activities
+was $8,748. Uses of cash arose principally from an increase in factored accounts
+receivable of $3,251, an increase in inventory of $5,666 and a decrease in
+income taxes payable of $4957. Cash was provided principally by net income of
+$16,043 and an increase in accounts payable and accrued expenses of $4,610.
+The Company has lease agreements for office, warehouse, and retail space,
+expiring at various times through 2011. Future obligations under these lease
+agreements total approximately $47,000.
+The Company has employment agreements with seven officers currently providing
+for aggregate annual salaries of approximately $1,775 subject to annual bonuses
+and annual increases as may be determined by the Company's Board of Directors.
+In addition, as part of two of the employment agreements, the Company is
+committed to pay incentive bonuses based on income before interest, depreciation
+and taxes to certain officers.
+The Company's customers consist principally of department stores and specialty
+stores, including shoe boutiques. Presently, the Company's Wholesale Division
+sells approximately sixty two percent (62%) of its products to department
+stores, including Federated Department Stores (Bloomingdales, Bon Marche,
+Burdines, Macy's and Rich's), May Department Stores (Famous Barr, Filene's,
+Foley's, Hecht's, Kaufmann's, Meier & Frank, Lord & Taylor and Robinsons May),
+Dillard's, Dayton-Hudson and Nordstrom and approximately thirty eight percent
+(38%) to specialty stores, including Journey's, Wet Seal and The Buckle and
+catalog retailers, including Victoria's Secret and Fingerhut. Federated
+Department Stores and May Department Stores presently account for approximately
+twenty one percent (21%) and eighteen percent (18%) of the Company's Wholesale
+Division sales, respectively.
+A significant portion of the Company's product is supplied from foreign
+manufacturers, the majority of which are located in Brazil, China, Italy and
+Mexico. Although the Company has not entered into any manufacturing contracts
+with any of these foreign companies, the Company believes that a sufficient
+number of alternative sources exist outside of the United States for the
+manufacture of its products if current suppliers need to be replaced. In
+addition, the Company currently deals approximately ninety five percent (95%) of
+its transactions in U.S. currency.
+CAPITAL IMPROVEMENT ACTIVITIES
+During the year ended December 31, 2000, the Company used cash of $7,446
+primarily for leasehold improvements on retail stores and office space and for a
+new point of sale computer system for the retail stores.
+33
+FINANCING ACTIVITIES
+During the year ended December 31, 2000, the Company received $2,807 from the
+sale of its common stock in connection with exercise of stock options. On
+February 29, 2000, the Company announced a 1,500,000 stock repurchase program.
+As of December 31, 2000, the Company repurchased 900,000 shares of the Company's
+common stock at a total cost of $6,076.
+INFLATION
+The Company does not believe that inflation has had a material adverse effect on
+sales or income during the past several years. Competitive pressures could limit
+the extent to which such costs could be passed along in the form of increased
+prices. As such, inflationary price increases in operating costs could adversely
+affect the profitability of the Company's operations.
+Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
+Not applicable.
+Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
+See financial statements following Item 14 of this Annual Report on
+Form 10-K.
+Item 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND
+FINANCIAL DISCLOSURE.
+None.
+PART III
+Item 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
+COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT OF THE REGISTRANT.
+Incorporated herein by reference from the Company's definitive proxy
+statement to be filed pursuant to Regulation 14A under the Securities Exchange
+Act of 1934.
+Item 11. EXECUTIVE COMPENSATION
+Incorporated herein by reference from the Company's definitive proxy
+statement to be filed pursuant to Regulation 14A under the Securities Exchange
+Act of 1934.
+34
+Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
+Incorporated herein by reference from the Company's definitive proxy
+statement to be filed pursuant to Regulation 14A under the Securities Exchange
+Act of 1934.
+Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
+Incorporated herein by reference from the Company's definitive proxy
+statement to be filed pursuant to Regulation 14A under the Securities Exchange
+Act of 1934.
+PART IV
+Item 14. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
+(a)(1) Financial Statements
+The following consolidated financial statements of Steven Madden, Ltd.
+and subsidiaries are included in Item 8:
+35
+STEVEN MADDEN, LTD. AND SUBSIDIARIES
+CONTENTS
+Page
+----
+CONSOLIDATED FINANCIAL STATEMENTS
+Independent auditors' report F-2
+Balance sheets as of December 31, 2000 and 1999 F-3
+Statements of operations for the years ended December 31, 2000, 1999
+and 1998 F-4
+Statements of changes in stockholders' equity for the years ended
+December 31, 2000, 1999 and 1998 F-5
+Statements of cash flows for the years ended December 31, 2000, 1999
+and 1998 F-6
+Notes to financial statements F-7
+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 as of December 31, 2000, and 1999, and the related
+consolidated statements of operations, changes in stockholders' equity and cash
+flows for each of the years in the three-year period ended December 31, 2000.
+These financial statements are the responsibility of the Company's management.
+Our responsibility is to express an opinion on these financial statements based
+on our audits.
+We conducted our audits in accordance with auditing standards generally accepted
+in the United States. Those standards require that we plan and perform the
+audits to obtain reasonable assurance about whether the financial statements are
+free of material misstatement. An audit includes examining, on a test basis,
+evidence supporting the amounts and disclosures in the financial statements. An
+audit also includes assessing the accounting principles used and significant
+estimates made by management, as well as evaluating the overall financial
+statement presentation. We believe that our audits provide a reasonable basis
+for our opinion.
+In our opinion, the financial statements enumerated above present fairly, in all
+material respects, the consolidated financial position of Steven Madden, Ltd.
+and subsidiaries as of December 31, 2000 and 1999, 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, 2000 in conformity with accounting
+principles generally accepted in the United States.
+New York, New York
+February 14, 2001
+(March 14, 2001 with respect to Note J[3])
+F-2
+STEVEN MADDEN, LTD. AND SUBSIDIARIES
+CONSOLIDATED BALANCE SHEETS
+December 31,
+----------------------------
+2000 1999
+------------ ------------
+ASSETS
+Current assets:
+Cash and cash equivalents $ 35,259,000 $ 37,361,000
+Investments 257,000
+Accounts receivable - net of allowances of $774,000 and $886,000 2,417,000 1,207,000
+Due from factor - net of allowances of $866,000 and $624,000 15,155,000 12,146,000
+Inventories 15,824,000 10,158,000
+Prepaid expenses and other current assets 1,289,000 867,000
+Deferred taxes 1,300,000 800,000
+------------ ------------
+Total current assets 71,244,000 62,796,000
+Property and equipment, net 15,600,000 11,114,000
+Deferred taxes 2,462,000 1,612,000
+Deposits and other 222,000 269,000
+Cost in excess of fair value of net assets acquired - net of accumulated
+amortization of $575,000 and $436,000 2,205,000 2,344,000
+------------ ------------
+$ 91,733,000 $ 78,135,000
+============ ============
+LIABILITIES
+Current liabilities:
+Current portion of capital lease obligations $ 128,000 $ 116,000
+Accounts payable 9,502,000 6,542,000
+Accrued expenses 4,178,000 2,528,000
+Income tax payable 4,957,000
+Accrued bonuses 229,000 577,000
+------------ ------------
+Total current liabilities 14,037,000 14,720,000
+Deferred rent 1,074,000 777,000
+Capital lease obligations, less current portion 56,000 203,000
+------------ ------------
+15,167,000 15,700,000
+------------ ------------
+Commitments, contingencies and other (Note J)
+STOCKHOLDERS' EQUITY
+Preferred stock - $.0001 par value, 5,000,000 shares authorized; none issued
+Common stock - $.0001 par value, 60,000,000 shares authorized, 12,306,684
+and 11,797,793 shares issued 1,000 1,000
+Additional paid-in capital 46,688,000 42,906,000
+Retained earnings 38,765,000 22,722,000
+Unearned compensation (897,000) (1,279,000)
+Treasury stock - 1,245,204 and 345,204 shares at cost (7,991,000) (1,915,000)
+------------ ------------
+76,566,000 62,435,000
+------------ ------------
+$ 91,733,000 $ 78,135,000
+============ ============
+See notes to financial statements F-3
+STEVEN MADDEN, LTD. AND SUBSIDIARIES
+CONSOLIDATED STATEMENTS OF OPERATIONS
+Year Ended December 31,
+-----------------------------------------------
+2000 1999 1998
+------------- ------------- -------------
+Net sales $ 205,113,000 $ 163,036,000 $ 85,783,000
+Cost of sales 115,495,000 94,536,000 49,893,000
+------------- ------------- -------------
+Gross profit 89,618,000 68,500,000 35,890,000
+Commission and licensing fee income 4,847,000 3,367,000 3,273,000
+Operating expenses (68,833,000) (52,946,000) (29,949,000)
+------------- ------------- -------------
+Income from operations before other income (expenses) 25,632,000 18,921,000 9,214,000
+Other income (expenses):
+Interest income 1,744,000 909,000 380,000
+Interest expense (102,000) (90,000) (235,000)
+Gain on sale of marketable securities 230,000
+------------- ------------- -------------
+Income before provision for income taxes 27,504,000 19,740,000 9,359,000
+Provision for income taxes 11,461,000 8,274,000 3,912,000
+------------- ------------- -------------
+NET INCOME $ 16,043,000 $ 11,466,000 $ 5,447,000
+============= ============= =============
+BASIC INCOME PER SHARE $ 1.42 $ 1.06 $ 0.58
+============= ============= =============
+DILUTED INCOME PER SHARE $ 1.26 $ 0.92 $ 0.50
+============= ============= =============
+WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - BASIC
+INCOME PER SHARE 11,310,130 10,831,250 9,436,798
+EFFECT OF DILUTIVE SECURITIES OPTIONS AND WARRANTS 1,387,244 1,634,102 1,546,303
+------------- ------------- -------------
+WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - DILUTED
+INCOME PER SHARE 12,697,374 12,465,352 10,983,101
+============= ============= =============
+See notes to financial statements F-4
+STEVEN MADDEN, LTD. AND SUBSIDIARIES
+CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
+Common Stock Additional
+----------------------- Paid-in Retained Unearned
+Shares Amount Capital Earnings Compensation
+---------- -------- ------------ ----------- -------------
+BALANCE - DECEMBER 31, 1997 8,429,073 $ 1,000 $ 21,721,000 $ 5,809,000 $ (1,281,000)
+Exercise of stock options, units and warrants
+net of costs of $60,000 2,447,050 13,345,000
+Common stock issued in connection with acquisition 64,520 667,000
+Compensation in connection with issuance of stock
+options to a consultant 14,000
+Tax benefit from exercise of options 198,000
+Net income 5,447,000
+Unearned compensation relating to issuance of
+stock options 656,000 (656,000)
+Amortization of unearned compensation 276,000
+Common stock purchased for treasury
+----------- -------- ------------ ------------ ------------
+BALANCE - DECEMBER 31, 1998 10,940,643 1,000 36,601,000 11,256,000 (1,661,000)
+Exercise of stock options and warrants 857,150 5,264,000
+Tax benefit from exercise of options 275,000
+Compensation in connection with issuance of stock
+options to a director 766,000
+Net income 11,466,000
+Amortization of unearned compensation 382,000
+Common stock purchased for treasury
+----------- -------- ------------ ------------ ------------
+BALANCE - DECEMBER 31, 1999 11,797,793 1,000 42,906,000 22,722,000 (1,279,000)
+Exercise of stock options and warrants 508,891 2,807,000
+Tax benefit from exercise of options 975,000
+Net income 16,043,000
+Amortization of unearned compensation 382,000
+Common stock purchased for treasury
+----------- -------- ------------ ------------ ------------
+BALANCE - DECEMBER 31, 2000 12,306,684 $ 1,000 $ 46,688,000 $ 38,765,000 $ (897,000)
+=========== ======== ============ ============ ============
+Treasury Stock Total
+----------------------- Stockholders'
+Shares Amount Equity
+--------- ----------- ------------
+BALANCE - DECEMBER 31, 1997 101,800 $ (457,000) $ 25,793,000
+Exercise of stock options, units and warrants
+net of costs of $60,000 13,345,000
+Common stock issued in connection with acquisition 667,000
+Compensation in connection with issuance of stock
+options to a consultant 14,000
+Tax benefit from exercise of options 198,000
+Net income 5,447,000
+Unearned compensation relating to issuance of
+stock options 0
+Amortization of unearned compensation 276,000
+Common stock purchased for treasury 168,404 (780,000) (780,000)
+--------- ----------- ------------
+BALANCE - DECEMBER 31, 1998 270,204 (1,237,000) 44,960,000
+Exercise of stock options and warrants 5,264,000
+Tax benefit from exercise of options 275,000
+Compensation in connection with issuance of stock
+options to a director 766,000
+Net income 11,466,000
+Amortization of unearned compensation 382,000
+Common stock purchased for treasury 75,000 (678,000) (678,000)
+--------- ----------- ------------
+BALANCE - DECEMBER 31, 1999 345,204 (1,915,000) 62,435,000
+Exercise of stock options and warrants 2,807,000
+Tax benefit from exercise of options 975,000
+Net income 16,043,000
+Amortization of unearned compensation 382,000
+Common stock purchased for treasury 900,000 (6,076,000) (6,076,000)
+--------- ----------- ------------
+BALANCE - DECEMBER 31, 2000 1,245,204 $(7,991,000) $ 76,566,000)
+========= =========== ============
+See notes to financial statements F-5
+STEVEN MADDEN, LTD. AND SUBSIDIARIES
+CONSOLIDATED STATEMENTS OF CASH FLOWS
+Year Ended December 31,
+--------------------------------------------
+2000 1999 1998
+------------ ------------ ------------
+CASH FLOWS FROM OPERATING ACTIVITIES:
+Net income $ 16,043,000 $ 11,466,000 $ 5,447,000
+Adjustments to reconcile net income to net cash provided by
+operating activities:
+Compensatory stock options 766,000 14,000
+Depreciation and amortization 3,586,000 2,950,000 1,357,000
+Deferred taxes (1,350,000) (1,585,000) (426,000)
+Deferred compensation 382,000 382,000 276,000
+Tax benefit from exercise of options 975,000 275,000 198,000
+Provision for doubtful accounts and chargebacks 506,000 757,000 228,000
+Deferred rent expense 297,000 392,000 385,000
+Gain on sale of marketable securities (230,000)
+Changes, net of acquisitions, in:
+Accounts receivable (1,474,000) (767,000) (9,000)
+Due from factor (3,251,000) (3,062,000) (4,552,000)
+Inventories (5,666,000) (2,187,000) (2,716,000)
+Prepaid expenses and other assets (375,000) 2,098,000 717,000
+Accounts payable and accrued expenses 4,610,000 6,120,000 386,000
+Accrued bonuses (348,000) 346,000 (362,000)
+Income tax payable (4,957,000) 4,957,000 111,000
+------------ ------------ ------------
+Net cash provided by operating activities 8,748,000 22,908,000 1,054,000
+------------ ------------ ------------
+CASH FLOWS FROM INVESTING ACTIVITIES:
+Purchase of property and equipment (7,933,000) (4,902,000) (4,259,000)
+Purchases of investment securities (257,000) (499,000)
+Maturity/sale of investment securities 487,000 499,000 1,991,000
+Payments in connection with acquisition of business (35,000)
+------------ ------------ ------------
+Net cash used in investing activities (7,446,000) (4,660,000) (2,802,000)
+------------ ------------ ------------
+CASH FLOWS FROM FINANCING ACTIVITIES:
+Proceeds from options, units and warrants exercised - net 2,807,000 5,264,000 13,345,000
+Purchase of treasury stock (6,076,000) (678,000) (780,000)
+Payments of lease obligations (135,000) (115,000) (62,000)
+------------ ------------ ------------
+Net cash (used in) provided by financing activities (3,404,000) 4,471,000 12,503,000
+------------ ------------ ------------
+NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (2,102,000) 22,719,000 10,755,000
+Cash and cash equivalents - beginning of year 37,361,000 14,642,000 3,887,000
+------------ ------------ ------------
+CASH AND CASH EQUIVALENTS - END OF YEAR $ 35,259,000 $ 37,361,000 $ 14,642,000
+============ ============ ============
+SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND
+FINANCING ACTIVITIES:
+Acquisition of leased assets $ 32,000
+Common stock issued in connection with acquisition $ 667,000
+SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
+Cash paid during the year for:
+Interest $ 102,000 $ 90,000 $ 235,000
+Income taxes $ 16,172,000 $ 3,886,000 $ 3,902,000
+See notes to financial statements F-6
+STEVEN MADDEN, LTD. AND SUBSIDIARIES
+NOTES TO FINANCIAL STATEMENTS
+DECEMBER 31, 2000 AND 1999
+NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
+[1] ORGANIZATION:
+Steven Madden, Ltd. was incorporated on July 9, 1990, in the state of New
+York and reincorporated in the state of Delaware on November 10, 1998. The
+Company is engaged primarily in the business of designing and sourcing
+women's shoes and to a lesser extent, girl's shoes, for sale through its'
+wholesale and retail channels. The Company markets footwear under the
+Steven Madden, David Aaron, Stevies and Lei (under license) brand names.
+Revenues are generated predominately through the sale of the Company's
+brand name merchandise and certain licensed product. See Note K for
+operating segment information.
+[2] PRINCIPLES OF CONSOLIDATION:
+The consolidated financial statements include the accounts of Steven
+Madden, Ltd. and its wholly owned subsidiaries Steven Madden Retail, Inc.,
+DIVA. Acquisition Corp., Adesso-Madden, Inc. and Stevies, Inc.
+(collectively referred to as the "Company"). All significant intercompany
+balances and transactions have been eliminated.
+[3] USE OF ESTIMATES:
+The preparation of financial statements in conformity with generally
+accepted accounting principles requires management to make estimates and
+assumptions that affect the reported amounts of assets and liabilities and
+disclosure of contingent assets and liabilities at the date of the
+financial statements and the reported amounts of revenues and expenses
+during the reporting period. Actual results could differ from those
+estimates.
+[4] CASH AND CASH EQUIVALENTS:
+Cash equivalents at December 31, 2000 and 1999, amounted to approximately
+$28,865,000 and $33,557,000, respectively, and consist of certificates of
+deposit and commercial paper. The Company considers all highly liquid
+instruments with an original maturity of three months or less to be cash
+equivalents.
+[5] INVESTMENTS:
+Investments held at December 31, 1999 consist of marketable equity
+securities, classified as available for sale, which are stated at quoted
+market price. Unrealized gains or losses, if any, are reflected as a
+separate component of stockholders' equity.
+[6] INVENTORIES:
+Inventories, which consist of finished goods, are stated at the lower of
+cost (first-in, first-out method) or market.
+[7] PROPERTY AND EQUIPMENT:
+Property and equipment are stated at cost less accumulated depreciation and
+amortization. Depreciation is computed utilizing the straight-line method
+based on estimated useful lives ranging from two to ten years. Leasehold
+improvements are amortized utilizing the straight-line method over the
+shorter of their estimated useful lives or the lease term. Depreciation and
+amortization include amounts relating to property and equipment under
+capital leases.
+F-7
+STEVEN MADDEN, LTD. AND SUBSIDIARIES
+NOTES TO FINANCIAL STATEMENTS
+DECEMBER 31, 2000 AND 1999
+NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
+[7] PROPERTY AND EQUIPMENT: (CONTINUED)
+Impairment losses are recognized for long-lived assets, including certain
+intangibles, used in operations when indicators of impairment are present
+and the undiscounted cash flows estimated to be generated by those assets
+are not sufficient to recover the assets' carrying amount. Impairment
+losses are measured by comparing the fair value of the assets to their
+carrying amount. No impairment losses have been incurred for the years
+presented.
+[8] COST IN EXCESS OF FAIR VALUE OF NET ASSETS ACQUIRED:
+Cost in excess of fair value of net assets acquired relates to the
+acquisitions of Diva International, Inc. and Daniel Scott, Inc. (Note B)
+and is being amortized over 20 years.
+[9] NET INCOME PER SHARE:
+Basic income per share is based on the weighted average number of common
+shares outstanding during the year. Diluted income per share reflects the
+potential dilution assuming common shares were issued upon the exercise of
+outstanding in-the-money options and warrants and the proceeds thereof were
+used to purchase treasury stock at the average market price during the
+period. For the year ended December 31, 2000, options exercisable into
+approximately 300,000 shares of common stock have not been included in the
+calculation of diluted income per share as the result would have been
+antidilutive.
+[10] ADVERTISING COSTS:
+The Company expenses costs of print, radio and billboard advertisements as
+of the first date the advertisements take place. Advertising expense
+included in operating expenses amounted to $6,941,000 in 2000, $5,046,000
+in 1999 and $2,515,000 in 1998.
+[11] FAIR VALUE OF FINANCIAL INSTRUMENTS:
+The carrying value of the Company's financial instruments approximate fair
+value due to their short-term nature or their underlying terms.
+[12] STOCK-BASED COMPENSATION:
+The Company has elected to continue to account for its stock-based
+compensation plans using the intrinsic value method prescribed by
+Accounting Principles Board Opinion No. 25 ("APB No. 25"), "Accounting for
+Stock Issued to Employees". Under the provisions of APB No. 25, employee
+compensation arising from the grant of stock options is measured as the
+excess, if any, of the quoted market price of the Company's common stock at
+the date of the grant over the amount an employee must pay to acquire the
+stock.
+[13] REVENUE RECOGNITION:
+Wholesale revenues, including commissions received in conjunction with
+private label footwear, are recognized upon shipment of products to
+customers. Allowances for estimated discounts and returns are recognized
+when sales are recorded. Retail sales are recognized when the payment is
+received from customers and are recorded net of returns. Licensing revenue
+is recognized on the basis of net sales reported by the licensee.
+F-8
+STEVEN MADDEN, LTD. AND SUBSIDIARIES
+NOTES TO FINANCIAL STATEMENTS
+DECEMBER 31, 2000 AND 1999
+NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
+[14] RECENTLY ISSUED ACCOUNTING STANDARDS:
+In December 1999, the Securities and Exchange Commission ("SEC") issued
+Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in
+Financial Statements," which provides guidance related to revenue
+recognition and was effective the first fiscal quarter of fiscal years
+beginning after December 15, 1999, and requires companies to report any
+changes in revenue recognition as a cumulative change in an accounting
+principle at the time of implementation, in accordance with APB Opinion 20,
+"Accounting Changes." Subsequently, SAB Nos. 101A and 101B were issued to
+delay the implementation of SAB No. 101. Management believes that the
+adoption had no effect on the Company's revenue recognition policies. The
+Company adopted this pronouncement during the fiscal year ended December
+31, 2000.
+In 2000, the Financial Accounting Standards Board ("FASB") issued
+Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
+Compensation," an interpretation of APB Opinion No. 25, "Stock Issued to
+Employees." Interpretation No. 44 clarifies the application of APB No. 25
+for the definition of an employee for purposes of applying APB No. 25, the
+criteria for determining whether a plan qualifies as a non-compensatory
+plan, the accounting consequences of various modifications to the terms of
+previously granted stock options or awards, and the accounting for an
+exchange of stock compensation awards in a business combination. The
+application of this interpretation had no effect on the financial
+statements for the fiscal year ended December 31, 2000.
+Also in 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and
+Servicing of Financial Assets and Extinguishments of Liabilities." The
+standard revises FASB Statement No. 125 and requires additional disclosure.
+The adoption of this standard will have no material effect on the financial
+statements.
+NOTE B - ACQUISITIONS
+On May 1, 1998, the Company purchased certain assets from and assumed certain
+liabilities of Daniel Scott, Inc. which operated two retail outlet stores under
+the name Shoe Biz located in Mineola, N.Y. in exchange for 64,520 shares of
+common stock. The acquisition was recorded at a total cost of approximately
+$703,000, including related expenses, of which $635,000 was allocated to cost in
+excess of fair value of the identifiable net assets acquired. The acquisition
+was accounted for as a purchase and accordingly, the results of operations of
+the acquired entity were included in the consolidated statements of operations
+from the date of acquisition.
+NOTE C - PROPERTY AND EQUIPMENT
+The major classes of assets and accumulated depreciation and amortization are as
+follows:
+December 31,
+----------------------------
+2000 1999
+------------ ------------
+Leasehold improvements $ 16,065,000 $ 11,427,000
+Machinery and equipment 805,000 628,000
+Furniture and fixtures 2,596,000 1,399,000
+Computer equipment 4,414,000 2,461,000
+Equipment under capital lease 217,000 249,000
+------------ ------------
+24,097,000 16,164,000
+Less accumulated depreciation and amortization (8,497,000) (5,050,000)
+------------ ------------
+Property and equipment - net $ 15,600,000 $ 11,114,000
+============ ============
+F-9
+STEVEN MADDEN, LTD. AND SUBSIDIARIES
+NOTES TO FINANCIAL STATEMENTS
+DECEMBER 31, 2000 AND 1999
+NOTE D - DUE FROM FACTOR
+Under the terms of a factoring agreement, the Company may request advances from
+the factor up to 80 percent of aggregate receivables purchased by the factor at
+an interest rate of prime minus 1%. The Company also pays a fee equal to .70% of
+the gross invoice amount of each receivable purchased. In addition, the factor
+charges an annual unused line fee of .25% of the average daily unused portion of
+the maximum credit line which is $15,000,000. The Company sells and assigns a
+substantial portion of its receivables, principally without recourse, to the
+factor. At December 31, 2000, $436,000 of factored receivables were sold by the
+Company with recourse. The factor assumes the credit risk of all assigned
+accounts approved by it, but maintains liens on all inventory, trade receivables
+(whether or not assigned) and the goods represented thereby. These transfers are
+recognized as sales of receivables.
+NOTE E - STOCK OPTIONS
+The Company established various stock option plans under which options to
+purchase shares of common stock may be granted to employees, directors,
+officers, agents, consultants and independent contractors. The plans provide
+that the option price shall not be less than the fair market value of the common
+stock on the date of grant and that no portion of the option may be exercised
+beyond ten years from that date. No incentive stock option can be granted for
+more than five years to a stockholder owning 10% or more of the Company's
+outstanding common stock. Options granted under the plans during the three years
+ended December 31, 2000 vest on the date of grant or up to three years from such
+date.
+In June 1999, the Company adopted the 1999 Stock Plan under which the maximum
+number of shares to which awards may be granted was initially 400,000 shares. In
+May 2000, the stockholders approved an amendment to the 1999 Stock Plan to
+increase the maximum number of shares subject to the plan to 975,000 shares.
+Terms of the 1999 Stock Plan are not materially different from the various
+existing stock option plans.
+Through December 31, 2000, 950,000 options had been granted under the 1999 Stock
+Plan, as amended, and as of such date 25,000 shares were available for the
+granting of future options under the 1999 Stock Plan.
+The Company granted options to an executive to purchase 250,000 shares of the
+Company's common stock at $7.50 per share in 1998. The market value of the stock
+at the date of grant was $10.125 per share. The Company recorded approximately
+$656,000 as unearned compensation relating to such options, of which
+approximately $254,000, $254,000 and $148,000 was charged to operations during
+the years ended December 31, 2000, 1999 and 1998, respectively.
+In connection with the former President's amended employment agreement, in 1997,
+the Company issued options to purchase 500,000 shares of its common stock. The
+options, which vested in August 1998, have an exercise price of $3.31 and an
+exercise period of 10 years. Unearned compensation was recorded in the amount of
+$1,345,000 which represents the difference between the exercise price and the
+fair value of the stock on the date of grant, and is classified as a component
+of stockholders' equity. The unearned compensation is being amortized over the
+ten-year term of the amended agreement. Accordingly, $128,000 has been charged
+to operations for 2000, 1999 and 1998.
+F-10
+STEVEN MADDEN, LTD. AND SUBSIDIARIES
+NOTES TO FINANCIAL STATEMENTS
+DECEMBER 31, 2000 AND 1999
+NOTE E - STOCK OPTIONS (CONTINUED)
+Activity relating to stock options during the three years ended December 31,
+2000:
+2000 1999 1998
+--------------------- --------------------- ---------------------
+Number Average Number Average Number Average
+of Exercise of Exercise of Exercise
+Shares Price Shares Price Shares Price
+--------- -------- --------- -------- --------- --------
+Outstanding at January 1 2,720,000 $ 5.85 2,968,000 $ 5.16 2,300,000 $ 4.54
+Granted 550,000 9.09 617,000 9.57 1,070,000 7.07
+Exercised (509,000) 5.52 (857,000) 6.14 (222,000) 5.55
+Cancelled (12,000) 6.34 (8,000) 6.14 (180,000) 7.44
+--------- --------- ---------
+Outstanding at December 31 2,749,000 6.36 2,720,000 5.85 2,968,000 5.16
+========= ========= =========
+Exercisable 2,575,000 6.06 2,515,000 5.48 2,530,000 4.79
+========= ========= =========
+The following table summarizes information about stock options at December 31,
+2000:
+Options Outstanding Options Exercisable
+------------------------------- ------------------------
+Weighted
+Average
+Remaining
+Contractual Weighted
+Life Average Average
+Range of Number (in Exercise Number Exercise
+Exercise Price Outstanding Years) Price Exercisable Price
+-------------- ----------- ------- -------- ----------- ---------
+$1.50 to $3.50 830,000 5.1 $ 2.35 830,000 $ 2.35
+$5.50 to $6.00 434,000 7.2 5.79 434,000 5.79
+$6.50 to $7.97 960,000 8.1 7.31 929,000 7.33
+$9.13 to $10.83 205,000 7.9 10.26 205,000 10.26
+$11.81 to $12.00 300,000 9.4 11.71 157,000 11.78
+$18.75 20,000 9.7 18.75 20,000 18.75
+--------- ---------
+2,749,000 6.36 2,575,000 6.06
+========= =========
+As set forth in Note A[12], the Company applies APB No. 25 in accounting for its
+stock option incentive plans and, accordingly, recognizes compensation expense
+for the difference between the fair value of the underlying common stock and the
+grant price of the option at the date of grant. Pro forma information regarding
+net income and earnings per share is required by Statement of Financial
+Accounting Standards No. 123 ("SFAS No.123") "Accounting for Stock-Based
+Compensation" and has been determined as if the Company had accounted for its
+employee stock options under the fair value method of SFAS No.123. For purposes
+of pro forma disclosures, the estimated fair value of the options is amortized
+to expense over the options vesting period. Substantially all options granted in
+2000, 1999 and 1998 vested on date of grant, and accordingly, the estimated fair
+value of such options were charged to expense in the year of grant for pro forma
+disclosures. The Company's pro forma information follows:
+2000 1999 1998
+---- ---- ----
+Net income:
+As reported $ 16,043,000 $ 11,466,000 $ 5,447,000
+Pro forma $ 14,588,000 $ 7,380,000 $ 2,619,000
+Basic income per share:
+As reported $.1.42 $1.06 $ .58
+Pro forma $.1.29 $ .68 $ .28
+Diluted income per share:
+As reported $.1.26 $ .92 $ .50
+Pro forma $.1.15 $ .59 $ .24
+F-11
+STEVEN MADDEN, LTD. AND SUBSIDIARIES
+NOTES TO FINANCIAL STATEMENTS
+DECEMBER 31, 2000 AND 1999
+NOTE E - STOCK OPTIONS (CONTINUED)
+The weighted average fair value of options granted in 2000, 1999 and 1998 was
+approximately $4.54, $6.62 and $4.57, respectively, using the Black-Scholes
+option-pricing model with the following assumptions:
+2000 1999 1998
+---- ---- ----
+Dividend yield 0 0 0
+Volatility 60% 61% 79%
+Risk free interest rate 5.97 - 6.30% 5.75 - 6.03% 4.22 - 5.57%
+Expected life in years 4 4 3 to 5
+NOTE F - WARRANTS
+In connection with its initial public offering, the Company granted to the
+underwriter an option to purchase an aggregate of 150,000 units exercisable for
+four years commencing December 10, 1995 (one year after the effective date) at
+an exercise price of $5.80 per unit. Each unit consisted of one share of common
+stock, one Class A warrant and one Class B warrant. During the year ended
+December 31, 1998 120,000 units were exercised and the Class A and Class B
+warrants issued in connection with the units were also exercised. In connection
+therewith, the Company received proceeds of $1,926,000.
+During July 1998, the Board of Directors of the Company approved the redemption
+of all of the Company's outstanding Class B warrants. Warrant holders had until
+the close of business on August 13, 1998 to exercise their Class B warrants for
+the purchase of shares of common stock at an exercise price of $5.50 per share.
+Unexercised Class B warrants were redeemable on August 14, 1998 at $.05 for each
+outstanding Class B warrant. The Company issued 1,859,690 shares of its common
+stock resulting from the exercise of Class B warrants and received proceeds of
+approximately $10,228,000. The Company redeemed 15,310 Class B warrants not
+exercised.
+The Company also had outstanding 150,000 Class C warrants issued in connection
+with a bridge financing which expired on December 10, 1998.
+NOTE G - TREASURY STOCK
+On February 29, 2000, the Company announced that the Board of Directors
+authorized a share repurchase program to acquire up to 1,500,000 shares of the
+Company's common stock from time to time in open market transactions. In June
+and July 2000, the Company purchased 900,000 shares of common stock in
+connection with such program.
+F-12
+STEVEN MADDEN, LTD. AND SUBSIDIARIES
+NOTES TO FINANCIAL STATEMENTS
+DECEMBER 31, 2000 AND 1999
+NOTE H - LEASES
+[1] CAPITAL LEASES:
+The Company leases certain equipment under capital leases. Future minimum
+lease payments consist of the following:
+2001 $ 141,000
+2002 46,000
+2003 14,000
+-----------
+Total minimum lease payments 201,000
+Less amounts representing interest 17,000
+-----------
+Present value of minimum lease payments 184,000
+Less current maturities 128,000
+-----------
+Capital lease obligation, less current maturities $ 56,000
+===========
+[2] OPERATING LEASES:
+The Company leases office, showroom, warehouse and retail facilities under
+noncancelable operating leases with terms expiring at various times through
+2011. Future minimum annual lease payments under noncancelable operating
+leases consist of the following at December 31, 2000:
+2001 $ 6,339,000
+2002 6,321,000
+2003 5,982,000
+2004 5,820,000
+2005 5,383,000
+Thereafter 16,839,000
+------------
+$ 46,684,000
+============
+A majority of the retail store leases provide for contingent rental
+payments if gross sales exceed certain targets. In addition, many of the
+leases contain rent escalation clauses to compensate for increases in
+operating costs and real estate taxes.
+Rent expense for the years ended December 31, 2000, 1999 and 1998 was
+approximately $7,604,000, $5,870,000 and $3,561,000, respectively. Included
+in such amounts are contingent rents of $122,000, $122,000 and $82,000 in
+2000, 1999 and 1998, respectively.
+Pursuant to certain leases, rent expense charged to operations differs from
+rent paid because of scheduled rent increases. Accordingly, the Company has
+recorded deferred rent. Rent expense is calculated by allocating total
+rental payments, including those attributable to scheduled rent increases,
+on a straight-line basis, over the lease term.
+F-13
+STEVEN MADDEN, LTD. AND SUBSIDIARIES
+NOTES TO FINANCIAL STATEMENTS
+DECEMBER 31, 2000 AND 1999
+NOTE I - INCOME TAXES
+The income tax provision consists of the following:
+2000 1999 1998
+------------ ------------ ------------
+Current:
+Federal $ 9,787,000 $ 7,285,000 $ 3,211,000
+State and city 3,024,000 2,574,000 1,127,000
+------------ ------------ ------------
+12,811,000 9,859,000 4,338,000
+------------ ------------ ------------
+Deferred:
+Federal (1,031,000) (1,167,000) (346,000)
+State and city (319,000) (418,000) (80,000)
+------------ ------------ ------------
+(1,350,000) (1,585,000) (426,000)
+------------ ------------ ------------
+$ 11,461,000 $ 8,274,000 $ 3,912,000
+============ ============ ============
+A reconciliation between taxes computed at the federal statutory rate and the
+effective tax rate is as follows:
+December 31,
+----------------------
+2000 1999 1998
+---- ---- ----
+Income taxes at federal statutory rate 35.0% 34.0% 34.0%
+State income taxes - net of federal income tax
+benefit 6.4 8.6 7.9
+Nondeductible items .3 .3 .1
+Other (1.0) (0.1)
+---- ---- ----
+Effective rate 41.7% 41.9% 41.9%
+==== ==== ====
+The Company applies the liability method in accounting for income taxes. Under
+this method, deferred tax assets and liabilities are determined based on
+differences between financial reporting and tax bases of assets and liabilities
+and are measured using the enacted tax rates and laws that are expected to be in
+effect when the differences are expected to reverse.
+The components of deferred tax assets and liabilities are as follows:
+December 31,
+-------------------------
+2000 1999
+---------- ----------
+Deferred tax assets:
+Depreciation $1,735,000 $ 482,000
+Accounts receivable allowances 617,000 619,000
+Inventory 683,000 482,000
+Nondeductible compensation 276,000 510,000
+Deferred rent 451,000 319,000
+---------- ----------
+Net deferred tax asset $3,762,000 $2,412,000
+========== ==========
+At December 31, 2000 current deferred tax assets amounted to $1,300,000 and
+non-current deferred tax assets amounted to $2,462,000.
+F-14
+STEVEN MADDEN, LTD. AND SUBSIDIARIES
+NOTES TO FINANCIAL STATEMENTS
+DECEMBER 31, 2000 AND 1999
+NOTE J - COMMITMENTS, CONTINGENCIES AND OTHER
+[1] CLASS ACTION LITIGATION:
+On or about August 9, 2000, several class action lawsuits were commenced in
+the United States District Court for the Eastern District of New York
+against the Company, Steven Madden personally, and, in some of the actions,
+the Company's President and its Chief Financial Officer.
+On December 8, 2000, the court consolidated these actions and appointed a
+lead plaintiff and approved the plaintiff as lead counsel. On February 26,
+2001, the plaintiff served a consolidated amended complaint.
+The amended complaint generally alleges that the Company and the individual
+defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act
+of 1934 and Rule 10b-5 promulgated thereunder by issuing false and
+misleading statements, and failing to disclose material adverse information
+relating, among other things, to certain matters and allegations concerning
+Mr. Madden. The plaintiff seeks an unspecified amount of damages, costs and
+expenses on behalf of the plaintiff and all other purchasers of the
+Company's common stock during the period June 21, 1997 through June 20,
+2000. The defendants have until April 12, 2001 to answer the consolidated
+amended complaint. Although the Company has not yet answered or otherwise
+responded to this complaint, the Company believes that it has substantial
+defenses to the claims. The resulting liability, if any, cannot presently
+be determined.
+[2] DERIVATIVE ACTION:
+On or about September 26, 2000, a shareholders derivative action was
+commenced in the United States District Court for the Eastern District of
+New York, captioned, HERRERA V. STEVEN MADDEN AND STEVEN MADDEN, LTD. The
+Company is named as a nominal defendant in the action. The complaint seeks
+to recover alleged damages on behalf of the Company from Mr. Madden's June
+20, 2000 indictment and to require him to disgorge certain profits, bonuses
+and stock option grants he received from the Company. On January 3, 2001,
+the plaintiff filed an amended complaint. On February 2, 2001, both the
+Company and Mr. Madden filed motions to dismiss the amended complaint
+because of the plaintiff's failure to make a pre-litigation demand upon the
+Company's Board of Directors. Briefing on the motions is scheduled to be
+completed shortly. The resulting liability, if any cannot presently be
+determined.
+[3] OTHER MATTER:
+In March 2001, the Company became aware that the SEC issued a formal order
+of investigation with respect to trading in the Company's securities. The
+SEC is investigating possible securities law violations. Certain officers
+and directors of the Company sold shares of the Company's common stock
+during 1999 and the first half of 2000 which were previously disclosed on
+Form 4's filed with the Securities and Exchange Commission. The ultimate
+effects of this matter, if any, cannot reasonably be determined at this
+time.
+[4] LITIGATION SETTLEMENTS:
+The separate actions involving Magnum Fashions, Inc., WK Maxx Industries,
+Ltd. and Lee N' Gi were settled in the aggregate for approximately $175,000
+for the year ended December 31, 2000 and have been included in operating
+expenses.
+F-15
+STEVEN MADDEN, LTD. AND SUBSIDIARIES
+NOTES TO FINANCIAL STATEMENTS
+DECEMBER 31, 2000 AND 1999
+NOTE J - COMMITMENTS, CONTINGENCIES AND OTHER (CONTINUED)
+[5] EMPLOYMENT AGREEMENTS:
+The Company also has an employment agreement with its Chief Executive
+Officer which was amended in February 2000 to extend the term through
+December 2009. The employment agreement provides for salary commitments of
+approximately $4,480,000 over the next nine years. Additionally, the
+agreement provides for a discretionary bonus in cash, capital stock or
+other property as the board may determine from time to time as well as an
+expense allowance. The prior agreement provided for a bonus plan based on
+graduated rates at specified levels of net revenue.
+The Company has employment agreements with two other executives, expiring
+through December 2003 which provide for aggregate annual salaries of
+$575,000, subject to increases. These agreements provide for cash bonuses
+based upon earnings, as defined, and the granting of options at the then
+market price. One agreement provides for 100,000 options and the other is
+based on the calculated amount of the cash bonus.
+[6] LETTERS OF CREDIT:
+At December 31, 2000 and 1999, the Company had open letters of credit for
+the purchase of imported inventories of approximately $6,142,000 and
+$3,163,000, respectively.
+[7] CONCENTRATIONS:
+The Company maintains cash and cash equivalents with various major
+financial institutions which at times are in excess of the amount insured.
+During the year ended December 31, 2000, the Company purchased
+approximately 50% and 27% of their inventory from supplies in China and
+Brazil, respectively.
+During the year ended December 31, 1999, the Company purchased
+approximately 44%, 24% and 19% of their inventory from suppliers in China,
+Brazil and Mexico, respectively. During the year ended December 31, 1998,
+the Company purchased approximately 41% of their inventory from several
+suppliers in Brazil and Mexico.
+Sales to two customers amounted to 14% and 12% of net sales for the year
+ended December 31, 2000. Amounts receivable from these and another customer
+represented 22%, 21% and 12% of accounts receivable at December 31, 2000.
+Sales to two customers amounted to 15% and 10% of net sales and amounts
+receivable at year end from these customers represented 22% and 14% of
+accounts receivable in 1999, respectively.
+Sales to one customer represented approximately 13% of net sales and
+amounts receivable at year end from such customer represented 11% of
+accounts receivable in 1998.
+Sales to such customers are included in the wholesale segment (see Note K).
+Purchases are made primarily in United States dollars.
+F-16
+STEVEN MADDEN, LTD. AND SUBSIDIARIES
+NOTES TO FINANCIAL STATEMENTS
+DECEMBER 31, 2000 AND 1999
+NOTE J - COMMITMENTS, CONTINGENCIES AND OTHER (CONTINUED)
+[8] VALUATION AND QUALIFYING ACCOUNTS:
+The following is a summary of the allowance for doubtful accounts related
+to accounts receivable and the allowance for chargebacks related to the
+amount due from factor for the years ended December 31,:
+2000 1999 1998
+----------- ----------- -----------
+Balance at beginning of year $ 1,510,000 $ 813,000 $ 686,000
+Charged to expense 506,000 757,000 228,000
+Uncollectible accounts written off, net of recoveries (376,000) (60,000) (101,000)
+----------- ----------- -----------
+Balance at end of year $ 1,640,000 $ 1,510,000 $ 813,000
+=========== =========== ===========
+The following is a summary of property and equipment and the related
+accounts of accumulated depreciation and amortization for the years ended
+December 31,:
+2000 1999 1998
+----------- ----------- -----------
+COST BASIS
+Balance at beginning of year $16,164,000 $11,233,000 $ 6,974,000
+Additions 7,933,000 4,931,000 4,259,000
+----------- ----------- -----------
+Balance at end of year 24,097,000 16,164,000 11,233,000
+----------- ----------- -----------
+ACCUMULATED DEPRECIATION AND AMORTIZATION
+Balance at beginning of year 5,050,000 2,242,000 1,013,000
+Depreciation and amortization 3,447,000 2,808,000 1,229,000
+----------- ----------- -----------
+Balance at end of year 8,497,000 5,050,000 2,242,000
+----------- ----------- -----------
+Property and equipment, net $15,600,000 $11,114,000 $ 8,991,000
+=========== =========== ===========
+The following is a summary of cost in excess of fair value and related
+accumulated amortization for the years ended December 31,:
+2000 1999 1998
+---------- ---------- ----------
+COST BASIS
+Balance at beginning of year $2,780,000 $2,780,000 $2,146,000
+Additions 634,000
+---------- ---------- ----------
+Balance at end of year 2,780,000 2,780,000 2,780,000
+---------- ---------- ----------
+ACCUMULATED DEPRECIATION AND AMORTIZATION
+Balance at beginning of year 436,000 297,000 170,000
+Amortization 139,000 139,000 127,000
+---------- ---------- ----------
+Balance at end of year 575,000 436,000 297,000
+---------- ---------- ----------
+Cost in excess of fair value of net assets acquired $2,205,000 $2,344,000 $2,483,000
+========== ========== ==========
+F-17
+STEVEN MADDEN, LTD. AND SUBSIDIARIES
+NOTES TO FINANCIAL STATEMENTS
+DECEMBER 31, 2000 AND 1999
+NOTE K - OPERATING SEGMENT INFORMATION
+The Company's reportable segments are primarily based on methods used to
+distribute its products. The wholesale and retail segments derive revenues from
+sales of women's and girl's footwear. The wholesale segment, through sales to
+department and specialty stores, and the retail segment through operation of its
+own retail stores, derive revenues from sales of branded women's and girls
+footwear. In addition, the wholesale segment has a licensing program that
+extends the Steve Madden brand to accessories and ready-to-wear apparel. The
+other segment represents activities of a subsidiary which earns commissions for
+serving as a buying agent to mass-market merchandisers, shoe chains and other
+off-price retailers with respect to their purchase of private label shoes.
+The accounting policies of the segments are the same as those described in the
+summary of significant accounting policies. The Company evaluates performance
+based on profit or loss from operations before interest income and interest
+expense and before income taxes. The following is information for the Company's
+reportable segments:
+Wholesale Retail Other Consolidated
+------------- ------------- ------------- -------------
+Year ended December 31, 2000:
+Net sales to external customers (a) $ 135,481,000 $ 69,632,000 $ 205,113,000
+Gross profit 50,681,000 38,937,000 89,618,000
+Commissions and licensing fees 1,216,000 $ 3,631,000 4,847,000
+Operating earnings 17,868,000 8,001,000 1,635,000 27,504,000
+Depreciation and amortization 1,000,000 2,581,000 5,000 3,586,000
+Other significant noncash items:
+Deferred compensation 382,000 382,000
+Deferred rent (13,000) 310,000 297,000
+Provision for doubtful accounts 463,000 43,000 506,000
+Segment assets (b) 60,740,000 30,215,000 778,000 91,733,000
+Capital expenditures 1,044,000 6,889,000 7,933,000
+Year ended December 31, 1999:
+Net sales to external customers (a) 114,406,000 48,630,000 163,036,000
+Gross profit 41,484,000 27,016,000 68,500,000
+Commissions and licensing fees 807,000 2,560,000 3,367,000
+Operating earnings 12,130,000 5,910,000 881,000 18,921,000
+Depreciation and amortization 1,244,000 1,703,000 3,000 2,950,000
+Other significant noncash items:
+Deferred compensation 382,000 382,000
+Deferred rent 8,000 384,000 392,000
+Provision for doubtful accounts 733,000 24,000 757,000
+Segment assets (b) 61,713,000 13,500,000 2,922,000 78,135,000
+Capital expenditures 974,000 3,810,000 4,784,000
+Year ended December 31, 1998:
+Net sales to external customers (a) 59,221,000 26,562,000 85,783,000
+Gross profit 21,398,000 14,492,000 35,890,000
+Commissions and licensing fees 594,000 2,679,000 3,273,000
+Operating earnings 5,126,000 2,741,000 1,347,000 9,214,000
+Depreciation and amortization 516,000 837,000 4,000 1,357,000
+Other significant noncash items:
+Deferred compensation 276,000 276,000
+Deferred rent 47,000 336,000 2,000 385,000
+Provision for doubtful accounts 228,000 228,000
+Segment assets (b) 33,731,000 14,663,000 534,000 48,928,000
+Capital expenditures 550,000 3,467,000 4,017,000
+(a) Attributed to the United States, based on the location in which the sale
+originated.
+(b) All long-lived assets, consisting of property and equipment and cost in
+excess of fair value of net assets acquired, are located in the United
+States.
+F-18
+STEVEN MADDEN, LTD. AND SUBSIDIARIES
+NOTES TO FINANCIAL STATEMENTS
+DECEMBER 31, 2000 AND 1999
+NOTE K - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
+The following is a summary of the quarterly results of operations for the years
+ended December 31, 2000 and 1999 (000's omitted):
+March 31 June 30 September 30 December 31
+-------- ------- ------------ -----------
+2000:
+Revenues $44,109 $48,057 $60,108 $52,839
+Cost of sales 25,925 27,123 33,620 28,827
+Commissions and licensing fee income 1,004 1,130 1,233 1,480
+Net income 3,182 3,743 4,600 4,518
+Net income per share:
+Basic 0.28 0.32 0.42 0.41
+Diluted 0.24 0.28 0.38 0.38
+1999:
+Revenues $26,731 $38,056 $48,963 $49,286
+Cost of sales 15,789 21,888 28,962 27,897
+Commissions and licensing
+fees 691 802 896 978
+Net income 1,411 2,364 3,448 4,243
+Net income per share:
+Basic 0.13 0.22 0.32 0.38
+Diluted 0.12 0.19 0.27 0.33
+F-19
+(a)(2) FINANCIAL STATEMENT SCHEDULES
+All other schedules for which provision is made in the applicable
+accounting regulations of the Securities and Exchange Commission are not
+required under the related instructions or are not applicable and therefore,
+have been omitted.
+(b) REPORTS ON FORM 8-K
+(1) None.
+(c) EXHIBITS.
+EXHIBITS
+3.01* Certificate of Incorporation of the Company.
+3.02* By-Laws of the Company.
+4.01* Specimen Certificate for shares of Common Stock.
+10.01* Amended Employment Agreement between the Company and Steven
+Madden.
+10.04* Employment Agreement of Rhonda Brown.
+10.05 Amendment No. 1 to Employment Agreement of Steven Madden.
+10.06 Amendments No. 1, 2 and 3 to Employment Agreement of Rhonda Brown
+10.07 Employment Agreement of Arvind Dharia
+10.08 Employment Agreement of Richard Olicker
+21.01 Subsidiaries of Registrant.
+23.01 Consent of Richard A. Eisner & Company, LLP.
+* Previously filed with the Securities and Exchange Commission.
+SIGNATURE
+Pursuant to the requirements of Section 13 or 15(d) of the Securities
+Exchange Act of 1934, the registrant has duly caused this report to be signed on
+its behalf by the undersigned, thereunto duly authorized.
+Dated: New York, New York
+March 30, 2001
+STEVEN MADDEN, LTD.
+By: /s/ STEVEN MADDEN
+--------------------------------
+Steven Madden
+Chief Executive Officer
+Pursuant to the requirements of the Securities Exchange Act of 1934,
+this report has been signed below by the following persons on behalf of the
+registrant in the capacities and on the dates indicated.
+SIGNATURE TITLE DATE
+/s/ CHARLES KOPPELMAN Chairman of the Board March 30, 2001
+---------------------------
+Charles Koppelman
+/s/ STEVEN MADDEN Chief Executive Officer March 30, 2001
+--------------------------- and Director
+Steven Madden
+/s/ RHONDA BROWN President and Director March 30, 2001
+---------------------------
+Rhonda Brown
+/s/ ARVIND DHARIA Chief Financial Officer March 30, 2001
+--------------------------- and Director
+Arvind Dharia
+/s/ JAMIESON KARSON Director March 30, 2001
+---------------------------
+Jamieson Karson
+/s/ JOHN L. MADDEN Director March 30, 2001
+---------------------------
+John L. Madden
+/s/ PETER MIGLIORINI Director March 30, 2001
+---------------------------
+Peter Migliorini
+/s/ HEYWOOD WILANSKY Director March 30, 2001
+---------------------------
+Heywood Wilansky
+37
\ No newline at end of file
diff --git a/raw/filings/0000913241/2000/0001019056-01-500024/filing_metadata.csv b/raw/filings/0000913241/2000/0001019056-01-500024/filing_metadata.csv
new file mode 100644
index 0000000000000000000000000000000000000000..5c7f2ccdf1211a6ecb16eea7cd1f7d4393af59fe
--- /dev/null
+++ b/raw/filings/0000913241/2000/0001019056-01-500024/filing_metadata.csv
@@ -0,0 +1,2 @@
+cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing
+0000913241,SHOO,"STEVEN MADDEN, LTD.",10-K,2001-03-30,2000-12-31,2001-03-30T05:00:00.000Z,0001019056-01-500024,file001.txt,FORM 10-K,271850,0,0,https://www.sec.gov/Archives/edgar/data/913241/000101905601500024/file001.txt,https://www.sec.gov/Archives/edgar/data/913241/000101905601500024/,2000,2000,1
diff --git a/raw/filings/0000913241/2000/0001019056-01-500024/item1.txt b/raw/filings/0000913241/2000/0001019056-01-500024/item1.txt
new file mode 100644
index 0000000000000000000000000000000000000000..a9d6492c643bbb64d35abb701799370fe197f921
--- /dev/null
+++ b/raw/filings/0000913241/2000/0001019056-01-500024/item1.txt
@@ -0,0 +1,928 @@
+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 websites, catalogs and department and specialty store locations
+in the United States and Canada. The Company's product line includes core
+products, which are sold year-round, complemented by a broad range of updated
+styles which are designed to establish or capitalize on market trends.
+The Company's business is comprised of three (3) distinct segments. The
+wholesale division includes five (5) brands: Steve Madden(R), David Aaron(R),
+l.e.i.(R), Stevies(TM) and the recently introduced Steve Madden Mens brand.
+Steven Madden Retail, Inc., the Company's wholly owned retail subsidiary,
+operates Steve Madden and David Aaron retail stores as well as the Company's
+outlet stores and e-commerce web sites. The Company's wholly owned private label
+subsidiary, Adesso-Madden, Inc., designs and sources footwear products under
+private labels for many of the country's largest mass merchandisers. The Company
+also licenses its Steve Madden(R) and Stevies(TM) trademarks for several
+accessory and apparel categories.
+Steven Madden, Ltd., was incorporated as a New York corporation on July
+9, 1990 and reincorporated under the same name in Delaware in November 1998. The
+Company was founded and developed by Steven Madden, its principal designer, and
+Chief Executive Officer and former Chairman of the Board, which 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".
+RECENT DEVELOPMENTS
+In January 2000, the Company announced the launch of its new
+Stevies(TM) brand which is marketed to girls ages 6 to 12 years old. The new
+footwear line mirrors some of the design concepts and attitudes present in the
+Steve Madden(R) brand and is distributed through moderate and better department
+stores and footwear specialty stores. The Company commenced shipping Stevies'
+products in time for the most recent back-to-school season.
+During the Spring and Summer of 2000, the Company also licensed the
+Stevies(TM) trademark for additional product categories and launched the
+e-commerce website, WWW.STEVIES.COM. In light of the fact that the Company
+believed that licensing opportunities were not being fully exploited, in January
+2001 the Company engaged Jassin O'Rourke Group, LLC, a consulting firm, to
+enhance the Company's licensing efforts. In February 2001, the Company
+terminated existing licensing agreements for jewelry and hair accessories for
+the Steve Madden(R) and Stevies(TM) brands, and sportswear for the Stevies(TM)
+brand. The Company expects that, with the assistance of Jassin O'Rourke, it will
+be successful in improving its licensed product business.
+2
+On October 2, 2000, the Company announced the engagement of Bear
+Stearns & Company as financial advisor to the Company. Bear Stearns was engaged
+to explore strategic alternatives for the Company.
+In November 2000, the Company announced its plans to launch the Steve
+Madden Mens footwear line. The line is managed by the Company's wholesale
+division and is designed and marketed with the signature Steve Madden(R) brand
+name. A preview of the new line debuted at the FFANY Shoe Show in December 2000
+and select styles were shipped to retail customers for the Spring 2001 selling
+season. The full collections were unveiled in February 2001 at the MAGIC and WSA
+Shoe Shows in Las Vegas. The new men's collection is targeted towards stylish
+male consumers between the ages of 20 and 35. The line incorporates similar
+design themes present in the Steve Madden women's footwear collection with
+retail price points ranging from $79-$99 a pair.
+The Company maintains its principal executive offices at 52-16 Barnett
+Avenue, Long Island City, NY 11104, telephone number (718) 446-1800.
+STEVEN MADDEN - WHOLESALE DIVISION
+The wholesale division sources, sells and markets the Company's Steve
+Madden(R) brand to major department stores, better specialty stores, and shoe
+stores throughout the country and Canada. During the last few years the Steve
+Madden(R) product line has become a leading footwear brand in the fashion
+conscious junior marketplace. By the end of 2000, the Steve Madden brand was
+sold in approximately 3,000 doors throughout the country. To serve its customers
+(primarily women ages 16 to 25), the wholesale division creates and markets
+fashion forward footwear designed to appeal to customers seeking exciting, new
+footwear designs at reasonable prices. In November 2000, the wholesale division
+expanded its marketing plan to include a men's footwear line which targets
+fashion conscious men ages 20 to 35.
+As the Company's largest division, the Steve Madden(R) wholesale
+division accounted for $87,977,000 in sales in 2000, or approximately 43% of the
+Company's total revenues. Many of the wholesale division's newly created styles
+are test marketed at the Company's retail stores. Within a few days, the Company
+can determine if a test product appeals to customers. This enables the Company
+to use its flexible sourcing model to rapidly respond to changing preferences
+which the Company believes is essential for success in the fashion footwear
+marketplace.
+DIVA ACQUISITION CORP. - THE DAVID AARON(R) WHOLESALE DIVISION
+Diva Acquisition Corp. ("Diva") designs and markets fashion footwear to
+women under the "David Aaron(R)" trademark through major department stores and
+better footwear specialty stores and two (2) Company owned retail shoe stores
+located in the Soho area of Manhattan and in Paramus, NJ. Priced a tier above
+the Steve Madden(R) brand, Diva's products are designed to appeal principally to
+fashion conscious women, ages 26 to 45, who shop at department stores and
+footwear boutiques. As of December 31, 2000, the David Aaron brand was sold in
+approximately 652 doors across the country. The Company recorded sales from the
+David Aaron(R) brand of $3,616,000 for the year ended December 31, 2000, or
+approximately 1.8% of the Company's total revenues. Revenues from the sale of
+3
+David Aaron footwear decreased by approximately 55% compared to the preceding
+year due to the repositioning and reorganization of the David Aaron brand. The
+Company intentionally planned to reduce its volume in 2000 enabling the David
+Aaron Division to use its two retail stores to test the popularity of new
+products. The Company intends to sell its most successful David Aaron products
+at wholesale beginning in Spring 2001.
+l.e.i. (R) - WHOLESALE DIVISION
+In September, 2000, the Company renewed its license agreement with
+R.S.V. Sport, Inc. pursuant to which the Company continues to have the right to
+use the l.e.i.(R) trademark in connection with the sale and marketing of
+footwear. The l.e.i.(R) trademark is well known for jeanswear in the junior
+marketplace and nationally through department and specialty stores. The
+Company's l.e.i.(R) footwear products were targeted to attract girls ages 6 to
+11 years old and young women ages 12 to 20 years old, a majority of which are
+younger than the typical Steve Madden(R) brand customer. At year end, l.e.i.
+footwear products were sold in major department shores and footwear specialty
+shops (approximately 3,500 doors ) across the country, an increase of 40% over
+the year ending December 31, 1999. The l.e.i. Wholesale Division generated
+revenue of $37,741,000 for the year ended December 31, 2000, or approximately
+18.4% of the Company's total revenues.
+STEVIES INC. - WHOLESALE DIVISION
+In the first quarter, the Company introduced a new brand, Stevies(TM).
+Stevies(TM) is a fashion brand which targets girls ages 6-9 and "tweens" ages
+10-12. The Company's new Stevies Wholesale Division ("Stevies Wholesale")
+commenced shipping to department stores throughout the country in the second
+quarter of 2000. Stevies Wholesale generated revenue of $6,147,000 for the year
+ended December 31, 2000, or approximately 3% of the Company's total revenues.
+Stevies(TM) now sells in over 1,000 doors, including store groups such as
+Nordstroms, Federated Department Stores, May Company stores, Belks, Dillards,
+Limited Too, as well as independent children's stores throughout the country.
+The Stevies(TM) brand ended the year with over 800 Stevies(TM) concept shop
+locations and over 500 Stevies(TM) accessories concept locations which display
+accessories and slippers. The web site for Stevies (TM) at www.stevies.com went
+live in March of 2000 and commenced e-commerce operation in July 2000.
+STEVEN MADDEN RETAIL, INC. - RETAIL DIVISION
+As of December 31, 2000, the Company owned and operated fifty-six (56)
+retail shoe stores under the Steve Madden(R) name, two (2) under the David
+Aaron(R) name, six (6) outlet stores and one (1) Internet store (through the
+www.stevemadden.com, www.stevies.com, and www.stevemaddenmens.com) web sites.
+Most of the Steve Madden stores are located in major shopping malls in
+California, Colorado, District of Columbia, Florida, Georgia, Illinois,
+Maryland, Massachusetts, Michigan, Minnesota, Nevada, New Jersey, New York,
+Ohio, Pennsylvania, Rhode Island, Texas and Virginia. Each of the Steve
+Madden(R) stores has been designed to appeal to young fashion conscious women by
+creating a "nightclub" type atmosphere. The retail stores have been very
+successful for the Company, generating annual sales in excess of $700 per square
+foot. Sales are primarily from the sale of the Company's Steve Madden(R) product
+line. Same store sales increased 10% in 2000 over 1999 sales and total sales for
+4
+the retail division were $70 million compared to $49 million for 1999. Sales
+from the retail division for year ended December 31, 2000 were approximately 34%
+of the Company's total sales.
+The Company believes that the Retail Division will continue to enhance
+overall sales and profits while building equity in the Steve Madden brand. It is
+for these reasons that the Company intends to add approximately ten (10) new
+retail stores during the 2001 calendar year. Additionally, the expansion of the
+Retail Division enables the Company to test and react to new products and
+classifications which strengthens the product development efforts of the Steve
+Madden wholesale division.
+THE ADESSO-MADDEN, INC. - PRIVATE LABEL DIVISION
+In September 1995, the Company incorporated Adesso-Madden, Inc. as a
+wholly owned subsidiary ("A-M"). A-M was formed to serve as a buying agent to
+mass market merchandisers, shoe store chains and other off-price retailers in
+connection with their purchase of private label shoes. As a buying agent, A-M
+arranges with shoe manufacturers in Asia and South America for them to
+manufacture private label shoes to the specifications of its clients. The
+Company believes that by operating in the private label, mass merchandising
+market, the Company is able to maximize additional non-branded sales
+opportunities. This leverages the Company's overall sourcing, design and
+distribution capabilities. Currently, this division serves as a buying agent for
+the procurement of women's footwear for large retailers including J.C. Penny,
+Sears, Mervyn's, Payless, Wal-Mart and Target. A-M receives commissions in
+connection with the purchase of private label shoes by its clients. A-M also
+sources and sells footwear under the Soho Cobbler(R) brand name. The private
+label division generated commission revenue of $3.6 million for the year ended
+December 31, 2000.
+PRODUCTS AND LICENSING
+The Company's products emphasize youthful styling and contemporary
+design and are marketed at moderate to better price points. The Company's
+primary products include Steve Madden(R), l.e.i.(R), Stevies (TM) and David
+Aaron(R) branded footwear, and in 2001, Steve Madden Mens. In addition, the
+Company has a private label shoe operation, Adesso-Madden, Inc., and has also
+entered into strategic licensing agreements for Steve Madden(R) and Stevies
+branded products.
+STEVE MADDEN(R)
+Steve Madden(R) branded products are designed to appeal to style
+conscious consumers in the junior market (ages 16 to 25 years). The Steve
+Madden(R) line emphasizes up-to-date fashion and includes a wide range of
+women's footwear including boots, sneakers, evening shoes, slippers, casual and
+tailored shoes and sandals. Steve Madden(R) brand shoes sell at retail price
+points generally ranging from $48 to $70 for shoes and up to $99 for boots.
+In order to reduce the impact of changes in fashion trends on the Steve
+Madden(R) brand product sales, the Company designs and classifies its product
+line into three categories: Core, Core-plus, and Fashion. The Company's Core
+line is available year round and consists of classic products which have proven
+to be consistent sellers over several seasons. The Core line currently includes
+eight (8) style/color combinations each of which can be reordered using the
+Company's EDI system and shipped to retailers within one to two weeks. This
+5
+results in rapid replenishment of the most popular Steve Madden styles. The
+Company's Core-plus line consists of basic styles whose patterns and colors are
+updated each season to keep pace with changing trends. Finally, the Company's
+Fashion line consists of styles that are designed close to or in season and
+capitalize on the Company's ability to design, test, manufacture and market
+products quickly. Core and Core-plus products account for a majority of Steve
+Madden(R) brand sales.
+STEVE MADDEN MENS
+After announcing the launch of Steve Madden Mens in November 2000, the
+Company's new men's footwear line of products met with enthusiastic responses
+from buyers at tradeshows in November, 2000 and February, 2001. The Steve Madden
+Men's footwear products will be designed to capitalize on the Company's success
+for designing, sourcing and marketing popular fashion forward footwear. Many of
+the men's products will be built in the same spirit as present in the Steve
+Madden women's footwear line. With retail price points ranging from $79 to $99 a
+pair, the Company expects to sell Steve Madden Mens to department store and
+footwear specialty stores throughout the country. In order to enhance sales, the
+Company expects to have at least 50 men's concept shops located in major
+department stores by year end. By using appropriate signs, logos and display
+fixtures, the Company has created concept shops located in department stores,
+specialty stores and independent shoe stores that segregate and distinguish the
+Company's products from other footwear brands.
+DAVID AARON(R)
+The Company acquired the David Aaron(R) brand in 1996, and David
+Aaron(R) products are marketed through the Company's Diva subsidiary. David
+Aaron(R) branded products are designed to appeal to more sophisticated, career
+and fashion oriented consumers (ages 26 to 45 years) in the better market
+segment. David Aaron(R) products are priced at a tier above the Steve Madden(R)
+brand and have retail price points generally ranging from $70 to $85 for shoes
+and up to $150 for boots. Similar to the Steve Madden(R) line, the Company's
+David Aaron(R) line is organized into Core, Core-plus, and Fashion categories
+with Core and Core-plus products accounting for a large majority of David
+Aaron(R) brand sales.
+l.e.i.(R)
+In September 2000, the Company renewed its license agreement with
+R.S.V. Sport, Inc. pursuant to which the Company has the right to use the
+l.e.i.(R)trademark in connection with the sale and marketing of footwear in
+exchange for which the Company is required, among other things, to make periodic
+royalty payments based on its net sales of l.e.i.(R)footwear. The
+l.e.i.(R)trademark is well known for jeanswear in the junior marketplace and
+l.e.i.(R)jeans are sold in department and specialty stores nationwide. The
+Company's l.e.i.(R)footwear products were targeted to attract girls ages 6 to 11
+years old and young women ages 12 to 20 years old, the majority of which are
+younger than the typical Steve Madden(R)brand customer. Despite having only
+started selling l.e.i.(R) products at retail in August, 1998, sales of
+l.e.i.(R)products increased considerably in 1999 and 2000. By December 31, 2000,
+l.e.i. footwear products were sold in approximately 3,500 doors nationwide, an
+increase of approximately 40% over 1999.
+6
+STEVIES(TM)
+Stevies(TM) is a fashion brand which targets girls ages 6-9 and
+"tweens" ages 10-12. The Stevies footwear line mirrors some of the design
+concepts and attitude present in the Steve Madden(R) brand and is distributed
+through moderate and better department stores and footwear specialty stores. The
+Company commenced shipping Stevies' products in time for the most recent
+back-to-school season. By year end Stevies(TM) sold in over 1,200 doors across
+the country, including store groups such as Nordstroms, Federated Department
+Stores, May Company stores, Belk, Dillards, Limited Too, as well as children's
+independent stores throughout the country. In addition, Stevies concept shops
+have been established in approximately 815 department stores, and the Company
+expects approximately 1000 Steve's concept shops to be installed by the end of
+2001.
+LICENSING
+The Company believes that strategic licensing will enhance the Steve
+Madden and Stevies(R) brands, leverage brand equity and increase customer
+loyalty. During 1997, the Company began to license the Steve Madden(R) trademark
+selectively while attempting to maintain strict design, merchandising and
+marketing control over its licensees. In 2000, the Company commenced licensing
+the Stevies trademark shortly after announcing the launch of the Stevies
+footwear brand.
+As of December 31, 2000, the Company licensed the Steve Madden
+trademark for use in connection with the manufacturing, marketing and sale of
+outerwear (including leather sportswear), belts, handbags, sunglasses, hosiery,
+hair accessories and jewelry. Each license agreement requires the licensee to
+pay to the Company a royalty based on net sales, a minimum royalty in the event
+that net sales fail to reach specified targets and a percentage of sales for
+advertising of the Steve Madden(R) brand.
+As of March 15, 2000, the Company and its sportswear licensee, Iron
+Will Group, Inc. executed a Termination Agreement with respect to that certain
+License Agreement dated as of January 1, 1999. Iron Will Group is an affiliate
+of Jordache enterprises. The Termination Agreement required that Iron Will
+terminate its sale and distribution of Steve Madden Sportswear products on or
+before June 15, 2000.
+During 2000, the Company licensed the Stevies trademark for use in
+connection with manufacturing marketing and sale of sportswear; outerwear,
+belts, handbags, sunglasses, hosiery, fashion accessories, jewelry, hair
+accessories. In February 2001, the Company terminated existing licensing
+agreements for jewelry and hair accessories for the Steve Madden(R) and
+Stevies(TM) brands, and sportswear for the Stevies(TM) brand.
+In order to enhance the performance of the Company's licensing
+business, in January 2001 the Company engaged Jassin O'Rourke Group, LLC, a
+consulting firm specializing in marketing, management and licensing for the
+apparel industry.
+7
+DESIGN
+The Company has established a reputation for its creative designs,
+popular styles and quality products at accessible price points. Steve Madden has
+been involved in the footwear industry for over twenty (20) years and is
+responsible for the Company's overall fashion direction, maintaining direct,
+day-to-day supervision of the Company's eleven (11) person product design and
+development team.
+The Company believes that its future success will depend in substantial
+part on its ability to continue to anticipate and react to changing consumer
+demands in a timely manner. To meet this objective, the Company has developed a
+unique design process that allows it to recognize and adapt quickly to changing
+consumer demands. The Company's design team works together to create designs
+which they believe fit the Company's image, reflect current or approaching
+trends and can be manufactured in a timely and cost-effective manner. Once the
+initial design is complete, a prototype is developed, which is reviewed and
+refined prior to the commencement of limited production. Most new Steve Madden
+designs are then tested in the Steve Madden(R) retail stores. Designs that prove
+popular are then scheduled for mass production overseas and wholesale and retail
+distribution nationwide. The Company believes that its unique design and testing
+process and flexible sourcing model is a significant competitive advantage
+allowing the Company to cut mass production lead times and avoid the costly
+production and distribution of unpopular designs.
+PRODUCT SOURCING AND DISTRIBUTION
+The Company sources each of its product lines separately based on the
+individual design, styling and quality specifications of such products. The
+Company does not own or operate any mass manufacturing facilities and sources
+its branded products directly or indirectly through independently owned
+manufacturers in Brazil, China, Italy, Mexico, Spain, Taiwan and the United
+States. The Company has established relationships with a number of manufacturers
+in each country. The Company believes that this sourcing of footwear products
+minimizes its investment and inventory risk, and enables efficient and timely
+introduction of new product designs. Although the Company has not entered into
+any long-term manufacturing or supply contracts, the Company believes that a
+sufficient number of alternative sources exist for the manufacture of its
+products. The principal materials used in the Company's footwear are available
+from any number of sources, both within the United States and in foreign
+countries.
+The Company's design and distribution processes are intended to be
+flexible, allowing the Company to respond to and accommodate changing consumer
+demand. The Company's production staff tracks warehouse inventory on a daily
+basis, monitors sell through data and incorporates input on product demand from
+wholesale customers. The Company can use product feedback to adjust production
+or manufacture new products in as little as five weeks. Constant inventory
+tracking allows the Company to manage inventory on a continuous flow basis with
+the goal of optimizing inventory turns. More specifically, all inventory is
+classified into three categories: Core products, which are sold year round,
+Core-plus products which are in-season styles that are experiencing unusually
+strong sell through, and Fashion products. The Company strives to only have
+reorder inventory in selected Core and Core-plus products that are proven
+best-sellers.
+8
+The Company distributes its products primarily from three (3) third
+party distribution warehouse centers located in California, Michigan and New
+Jersey and its own distribution facility located in Florida. 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.
+In 1999, the Company expanded its use of electronic data interchange
+("EDI") quick replenishment system to its department store accounts on
+designated Core items and offered EDI to all of its significant wholesale
+accounts. Sales resulting from EDI replenishment remained unchanged during 2000
+compared to 1999. The Company believes that its flexible product introduction
+schedule and perpetual inventory control system are competitive advantages in an
+industry that is subject to high fashion risks.
+CUSTOMERS
+The Company's customers purchasing shoes consist principally of
+department stores and specialty stores, including shoe boutiques. Presently, the
+Company sells approximately sixty two percent (62%) of its products to
+department stores, including Federated Department Stores (Bloomingdales, Bon
+Marche, Burdines, Macy's and Rich's), May Department Stores (Famous Barr,
+Filene's, Foley's, Hecht's, Kaufmann's, Meier & Frank, Lord and Taylor and
+Robinsons May), Dillard's, Dayton-Hudson and Nordstrom; and approximately thirty
+eight percent (38%) to specialty stores, including Journey's, Limited Too and
+Mandees; and catalog retailers, including Victoria's Secret and Fingerhut.
+Federated Department Stores, May Department Stores and Nordstrom presently
+account for approximately twenty one percent (21%), and eighteen percent (18%)
+and eleven percent (11%) of the Company's wholesale sales, respectively.
+DISTRIBUTION CHANNELS
+The Company sells it products principally through its Company-owned
+retail stores, better department stores and specialty shoe stores in the United
+States and abroad. Retail stores and wholesale sales account for approximately
+thirty four percent (34%) and sixty six percent (66%) of total sales,
+respectively. The following paragraphs describe each of these distribution
+channels:
+STEVE MADDEN AND DAVID AARON RETAIL STORES
+As of December 31, 2000, the Company operated fifty six (56)
+Company-owned retail stores under the Steve Madden(R) name and two (2) under the
+David Aaron(R) name. The Company believes that its retail stores will continue
+to enhance overall sales, profitability, and its ability to react to changing
+consumer trends. The design, format and environment of the Steve Madden(R)
+retail stores resemble a nightclub type atmosphere which has become a popular
+destination and gathering place for young women. The David Aaron(R) store has a
+more sophisticated design and format styled to appeal to its more mature target
+audience. These stores are used as a marketing tool which allow the Company to
+strengthen brand recognition and to showcase certain of 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
+9
+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. In addition to carefully analyzing mall demographics,
+the Company also sets profitability guidelines for each potential store site.
+Specifically, the Company targets sites at which the demographics fit the
+consumer profile, the positioning of the site is well trafficked and the
+projected fixed annual rent expense does not exceed a specified percentage of
+sales over the life of the lease. By setting these standards, the Company
+believes that each store will contribute to the Company's overall profits both
+in the near- and longer-terms.
+OUTLET STORES
+In May 1998, Shoe Biz, Inc. (formerly known as Steven Madden Outlets,
+Inc.) a wholly owned subsidiary of the Company ("Shoe Biz"), purchased certain
+assets from and assumed certain liabilities of, Daniel Scott, Inc. with respect
+to its Shoe Biz outlet store located in Mineola, New York. In connection with
+the transaction, the Company hired Robert Schmertz, the former President and
+sole stockholder of Daniel Scott, as the President of Shoe Biz. Shoe Biz
+operates the six (6) outlet stores in New Jersey and New York, four (4) of which
+operate under the Shoe Biz name and two (2) of which operate as Steve Madden
+Outlet stores. Shoe Biz sells many product lines, including Steve Madden, David
+Aaron, Stevies and l.e.i.(R) footwear, at significantly lower prices than prices
+typically charged by other "full price" retailers.
+DEPARTMENT STORES
+The Company currently sells to over 2,500 locations of twenty (20)
+better department stores throughout the United States and Canada. The Company's
+top accounts include Federated Department Stores (Bloomingdale's, Bon Marche,
+Burdine's, Macy's and Rich's), May Department Stores (Hecht's, Famous Barr,
+Filene's, Foley's, Kaufmann's, Meier & Frank, Lord and Taylor and Robinson's
+May), Dillard's, Dayton-Hudson and Nordstrom.
+Department store accounts are offered merchandising support which
+includes in-store fixtures and signage, supervision of displays and
+merchandising of the Company's various product lines. An important development
+in the Company's wholesale merchandising effort is the creation of in-store
+concept shops, where a broader collection of the Company's branded products are
+showcased. These in-store concept shops create an environment that is consistent
+with the Company's image and enable the retailer to display and stock a greater
+volume of the Company's products per square foot of retail space. In addition,
+these in-store concept shops encourage longer term commitment by the retailer to
+the Company's products and enhance consumer brand awareness. As of December 31,
+2000, the Steve Madden(R) and Stevies brands were featured in over 1,200 and 815
+in-store concept shops, respectively, in leading department and specialty
+stores.
+In addition to merchandising support, the Company's customer service
+representatives maintain weekly communications with their accounts to guide them
+in placing orders and to assist them in managing inventory, assortment and
+10
+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 poor
+sales records. In addition to this account order support, the Company has
+implemented an electronic data interchange ("EDI") program which allows top
+accounts rapid size replenishment of eight (8) style/color combinations of
+certain core products within one to two weeks. EDI replenishment of key core
+styles is offered to all of the Company's retail customer accounts.
+INTERNET SALES
+In 2000, the Company updated its web site, www.stevemadden.com, and
+introduced its Stevies web site www.stevies.com in March 2000. Customers can
+purchase numerous styles of the Company's Steve Madden and Stevies footwear,
+accessory and clothing products. As a result of the Company's increased focus on
+e-commerce, sales in 2000 derived from www.stevemadden.com increased 196%
+compared with sales in 1999. For the year ended December 31, 2000, the Company's
+stevemadden.com web site recorded 156.3 million hits, 866,000 unique users and a
+sales conversions rate of approximately 7%. In August 1999, the Company signed
+an agreement with America Online pursuant to which the Company has a significant
+presence in the Shop AOL area of AOL, specifically in the footwear areas.
+As a result of the increased sales activity on the Company's web sites,
+[the Company] entered an agreement with Progressive Distribution in April 2000.
+Under the terms of the Agreement, Progressive Distribution provides
+direct-to-customer and other fulfillment services the Company's web sites
+customers, including validation of customer credit, picking, packing and
+shipment of footwear products to customers of the Company.
+In February 2001, the Company launched the SteveMaddenMens.com web
+site. Already e-commerce enabled, this newest Madden web site allows customers
+to view Steve Madden Mens products three dimensionally simply by moving a
+computer mouse.
+SPECIALTY STORES/CATALOG SALES
+The Company currently sells to specialty store locations throughout the
+United States and Canada. The Company's top specialty store accounts include
+Journey's, Limited Too and Mandees. The Company offers 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 Fingerhut and Victoria's Secret.
+COMPETITION
+The fashionable 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 fashionable footwear has encouraged the entry of many new competitors and
+increased competition from established companies. Most of these competitors,
+including Kenneth Cole, Nine West, DKNY, Skechers, Nike and Guess, may have
+significantly greater financial and other resources than the Company. The
+Company believes effective advertising and marketing, fashionable styling, high
+11
+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 will
+compete with several brands that are more established with greater consumer
+awareness, including Kenneth Cole Reaction, Skechers Collection, Tommy Hilfiger
+and Nautica.
+MARKETING AND SALES
+Prior to 1997, the Company's marketing plans relied heavily on its few
+Steve Madden(R) retail store locations and word-of-mouth referrals. In 1998, the
+Company continued to focus on creating a more integrated brand building program
+to establish Steve Madden as the leading designer of fashion footwear for
+style-conscious young women. As a result, the Company developed a national
+advertising campaign for lifestyle and fashion magazines which was also used in
+regional marketing programs such as radio advertisements, television
+commercials, outdoor media, college event sponsorship and live online chat
+forums. The Company also continues to promote its web sites (WWW.STEVEMADDEN.COM
+and WWW.STEVIES.COM) where consumers can purchase Steve Madden(R) and Stevies
+products and interact with both the Company and other customers.
+In 2000, the Company reinforced the link between Steve Madden footwear
+and the hip young music scene by joining with Atlantic Records, Sam Goody and
+Glamour magazine for the first annual Girl Band Search: a major cross-marketing
+campaign with retail stores and wholesale partners to crown the next hot girl
+band. The Company assisted in marketing this year's winner, Jill Joia, who
+publicized her Steve Madden affiliation on the David Letterman Show, and
+performed the opening act at the launch party for Steve Madden Mens in Las Vegas
+in February 2001. For the second year running, the Company also co-sponsored the
+2000 Music Video Awards.
+The Company also increased the marketing of the Steve Madden brand to
+college students in 2000. The Company targeted universities for a series of
+lively promotions, many of them tied in with musical performances, and the
+Company was one of seven vendors visiting top ten universities in the Glamour
+magazine sponsored "Venus Tour". Other promotional initiatives reached 40
+universities.
+The Company commenced an aggressive marketing campaign for the Stevies
+brand with separate marketing, advertising, promotional events and in-store
+displays targeting the new Stevies customer. In August, 2000, the Company
+initiated a nationwide, three month Stevies Model Search featuring a six-city
+mall tour and in-store promotions with Filene's, Foley, Hecht's, FAO Schwartz
+and Macy's East. Supported by strong advertising and on-line promotions, these
+in-store events featured Stevies fashion shows, Radio Disney personality
+appearances, and performances by such crowd-drawers as the boyband, DreamStreet.
+The 11-year old winner of the model search will be the subject of the 2001 ad
+campaign for consumer and trade publications, and will be featured on the
+Stevies website. 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 twelve independent sales representatives. These sales representatives
+work on a commission basis and are responsible for placing the Company's
+products with its principal customers, including better department and specialty
+stores. The sales representatives are supported by the Company's Vice President,
+12
+a staff of twelve account executives, four merchandise coordinators and twenty
+five customer service representatives who continually cultivate relationships
+with wholesale customers. This staff assists accounts in merchandising and
+assessing customer preferences and inventory requirements, which ultimately
+serves to increase sales and profitability.
+MANAGEMENT INFORMATION SYSTEMS (MIS) OPERATIONS
+Sophisticated information systems are essential to the Company's
+ability to maintain its competitive position and to support continued growth.
+The Company operates on a dual AS/400 system which provides system support for
+all aspects of its business including manufacturing purchase orders; customer
+purchase orders; order allocations; invoicing; accounts receivable management;
+real time inventory management; quick response replenishment; point-of-sale
+support; and financial and management reporting functions. The Company has a
+PKMS bar coded warehousing system which is integrated with the wholesale system
+in order to provide accurate inventory positions and quick response size
+replenishment for its customers. In addition, the Company has installed an EDI
+system which provides a computer link between the Company and certain wholesale
+customers that enables both the customer and the Company to monitor purchases,
+shipments and invoicing. The EDI system also improves the Company's ability to
+respond to customer inventory requirements on a weekly basis.
+In 2000, a new AS400 computer platform was implemented to support the
+Company's wholesale division, and at the retail division , a new system was
+installed by Applied Digital Solutions, formally STR. This in-store
+point-of-sale system is a fully functional system governing a broad range of
+transactions including layaway, gift certificates, store credit, customer
+profiles, and preferred customer packages. The Company also installed a loss
+prevention system named "Trade Watch", and a retail marketing system, Corema,
+which is fully integrated into the in-store POS system. A new retail inventory
+management system was also installed to support the Company's just-in-time
+inventory flow.
+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 one point below the Prime Rate (as defined). The agreement
+provides that Capital Factors is not required to purchase all the Company's
+receivables and requires that the Company to pay an unused line fee of .25% of
+the average daily unused portion of the maximum amount of the credit line. On
+September 1, 1998, the Company and Capital Factors amended its Factoring
+Agreement to, among other things, provide the Company with a credit line of up
+to $15,000,000, subject to certain limitations. The Company has not recently
+borrowed funds under its credit line with Capital Factors. The agreement with
+Capital Factors was renewed as of December 31, 2000 for an additional one year
+term. Capital Factors maintains a lien on all of the Company's inventory and
+receivables and assumes the credit risk for all assigned accounts approved by
+it.
+TRADEMARKS AND SERVICE MARKS
+The STEVE MADDEN and STEVE MADDEN plus Design trademarks/service marks
+have been registered in numerous International Classes (25 clothing and shoes;
+18 leather goods, such as handbags and wallets; 9 eye wear; 14 jewelry; 3
+cosmetics and perfume; 20 picture frames and furniture; 16, paper goods; 24
+13
+bedding; and, 35 retail store services) in the United States. The Company also
+has trademark registrations in the U.S. for the marks EYESHADOWS BY STEVE MADDEN
+(Int'l Cl. 9 eye wear), ICE TEA (Int'l Cl. 25 clothing), SOHO COBBLER (Int. Cl.
+9; eye wear; and, 25 clothing and shoes), SHOE BIZ By STEVE MADDEN (Int'l Cls.
+25 for shoes and clothing; and, Int'l Cl.
+35 for retail store services)
+The Company further owns registrations for the STEVE MADDEN and STEVE
+MADDEN plus Design trademarks/service marks in various International Classes in
+Argentina, Australia, Brazil, Canada, Chile, China, Colombia, Hong Kong, Israel,
+Italy, Japan, Korea, Mexico, Panama, South Africa, Taiwan, the 15 cooperating
+countries of Europe and the Benelux countries and has pending applications for
+registration for the STEVE MADDEN and STEVE MADDEN plus Design
+trademarks/service marks in Malaysia, Peru, Saudi Arabia, Thailand and
+Venezuela. There can be no assurance, however, that the Company will be able to
+effectively obtain rights to the STEVE MADDEN mark throughout all of the
+countries of the world. Moreover, no assurance can be given that others will not
+assert rights in, or ownership of, trademarks and other proprietary rights of
+the Company or that the Company will be able to successfully resolve such
+conflicts. The failure of the Company to protect such rights from unlawful and
+improper appropriation may have a material adverse effect on the Company's
+business and financial condition.
+Additionally, the Company through its Diva Acquisition Corp. subsidiary
+owns registrations for the DAVID AARON trademark and service mark in various
+International Classes in the United States (Int'l Cl. 25 clothes, shoes; 18
+leather goods, handbags, wallets; and, 35 retail store services), Australia,
+Canada, Hong Kong, Israel, Japan, South Africa, Spain and the 15 cooperating
+countries in Europe. The Company further has pending application for
+registration of the DAVID AARON trademark and service mark in Panama. The
+Company believes that the DAVID AARON trademark has a significant value and is
+important to the marketing of the Company's products.
+The Company through its Stevies, Inc. subsidiary also has several
+pending trademark and service mark applications for registration of the STEVIES
+and STEVIES plus Design marks in various International Classes in the United
+States (Int'l Cl. 25 clothes, shoes, 18 leather goods, handbags, wallets; 9 eye
+wear; 14 jewelry; and, 35 retail store services) and in Canada, Mexico and the
+15 cooperating countries of Europe.
+EMPLOYEES
+At March 9, 2001, the Company employed approximately 1,017 employees,
+of whom approximately 394 work on a full-time basis and approximately 623 work
+on a part-time basis. The management of the Company considers relations with its
+employees to be good.
+RISK FACTORS
+In addition to other information in this Annual Report on Form 10-K,
+the following important factors should be carefully considered in evaluating the
+Company and its business because such factors currently have a significant
+impact on the Company's business, prospects, financial condition and results of
+operations.
+14
+Dependence on Key Personnel. Although the Company has strengthened its
+senior management team, the Company is dependent, in particular, upon the
+services of Steven Madden, its Chief Executive Officer and chief designer, and
+Rhonda Brown, its President. In June 2000, Mr. Madden was indicted in the
+Southern District and Eastern District of New York for his alleged involvement
+in securities fraud and money laundering activities. If Mr. Madden is convicted
+of, or pleads guilty to, these charges (or related offenses), and/or is required
+to devote a substantial portion of his time and attention to the defense of the
+allegations contained in the indictments, the Company may be deprived of his
+services for an extended period of time. In addition, the Securities and
+Exchange Commission filed a complaint against Mr. Madden alleging securities law
+violations and seeking certain remedies against Mr. Madden, including an
+injunction prohibiting him from serving as an officer or director of a public
+company. The action initiated by the Securities and Exchange Commission has been
+stayed pending resolution of the indictments. If Mr. Madden is prohibited from
+serving as an officer or director of the Company, the Company may be deprived of
+certain or all of Mr. Madden's services. If Mr. Madden or Ms. Brown are unable
+to provide services to the Company for whatever reason, the Company's business,
+prospects and financial condition may be adversely affected.
+The Company maintains a key person life insurance policy on Mr. Madden
+with coverage in the amount of $10,000,000; however, the Company does not
+maintain a policy on Ms. Brown. The Company has employment contracts with each
+of Mr. Madden and Ms. Brown that expire on December 31, 2009 and December 31,
+2003, respectively. Under the terms of their respective employment contracts, if
+Mr. Madden or Ms. Brown are terminated for other than cause, death or total
+disability, the Company will be required to pay the remaining salary due under
+the contract, half of which must be paid upon termination. Mr. Madden is also
+entitled during the term of the contract to an annual $50,000 non-accountable
+expense account. In the event of a change in control, Mr. Madden and Ms. Brown
+may choose to continue their employment with the Company or terminate employment
+and receive the remaining salary under their respective contracts.
+Since Mr. Madden and Ms. Brown are involved in many material aspects of
+the Company's business, there can be no assurance that a suitable replacement
+for either Mr. Madden or Ms. Brown could be found if either were unable to
+perform services for the Company. As a consequence, the loss of Mr. Madden, Ms.
+Brown or other key management personnel could have a material adverse effect
+upon the Company's business, results of operations and financial condition. In
+addition, the Company's ability to market its products and to maintain
+profitability will depend, in large part, on its ability to attract and retain
+qualified personnel. Competition for such personnel is intense and there can be
+no assurance that the Company will be able to attract and retain such personnel.
+The inability of the Company to attract and retain such qualified personnel
+would have a material adverse effect on the Company's business, financial
+condition and results of operations.
+Fashion Industry Risks. The success of the Company will depend in
+significant part upon its ability to anticipate and respond to product and
+fashion trends as well as to anticipate, gauge and react to changing consumer
+demands in a timely manner. There can be no assurance that the Company's
+products will correspond to the changes in taste and demand or that the Company
+will be able to successfully market products which respond to such trends. If
+the Company misjudges the market for its products, it may be faced with
+significant excess inventories for some products and missed opportunities with
+others. In addition, misjudgments in merchandise selection could adversely
+affect the Company's image with its customers and weak sales and resulting
+15
+markdown requests from customers could have a material adverse effect on the
+Company's business, financial condition and results of operations.
+The industries in which the Company operates are cyclical, with
+purchases tending to decline during recessionary periods when disposable income
+is low. Purchases of contemporary shoes and accessories tend to decline during
+recessionary periods and also may decline at other times. While the Company has
+fared well in recent years in a difficult retail environment, there can be no
+assurance that the Company will be able to maintain its historical rate of
+growth in revenues and earnings, or remain profitable in the future. A recession
+in the national or regional economies or uncertainties regarding future economic
+prospects, among other things, could affect consumer spending habits and have a
+material adverse effect on the Company's business, financial condition and
+results of operations.
+In recent years, the retail industry has experienced consolidation and
+other ownership changes. In addition, some of the Company's customers have
+operated under the protection of the federal bankruptcy laws. In the future,
+retailers in the United States and in foreign markets may consolidate, undergo
+restructurings or reorganizations, or realign their affiliations, any of which
+could decrease the number of stores that carry the Company's products or
+increase the ownership concentration within the retail industry. While such
+changes in the retail industry to date have not had a material adverse effect on
+the Company's business or financial condition, there can be no assurance as to
+the future effect of any such changes.
+Inventory Management. The Company's ability to manage its inventories
+properly is an important factor in its operations. Inventory shortages can
+adversely affect the timing of shipments to customers and diminish brand
+loyalty. Conversely, excess inventories can result in increased interest costs
+as well as lower gross margins due to the necessity of providing discounts to
+retailers. The inability of the Company to effectively manage its inventory
+would have a material adverse effect on the Company's business, financial
+condition and results of operations.
+Dependence Upon Customers and Risks Related to Extending Credit to
+Customers. The Company's customers purchasing shoes 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 net sales.
+Presently, the Company sells approximately sixty two percent (62%) of its
+products to department stores, including Federated Stores (Bloomingdales,
+Burdines, Macy's and Bullocks), Dillards, Nordstrom, Dayton Hudson and May
+Department Stores (Famous Barr, Filene's, Foley's, Hecht's, Kaufmann's, Meier &
+Frank, Lord and Taylor and Robinson's May) and approximately [thirty eight
+(38%)] percent to specialty stores, including shoe boutiques. The Company's
+largest customers, Federated Stores, May Department Stores, account for
+approximately twenty one percent (21%), eighteen percent (18%) and eleven
+percent (11%) of the Company's wholesale sales, respectively.
+The Company believes that a substantial portion of sales of the
+Company's licensed products by its domestic licensing partners are also made to
+the Company's largest department store customers. The Company generally enters
+into a number of purchase order commitments with its customers for each of its
+lines every season and does not enter into long-term agreements with any of its
+customers. Therefore, a decision by Federated Stores, Nordstrom or any other
+significant customer, whether motivated by competitive conditions, financial
+difficulties or otherwise, to decrease the amount of merchandise purchased from
+16
+the Company or its licensing partners, or to change its manner of doing business
+could have a material adverse effect on the Company's business, financial
+condition and results of operations. The Company sells its products primarily to
+retail stores across the United States and extends credit based on an evaluation
+of each customer's financial condition, usually without requiring collateral.
+While various retailers, including some of the Company's customers, have
+experienced financial difficulties in the past few years which increased the
+risk of extending credit to such retailers, the Company's losses due to bad
+debts have been limited. However, financial difficulties of a customer could
+cause the Company to curtail business with such customer or require the Company
+to assume more credit risk relating to such customer's receivables.
+Pending Litigation. In connection with the indictments filed against
+Mr. Madden in June 2000, certain class action lawsuits were commenced against
+the Company, Mr. Madden, the Company's Chief Executive Officer, Rhonda Brown,
+the Company's President, and Arvind Dharia, the Company's Chief Financial
+Officer. The complaint alleges that the Company and the individual defendants
+issued false and misleading statements and failed to disclose material adverse
+information relating to matters arising from Mr. Madden's indictment. In the
+event that resolution of this action exceeds coverage available under the
+Company's directors and officers insurance policy, the Company's business,
+prospects and financial condition could be materially and adversely affected.
+Impact of Foreign Manufacturers. Substantially all of the Company's
+products are currently sourced outside the United States through arrangements
+with a number of foreign manufacturers in four different countries. During the
+year ended December 31, 2000, approximately [90%] of the Company's products were
+purchased from sources outside the United States, including Mexico, 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 conditions will materially
+affect the Company's ability to purchase products, since a variety of materials
+and alternative sources exist. The Company cannot be certain, however, that it
+will be able to identify such alternative sources without delay or without
+greater cost to the Company, if ever. The Company's inability to identify and
+secure alternative sources of supply in this situation would have a material
+adverse effect on the Company's business, financial condition and results of
+operations.
+The Company's imported products are also subject to United States
+customs duties. The United States and the countries in which the Company's
+products are produced or sold may, from time to time, impose new quotas, duties,
+tariffs, or other restrictions, or may adversely adjust prevailing quota, duty
+or tariff levels, any of which could have a material adverse effect on the
+Company's business, financial condition and results of operations.
+Possible Adverse Impact of Unaffiliated Manufacturers' Inability to
+Manufacture in a Timely Manner, to Meet Quality Standards or to Use Acceptable
+Labor Practices. As is common in the footwear industry, the Company contracts
+17
+for the manufacture of a majority of its products to its specifications through
+foreign manufacturers. The Company does not own or operate any manufacturing
+facilities and is therefore dependent upon independent third parties for the
+manufacture of all of its products. The Company's products are manufactured to
+its specifications by both domestic and international manufacturers. The
+inability of a manufacturer to ship orders of the Company's products in a timely
+manner or to meet the Company's quality standards could cause the Company to
+miss the delivery date requirements of its customers for those items, which
+could result in cancellation of orders, refusal to accept deliveries or a
+reduction in purchase prices, any of which could have a material adverse effect
+on the Company's business, financial condition and results of operations.
+Although the Company enters into a number of purchase order commitments
+each season specifying a time frame for delivery, method of payment, design and
+quality specifications and other standard industry provisions, the Company does
+not have long-term contracts with any manufacturer. As a consequence, any of
+these manufacturing relationships may be terminated, by either party, at any
+time. Although the Company believes that other facilities are available for the
+manufacture of the Company's products, both within and outside of the United
+States, there can be no assurance that such facilities would be available to the
+Company on an immediate basis, if at all, or that the costs charged to the
+Company by such manufacturers will not be greater than those presently paid.
+The Company requires its licensing partners and independent
+manufacturers to operate in compliance with applicable laws and regulations.
+While the Company promotes ethical business practices and the Company's staff
+periodically visits and monitors the operations of its independent
+manufacturers, the Company does not control such manufacturers or their labor
+practices. The violation of labor or other laws by an independent manufacturer
+of the Company or by one of the Company's licensing partners, or the divergence
+of an independent manufacturer's or licensing partner's labor practices from
+those generally accepted as ethical in the United States, could have a material
+adverse effect on the Company's business, financial condition and results of
+operations.
+Intense Industry Competition. The fashionable footwear industry is
+highly competitive and barriers to entry are low. The Company's competitors
+include specialty companies as well as companies with diversified product lines.
+The recent substantial growth in the sales of fashionable footwear has
+encouraged the entry of many new competitors and increased competition from
+established companies. Most of these competitors, including Kenneth Cole, Nine
+West, DKNY, Skechers, Nike and Guess, may have significantly greater financial
+and other resources than the Company and there can be no assurance that the
+Company will be able to compete successfully with other fashion footwear
+companies. Increased competition could result in pricing pressures, increased
+marketing expenditures and loss of market share, and could have a material
+adverse effect on the Company's business, financial condition and results of
+operations. The Company believes effective advertising and marketing,
+fashionable styling, high quality and value are the most important competitive
+factors and plans to employ these elements as it develops its products. The
+Company's inability to effectively advertise and market its products could have
+a material adverse effect on the Company's business, financial condition and
+results of operations.
+Expansion of Retail Business. The Company's continued growth depends to
+a significant degree on further developing the Steve Madden(R), David Aaron(R),
+Stevies and l.e.i.(R) brands, creating new product categories and businesses and
+operating Company-owned stores on a profitable basis. The Company plans to open
+18
+approximately ten (10) Steve Madden retail stores in 2001. The Company's recent
+and planned expansion includes the opening of stores in new geographic markets
+as well as strengthening existing markets. New markets have in the past
+presented, and will continue to present, competitive and merchandising
+challenges that are different from those faced by the Company in its existing
+markets. There can be no assurance that the Company will be able to open new
+stores, and if opened, that such new stores will be able to achieve sales and
+profitability levels consistent with existing stores. The Company's retail
+expansion is dependent on a number of factors, including the Company's ability
+to locate and obtain favorable store sites, the performance of the Company's
+wholesale and retail operations, and the ability of the Company to manage such
+expansion and hire and train personnel. Past comparable store sales results may
+not be indicative of future results, and there can be no assurance that the
+Company's comparable store sales results will increase or not decrease in the
+future. In addition, there can be no assurance that the Company's strategies to
+increase other sources of revenue, which may include expansion of its licensing
+activities, will be successful or that the Company's overall sales or
+profitability will increase or not be adversely affected as a result of the
+implementation of such retail strategies.
+The Company's growth has increased and will continue to increase demand
+on the Company's managerial, operational and administrative resources. The
+Company has recently invested significant resources in, among other things, its
+management information systems and hiring and training new personnel. However,
+in order to manage currently anticipated levels of future demand, the Company
+may be required to, among other things, expand its distribution facilities,
+establish relationships with new manufacturers to produce its products, and
+continue to expand and improve its financial, management and operating systems.
+There can be no assurance that the Company will be able to manage future growth
+effectively and a failure to do so could have a material adverse effect on the
+Company's business, financial condition and results of operations.
+Seasonal and Quarterly Fluctuations. The Company's quarterly results
+may fluctuate quarter to quarter as a result of the timing of holidays, weather,
+the timing of larger shipments of footwear, market acceptance of the Company's
+products, the mix, pricing and presentation of the products offered and sold,
+the hiring and training of additional personnel, the timing of inventory write
+downs, the cost of materials, the mix between wholesale and licensing
+businesses, the incurrence of other operating costs and factors beyond the
+Company's control, such as general economic conditions and actions of
+competitors. In addition, the Company expects that its sales and operating
+results may be significantly impacted by (i) the opening of new retail stores,
+(ii) the introduction of new products and (iii) the commencement of the
+Company's new Mens brand. 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/service marks and other proprietary rights are important to its
+success and its competitive position. Accordingly, the Company devotes
+substantial resources to the establishment and protection of its trademarks on a
+worldwide basis. Nevertheless, there can be no assurance that the actions taken
+by the Company to establish and protect its trademarks and other proprietary
+rights will be adequate to prevent imitation of its products by others or to
+prevent others from seeking to block sales of the Company's products as
+violative of the trademarks and proprietary rights of others. Moreover, no
+assurance can be given that others will not assert rights in, or ownership of,
+trademarks and other proprietary rights of the Company or that the Company will
+be able to successfully resolve such conflicts. In addition, the laws of certain
+19
+foreign countries may not protect proprietary rights to the same extent as do
+the laws of the United States. The failure of the Company to establish and then
+protect such proprietary rights from unlawful and improper appropriation could
+have a material adverse impact on the Company's business, financial condition
+and results of operations. See "Business - Trademarks and Service Marks".
+Foreign Currency Fluctuations. The Company generally purchases its
+products in U.S. dollars. However, the Company sources substantially all of its
+products overseas and, as such, the cost of these products may be affected by
+changes in the value of the relevant currencies. Changes in currency exchange
+rates may also affect the relative prices at which the Company and foreign
+competitors sell their products in the same market. There can be no assurance
+that foreign currency fluctuations will not have a material adverse impact on
+the Company's business, financial condition and results of operations.
+Absence of Dividends. The Company anticipates that all of its earnings
+in the foreseeable future will be retained to finance the continued growth and
+expansion of its business and has no current intention to pay cash dividends.
+Outstanding Options. As of March 1, 2001, the Company had outstanding
+options to purchase an aggregate of approximately 2,592,900 shares of Common
+Stock. Holders of such options are likely to exercise them when, in all
+likelihood, the Company could obtain additional capital on terms more favorable
+than those provided by the options. Further, while its options are outstanding,
+they may adversely affect the terms in which the Company could obtain additional
+capital.
\ No newline at end of file
diff --git a/raw/filings/0000913241/2000/0001019056-01-500024/item13.txt b/raw/filings/0000913241/2000/0001019056-01-500024/item13.txt
new file mode 100644
index 0000000000000000000000000000000000000000..73dcf8d753371c8db5001d9fd013f0ad6137d024
--- /dev/null
+++ b/raw/filings/0000913241/2000/0001019056-01-500024/item13.txt
@@ -0,0 +1,4 @@
+Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
+Incorporated herein by reference from the Company's definitive proxy
+statement to be filed pursuant to Regulation 14A under the Securities Exchange
+Act of 1934.
\ No newline at end of file
diff --git a/raw/filings/0000913241/2000/0001019056-01-500024/item9a.txt b/raw/filings/0000913241/2000/0001019056-01-500024/item9a.txt
new file mode 100644
index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391
diff --git a/raw/filings/0000913241/2000/0001019056-01-500024/rp_note.txt b/raw/filings/0000913241/2000/0001019056-01-500024/rp_note.txt
new file mode 100644
index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391
diff --git a/raw/filings/0000913241/2000/0001019056-01-500024/rpt_disclosure.txt b/raw/filings/0000913241/2000/0001019056-01-500024/rpt_disclosure.txt
new file mode 100644
index 0000000000000000000000000000000000000000..660fcbbbd66176ef82b375be5e71d5cfa0ff9c89
--- /dev/null
+++ b/raw/filings/0000913241/2000/0001019056-01-500024/rpt_disclosure.txt
@@ -0,0 +1,15 @@
+Certain Relationships and Related Transactions
+In July 2001, the Company entered into a consulting agreement with Peter J.
+Solomon & Company, a financial advisory firm of which Marc Cooper, one of the
+Company's directors, is a managing director. The agreement provides for a fee of
+$150,000 over the one year term of the agreement which expires in June 2002. The
+firm is to provide financial advisory and investment banking services to the
+Company.
+Compensation Committee Report On Executive Compensation
+The Compensation Committee is responsible for reviewing and approving the
+Company's compensation policies and the compensation paid to its executive
+officers, including the Chief Executive Officer and the other named executive
+officers. The Compensation Committee is comprised of Charles A. Koppelman, Peter
+Migliorini and John Madden. Each member of the Compensation Committee was a
+non-employee directors of the Company during 2001, however, Mr. Koppelman
+received a salary and certain other benefits for serving as the Chairman of the
\ No newline at end of file
diff --git a/raw/filings/0000913241/2001/0001019056-02-000198/filing.txt b/raw/filings/0000913241/2001/0001019056-02-000198/filing.txt
new file mode 100644
index 0000000000000000000000000000000000000000..1c947a54f6dfdc184fb95d8eca4816fe0123765e
--- /dev/null
+++ b/raw/filings/0000913241/2001/0001019056-02-000198/filing.txt
@@ -0,0 +1,2684 @@
+10-K
+1
+smadden_k.txt
+FORM 10-K
+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, 2001 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
+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. [ ]
+The aggregate market value of the voting stock held by non-affiliates of the
+registrant as of March 26, 2002 was approximately $214,536,498.
+The number of outstanding shares of the registrant's common stock as of
+March 26, 2002 was 12,365,216 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 17, 2002.
+TABLE OF CONTENTS
+Page
+----
+PART I
+ITEM 1 BUSINESS...........................................................1
+ITEM 2 PROPERTIES.........................................................7
+ITEM 3 LEGAL PROCEEDINGS..................................................8
+ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS................10
+PART II
+ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
+MATTERS..........................................................11
+ITEM 6 SELECTED FINANCIAL DATA...........................................12
+ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
+AND RESULTS OF OPERATIONS........................................13
+ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......................24
+ITEM 9 CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND
+FINANCIAL DISCLOSURE.............................................24
+PART III
+ITEM 10 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
+COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT OF
+THE REGISTRANT...................................................24
+ITEM 11 EXECUTIVE COMPENSATION............................................24
+ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT....24
+ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................25
+PART IV
+ITEM 14 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
+FORM 8-K.........................................................25
+-i-
+ITEM 1 BUSINESS
+Steven Madden, Ltd. (together with its subsidiaries, the "Company") designs,
+sources, markets and sells fashion-forward footwear brands for women, men and
+children. The Company distributes products through its retail stores, its
+e-commerce web sites, catalogs and department and specialty store locations in
+the United States and Canada. The Company's product line includes core products,
+which are sold year-round, complemented by a broad range of updated styles which
+are designed to establish or capitalize on market trends.
+The Company's business is comprised of three (3) distinct segments
+(wholesale, retail and private label). The wholesale division includes five (5)
+brands: Steve Madden(R), David Aaron(R), l.e.i.(R), Stevies(R) and the Steve
+Madden Mens brand. Steven Madden Retail, Inc., the Company's wholly owned retail
+subsidiary, operates Steve Madden and David Aaron retail stores as well as the
+Company's outlet stores and e-commerce web sites. The Company's wholly owned
+private label subsidiary, Adesso-Madden, Inc., designs and sources footwear
+products under private labels for many of the country's largest mass
+merchandisers. The Company also licenses its Steve Madden(R) and Stevies(R)
+trademarks for several accessory and apparel categories.
+Steven Madden, Ltd., was incorporated as a New York corporation on July 9,
+1990 and reincorporated under the same name in Delaware in November 1998. The
+Company, which has established a reputation for its creative designs, popular
+styles and quality products at accessible price points, was founded and
+developed by Steven Madden, its principal designer, and former Chief Executive
+Officer and Chairman of the Board. The Company completed its initial public
+offering in December 1993 and its shares of Common Stock currently trade on The
+Nasdaq National Market under the symbol "SHOO".
+The Company maintains its principal executive offices at 52-16 Barnett
+Avenue, Long Island City, NY 11104, telephone number (718) 446-1800.
+STEVEN MADDEN - WHOLESALE DIVISION
+The wholesale division sources, sells and markets the Company's Steve
+Madden(R) brand to major department stores, better specialty stores, and shoe
+stores throughout the United States and Canada. During the last few years the
+Steve Madden(R) product line has become a leading footwear brand in the fashion
+conscious junior marketplace. To serve its customers (primarily women ages 16 to
+25), the wholesale division creates and markets fashion forward footwear
+designed to appeal to customers seeking exciting, new footwear designs at
+reasonable prices. In January 2001, the wholesale division expanded to include a
+men's footwear line which targets fashion conscious men ages 20 to 35.
+As the Company's largest division, the Steve Madden(R) wholesale division
+accounted for $92,413,000 in sales in 2001, or approximately 38% of the
+Company's total sales. Many of the wholesale division's newly created styles are
+test marketed at the Company's retail stores. Within a few days, the Company can
+determine if a test product appeals to customers. This enables the Company to
+use its flexible sourcing model to rapidly respond to changing preferences which
+the Company believes is essential for success in the fashion footwear
+marketplace.
+DIVA ACQUISITION CORP. - THE DAVID AARON(R) WHOLESALE DIVISION
+Diva Acquisition Corp. ("Diva") designs and markets fashion footwear to
+women under the "David Aaron(R)" trademark through major department stores and
+better footwear specialty stores and two (2) Company owned retail shoe stores
+located in the Soho area of Manhattan and in Paramus, NJ. Priced a tier above
+the Steve Madden(R) brand, Diva's products are designed to appeal principally to
+fashion conscious women, ages 26 to 45, who shop at department stores and
+footwear boutiques. The Company recorded wholesale sales from the David Aaron(R)
+brand of $7,454,000 for the year ended December 31, 2001, or approximately 3% of
+the Company's total revenues. Revenues from the sale of David Aaron footwear
+increased by approximately 106% compared to the preceding year due to the
+repositioning and reorganization of the David Aaron brand.
+1
+l.e.i. (R) - WHOLESALE DIVISION
+Pursuant to the Company's license agreement with R.S.V. Sport, Inc., the
+Company has the right to use the l.e.i.(R) trademark in connection with the sale
+and marketing of footwear. The l.e.i.(R) trademark is well known for jeanswear
+in the junior marketplace and nationally through department and specialty
+stores. The Company's l.e.i.(R) footwear products are targeted to attract girls
+and young women ages 6 to 20 years old, a majority of which are younger than the
+typical Steve Madden(R) brand customer. The l.e.i. Wholesale Division generated
+revenue of $42,592,000 for the year ended December 31, 2001, or approximately
+17% of the Company's total revenues.
+STEVIES INC. - WHOLESALE DIVISION
+The Company's Stevies Wholesale Division ("Stevies Wholesale") generated
+revenue of $10,984,000 for the year ended December 31, 2001, or approximately 5%
+of the Company's total revenues. Stevies(R) now sells in store groups such as
+Nordstrom, Federated Department Stores, May Department Stores, Belk, Dillard's,
+Limited Too, as well as independent children's stores throughout the country.
+STEVEN MADDEN RETAIL, INC. - RETAIL DIVISION
+As of December 31, 2001, the Company owned and operated sixty-five (65)
+retail shoe stores under the Steve Madden(R) name, two (2) under the David
+Aaron(R) name, five (5) outlet stores and one (1) Internet store (through the
+www.stevemadden.com, www.stevies.com and www.stevemaddenmens.com web sites). In
+2001, the Company opened ten (10) new stores and closed two (2) under-performing
+stores. Most of the Steve Madden stores are located in major shopping malls in
+California, Colorado, District of Columbia, Florida, Georgia, Illinois,
+Maryland, Massachusetts, Michigan, Minnesota, Nevada, New Jersey, New York,
+Ohio, Pennsylvania, Rhode Island, Texas and Virginia. The retail stores have
+been successful for the Company, generating annual sales in excess of $680 per
+square foot. Sales are primarily from the sale of the Company's Steve Madden(R)
+product line. Same store sales decreased 1% in 2001 over 2000 sales and total
+sales for the retail division were $79 million compared to $70 million for 2000.
+Sales from the retail division for the year ended December 31, 2001 were
+approximately 33% of the Company's total sales.
+The Company believes that the Retail Division will continue to enhance
+overall sales and profits while building equity in the Steve Madden brand. It is
+for these reasons that the Company intends to add approximately ten (10) new
+retail stores during the 2002 calendar year. Additionally, the expansion of the
+Retail Division enables the Company to test and react to new products and
+classifications which strengthens the product development efforts of the Steve
+Madden wholesale division.
+THE ADESSO-MADDEN, INC. - PRIVATE LABEL DIVISION
+In September 1995, the Company incorporated Adesso-Madden, Inc. as a wholly
+owned subsidiary ("A-M"). A-M was formed to serve as a buying agent to mass
+market merchandisers, shoe store chains and other off-price retailers in
+connection with their purchase of private label shoes. As a buying agent, A-M
+arranges for shoe manufacturers in Asia and South America to manufacture private
+label shoes to the specifications of its clients. The Company believes that by
+operating in the private label, mass merchandising market, the Company is able
+to maximize additional non-branded sales opportunities. This leverages the
+Company's overall sourcing, design and distribution capabilities. Currently,
+this division serves as a buying agent for the procurement of women's footwear
+for large retailers including Sears, Payless, Wal-Mart and Target. A-M receives
+commissions in connection with the purchase of private label shoes by its
+clients. A-M also sources and sells footwear under the Soho Cobbler(R) brand
+name. The private label division generated commission revenue of $4,200,000
+million for the year ended December 31, 2001.
+LICENSING
+As of December 31, 2001, the Company licensed the Steve Madden trademark for
+use in connection with the manufacturing, marketing and sale of outerwear
+(including leather outerwear), belts, handbags, sunglasses, eyewear and hosiery.
+Each license agreement requires the licensee to pay to the Company a royalty
+based on net sales, a minimum royalty in the event that net sales fail to reach
+specified targets and a percentage of sales for advertising of the Steve
+Madden(R) brand.
+2
+During 2001, the Company licensed the Stevies trademark for use in
+connection with manufacturing, marketing and sale of sportswear, outerwear,
+belts, handbags, sunglasses and hosiery, fashion accessories. In February 2001,
+the Company terminated existing licensing agreements for jewelry and hair
+accessories for the Steve Madden(R) and Stevies(R) brands, and sportswear for
+the Stevies(R) brand.
+DESIGN
+The Company has established a reputation for its creative designs, popular
+styles and quality products at accessible price points. The Company believes
+that its future success will depend in substantial part on its ability to
+continue to anticipate and react to changing consumer demands in a timely
+manner. To meet this objective, the Company has developed a unique design
+process that allows it to recognize and adapt quickly to changing consumer
+demands. The Company's design team works together to create designs which they
+believe fit the Company's image, reflect current or approaching trends and can
+be manufactured in a timely and cost-effective manner. Once the initial design
+is complete, a prototype is developed, which is reviewed and refined prior to
+the commencement of limited production. Most new Steve Madden designs are then
+tested in the Steve Madden(R) retail stores. Designs that prove popular are then
+scheduled for mass production overseas and wholesale and retail distribution
+nationwide. The Company believes that its unique design and testing process and
+flexible sourcing model is a significant competitive advantage allowing the
+Company to cut mass production lead times and avoid the costly production and
+distribution of unpopular designs.
+PRODUCT SOURCING AND DISTRIBUTION
+The Company sources each of its product lines separately based on the
+individual design, styling and quality specifications of such products. The
+Company does not own or operate any mass manufacturing facilities and sources
+its branded products through independently owned manufacturers in Brazil, China,
+Italy, Mexico, Spain, Taiwan and the United States. The Company has established
+relationships with a number of manufacturers in each country. The Company
+believes that this sourcing of footwear products minimizes its investment and
+inventory risk, and enables efficient and timely introduction of new product
+designs. Although the Company has not entered into any long-term manufacturing
+or supply contracts, the Company believes that a sufficient number of
+alternative sources exist for the manufacture of its products. The principal
+materials used in the Company's footwear are available from any number of
+sources, both within the United States and in foreign countries.
+The Company's design and distribution processes are intended to be flexible,
+allowing the Company to respond to and accommodate changing consumer demand. The
+Company's production staff tracks warehouse inventory on a daily basis, monitors
+sell-through data and incorporates input on product demand from wholesale
+customers. The Company can use product feedback to adjust production or
+manufacture new products in as little as five weeks. Constant inventory tracking
+allows the Company to manage inventory on a continuous flow basis with the goal
+of optimizing inventory turns.
+The Company distributes its products from two (2) third party distribution
+warehouse centers located in California and New Jersey and its own distribution
+facility located in Florida. The Company also distributes its Internet shipments
+from a third party fulfillment center located in Michigan. By utilizing
+distribution facilities that specialize in distributing products to certain
+customers (wholesale accounts, Steve Madden retail stores and Internet
+fulfillment), the Company believes that its customers are better served.
+CUSTOMERS
+The Company's customers purchasing shoes consist principally of department
+stores and specialty stores, including shoe boutiques. Presently, the Company
+sells approximately sixty-two percent (62%) of its products at wholesale to
+department stores, including Federated Department Stores (Bloomingdale's, Bon
+Marche, Burdines, Macy's and Rich's), May Department Stores (Famous Barr,
+Filene's, Foley's, Hecht's, Kaufmann's, Meier & Frank, Lord and Taylor and
+Robinsons May), Dillard's, Marshall Field's and Nordstrom; and approximately
+thirty-eight percent (38%) to specialty stores, including Journeys, Limited Too
+and Mandees; and catalog retailers, including Victoria's Secret and Fingerhut.
+For the year ended December 31, 2001, May Department Stores, Federated
+Department Stores and Nordstrom accounted for approximately twenty-one percent
+(21%), eighteen percent (18%) and eleven percent (11%) of the Company's
+wholesale sales, respectively.
+3
+DISTRIBUTION CHANNELS
+The Company sells it products principally through its Company-owned retail
+stores, better department stores and specialty shoe stores in the United States
+and abroad. Retail stores and wholesale sales account for approximately
+thirty-three percent (33%) and sixty-seven percent (67%) of total sales,
+respectively. The following paragraphs describe each of these distribution
+channels:
+STEVE MADDEN AND DAVID AARON RETAIL STORES
+As of December 31, 2001, the Company operated sixty-five (65) Company-owned
+retail stores under the Steve Madden(R) name and two (2) under the David
+Aaron(R) name. The Company believes that its retail stores will continue to
+enhance overall sales, profitability, and its ability to react to changing
+consumer trends. The stores are used as a marketing tool which allows the
+Company to strengthen brand recognition and to showcase selected items from its
+full line of branded and licensed products. Furthermore, the retail stores
+provide the Company with a venue to test and introduce new products and
+merchandising strategies. Specifically, the Company often tests new designs at
+its Steve Madden(R) retail stores before scheduling them for mass production and
+wholesale distribution. In addition to these test marketing benefits, the
+Company has been able to leverage sales information gathered at Steve Madden(R)
+retail stores to assist its wholesale accounts in order placement and inventory
+management.
+A typical Steve Madden(R) store is approximately 1,400 to 1,600 square feet
+and is located in malls and street locations which attract the highest
+concentration of the Company's core demographic -- style-conscious young women
+ages 16 to 25 years old. The David Aaron(R) store has a more sophisticated
+design and format styled to appeal to its more mature target audience. In
+addition to carefully analyzing mall demographics, the Company also sets
+profitability guidelines for each potential store site. Specifically, the
+Company targets sites at which the demographics fit the consumer profile, the
+positioning of the site is well trafficked and the projected fixed annual rent
+expense does not exceed a specified percentage of sales over the life of the
+lease. By setting these standards, the Company believes that each store will
+contribute to the Company's overall profits both in the near- and longer-terms.
+OUTLET STORES
+In May 1998, Shoe Biz, Inc., a wholly owned subsidiary of the Company ("Shoe
+Biz"), purchased certain assets from and assumed certain liabilities of, Daniel
+Scott, Inc. with respect to its Shoe Biz outlet store located in Mineola, New
+York. In connection with the transaction, the Company hired Robert Schmertz, the
+former President and sole stockholder of Daniel Scott, Inc., as the President of
+Shoe Biz. Shoe Biz operates the five (5) outlet stores in New Jersey and New
+York, three (3) of which operate under the Shoe Biz name and two (2) of which
+operate as Steve Madden Outlet stores. Shoe Biz sells many product lines,
+including Steve Madden, David Aaron, Stevies and l.e.i.(R) footwear, at lower
+prices than prices typically charged by other "full price" retailers.
+DEPARTMENT STORES
+The Company currently sells to over 2,500 locations of twenty (20) better
+department stores throughout the United States and Canada. The Company's top
+accounts include Federated Department Stores (Macy's, Bloomingdale's, Bon
+Marche, Burdine's and Rich's), May Department Stores (Filene's, Hecht's, Famous
+Barr, Foley's, Kaufmann's, Meier & Frank, Lord and Taylor and Robinsons May),
+Nordstrom, Dillard's and Marshall Field's.
+Department store accounts are offered merchandising support which includes
+in-store fixtures and signage, supervision of displays and merchandising of the
+Company's various product lines. An important development in the Company's
+wholesale merchandising effort is the creation of in-store concept shops, where
+a broader collection of the Company's branded products are showcased. These
+in-store concept shops create an environment that is consistent with the
+Company's image and enable the retailer to display and stock a greater volume of
+the Company's products per square foot of retail space. In addition, these
+in-store concept shops encourage longer term commitment by the retailer to the
+Company's products and enhance consumer brand awareness.
+In addition to merchandising support, the Company's customer service
+representatives maintain weekly communications with their accounts to guide them
+in placing orders and to assist them in managing inventory,
+4
+assortment and retail sales. The Company leverages its sell-through data
+gathered at its retail stores to assist department stores in allocating their
+open-to-buy dollars to the most popular styles in the product line and to phase
+out styles with weaker sell-throughs.
+SPECIALTY STORES/CATALOG SALES
+The Company currently sells to specialty store locations throughout the
+United States and Canada. The Company's top specialty store accounts include
+Journeys, Limited Too and Mandees. The Company offers its specialty store
+accounts the same merchandising, sell-through and inventory tracking support
+offered to its department store accounts. Sales of the Company's products are
+also made through various catalogs, such as Victoria's Secret.
+INTERNET SALES
+The Company operates three (3) Internet web sites: www.stevemadden.com,
+www.stevies.com and www.stevemaddenmens.com. Customers can purchase numerous
+styles of the Company's Steve Madden and Stevies footwear, accessory and
+clothing products. As a result of the Company's increased focus on e-commerce,
+sales in 2001 derived from its Internet store increased 37% to $4,900,000 from
+$3,500,000 in 2000.
+As a result of the increased sales activity on the Company's web sites, the
+Company entered into an agreement with Progressive Distribution Services in
+April 2000. Under the terms of the Agreement, Progressive Distribution Services
+provides direct-to-customer and other fulfillment services for purchases made on
+the Company's web sites, including validation of customer credit, picking,
+packing and shipment of footwear products to customers of the Company.
+MILLE 21 DISTRIBUTION AGREEMENT
+On January 7, 2002, the Company and Mille 21, Inc. ("Mille 21") entered into
+a written agreement whereby the Company granted Mille 21 the exclusive right to
+develop Steve Madden retail stores and sell Steve Madden products in South
+Korea. Under the terms of the agreement, Mille 21 is obligated to open four (4)
+Steve Madden stores in South Korea in 2002 and is also obligated to purchase
+minimum amounts of Steve Madden products. The Company believes that establishing
+a presence in South Korea is a first step toward expanding into the pacific rim.
+COMPETITION
+The fashion footwear industry is highly competitive. The Company's
+competitors include specialty shoe companies as well as companies with
+diversified footwear product lines. The recent substantial growth in the sales
+of fashion footwear has encouraged the entry of many new competitors and
+increased competition from established companies. Most of these competitors,
+including Kenneth Cole, Nine West, DKNY, Skechers, Nike and Guess, may have
+significantly greater financial and other resources than the Company. The
+Company believes effective advertising and marketing, fashionable styling, high
+quality and value are the most important competitive factors and intends to
+continue to employ these elements as it develops its products.
+In 2001, the Company launched the Steve Madden Mens brand which competes
+with several brands that are more established with greater consumer awareness,
+including Kenneth Cole, Skechers Collection, Tommy Hilfiger and Nautica.
+MARKETING AND SALES
+Prior to 1997, the Company's marketing plans relied heavily on its few Steve
+Madden(R) retail store locations and word-of-mouth referrals. In 1998, the
+Company continued to focus on creating a more integrated brand building program
+to establish Steve Madden as the leading designer of fashion footwear for
+style-conscious young women. As a result, the Company developed a national
+advertising campaign for lifestyle and fashion magazines which was also used in
+regional marketing programs such as radio advertisements, television
+commercials, outdoor media, college event sponsorship and live online chat
+forums. The Company also continues to promote its web sites
+(www.stevemadden.com, www.stevies.com and www.stevemaddenmens.com) where
+consumers can purchase Steve Madden(R), Stevies and Steve Madden Mens products
+and interact with both the Company and other customers.
+5
+The Company also increased the marketing of the Steve Madden brand to
+college students in 2001. The Company targeted universities for a series of
+lively promotions, many of them tied in with musical performances.
+The Company commenced an aggressive marketing campaign for the Stevies brand
+with separate marketing, advertising, promotional events and in-store displays
+targeting the new Stevies customer. As for Steve Madden Mens, the Company
+supported the brand's roll-out with strategic marketing and advertising
+initiatives.
+In order to service its wholesale accounts, the Company retains a sales
+force of fourteen independent sales representatives. These sales representatives
+work on a commission basis and are responsible for placing the Company's
+products with its principal customers, including better department and specialty
+stores. The sales representatives are supported by the Company's senior
+executives, a staff of twelve account executives, two merchandise coordinators
+and twenty five customer service representatives who continually cultivate
+relationships with wholesale customers. This staff assists accounts in
+merchandising and assessing customer preferences and inventory requirements,
+which ultimately serves to increase sales and profitability.
+MANAGEMENT INFORMATION SYSTEMS (MIS) OPERATIONS
+Sophisticated information systems are essential to the Company's ability to
+maintain its competitive position and to support continued growth. The Company
+operates on a dual AS/400 system which provides system support for all aspects
+of its business including manufacturing purchase orders; customer purchase
+orders; order allocations; invoicing; accounts receivable management; real time
+inventory management; quick response replenishment; point-of-sale support; and
+financial and management reporting functions. The Company has a PKMS bar coded
+warehousing system which is integrated with the wholesale system in order to
+provide accurate inventory positions and quick response size replenishment for
+its customers. In addition, the Company has installed an EDI system which
+provides a computer link between the Company and certain wholesale customers
+that enables both the customer and the Company to monitor purchases, shipments
+and invoicing. The EDI system also improves the Company's ability to respond to
+customer inventory requirements on a weekly basis.
+In 2001, a new AS400 computer platform was implemented to support the
+Company's retail division. After the events of September 11, 2001, the Company
+reevaluated and implemented an enhanced business resumption plan. This plan
+insures that all mission critical business systems are available twenty four
+hours a day, seven days a week with a supporting redundant network
+infrastructure in place.
+RECEIVABLES FINANCING; LINE OF CREDIT
+Under the terms of a factoring agreement with Capital Factors, Inc., the
+Company is permitted to draw down 80% of its invoiced receivables at an interest
+rate of two points below the Prime Rate (as defined in such agreement). The
+agreement provides that Capital Factors is not required to purchase all the
+Company's receivables and requires the Company to pay an unused line fee of .25%
+of the average daily unused portion of the maximum amount of the credit line. On
+September 1, 1998, the Company and Capital Factors amended its Factoring
+Agreement to, among other things, provide the Company with a credit line of up
+to $15,000,000, subject to certain limitations. The Company has not recently
+borrowed funds under its credit line with Capital Factors. The agreement with
+Capital Factors was renewed as of December 31, 2001 for an additional one year
+term. Capital Factors maintains a lien on all of the Company's inventory and
+receivables and assumes the credit risk for all assigned accounts approved by
+it.
+TRADEMARKS AND SERVICE MARKS
+The STEVE MADDEN and STEVE MADDEN plus Design trademarks and service marks
+have been registered in numerous International Classes (Int'l Cl. 25 for
+clothing and footwear; Int'l Cl. 18 for leather goods, such as handbags and
+wallets; Int'l Cl. 9 for eyewear; Int'l Cl. 14 for jewelry; Int'l Cl. 3 for
+cosmetics and fragrances; Int'l Cl. 20 for picture frames and furniture; Int'l
+Cl. 16 for paper goods; Int'l Cl. 24 for bedding; and Int'l Cl. 35 for retail
+store services) in the United States. The Company also has trademark
+registrations in the United States for the marks EYESHADOWS BY STEVE MADDEN
+(Int'l Cl. 9 for eyewear), ICE TEA (Int'l Cl. 25 for clothing and footwear),
+SOHO COBBLER (Int'l. Cl. 9 for eyewear; and Int'l Cl. 25 for clothing and
+footwear), and SHOE BIZ By STEVE MADDEN (Int'l Cl. 25 for clothing and footwear;
+and Int'l Cl. 35 for retail store services).
+6
+The Company further owns registrations for the STEVE MADDEN and STEVE MADDEN
+plus Design trademarks and service marks in various International Classes in
+Argentina, Australia, Brazil, Canada, Chile, China, Colombia, Hong Kong, Israel,
+Italy, Japan, Korea, Mexico, Panama, Saudi Arabia, South Africa, Taiwan, the 15
+cooperating countries of Europe and the Benelux countries and has pending
+applications for registration of the STEVE MADDEN and STEVE MADDEN plus Design
+trademarks and service marks in Bahrain, Kuwait, Malaysia, Oman, Peru, Qatar,
+the United Arab Emirates and Venezuela. There can be no assurance, however, that
+the Company will be able to effectively obtain rights to the STEVE MADDEN mark
+throughout all of the countries of the world. Moreover, no assurance can be
+given that others will not assert rights in, or ownership of, trademarks and
+other proprietary rights of the Company or that the Company will be able to
+successfully resolve such conflicts. The failure of the Company to protect such
+rights from unlawful and improper appropriation may have a material adverse
+effect on the Company's business and financial condition.
+Additionally, the Company, through its Diva Acquisition Corp. subsidiary,
+owns registrations for the DAVID AARON trademark and service mark in various
+International Classes in the United States (Int'l Cl. 25 for clothing and
+footwear; Int'l Cl. 18 for leather goods, such as handbags and wallets; and
+Int'l Cl. 35 for retail store services), Australia, Canada, Hong Kong, Israel,
+Japan, South Africa and the 15 cooperating countries in Europe and for its D.
+AARON trademark in Spain. The Company further has a pending application for
+registration of the DAVID AARON trademark and service mark in Panama. The
+Company believes that the DAVID AARON trademark has a significant value and is
+important to the marketing of the Company's products.
+The Company, through its Stevies, Inc. subsidiary, also owns several
+registrations for the STEVIES trademark and service mark in two International
+Classes in the United States (Int'l Cl. 18 for leather goods, such as handbags
+and wallets; and Int'l Cl. 9 for eyewear) and for its STEVIES plus Design mark
+for various goods in Hong Kong and the 15 cooperating countries in Europe.
+Additionally, Stevies, Inc. has several pending trademark and service mark
+applications for registration of the STEVIES and STEVIES plus Design marks in
+various International Classes in the United States (Int'l Cl. 25 for clothing
+and footwear; Int'l Cl. 18 for leather goods, such as handbags and wallets;
+Int'l Cl. 9 for eyewear; Int'l Cl. 14 for jewelry; Int'l Cl. 3 for cosmetics and
+fragrances; Int'l Cl. 16 for paper goods; Int'l Cl. 28 for toys; Int'l Cl. 26
+for hair accessories; and Int'l Cl. 35 for retail store services) and in
+Argentina, Bahrain, Brazil, Canada, China, Colombia, Indonesia, Japan, Korea,
+Kuwait, Malaysia, Mexico, Oman, Panama, Peru, Qatar, Saudi Arabia, South Africa,
+Thailand, Taiwan, the United Arab Emirates and Venezuela. Finally, Stevies, Inc.
+also owns several pending trademark and service mark applications for
+registration of the STEVIES BY STEVE MADDEN mark in various International
+Classes in the United States (Int'l Cl. 25 for clothing and footwear; Int'l Cl.
+14 for jewelry; Int'l Cl. 18 for leather goods, such as handbags and wallets;
+Int'l Cl. 16 for paper goods; Int'l Cl. 3 for cosmetics and fragrances; Int'l
+Cl. 9 for eyewear; Int'l Cl. 26 for hair accessories; Int'l Cl. 28 for toys; and
+Int'l Cl. 35 for retail store services).
+EMPLOYEES
+At March 18, 2002, the Company employed approximately 1,023 employees, of
+whom approximately 313 work on a full-time basis and approximately 710 work on a
+part-time basis. The management of the Company considers relations with its
+employees to be good.
+ITEM 2 PROPERTIES
+The Company maintains approximately 25,000 square feet for its executive
+offices and sample production facilities at 52-16 Barnett Avenue, Long Island
+City, NY 11104. The lease for the Company's headquarters expires in June 2002.
+The Company's showroom is located at 1370 Avenue of the Americas, New York,
+NY. All of the Company's brands are displayed for sale from this 3,762 square
+foot space. The lease for the Company's showroom expires in November 2002.
+The Company's l.e.i.(R) showroom is located at 2300 Stemmons Freeway,
+Dallas, Texas. The Company's l.e.i. brands are displayed from this 1,080 square
+foot space. The lease for this showroom expires in September 2004.
+7
+The Company maintains a warehouse and distribution center in Port
+Everglades, Florida servicing wholesale and retail accounts. The lease for the
+Florida warehouse expires on January 31, 2003. In addition, the Company has
+engaged three independent distributors to warehouse and distribute its products.
+All of the Company's retail stores are leased pursuant to leases that extend
+for terms which average ten years in length. A majority of the leases include
+clauses that provide for contingent rental payments if gross sales exceed
+certain targets. In addition, a majority of the leases enable the Company and/or
+the landlord to terminate the lease in the event that the Company's gross sales
+do not achieve certain minimum levels during a prescribed period. Many of the
+leases contain rent escalation clauses to compensate for increases in operating
+costs and real estate taxes.
+The current terms of the Company's retail store leases expire as follows:
+Years Lease Terms Expire Number of Stores
+------------------------ ----------------
+2003 3
+2004 3
+2005 4
+2006 2
+2007 6
+2008 13
+2009 12
+2010 11
+2011 16
+2012 2
+ITEM 3 LEGAL PROCEEDINGS
+Except as set forth below, no material legal proceedings are pending to
+which the Company or any of its property is subject.
+On June 20, 2000, Steven Madden, the Company's former Chairman and Chief
+Executive Officer, was indicted in the United States District Courts for the
+Southern District and Eastern District of New York. The indictments alleged that
+Mr. Madden engaged in securities fraud and money laundering activities. In
+addition, the Securities and Exchange Commission filed a complaint in the United
+States District Court for the Eastern District of New York alleging that Mr.
+Madden violated Section 17(a) of the Securities Exchange Act of 1934, as
+amended. On May 21, 2001, Steven Madden entered into a plea agreement with the
+U.S. Attorney's Office, pursuant to which he pled guilty to four of the federal
+charges filed against him. In addition, Mr. Madden reached a separate settlement
+agreement with the Securities and Exchange Commission regarding the allegations
+contained in its complaint. As a result, Mr. Madden resigned as the Company's
+Chief Executive Officer and as a member of the Company's Board of Directors
+effective July 1, 2001. Mr. Madden has agreed to serve as the Company's Creative
+and Design Chief, a non-executive position. It is expected that Mr. Madden will
+be sentenced in April 2002. Under the settlement agreement with the Securities
+and Exchange Commission, Mr. Madden has agreed to not serve as an officer or
+director of a publicly traded company for 7 years. Neither the indictments nor
+the Securities and Exchange Commission complaint allege any wrongdoing by the
+Company or its other officers and directors.
+In December 2001, the Company purchased a loss mitigation policy to cover
+costs arising out of lawsuits related to the June 2000 federal indictment of
+Steve Madden, the Company's former Chief Executive Officer. The policy covers
+the Company's anticipated damages and legal costs in connection with such
+lawsuits. The Company is obligated to pay for damages and costs in excess of the
+policy limits. The cost of the policy was $6,950,000.
+Class Action
+Between June and August 2000, eight putative securities fraud class action
+lawsuits have been commenced in the United States District Court for the Eastern
+District of New York against the Company, Steven Madden and, in five of the
+actions, Rhonda J. Brown (the former President and a former director of the
+Company) and Arvind Dharia. These actions are captioned: Wilner v. Steven
+Madden, Ltd., et al., 00 CV 3676 (filed June 21, 2000); Connor v. Steven Madden,
+et al., 00 CV 3709 (filed June 22, 2000); Blumenthal v. Steven Madden, Ltd., et
+al., 00
+8
+CV 3709 (filed June 23, 2000); Curry v. Steven Madden, Ltd., et al., 00
+CV 3766 (filed June 26, 2000); Dempster v. Steven Madden Ltd., et al., 00 CV
+3702 (filed June 30, 2000); Salafia v. Steven Madden, Ltd., et al., 00 CV 4289
+(filed July 24, 2000); Fahey v. Steven Madden, Ltd., et al., 00 CV 4712 (filed
+August 11, 2000); Process Engineering Services, Inc. v. Steven Madden, Ltd., et
+al., 00 CV 5002 (filed August 22, 2000). By Order dated December 8, 2000, the
+Court consolidated these eight actions, appointed Process Engineering, Inc.,
+Michael Fasci and Mark and Libby Adams as lead plaintiffs and approved their
+selection of lead counsel. On February 26, 2001, Plaintiffs served a
+Consolidated Amended Complaint. On or about October 31, 2001, plaintiffs filed a
+Second Consolidated Amended Class Action Complaint. The pleading names the
+Company, Steven Madden, Rhonda J. Brown and Arvind Dharia as defendants. It
+principally alleges that the Company and the individual defendants violated
+Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5
+promulgated under the 1934 Act by issuing false and misleading statements, and
+failing to disclose material adverse information, generally relating to matters
+arising from Mr. Madden's June 2000 indictment. The plaintiffs seek an
+unspecified amount of damages, costs and expenses on behalf of themselves and
+all other purchasers of the Company's common stock during the period June 21,
+1997 through June 20, 2000. On November 30, 2001, all of the defendants served
+motions to dismiss the Consolidated Amended Complaint. The motions were fully
+briefed on January 14, 2002. Since that time, a settlement in principle of these
+actions has been reached, subject to execution of definitive settlement
+documentation, notices to class members, a hearing and approval by the District
+Court. The tentative settlement is within the limits of the Company's insurance
+coverage.
+Shareholder Derivative Actions
+On or about September 26, 2000, a putative shareholders derivative action
+was commenced in the United States District Court for the Eastern District of
+New York, captioned Herrera v. Steven Madden and Steven Madden, Ltd., 00 CV 5803
+(JG). The Company is named as a nominal defendant in the action. The complaint
+seeks to recover alleged damages on behalf of the Company from Mr. Madden
+arising from his June 2000 indictment and to require him to disgorge certain
+profits, bonuses and stock option grants he received. On January 3, 2001,
+plaintiff filed an Amended Shareholder's Derivative Complaint. On February 2,
+2001, both the Company and Mr. Madden filed motions to dismiss the Amended
+Complaint because of plaintiff's failure to make a pre-litigation demand upon
+the Company's board of directors. On October 1, 2001, plaintiff filed a Second
+Amended Complaint. On November 2, 2001, the Company filed a motion to dismiss
+this pleading on grounds that plaintiff had failed to make a pre-litigation
+demand upon the Company's board of directors. On February 7, 2002, the
+Magistrate Judge filed a Report recommending that the Company's motion to
+dismiss be denied. The Company filed its objections to the Report on March 4,
+2002. The Company believes, after consultation with counsel, that its defense
+costs and certain attorneys fees in connection with this action will be subject
+to coverage by the Company's insurance as supplemented by the loss mitigation
+policy described above.
+On or about November 28, 2001, a purported shareholder derivative complaint
+was filed in the United States District Court for the Eastern District of New
+York, captioned Herrera v. Karson, et al., 00 CV 7868. Named as defendants
+therein are the Company (as nominal defendant) and certain of the Company's
+present and/or former directors. The complaint alleges that the individual
+defendants breached their fiduciary duties to the Company in connection with a
+decision by the Board of Directors of the Company to enter into an employment
+agreement with Mr. Steven Madden in or about May 2001. The complaint seeks
+declaratory and other equitable relief, as well as an unspecified amount of
+compensatory damages, costs and expenses. On or about February 1, 2002,
+plaintiff filed an Amended Shareholder Derivative Complaint (the "Amended
+Complaint"). The Amended Complaint contains substantially the same allegations
+and names the same defendants as the original complaint. The Company believes,
+after consultation with counsel, that its defense costs and certain attorneys
+fees in connection with this action will be subject to coverage by the Company's
+insurance as supplemented by the loss mitigation policy described above.
+SEC Investigation
+On March 14, 2001, the Company became aware that the Securities and Exchange
+Commission had issued a formal order of investigation with respect to trading in
+the Company's securities.
+Other Actions
+On or about September 17, 2001, an action was commenced against the Company
+in the Supreme Court, Queens County, captioned Mitch Stewart v. Steven Madden,
+Ltd. Mr. Stewart is a former independent contractor
+9
+for the Company. The complaint seeks damages of approximately $1.3 million for
+breach of contract. On December 20, 2001, the Company answered the complaint,
+denying the allegations and asserting various affirmative defenses. On January
+25, 2002, the plaintiff filed a motion for partial summary judgement, which is
+pending. The Company believes that it has substantial defenses to the claims
+asserted in the lawsuit.
+On or about November 29, 2001, an action was commenced against the Company
+for breach of contract in the United States District Court, Eastern District of
+Texas, captioned Lina Enterprises v. Steven Madden, Ltd. Lina is a former
+independent contractor for the Company. The complaint seeks damages for breach
+of contract. The complaint does not specify the amount of damages being sought,
+but alleges that they are greater than $75,000. On March 13, 2002, the Company
+filed a motion to dismiss the complaint. The Company believes that it has
+substantial defenses to the claims asserted in the lawsuit.
+ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
+No matters were submitted to a vote of the holders of the Company's Common
+Stock during the last quarter of its fiscal year ended December 31, 2001.
+10
+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, 2001 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.
+Common Stock
+High Low High Low
+------------- ------------- ------------ ------------
+2001 2000
+Quarter ended 15.125 7.656 Quarter ended 19 12 1/2
+March 31, 2001 March 31, 2000
+Quarter ended June 30, 19.050 13.350 Quarter ended June 30, 22 7/16 6 9/16
+2001 2000
+Quarter ended 19.890 7.450 Quarter ended 12 11/16 6 13/16
+September 30, 2001 September 30, 2000
+Quarter ended 14.200 8.900 Quarter ended 8 15/32 7
+December 31, 2001 December 31, 2000
+On March 26, 2002, the final quoted price as reported by The Nasdaq National
+Market was $17.35 for each share of common stock. As of March 26, 2002, there
+were 12,365,216 shares of Common Stock outstanding, held of record by 73 record
+holders and approximately 3,402 beneficial owners.
+Absence of Dividends. The Company anticipates that all of its earnings in
+the foreseeable future will be retained to finance the continued growth and
+expansion of its business and has no current intention to pay cash dividends.
+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 2001, 2000
+and 1999 and the Balance Sheet Data as of December 31, 2001 and 2000 should be
+read in Conjunction with the Company's audited consolidated financial statements
+and notes thereto appearing elsewhere herein.
+Year Ended December 31,
+---------------------------------------------------------------------------
+2001 2000 1999 1998 1997
+----------- ----------- ----------- ---------- ----------
+INCOME STATEMENT DATA:
+Net sales 243,391,000 205,113,000 163,036,000 85,783,000 59,311,000
+Cost of sales 143,518,000 115,495,000 94,536,000 49,893,000 34,744,000
+Gross profit 99,873,000 89,618,000 68,500,000 35,890,000 24,567,000
+Commissions and licensing fee 5,911,000 4,847,000 3,367,000 3,273,000 2,321,000
+Operating expenses (79,472,000) (68,833,000) (52,946,000) (29,949,000) (22,262,000)
+Cost of loss mitigation coverage (6,950,000)
+Income from operations 19,362,000 25,632,000 18,921,000 9,214,000 4,626,000
+Interest income 1,344,000 1,744,000 909,000 380,000 312,000
+Interest expense (66,000 (102,000) (90,000) (235,000) (339,000)
+Gain on sale of marketable securities 71,000 230,000
+Income before provision for income taxes 20,711,000 27,504,000 19,740,000 9,359,000 4,599,000
+Provision for income taxes 8,595,000 11,461,000 8,274,000 3,912,000 1,899,000
+Net Income 12,116,000 16,043,000 11,466,000 5,447,000 2,700,000
+Basic income per share $1.04 $1.42 $1.06 $.058 $0.33
+Diluted income per share $0.94 $1.26 $0.92 $0.50 $0.30
+Weighted average common shares
+outstanding-basic income per share 11,617,862 11,310,130 10,831,250 9,436,798 8,064,604
+Effect of potential common shares from
+exercise of options and warrants 1,330,002 1,387,244 1,634,102 1,546,303 848,462
+Weighted average common shares
+outstanding 12,947,864 12,697,374 12,465,352 10,983,101 8,913,066
+BALANCE SHEET DATA
+Total assets 100,822,000 91,733,000 78,135,000 48,928,000 29,277,000
+Working capital 82,633,000 57,207,000 48,076,000 33,627,000 16,545,000
+Noncurrent liabilities 1,313,000 1,130,000 980,000 681,000 359,000
+Stockholders' equity 102,360,000 76,566,000 62,435,000 44,960,000 25,793,000
+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:
+PERCENTAGE OF NET SALES
+-----------------------
+YEAR ENDED
+----------
+DECEMBER 31
+-----------
+($ in thousands)
+Consolidated: 2001 2000 1999
+------------ ---- ---- ----
+Net Sales $243,391 100% $205,113 100% $163,036 100%
+Cost of Sales 143,518 59 115,495 56 94,536 58
+Other Operating Income 5,911 2 4,847 2 3,367 2
+Operating Expenses 79,472 33 68,833 34 52,946 32
+Cost of Loss Mitigation Coverage 6,950 3 -- -- -- --
+Income from Operations 19,362 8 25,632 12 18,921 12
+Interest and Other Income (Expense) Net 1,349 1 1,872 1 819 1
+Income Before Income Taxes 20,711 9 27,504 13 19,740 12
+Net Income 12,116 5 16,043 8 11,466 7
+13
+PERCENTAGE OF NET SALES
+-----------------------
+YEAR ENDED
+----------
+DECEMBER 31
+-----------
+($ in thousands)
+By Segment 2001 2000 1999
+-------- -------- --------
+WHOLESALE DIVISIONS:
+--------------------
+Steven Madden, Ltd.
+-------------------
+Net Sales $ 92,413 100% $ 87,977 100% $ 78,890 100%
+Cost of Sales 60,052 65 54,707 62 49,770 63
+Other Operating Income 1,462 2 959 1 807 1
+Operating Expenses 24,929 27 25,422 29 22,758 29
+Cost of Loss Mitigation Coverage 6,950 8 -- -- -- --
+Income (Loss) from Operations 1,944 2 8,807 10 7,169 9
+l.e.i. Footwear:
+----------------
+Net Sales $ 42,592 100% $ 37,741 100% $ 27,546 100%
+Cost of sales 26,859 63 23,657 63 17,856 65
+Operating Expenses 9,833 23 7,652 20 5,856 21
+Income from Operations 5,900 14 6,432 17 3,834 14
+Madden Mens:
+------------
+Net Sales $ 10,461 100% -- -- -- --
+Cost of sales 6,737 64 -- -- -- --
+Operating Expenses 3,340 32 -- -- -- --
+Income from Operations 384 4 -- -- -- --
+Diva Acquisition Corp:
+----------------------
+Net Sales $ 7,454 100% $ 3,616 100% $ 7,970 100%
+Cost of sales 5,384 72 2,591 72 5,296 66
+Operating Expenses 1,796 24 1,231 34 1,547 19
+Income (Loss) from Operations 274 4 (206) (6) 1,127 14
+Stevies Inc.:
+-------------
+Net Sales $ 10,984 100% $ 6,147 100% -- --
+Cost of sales 7,014 64 3,846 63 -- --
+Other Operating Income 249 2 257 4 -- --
+Operating Expenses 2,626 24 1,595 26 -- --
+Income from Operations 1,593 15 963 16 -- --
+STEVEN MADDEN RETAIL INC.:
+--------------------------
+Net Sales $ 79,487 100% $ 69,632 100% $ 48,630 100%
+Cost of Sales 37,472 47 30,694 44 21,614 44
+Operating Expenses 34,992 44 30,937 44 21,106 43
+Income from Operations 7,023 9 8,001 12 5,910 12
+14
+PERCENTAGE OF NET SALES
+-----------------------
+YEAR ENDED
+----------
+DECEMBER 31
+-----------
+($ in thousands)
+By Segment (Continued)
+ADESSO MADDEN INC.: 2001 2000 1999
+------------------- -------- -------- --------
+(FIRST COST)
+Other Operating Revenue $ 4,200 100% $ 3,631 100% $ 2,560 100%
+Operating Expenses 1,956 47 1,996 55 1,679 66
+Income from Operations 2,244 53 1,635 45 881 34
+RESULTS OF OPERATIONS
+($ in thousands)
+YEAR ENDED DECEMBER 31, 2001 VS. YEAR ENDED DECEMBER 31, 2000
+CONSOLIDATED:
+-------------
+Sales for the year ended December 31, 2001 were $243,391 or 19% higher than
+the $205,113 in the comparable period of 2000. The increase in sales is due to
+several factors, including (i) additional revenues of $10,461 from the Company's
+new Madden Mens Wholesale Division which commenced shipping in the first quarter
+of 2001 (ii) a 14% increase in retail sales due to the opening of additional
+retail stores, (iii) a 13% increase in sales from the l.e.i. Wholesale Division
+("l.e.i. Wholesale"), (iv) a 79% increase in sales from the Stevies Wholesale
+Division ("Stevies Wholesale"), (v) a 106% increase in sales from the Diva
+Acquisition Corp. Wholesale Division ("Diva Wholesale"), (vi) the addition in
+wholesale accounts, and (vii) an increase in public awareness with respect to
+the Company's brands.
+Consolidated gross profit as a percentage of sales decreased from 44% in
+2000 to 41% in 2001. The decrease in gross margin resulted from greater
+promotional activity at retail this year due to sluggish July sales and the
+tragic events of September 11th and its aftermath. Margin pressures from
+wholesale large accounts prompted the Company to be early and aggressive with
+markdowns in a highly promotional retail climate. Finally, the decrease in the
+Company's higher margin retail business as a percentage of total sales
+contributed to the margin erosion.
+Selling, general and administrative (SG&A) expenses increased to $79,472 in
+2001 from $68,833 in 2000. The increase in SG&A expenses is due primarily to a
+28% increase in payroll, officers' bonuses and payroll-related expenses from
+$24,268 in 2000 to $31,004 in 2001. Also, selling and designing expenses
+increased by 19% from $10,510 in 2000 to $12,499 in 2001. This is due in part to
+an increase in sales in the current period and to the Company's increased focus
+on selling and designing activities. The increase in the number of retail
+outlets and expanded corporate office facilities resulted in an increase in
+occupancy, telephone and utilities expenses by 19% from $9,208 in 2000 to
+$10,957 in 2001.
+Income from operations for 2001 was $19,362, which represents a decrease of
+$6,270 over the income from operations of $25,632 in 2000 due to a non-recurring
+charge taken in the fourth quarter of 2001 as a result of the purchase of loss
+mitigation insurance coverage in the amount of $6,950. Net income decreased to
+$12,116 in 2001 from $16,043 in 2000 due to the factors mentioned above.
+15
+WHOLESALE DIVISIONS:
+--------------------
+Sales from the Steve Madden Women's Wholesale Division ("Madden Wholesale")
+accounted for $92,413 or 38%, and $87,977 or 43%, of total sales in 2001 and
+2000, respectively. The increase in sales was driven by the sales of key styles
+including euro-sport casuals, pointed toe and Madden slippers. Also, sales were
+driven by an increase in reorders through open stock replenishment for late
+spring and fall items. Gross profit as a percentage of sales decreased from 38%
+in 2000 to 35% in 2001 due to margin pressures from Madden Wholesale large
+accounts which prompted the Company to be early and aggressive with markdowns in
+a highly promotional retail climate. Operating expenses decreased to $24,929 in
+2001 from $25,422 in 2000 due to decreases in advertising and marketing
+expenses. Madden Wholesale income from operations decreased to $1,944 in 2001
+compared to income from operations of $8,807 in 2000 due to a non-recurring
+charge taken in the fourth quarter of 2001 as a result of the purchase of loss
+mitigation insurance coverage in the amount of $6,950.
+Sales from l.e.i. Wholesale accounted for $42,592 or 17%, and $37,741 or
+18%, of total sales in 2001 and 2000, respectively. Revenues for the year ended
+December 31, 2001 increased 13% over the same period of 2000. The focus of the
+l.e.i. Wholesale expansion was in the department stores such as May Department
+Stores, and specialty store channels such as Journeys. Gross profit as a
+percentage of sales remained the same in 2000 and 2001. Operating expenses
+increased to $9,833 in 2001 from $7,652 in 2000 due to increases in payroll and
+payroll-related expenses. Additionally, selling and designing expenses increased
+due to an increase in sales in the current period. Income from operations for
+l.e.i. Wholesale was $5,900 in 2001 compared to income from operations of $6,432
+in 2000.
+The Company's new Madden Mens Wholesale Division ("Madden Mens Wholesale")
+commenced shipping in the first quarter of 2001. Madden Mens Wholesale generated
+revenues of $10,461 for the year ended December 31, 2001. The Company is pleased
+by the market's acceptance of the new mens line, particularly in the
+sport-casual classification.
+Sales from Diva Wholesale accounted for $7,454 or 3%, and $3,616 or 2%, of
+total sales in 2001 and 2000, respectively. The Company believes that the
+increase in sales was driven by placements of its new product line in major
+department stores, specialty stores, and specialty catalogues. Gross profit as a
+percentage of sales remained the same in 2000 and 2001. Operating expenses
+increased to $1,796 in 2001 from $1,231 in 2000 due to increases in payroll and
+payroll-related expenses. Additionally, selling and related expenses increased
+due to an increase in sales in the current period. Income from operations for
+Diva Wholesale was $274 for the year ended December 31, 2001 which represents a
+233% increase over loss from operations of $206 during the same period in 2000.
+Sales from the Stevies Wholesale, which commenced shipping in the second
+quarter of 2000, accounted for 10,984 or 5%, and $6,147 or 3%, of total sales in
+2001 and 2000, respectively. This increase was primarily due to a full year of
+operation and the growth in accounts such as Limited Too and Nordstrom. Gross
+profit as a percentage of sales decreased from 37% in 2000 to 36% in 2001 due to
+margin pressures from some of Stevies' large accounts which prompted the Company
+to be early and aggressive with markdowns in a highly promotional retail
+climate. Operating expenses increased to $2,626 in 2001 from $1,595 in 2000 due
+to increases in payroll and payroll-related expenses. Additionally, selling and
+designing expenses increased due to an increase in sales in the current period.
+Income from operations for Stevies Wholesale was $1,593 in 2001 compared to
+income from operations of $963 in 2000.
+RETAIL DIVISION:
+----------------
+Sales from the Retail Division accounted for $79,487 or 33% and $69,632 or
+34% of total sales in 2001 and 2000, respectively. This increase in Retail
+Division sales is primarily due to the increase in the number of Steve Madden
+retail stores. During the year ended December 31, 2001, the Company closed two
+of its least productive stores located in Coconut Grove, Florida and in Mineola,
+New York. The Company is considering new sites with greater projected
+productivity. As of December 31, 2001, there were 73 Steve Madden retail stores
+compared to 65 stores as of December 31, 2000. Same store sales for the year
+ended December 31, 2001 decreased by 1% compared to the same store sales for
+2000 due to sluggish consumer traffic in the aftermath of September 11th.
+Revenues from the Internet store for the year ended December 31, 2001 were in
+excess of $4,000, showing an increase of 37% over such revenues in 2000. Gross
+profit as a percentage of sales decreased from 56% in 2000 to 53% in 2001 due to
+16
+greater promotional activity at retail this year. Operating expenses for the
+Retail Division increased to $34,992 or 44% of sales in 2001 from $30,937 or 44%
+of sales in 2000. This increase in dollars was due to increases in payroll and
+payroll-related expenses and occupancy expenses as a result of opening ten
+additional stores since December 31, 2000. Income from operations for the Retail
+Division was $7,023 in 2001 compared to income from operations of $8,001 in
+2000.
+ADESSO-MADDEN DIVISION:
+-----------------------
+Adesso-Madden, Inc. generated commission revenues of $4,200 for the year
+ended December 31, 2001, which represents a 16% increase over commission
+revenues of $3,631 during the same period in 2000. This increase was primarily
+due to the growth in accounts such as Walmart and Target and the addition of
+children's products to the assortment mix. Operating expenses decreased to
+$1,956 in 2001 from $1,996 in 2000. Income from operations for Adesso-Madden was
+$2,244 in 2001 compared to income from operations of $1,635 in 2000.
+YEAR ENDED DECEMBER 31, 2000 VS. YEAR ENDED DECEMBER 31, 1999
+CONSOLIDATED:
+-------------
+Sales for the year ended December 31, 2000 were $205,113 or 26% higher than
+the $163,036 recorded in the comparable period of 1999. The increase in sales
+was due to several factors, including (i) the addition of new wholesale
+accounts, (ii) a 43% increase in retail sales due to the opening of additional
+Steve Madden retail stores during 2000 and an increase in same store sales,
+(iii) a 37% increase in sales from l.e.i. Wholesale, (iv) an increase in the
+number of Steve Madden concept shops located in major department stores and
+specialty stores, and (v) an increase in public awareness with respect to the
+Company's brands. In turn, increased sales have enabled the Company to expand
+its advertising and in store concept efforts, all of which have contributed to
+the continuing increase in sales. Also in the first quarter of 2000, the Company
+introduced a new brand, Stevies(TM). Positioned as a fashion brand, Stevies(TM)
+targets girls ages 6-9 and "tweens" ages 10-12. The Company's new Stevies
+Wholesale commenced shipping to department stores throughout the country in the
+second quarter of 2000. Stevies Wholesale generated revenue of $6,147 for the
+year ended December 31, 2000. Also, during the year ended December 31, 2000, 11
+licenses in 13 product classifications were signed for the Stevies(TM) brand.
+The web site for Stevies at www.stevies.com went live in March 2000 and
+commenced engaging in e-commerce transactions in July 2000.
+Consolidated gross profit as a percentage of sales in 2000 increased to 44%
+as compared to 42% for 1999 due to increased retail sales which were at higher
+margins, a change in the product mix, balanced sourcing and improved inventory
+management.
+Selling, general and administrative (SG&A) expenses increased to $68,833 in
+2000 from $52,946 in 1999. The increase in SG&A was due primarily to a 27%
+increase in payroll, officers' bonuses and payroll related expenses from $19,147
+in 1999 to $24,268 in 2000. Also, the Company focused its efforts on advertising
+and marketing by increasing those expenses by 38% from $5,046 in 1999 to $6,941
+in 2000. Additionally, selling, designing and licensing costs increased by 21%
+from $8,702 in 1999 to $10,510 in 2000. This was due in part to an increase in
+sales in the current period and to the Company's increased focus on selling,
+designing, and licensing activities. The increase in the number of retail
+outlets and expanded office and warehouse facilities resulted in an increase in
+occupancy, telephone, utilities, warehouse, computer, printing/supplies and
+depreciation expenses of 47% from $12,162 in 1999 to $17,820 in 2000.
+Income from operations for 2000 was $25,632, which represents an increase of
+$6,711 or 35% over the income from operations of $18,921 in 1999. Net income
+increased by 40% to $16,043 in 2000 from $11,466 in 1999.
+WHOLESALE DIVISIONS:
+--------------------
+Sales from Steve Madden Women's Wholesale accounted for $87,977 or 43%, and
+$78,890 or 48%, of total sales in 2000 and 1999, respectively. This increase in
+sales was primarily due to the addition of new Madden Wholesale accounts and an
+increase in the number of Steve Madden concepts shops located in major
+department stores and specialty stores throughout the country. Gross profit as a
+percentage of sales increased from 37% in 1999 to 38% in 2000 due to a change in
+the product mix, balanced sourcing and improved inventory management. Operating
+expenses increased to $25,422 in 2000 from $22,758 in 1999. This increase was
+due to an increase in
+17
+payroll and payroll related expenses principally due to the hiring of additional
+management personnel. Also, advertising and marketing expenses increased due to
+the Company's expanded marketing strategy. Additionally, selling, designing and
+licensing costs increased due to an increase in sales during 2000 and to the
+Company's increased focus on selling, designing, and licensing activities.
+Madden Wholesale income from operations was $8,807 in 2000 compared to income
+from operations of $7,169 in 1999.
+Sales from l.e.i. Wholesale accounted for $37,741 or 18%, and $27,546 or
+17%, of total sales in 2000 and 1999, respectively. The increase in sales was
+due to the addition of new l.e.i. Wholesale accounts and an increase in reorders
+from existing customers. The l.e.i. footwear was sold in over 3,500 doors in
+2000 compared to 2,500 doors in 1999, in the United States, primarily in
+department stores, including Macy's East, Burdines, Rich's, Hecht's, Filene's,
+Foley's, Kohl's, Belk and JC Penney, and in specialty store chains, such as
+Journeys and Mandees. Also, during the third quarter of 2000, l.e.i. Wholesale
+shipped shoes to Kohl's for the first time. Gross profit as a percentage of
+sales increased from 35% in 1999 to 37% in 2000 due to changes in product mix,
+balanced sourcing and improved inventory management. Operating expenses
+increased to $7,652 in 2000 from $5,856 in 1999 due to increases in occupancy
+and payroll and payroll related expenses. Additionally, sales commissions,
+selling, designing and licensing costs increased due to an increase in sales in
+the current period and due to the Company's increased focus on these activities.
+Income from operations for l.e.i. Wholesale was $6,432 in 2000 compared to
+income from operations of $3,834 in 1999.
+Sales from the Diva Wholesale accounted for $3,616 or 2%, and $7,970 or 5%,
+of total sales in 2000 and 1999, respectively. The Company believes that the
+decrease in sales was due to the repositioning and reorganization of the David
+Aaron brand. The Company intentionally planned to reduce sales volume in 2000
+enabling Diva Wholesale to use its two retail stores to test the popularity of
+new products. Gross profit as a percentage of sales decreased from 34% in 1999
+to 28% in 2000 as under-performing carryover inventory was cleared at lower
+gross margins. Operating expenses decreased to $1,231 in 2000 from $1,547 in
+1999 due to the decrease in sales commission expenses as a result of the
+decrease in sales and from decreases in selling and designing expenses. Loss
+from operations from Diva Wholesale was $206 in 2000 compared to income from
+operations of $1,127 in 1999.
+Stevies Wholesale commenced shipping to department stores and specialty
+stores throughout the country in the second quarter of 2000. Stevies Wholesale
+generated revenue of $6,147 for the year ended December 31, 2000. Stevies sold
+in over 1,200 doors including store groups such as Nordstrom, Federated
+Department Stores, May Department Stores, Belk, Dillard's, Limited Too, as well
+as, children's independent shoe stores throughout the country. The Stevies brand
+ended the fourth quarter of 2000 with over 815 Stevies concept shop locations
+and over 500 Stevies accessories concept shop locations. Stevies accessory
+concept shops house Stevies licensed accessories and slippers. Gross profit as a
+percentage of sales was 37% for the year ended December 31, 2000. Income from
+operations was $963 in 2000.
+RETAIL DIVISION:
+----------------
+Sales from the Retail Division accounted for $69,632 or 34% and $48,630 or
+30% of total revenues in 2000 and 1999, respectively. This increase in Retail
+Division sales was primarily due to the increase in the number of Steve Madden
+retail stores. As of December 31, 2000, there were 65 Steve Madden retail stores
+compared to 49 stores as of December 31, 1999. Additionally, same store sales
+for the year ended December 31, 2000 increased 10% over the same period of 1999.
+This increase in same store sales was largely due to the Company's ability to
+track and quickly reorder bestsellers and it's strategy of testing and quickly
+reordering successful new products such as athletic inspired casuals, sneakers,
+boots and tailored shoes. Revenues from the Internet store for the year ended
+December 31, 2000 were $3,549 an increase of 196% over the same period of 1999.
+The Company's sales generated through its websites at www.stevemadden.com and
+www.stevies.com continued to increase as the Company made additional styles
+available for sale on its website and usage of the Internet continued to grow.
+Also, the web sites for the Madden Mens at www.stevemaddenmens.com was launched
+in February 2001. Gross profit as a percentage of sales remained the same in
+1999 and 2000. Operating expenses increased to $30,937 or 44% of sales in 2000
+from $21,106 or 43% of sales in 1999. This increase was due to increases in
+payroll and payroll related expenses such as incentive bonuses for store
+managers and the corporate retail management team, marketing and operating
+expenses for the Internet store, occupancy, printing, computer and depreciation
+expenses as a result of opening 16 additional stores since December 31, 1999.
+Income from operations from the Retail Division was $8,001 in 2000 compared to
+income from operations of $5,910 in 1999.
+18
+ADESSO-MADDEN DIVISION:
+-----------------------
+Adesso-Madden, Inc. generated commission revenues of $3,631 for the year
+ended December 31, 2000, which represented a 42% increase over commission
+revenues of $2,560 during the same period in 1999. This increase was primarily
+due to the growth in accounts such as Walmart, Parade of Shoes, Sears, Famous
+Footwear, Payless, Bass, MarMaxx, Bakers, and Target kids. Operating expenses
+increased to $1,996 in 2000 from $1,679 in 1999 primarily due to increases in
+payroll and payroll related expenses. Income from operations from Adesso-Madden
+was $1,635 in 2000 compared to income from operations of $881 in 1999.
+LICENSE AGREEMENTS
+Revenues from licensing increased by 41% to $1,711 for the year ended 2001
+from $1,216 in 2000. This increase was primarily driven by increases in
+licensing income from leather sportswear and sunglasses. As of December 31,
+2001, the Company had six license partners covering six product categories for
+its Steve Madden brand. Also, as of December 31, 2001, the Company had three
+license partners covering three product categories for its Stevies brand. The
+product categories include handbags, hosiery, sunglasses, eyewear, belts and
+outerwear.
+LIQUIDITY AND CAPITAL RESOURCES
+The Company had working capital of $82,633 at December 31, 2001 compared to
+$57,207 in working capital at December 31, 2000, representing an increase of
+$25,426, which was primarily due to the Company's net income and proceeds
+received from the exercise of options.
+Under the terms of a factoring agreement with Capital Factors, Inc., the
+Company is permitted to draw down 80% of its invoiced receivables at an interest
+rate of two points below the Prime Rate (as defined in such agreement). The
+agreement with Capital Factors was renewed as of December 31, 2001 for an
+additional one year term. Capital Factors maintains a lien on all of the
+Company's inventory and receivables and assumes the credit risk for all assigned
+accounts approved by it.
+OPERATING ACTIVITIES
+During the year ended December 31, 2001, cash provided by operating
+activities was $9,393. Uses of cash arose principally from an increase in
+factored accounts receivable of $8,364 and an increase in prepaid expenses and
+other assets of $7,484 principally from prepaid income taxes. Cash was provided
+principally by net income of $12,116 and a decrease in accounts payables and
+accrued expenses of $4,054.
+The Company leases office, showroom, warehouse and retail facilities under
+non-cancelable operating leases with terms expiring at various times through
+2012. Future minimum annual lease payments under non-cancelable operating leases
+consist of the following at December 31:
+2002 $ 7,172,000
+2003 6,835,000
+2004 6,742,000
+2005 6,346,000
+2006 6,329,000
+Thereafter 15,834,000
+---------------
+$ 49,258,000
+===============
+The Company has employment agreements with four key executives and its
+Creative Design Chief as of December 31, 2001 providing for aggregate annual
+salaries of approximately $1,625 subject to annual bonuses and annual increases
+as may be determined by the Company's Board of Directors. In addition, as part
+of four of the employment agreements, the Company is committed to pay incentive
+bonuses based on income before interest, depreciation and taxes.
+19
+A significant portion of the Company's product is supplied from foreign
+manufacturers, the majority of which are located in Brazil, China, Italy and
+Spain. Although the Company has not entered into any manufacturing contracts
+with any of these foreign companies, the Company believes that a sufficient
+number of alternative sources exist outside of the United States for the
+manufacture of its products if current suppliers need to be replaced. In
+addition, the Company currently makes approximately ninety-five percent (95%) of
+its purchases in U.S. dollars.
+CAPITAL IMPROVEMENT ACTIVITIES
+During the year ended December 31, 2001, the Company used cash of $3,415
+primarily for leasehold improvements on new retail stores and corporate office
+space and for a new point of sale computer system for the retail stores.
+FINANCING ACTIVITIES
+During the year ended December 31, 2001, the Company received $8,998 from
+the sale of its common stock in connection with the exercise of stock options.
+On February 29, 2000, the Company announced a 1,500,000 share repurchase
+program. As of December 31, 2000, the Company had repurchased 900,000 shares of
+the Company's common stock at a total cost of $6,076 under this program. The
+Company had a total of 600,000 shares remaining for repurchase as of September
+24, 2001. On September 24, 2001 the Company announced that the share repurchase
+program was increased by 3 million shares. The Company did not repurchase any
+common stock during 2001.
+OTHER CONSIDERATIONS
+Dependence on Key Personnel. Although the Company has strengthened its
+senior management team, the Company is dependent, in particular, upon the
+services of Steven Madden, its current Creative and Design Chief and former
+Chairman and Chief Executive Officer. On June 20, 2000, Mr. Madden was indicted
+in the United States District Courts for the Southern District and Eastern
+District of New York. The indictments alleged that Mr. Madden engaged in
+securities fraud and money laundering activities. In addition, the Securities
+and Exchange Commission filed a complaint in the United States District Court
+for the Eastern District of New York alleging that Mr. Madden violated Section
+17(a) of the Securities Exchange Act of 1934, as amended. On May 21, 2001,
+Steven Madden entered into a plea agreement with the U.S. Attorney's Office,
+pursuant to which he pled guilty to four of the federal charges filed against
+him. In addition, Mr. Madden reached a separate settlement agreement with the
+Securities and Exchange Commission regarding the allegations contained in its
+complaint. As a result, Mr. Madden resigned as the Company's Chief Executive
+Officer and as a member of the Company's Board of Directors effective July 1,
+2001. Mr. Madden has agreed to serve as the Company's Creative and Design Chief,
+a non-executive position. It is expected that Mr. Madden will be sentenced in
+April 2002. Under the settlement agreement with the Securities and Exchange
+Commission, Mr. Madden has agreed to not serve as an officer or director of a
+publicly traded company for 7 years. Neither the indictments nor the Securities
+and Exchange Commission complaint allege any wrongdoing by the Company or its
+other officers and directors.
+The Company maintains a key person life insurance policy on Mr. Madden with
+coverage in the amount of $10,000,000. The Company has an employment contract
+with Mr. Madden that expires on June 30, 2011. Under the terms of his employment
+contract, if Mr. Madden is terminated for other than cause, death or total
+disability, the Company will be required to pay the remaining base salary due
+under his contract, half of which must be paid upon termination. Mr. Madden is
+also entitled during the term of the contract to an annual $200,000
+non-accountable expense account payable in monthly installments; however, the
+Company is not required to pay this non-accountable expense allowance for any
+month that Mr. Madden is not actively engaged in the duties of Creative and
+Design Chief. If, during the period commencing 120 days prior to a change of
+control and ending on the first anniversary of a change of control, Mr. Madden's
+employment is terminated by the Company (other than for cause) or by Mr. Madden
+for good reason, Mr. Madden will be entitled to receive a lump sum payment equal
+to three times his compensation for the preceding 12-month period ending
+December 31st.
+The Company believes that Mr. Madden is integral to attracting talented shoe
+designers. Since Mr. Madden is involved in many material creative aspects of the
+Company's business, there can be no assurance that a suitable replacement for
+Mr. Madden could be found if he was unable to perform services for the Company.
+As a consequence, the loss of Mr. Madden or other key management personnel could
+have a material adverse effect upon the Company's business, results of
+operations and financial condition. In addition, the Company's ability to market
+20
+its products and to maintain profitability will depend, in large part, on its
+ability to attract and retain qualified personnel. Competition for such
+personnel is intense and there can be no assurance that the Company will be able
+to attract and retain such personnel. The inability of the Company to attract
+and retain such qualified personnel would have a material adverse effect on the
+Company's business, financial condition and results of operations.
+Fashion Industry Risks. The success of the Company will depend in
+significant part upon its ability to anticipate and respond to product and
+fashion trends as well as to anticipate, gauge and react to changing consumer
+demands in a timely manner. There can be no assurance that the Company's
+products will correspond to the changes in taste and demand or that the Company
+will be able to successfully market products which respond to such trends. If
+the Company misjudges the market for its products, it may be faced with
+significant excess inventories for some products and missed opportunities with
+others. In addition, misjudgments in merchandise selection could adversely
+affect the Company's image with its customers and weak sales and resulting
+markdown requests from customers could have a material adverse effect on the
+Company's business, financial condition and results of operations.
+The industry in which the Company operates is cyclical, with purchases
+tending to decline during recessionary periods when disposable income is low.
+Purchases of contemporary shoes and accessories tend to decline during
+recessionary periods and also may decline at other times. While the Company has
+fared well in recent years in a difficult retail environment, there can be no
+assurance that the Company will be able to maintain its historical rate of
+growth in revenues and earnings, or remain profitable in the future. A recession
+in the national or regional economies or uncertainties regarding future economic
+prospects, among other things, could affect consumer spending habits and have a
+material adverse effect on the Company's business, financial condition and
+results of operations.
+In recent years, the retail industry has experienced consolidation and other
+ownership changes. In addition, some of the Company's customers have operated
+under the protection of the federal bankruptcy laws. In the future, retailers in
+the United States and in foreign markets may consolidate, undergo restructurings
+or reorganizations, or realign their affiliations, any of which could decrease
+the number of stores that carry the Company's products or increase the ownership
+concentration within the retail industry. While such changes in the retail
+industry to date have not had a material adverse effect on the Company's
+business or financial condition, there can be no assurance as to the future
+effect of any such changes.
+Inventory Management. The fashion-oriented nature of the Company's industry
+and the rapid changes in customer preferences leave the Company vulnerable to an
+increased risk of inventory obsolescence. Thus, the Company's ability to manage
+its inventories properly is an important factor in its operations. Inventory
+shortages can adversely affect the timing of shipments to customers and diminish
+brand loyalty. Conversely, excess inventories can result in increased interest
+costs as well as lower gross margins due to the necessity of providing discounts
+to retailers. The inability of the Company to effectively manage its inventory
+would have a material adverse effect on the Company's business, financial
+condition and results of operations.
+Dependence Upon Customers and Risks Related to Extending Credit to
+Customers. The Company's customers consist principally of department stores and
+specialty stores, including shoe boutiques. Certain of the Company's department
+store customers, including some under common ownership, account for significant
+portions of the Company's wholesale sales. Presently, the Company sells
+approximately sixty-two percent (62%) of its products at wholesale to department
+stores, including Federated Department Stores (Bloomingdale's, Bon Marche,
+Burdines, Macy's and Rich's), Dillard's, Nordstrom, Marshall Field's and May
+Department Stores (Famous Barr, Filene's, Foley's, Hecht's, Kaufmann's, Meier &
+Frank, Lord and Taylor and Robinsons May) and approximately thirty-eight (38%)
+percent of its products at wholesale to specialty stores, including shoe
+boutiques. The Company's largest customers, May Department Stores, Federated
+Department Stores, and Nordstrom, account for approximately twenty-one percent
+(21%), eighteen percent (18%) and eleven percent (11%) of the Company's
+wholesale sales, respectively.
+The Company believes that a substantial portion of sales of the Company's
+licensed products by its domestic licensing partners are also made to the
+Company's largest department store customers. The Company generally enters into
+a number of purchase order commitments with its customers for each of its lines
+every season and does not enter into long-term agreements with any of its
+customers. Therefore, a decision by Federated Department Stores, May Department
+Stores, Nordstrom or any other significant customer, whether motivated by
+competitive
+21
+conditions, financial difficulties or otherwise, to decrease the amount of
+merchandise purchased from the Company or its licensing partners, or to change
+its manner of doing business could have a material adverse effect on the
+Company's business, financial condition and results of operations. The Company
+sells its products primarily to retail stores across the United States and
+extends credit based on an evaluation of each customer's financial condition,
+usually without requiring collateral. While various retailers, including some of
+the Company's customers, have experienced financial difficulties in the past few
+years which increased the risk of extending credit to such retailers, the
+Company's losses due to bad debts have been limited. Pursuant to the Factoring
+Agreement between Capital Factors and the Company, Capital Factors currently
+assumes the credit risk related to approximately 95% of the Company's accounts
+receivables. However, financial difficulties of a customer could cause the
+Company to curtail business with such customer or require the Company to assume
+more credit risk relating to such customer's receivables.
+Impact of Foreign Manufacturers. Substantially all of the Company's products
+are currently sourced outside the United States through arrangements with a
+number of foreign manufacturers in four different countries. During the year
+ended December 31, 2001, approximately 90% of the Company's products were
+purchased from sources outside the United States, including China, Brazil, Italy
+and Spain.
+Risks inherent in foreign operations include work stoppages, transportation
+delays and interruptions, changes in social, political and economic conditions
+which could result in the disruption of trade from the countries in which the
+Company's manufacturers or suppliers are located, the imposition of additional
+regulations relating to imports, the imposition of additional duties, taxes and
+other charges on imports, significant fluctuations of the value of the dollar
+against foreign currencies, or restrictions on the transfer of funds, any of
+which could have a material adverse effect on the Company's business, financial
+condition and results of operations. The Company does not believe that any such
+economic or political condition will materially affect the Company's ability to
+purchase products, since a variety of materials and alternative sources exist.
+The Company cannot be certain, however, that it will be able to identify such
+alternative sources without delay or without greater cost to the Company, if
+ever. The Company's inability to identify and secure alternative sources of
+supply in this situation would have a material adverse effect on the Company's
+business, financial condition and results of operations.
+The Company's imported products are also subject to United States customs
+duties. The United States and the countries in which the Company's products are
+produced or sold may, from time to time, impose new quotas, duties, tariffs, or
+other restrictions, or may adversely adjust prevailing quota, duty or tariff
+levels, any of which could have a material adverse effect on the Company's
+business, financial condition and results of operations.
+Possible Adverse Impact of Unaffiliated Manufacturers' Inability to
+Manufacture in a Timely Manner, to Meet Quality Standards or to Use Acceptable
+Labor Practices. As is common in the footwear industry, the Company contracts
+for the manufacture of a majority of its products to its specifications through
+foreign manufacturers. The Company does not own or operate any manufacturing
+facilities and is therefore dependent upon independent third parties for the
+manufacture of all of its products. The Company's products are manufactured to
+its specifications by both domestic and international manufacturers. The
+inability of a manufacturer to ship orders of the Company's products in a timely
+manner or to meet the Company's quality standards could cause the Company to
+miss the delivery date requirements of its customers for those items, which
+could result in cancellation of orders, refusal to accept deliveries or a
+reduction in purchase prices, any of which could have a material adverse effect
+on the Company's business, financial condition and results of operations.
+Although the Company enters into a number of purchase order commitments each
+season specifying a time frame for delivery, method of payment, design and
+quality specifications and other standard industry provisions, the Company does
+not have long-term contracts with any manufacturer. As a consequence, any of
+these manufacturing relationships may be terminated, by either party, at any
+time. Although the Company believes that other facilities are available for the
+manufacture of the Company's products, both within and outside of the United
+States, there can be no assurance that such facilities would be available to the
+Company on an immediate basis, if at all, or that the costs charged to the
+Company by such manufacturers will not be greater than those presently paid.
+The Company requires its licensing partners and independent manufacturers to
+operate in compliance with applicable laws and regulations. While the Company
+promotes ethical business practices and the Company's staff periodically visits
+and monitors the operations of its independent manufacturers, the Company does
+not control such manufacturers or their labor practices. The violation of labor
+or other laws by an independent manufacturer of the
+22
+Company or by one of the Company's licensing partners, or the divergence of an
+independent manufacturer's or licensing partner's labor practices from those
+generally accepted as ethical in the United States, could have a material
+adverse effect on the Company's business, financial condition and results of
+operations.
+Intense Industry Competition. The fashionable footwear industry is highly
+competitive and barriers to entry are low. The Company's competitors include
+specialty companies as well as companies with diversified product lines. The
+recent substantial growth in the sales of fashionable footwear has encouraged
+the entry of many new competitors and increased competition from established
+companies. Most of these competitors, including Kenneth Cole, Nine West, DKNY,
+Skechers, Nike and Guess, may have significantly greater financial and other
+resources than the Company and there can be no assurance that the Company will
+be able to compete successfully with other fashion footwear companies. Increased
+competition could result in pricing pressures, increased marketing expenditures
+and loss of market share, and could have a material adverse effect on the
+Company's business, financial condition and results of operations. The Company
+believes effective advertising and marketing, fashionable styling, high quality
+and value are the most important competitive factors and plans to employ these
+elements as it develops its products. The Company's inability to effectively
+advertise and market its products could have a material adverse effect on the
+Company's business, financial condition and results of operations.
+Expansion of Retail Business. The Company's continued growth depends to a
+significant degree on further developing the Steve Madden(R), David Aaron(R),
+Stevies, Steve Madden Mens and l.e.i.(R) brands, creating new product categories
+and businesses and operating Company-owned stores on a profitable basis. The
+Company plans to open approximately ten (10) Steve Madden retail stores in 2002.
+The Company's recent and planned expansion includes the opening of stores in new
+geographic markets as well as strengthening existing markets. New markets have
+in the past presented, and will continue to present, competitive and
+merchandising challenges that are different from those faced by the Company in
+its existing markets. There can be no assurance that the Company will be able to
+open new stores, and if opened, that such new stores will be able to achieve
+sales and profitability levels consistent with existing stores. The Company's
+retail expansion is dependent on a number of factors, including the Company's
+ability to locate and obtain favorable store sites, the performance of the
+Company's wholesale and retail operations, and the ability of the Company to
+manage such expansion and hire and train personnel. Past comparable store sales
+results may not be indicative of future results, and there can be no assurance
+that the Company's comparable store sales results will increase or not decrease
+in the future. In addition, there can be no assurance that the Company's
+strategies to increase other sources of revenue, which may include expansion of
+its licensing activities, will be successful or that the Company's overall sales
+or profitability will increase or not be adversely affected as a result of the
+implementation of such retail strategies.
+The Company's growth has increased and will continue to increase demand on
+the Company's managerial, operational and administrative resources. The Company
+has recently invested significant resources in, among other things, its
+management information systems and hiring and training new personnel. However,
+in order to manage currently anticipated levels of future demand, the Company
+may be required to, among other things, expand its distribution facilities,
+establish relationships with new manufacturers to produce its products, and
+continue to expand and improve its financial, management and operating systems.
+There can be no assurance that the Company will be able to manage future growth
+effectively and a failure to do so could have a material adverse effect on the
+Company's business, financial condition and results of operations.
+Seasonal and Quarterly Fluctuations. The Company's results may fluctuate
+quarter to quarter as a result of the timing of holidays, weather, the timing of
+larger shipments of footwear, market acceptance of the Company's products, the
+mix, pricing and presentation of the products offered and sold, the hiring and
+training of additional personnel, the timing of inventory write downs, the cost
+of materials, the mix between wholesale and licensing businesses, the incurrence
+of other operating costs and factors beyond the Company's control, such as
+general economic conditions and actions of competitors. In addition, the Company
+expects that its sales and operating results may be significantly impacted by
+(i) the opening of new retail stores and (ii) the introduction of new products.
+Accordingly, the results of operations in any quarter will not necessarily be
+indicative of the results that may be achieved for a full fiscal year or any
+future quarter.
+Trademark and Service Mark Protection. The Company believes that its
+trademarks and service marks and other proprietary rights are important to its
+success and its competitive position. Accordingly, the Company devotes
+substantial resources to the establishment and protection of its trademarks on a
+worldwide basis. Nevertheless, there can be no assurance that the actions taken
+by the Company to establish and protect its trademarks and other
+23
+proprietary rights will be adequate to prevent imitation of its products by
+others or to prevent others from seeking to block sales of the Company's
+products as violative of the trademarks and proprietary rights of others.
+Moreover, no assurance can be given that others will not assert rights in, or
+ownership of, trademarks and other proprietary rights of the Company or that the
+Company will be able to successfully resolve such conflicts. In addition, the
+laws of certain foreign countries may not protect proprietary rights to the same
+extent as do the laws of the United States. The failure of the Company to
+establish and then protect such proprietary rights from unlawful and improper
+appropriation could have a material adverse effect on the Company's business,
+financial condition and results of operations. See "Business -- Trademarks and
+Service Marks".
+Foreign Currency Fluctuations. The Company generally purchases its products
+in U.S. dollars. However, the Company sources substantially all of its products
+overseas and, as such, the cost of these products may be affected by changes in
+the value of the relevant currencies. Changes in currency exchange rates may
+also affect the relative prices at which the Company and foreign competitors
+sell their products in the same market. There can be no assurance that foreign
+currency fluctuations will not have a material adverse effect on the Company's
+business, financial condition and results of operations.
+Outstanding Options. As of March 11, 2002, the Company had outstanding
+options to purchase an aggregate of approximately 2,089,514 shares of Common
+Stock. Holders of such options are likely to exercise them when, in all
+likelihood, the Company could obtain additional capital on terms more favorable
+than those provided by the options. Further, while its options are outstanding,
+they may adversely affect the terms in which the Company could obtain additional
+capital.
+ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
+Not applicable.
+ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
+See financial statements following Item 14 of this Annual Report on Form
+10-K.
+ITEM 9 CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND
+FINANCIAL DISCLOSURE
+None.
+PART III
+ITEM 10 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
+COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT OF THE REGISTRANT
+Incorporated herein by reference from the Company's definitive proxy
+statement to be filed pursuant to Regulation 14A under the Securities Exchange
+Act of 1934.
+ITEM 11 EXECUTIVE COMPENSATION
+Incorporated herein by reference from the Company's definitive proxy
+statement to be filed pursuant to Regulation 14A under the Securities Exchange
+Act of 1934.
+ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
+Incorporated herein by reference from the Company's definitive proxy
+statement to be filed pursuant to Regulation 14A under the Securities Exchange
+Act of 1934.
+24
+ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
+Incorporated herein by reference from the Company's definitive proxy
+statement to be filed pursuant to Regulation 14A under the Securities Exchange
+Act of 1934.
+PART IV
+ITEM 14 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
+(a)(1) Financial Statements
+The following consolidated financial statements of Steven Madden, Ltd. and
+subsidiaries are included in Item 8:
+25
+STEVEN MADDEN, LTD. AND SUBSIDIARIES
+CONTENTS
+PAGE
+----
+CONSOLIDATED FINANCIAL STATEMENTS
+Independent auditors' report F-2
+Balance sheets as of December 31, 2001 and 2000 F-3
+Statements of operations for the years ended
+December 31, 2001, 2000 and 1999 F-4
+Statements of changes in stockholders' equity for the
+years ended December 31, 2001, 2000 and 1999 F-5
+Statements of cash flows for the years ended
+December 31, 2001, 2000 and 1999 F-6
+Notes to financial statements F-7
+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 as of December 31, 2001 and 2000, and the related
+consolidated statements of operations, changes in stockholders' equity and cash
+flows for each of the years in the three-year period ended December 31, 2001.
+These financial statements are the responsibility of the Company's management.
+Our responsibility is to express an opinion on these financial statements based
+on our audits.
+We conducted our audits in accordance with auditing standards generally accepted
+in the United States. Those standards require that we plan and perform the
+audits to obtain reasonable assurance about whether the financial statements are
+free of material misstatement. An audit includes examining, on a test basis,
+evidence supporting the amounts and disclosures in the financial statements. An
+audit also includes assessing the accounting principles used and significant
+estimates made by management, as well as evaluating the overall financial
+statement presentation. We believe that our audits provide a reasonable basis
+for our opinion.
+In our opinion, the financial statements enumerated above present fairly, in all
+material respects, the consolidated financial position of Steven Madden, Ltd.
+and subsidiaries as of December 31, 2001 and 2000, and the consolidated results
+of their operations and their consolidated cash flows for each of the years in
+the three-year period ended December 31, 2001 in conformity with accounting
+principles generally accepted in the United States.
+Richard A. Eisner & Company, LLP
+New York, New York
+February 22, 2002
+With respect to Notes J[1] and J[2],
+March 4, 2002
+F-2
+STEVEN MADDEN, LTD. AND SUBSIDIARIES
+CONSOLIDATED BALANCE SHEETS
+December 31,
+------------------------------
+2001 2000
+------------- -------------
+ASSETS
+Current assets:
+Cash and cash equivalents $ 50,179,000 $ 35,259,000
+Accounts receivable - net of allowances of $257,000 and $774,000 2,072,000 2,417,000
+Due from factor - net of allowances of $1,387,000 and $866,000 22,783,000 15,155,000
+Inventories 15,818,000 15,824,000
+Prepaid expenses and other current assets 836,000 1,145,000
+Prepaid taxes 7,911,000 144,000
+Deferred taxes 1,223,000 1,300,000
+------------- -------------
+Total current assets 100,822,000 71,244,000
+Property and equipment, net 15,707,000 15,600,000
+Deferred taxes 3,019,000 2,462,000
+Deposits and other 248,000 222,000
+Cost in excess of fair value of net assets acquired - net of accumulated
+amortization of $714,000 and $575,000 2,066,000 2,205,000
+------------- -------------
+$ 121,862,000 $ 91,733,000
+============= =============
+LIABILITIES
+Current liabilities:
+Current portion of capital lease obligations $ 43,000 $ 128,000
+Accounts payable 6,836,000 9,502,000
+Accrued expenses 10,898,000 4,178,000
+Accrued bonuses 412,000 229,000
+------------- -------------
+Total current liabilities 18,189,000 14,037,000
+Deferred rent 1,299,000 1,074,000
+Capital lease obligations, less current portion 14,000 56,000
+------------- -------------
+19,502,000 15,167,000
+------------- -------------
+Commitments, contingencies and other (Note J)
+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 - $.0001 par value, 60,000,000 shares authorized, 13,439,020 and
+12,306,684 shares issued, 12,193,816 and 11,061,480 shares
+outstanding 1,000 1,000
+Additional paid-in capital 60,643,000 46,688,000
+Retained earnings 50,881,000 38,765,000
+Unearned compensation (1,174,000) (897,000)
+Treasury stock - 1,245,204 shares at cost (7,991,000) (7,991,000)
+------------- -------------
+102,360,000 76,566,000
+------------- -------------
+$ 121,862,000 $ 91,733,000
+============= =============
+See Notes to Financial Statements F-3
+STEVEN MADDEN, LTD. AND SUBSIDIARIES
+CONSOLIDATED STATEMENTS OF OPERATIONS
+Year Ended December 31,
+-----------------------------------------------
+2001 2000 1999
+------------- ------------- -------------
+Net sales:
+Wholesale $ 163,904,000 $ 135,481,000 $ 114,406,000
+Retail 79,487,000 69,632,000 48,630,000
+------------- ------------- -------------
+243,391,000 205,113,000 163,036,000
+------------- ------------- -------------
+Cost of sales:
+Wholesale 106,046,000 84,801,000 72,922,000
+Retail 37,472,000 30,694,000 21,614,000
+------------- ------------- -------------
+143,518,000 115,495,000 94,536,000
+------------- ------------- -------------
+Gross profit 99,873,000 89,618,000 68,500,000
+Commission and licensing fee income 5,911,000 4,847,000 3,367,000
+Operating expenses (79,472,000) (68,833,000) (52,946,000)
+Cost of loss mitigation coverage (6,950,000)
+------------- ------------- -------------
+Income from operations before other income (expenses) 19,362,000 25,632,000 18,921,000
+Other income (expenses):
+Interest income 1,344,000 1,744,000 909,000
+Interest expense (66,000) (102,000) (90,000)
+Gain on sale of marketable securities 71,000 230,000
+------------- ------------- -------------
+Income before provision for income taxes 20,711,000 27,504,000 19,740,000
+Provision for income taxes 8,595,000 11,461,000 8,274,000
+------------- ------------- -------------
+NET INCOME $ 12,116,000 $ 16,043,000 $ 11,466,000
+============= ============= =============
+BASIC INCOME PER SHARE $1.04 $1.42 $1.06
+===== ===== =====
+DILUTED INCOME PER SHARE $0.94 $1.26 $0.92
+===== ===== =====
+WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - BASIC
+INCOME PER SHARE 11,617,862 11,310,130 10,831,250
+EFFECT OF DILUTIVE SECURITIES - OPTIONS 1,330,002 1,387,244 1,634,102
+------------- ------------- -------------
+WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - DILUTED
+INCOME PER SHARE 12,947,864 12,697,374 12,465,352
+============= ============= =============
+See Notes to Financial Statements F-4
+STEVEN MADDEN, LTD. AND SUBSIDIARIES
+CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
+Common Stock Additional
+-------------------- Paid-in Retained Unearned
+Shares Amount Capital Earnings Compensation
+---------- ------- ------------ ------------ ------------
+BALANCE - DECEMBER 31, 1998 10,940,643 $ 1,000 $ 36,601,000 $ 11,256,000 $ (1,661,000)
+Exercise of stock options 857,150 5,264,000
+Tax benefit from exercise of options 275,000
+Compensation in connection with issuance of
+stock options to a director 766,000
+Net income 11,466,000
+Amortization of unearned compensation 382,000
+Common stock purchased for treasury
+---------- ------- ------------ ------------ ------------
+BALANCE - DECEMBER 31, 1999 11,797,793 1,000 42,906,000 22,722,000 (1,279,000)
+Exercise of stock options 508,891 2,807,000
+Tax benefit from exercise of options 975,000
+Net income 16,043,000
+Amortization of unearned compensation 382,000
+Common stock purchased for treasury
+---------- ------- ------------ ------------ ------------
+BALANCE - DECEMBER 31, 2000 12,306,684 1,000 46,688,000 38,765,000 (897,000)
+Exercise of stock options 1,122,336 8,998,000
+Tax benefit from exercise of options 2,765,000
+Compensation in connection with issuance of
+stock options 2,004,000 (810,000)
+Compensation in connection with issuance of
+restricted stock 10,000 188,000
+Net income 12,116,000
+Amortization of unearned compensation 533,000
+---------- ------- ------------ ------------ ------------
+BALANCE - DECEMBER 31, 2001 13,439,020 $ 1,000 $ 60,643,000 $ 50,881,000 $ (1,174,000)
+========== ======= ============ ============ ============
+Treasury Stock Total
+----------------------- Stockholders'
+Shares Amount Equity
+--------- ----------- -------------
+BALANCE - DECEMBER 31, 1998 270,204 $(1,237,000) $ 44,960,000
+Exercise of stock options 5,264,000
+Tax benefit from exercise of options 275,000
+Compensation in connection with issuance of
+stock options to a director 766,000
+Net income 11,466,000
+Amortization of unearned compensation 382,000
+Common stock purchased for treasury 75,000 (678,000) (678,000)
+--------- ----------- -------------
+BALANCE - DECEMBER 31, 1999 345,204 (1,915,000) 62,435,000
+Exercise of stock options 2,807,000
+Tax benefit from exercise of options 975,000
+Net income 16,043,000
+Amortization of unearned compensation 382,000
+Common stock purchased for treasury 900,000 (6,076,000) (6,076,000)
+--------- ----------- -------------
+BALANCE - DECEMBER 31, 2000 1,245,204 (7,991,000) 76,566,000
+Exercise of stock options 8,998,000
+Tax benefit from exercise of options 2,765,000
+Compensation in connection with issuance of
+stock options 1,194,000
+Compensation in connection with issuance of
+restricted stock 188,000
+Net income 12,116,000
+Amortization of unearned compensation 533,000
+--------- ----------- -------------
+BALANCE - DECEMBER 31, 2001 1,245,204 $(7,991,000) $ 102,360,000
+========= =========== =============
+See notes to financial statements F-5
+STEVEN MADDEN, LTD. AND SUBSIDIARIES
+CONSOLIDATED STATEMENTS OF CASH FLOWS
+Year Ended December 31,
+--------------------------------------------
+2001 2000 1999
+------------ ------------ ------------
+Cash flows from operating activities:
+Net income $ 12,116,000 $ 16,043,000 $ 11,466,000
+Adjustments to reconcile net income to net cash provided by
+operating activities:
+Compensatory stock options and restricted stock 1,382,000 766,000
+Depreciation and amortization 3,447,000 3,586,000 2,950,000
+Deferred taxes (480,000) (1,350,000) (1,585,000)
+Deferred compensation 533,000 382,000 382,000
+Tax benefit from exercise of options 2,765,000 975,000 275,000
+Provision for doubtful accounts and chargebacks 219,000 506,000 757,000
+Deferred rent expense 225,000 297,000 392,000
+Gain on sale of marketable securities (71,000) (230,000)
+Changes in:
+Accounts receivable 862,000 (1,474,000) (767,000)
+Due from factor (8,364,000) (3,251,000) (3,062,000)
+Inventories 6,000 (5,666,000) (2,187,000)
+Prepaid expenses, prepaid taxes and other assets (7,484,000) (375,000) 2,098,000
+Accounts payable and accrued expenses 4,054,000 4,610,000 6,120,000
+Accrued bonuses 183,000 (348,000) 346,000
+Income tax payable (4,957,000) 4,957,000
+------------ ------------ ------------
+Net cash provided by operating activities 9,393,000 8,748,000 22,908,000
+------------ ------------ ------------
+Cash flows from investing activities:
+Purchase of property and equipment (3,415,000) (7,933,000) (4,902,000)
+Purchases of investment securities (54,000) (257,000)
+Maturity/sale of investment securities 125,000 487,000 499,000
+------------ ------------ ------------
+Net cash used in investing activities (3,344,000) (7,446,000) (4,660,000)
+------------ ------------ ------------
+Cash flows from financing activities:
+Proceeds from exercise of stock options 8,998,000 2,807,000 5,264,000
+Purchase of treasury stock (6,076,000) (678,000)
+Payments of lease obligations (127,000) (135,000) (115,000)
+------------ ------------ ------------
+Net cash provided by (used in) financing activities 8,871,000 (3,404,000) 4,471,000
+------------ ------------ ------------
+Net increase (decrease) in cash and cash equivalents 14,920,000 (2,102,000) 22,719,000
+Cash and cash equivalents - beginning of year 35,259,000 37,361,000 14,642,000
+------------ ------------ ------------
+Cash and cash equivalents - end of year $ 50,179,000 $ 35,259,000 $ 37,361,000
+============ ============ ============
+Supplemental disclosure of noncash investing and financing activities:
+Acquisition of leased assets $ 29,000
+Supplemental disclosures of cash flow information:
+Cash paid during the year for:
+Interest $ 66,000 $ 102,000 $ 90,000
+Income taxes $ 14,389,000 $ 16,172,000 $ 3,886,000
+See notes to financial statements F-6
+STEVEN MADDEN, LTD. AND SUBSIDIARIES
+NOTES TO FINANCIAL STATEMENTS
+DECEMBER 31, 2001 AND 2000
+NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
+[1] ORGANIZATION:
+Steven Madden, Ltd., a Delaware corporation, designs and sources women's,
+girl's and men's shoes, for sale through its wholesale and retail channels
+under the Steve Madden, David Aaron, Stevies, Madden Mens and Lei (under
+license) brand names. Revenue is generated predominately through the sale
+of the Company's brand name merchandise and certain licensed products. At
+December 31, 2001 and 2000, the Company operated 73 and 65 retail stores
+(including its website as a store), respectively. Such revenues are subject
+to seasonal fluctuations. See Note K for operating segment information.
+[2] PRINCIPLES OF CONSOLIDATION:
+The consolidated financial statements include the accounts of Steven
+Madden, Ltd. and its wholly owned subsidiaries Steven Madden Retail, Inc.,
+Diva Acquisition Corp., Adesso-Madden, Inc. and Stevies, Inc. (collectively
+referred to as the "Company"). All significant intercompany balances and
+transactions have been eliminated.
+[3] USE OF ESTIMATES:
+The preparation of financial statements in conformity with accounting
+principles generally accepted in the United States of America requires
+management to make estimates and assumptions that affect the reported
+amounts of assets and liabilities and disclosure of contingent assets and
+liabilities at the date of the financial statements and the reported
+amounts of revenue and expenses during the reporting period. Actual results
+could differ from those estimates.
+[4] CASH AND CASH EQUIVALENTS:
+Cash equivalents at December 31, 2001 and 2000, amounted to approximately
+$41,777,000 and $28,865,000, respectively, and consist of certificates of
+deposit and commercial paper. The Company considers all highly liquid
+instruments with an original maturity of three months or less to be cash
+equivalents.
+[5] INVENTORIES:
+Inventories, which consist of finished goods, are stated at the lower of
+cost (first-in, first-out method) or market.
+[6] PROPERTY AND EQUIPMENT:
+Property and equipment are stated at cost less accumulated depreciation and
+amortization. Depreciation is computed utilizing the straight-line method
+based on estimated useful lives ranging from two to ten years. Leasehold
+improvements are amortized utilizing the straight-line method over the
+shorter of their estimated useful lives or the lease term. Depreciation and
+amortization include amounts relating to property and equipment under
+capital leases.
+Impairment losses are recognized for long-lived assets, including certain
+intangibles, used in operations when indicators of impairment are present
+and the undiscounted cash flows estimated to be generated by those assets
+are not sufficient to recover the assets' carrying amount. Impairment
+losses are measured by comparing the fair value of the assets to their
+carrying amount. No impairment losses have been incurred for the years
+presented.
+F-7
+STEVEN MADDEN, LTD. AND SUBSIDIARIES
+NOTES TO FINANCIAL STATEMENTS
+DECEMBER 31, 2001 AND 2000
+NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
+[7] COST IN EXCESS OF FAIR VALUE OF NET ASSETS ACQUIRED:
+Cost in excess of fair value of net assets acquired relates to two
+acquisitions and through December 31, 2001 is being amortized over 20 years
+(see Note A[14]).
+[8] NET INCOME PER SHARE:
+Basic income per share is based on the weighted average number of common
+shares outstanding during the year. Diluted income per share reflects the
+potential dilution assuming common shares were issued upon the exercise of
+outstanding in-the-money options and the proceeds (including the amount of
+compensation cost, if any, attributed to future services and not yet
+recognized and the amount of tax benefits, if any, that would be credited
+to additional paid-in capital assuming exercise of the options) thereof
+were used to purchase treasury stock at the average market price during the
+period. For the years ended December 31, 2001 and 2000, options exercisable
+into approximately 265,000 and 300,000 shares of common stock, respectively
+have not been included in the calculation of diluted income per share as
+the result would have been antidilutive.
+[9] ADVERTISING COSTS:
+The Company expenses costs of print, radio and billboard advertisements as
+of the first date the advertisements take place. Advertising expense
+included in operating expenses amounted to approximately $6,596,000 in
+2001, $6,941,000 in 2000, and $5,046,000 in 1999.
+[10] FAIR VALUE OF FINANCIAL INSTRUMENTS:
+The carrying value of the Company's financial instruments approximate fair
+value due to their short-term nature or their underlying terms.
+[11] STOCK-BASED COMPENSATION:
+The Company has elected to continue to account for its stock-based
+compensation plans using the intrinsic value method prescribed by
+Accounting Principles Board Opinion No. 25 ("APB No. 25"), "Accounting for
+Stock Issued to Employees". Under the provisions of APB No. 25, employee
+compensation arising from the grant of stock options is measured as the
+excess, if any, of the quoted market price of the Company's common stock at
+the date of the grant over the amount an employee must pay to acquire the
+stock.
+[12] REVENUE RECOGNITION:
+Wholesale revenue, including commissions received in conjunction with
+private label footwear, is recognized upon shipment and transfer of title
+of products to customers. Allowances for estimated discounts and returns
+are recognized when sales are recorded. Retail sales are recognized when
+the payment is received from customers and are recorded net of returns.
+Licensing revenue is recognized on the basis of net sales reported by the
+licensee.
+[13] RECLASSIFICATION:
+Certain reclassifications have been made to the December 31, 2000 financial
+statements to conform to current year presentation.
+F-8
+STEVEN MADDEN, LTD. AND SUBSIDIARIES
+NOTES TO FINANCIAL STATEMENTS
+DECEMBER 31, 2001 AND 2000
+NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
+[14] RECENTLY ISSUED ACCOUNTING STANDARDS:
+In December 1999, the Securities and Exchange Commission ("SEC") issued
+Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in
+Financial Statements," which provides guidance related to revenue
+recognition and was effective the first fiscal quarter of fiscal years
+beginning after December 15, 1999, and requires companies to report any
+changes in revenue recognition as a cumulative change in an accounting
+principle at the time of implementation, in accordance with APB Opinion 20,
+"Accounting Changes." Subsequently, SAB Nos. 101A and 101B were issued to
+delay the implementation of SAB No. 101. Management believes that the
+adoption had no effect on the Company's revenue recognition policies. The
+Company adopted this pronouncement during the fiscal year ended December
+31, 2000.
+In 2000, the Financial Accounting Standards Board ("FASB") issued
+Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
+Compensation," an interpretation of APB No. 25, "Stock Issued to
+Employees." Interpretation No. 44 clarifies the application of APB No. 25
+for the definition of an employee for purposes of applying APB No. 25, the
+criteria for determining whether a plan qualifies as a non-compensatory
+plan, the accounting consequences of various modifications to the terms of
+previously granted stock options or awards, and the accounting for an
+exchange of stock compensation awards in a business combination. The
+application of this interpretation had no effect on the financial
+statements for the fiscal year ended December 31, 2000.
+Also in 2000, the FASB issued Statement of Financial Accounting Standards
+("SFAS") No. 140, "Accounting for Transfers and Servicing of Financial
+Assets and Extinguishments of Liabilities." The standard replaces SFAS No.
+125 and requires additional disclosure. The adoption of this standard had
+no material effect on the financial statements.
+In June 2001, the FASB issued SFAS No. 141, Business Combinations, and SFAS
+No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires
+business combinations initiated after June 30, 2001 to be accounted for
+using the purchase method of accounting. It also specifies the types of
+acquired intangible assets that are required to be recognized and reported
+separately from goodwill. SFAS No. 142 will require that goodwill and
+intangibles with indeterminate lives will no longer be amortized, but
+instead tested for impairment. SFAS No. 142 is required to be applied
+starting with fiscal years beginning after December 15, 2001, with early
+application permitted in certain circumstances. The Company will adopt SFAS
+No. 142 in 2002 and does not expect any impairment of goodwill upon
+adoption.
+In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
+or Disposal of Long-Lived Assets. This statement supercedes SFAS No. 121,
+Accounting for the Impairment of Long-Lived Assets and for Long-Lived
+Assets to Be Disposed Of. The statement retains the previously existing
+accounting requirements related to the recognition and measurement of the
+impairment of long-lived assets to be held and used while expanding the
+measurement requirements of long-lived assets to be disposed of by sale to
+include discontinued operations. It also expands on the previously existing
+reporting requirements for discontinued operations to include a component
+of an entity that either has been disposed of or is classified as held for
+sale. The Company is required to implement SFAS No. 144 on January 1, 2002.
+management does not expect this statement to have a material impact on the
+Company's financial position or results of operations.
+F-9
+STEVEN MADDEN, LTD. AND SUBSIDIARIES
+NOTES TO FINANCIAL STATEMENTS
+DECEMBER 31, 2001 AND 2000
+NOTE B - PROPERTY AND EQUIPMENT
+The major classes of assets and accumulated depreciation and amortization are as
+follows:
+December 31,
+----------------------------
+2001 2000
+------------ ------------
+Leasehold improvements $ 18,180,000 $ 16,065,000
+Machinery and equipment 890,000 805,000
+Furniture and fixtures 3,297,000 2,596,000
+Computer equipment 4,928,000 4,414,000
+Equipment under capital lease 217,000 217,000
+------------ ------------
+27,512,000 24,097,000
+Less accumulated depreciation and amortization (11,805,000) (8,497,000)
+------------ ------------
+Property and equipment - net $ 15,707,000 $ 15,600,000
+============ ============
+NOTE C - DUE FROM FACTOR
+Under the terms of its factoring agreement, as amended, the Company may request
+advances from the factor up to 80 percent of aggregate receivables purchased by
+the factor at an interest rate of prime minus 2%. The Company also pays a fee
+equal to .70% of the gross invoice amount of each receivable purchased. In
+addition, the factor charges an annual unused line fee of .25% of the average
+daily unused portion of the maximum credit line which is $15,000,000. The
+Company sells and assigns a substantial portion of its receivables, principally
+without recourse, to the factor. At December 31, 2001 and 2000, $1,120,000 and
+$436,000 of factored receivables were sold by the Company with recourse. The
+factor assumes the credit risk of all assigned accounts approved by it, but
+maintains liens on all inventory, trade receivables (whether or not assigned)
+and the goods represented thereby. These transfers are recognized as sales of
+receivables.
+NOTE D - STOCK OPTIONS
+The Company established various stock option plans under which options to
+purchase shares of common stock may be granted to employees, directors,
+officers, agents, consultants and independent contractors. The plans provide
+that the option price shall not be less than the fair market value of the common
+stock on the date of grant and that no portion of the option may be exercised
+beyond ten years from that date. No incentive stock option can be granted for
+more than five years to a stockholder owning 10% or more of the Company's
+outstanding common stock. Options granted under the plans during the three years
+ended December 31, 2001 vest on the date of grant or up to three years from such
+date.
+The Company has several stock option plans. The 1993 Incentive Stock Option
+Plan, the 1995 Stock Plan, The 1996 Stock Plan and the 1997 Stock Plan provide
+for options to be granted to employees and directors. Each plan provides that
+the option price shall not be less than the fair market value on the date of
+grant and that no portion of the option may be exercised beyond ten years from
+the date of grant. No incentive stock option can be granted to a stockholder
+owning 10% or more of the Company's outstanding common stock.
+In June 1999, the Company adopted the 1999 Stock Plan under which the maximum
+number of shares to which awards may be granted was initially 400,000 shares. In
+May 2000, the stockholders approved an amendment to the 1999 Stock Plan to
+increase the maximum number of shares subject to the plan to 975,000 shares. In
+July 2001, the stockholders approved an amendment to the 1999 Stock Plan to
+increase the maximum number of shares subject to the plan to 1,600,000 shares.
+Terms of the 1999 Stock Plan are not materially different from the various
+existing stock option plans.
+F-10
+STEVEN MADDEN, LTD. AND SUBSIDIARIES
+NOTES TO FINANCIAL STATEMENTS
+DECEMBER 31, 2001 AND 2000
+NOTE D - STOCK OPTIONS (CONTINUED)
+Through December 31, 2001, 1,564,000 options had been granted under the 1999
+Stock Plan, as amended, and as of such date 36,000 shares were available for the
+granting of future options under the 1999 Stock Plan.
+The Company granted options to an executive employee to purchase 250,000 shares
+of the Company's common stock at $7.50 per share in 1998. The market value of
+the stock at the date of grant was $10.125 per share. The Company recorded
+approximately $656,000 as unearned compensation relating to such options, of
+which approximately $254,000, was charged to operations during each of the years
+ended December 31, 2000 and 1999.
+In connection with the amended employment agreement of the former Chief
+Executive Officer ("CEO"), who is now the Company's Creative and Design Chief,
+the Company issued options to purchase 500,000 shares of its common stock. The
+options, which vested in August 1998, have an exercise price of $3.31 and an
+exercise period of 10 years. Unearned compensation was recorded in the amount of
+$1,345,000 which represented the difference between the exercise price and the
+fair value of the stock on the date of grant, and is classified as a component
+of stockholders' equity. The unearned compensation is being amortized over the
+ten-year term of the amended agreement. Accordingly, $128,000 per annum has been
+charged to operations for 2001, 2000 and 1999.
+In connection with the Chief Operating Officer's employment agreement, the
+Company issued options to purchase 75,000 shares of its common stock. The
+options which vested quarterly through December 31, 2001, have an exercise price
+of $8.00. Unearned compensation was recorded in the amount of $810,000, which
+represents the difference between the exercise price and the fair value of the
+stock on the date of grant, and is classified as a component of stockholders'
+equity. The unearned compensation is being amortized over the two year term of
+the employment agreement. Accordingly, $405,000 has been charged to operations
+for 2001.
+Activity relating to stock options granted under the Company's plans and outside
+the plans during the three years ended December 31, 2001:
+2001 2000 1999
+---------------------- -------------------- --------------------
+Number Average Number Average Number Average
+of Exercise of Exercise of Exercise
+Shares Price Shares Price Shares Price
+--------- --------- --------- -------- --------- ---------
+Outstanding at January 1 2,749,000 $6.36 2,720,000 $5.85 2,968,000 $5.16
+Granted 614,000 12.68 550,000 9.09 617,000 9.57
+Exercised (1,122,000) 8.02 (509,000) 5.52 (857,000) 6.14
+Cancelled (10,000) 9.98 (12,000) 6.34 (8,000) 6.14
+--------- --------- ---------
+Outstanding at December 31 2,231,000 7.25 2,749,000 6.36 2,720,000 5.85
+========= ========= =========
+Exercisable 2,131,000 7.22 2,575,000 6.06 2,515,000 5.48
+========= ========= =========
+F-11
+STEVEN MADDEN, LTD. AND SUBSIDIARIES
+NOTES TO FINANCIAL STATEMENTS
+DECEMBER 31, 2001 AND 2000
+NOTE D - STOCK OPTIONS (CONTINUED)
+The following table summarizes information about stock options at December 31,
+2001:
+Options Outstanding Options Exercisable
+-------------------------------------------- --------------------------
+Weighted
+Average
+Remaining Weighted Weighted
+Contractual Average Average
+Number Life Exercise Number Exercise
+Range of Exercise Price Outstanding (in Years) Price Exercisable Price
+------------------------------ ------------- --------------- ---------- ----------- ----------
+$1.50 to $3.50 820,000 4.1 $ 2.36 820,000 $2.36
+$5.50 to $6.00 337,000 6.2 5.82 337,000 5.82
+$6.50 to $7.97 279,000 8.2 7.12 241,000 7.14
+$8.00 to $9.12 210,000 9.2 8.61 148,000 8.75
+$9.55 to $10.83 230,000 7.9 10.34 230,000 10.34
+$11.81 to $12.00 89,000 7.8 11.84 89,000 11.84
+$18.27 to $20.80 266,000 9.5 19.01 266,000 18.75
+------------- ----------
+2,231,000 6.6 7.25 2,131,000 7.22
+============= ==========
+As set forth in Note A[11], the Company applies APB No. 25 in accounting for its
+employee/director stock option incentive plans and, accordingly, recognizes
+compensation expense for the difference between the fair value of the underlying
+common stock and the exercise price of the option at the date of grant. Pro
+forma information regarding net income and earnings per share is required by
+SFAS No. 123 "Accounting for Stock-Based Compensation" and has been determined
+as if the Company had accounted for its employee stock options under the fair
+value method of SFAS No.123. For purposes of pro forma disclosures, the
+estimated fair value of the options is amortized to expense over the options
+vesting period. Substantially all options granted in 2001, 2000 and 1999 vested
+on date of grant, and accordingly, the estimated fair value of such options were
+charged to expense in the year of grant for pro forma disclosures. The Company's
+pro forma information follows:
+2001 2000 1999
+-------------- ------------ --------------
+Net income:
+As reported $ 12,116,000 $ 16,043,000 $ 11,466,000
+Pro forma $ 10,779,000 $ 14,588,000 $ 7,380,000
+Basic income per share:
+As reported $1.04 $1.42 $1.06
+Pro forma $.93 $1.29 $.68
+Diluted income per share:
+As reported $.94 $1.26 $.92
+Pro forma $.83 $1.15 $.59
+The weighted average fair value of options granted in 2001, 2000 and 1999 was
+approximately $9.44, $4.54 and $6.62, respectively, using the Black-Scholes
+option-pricing model with the following assumptions:
+2001 2000 1999
+-------------- ------------ --------------
+Dividend yield 0 0 0
+Volatility 75% 60% 61%
+Risk free interest rate 3.56 - 4.98% 5.97 - 6.30% 5.75 - 6.03%
+Expected life in years 4 4 4
+F-12
+STEVEN MADDEN, LTD. AND SUBSIDIARIES
+NOTES TO FINANCIAL STATEMENTS
+DECEMBER 31, 2001 AND 2000
+NOTE E - PREFERRED STOCK
+The Company has authorized 5,000,000 shares of preferred stock. The Board of
+Directors have designated 60,000 shares of such preferred stock as Series A
+Junior Participating Preferred Stock ("Series A Preferred"). Holders of the
+shares of Series A Preferred are entitled to dividends equal to 1,000 times
+dividends declared or paid on the Company's common stock. Each share of Series A
+preferred entitles the holder to 1,000 votes on all matters submitted to the
+holders of common stock. The Series A Preferred has a liquidation preference of
+a $1,000 per share, and is not redeemable by the Company or the holder. No
+preferred shares have been issued.
+NOTE F - RIGHTS AGREEMENT
+On October 30, 2001, the Company declared a dividend distribution of one
+preferred stock purchase right (a "Right") for each outstanding share of common
+stock. Each Right entitles the holder to purchase from the Company one
+one-thousandth (1/1,000) of a share of Series A Preferred at a price of $75 per
+one one-thousandth (1/1,000) of a share. Initially, the Rights will not be
+exercisable and will automatically trade with the common stock. The Rights
+become exercisable, in general, ten days following the announcement of a person
+or group acquiring beneficial ownership of at least 15% of the outstanding
+voting stock of the Company.
+NOTE G - TREASURY STOCK
+On February 29, 2000, the Company announced that the Board of Directors
+authorized a share repurchase program to acquire up to 1,500,000 shares of the
+Company's common stock from time to time in open market transactions. In June
+and July 2000, the Company purchased 900,000 shares of common stock in
+connection with such program.
+NOTE H - LEASES
+[1] CAPITAL LEASES:
+The Company leases certain equipment under capital leases. Future minimum
+lease payments consist of the following at December 31:
+2002 $ 46,000
+2003 14,000
+-----------
+Total minimum lease payments 60,000
+Less amounts representing interest 3,000
+-----------
+Present value of minimum lease payments 57,000
+Less current maturities 43,000
+-----------
+Capital lease obligation, less current maturities $ 14,000
+===========
+F-13
+STEVEN MADDEN, LTD. AND SUBSIDIARIES
+NOTES TO FINANCIAL STATEMENTS
+DECEMBER 31, 2001 AND 2000
+NOTE H - LEASES (CONTINUED)
+[2] OPERATING LEASES:
+The Company leases office, showroom, warehouse and retail facilities under
+noncancelable operating leases with terms expiring at various times
+through 2012. Future minimum annual lease payments under noncancelable
+operating leases consist of the following at December 31:
+2002 $ 7,172,000
+2003 6,835,000
+2004 6,742,000
+2005 6,346,000
+2006 6,329,000
+Thereafter 15,834,000
+---------------
+$ 49,258,000
+===============
+A majority of the retail store leases provide for contingent rental
+payments if gross sales exceed certain targets. In addition, many of the
+leases contain rent escalation clauses to compensate for increases in
+operating costs and real estate taxes.
+Rent expense for the years ended December 31, 2001, 2000 and 1999 was
+approximately $9,142,000, $7,604,000 and $5,870,000, respectively. Included
+in such amounts are contingent rents of $125,000, $122,000 and $122,000 in
+2001, 2000 and 1999, respectively.
+Pursuant to certain leases, rent expense charged to operations differs from
+rent paid because of scheduled rent increases. Accordingly, the Company has
+recorded deferred rent. Rent expense is calculated by allocating total
+rental payments, including those attributable to scheduled rent increases,
+on a straight-line basis, over the lease term.
+NOTE I - INCOME TAXES
+The income tax provision (benefit) consists of the following:
+2001 2000 1999
+------------ ------------ ------------
+Current:
+Federal $ 6,899,000 $ 9,787,000 $ 7,285,000
+State and local 2,176,000 3,024,000 2,574,000
+------------ ------------ ------------
+9,075,000 12,811,000 9,859,000
+------------ ------------ ------------
+Deferred:
+Federal (365,000) (1,031,000) (1,167,000)
+State and local (115,000) (319,000) (418,000)
+------------ ------------ ------------
+(480,000) (1,350,000) (1,585,000)
+------------ ------------ ------------
+$ 8,595,000 $ 11,461,000 $ 8,274,000
+============ ============ ============
+F-14
+STEVEN MADDEN, LTD. AND SUBSIDIARIES
+NOTES TO FINANCIAL STATEMENTS
+DECEMBER 31, 2001 AND 2000
+NOTE I - INCOME TAXES (CONTINUED)
+A reconciliation between taxes computed at the federal statutory rate and the
+effective tax rate is as follows:
+December 31,
+---------------------
+2001 2000 1999
+----- ----- -----
+Income taxes at federal statutory rate 35.0% 35.0% 34.0%
+State income taxes - net of federal income tax benefit 6.5 6.4 8.6
+Nondeductible items .3 .3 .3
+Other (.3) (1.0)
+----- ----- -----
+Effective rate 41.5% 41.7% 41.9%
+===== ===== =====
+The Company applies the liability method in accounting for income taxes. Under
+this method, deferred tax assets and liabilities are determined based on
+differences between financial reporting and tax bases of assets and liabilities
+and are measured using the enacted tax rates and laws that are expected to be in
+effect when the differences are expected to reverse.
+The components of deferred tax assets and liabilities are as follows:
+December 31,
+---------------------------
+2001 2000
+------------ ------------
+Current deferred tax assets:
+Accounts receivable allowances $ 691,000 $ 617,000
+Inventory 532,000 683,000
+------------ ------------
+1,223,000 1,300,000
+------------ ------------
+Non-current deferred tax assets:
+Depreciation 2,035,000 1,735,000
+Nondeductible compensation 438,000 276,000
+Deferred rent 546,000 451,000
+------------ ------------
+3,019,000 2,462,000
+------------ ------------
+Deferred tax assets $ 4,242,000 $ 3,762,000
+============ ============
+NOTE J - COMMITMENTS, CONTINGENCIES AND OTHER
+[1] CLASS ACTION LITIGATION:
+Between June and August 2000 several class action lawsuits were commenced
+in the United States District Court for the Eastern District of New York
+against the Company, Steven Madden personally, and, in some of the actions,
+the Company's then President and its Chief Financial Officer.
+On December 8, 2000, the court consolidated these actions and appointed a
+lead plaintiff. On October 31, 2001, the plaintiffs served a second
+consolidated amended class action complaint.
+F-15
+STEVEN MADDEN, LTD. AND SUBSIDIARIES
+NOTES TO FINANCIAL STATEMENTS
+DECEMBER 31, 2001 AND 2000
+NOTE J - COMMITMENTS, CONTINGENCIES AND OTHER (CONTINUED)
+[1] CLASS ACTION LITIGATION: (CONTINUED)
+The amended complaint generally alleges that the Company and the individual
+defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act
+of 1934 and Rule 10b-5 promulgated thereunder by issuing false and
+misleading statements, and failing to disclose material adverse information
+relating, among other things, to certain matters and allegations concerning
+Mr. Madden. The plaintiff seeks an unspecified amount of damages, costs and
+expenses on behalf of the plaintiff and all other purchasers of the
+Company's common stock during the period June 21, 1997 through June 20,
+2000. In January 2002, motions to dismiss the complaint were fully briefed.
+Since that time, a settlement in principle of these actions has been
+reached, subject to execution of definitive settlement documentation,
+notices to class members, a hearing and approval by the District Court. The
+tentative settlement is within the limits of insurance coverage (see Note
+J[7]).
+[2] DERIVATIVE ACTIONS:
+On or about September 26, 2000, a shareholders' derivative action was
+commenced in the United States District Court for the Eastern District of
+New York, captioned, Herrera v. Steven Madden and Steven Madden, Ltd. The
+Company is named as a nominal defendant in the action. The complaint seeks
+to recover alleged damages on behalf of the Company from Mr. Madden's June
+20, 2000 indictment and to require him to disgorge certain profits, bonuses
+and stock option grants he received from the Company. On January 3, 2001,
+the plaintiff filed an amended complaint. On February 2, 2001, both the
+Company and Mr. Madden filed motions to dismiss the amended complaint
+because of the plaintiff's failure to make a pre-litigation demand upon the
+Company's Board of Directors. On October 1, 2001, plaintiff filed a second
+amended complaint. On November 2, 2001, the Company filed a motion to
+dismiss this pleading on the grounds that plaintiff had failed to make a
+pre-litigation demand upon the Company's board of directors. In February
+2002, the magistrate judge filed a report recommending that the Company's
+motion to dismiss be denied. On March 4, 2002, the Company filed its
+objection to the Magistrate Judge's report. The Company believes, after
+consultation with counsel, that its defense costs and certain attorney fees
+in connection with this action will be subject to coverage by the Company's
+insurance as supplemented by the loss mitigation policy described below.
+The liability resulting from this derivative complaint, if any, cannot
+presently be determined.
+In November 2001, a purported shareholder derivative complaint was filed in
+the United States District Court for the Eastern District of New York,
+captioned Herrera v. Karson, et al. Named as defendants therein are the
+Company (as nominal defendant) and certain of the Company's present and/or
+former directors. The complaint alleged that the individual defendants
+breached their fiduciary duties to the Company in connection with a
+decision by the Board of Directors of the Company to enter into an
+employment agreement with Mr. Steven Madden in May 2001. The complaint
+seeks declaratory and other equitable relief, as well as an unspecified
+amount of compensatory damages, costs and expenses. On or about February 1,
+2002, plaintiff filed an Amended Shareholder Derivative Complaint (the
+"Amended Complaint"). The Amended Complaint contains substantially the same
+allegations and names the same defendants as the original complaint. The
+Company believes, after consultation with counsel, that its defense costs
+and certain attorney fees in connection with this action will be subject to
+coverage by the Company's insurance as supplemented by the loss mitigation
+policy described below. The liability resulting from this derivative
+complaint, if any, cannot presently be determined.
+[3] OTHER MATTER:
+In March 2001, the Company became aware that the SEC issued a formal order
+of investigation with respect to trading in the Company's securities. The
+SEC is investigating possible securities law violations. Certain officers
+and directors of the Company sold shares of the Company's common stock
+prior to Mr. Madden's indictment in June 2000, as previously disclosed on
+Form 4's filed with the SEC. The ultimate effects of this matter, if any,
+cannot reasonably be determined at this time.
+F-16
+STEVEN MADDEN, LTD. AND SUBSIDIARIES
+NOTES TO FINANCIAL STATEMENTS
+DECEMBER 31, 2001 AND 2000
+NOTE J - COMMITMENTS, CONTINGENCIES AND OTHER (CONTINUED)
+[4] BREACH OF CONTRACT SUITS:
+On or about September 17, 2001, an action was commenced against the Company
+in the Supreme Court, Queens County, captioned Mitch Stewart v. Steven
+Madden, Ltd. Mr. Stewart is a former independent contractor for the
+Company. The complaint seeks damages of approximately $1.3 million for
+breach of contract. On December 20, 2001, the Company answered the
+complaint, denying the allegations and asserting various affirmative
+defenses. On January 25, 2002, the plaintiff filed a motion for partial
+summary judgement, which is pending. The Company believes that it has
+substantial defenses to the motions and the claims asserted in the lawsuit.
+The resulting liability, if any, cannot be presently determined.
+On or about November 29, 2001, an action was commenced against the Company
+for breach of contract in the United States District Court, Eastern
+District of Texas, captioned Lina Enterprises v. Steven Madden, Ltd. Lina
+is a former independent contractor for the Company. The complaint seeks
+damages for breach of contract. The complaint does not specify the amount
+of damages being sought, but alleges that they are greater than $75,000. In
+March 2002, the Company filed a motion to dismiss the complaint. The
+Company believes that it has substantial defenses to the claims asserted in
+the lawsuit. The resulting liability, if any, cannot be presently
+determined.
+[5] INDICTMENT:
+On June 20, 2000, Steven Madden, the Company's former Chairman and Chief
+Executive Officer, was indicted in the United States District Courts for
+the Southern District and Eastern District of New York. The indictments
+alleged that Mr. Madden engaged in securities fraud and money laundering
+activities. In addition, the Securities and Exchange Commission filed a
+complaint in the United States District Court for the Eastern District of
+New York alleging that Mr. Madden violated Section 17(a) of the Securities
+Exchange Act of 1934, as amended. On May 21, 2001, Steven Madden entered
+into a plea agreement with the U.S. Attorney's Office, pursuant to which he
+pled guilty to four of the federal charges filed against him. In addition,
+Mr. Madden reached a separate settlement agreement with the Securities and
+Exchange Commission regarding the allegations contained in its complaint.
+As a result, Mr. Madden resigned as the Company's Chief Executive Officer
+and as a member of the Company's Board of Directors effective July 1, 2001.
+Mr. Madden has agreed to serve as the Company's Creative and Design Chief,
+a non-executive position. It is expected that Mr. Madden will be sentenced
+in April 2002. Under the settlement agreement with the Securities and
+Exchange Commission, Mr. Madden has agreed to not serve as an officer or
+director of a publicly traded company for 7 years. Neither the indictments
+nor the Securities and Exchange Commission complaint allege any wrongdoing
+by the Company or its other officers and directors.
+[6] LITIGATION SETTLEMENTS:
+Separate actions involving Magnum Fashions, Inc., WK Maxx Industries, Ltd.
+and Lee N' Gi were settled in 2000 for approximately $175,000 and have been
+included in operating expenses.
+F-17
+STEVEN MADDEN, LTD. AND SUBSIDIARIES
+NOTES TO FINANCIAL STATEMENTS
+DECEMBER 31, 2001 AND 2000
+NOTE J - COMMITMENTS, CONTINGENCIES AND OTHER (CONTINUED)
+[7] LOSS MITIGATION COVERAGE:
+In December 2001, the Company purchased a loss mitigation policy to cover
+costs arising out of lawsuits related to the June 2000 federal indictment
+of Steve Madden, the Company's former Chief Executive Officer. The policy
+covers the Company's anticipated damages and legal costs in connection with
+such lawsuits. The Company is obligated to pay for damages and costs in
+excess of the policy limits. The cost of the policy was $6,950,000 and has
+been classified as cost of loss mitigation coverage on the accompanying
+statement of operations for the year ended December 31, 2001.
+[8] EMPLOYMENT AGREEMENTS:
+The Company has an employment agreement with Steve Madden, its former CEO
+and President to serve as the Company's Creative and Design Chief. The
+employment agreement, as amended, provides for an annual salary of $700,000
+through June 30, 2011. The agreement also provides for an annual
+performance bonus, an annual option grant at exercise prices equal to
+market on the date of grant and a non-accountable expense allowance.
+The Company has employment agreements with four other executives (the
+"executives") which expire between January 3, 2003 and December 31, 2005.
+These agreements provide for cash bonuses based upon earnings, option
+grants and non-accountable expense allowances as defined. Base salary
+commitment for these four executives, subject to increases, are as follows:
+2000 $ 925,000
+2003 658,000
+2004 422,000
+2005 240,000
+---------------
+$ 2,245,000
+===============
+In connection with their employment agreements, two of the executives
+received an aggregate of 20,000 shares of restricted common stock from the
+Company. The restricted shares vest over one year through July 2002.
+Accordingly, the Company has recorded a charge to operations in the amount
+of $188,000 for the 10,000 shares that vested during the year ended
+December 31, 2001 and will record a charge of $188,000 in 2002 for the
+grant of such restricted shares.
+[9] LETTERS OF CREDIT:
+At December 31, 2001 and 2000, the Company had open letters of credit for
+the purchase of imported inventories of approximately $6,252,000 and
+$6,142,000, respectively.
+F-18
+STEVEN MADDEN, LTD. AND SUBSIDIARIES
+NOTES TO FINANCIAL STATEMENTS
+DECEMBER 31, 2001 AND 2000
+NOTE J - COMMITMENTS, CONTINGENCIES AND OTHER (CONTINUED)
+[10] CONCENTRATIONS:
+The Company maintains cash and cash equivalents with various major
+financial institutions which at times are in excess of the amount insured.
+During the year ended December 31, 2001, the Company purchased
+approximately 28% and 21% of their merchandise from two suppliers in Brazil
+and China, respectively. Total inventory purchases for the year ended
+December 31, 2001 from Brazil and China were approximately 28% and 53%,
+respectively.
+During the year ended December 31, 2000, the Company purchased
+approximately 50% and 27% of their inventory from suppliers in China and
+Brazil, respectively.
+During the year ended December 31, 1999, the Company purchased
+approximately 44%, 24% and 19% of their inventory from suppliers in China,
+Brazil and Mexico, respectively.
+Sales to two customers amounted to 13% and 11% of net sales for the year
+ended December 31, 2001. Amounts receivable from these customers
+represented 18% and 15% of accounts receivable at December 31, 2001,
+respectively.
+Sales to two customers amounted to 14% and 12% of net sales for the year
+ended December 31, 2000. Amounts receivable from these and another customer
+represented 22%, 21% and 12% of accounts receivable at December 31, 2000.
+Sales to two customers amounted to 15% and 10% of net sales for the year
+ended December 31, 1999. Amounts receivable from these customers
+represented 22% and 14% of accounts receivable at December 31, 1999,
+respectively.
+Sales to such customers are included in the wholesale segment (see Note K).
+Purchases are made primarily in United States dollars.
+[11] CONSULTING AGREEMENT:
+The Company has a consulting agreement with a financial advisory firm of
+which one of the Company's Board members is a managing director. The
+agreement provides for a fee of $150,000 over the one year term of the
+agreement which expires in June 2002. The firm is to provide financial
+advisory and investment banking services to the Company. The Company
+recorded a charge to operations in the amount of $75,000 for the year ended
+December 31, 2001 in connection with the agreement.
+[12] VALUATION AND QUALIFYING ACCOUNTS:
+The following is a summary of the allowance for doubtful accounts related
+to accounts receivable and the allowance for chargebacks related to the
+amount due from factor for the years ended December 31,:
+2001 2000 1999
+----------- ----------- -----------
+Balance at beginning of year $ 1,640,000 $ 1,510,000 $ 813,000
+Charged to expense 219,000 506,000 757,000
+Uncollectible accounts written off, net of recoveries (215,000) (376,000) (60,000)
+----------- ----------- -----------
+Balance at end of year $ 1,644,000 $ 1,640,000 $ 1,510,000
+=========== =========== ===========
+F-19
+STEVEN MADDEN, LTD. AND SUBSIDIARIES
+NOTES TO FINANCIAL STATEMENTS
+DECEMBER 31, 2001 AND 2000
+NOTE J - COMMITMENTS, CONTINGENCIES AND OTHER (CONTINUED)
+[12] Valuation and qualifying accounts: (continued)
+The following is a summary of property and equipment and the related
+accounts of accumulated depreciation and amortization for the years ended
+December 31,:
+2001 2000 1999
+----------- ----------- -----------
+Cost basis
+Balance at beginning of year $24,097,000 $16,164,000 $11,233,000
+Additions 3,415,000 7,933,000 4,931,000
+----------- ----------- -----------
+Balance at end of year 27,512,000 24,097,000 16,164,000
+----------- ----------- -----------
+Accumulated depreciation and amortization
+Balance at beginning of year 8,497,000 5,050,000 2,242,000
+Depreciation and amortization 3,308,000 3,447,000 2,808,000
+----------- ----------- -----------
+Balance at end of year 11,805,000 8,497,000 5,050,000
+----------- ----------- -----------
+Property and equipment, net $15,707,000 $15,600,000 $11,114,000
+=========== =========== ===========
+The following is a summary of cost in excess of fair value and related
+accumulated amortization for the years ended December 31,:
+2001 2000 1999
+----------- ----------- -----------
+Cost basis
+Balance at beginning and end of year $ 2,780,000 $ 2,780,000 $ 2,780,000
+----------- ----------- -----------
+Accumulated amortization
+Balance at beginning of year 575,000 436,000 297,000
+Amortization 139,000 139,000 139,000
+----------- ----------- -----------
+Balance at end of year 714,000 575,000 436,000
+----------- ----------- -----------
+Cost in excess of fair value of net assets acquired $ 2,066,000 $ 2,205,000 $ 2,344,000
+=========== =========== ===========
+NOTE K - OPERATING SEGMENT INFORMATION
+The Company's reportable segments are primarily based on methods used to
+distribute its products. The wholesale and retail segments derive revenue from
+sales of women's, men's and girl's footwear. The wholesale segment, through
+sales to department and specialty stores, and the retail segment through
+operation of its own retail stores, derive revenue from sales of branded
+women's, men's and girl's footwear. In addition, the wholesale segment has a
+licensing program that extends the Steve Madden and Stevies brands to
+accessories and ready-to-wear apparel. The other segment represents activities
+of a subsidiary which earns commissions for serving as a buying agent to
+mass-market merchandisers, shoe chains and other off-price retailers with
+respect to their purchase of private label shoes.
+F-20
+STEVEN MADDEN, LTD. AND SUBSIDIARIES
+NOTES TO FINANCIAL STATEMENTS
+DECEMBER 31, 2001 AND 2000
+NOTE K - OPERATING SEGMENT INFORMATION (CONTINUED)
+The accounting policies of the segments are the same as those described in the
+summary of significant accounting policies. The Company evaluates performance
+based on profit or loss from operations before interest income and interest
+expense and before income taxes. The following is information for the Company's
+reportable segments:
+Wholesale Retail Other Consolidated
+------------- ------------- ------------- -------------
+Year ended December 31, 2001:
+Net sales to external customers (a) $ 163,904,000 $ 79,487,000 $ 243,391,000
+Gross profit 57,858,000 42,015,000 99,873,000
+Commissions and licensing fees 1,711,000 $ 4,200,000 5,911,000
+Operating earnings (c) 10,095,000 7,023,000 2,244,000 19,362,000
+Depreciation and amortization 869,000 2,577,000 1,000 3,447,000
+Other significant noncash items:
+Deferred compensation 533,000 533,000
+Deferred rent expense (reversal) (21,000) 249,000 (3,000) 225,000
+Provision for doubtful accounts 219,000 219,000
+Segment assets (b) 90,061,000 30,922,000 879,000 121,862,000
+Capital expenditures 551,000 2,864,000 3,415,000
+Year ended December 31, 2000:
+Net sales to external customers (a) 135,481,000 69,632,000 205,113,000
+Gross profit 50,680,000 38,938,000 89,618,000
+Commissions and licensing fees 1,216,000 3,631,000 4,847,000
+Operating earnings 15,996,000 8,001,000 1,635,000 25,632,000
+Depreciation and amortization 1,000,000 2,581,000 5,000 3,586,000
+Other significant noncash items:
+Deferred compensation 382,000 382,000
+Deferred rent (13,000) 310,000 297,000
+Provision for doubtful accounts 463,000 43,000 506,000
+Segment assets (b) 60,740,000 30,215,000 778,000 91,733,000
+Capital expenditures 1,044,000 6,889,000 7,933,000
+Year ended December 31, 1999:
+Net sales to external customers (a) 114,406,000 48,630,000 163,036,000
+Gross profit 41,484,000 27,016,000 68,500,000
+Commissions and licensing fees 807,000 2,560,000 3,367,000
+Operating earnings 12,130,000 5,910,000 881,000 18,921,000
+Depreciation and amortization 1,244,000 1,703,000 3,000 2,950,000
+Other significant noncash items:
+Deferred compensation 382,000 382,000
+Deferred rent 8,000 384,000 392,000
+Provision for doubtful accounts 733,000 24,000 757,000
+Segment assets (b) 61,713,000 13,500,000 2,922,000 78,135,000
+Capital expenditures 1,092,000 3,810,000 4,902,000
+(a) Attributed to the United States, based on the location in which the sale
+originated.
+(b) All long-lived assets, consisting of property and equipment and cost in
+excess of fair value of net assets acquired, are located in the United
+States.
+(c) Loss mitigation coverage expense of $6,950,000 reflected in wholesale
+segment.
+F-21
+STEVEN MADDEN, LTD. AND SUBSIDIARIES - DRAFT SUBJECT TO REVIEW AND REVISION
+NOTES TO FINANCIAL STATEMENTS
+DECEMBER 31, 2001 AND 2000
+NOTE L - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
+The following is a summary of the quarterly results of operations for the years
+ended December 31, 2001 and 2000 (000's omitted):
+March 31 June 30 September 30 December 31
+-------- -------- ------------ -----------
+2001:
+Revenue $ 53,395 $ 59,563 $ 70,245 $ 60,188
+Cost of sales 31,314 34,245 40,517 37,442
+Commissions and licensing fee income 1,134 1,235 1,637 1,905
+Net income (loss) 3,650 4,423 5,367 (1,324)
+Net income (loss) per share:
+Basic 0.33 0.38 0.46 (0.11)
+Diluted 0.29 0.34 0.41 (0.11)
+2000:
+Revenue 44,109 48,057 60,108 52,839
+Cost of sales 25,925 27,123 33,620 28,827
+Commissions and licensing fee income 1,004 1,130 1,233 1,480
+Net income 3,182 3,743 4,600 4,518
+Net income per share:
+Basic 0.28 0.32 0.42 0.41
+Diluted 0.24 0.28 0.38 0.38
+F-22
+(a)(2) Financial Statement Schedules
+All other schedules for which provision is made in the applicable
+accounting regulations of the Securities and Exchange Commission are not
+required under the related instructions or are not applicable and therefore,
+have been omitted.
+(b) Reports on Form 8-K
+(1) Report on Form 8-K dated September 21, 2001 filed with the Securities
+and Exchange Commission on October 5, 2001 with respect to Item 5.
+------
+(1) Report on Form 8-K dated November 14, 2001 filed with the Securities
+and Exchange Commission on November 16, 2001 with respect to Item 5.
+------
+(c) Exhibits.
+EXHIBITS
+3.01* Certificate of Incorporation of the Company.
+3.02 Amended & Restated By-Laws of the Company.
+4.01* Specimen Certificate for shares of Common Stock.
+4.02* Rights Agreement between the Company and American Stock Transfer and
+Trust Company.
+10.07* Employment Agreement of Arvind Dharia.
+10.08* Employment Agreement of Richard Olicker.
+10.09* Second Amended Employment Agreement between the Company and Steven
+Madden.
+10.10* Employment Agreement of Charles Koppelman.
+10.11* Employment Agreement of Jamieson Karson.
+10.12* Amendment No. 1 to Employment Agreement of Arvind Dharia.
+10.13* Employment Agreement between Adesso-Madden, Inc. and Gerald
+Mongeluzo.
+10.14* Employment Agreement between Steven Madden Retail, Inc. and Mark
+Jankowski.
+21.01* Subsidiaries of Registrant.
+23.01 Consent of Richard A. Eisner & Company, LLP.
+* Previously filed with the Securities and Exchange Commission.
+SIGNATURE
+Pursuant to the requirements of Section 13 or 15(d) of the Securities
+Exchange Act of 1934, the registrant has duly caused this report to be signed on
+its behalf by the undersigned, thereunto duly authorized. Dated: New York, New
+York March 29, 2002
+STEVEN MADDEN, LTD.
+By: /s/ JAMIESON KARSON
+-------------------------------------
+Jamieson Karson
+Chief Executive Officer
+Pursuant to the requirements of the Securities Exchange Act of 1934, this
+report has been signed below by the following persons on behalf of the
+registrant in the capacities and on the dates indicated.
+Signature Title Date
+--------------------------- -------------------------------- --------------
+/s/ CHARLES KOPPELMAN Chairman of the Board and March 29, 2002
+--------------------------- Executive Chairman
+Charles Koppelman
+/s/ JAMIESON KARSON Chief Executive Officer and March 29, 2002
+--------------------------- Vice Chairman of the Board
+Jamieson Karson
+/s/ ARVIND DHARIA Chief Financial Officer and March 29, 2002
+--------------------------- Director
+Arvind Dharia
+/s/ GERALD MONGELUZO Director March 29, 2002
+---------------------------
+Gerald Mongeluzo
+/s/ JOHN L. MADDEN Director March 29, 2002
+---------------------------
+John L. Madden
+/s/ PETER MIGLIORINI Director March 29, 2002
+---------------------------
+Peter Migliorini
+/s/ HEYWOOD WILANSKY Director March 29, 2002
+---------------------------
+Heywood Wilansky
+/s/ MARC COOPER Director March 29, 2002
+---------------------------
+Marc Cooper
\ No newline at end of file
diff --git a/raw/filings/0000913241/2001/0001019056-02-000198/filing_metadata.csv b/raw/filings/0000913241/2001/0001019056-02-000198/filing_metadata.csv
new file mode 100644
index 0000000000000000000000000000000000000000..483c66cfb8af767d675ec83dccb53f71f410a244
--- /dev/null
+++ b/raw/filings/0000913241/2001/0001019056-02-000198/filing_metadata.csv
@@ -0,0 +1,2 @@
+cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing
+0000913241,SHOO,"STEVEN MADDEN, LTD.",10-K,2002-03-29,2001-12-31,2002-03-29T05:00:00.000Z,0001019056-02-000198,smadden_k.txt,FORM 10-K,246742,0,0,https://www.sec.gov/Archives/edgar/data/913241/000101905602000198/smadden_k.txt,https://www.sec.gov/Archives/edgar/data/913241/000101905602000198/,2001,2001,1
diff --git a/raw/filings/0000913241/2001/0001019056-02-000198/item1.txt b/raw/filings/0000913241/2001/0001019056-02-000198/item1.txt
new file mode 100644
index 0000000000000000000000000000000000000000..581874d64758c87f680b50a0a0e1f6319d6081d9
--- /dev/null
+++ b/raw/filings/0000913241/2001/0001019056-02-000198/item1.txt
@@ -0,0 +1,437 @@
+ITEM 1 BUSINESS
+Steven Madden, Ltd. (together with its subsidiaries, the "Company") designs,
+sources, markets and sells fashion-forward footwear brands for women, men and
+children. The Company distributes products through its retail stores, its
+e-commerce web sites, catalogs and department and specialty store locations in
+the United States and Canada. The Company's product line includes core products,
+which are sold year-round, complemented by a broad range of updated styles which
+are designed to establish or capitalize on market trends.
+The Company's business is comprised of three (3) distinct segments
+(wholesale, retail and private label). The wholesale division includes five (5)
+brands: Steve Madden(R), David Aaron(R), l.e.i.(R), Stevies(R) and the Steve
+Madden Mens brand. Steven Madden Retail, Inc., the Company's wholly owned retail
+subsidiary, operates Steve Madden and David Aaron retail stores as well as the
+Company's outlet stores and e-commerce web sites. The Company's wholly owned
+private label subsidiary, Adesso-Madden, Inc., designs and sources footwear
+products under private labels for many of the country's largest mass
+merchandisers. The Company also licenses its Steve Madden(R) and Stevies(R)
+trademarks for several accessory and apparel categories.
+Steven Madden, Ltd., was incorporated as a New York corporation on July 9,
+1990 and reincorporated under the same name in Delaware in November 1998. The
+Company, which has established a reputation for its creative designs, popular
+styles and quality products at accessible price points, was founded and
+developed by Steven Madden, its principal designer, and former Chief Executive
+Officer and Chairman of the Board. The Company completed its initial public
+offering in December 1993 and its shares of Common Stock currently trade on The
+Nasdaq National Market under the symbol "SHOO".
+The Company maintains its principal executive offices at 52-16 Barnett
+Avenue, Long Island City, NY 11104, telephone number (718) 446-1800.
+STEVEN MADDEN - WHOLESALE DIVISION
+The wholesale division sources, sells and markets the Company's Steve
+Madden(R) brand to major department stores, better specialty stores, and shoe
+stores throughout the United States and Canada. During the last few years the
+Steve Madden(R) product line has become a leading footwear brand in the fashion
+conscious junior marketplace. To serve its customers (primarily women ages 16 to
+25), the wholesale division creates and markets fashion forward footwear
+designed to appeal to customers seeking exciting, new footwear designs at
+reasonable prices. In January 2001, the wholesale division expanded to include a
+men's footwear line which targets fashion conscious men ages 20 to 35.
+As the Company's largest division, the Steve Madden(R) wholesale division
+accounted for $92,413,000 in sales in 2001, or approximately 38% of the
+Company's total sales. Many of the wholesale division's newly created styles are
+test marketed at the Company's retail stores. Within a few days, the Company can
+determine if a test product appeals to customers. This enables the Company to
+use its flexible sourcing model to rapidly respond to changing preferences which
+the Company believes is essential for success in the fashion footwear
+marketplace.
+DIVA ACQUISITION CORP. - THE DAVID AARON(R) WHOLESALE DIVISION
+Diva Acquisition Corp. ("Diva") designs and markets fashion footwear to
+women under the "David Aaron(R)" trademark through major department stores and
+better footwear specialty stores and two (2) Company owned retail shoe stores
+located in the Soho area of Manhattan and in Paramus, NJ. Priced a tier above
+the Steve Madden(R) brand, Diva's products are designed to appeal principally to
+fashion conscious women, ages 26 to 45, who shop at department stores and
+footwear boutiques. The Company recorded wholesale sales from the David Aaron(R)
+brand of $7,454,000 for the year ended December 31, 2001, or approximately 3% of
+the Company's total revenues. Revenues from the sale of David Aaron footwear
+increased by approximately 106% compared to the preceding year due to the
+repositioning and reorganization of the David Aaron brand.
+1
+l.e.i. (R) - WHOLESALE DIVISION
+Pursuant to the Company's license agreement with R.S.V. Sport, Inc., the
+Company has the right to use the l.e.i.(R) trademark in connection with the sale
+and marketing of footwear. The l.e.i.(R) trademark is well known for jeanswear
+in the junior marketplace and nationally through department and specialty
+stores. The Company's l.e.i.(R) footwear products are targeted to attract girls
+and young women ages 6 to 20 years old, a majority of which are younger than the
+typical Steve Madden(R) brand customer. The l.e.i. Wholesale Division generated
+revenue of $42,592,000 for the year ended December 31, 2001, or approximately
+17% of the Company's total revenues.
+STEVIES INC. - WHOLESALE DIVISION
+The Company's Stevies Wholesale Division ("Stevies Wholesale") generated
+revenue of $10,984,000 for the year ended December 31, 2001, or approximately 5%
+of the Company's total revenues. Stevies(R) now sells in store groups such as
+Nordstrom, Federated Department Stores, May Department Stores, Belk, Dillard's,
+Limited Too, as well as independent children's stores throughout the country.
+STEVEN MADDEN RETAIL, INC. - RETAIL DIVISION
+As of December 31, 2001, the Company owned and operated sixty-five (65)
+retail shoe stores under the Steve Madden(R) name, two (2) under the David
+Aaron(R) name, five (5) outlet stores and one (1) Internet store (through the
+www.stevemadden.com, www.stevies.com and www.stevemaddenmens.com web sites). In
+2001, the Company opened ten (10) new stores and closed two (2) under-performing
+stores. Most of the Steve Madden stores are located in major shopping malls in
+California, Colorado, District of Columbia, Florida, Georgia, Illinois,
+Maryland, Massachusetts, Michigan, Minnesota, Nevada, New Jersey, New York,
+Ohio, Pennsylvania, Rhode Island, Texas and Virginia. The retail stores have
+been successful for the Company, generating annual sales in excess of $680 per
+square foot. Sales are primarily from the sale of the Company's Steve Madden(R)
+product line. Same store sales decreased 1% in 2001 over 2000 sales and total
+sales for the retail division were $79 million compared to $70 million for 2000.
+Sales from the retail division for the year ended December 31, 2001 were
+approximately 33% of the Company's total sales.
+The Company believes that the Retail Division will continue to enhance
+overall sales and profits while building equity in the Steve Madden brand. It is
+for these reasons that the Company intends to add approximately ten (10) new
+retail stores during the 2002 calendar year. Additionally, the expansion of the
+Retail Division enables the Company to test and react to new products and
+classifications which strengthens the product development efforts of the Steve
+Madden wholesale division.
+THE ADESSO-MADDEN, INC. - PRIVATE LABEL DIVISION
+In September 1995, the Company incorporated Adesso-Madden, Inc. as a wholly
+owned subsidiary ("A-M"). A-M was formed to serve as a buying agent to mass
+market merchandisers, shoe store chains and other off-price retailers in
+connection with their purchase of private label shoes. As a buying agent, A-M
+arranges for shoe manufacturers in Asia and South America to manufacture private
+label shoes to the specifications of its clients. The Company believes that by
+operating in the private label, mass merchandising market, the Company is able
+to maximize additional non-branded sales opportunities. This leverages the
+Company's overall sourcing, design and distribution capabilities. Currently,
+this division serves as a buying agent for the procurement of women's footwear
+for large retailers including Sears, Payless, Wal-Mart and Target. A-M receives
+commissions in connection with the purchase of private label shoes by its
+clients. A-M also sources and sells footwear under the Soho Cobbler(R) brand
+name. The private label division generated commission revenue of $4,200,000
+million for the year ended December 31, 2001.
+LICENSING
+As of December 31, 2001, the Company licensed the Steve Madden trademark for
+use in connection with the manufacturing, marketing and sale of outerwear
+(including leather outerwear), belts, handbags, sunglasses, eyewear and hosiery.
+Each license agreement requires the licensee to pay to the Company a royalty
+based on net sales, a minimum royalty in the event that net sales fail to reach
+specified targets and a percentage of sales for advertising of the Steve
+Madden(R) brand.
+2
+During 2001, the Company licensed the Stevies trademark for use in
+connection with manufacturing, marketing and sale of sportswear, outerwear,
+belts, handbags, sunglasses and hosiery, fashion accessories. In February 2001,
+the Company terminated existing licensing agreements for jewelry and hair
+accessories for the Steve Madden(R) and Stevies(R) brands, and sportswear for
+the Stevies(R) brand.
+DESIGN
+The Company has established a reputation for its creative designs, popular
+styles and quality products at accessible price points. The Company believes
+that its future success will depend in substantial part on its ability to
+continue to anticipate and react to changing consumer demands in a timely
+manner. To meet this objective, the Company has developed a unique design
+process that allows it to recognize and adapt quickly to changing consumer
+demands. The Company's design team works together to create designs which they
+believe fit the Company's image, reflect current or approaching trends and can
+be manufactured in a timely and cost-effective manner. Once the initial design
+is complete, a prototype is developed, which is reviewed and refined prior to
+the commencement of limited production. Most new Steve Madden designs are then
+tested in the Steve Madden(R) retail stores. Designs that prove popular are then
+scheduled for mass production overseas and wholesale and retail distribution
+nationwide. The Company believes that its unique design and testing process and
+flexible sourcing model is a significant competitive advantage allowing the
+Company to cut mass production lead times and avoid the costly production and
+distribution of unpopular designs.
+PRODUCT SOURCING AND DISTRIBUTION
+The Company sources each of its product lines separately based on the
+individual design, styling and quality specifications of such products. The
+Company does not own or operate any mass manufacturing facilities and sources
+its branded products through independently owned manufacturers in Brazil, China,
+Italy, Mexico, Spain, Taiwan and the United States. The Company has established
+relationships with a number of manufacturers in each country. The Company
+believes that this sourcing of footwear products minimizes its investment and
+inventory risk, and enables efficient and timely introduction of new product
+designs. Although the Company has not entered into any long-term manufacturing
+or supply contracts, the Company believes that a sufficient number of
+alternative sources exist for the manufacture of its products. The principal
+materials used in the Company's footwear are available from any number of
+sources, both within the United States and in foreign countries.
+The Company's design and distribution processes are intended to be flexible,
+allowing the Company to respond to and accommodate changing consumer demand. The
+Company's production staff tracks warehouse inventory on a daily basis, monitors
+sell-through data and incorporates input on product demand from wholesale
+customers. The Company can use product feedback to adjust production or
+manufacture new products in as little as five weeks. Constant inventory tracking
+allows the Company to manage inventory on a continuous flow basis with the goal
+of optimizing inventory turns.
+The Company distributes its products from two (2) third party distribution
+warehouse centers located in California and New Jersey and its own distribution
+facility located in Florida. The Company also distributes its Internet shipments
+from a third party fulfillment center located in Michigan. By utilizing
+distribution facilities that specialize in distributing products to certain
+customers (wholesale accounts, Steve Madden retail stores and Internet
+fulfillment), the Company believes that its customers are better served.
+CUSTOMERS
+The Company's customers purchasing shoes consist principally of department
+stores and specialty stores, including shoe boutiques. Presently, the Company
+sells approximately sixty-two percent (62%) of its products at wholesale to
+department stores, including Federated Department Stores (Bloomingdale's, Bon
+Marche, Burdines, Macy's and Rich's), May Department Stores (Famous Barr,
+Filene's, Foley's, Hecht's, Kaufmann's, Meier & Frank, Lord and Taylor and
+Robinsons May), Dillard's, Marshall Field's and Nordstrom; and approximately
+thirty-eight percent (38%) to specialty stores, including Journeys, Limited Too
+and Mandees; and catalog retailers, including Victoria's Secret and Fingerhut.
+For the year ended December 31, 2001, May Department Stores, Federated
+Department Stores and Nordstrom accounted for approximately twenty-one percent
+(21%), eighteen percent (18%) and eleven percent (11%) of the Company's
+wholesale sales, respectively.
+3
+DISTRIBUTION CHANNELS
+The Company sells it products principally through its Company-owned retail
+stores, better department stores and specialty shoe stores in the United States
+and abroad. Retail stores and wholesale sales account for approximately
+thirty-three percent (33%) and sixty-seven percent (67%) of total sales,
+respectively. The following paragraphs describe each of these distribution
+channels:
+STEVE MADDEN AND DAVID AARON RETAIL STORES
+As of December 31, 2001, the Company operated sixty-five (65) Company-owned
+retail stores under the Steve Madden(R) name and two (2) under the David
+Aaron(R) name. The Company believes that its retail stores will continue to
+enhance overall sales, profitability, and its ability to react to changing
+consumer trends. The stores are used as a marketing tool which allows the
+Company to strengthen brand recognition and to showcase selected items from its
+full line of branded and licensed products. Furthermore, the retail stores
+provide the Company with a venue to test and introduce new products and
+merchandising strategies. Specifically, the Company often tests new designs at
+its Steve Madden(R) retail stores before scheduling them for mass production and
+wholesale distribution. In addition to these test marketing benefits, the
+Company has been able to leverage sales information gathered at Steve Madden(R)
+retail stores to assist its wholesale accounts in order placement and inventory
+management.
+A typical Steve Madden(R) store is approximately 1,400 to 1,600 square feet
+and is located in malls and street locations which attract the highest
+concentration of the Company's core demographic -- style-conscious young women
+ages 16 to 25 years old. The David Aaron(R) store has a more sophisticated
+design and format styled to appeal to its more mature target audience. In
+addition to carefully analyzing mall demographics, the Company also sets
+profitability guidelines for each potential store site. Specifically, the
+Company targets sites at which the demographics fit the consumer profile, the
+positioning of the site is well trafficked and the projected fixed annual rent
+expense does not exceed a specified percentage of sales over the life of the
+lease. By setting these standards, the Company believes that each store will
+contribute to the Company's overall profits both in the near- and longer-terms.
+OUTLET STORES
+In May 1998, Shoe Biz, Inc., a wholly owned subsidiary of the Company ("Shoe
+Biz"), purchased certain assets from and assumed certain liabilities of, Daniel
+Scott, Inc. with respect to its Shoe Biz outlet store located in Mineola, New
+York. In connection with the transaction, the Company hired Robert Schmertz, the
+former President and sole stockholder of Daniel Scott, Inc., as the President of
+Shoe Biz. Shoe Biz operates the five (5) outlet stores in New Jersey and New
+York, three (3) of which operate under the Shoe Biz name and two (2) of which
+operate as Steve Madden Outlet stores. Shoe Biz sells many product lines,
+including Steve Madden, David Aaron, Stevies and l.e.i.(R) footwear, at lower
+prices than prices typically charged by other "full price" retailers.
+DEPARTMENT STORES
+The Company currently sells to over 2,500 locations of twenty (20) better
+department stores throughout the United States and Canada. The Company's top
+accounts include Federated Department Stores (Macy's, Bloomingdale's, Bon
+Marche, Burdine's and Rich's), May Department Stores (Filene's, Hecht's, Famous
+Barr, Foley's, Kaufmann's, Meier & Frank, Lord and Taylor and Robinsons May),
+Nordstrom, Dillard's and Marshall Field's.
+Department store accounts are offered merchandising support which includes
+in-store fixtures and signage, supervision of displays and merchandising of the
+Company's various product lines. An important development in the Company's
+wholesale merchandising effort is the creation of in-store concept shops, where
+a broader collection of the Company's branded products are showcased. These
+in-store concept shops create an environment that is consistent with the
+Company's image and enable the retailer to display and stock a greater volume of
+the Company's products per square foot of retail space. In addition, these
+in-store concept shops encourage longer term commitment by the retailer to the
+Company's products and enhance consumer brand awareness.
+In addition to merchandising support, the Company's customer service
+representatives maintain weekly communications with their accounts to guide them
+in placing orders and to assist them in managing inventory,
+4
+assortment and retail sales. The Company leverages its sell-through data
+gathered at its retail stores to assist department stores in allocating their
+open-to-buy dollars to the most popular styles in the product line and to phase
+out styles with weaker sell-throughs.
+SPECIALTY STORES/CATALOG SALES
+The Company currently sells to specialty store locations throughout the
+United States and Canada. The Company's top specialty store accounts include
+Journeys, Limited Too and Mandees. The Company offers its specialty store
+accounts the same merchandising, sell-through and inventory tracking support
+offered to its department store accounts. Sales of the Company's products are
+also made through various catalogs, such as Victoria's Secret.
+INTERNET SALES
+The Company operates three (3) Internet web sites: www.stevemadden.com,
+www.stevies.com and www.stevemaddenmens.com. Customers can purchase numerous
+styles of the Company's Steve Madden and Stevies footwear, accessory and
+clothing products. As a result of the Company's increased focus on e-commerce,
+sales in 2001 derived from its Internet store increased 37% to $4,900,000 from
+$3,500,000 in 2000.
+As a result of the increased sales activity on the Company's web sites, the
+Company entered into an agreement with Progressive Distribution Services in
+April 2000. Under the terms of the Agreement, Progressive Distribution Services
+provides direct-to-customer and other fulfillment services for purchases made on
+the Company's web sites, including validation of customer credit, picking,
+packing and shipment of footwear products to customers of the Company.
+MILLE 21 DISTRIBUTION AGREEMENT
+On January 7, 2002, the Company and Mille 21, Inc. ("Mille 21") entered into
+a written agreement whereby the Company granted Mille 21 the exclusive right to
+develop Steve Madden retail stores and sell Steve Madden products in South
+Korea. Under the terms of the agreement, Mille 21 is obligated to open four (4)
+Steve Madden stores in South Korea in 2002 and is also obligated to purchase
+minimum amounts of Steve Madden products. The Company believes that establishing
+a presence in South Korea is a first step toward expanding into the pacific rim.
+COMPETITION
+The fashion footwear industry is highly competitive. The Company's
+competitors include specialty shoe companies as well as companies with
+diversified footwear product lines. The recent substantial growth in the sales
+of fashion footwear has encouraged the entry of many new competitors and
+increased competition from established companies. Most of these competitors,
+including Kenneth Cole, Nine West, DKNY, Skechers, Nike and Guess, may have
+significantly greater financial and other resources than the Company. The
+Company believes effective advertising and marketing, fashionable styling, high
+quality and value are the most important competitive factors and intends to
+continue to employ these elements as it develops its products.
+In 2001, the Company launched the Steve Madden Mens brand which competes
+with several brands that are more established with greater consumer awareness,
+including Kenneth Cole, Skechers Collection, Tommy Hilfiger and Nautica.
+MARKETING AND SALES
+Prior to 1997, the Company's marketing plans relied heavily on its few Steve
+Madden(R) retail store locations and word-of-mouth referrals. In 1998, the
+Company continued to focus on creating a more integrated brand building program
+to establish Steve Madden as the leading designer of fashion footwear for
+style-conscious young women. As a result, the Company developed a national
+advertising campaign for lifestyle and fashion magazines which was also used in
+regional marketing programs such as radio advertisements, television
+commercials, outdoor media, college event sponsorship and live online chat
+forums. The Company also continues to promote its web sites
+(www.stevemadden.com, www.stevies.com and www.stevemaddenmens.com) where
+consumers can purchase Steve Madden(R), Stevies and Steve Madden Mens products
+and interact with both the Company and other customers.
+5
+The Company also increased the marketing of the Steve Madden brand to
+college students in 2001. The Company targeted universities for a series of
+lively promotions, many of them tied in with musical performances.
+The Company commenced an aggressive marketing campaign for the Stevies brand
+with separate marketing, advertising, promotional events and in-store displays
+targeting the new Stevies customer. As for Steve Madden Mens, the Company
+supported the brand's roll-out with strategic marketing and advertising
+initiatives.
+In order to service its wholesale accounts, the Company retains a sales
+force of fourteen independent sales representatives. These sales representatives
+work on a commission basis and are responsible for placing the Company's
+products with its principal customers, including better department and specialty
+stores. The sales representatives are supported by the Company's senior
+executives, a staff of twelve account executives, two merchandise coordinators
+and twenty five customer service representatives who continually cultivate
+relationships with wholesale customers. This staff assists accounts in
+merchandising and assessing customer preferences and inventory requirements,
+which ultimately serves to increase sales and profitability.
+MANAGEMENT INFORMATION SYSTEMS (MIS) OPERATIONS
+Sophisticated information systems are essential to the Company's ability to
+maintain its competitive position and to support continued growth. The Company
+operates on a dual AS/400 system which provides system support for all aspects
+of its business including manufacturing purchase orders; customer purchase
+orders; order allocations; invoicing; accounts receivable management; real time
+inventory management; quick response replenishment; point-of-sale support; and
+financial and management reporting functions. The Company has a PKMS bar coded
+warehousing system which is integrated with the wholesale system in order to
+provide accurate inventory positions and quick response size replenishment for
+its customers. In addition, the Company has installed an EDI system which
+provides a computer link between the Company and certain wholesale customers
+that enables both the customer and the Company to monitor purchases, shipments
+and invoicing. The EDI system also improves the Company's ability to respond to
+customer inventory requirements on a weekly basis.
+In 2001, a new AS400 computer platform was implemented to support the
+Company's retail division. After the events of September 11, 2001, the Company
+reevaluated and implemented an enhanced business resumption plan. This plan
+insures that all mission critical business systems are available twenty four
+hours a day, seven days a week with a supporting redundant network
+infrastructure in place.
+RECEIVABLES FINANCING; LINE OF CREDIT
+Under the terms of a factoring agreement with Capital Factors, Inc., the
+Company is permitted to draw down 80% of its invoiced receivables at an interest
+rate of two points below the Prime Rate (as defined in such agreement). The
+agreement provides that Capital Factors is not required to purchase all the
+Company's receivables and requires the Company to pay an unused line fee of .25%
+of the average daily unused portion of the maximum amount of the credit line. On
+September 1, 1998, the Company and Capital Factors amended its Factoring
+Agreement to, among other things, provide the Company with a credit line of up
+to $15,000,000, subject to certain limitations. The Company has not recently
+borrowed funds under its credit line with Capital Factors. The agreement with
+Capital Factors was renewed as of December 31, 2001 for an additional one year
+term. Capital Factors maintains a lien on all of the Company's inventory and
+receivables and assumes the credit risk for all assigned accounts approved by
+it.
+TRADEMARKS AND SERVICE MARKS
+The STEVE MADDEN and STEVE MADDEN plus Design trademarks and service marks
+have been registered in numerous International Classes (Int'l Cl. 25 for
+clothing and footwear; Int'l Cl. 18 for leather goods, such as handbags and
+wallets; Int'l Cl. 9 for eyewear; Int'l Cl. 14 for jewelry; Int'l Cl. 3 for
+cosmetics and fragrances; Int'l Cl. 20 for picture frames and furniture; Int'l
+Cl. 16 for paper goods; Int'l Cl. 24 for bedding; and Int'l Cl. 35 for retail
+store services) in the United States. The Company also has trademark
+registrations in the United States for the marks EYESHADOWS BY STEVE MADDEN
+(Int'l Cl. 9 for eyewear), ICE TEA (Int'l Cl. 25 for clothing and footwear),
+SOHO COBBLER (Int'l. Cl. 9 for eyewear; and Int'l Cl. 25 for clothing and
+footwear), and SHOE BIZ By STEVE MADDEN (Int'l Cl. 25 for clothing and footwear;
+and Int'l Cl. 35 for retail store services).
+6
+The Company further owns registrations for the STEVE MADDEN and STEVE MADDEN
+plus Design trademarks and service marks in various International Classes in
+Argentina, Australia, Brazil, Canada, Chile, China, Colombia, Hong Kong, Israel,
+Italy, Japan, Korea, Mexico, Panama, Saudi Arabia, South Africa, Taiwan, the 15
+cooperating countries of Europe and the Benelux countries and has pending
+applications for registration of the STEVE MADDEN and STEVE MADDEN plus Design
+trademarks and service marks in Bahrain, Kuwait, Malaysia, Oman, Peru, Qatar,
+the United Arab Emirates and Venezuela. There can be no assurance, however, that
+the Company will be able to effectively obtain rights to the STEVE MADDEN mark
+throughout all of the countries of the world. Moreover, no assurance can be
+given that others will not assert rights in, or ownership of, trademarks and
+other proprietary rights of the Company or that the Company will be able to
+successfully resolve such conflicts. The failure of the Company to protect such
+rights from unlawful and improper appropriation may have a material adverse
+effect on the Company's business and financial condition.
+Additionally, the Company, through its Diva Acquisition Corp. subsidiary,
+owns registrations for the DAVID AARON trademark and service mark in various
+International Classes in the United States (Int'l Cl. 25 for clothing and
+footwear; Int'l Cl. 18 for leather goods, such as handbags and wallets; and
+Int'l Cl. 35 for retail store services), Australia, Canada, Hong Kong, Israel,
+Japan, South Africa and the 15 cooperating countries in Europe and for its D.
+AARON trademark in Spain. The Company further has a pending application for
+registration of the DAVID AARON trademark and service mark in Panama. The
+Company believes that the DAVID AARON trademark has a significant value and is
+important to the marketing of the Company's products.
+The Company, through its Stevies, Inc. subsidiary, also owns several
+registrations for the STEVIES trademark and service mark in two International
+Classes in the United States (Int'l Cl. 18 for leather goods, such as handbags
+and wallets; and Int'l Cl. 9 for eyewear) and for its STEVIES plus Design mark
+for various goods in Hong Kong and the 15 cooperating countries in Europe.
+Additionally, Stevies, Inc. has several pending trademark and service mark
+applications for registration of the STEVIES and STEVIES plus Design marks in
+various International Classes in the United States (Int'l Cl. 25 for clothing
+and footwear; Int'l Cl. 18 for leather goods, such as handbags and wallets;
+Int'l Cl. 9 for eyewear; Int'l Cl. 14 for jewelry; Int'l Cl. 3 for cosmetics and
+fragrances; Int'l Cl. 16 for paper goods; Int'l Cl. 28 for toys; Int'l Cl. 26
+for hair accessories; and Int'l Cl. 35 for retail store services) and in
+Argentina, Bahrain, Brazil, Canada, China, Colombia, Indonesia, Japan, Korea,
+Kuwait, Malaysia, Mexico, Oman, Panama, Peru, Qatar, Saudi Arabia, South Africa,
+Thailand, Taiwan, the United Arab Emirates and Venezuela. Finally, Stevies, Inc.
+also owns several pending trademark and service mark applications for
+registration of the STEVIES BY STEVE MADDEN mark in various International
+Classes in the United States (Int'l Cl. 25 for clothing and footwear; Int'l Cl.
+14 for jewelry; Int'l Cl. 18 for leather goods, such as handbags and wallets;
+Int'l Cl. 16 for paper goods; Int'l Cl. 3 for cosmetics and fragrances; Int'l
+Cl. 9 for eyewear; Int'l Cl. 26 for hair accessories; Int'l Cl. 28 for toys; and
+Int'l Cl. 35 for retail store services).
+EMPLOYEES
+At March 18, 2002, the Company employed approximately 1,023 employees, of
+whom approximately 313 work on a full-time basis and approximately 710 work on a
+part-time basis. The management of the Company considers relations with its
+employees to be good.
\ No newline at end of file
diff --git a/raw/filings/0000913241/2001/0001019056-02-000198/item13.txt b/raw/filings/0000913241/2001/0001019056-02-000198/item13.txt
new file mode 100644
index 0000000000000000000000000000000000000000..d2e3d76559dd3ffcb986fb1135efb04484f339e3
--- /dev/null
+++ b/raw/filings/0000913241/2001/0001019056-02-000198/item13.txt
@@ -0,0 +1,4 @@
+ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
+Incorporated herein by reference from the Company's definitive proxy
+statement to be filed pursuant to Regulation 14A under the Securities Exchange
+Act of 1934.
\ No newline at end of file
diff --git a/raw/filings/0000913241/2001/0001019056-02-000198/item9a.txt b/raw/filings/0000913241/2001/0001019056-02-000198/item9a.txt
new file mode 100644
index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391
diff --git a/raw/filings/0000913241/2001/0001019056-02-000198/rp_note.txt b/raw/filings/0000913241/2001/0001019056-02-000198/rp_note.txt
new file mode 100644
index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391
diff --git a/raw/filings/0000913241/2001/0001019056-02-000198/rpt_disclosure.txt b/raw/filings/0000913241/2001/0001019056-02-000198/rpt_disclosure.txt
new file mode 100644
index 0000000000000000000000000000000000000000..660fcbbbd66176ef82b375be5e71d5cfa0ff9c89
--- /dev/null
+++ b/raw/filings/0000913241/2001/0001019056-02-000198/rpt_disclosure.txt
@@ -0,0 +1,15 @@
+Certain Relationships and Related Transactions
+In July 2001, the Company entered into a consulting agreement with Peter J.
+Solomon & Company, a financial advisory firm of which Marc Cooper, one of the
+Company's directors, is a managing director. The agreement provides for a fee of
+$150,000 over the one year term of the agreement which expires in June 2002. The
+firm is to provide financial advisory and investment banking services to the
+Company.
+Compensation Committee Report On Executive Compensation
+The Compensation Committee is responsible for reviewing and approving the
+Company's compensation policies and the compensation paid to its executive
+officers, including the Chief Executive Officer and the other named executive
+officers. The Compensation Committee is comprised of Charles A. Koppelman, Peter
+Migliorini and John Madden. Each member of the Compensation Committee was a
+non-employee directors of the Company during 2001, however, Mr. Koppelman
+received a salary and certain other benefits for serving as the Chairman of the
\ No newline at end of file
diff --git a/raw/filings/0000913241/2002/0001019056-03-000273/filing.txt b/raw/filings/0000913241/2002/0001019056-03-000273/filing.txt
new file mode 100644
index 0000000000000000000000000000000000000000..de8ee90466a26ff72ea4e5257fd3b20d3c34fc6c
--- /dev/null
+++ b/raw/filings/0000913241/2002/0001019056-03-000273/filing.txt
@@ -0,0 +1,2893 @@
+10-K
+1
+smadden_10k02.txt
+FORM 10-K
+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, 2002 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
+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
+28, 2002, the last business day of the registrant's most recently completed
+second fiscal quarter, was $235,126,741 (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 18, 2003 was 12,783,355 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 23, 2003.
+TABLE OF CONTENTS
+Page
+----
+ITEM 1 BUSINESS............................................................1
+ITEM 2 PROPERTIES..........................................................8
+ITEM 3 LEGAL PROCEEDINGS...................................................8
+ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.................11
+PART II
+ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
+STOCKHOLDER MATTERS..............................................12
+ITEM 6 SELECTED FINANCIAL DATA............................................13
+ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
+AND RESULTS OF OPERATIONS........................................14
+ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
+RISK.............................................................24
+ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................24
+ITEM 9 CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON
+ACCOUNTING AND FINANCIAL DISCLOSURE..............................24
+PART III
+ITEM 10 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
+PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
+OF THE REGISTRANT................................................25
+ITEM 11 EXECUTIVE COMPENSATION.............................................25
+ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
+MANAGEMENT.......................................................25
+ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.....................25
+ITEM 14 CONTROLS AND PROCEDURES............................................25
+ITEM 15 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
+FORM 8-K.........................................................25
+SIGNATURE..........................................................51
+CERTIFICATIONS PURSUANT TO THE SARBANES-OXLEY ACT OF 2002..........53
+-i-
+ITEM 1 BUSINESS
+Steven Madden, Ltd. (together with its subsidiaries, the "Company")
+designs, sources, markets and sells fashion-forward footwear brands for women,
+men and children. The Company distributes products through its retail stores,
+its e-commerce web site, catalogs and department and specialty store locations
+in 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 five (5)
+brands: Steve Madden(R), David Aaron(R), l.e.i.(R), Stevies(R) and the Steve
+Madden Mens brand. Steven Madden Retail, Inc., the Company's wholly-owned retail
+subsidiary, operates Steve Madden and David Aaron retail stores as well as the
+Company's outlet stores and e-commerce web site. The Company's wholly-owned
+private label subsidiary, Adesso-Madden, Inc., designs and sources footwear
+products under private labels for many of the country's largest mass
+merchandisers. The Company also licenses its Steve Madden(R) and Stevies(R)
+trademarks for several accessory and apparel categories.
+Steven Madden, Ltd., was incorporated as a New York corporation on July 9,
+1990 and reincorporated under the same name in Delaware in November 1998. The
+Company 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.
+Wholesale Divisions
+Madden Women's Wholesale
+The Steve Madden(R) Women's Wholesale Division ("Madden Women's
+Wholesale") sources, sells and markets the Company's Steve Madden(R) brand to
+major department stores, better specialty stores, and shoe stores throughout the
+United States and Canada. During the last few years the Steve Madden(R) product
+line has become a leading footwear brand in the fashion conscious junior
+marketplace. To serve its customers (primarily women ages 16 to 25), Madden
+Women's Wholesale creates and markets fashion forward footwear designed to
+appeal to customers seeking exciting, new footwear designs at reasonable prices.
+As the Company's largest division, Madden Women's Wholesale accounted for
+$108,577,000 of net sales in 2002, or approximately 33% of the Company's total
+sales. Many of Madden Women's Wholesale's newly created styles are test marketed
+at the Company's retail stores. Within a few days, the Company can determine if
+a test product appeals to customers. This enables the Company to use its
+flexible sourcing model to rapidly respond to changing preferences which the
+Company believes is essential for success in the fashion footwear marketplace.
+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 known for
+jeanswear in the junior marketplace and nationally through department and
+specialty stores. The Company's l.e.i.(R)footwear products are targeted to
+attract girls and young women ages 6 to 20 years old, a majority of which are
+younger than the typical Steve Madden(R)brand customer. The l.e.i. Wholesale
+Division generated net sales of $55,664,000 for the year ended December 31,
+2002, or approximately 17% of the Company's total revenues.
+1
+Madden Men's Wholesale
+The Steve Madden Men's Wholesale Division ("Madden Men's Wholesale")
+markets and sells a full collection of directional young men's shoes to major
+department stores, better specialty stores and independent shoe stores
+throughout the United States. Price points range from $70 to $100, targeted at
+men ages 18 to 44 years old.
+The Madden Men's Wholesale accounted for $45,153,000 of net sales in 2002,
+or approximately 14% of the Company's total sales. Steve Madden Men's, which is
+primarily sourced in China, takes open stock inventory positions in a variety of
+patterns and colors to serve the replenishment programs of its wholesale
+customers.
+Diva Acquisition Corp. - The David Aaron(R) Wholesale Division
+Diva Acquisition Corp. ("Diva") designs and markets fashion footwear to
+women under the "David Aaron(R)" trademark through major department stores and
+better footwear specialty stores and two (2) Company owned retail shoe stores
+located in New York, New York and in Paramus, New Jersey. Priced a tier above
+the Steve Madden(R) brand, Diva's products are designed to appeal principally to
+fashion conscious women, ages 26 to 45, who shop at department stores and
+footwear boutiques. The Company recorded wholesale sales from the David Aaron(R)
+brand of $11,194,000 for the year ended December 31, 2002, or approximately 3%
+of the Company's total net sales. Revenues from the sale of David Aaron footwear
+increased by approximately 50% compared to the preceding year due to the
+repositioning and reorganization of the David Aaron brand.
+Stevies Inc. - Wholesale Division
+The Company's Stevies Wholesale Division ("Stevies Wholesale") generated
+net sales of $13,664,000 for the year ended December 31, 2002, or approximately
+4% of the Company's total net sales. Stevies(R) now sells in store groups such
+as Nordstrom, Federated Department Stores, May Department Stores, Belk,
+Dillard's, Limited Too, as well as independent children's stores throughout the
+country.
+Steven Madden Retail, Inc. - Retail Division
+As of December 31, 2002, the Company owned and operated seventy-two (72)
+retail shoe stores under the Steve Madden(R) name, two (2) under the David
+Aaron(R) name, five (5) outlet stores and one (1) Internet store (through the
+www.stevemadden.com web site). In 2002, the Company elected to consolidate its
+three websites into one for better productivity. In 2002, the Company opened ten
+(10) 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,
+Maryland, Massachusetts, Michigan, Minnesota, Nevada, New Jersey, New York,
+Ohio, Pennsylvania, Puerto Rico, Rhode Island, Texas, Virginia and Wisconsin.
+The retail stores have been successful for the Company, generating annual sales
+in excess of $716 per square foot. Sales are primarily from the sale of the
+Company's Steve Madden(R) product line. Same store sales increased 6% in 2002
+over 2001 sales and total sales for the retail division were $92,000,000
+compared to $79,000,000 for 2001. Sales from the retail division for the year
+ended December 31, 2002 were approximately 28% of the Company's net sales.
+The Company believes that the Retail Division will continue to enhance
+overall sales and profits while building equity in the Steve Madden brand. It is
+for these reasons that the Company intends to add approximately eight to ten
+(8-10) new retail stores during the 2003 calendar year. Additionally, the
+expansion of the Retail Division enables the Company to test and react to new
+products and classifications which strengthens the product development efforts
+of the Steve Madden wholesale division.
+The Adesso-Madden, Inc. - Private Label Division
+In September 1995, the Company incorporated Adesso-Madden, Inc. as a
+wholly owned subsidiary ("A-M"). A-M was formed to serve as a buying agent to
+mass market merchandisers, shoe store chains and other off-price retailers in
+connection with their purchase of private label shoes. As a buying agent, A-M
+arranges for shoe manufacturers in Asia and South America to manufacture private
+label shoes to the specifications of its clients. The Company believes that by
+operating in the private label, mass merchandising market, the Company is able
+to maximize additional non-branded sales opportunities. This leverages the
+Company's overall sourcing, design and distribution capabilities. Currently,
+this division serves as a buying agent for the procurement of women's, men's and
+2
+children's footwear for large retailers including Sears, Payless, Wal-Mart and
+Target. A-M receives commissions in connection with the purchase of private
+label shoes by its clients. A-M also sources and sells footwear under the Soho
+Cobbler(R) brand name. The private label division generated commission income of
+$4,770,000 for the year ended December 31, 2002.
+Licensing
+As of December 31, 2002, the Company licensed the Steve Madden trademark
+for use in connection with the manufacturing, marketing and sale of outerwear
+(including leather outerwear), belts, handbags, sunglasses, eyewear and hosiery.
+Each license agreement requires the licensee to pay to the Company a royalty
+based on net sales, a minimum royalty in the event that net sales fail to reach
+specified targets and a percentage of sales for advertising of the Steve
+Madden(R) brand.
+During 2002, the Company licensed the Stevies trademark for use in
+connection with manufacturing, marketing and sale of sportswear, outerwear,
+belts, handbags, sunglasses and hosiery, fashion accessories.
+Design
+The Company has established a reputation for its creative designs, popular
+styles and quality products at accessible price points. The Company believes
+that its future success will depend in substantial part on its ability to
+continue to anticipate and react to changing consumer demands in a timely
+manner. To meet this objective, the Company has developed a unique design
+process that allows it to recognize and adapt quickly to changing consumer
+demands. The Company's design team works together to create designs which they
+believe fit the Company's image, reflect current or approaching trends and can
+be manufactured in a timely and cost-effective manner. Once the initial design
+is complete, a prototype is developed, which is reviewed and refined prior to
+the commencement of limited production. Most new Steve Madden designs are then
+tested in the Steve Madden(R) retail stores. Designs that prove popular are then
+scheduled for mass production overseas and wholesale and retail distribution
+nationwide. The Company believes that its unique design and testing process and
+flexible sourcing model is a significant competitive advantage allowing the
+Company to cut mass production lead times and avoid the costly production and
+distribution of unpopular designs.
+Product Sourcing and Distribution
+The Company sources each of its product lines separately based on the
+individual design, styling and quality specifications of such products. The
+Company does not own or operate any mass manufacturing facilities and sources
+its branded products through independently owned manufacturers in Brazil, China,
+Italy, Mexico, Spain, Taiwan and the United States. The Company has established
+relationships with a number of manufacturers in each country. The Company
+believes that this sourcing of footwear products minimizes its investment and
+inventory risk, and enables efficient and timely introduction of new product
+designs. Although the Company has not entered into any long-term manufacturing
+or supply contracts, the Company believes that a sufficient number of
+alternative sources exist for the manufacture of its products. The principal
+materials used in the Company's footwear are available from any number of
+sources, both within the United States and in foreign countries.
+The Company's design and distribution processes are intended to be
+flexible, allowing the Company to respond to and accommodate changing consumer
+demand. The Company's production staff tracks warehouse inventory on a daily
+basis, monitors sell-through data and incorporates input on product demand from
+wholesale customers. The Company can use product feedback to adjust production
+or manufacture new products in as little as five weeks. Constant inventory
+tracking allows the Company to manage inventory on a continuous flow basis with
+the goal of optimizing inventory turns.
+The Company distributes its products from two (2) third party distribution
+warehouse centers located in California and New Jersey and its own distribution
+facility located in Florida. The Company also distributes its Internet shipments
+from a third party fulfillment center located in Michigan. By utilizing
+distribution facilities that specialize in distributing products to certain
+customers (wholesale accounts, Steve Madden retail stores and Internet
+fulfillment), the Company believes that its customers are better served.
+3
+Customers
+The Company's customers purchasing shoes consist principally of department
+stores and specialty stores, including shoe boutiques. Presently, the Company
+sells approximately sixty-three percent (63%) of its products at wholesale to
+department stores, including Federated Department Stores (Bloomingdale's, Bon
+Marche, Burdines, Macy's and Rich's), May Department Stores (Famous Barr,
+Filene's, Foley's, Hecht's, Kaufmann's, Meier & Frank, Lord and Taylor and
+Robinsons May), Dillard's, Marshall Field's and Nordstrom; and approximately
+thirty-four percent (34%) to specialty stores, including Journeys, Limited Too
+and Mandees; and catalog retailers, including Victoria's Secret and Fingerhut.
+For the year ended December 31, 2002, May Department Stores, Federated
+Department Stores and Nordstrom accounted for approximately twenty-two percent
+(22%), seventeen percent (17%) and ten percent (10%) of the Company's wholesale
+sales, respectively.
+Distribution Channels
+The Company sells its products principally through its Company-owned
+retail stores, better department stores and specialty shoe stores in the United
+States and abroad. For the year 2002, retail stores and wholesale sales
+accounted for approximately twenty-eight percent (28%) and seventy-two percent
+(72%) of total sales, respectively. The following paragraphs describe each of
+these distribution channels:
+Steve Madden and David Aaron Retail Stores
+As of December 31, 2002, the Company operated seventy-three (73)
+Company-owned retail stores (including one Internet store) under the Steve
+Madden(R) name and two (2) under the David Aaron(R) name. The Company believes
+that its retail stores will continue to enhance overall sales, profitability,
+and its ability to react to changing consumer trends. The stores are used as a
+marketing tool which allows the Company to strengthen brand recognition and to
+showcase selected items from its full line of branded and licensed products.
+Furthermore, the retail stores provide the Company with a venue to test and
+introduce new products and merchandising strategies. Specifically, the Company
+often tests new designs at its Steve Madden(R) retail stores before scheduling
+them for mass production and wholesale distribution. In addition to these test
+marketing benefits, the Company has been able to leverage sales information
+gathered at Steve Madden(R) retail stores to assist its wholesale accounts in
+order placement and inventory management.
+A typical Steve Madden(R) store is approximately 1,400 to 1,600 square
+feet and is located in malls and street locations which attract the highest
+concentration of the Company's core demographic -- style-conscious young women
+ages 16 to 25 years old. The David Aaron(R) store has a more sophisticated
+design and format styled to appeal to its more mature target audience. In
+addition to carefully analyzing mall demographics, the Company also sets
+profitability guidelines for each potential store site. Specifically, the
+Company targets sites at which the demographics fit the consumer profile, the
+positioning of the site is well trafficked and the projected fixed annual rent
+expense does not exceed a specified percentage of sales over the life of the
+lease. By setting these standards, the Company believes that each store will
+contribute to the Company's overall profits both in the near- and longer-terms.
+Outlet Stores
+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, David
+Aaron, Stevies and l.e.i.(R) footwear, at lower prices than prices typically
+charged by other "full price" retailers.
+Department Stores
+The Company currently sells to over 2,750 locations of twenty-two (22)
+better department stores throughout the United States and Canada. The Company's
+top accounts include Federated Department Stores (Macy's, Bloomingdale's, Bon
+Marche, Burdine's and Rich's), May Department Stores (Filene's, Hecht's, Famous
+Barr, Foley's, Kaufmann's, Meier & Frank, Lord and Taylor and Robinsons May),
+Nordstrom, Dillard's and Marshall Field's.
+4
+Department store accounts are offered merchandising support which includes
+in-store fixtures and signage, supervision of displays and merchandising of the
+Company's various product lines. An important development in the Company's
+wholesale merchandising effort is the creation of in-store concept shops, where
+a broader collection of the Company's branded products are showcased. These
+in-store concept shops create an environment that is consistent with the
+Company's image and enable the retailer to display and stock a greater volume of
+the Company's products per square foot of retail space. In addition, these
+in-store concept shops encourage longer term commitment by the retailer to the
+Company's products and enhance consumer brand awareness.
+In addition to merchandising support, the Company's customer service
+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 top specialty store accounts include
+Journeys, Limited Too and Mandees. The Company offers its specialty store
+accounts the same merchandising, sell-through and inventory tracking support
+offered to its department store accounts. Sales of the Company's products are
+also made through various catalogs, such as Victoria's Secret.
+Internet Sales
+The Company operates one (1) Internet web site: www.stevemadden.com.
+Customers can purchase numerous styles of the Company's Steve Madden and Stevies
+footwear, accessory and clothing products. Sales derived from the Company's
+Internet store decreased 2% to $4,800,000 in 2002 from $4,900,000 in 2001.
+Distribution Agreements
+In June 2002, the Company and Dabsan International, S.A. ("Dabsan")
+entered into a written 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 minimum amounts of Steve Madden products.
+In February 2003, the Company and F.E.E.T. sas ("FEET") entered into a
+written 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 minimum amounts of Steve Madden products.
+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.
+5
+Marketing and Sales
+Prior to 1997, the Company's marketing plans relied heavily on its few
+Steve Madden(R) retail store locations and word-of-mouth referrals. In 1998, the
+Company continued to focus on creating a more integrated brand building program
+to establish Steve Madden as the leading designer of fashion footwear for
+style-conscious young women. As a result, the Company developed a national
+advertising campaign for lifestyle and fashion magazines which was also used in
+regional marketing programs such as radio advertisements, television
+commercials, outdoor media, college event sponsorship and live online chat
+forums. The Company also continues to promote its web site (www.stevemadden.com)
+where consumers can purchase Steve Madden(R), Stevies and Steve Madden Mens
+products and interact with both the Company and other customers.
+The Company commenced an aggressive marketing campaign for the Stevies
+brand with separate marketing, advertising, promotional events and in-store
+displays targeting the new Stevies customer. As for Steve Madden Mens, the
+Company supported the brand's roll-out with strategic marketing and advertising
+initiatives.
+In order to service its wholesale accounts, the Company retains a sales
+force of sixteen independent sales representatives. These sales representatives
+work on a commission basis and are responsible for placing the Company's
+products with its principal customers, including better department and specialty
+stores. The sales representatives are supported by the Company's senior
+executives, a staff of nine account executives, three merchandise coordinators
+and twenty-six customer service representatives who continually cultivate
+relationships with wholesale customers. This staff assists accounts in
+merchandising and assessing customer preferences and inventory requirements,
+which ultimately serves to increase sales and profitability.
+Management Information Systems (MIS) Operations
+Sophisticated information systems are essential to the Company's ability
+to maintain its competitive position and to support continued growth. The
+Company operates on a dual AS/400 system which provides system support for all
+aspects of its business including manufacturing purchase orders; customer
+purchase orders; order allocations; invoicing; accounts receivable management;
+real time inventory management; quick response replenishment; point-of-sale
+support; and financial and management reporting functions. The Company has a
+PKMS bar coded warehousing system which is integrated with the wholesale system
+in order to provide accurate inventory positions and quick response size
+replenishment for its customers. In addition, the Company has installed an EDI
+system which provides a computer link between the Company and certain wholesale
+customers that enables both the customer and the Company to monitor purchases,
+shipments and invoicing. The EDI system also improves the Company's ability to
+respond to customer inventory requirements on a weekly basis.
+Receivables Financing; Line of Credit
+Under the terms of a factoring agreement with Capital Factors, Inc., the
+Company is permitted to draw down 80% of its invoiced receivables at an interest
+rate of two points below the Prime Rate (as defined in such agreement). The
+agreement provides that Capital Factors is not required to purchase all the
+Company's receivables and requires the Company to pay an unused line fee of .25%
+of the average daily unused portion of the maximum amount of the credit line. On
+September 1, 1998, the Company and Capital Factors amended its Factoring
+Agreement to, among other things, provide the Company with a credit line of up
+to $15,000,000, subject to certain limitations. The Company has not recently
+borrowed funds under its credit line with Capital Factors. The agreement with
+Capital Factors was renewed 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),
+6
+SOHO COBBLER (Int'l. Cl. 9 for eyewear; and Int'l Cl. 25 for clothing and
+footwear), and SHOE BIZ By STEVE MADDEN (Int'l Cl. 25 for clothing and footwear;
+and Int'l Cl. 35 for retail store services). Additionally, the Company has
+several pending trademark and service mark applications 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 M. (Int'l Class 25 for clothing and footwear); and,
+STEVEN (Int'l Cl. 25 for clothing and 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, Brazil, Canada, Chile, China, Colombia, Hong Kong,
+Israel, Italy, Japan, Korea, Mexico, Panama, Saudi Arabia, South Africa, Taiwan,
+the 15 cooperating countries of Europe and the Benelux countries and has pending
+applications for registration of the STEVE MADDEN and STEVE MADDEN plus Design
+trademarks and service marks in Bahrain, Kuwait, Lebanon, Malaysia, Oman, Peru,
+Qatar, Turkey, the United Arab Emirates and Venezuela. There can be no
+assurance, however, that the Company will be able to effectively obtain rights
+to the STEVE MADDEN mark throughout all of the countries of the world. Moreover,
+no assurance can be given that others will not assert rights in, or ownership
+of, trademarks and other proprietary rights of the Company or that the Company
+will be able to successfully resolve such conflicts. The failure of the Company
+to protect such rights from unlawful and improper appropriation may have a
+material adverse effect on the Company's business and financial condition.
+Additionally, the Company, through its Diva Acquisition Corp. subsidiary,
+owns registrations for the DAVID AARON trademark and service mark in various
+International Classes in the United States (Int'l Cl. 25 for clothing and
+footwear; Int'l Cl. 18 for leather goods, such as handbags and wallets; and
+Int'l Cl. 35 for retail store services), Australia, Canada, Hong Kong, Israel,
+Japan, South Africa and the 15 cooperating countries in Europe and for its D.
+AARON trademark in Spain. The Company further has a pending application for
+registration of the DAVID AARON trademark and service mark in Panama. Also, the
+Company has three pending applications for registration of 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 Hong
+Kong, Israel, Mexico, Taiwan and the 15 cooperating countries in Europe.
+Additionally Stevies, Inc. has several pending trademark and service mark
+applications for registration of the STEVIES and STEVIES plus Design marks in
+various International Classes in the United States (Int'l Cl. 25 for clothing
+and footwear; Int'l Cl. 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 in Argentina,
+Bahrain, Brazil, Canada, China, Colombia, Indonesia, Japan, Korea, Kuwait,
+Lebanon, Malaysia, Mexico, Oman, Panama, Peru, Qatar, Saudi Arabia, South
+Africa, Thailand, Taiwan, 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
+At March 10, 2003, the Company employed approximately 1081 employees, of
+whom approximately 482 work on a full-time basis and approximately 599 work on a
+part-time basis. The management of the Company considers relations with its
+employees to be good.
+7
+ITEM 2 PROPERTIES
+The Company maintains approximately 25,000 square feet for its executive
+offices and sample production facilities at 52-16 Barnett Avenue, Long Island
+City, NY 11104. The lease for the Company's headquarters expired in June 2002;
+management is currently negotiating a renewal of this lease. Management strongly
+believes the Company will continue to remain on the same premesis.
+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's l.e.i.(R) showroom is located at 2300 Stemmons Freeway,
+Dallas, Texas. The Company's l.e.i. brands are displayed from this 1,080 square
+foot space. The lease for this showroom expires in September 2004.
+The Company maintains a warehouse and distribution center in Port
+Everglades, Florida servicing wholesale and retail accounts. The lease for the
+Florida warehouse expired on January 31, 2003; the Company is currently leasing
+this space on a month-to-month basis. The Company is protected for its space
+requirements for its warehousing and distribution center. 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
+------------------------ ----------------
+2003 1
+2004 3
+2005 4
+2006 2
+2007 7
+2008 12
+2009 11
+2010 11
+2011 16
+2012 9
+2013 4
+ITEM 3 LEGAL PROCEEDINGS
+Except as set forth below, no material legal proceedings are pending to
+which the Company or any of its property is subject.
+On June 20, 2000, Steven Madden, the Company's former Chairman and Chief
+Executive Officer, was indicted in the United States District Courts for the
+Southern District and Eastern District of New York. The indictments alleged that
+Mr. Madden engaged in securities fraud and money laundering activities. In
+addition, the Securities and Exchange Commission filed a complaint in the United
+States District Court for the Eastern District of New York alleging that Mr.
+Madden violated Section 17(a) of the Securities Exchange Act of 1934, as
+amended. On May 21, 2001, Steven Madden entered into a plea agreement with the
+U.S. Attorney's Office, pursuant to which he pled guilty to four of the federal
+8
+charges filed against him. In addition, Mr. Madden reached a separate settlement
+agreement with the Securities and Exchange Commission regarding the allegations
+contained in its complaint. As a result, Mr. Madden resigned as the Company's
+Chief Executive Officer and as a member of the Company's Board of Directors
+effective July 1, 2001. Mr. Madden has agreed to serve as the Company's Creative
+and Design Chief, a non-executive position. On April 4, 2002, Mr. Madden was
+sentenced in the United States District Court for the Southern District of New
+York to forty-one (41) months imprisonment in connection with two of the federal
+charges to which he pled guilty. On May 3, 2002, Mr. Madden was sentenced in the
+United States District Court for the Eastern District of New York to forty-one
+(41) months imprisonment in connection with the remaining two charges to which
+he pled guilty. The sentences will run concurrently. Mr. Madden began serving
+his sentence in September of 2002. Under the settlement agreement with the
+Securities and Exchange Commission, Mr. Madden has agreed to not serve as an
+officer or director of a publicly traded company for 7 years. Neither the
+indictments nor the Securities and Exchange Commission complaint allege any
+wrongdoing by the Company or its other officers and directors.
+In December 2001, the Company purchased a loss mitigation policy to cover
+costs arising out of lawsuits related to the June 2000 federal indictment of
+Steve Madden, the Company's former Chief Executive Officer. The policy covers
+the Company's anticipated damages and legal costs in connection with such
+lawsuits. The Company is obligated to pay for damages and costs in excess of the
+policy limits. The cost of the policy was $6,950,000.
+Class Action
+Between June and August 2000, eight putative securities fraud class action
+lawsuits have been commenced in the United States District Court for the Eastern
+District of New York against the Company, Steven Madden and, in five of the
+actions, Rhonda J. Brown (the former President and a former director of the
+Company) and Arvind Dharia. These actions are captioned: Wilner v. Steven
+Madden, Ltd., et al., 00 CV 3676 (filed June 21, 2000); Connor v. Steven Madden,
+et al., 00 CV 3709 (filed June 22, 2000); Blumenthal v. Steven Madden, Ltd., et
+al., 00 CV 3709 (filed June 23, 2000); Curry v. Steven Madden, Ltd., et al., 00
+CV 3766 (filed June 26, 2000); Dempster v. Steven Madden Ltd., et al., 00 CV
+3702 (filed June 30, 2000); Salafia v. Steven Madden, Ltd., et al., 00 CV 4289
+(filed July 24, 2000); Fahey v. Steven Madden, Ltd., et al., 00 CV 4712 (filed
+August 11, 2000); Process Engineering Services, Inc. v. Steven Madden, Ltd., et
+al., 00 CV 5002 (filed August 22, 2000). By Order dated December 8, 2000, the
+Court consolidated these eight actions, appointed Process Engineering, Inc.,
+Michael Fasci and Mark and Libby Adams as lead plaintiffs and approved their
+selection of lead counsel. On February 26, 2001, Plaintiffs served a
+Consolidated Amended Complaint. On or about October 31, 2001, plaintiffs filed a
+Second Consolidated Amended Class Action Complaint. The pleading names the
+Company, Steven Madden, Rhonda J. Brown and Arvind Dharia as defendants. It
+principally alleges that the Company and the individual defendants violated
+Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5
+promulgated under the 1934 Act by issuing false and misleading statements, and
+failing to disclose material adverse information, generally relating to matters
+arising from Mr. Madden's June 2000 indictment. The plaintiffs seek an
+unspecified amount of damages, costs and expenses on behalf of themselves and
+all other purchasers of the Company's common stock during the period June 21,
+1997 through June 20, 2000. On November 30, 2001, all of the defendants served
+motions to dismiss the Consolidated Amended Complaint. The motions were fully
+briefed on January 14, 2002. Since that time, a settlement in principle of these
+actions has been reached, subject to execution of definitive settlement
+documentation, notices to class members, a hearing and approval by the District
+Court. The tentative settlement is within the limits of the Company's insurance
+coverage.
+Shareholder Derivative Actions
+On or about September 26, 2000, a putative shareholders derivative action
+was commenced in the United States District Court for the Eastern District of
+New York, captioned Herrera v. Steven Madden and Steven Madden, Ltd., 00 CV 5803
+(JG). The Company is named as a nominal defendant in the action. The complaint
+seeks to recover alleged damages on behalf of the Company from Mr. Madden
+arising from his June 2000 indictment and to require him to disgorge certain
+profits, bonuses and stock option grants he received. On January 3, 2001,
+plaintiff filed an Amended Shareholder's Derivative Complaint. On February 2,
+2001, both the Company and Mr. Madden filed motions to dismiss the Amended
+Complaint because of plaintiff's failure to make a pre-litigation demand upon
+the Company's board of directors. On October 1, 2001, plaintiff filed a Second
+Amended Complaint. On November 2, 2001, the Company filed a motion to dismiss
+this pleading on grounds that plaintiff had failed to make a pre-litigation
+demand upon the Company's board of directors. On February 7, 2002, the
+Magistrate Judge filed a Report recommending that the Company's motion to
+9
+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 in principle has been reached to resolve all claims in this action,
+subject to execution of definitive documentation, such notice to the Company's
+shareholders (if any) as may be required by the District Court, 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 as supplemented by the loss
+mitigation policy described above.
+On or about November 28, 2001, a purported shareholder derivative
+complaint was filed in the United States District Court for the Eastern District
+of New York, captioned Herrera v. Karson, et al., 00 CV 7868. Named as
+defendants therein are the Company (as nominal defendant) and certain of the
+Company's present and/or former directors. The complaint alleges that the
+individual defendants breached their fiduciary duties to the Company in
+connection with a decision by the Board of Directors of the Company to enter
+into an employment agreement with Mr. Steven Madden in or about May 2001. The
+complaint seeks declaratory and other equitable relief, as well as an
+unspecified amount of compensatory damages, costs and expenses. On or about
+February 1, 2002, plaintiff filed an Amended Shareholder Derivative Complaint
+(the "Amended Complaint"). The Amended Complaint contains substantially the same
+allegations and names the same defendants as the original complaint. Since that
+time, an agreement in principle has been reached to resolve all claims in this
+action, subject to execution of definitive documentation, such notice to the
+Company's shareholders (if any) as may be required by the District Court, 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 as
+supplemented by the loss mitigation policy described above.
+SEC Investigation
+On March 14, 2001, the Company became aware that the Securities and
+Exchange Commission had issued a formal order of investigation with respect to
+trading in the Company's securities. The Company has had no communications with
+the SEC with regards to this matter since it filed its Annual Report on Form 10K
+for 2001.
+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. No subsequent
+proceedings have occurred in this action as the parties are engaged in
+discussions directed at resolving Safeco's claims.
+On or about January 22, 2002, an action was commenced against the Company
+in the United States District Court for the District of Oregon, captioned Adidas
+America, Inc. and Adidas Salomon AG v. Steve Madden, Ltd. and Steve Madden
+Retail, Inc., CA No. CV02-0057 HU. The Complaint seeks injunctive relief and
+unspecified monetary damages for trademark infringement, trademark dilution,
+unfair competition and deceptive trade practices arising from the Company's use
+of four stripes as a design element on footwear which Adidas alleges infringes
+on its registered Three Stripe Trademark. On or about September 3, 2002, Adidas
+commenced a second action against the Company in the United States District
+Court for the District of Oregon, captioned Adidas America, Inc. and Adidas
+Salomon AG v. Steve Madden, Ltd. and Steve Madden Retail, Inc., CA No. CV
+02-1191 KI. The second Complaint seeks the same injunctive relief and
+unspecified monetary damages as the first lawsuit for various trademark
+infringement claims arising from the Company's use of two stripes as a design
+element on footwear. The Company believes it has substantial defenses to the
+claims asserted in both lawsuits based on pervasive use of two and four stripes
+as a design element by numerous other footwear manufacturers over the past three
+decades. The Company filed answers denying the allegations of infringement in
+both cases, which were consolidated before a single judge. Discovery is
+continuing and trial is schedule to begin May 19, 2003. Court ordered
+non-binding mediation is scheduled for a future date.
+10
+On October 4, 2002, Skechers U.S.A., Inc., and Skechers U.S.A., Inc. II,
+filed suit against Steven Madden Ltd. and R.S.V. Sport, Inc. in the United
+States District Court for the Central District of California, Case No. CV
+02-0766. Skechers alleges claims for patent infringement, federal unfair
+competition, federal antidilution violation, California unfair competition,
+California antidilution violation, and common law unfair competition. Skechers
+seeks unspecified monetary damages. Since that time, an agreement in principle
+has been reached to resolve all claims in this action, subject to the parties'
+approval of the written settlement documentation. While the Company believes
+that it will finalize a settlement agreement with Skechers in the near future,
+it further believes that it has substantial defenses to the claims asserted in
+the lawsuit in the unlikely event that no final agreement is reached.
+On September 6, 2002 Ron Owen filed an action against Steven Madden
+Retail, Inc., which action is pending in the United States District Court for
+the Northern District of Texas - Dallas Division, Civil Action No. 3-02 CV
+2316-R. Plaintiff alleges a cause of action for breach of contract and seeks
+unspecified monetary damages. On October 10, 2002, the Company answered the
+complaint. The Company believes that it has substantial defenses to the claims
+asserted in the lawsuit.
+ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
+No matters were submitted to a vote of the holders of the Company's Common
+Stock during the last quarter of its fiscal year ended December 31, 2002.
+11
+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, 2002 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.
+Common Stock
+High Low High Low
+------ ------ ------ ------
+2002 2001
+Quarter ended 17.790 13.320 Quarter ended 15.125 7.656
+March 29, 2002 March 31, 2001
+Quarter ended 20.250 15.790 Quarter ended 19.050 13.350
+June 28, 2002 June 30, 2001
+Quarter ended 19.790 13.430 Quarter ended 19.890 7.450
+September 30, 2002 September 30, 2001
+Quarter ended 18.850 13.590 Quarter ended 14.200 8.900
+December 31, 2002 December 31, 2001
+On March 25, 2003, the final quoted price as reported by The Nasdaq
+National Market was $15.33 for each share of common stock. As of March 18, 2003,
+there were 12,783,355 shares of Common Stock outstanding, held of record by 69
+record holders and approximately 2,476 beneficial owners.
+Absence of Dividends. The Company anticipates that all of its earnings in
+the foreseeable future will be retained to finance the continued growth and
+expansion of its business and has no current intention to pay cash dividends.
+12
+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 2002, 2001,
+2000, 1999 and 1998 and the Balance Sheet Data as of December 31, 2002, 2001,
+2000, 1999 and 1998 should be read in Conjunction with the Company's audited
+consolidated financial statements and notes thereto appearing elsewhere herein.
+Year Ended December 31,
+----------------------------------------------------------------------------
+2002 2001 2000 1999 1998
+------------ ------------ ------------ ------------ ------------
+INCOME STATEMENT DATA:
+Net sales 326,136,000 243,391,000 205,113,000 163,036,000 85,783,000
+Cost of sales 199,453,000 143,518,000 115,495,000 94,536,000 49,893,000
+Gross profit 126,683,000 99,873,000 89,618,000 68,500,000 35,890,000
+Commissions and licensing fee 6,603,000 5,911,000 4,847,000 3,367,000 3,273,000
+Operating expenses (100,074,000) (79,472,000) (68,833,000) (52,946,000) (29,949,000)
+Cost of loss mitigation coverage (6,950,000)
+Income from operations 33,212,000 19,362,000 25,632,000 18,921,000 9,214,000
+Interest income 1,166,000 1,344,000 1,744,000 909,000 380,000
+Interest expense (16,000) (66,000) (102,000) (90,000) (235,000)
+Gain on sale of marketable securities 66,000 71,000 230,000
+Income before provision for income
+taxes 34,428,000 20,711,000 27,504,000 19,740,000 9,359,000
+Provision for income taxes 14,587,000 8,595,000 11,461,000 8,274,000 3,912,000
+Net Income 19,841,000 12,116,000 16,043,000 11,466,000 5,447,000
+Basic income per share $ 1.58 $ 1.04 $ 1.42 $ 1.06 $ 0.58
+Diluted income per share $ 1.45 $ 0.94 $ 1.26 $ 0.92 $ 0.50
+Basic weighted average common shares
+outstanding 12,594,861 11,617,862 11,310,130 10,831,250 9,436,798
+Effect of potential common shares from
+exercise of options and warrants 1,115,018 1,330,002 1,387,244 1,634,102 1,546,303
+Diluted weighted average common shares
+outstanding 13,709,879 12,947,864 12,697,374 12,465,352 10,983,101
+BALANCE SHEET DATA
+Total assets 150,500,000 121,862,000 91,733,000 78,135,000 48,928,000
+Working capital 86,461,000 82,633,000 57,207,000 48,076,000 33,627,000
+Noncurrent liabilities 1,532,000 1,313,000 1,130,000 980,000 681,000
+Stockholders' equity 130,075,000 102,360,000 76,566,000 62,435,000 44,960,000
+13
+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)
+2002 2001 2000
+-------------- -------------- --------------
+Consolidated:
+------------
+Net Sales $326,136 100% $243,391 100% $205,113 100%
+Cost of Sales 199,453 61 143,518 59 115,495 56
+Gross Profit 126,683 39 99,873 41 89,618 44
+Other Operating Income 6,603 2 5,911 3 4,847 2
+Operating Expenses 100,074 31 79,472 33 68,833 34
+Cost of Loss Mitigation Coverage -- -- 6,950 3 -- --
+Income from Operations 33,212 10 19,362 8 25,632 12
+Interest and Other Income Net 1,216 1 1,349 1 1,872 1
+Income Before Income Taxes 34,428 11 20,711 9 27,504 13
+Net Income 19,841 6 12,116 5 16,043 8
+14
+Selected Financial Information
+------------------------------
+Year Ended
+----------
+December 31
+-----------
+($ in thousands)
+2002 2001 2000
+-------------- -------------- --------------
+By Segment
+WHOLESALE DIVISIONS:
+-------------------
+Steven Madden, Ltd. (Madden Womens)
+-----------------------------------
+Net Sales $108,577 100% $ 92,413 100% $ 87,977 100%
+Cost of Sales 75,080 69 60,052 65 54,707 62
+Gross Profit 33,497 31 32,361 35 33,270 38
+Other Operating Income 1,736 2 1,462 2 959 1
+Operating Expenses 27,714 26 24,929 27 25,422 29
+Cost of Loss Mitigation Coverage -- -- 6,950 8 -- --
+Income from Operations 7,519 7 1,944 2 8,807 10
+l.e.i. Footwear:
+---------------
+Net Sales $ 55,665 100% $ 42,592 100% $ 37,741 100%
+Cost of sales 35,368 64 26,859 63 23,657 63
+Gross Profit 20,297 36 15,733 37 14,084 37
+Operating Expenses 14,165 25 9,833 23 7,652 20
+Income from Operations 6,132 11 5,900 14 6,432 17
+Madden Mens:
+-----------
+Net Sales $ 45,153 100% $ 10,461 100% -- --
+Cost of sales 29,022 64 6,737 64 -- --
+Gross Profit 16,131 36 3,724 36
+Operating Expenses 10,330 23 3,340 32 -- --
+Income from Operations 5,801 13 384 4 -- --
+Diva Acquisition Corp:
+---------------------
+Net Sales $ 11,194 100% $ 7,454 100% $ 3,616 100%
+Cost of sales 8,117 73 5,384 72 2,591 72
+Gross Profit 3,077 27 2,070 28 1,025 28
+Operating Expenses 2,645 23 1,796 24 1,231 34
+Income (Loss) from Operations 432 4 274 4 (206) (6)
+Stevies Inc.:
+------------
+Net Sales $ 13,664 100% $ 10,984 100% $ 6,147 100%
+Cost of sales 8,777 64 7,014 64 3,846 63
+Gross Profit 4,887 36 3,970 36 2,301 37
+Other Operating Income 97 1 249 2 257 4
+Operating Expenses 3,205 24 2,626 24 1,595 26
+Income from Operations 1,779 13 1,593 14 963 15
+STEVEN MADDEN RETAIL INC.:
+-------------------------
+Net Sales $ 91,883 100% $ 79,487 100% $ 69,632 100%
+Cost of Sales 43,089 47 37,472 47 30,694 44
+Gross Profit 48,794 53 42,015 53 38,938 56
+Operating Expenses 39,793 43 34,992 44 30,937 44
+Income from Operations 9,001 10 7,023 9 8,001 12
+Number of Stores 80 73 65
+15
+Selected Financial Information
+------------------------------
+Year Ended
+----------
+December 31
+-----------
+($ in thousands)
+2002 2001 2000
+-------------- -------------- --------------
+By Segment (Continued)
+ADESSO MADDEN INC.: 2002 2001 2000
+------------------ ---- ---- ----
+(FIRST COST)
+Other Operating Revenue $ 4,770 100% $ 4,200 100% $ 3,631 100%
+Operating Expenses 2,222 47 1,956 47 1,996 55
+Income from Operations 2,548 53 2,244 53 1,635 45
+RESULTS OF OPERATIONS
+($ in thousands)
+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 partially due to a $34,692 increase in sales from the Madden Mens Wholesale
+Division ("Madden Mens") and year 2002 was a full year of operations from this
+division as well as double-digit percentage gains in each of our other Wholesale
+Divisions and sales gains of 16% ($12,396) 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 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 a first full year of operation for Madden Mens
+division, cost associated with growth in other segments of business as well as
+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, 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 growth in sales, decrease in operating expenses as a percentage of
+sales as well as a $6,950 of expense in 2001 relating to a non-recurring charge
+associated with the purchase of loss mitigation insurance coverage.
+Wholesale Divisions:
+-------------------
+Steven Madden Ltd. (Madden Women's, l.e.i. and Madden Mens):
+Sales from Madden Women's Wholesale Division ("Madden Women's") 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
+16
+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 by reducing selling prices to create open-to-buy for new best sellers and
+the higher markdowns taken by the division because of 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 Women's 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. ("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 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, out
+freight 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 ("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 year 2002 was the first full complete year 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. ("Stevies"):
+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.
+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,
+17
+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.
+Year Ended December 31, 2001 vs. Year Ended December 31, 2000
+Consolidated:
+------------
+Sales for the year ended December 31, 2001 were $243,391 or 19% higher
+than sales of $205,113 for the year ended December 31, 2000. The increase in
+sales was due to several factors, including (i) additional revenues of $10,461
+from the Company's new Madden Mens Wholesale Division, which commenced shipping
+in the first quarter of 2001, (ii) a 14% increase in retail sales due to the
+opening of additional retail stores, (iii) a 13% increase in sales from l.e.i.
+Wholesale, (iv) a 79% increase in sales from Stevies Wholesale, (v) a 106%
+increase in sales from Diva Wholesale, (vi) the addition in wholesale accounts,
+and (vii) an increase in public awareness with respect to the Company's brands.
+Consolidated gross profit as a percentage of sales decreased from 44% in
+2000 to 41% in 2001. The decrease in gross margin resulted from greater
+promotional activity at retail this year due to sluggish July 2001 sales and the
+tragic events of September 11th and its aftermath. Margin pressures from
+wholesale large accounts prompted the Company to be early and aggressive with
+markdowns in a highly promotional retail climate. Finally, the decrease in the
+Company's higher margin retail business as a percentage of total sales
+contributed to the margin erosion.
+Selling, general and administrative (SG&A) expenses increased to $79,472
+in 2001 from $68,833 in 2000. The increase in SG&A expenses was due primarily to
+a 28% increase in payroll, management incentives and payroll-related expenses
+from $24,268 in 2000 to $31,004 in 2001. Also, selling and designing expenses
+increased by 19% from $10,510 in 2000 to $12,499 in 2001. This was due in part
+to an increase in sales in the current period and to the Company's increased
+focus on selling and designing activities. The increase in the number of retail
+outlets and expanded corporate office facilities resulted in an increase in
+occupancy, telephone and utilities expenses by 19% from $9,208 in 2000 to
+$10,957 in 2001.
+Income from operations for 2001 was $19,362, which represented a decrease
+of $6,270 from the income from operations of $25,632 in 2000 and was due to a
+non-recurring charge taken in the fourth quarter of 2001 for the purchase of
+loss mitigation insurance coverage in the amount of $6,950. Net income decreased
+to $12,116 in 2001 from $16,043 in 2000 due to the factors mentioned above.
+Wholesale Divisions:
+-------------------
+Steven Madden Ltd (Madden Women's, l.e.i. and Madden Mens):
+Sales from the Madden Women's Wholesale Division accounted for $92,413 or
+38%, and $87,977 or 43%, of total sales in 2001 and 2000, respectively. The
+increase in sales was driven by the sales of key styles including euro-sport
+casuals, pointed toe and Madden slippers. Also, sales were driven by an increase
+in reorders through open stock replenishment for late spring and fall items.
+18
+Gross profit as a percentage of sales decreased from 38% in 2000 to 35% in 2001
+due to margin pressures from Madden Wholesale large accounts which prompted the
+Company to be early and aggressive with markdowns in a highly promotional retail
+climate. Operating expenses decreased to $24,929 in 2001 from $25,422 in 2000
+due to decreases in advertising and marketing expenses. Madden Wholesale income
+from operations decreased to $1,944 in 2001 compared to income from operations
+of $8,807 in 2000 due to a non-recurring charge taken in the fourth quarter of
+2001 as a result of the purchase of loss mitigation insurance coverage in the
+amount of $6,950.
+Sales from l.e.i. accounted for $42,592 or 17%, and $37,741 or 18%, of
+total sales in 2001 and 2000, respectively. Revenues for the year ended December
+31, 2001 increased 13% over the same period of 2000. The focus of the l.e.i.
+Wholesale expansion was in department stores such as May Department Stores, and
+specialty store channels such as Journeys. Gross profit as a percentage of sales
+remained the same in 2000 and 2001. Operating expenses increased to $9,833 in
+2001 from $7,652 in 2000 due to increases in payroll and payroll-related
+expenses. Additionally, selling and designing expenses increased due to an
+increase in sales in the current period. Income from operations for l.e.i. was
+$5,900 in 2001 compared to income from operations of $6,432 in 2000.
+Madden Mens commenced shipping in the first quarter of 2001. Madden Mens
+generated revenues of $10,461 for the year ended December 31, 2001.
+Sales from Diva accounted for $7,454 or 3%, and $3,616 or 2%, of total
+sales in 2001 and 2000, respectively. The Company believes that the increase in
+sales was driven by placements of its new product line in major department
+stores, specialty stores, and specialty catalogues. Gross profit as a percentage
+of sales remained the same in 2000 and 2001. Operating expenses increased to
+$1,796 in 2001 from $1,231 in 2000 due to increases in payroll and
+payroll-related expenses. Additionally, selling and related expenses increased
+due to an increase in sales in the current period. Income from operations for
+Diva was $274 for the year 2001 which represented a 233% increase over loss from
+operations of $206 in 2000.
+Sales from Stevies, which commenced shipping in the second quarter of
+2000, accounted for 10,984 or 5%, and $6,147 or 3%, of total sales in 2001 and
+2000, respectively. This increase was primarily due to a full year of operation
+and growth in accounts such as Limited Too and Nordstrom. Gross profit as a
+percentage of sales decreased from 37% in 2000 to 36% in 2001 due to margin
+pressures from some of Stevies' large accounts, which prompted the Company to be
+early and aggressive with markdowns in a highly promotional retail climate.
+Operating expenses increased to $2,626 in 2001 from $1,595 in 2000 due to
+increases in payroll and payroll-related expenses. Additionally, selling and
+designing expenses increased due to an increase in sales in the current period.
+Income from operations for Stevies Wholesale was $1,593 in 2001 compared to
+income from operations of $963 in 2000.
+Retail Division:
+---------------
+Sales from the Retail Division accounted for $79,487 or 33% and $69,632 or
+34% of total sales in 2001 and 2000, respectively. This increase in Retail
+Division sales was primarily due to the increase in the number of Steve Madden
+retail stores. During the year ended December 31, 2001, the Company closed two
+of its least productive stores located in Coconut Grove, Florida and in Mineola,
+New York. As of December 31, 2001, there were 73 Steve Madden retail stores
+compared to 65 stores as of December 31, 2000. Same store sales for the year
+ended December 31, 2001 decreased by 1% compared to the same store sales for
+2000 due to sluggish consumer traffic in the aftermath of September 11th.
+Revenues from the Internet store for the year ended December 31, 2001 were in
+excess of $4,000, showing an increase of 37% over such revenues in 2000. Gross
+profit as a percentage of sales decreased from 56% in 2000 to 53% in 2001 due to
+greater promotional activity at retail in 2001. Operating expenses for the
+Retail Division increased to $34,992 or 44% of sales in 2001 from $30,937 or 44%
+of sales in 2000. This increase in dollars was due to increases in payroll and
+payroll-related expenses and occupancy expenses as a result of opening ten
+additional stores in 2001. Income from operations for the Retail Division was
+$7,023 in 2001 compared to income from operations of $8,001 in 2000.
+Adesso-Madden Division:
+----------------------
+Adesso-Madden, Inc. generated commission revenues of $4,200 for the year
+ended December 31, 2001, which represented a 16% increase over commission
+revenues of $3,631 in 2000. This increase was primarily due to the growth in
+19
+accounts such as Walmart and Target and the addition of children's products to
+the assortment mix. Operating expenses decreased to $1,956 in 2001 from $1,996
+in 2000. Income from operations for Adesso-Madden was $2,244 in 2001 compared to
+income from operations of $1,635 in 2000.
+LICENSE AGREEMENTS
+Revenues from licensing increased to $1,833 in 2002 from $1,711 in 2001.
+As of December 31, 2002, the Company had six license partners covering six
+product categories of its Steve Madden brand. Also, as of December 31, 2002, the
+Company had two license partners covering two product categories of its Stevies
+brand. The product categories include handbags, hosiery, sunglasses, eyewear,
+belts and outerwear.
+LIQUIDITY AND CAPITAL RESOURCES
+The Company had working capital of $86,461 at December 31, 2002 compared
+to $82,633 of working capital at December 31, 2001, representing an increase of
+$3,828, which was primarily due to the Company's net income and proceeds
+received from the exercise of stock options. The Company believes that based
+upon its financial position and its ability to generate cash flow from
+operations, it expects to meet all of its financial commitments and operating
+needs through December 31, 2003.
+Under the terms of a factoring agreement with Capital Factors, Inc., the
+Company is permitted to draw down 80% of its invoiced receivables at an interest
+rate of two points below the Prime Rate (as defined in such agreement). The
+agreement with Capital Factors was renewed 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 them. Under the agreement, the Company has a credit line of
+$15,000. The Company did not use any portion of credit line during 2002.
+The Company has invested in marketable securities consisting of corporate
+bonds, U.S. Treasury notes and government asset-backed securities. The
+securities mature on various dates through 2007.
+OPERATING ACTIVITIES
+During the year ended December 31, 2002, cash provided from operating
+activities was $29,593. Uses of cash arose principally from an increase in
+non-factored accounts receivable of $1,207 and an increase in inventories of
+$3,627. Sources of cash were provided principally by net income of $19,841 and a
+decrease in prepaid expenses and other assets of $7,046.
+The Company leases office, showroom, warehouse and retail facilities under
+non-cancelable operating leases with terms expiring at various times through
+2013. Future minimum annual lease payments under non-cancelable operating leases
+consist of the following at December 31:
+2003 $ 8,653
+2004 8,582
+2005 8,236
+2006 8,256
+2007 7,716
+Thereafter 21,786
+---------
+$ 63,229
+=========
+The Company has an employment agreement with Steve Madden, its former CEO
+and President, to serve as the Company's Creative and Design Chief. The
+employment agreement, as amended, provides for an annual salary of $700,000
+through June 30, 2011. The agreement also provides for an annual performance
+bonus, an annual option grant at exercise prices equal to 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 $1,639 in
+2003, $1,545 in 2004 and $641 in 2005. In addition, such employment agreements
+provide for incentive compensation based on various performance criteria as well
+as other benefits.
+20
+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-five percent (95%) of its purchases in U.S. dollars.
+INVESTING ACTIVITIES
+During the year ended December 31, 2002, the Company invested $22,308 in
+marketable securities, net of maturities and sales of $4,041. In addition, the
+Company invested $5,072 on leasehold improvements to its corporate office space,
+the cost of opening of ten (10) new stores and upgrading its computer system.
+FINANCING ACTIVITIES
+During the year ended December 31, 2002, the Company received $4,364 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 or profitability.
+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 which respond to such trends. If
+the Company misjudges the market for its products, it may be faced with
+significant excess inventories for some products and missed opportunities with
+others. In addition, misjudgments in merchandise selection could adversely
+affect the Company's image with its customers resulting in weak 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 maintain its historical rate of
+growth in revenues and earnings, or remain profitable in the future. A recession
+in the national or regional economies or uncertainties regarding future economic
+prospects, among other things, could affect consumer spending habits and have a
+material adverse effect on the Company's business, financial condition and
+results of operations.
+In recent years, the retail industry has experienced consolidation and
+other ownership changes. In addition, some of the Company's customers have
+operated under the protection of the federal bankruptcy laws. In the future,
+retailers in the United States and in foreign markets may consolidate, undergo
+restructurings or reorganizations, or realign their affiliations, any of which
+could decrease the number of stores that carry the Company's products or
+increase the ownership concentration within the retail industry. While such
+changes in the retail industry to date have not had a material adverse effect on
+the Company's business or financial condition, there can be no assurance as to
+the future effect of any such changes.
+Inventory Management. The fashion-oriented nature of the Company's
+industry and the rapid changes in customer preferences leave the Company
+vulnerable to an increased risk of inventory obsolescence. Thus, the Company's
+ability to manage its inventories properly is an important factor in its
+operations. Inventory shortages can adversely affect the timing of shipments to
+customers and diminish brand loyalty. Conversely, excess inventories can result
+in lower gross margins due to the necessity of providing discounts to retailers.
+21
+The inability of the Company to effectively manage its inventory would have a
+material adverse effect on the Company's business, financial condition and
+results of operations.
+Dependence Upon Customers and Risks Related to Extending Credit to
+Customers. The Company's customers consist principally of department stores and
+specialty stores, including shoe boutiques. Certain of the Company's department
+store customers, including some under common ownership, account for significant
+portions of the Company's wholesale sales.
+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 requiring collateral.
+While various retailers, including some of the Company's customers, have
+experienced financial difficulties in the past few years which increased the
+risk of extending credit to such retailers, the Company's losses due to bad
+debts have been limited. Pursuant to the Factoring Agreement between Capital
+Factors and the Company, Capital Factors currently assumes the credit risk
+related to approximately 95% of the Company's accounts receivables. However,
+financial difficulties of a customer could cause the Company to curtail business
+with such customer or require the Company to assume more credit risk relating to
+such customer's receivables.
+Impact of Foreign Manufacturers. 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. During the
+year ended December 31, 2002, approximately 80% of the Company's products were
+purchased from sources outside the United States, including China, Brazil, Italy
+and Spain.
+Risks inherent in foreign operations include work stoppages,
+transportation delays and interruptions, changes in social, political and
+economic conditions which could result in the disruption of trade from the
+countries in which the Company's manufacturers or suppliers are located, the
+imposition of additional regulations relating to imports, the imposition of
+additional duties, taxes and other charges on imports, significant fluctuations
+of the value of the dollar against foreign currencies, or restrictions on the
+transfer of funds, any of which could have a material adverse effect on the
+Company's business, financial condition and results of operations. The Company
+does not believe that any such economic or political condition will materially
+affect the Company's ability to purchase products, since a variety of materials
+and alternative sources 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
+22
+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 substantial growth in the sales of fashionable footwear has encouraged
+the entry of many new competitors and increased competition from established
+companies. Most of these competitors, including 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, fashionable styling, high
+quality and value are the most important competitive factors and plans to
+continually employ these elements as it develops its products. The Company's
+inability to effectively advertise and market its products could have a material
+adverse effect on the Company's business, financial condition and results of
+operations.
+Expansion of Retail Business. The Company's continued growth depends to a
+significant degree on further developing the Steve Madden(R), David Aaron(R),
+Stevies, Steven, Steve Madden Mens and l.e.i. (R) brands, creating new product
+categories and businesses and operating Company-owned stores on a profitable
+basis. During the year ended December 31, 2002 the Company opened ten (10) Steve
+Madden retail stores and has plans to open approximately eight to ten (8-10)
+Steve Madden retail stores in the year 2003. The Company's recent and planned
+expansion includes the opening of stores in new geographic markets as well as
+strengthening existing markets. New markets have in the past presented, and will
+continue to present, competitive and merchandising challenges that are different
+from those faced by the Company in its existing markets. There can be no
+assurance that the Company will be able to open new stores, and if opened, that
+such new stores will be able to achieve sales and profitability levels
+consistent with existing stores. The Company's retail expansion is dependent on
+a number of factors, including the Company's ability to locate and obtain
+favorable store sites, the performance of the Company's wholesale and retail
+operations, and the ability of the Company to manage such expansion and hire and
+train personnel. Past comparable store sales results may not be indicative of
+future results, and there can be no assurance that the Company's comparable
+store sales results will increase or not decrease in the future. In addition,
+there can be no assurance that the Company's strategies to increase other
+sources of revenue, which may include expansion of its licensing activities,
+will be successful or that the Company's overall sales or profitability will
+increase or not be adversely affected as a result of the implementation of such
+retail strategies.
+The Company's growth has increased and will continue to increase demand on
+the Company's managerial, operational and administrative resources. The Company
+has recently invested significant resources in, among other things, its
+management information systems and hiring and training new personnel. However,
+in order to manage currently anticipated levels of future demand, the Company
+may be required to, among other things, expand its distribution facilities,
+establish relationships with new manufacturers to produce its products, and
+continue to expand and improve its financial, management and operating systems.
+There can be no assurance that the Company will be able to manage future growth
+effectively and a failure to do so could have a material adverse effect on the
+Company's business, financial condition and results of operations.
+Seasonal and Quarterly Fluctuations. The Company's results may fluctuate
+quarter to quarter as a result of the timing of holidays, weather, the timing of
+larger shipments of footwear, market acceptance of the Company's products, the
+mix, pricing and presentation of the products offered and sold, the hiring and
+23
+training of additional personnel, the timing of inventory write downs, the cost
+of materials, the mix between wholesale and licensing businesses, the incurrence
+of other operating costs and factors beyond the Company's control, such as
+general economic conditions and actions of competitors. In addition, the Company
+expects that its sales and operating results may be significantly impacted by
+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
+appropriation 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 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 17, 2003, the Company had outstanding
+options to purchase an aggregate of approximately 2,342,425 shares of Common
+Stock. Holders of such options are likely to exercise them when, in all
+likelihood, the Company could obtain additional capital on terms more favorable
+than those provided by the options. Further, while its options are outstanding,
+they may adversely affect the terms in which the Company could obtain additional
+capital.
+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 which purchase 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 credit agreement can be found in Note C. "Due From
+Factor" to the Consolidated Financial Statements included in this report. On
+December 31, 2002 and December 31, 2001, there were no direct borrowings
+outstanding under the credit agreement.
+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 DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND
+FINANCIAL DISCLOSURE
+None.
+24
+PART III
+ITEM 10 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
+COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT OF THE REGISTRANT
+Incorporated herein by reference from the Company's definitive proxy
+statement to be filed pursuant to Regulation 14A under the Securities Exchange
+Act of 1934.
+ITEM 11 EXECUTIVE COMPENSATION
+Incorporated herein by reference from the Company's definitive proxy
+statement to be filed pursuant to Regulation 14A under the Securities Exchange
+Act of 1934.
+ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
+Incorporated herein by reference from the Company's definitive proxy
+statement to be filed pursuant to Regulation 14A under the Securities Exchange
+Act of 1934.
+ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
+Incorporated herein by reference from the Company's definitive proxy
+statement to be filed pursuant to Regulation 14A under the Securities Exchange
+Act of 1934.
+ITEM 14 CONTROLS AND PROCEDURES
+Under the supervision and with the participation of the Company's
+management, including the Company's Chief Executive Officer and Chief Financial
+Officer, the Company has evaluated the effectiveness of the design and operation
+of its disclosure controls and procedures within 90 days of the filing date of
+this annual report, and, based on their evaluation, the Chief Executive Officer
+and Chief Financial Officer have concluded that these disclosure controls and
+procedures are effective. There were no significant changes in our internal
+controls or in other factors that could significantly affect these controls
+subsequent to the date of their evaluation.
+ITEM 15 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
+(a)(1) Financial Statements
+The following consolidated financial statements of Steven Madden, Ltd. and
+subsidiaries are included in Item 8:
+25
+Steven Madden, Ltd. and Subsidiaries
+CONTENTS
+Page
+----
+CONSOLIDATED FINANCIAL STATEMENTS
+Independent auditors' report F-2
+Balance sheets as of December 31, 2002 and 2001 F-3
+Statements of income for the years ended December 31, 2002, 2001
+and 2000 F-4
+Statements of changes in stockholders' equity for the years ended
+December 31, 2002, 2001 and 2000 F-5
+Statements of cash flows for the years ended December 31, 2002,
+2001 and 2000 F-8
+Notes to financial statements F-9
+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 as of December 31, 2002 and 2001, 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, 2002.
+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, 2002 and 2001, 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, 2002 in conformity with accounting
+principles generally accepted in the United States of America.
+Eisner LLP
+New York, New York
+February 12, 2003
+F-2
+Steven Madden, Ltd. and Subsidiaries
+Consolidated Balance Sheets
+December 31,
+------------------------------
+2002 2001
+------------- -------------
+ASSETS
+Current assets:
+Cash and cash equivalents $ 56,713,000 $ 50,179,000
+Accounts receivable - net of allowances of $497,000 and $257,000 3,039,000 2,072,000
+Due from factor - net of allowances of $1,718,000 and $1,387,000 22,373,000 22,783,000
+Inventories 19,445,000 15,818,000
+Marketable securities - available for sale 500,000
+Prepaid expenses and other current assets 1,651,000 836,000
+Prepaid taxes 7,911,000
+Deferred taxes 1,633,000 1,223,000
+------------- -------------
+Total current assets 105,354,000 100,822,000
+Property and equipment, net 17,073,000 15,707,000
+Deferred taxes 3,699,000 3,019,000
+Deposits and other 298,000 248,000
+Marketable securities - available for sale 22,010,000
+Cost in excess of fair value of net assets acquired - net of accumulated
+amortization of $714,000 2,066,000 2,066,000
+------------- -------------
+$ 150,500,000 $ 121,862,000
+============= =============
+LIABILITIES
+Current liabilities:
+Current portion of capital lease obligations $ 14,000 $ 43,000
+Accounts payable 9,044,000 6,836,000
+Accrued expenses 7,134,000 10,898,000
+Accrued incentive compensation 2,701,000 412,000
+------------- -------------
+Total current liabilities 18,893,000 18,189,000
+Deferred rent 1,532,000 1,299,000
+Capital lease obligations, less current portion 14,000
+------------- -------------
+20,425,000 19,502,000
+------------- -------------
+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 - $.0001 par value, 60,000,000 shares authorized, 14,016,059
+and 13,439,020 shares issued, 12,770,855 and 12,193,816 shares
+outstanding 1,000 1,000
+Additional paid-in capital 70,683,000 60,643,000
+Retained earnings 70,722,000 50,881,000
+Unearned compensation (3,476,000) (1,174,000)
+Other comprehensive gain:
+Unrealized gain on marketable securities 136,000
+Treasury stock - 1,245,204 shares at cost (7,991,000) (7,991,000)
+------------- -------------
+130,075,000 102,360,000
+------------- -------------
+$ 150,500,000 $ 121,862,000
+============= =============
+See Notes to Financial Statements
+F-3
+Steven Madden, Ltd. and Subsidiaries
+Consolidated Statements of Income
+Year Ended December 31,
+-----------------------------------------------
+2002 2001 2000
+------------- ------------- -------------
+Net sales:
+Wholesale $ 234,253,000 $ 163,904,000 $ 135,481,000
+Retail 91,883,000 79,487,000 69,632,000
+------------- ------------- -------------
+326,136,000 243,391,000 205,113,000
+------------- ------------- -------------
+Cost of sales:
+Wholesale 156,364,000 106,046,000 84,801,000
+Retail 43,089,000 37,472,000 30,694,000
+------------- ------------- -------------
+199,453,000 143,518,000 115,495,000
+------------- ------------- -------------
+Gross profit 126,683,000 99,873,000 89,618,000
+Commission and licensing fee income 6,603,000 5,911,000 4,847,000
+Operating expenses (100,074,000) (79,472,000) (68,833,000)
+Cost of loss mitigation coverage (6,950,000)
+------------- ------------- -------------
+Income before other income (expenses) and provision
+for income taxes 33,212,000 19,362,000 25,632,000
+Other income (expenses):
+Interest income 1,166,000 1,344,000 1,744,000
+Interest expense (16,000) (66,000) (102,000)
+Gain on sale of marketable securities 66,000 71,000 230,000
+------------- ------------- -------------
+Income before provision for income taxes 34,428,000 20,711,000 27,504,000
+Provision for income taxes 14,587,000 8,595,000 11,461,000
+------------- ------------- -------------
+Net income $ 19,841,000 $ 12,116,000 $ 16,043,000
+============= ============= =============
+Basic income per share $ 1.58 $ 1.04 $ 1.42
+============= ============= =============
+Diluted income per share $ 1.45 $ 0.94 $ 1.26
+============= ============= =============
+Basic weighted average common shares outstanding 12,594,861 11,617,862 11,310,130
+Effect of dilutive securities - options 1,115,018 1,330,002 1,387,244
+------------- ------------- -------------
+Diluted weighted average common shares 13,709,879 12,947,864 12,697,374
+outstanding ============= ============= =============
+See Notes to Financial Statements
+F-4
+Steven Madden, Ltd. and Subsidiaries
+Consolidated Statements of Changes in Stockholders' Equity
+Common Stock Additional
+----------------------- Paid-in Retained Unearned
+Shares Amount Capital Earnings Compensation
+---------- ---------- ------------ ------------ ------------
+Balance - December 31, 1999 11,797,793 $ 1,000 $ 42,906,000 $ 22,722,000 $ (1,279,000)
+Exercise of stock options 508,891 2,807,000
+Tax benefit from exercise of options 975,000
+Net income 16,043,000
+Amortization of unearned compensation 382,000
+Common stock purchased for treasury
+---------- ---------- ------------ ------------ ------------
+Balance - December 31, 2000 12,306,684 1,000 46,688,000 38,765,000 (897,000)
+Exercise of stock options 1,122,336 8,998,000
+Tax benefit from exercise of options 2,765,000
+Compensation in connection with issuance of
+stock options 2,004,000 (810,000)
+Compensation in connection with issuance of
+restricted stock 10,000 188,000
+Net income 12,116,000
+Amortization of unearned compensation 533,000
+---------- ---------- ------------ ------------ ------------
+Balance - December 31, 2001 13,439,020 1,000 60,643,000 50,881,000 (1,174,000)
+Exercise of stock options 567,039 4,364,000
+Tax benefit from exercise of options 1,146,000
+Deferred compensation in connection with
+issuance of stock options and restricted
+stock 3,930,000 (3,930,000)
+Compensation in connection with issuance of
+stock options 412,000
+Compensation in connection with issuance of
+restricted stock 10,000 188,000
+Amortization of unearned compensation 1,628,000
+Unrealized holding gain on marketable
+securities
+Net income 19,841,000
+Comprehensive income
+---------- ---------- ------------ ------------ ------------
+Balance - December 31, 2002 14,016,059 $ 1,000 $ 70,683,000 $ 70,722,000 $ (3,476,000)
+========== ========== ============ ============ ============
+See Notes to Financial Statements
+F-5
+Steven Madden, Ltd. and Subsidiaries
+Consolidated Statements of Changes in Stockholders' Equity (cont.)
+Accumulated
+Other Treasury Stock
+Comprehensive -------------------------
+Gain Shares Amount
+----------- ----------- -----------
+Balance - December 31, 1999 345,204 $(1,915,000)
+Exercise of stock options
+Tax benefit from exercise of options
+Net income
+Amortization of unearned compensation
+Common stock purchased for treasury 900,000 (6,076,000)
+----------- -----------
+Balance - December 31, 2000 1,245,204 (7,991,000)
+Exercise of stock options
+Tax benefit from exercise of options
+Compensation in connection with issuance of
+stock options
+Compensation in connection with issuance of
+restricted stock
+Net income
+Amortization of unearned compensation
+----------- -----------
+Balance - December 31, 2001 1,245,204 (7,991,000)
+Exercise of stock options
+Tax benefit from exercise of options
+Deferred compensation in connection with
+issuance of stock options and restricted stock
+Compensation in connection with issuance of
+stock options
+Compensation in connection with issuance of
+restricted stock
+Amortization of unearned compensation
+Unrealized holding gain on marketable securities $ 136,000
+Net income
+Comprehensive income
+----------- ----------- -----------
+Balance - December 31, 2002 $ 136,000 1,245,204 $(7,991,000)
+=========== =========== ===========
+See Notes to Financial Statements
+F-6
+Consolidated Statements of Changes in Stockholders' Equity (cont.)
+Total
+Stockholders' Comprehensive
+Equity Income
+------------- -------------
+Balance - December 31, 1999 $ 62,435,000
+Exercise of stock options 2,807,000
+Tax benefit from exercise of options 975,000
+Net income 16,043,000
+Amortization of unearned compensation 382,000
+Common stock purchased for treasury (6,076,000)
+-------------
+Balance - December 31, 2000 76,566,000
+Exercise of stock options 8,998,000
+Tax benefit from exercise of options 2,765,000
+Compensation in connection with issuance of stock
+options 1,194,000
+Compensation in connection with issuance of
+restricted stock 188,000
+Net income 12,116,000
+Amortization of unearned compensation 533,000
+-------------
+Balance - December 31, 2001 102,360,000
+Exercise of stock options 4,364,000
+Tax benefit from exercise of options 1,146,000
+Deferred compensation in connection with
+issuance of stock options and restricted stock 0
+Compensation in connection with issuance of
+stock options 412,000
+Compensation in connection with issuance of
+restricted stock 188,000
+Amortization of unearned compensation 1,628,000
+Unrealized holding gain on marketable securities 136,000 $ 136,000
+Net income 19,841,000 19,841,000
+-------------
+Comprehensive income $ 19,977,000
+------------- =============
+Balance - December 31, 2002 $ 130,075,000
+=============
+See Notes to Financial Statements
+F-7
+Steven Madden, Ltd. and Subsidiaries
+Consolidated Statements of Cash Flows
+Year Ended December 31,
+--------------------------------------------
+2002 2001 2000
+------------ ------------ ------------
+Cash flows from operating activities:
+Net income $ 19,841,000 $ 12,116,000 $ 16,043,000
+Adjustments to reconcile net income to net cash provided by
+operating activities:
+Non-cash compensation 2,228,000 1,915,000 382,000
+Depreciation and amortization 3,706,000 3,447,000 3,586,000
+Deferred taxes (1,090,000) (480,000) (1,350,000)
+Tax benefit from exercise of options 1,146,000 2,765,000 975,000
+Provision for doubtful accounts and chargebacks 571,000 219,000 506,000
+Deferred rent expense 233,000 225,000 297,000
+Realized gain on sale of marketable securities (66,000) (71,000) (230,000)
+Changes in:
+Accounts receivable (1,207,000) 862,000 (1,474,000)
+Due from factor 79,000 (8,364,000) (3,251,000)
+Inventories (3,627,000) 6,000 (5,666,000)
+Prepaid expenses, prepaid taxes and other assets 7,046,000 (7,484,000) (375,000)
+Accounts payable and accrued expenses (1,556,000) 4,054,000 4,610,000
+Accrued incentive compensation 2,289,000 183,000 (348,000)
+Income tax payable (4,957,000)
+------------ ------------ ------------
+Net cash provided by operating activities 29,593,000 9,393,000 8,748,000
+------------ ------------ ------------
+Cash flows from investing activities:
+Purchase of property and equipment (5,072,000) (3,415,000) (7,933,000)
+Purchases of marketable securities (26,349,000) (54,000)
+Maturity/sale of marketable securities 4,041,000 125,000 487,000
+------------ ------------ ------------
+Net cash used in investing activities (27,380,000) (3,344,000) (7,446,000)
+------------ ------------ ------------
+Cash flows from financing activities:
+Proceeds from exercise of stock options 4,364,000 8,998,000 2,807,000
+Purchase of treasury stock (6,076,000)
+Payments of lease obligations (43,000) (127,000) (135,000)
+------------ ------------ ------------
+Net cash provided by (used in) financing activities 4,321,000 8,871,000 (3,404,000)
+------------ ------------ ------------
+Net increase (decrease) in cash and cash equivalents 6,534,000 14,920,000 (2,102,000)
+Cash and cash equivalents - beginning of year 50,179,000 35,259,000 37,361,000
+------------ ------------ ------------
+Cash and cash equivalents - end of year $ 56,713,000 $ 50,179,000 $ 35,259,000
+============ ============ ============
+Supplemental disclosures of cash flow information:
+Cash paid during the year for:
+Interest $ 16,000 $ 66,000 $ 102,000
+Income taxes $ 6,522,000 $ 14,389,000 $ 16,172,000
+See Notes to Financial Statements
+F-8
+Steven Madden, Ltd. and Subsidiaries
+Notes to Financial Statements
+December 31, 2002 and 2001
+NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
+[1] Organization:
+Steven Madden, Ltd., a Delaware corporation, designs and sources
+women's, girl's and men's shoes, for sale through its wholesale and
+retail channels under the Steve Madden, David Aaron, Stevies, Madden
+Mens and Lei (under license) brand names. Revenue is generated
+predominately through the sale of the Company's brand name merchandise
+and certain licensed products. At December 31, 2002 and 2001, the
+Company operated 80 and 73 retail stores (including its website as a
+store), respectively. Such revenue is subject to seasonal fluctuations.
+See Note K for operating segment information.
+[2] Principles of consolidation:
+The consolidated financial statements include the accounts of Steven
+Madden, Ltd. and its wholly owned subsidiaries Steven Madden Retail,
+Inc., Diva Acquisition Corp., Adesso-Madden, Inc. and Stevies, Inc.
+(collectively referred to as the "Company"). All significant
+intercompany balances and transactions have been eliminated.
+[3] Use of estimates:
+The preparation of financial statements in conformity with accounting
+principles generally accepted in the United States of America requires
+management to make estimates and assumptions that affect the reported
+amounts of assets and liabilities and disclosure of contingent assets
+and liabilities at the date of the financial statements and the
+reported amounts of revenue and expenses during the reporting period.
+Actual results could differ from those estimates.
+[4] Cash equivalents:
+Cash equivalents at December 31, 2002 and 2001, amounted to
+approximately $46,024,000 and $41,770,000, respectively, and consist of
+money market accounts, certificates of deposit and commercial paper.
+The Company considers all highly liquid instruments with an original
+maturity of three months or less to be cash equivalents.
+[5] Marketable securities:
+Marketable securities consist primarily of corporate bonds, U.S.
+treasury notes and government asset-backed securities with maturities
+greater than three months up to 5 years at the time of purchase. These
+securities, which are classified as available for sale, are carried at
+fair value, with unrealized gains and losses, net of any tax effect,
+reported in shareholders' equity as accumulated other comprehensive
+income.
+[6] Inventories:
+Inventories, which consist of finished goods, are stated at the lower
+of cost (first-in, first-out method) or market.
+F-9
+Steven Madden, Ltd. and Subsidiaries
+Notes to Financial Statements
+December 31, 2002 and 2001
+NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
+[7] Property and equipment:
+Property and equipment are stated at cost less accumulated depreciation
+and amortization. Depreciation is computed utilizing the straight-line
+method based on estimated useful lives ranging from three to ten years.
+Leasehold improvements are amortized utilizing the straight-line method
+over the shorter of their estimated useful lives or the remaining lease
+term. Depreciation and amortization include amounts relating to
+property and equipment under capital leases.
+Impairment losses are recognized for long-lived assets, including
+certain intangibles, used in operations when indicators of impairment
+are present and the undiscounted cash flows estimated to be generated
+by those assets are not sufficient to recover the assets' carrying
+amount. Impairment losses are measured by comparing the fair value of
+the assets to their carrying amount. No impairment losses have been
+incurred for the years presented.
+[8] Cost in excess of fair value of net assets acquired:
+Cost in excess of fair value of net assets acquired relates to two
+acquisitions, and through December 31, 2001 was being amortized over 20
+years.
+During 2002, the Company adopted SFAS No. 142, "Goodwill and other
+Intangible Assets" ("FAS 142"). Amortization of indefinite lived
+intangible assets was no longer allowed under FAS 142, however these
+identified assets are subject to annual impairment tests. The Company
+has determined that the carrying amount of these assets is not impaired
+at December 31, 2002. Diluted earnings per share without the impact of
+amortization would have been $0.95 and $1.27 for 2001 and 2000,
+respectively.
+[9] Net income per share:
+Basic income per share is based on the weighted average number of
+common shares outstanding during the year. Diluted income per share
+reflects the potential dilution assuming common shares were issued upon
+the exercise of outstanding in-the-money options and the proceeds
+(including the amount of compensation cost, if any, attributed to
+future services and not yet recognized and the amount of tax benefits,
+if any, that would be credited to additional paid-in capital assuming
+exercise of the options) thereof were used to purchase treasury stock
+at the average market price during the period. For the years ended
+December 31, 2002 and 2001, options exercisable into approximately
+741,000 and 265,000 shares of common stock, respectively, have not been
+included in the calculation of diluted income per share as the result
+would have been antidilutive.
+[10] Advertising costs:
+The Company expenses costs of print, radio and billboard advertisements
+as of the first date the advertisements take place. Advertising expense
+included in operating expenses amounted to approximately $7,451,000 in
+2002, $6,596,000 in 2001 and $6,941,000 in 2000.
+[11] Fair value of financial instruments:
+The carrying value of the Company's financial instruments approximate
+fair value due to their short-term nature or their underlying terms.
+Marketable securities are carried at quoted market prices which
+represent fair value.
+F-10
+Steven Madden, Ltd. and Subsidiaries
+Notes to Financial Statements
+December 31, 2002 and 2001
+NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
+[12] Stock-based compensation:
+At December 31, 2002, the Company had various stock option plans, which
+are described more fully in Note D. As permitted under SFAS No. 148,
+"Accounting for Stock-Based Compensation - Transition and Disclosure,"
+which amended SFAS No. 123, "Accounting for Stock-Based Compensation,"
+the Company has elected to continue to follow the intrinsic value
+method in accounting for its stock-based employee compensation
+arrangements as defined by Accounting Principles Board Opinion ("APB")
+No. 25, "Accounting for Stock Issued to Employees," and related
+interpretations including Financial Accounting Standards Board
+Interpretation No. 44, "Accounting for Certain Transactions Involving
+Stock Compensation," an interpretation of APB No. 25. The following
+table illustrates the effect on net income and earnings per share if
+the company had applied the fair value recognition provisions of SFAS
+No. 123 to stock-based employee compensation.
+Year Ended December 31,
+--------------------------------------------------
+2002 2001 2000
+-------------- -------------- --------------
+Reported net income $ 19,841,000 $ 12,116,000 $ 16,043,000
+Stock-based employee compensation included in
+reported net income, net of tax 932,000 935,000 223,000
+Stock-based employee compensation determined
+under the fair value based method, net of tax (2,663,000) (2,272,000) (1,678,000)
+-------------- -------------- --------------
+Pro forma net income $ 18,110,000 $ 10,779,000 $ 14,588,000
+============== ============== ==============
+Basic income per share:
+As reported $ 1.58 $ 1.04 $ 1.42
+Pro forma $ 1.44 $ 0.93 $ 1.29
+Diluted income per share:
+As reported $ 1.45 $ 0.94 $ 1.26
+Pro forma $ 1.32 $ 0.83 $ 1.15
+The weighted average fair value of options granted in 2002, 2001 and
+2000 was approximately $10.60, $9.44 and 4.54, respectively, using the
+Black-Scholes option-pricing model with the following assumptions:
+2002 2001 2000
+------------- ------------- -------------
+Volatility 73% 75% 60%
+Risk free interest rate 2.60% - 4.15% 3.56% - 4.98% 5.97% - 6.30%
+Expected life in years 4 4 4
+Dividend yield 0 0 0
+[13] Revenue recognition:
+Wholesale revenue is recognized upon shipment. Allowances for estimated
+discounts and allowances are recognized when sales are recorded.
+Commission revenue is recognized when title of product transfers to the
+customer. Retail sales are recognized when the payment is received from
+customers and are recorded net of returns. Licensing revenue is
+recognized on the basis of net sales reported by the licensees.
+F-11
+Steven Madden, Ltd. and Subsidiaries
+Notes to Financial Statements
+December 31, 2002 and 2001
+NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
+[14] Impairment of long-lived assets:
+During fiscal 2002, the Company adopted SFAS No. 144, "Accounting for
+the Impairment or Disposal of Long-Lived Assets" ("FAS 144"). If facts
+and circumstances indicate that the Company's long-lived assets might
+be impaired, the estimated future undiscounted cash flows associated
+with the long-lived asset would be compared to its carrying amounts to
+determine if a write-down to fair value is necessary. If a write-down
+is required, the amount is determined by estimation of the present
+value of net discounted cash flows in accordance with FAS 144.
+[15] Reclassification:
+Certain reclassifications have been made to the statements of cash
+flows for the years ended December 31, 2001 and 2000 to conform to the
+current year presentation.
+NOTE B - PROPERTY AND EQUIPMENT
+The major classes of assets and accumulated depreciation and
+amortization are as follows:
+December 31,
+----------------------------
+2002 2001
+------------ ------------
+Leasehold improvements $ 19,478,000 $ 18,180,000
+Machinery and equipment 719,000 890,000
+Furniture and fixtures 3,157,000 3,297,000
+Computer equipment 3,959,000 4,928,000
+Equipment under capital lease 194,000 217,000
+------------ ------------
+27,507,000 27,512,000
+Less accumulated depreciation and amortization (10,434,000) (11,805,000)
+------------ ------------
+Property and equipment - net $ 17,073,000 $ 15,707,000
+============ ============
+NOTE C - DUE FROM FACTOR
+Under the terms of its factoring agreement, as amended, the Company may request
+advances from the factor up to 80 percent of aggregate receivables purchased by
+the factor at an interest rate of prime minus 2%. The Company also pays a fee
+equal to 0.6% of the gross invoice amount of each receivable purchased. In
+addition, the factor charges an annual unused line fee of .25% of the average
+daily unused portion of the Company's $15,000,000 credit line. The Company sells
+and assigns a substantial portion of its receivables, principally without
+recourse, to the factor. At December 31, 2002 and 2001, $865,000 and $1,120,000
+of factored receivables were sold by the Company with recourse. The factor
+assumes the credit risk of all assigned accounts approved by it, but maintains
+liens on all inventory, trade receivables (whether or not assigned) and the
+goods represented thereby.
+F-12
+Steven Madden, Ltd. and Subsidiaries
+Notes to Financial Statements
+December 31, 2002 and 2001
+NOTE D - STOCK OPTIONS
+The Company established various stock option plans under which options to
+purchase shares of common stock may be granted to employees, directors,
+officers, agents, consultants and independent contractors. The plans provide
+that the option price shall not be less than the fair market value of the common
+stock on the date of grant and that no portion of the option may be exercised
+beyond ten years from that date. No incentive stock option can be granted and
+exercised beyond five years to a stockholder owning 10% or more of the Company's
+outstanding common stock. Options granted under the plans during the three years
+ended December 31, 2002 vest on the date of grant or up to three years from such
+date.
+The Company has several stock option plans. The 1993 Incentive Stock Option
+Plan, The 1995 Stock Plan, The 1996 Stock Plan and The 1997 Stock Plan provide
+for options to be granted to employees and directors.
+In June 1999, the Company adopted The 1999 Stock Plan which authorized the
+issuance of up to 400,000 shares. In May 2000, the stockholders approved an
+amendment to this Plan to increase the maximum number of shares to be issued
+under the Plan to 975,000 shares. In July 2001, the stockholders approved an
+amendment to this Plan to increase the maximum number of shares to be issued
+under the Plan to 1,600,000 shares. In May 2002, the stockholders approved a
+further amendment to this Plan to increase the maximum number of shares to be
+issued under the Plan to 2,280,000. Terms of the 1999 Stock Plan are not
+materially different from the various existing stock option plans.
+Through December 31, 2002, 2,250,000 options had been granted under The 1999
+Stock Plan, as amended, and as of such date 30,000 shares were available for
+grant.
+In connection with the amended employment agreement of the former Chief
+Executive Officer ("CEO"), who is now the Company's Creative and Design Chief,
+the Company issued options to purchase 500,000 shares of its common stock. The
+options, which vested in August 1998, have an exercise price of $3.31 and are
+exercisable over 10 years. Unearned compensation was recorded in the amount of
+$1,345,000 which represented the difference between the exercise price and the
+fair value of the stock on the date of grant, and is classified as a component
+of stockholders' equity. The unearned compensation is being amortized over the
+ten-year term of the amended agreement. Accordingly, $128,000 has been charged
+to operations for 2002, 2001 and 2000.
+In connection with the Chief Operating Officer's employment agreement, the
+Company issued options to purchase 75,000 shares of its common stock. The
+options which vested quarterly through December 31, 2001, have an exercise price
+of $8.00. The market value of the stock on the date of grant was $10.80 per
+share. Unearned compensation was recorded in the amount of $810,000, which
+represented the difference between the exercise price and the fair value of the
+stock on the date of grant, and is classified as a component of stockholders'
+equity. The unearned compensation was amortized over the two year term of the
+employment agreement. Accordingly, $405,000 has been charged to operations in
+2002 and 2001.
+The Company granted options to an executive employee, who resigned in December
+2000, to purchase 250,000 shares of the Company's common stock at $7.50 per
+share in 1998. The market value of the stock on the date of grant was $10.125
+per share. The Company recorded approximately $656,000 as unearned compensation
+relating to such options, of which the remaining unamortized portion of
+approximately $254,000, was charged to operations during the year ended December
+31, 2000.
+F-13
+Steven Madden, Ltd. and Subsidiaries
+Notes to Financial Statements
+December 31, 2002 and 2001
+NOTE D - STOCK OPTIONS (CONTINUED)
+Activity relating to stock options granted under the Company's plans and outside
+the plans during the three years ended December 31, 2002 is as follows:
+2002 2001 2000
+----------------------- ----------------------- -----------------------
+Number Weighted Number Weighted Number Weighted
+of Exercise of Exercise of Exercise
+Shares Price Shares Price Shares Price
+---------- ---------- ---------- ---------- ---------- ----------
+Outstanding at January 1 2,231,000 $ 7.25 2,749,000 $ 6.36 2,720,000 $ 5.85
+Granted 696,000 17.53 614,000 12.68 550,000 9.09
+Exercised (567,000) 7.70 (1,122,000) 8.02 (509,000) 5.52
+Cancelled (15,000) 16.71 (10,000) 9.98 (12,000) 6.34
+---------- ---------- ----------
+Outstanding at December 31 2,345,000 10.14 2,231,000 7.25 2,749,000 6.36
+========== ========== ==========
+Exercisable at December 31 1,813,000 8.01 2,131,000 7.22 2,575,000 6.06
+========== ========== ==========
+The following table summarizes information about stock options at December 31,
+2002:
+Options Outstanding Options Exercisable
+---------------------------------- ----------------------
+Weighted
+Average
+Remaining Weighted Weighted
+Contractual Average Average
+Number Life Exercise Number Exercise
+Range of Exercise Price Outstanding (in Years) Price Exercisable Price
+----------------------- ----------- ----------- --------- ----------- ---------
+$1.50 to $3.31 820,000 3.1 $ 2.36 820,000 $ 2.36
+$5.50 to $6.00 99,000 4.6 5.52 99,000 5.52
+$6.57 to $7.00 138,000 8.0 6.91 138,000 6.91
+$8.00 to $9.12 160,000 8.3 8.81 160,000 8.81
+$9.55 to $10.25 110,000 7.3 9.94 110,000 9.94
+$11.81 to $12.00 67,000 6.8 11.84 67,000 11.84
+$13.50 to $17.41 243,000 9.5 14.99 50,000 15.11
+$18.00 to $20.80 708,000 9.0 19.01 369,000 18.99
+--------- ---------
+2,345,000 6.5 10.14 1,813,000 8.01
+========= =========
+NOTE E - RESTRICTED STOCK AWARDS
+Restricted stock awards have been granted to certain key executive management.
+These awards vest on various dates between January 2004 and January 2006. Awards
+of 190,000 shares and 20,000 shares were granted in 2002 and 2001, respectively.
+The average market price on the date of grant for awards granted in 2002 and
+2001 were $17.15 and $18.80, respectively. Restricted stock compensation charged
+to expense was $871,000 and $188,000 for 2002 and 2001, respectively.
+F-14
+Steven Madden, Ltd. and Subsidiaries
+Notes to Financial Statements
+December 31, 2002 and 2001
+NOTE F - PREFERRED STOCK
+The Company has authorized 5,000,000 shares of preferred stock. The Board of
+Directors have designated 60,000 shares of such preferred stock as Series A
+Junior Participating Preferred Stock ("Series A Preferred"). Holders of the
+shares of Series A Preferred are entitled to dividends equal to 1,000 times
+dividends declared or paid on the Company's common stock. Each share of Series A
+preferred entitles the holder to 1,000 votes on all matters submitted to the
+holders of common stock. The Series A Preferred has a liquidation preference of
+a $1,000 per share, and is not redeemable by the Company or the holder. No
+preferred shares have been issued.
+NOTE G - RIGHTS AGREEMENT
+On October 30, 2001, the Company declared a dividend distribution of one
+preferred stock purchase right (a "Right") for each outstanding share of common
+stock. Each Right entitles the holder to purchase from the Company one
+one-thousandth (1/1,000) of a share of Series A Preferred at a price of $75 per
+one one-thousandth (1/1,000) of a share. Initially, the Rights will not be
+exercisable and will automatically trade with the common stock. The Rights
+become exercisable, in general, ten days following the announcement of a person
+or group acquiring beneficial ownership of at least 15% of the outstanding
+voting stock of the Company.
+NOTE H - OPERATING LEASES
+The Company leases office, showroom, warehouse and retail facilities under
+noncancelable operating leases with terms expiring at various times through
+2013. Future minimum annual lease payments under noncancelable operating leases
+consist of the following at December 31:
+2003 $ 8,653,000
+2004 8,582,000
+2005 8,236,000
+2006 8,256,000
+2007 7,716,000
+Thereafter 21,786,000
+------------
+$ 63,229,000
+============
+A majority of the retail store leases provide for contingent rental payments if
+gross sales exceed certain targets. In addition, many of the leases contain rent
+escalation clauses to compensate for increases in operating costs and real
+estate taxes.
+Rent expense for the years ended December 31, 2002, 2001 and 2000 was
+approximately $10,795,000, $9,142,000 and $7,604,000, respectively. Included in
+such amounts are contingent rents of $151,000, $125,000 and $122,000 in 2002,
+2001 and 2000, respectively.
+Pursuant to certain leases, rent expense charged to operations differs from rent
+paid because of scheduled rent increases. Accordingly, the Company has recorded
+deferred rent. Rent expense is calculated by allocating total rental payments,
+including those attributable to scheduled rent increases, on a straight-line
+basis, over the lease term.
+F-15
+Steven Madden, Ltd. and Subsidiaries
+Notes to Financial Statements
+December 31, 2002 and 2001
+NOTE I - INCOME TAXES
+The income tax provision (benefit) consists of the following:
+2002 2001 2000
+------------ ------------ ------------
+Current:
+Federal $ 11,411,000 $ 6,899,000 $ 9,787,000
+State and local 4,266,000 2,176,000 3,024,000
+------------ ------------ ------------
+15,677,000 9,075,000 12,811,000
+------------ ------------ ------------
+Deferred:
+Federal (793,000) (365,000) (1,031,000)
+State and local (297,000) (115,000) (319,000)
+------------ ------------ ------------
+(1,090,000) (480,000) (1,350,000)
+------------ ------------ ------------
+$ 14,587,000 $ 8,595,000 $ 11,461,000
+============ ============ ============
+A reconciliation between taxes computed at the federal statutory rate and the
+effective tax rate is as follows:
+December 31,
+----------------------
+2002 2001 2000
+---- ---- ----
+Income taxes at federal statutory rate 35.0% 35.0% 35.0%
+State income taxes - net of federal
+income tax benefit 8.3 6.5 6.4
+Nondeductible items 0.1 .3 0.3
+Other (1.0) (0.3)
+---- ---- ----
+Effective rate 42.4% 41.5% 41.7%
+==== ==== ====
+The Company applies the liability method of accounting for income taxes. Under
+this method, deferred tax assets and liabilities are determined based on
+differences between financial reporting and tax bases of assets and liabilities
+and are measured using the enacted tax rates and laws that are expected to be in
+effect when the differences are expected to reverse.
+The components of deferred tax assets and liabilities are as follows:
+December 31,
+-----------------------
+2002 2001
+---------- ----------
+Current deferred tax assets:
+Receivable allowances $ 930,000 $ 691,000
+Inventory 703,000 532,000
+---------- ----------
+1,633,000 1,223,000
+---------- ----------
+Non-current deferred tax assets:
+Depreciation 2,242,000 2,035,000
+Deferred compensation 813,000 438,000
+Deferred rent 644,000 546,000
+---------- ----------
+3,699,000 3,019,000
+---------- ----------
+Deferred tax assets $5,332,000 $4,242,000
+========== ==========
+F-16
+Steven Madden, Ltd. and Subsidiaries
+Notes to Financial Statements
+December 31, 2002 and 2001
+NOTE J - COMMITMENTS, CONTINGENCIES AND OTHER
+[1] Indictment:
+On June 20, 2000, Steven Madden, the Company's former Chairman and
+Chief Executive Officer, was indicted in the United States District
+Courts for the Southern District and Eastern District of New York. The
+indictments alleged that Mr. Madden engaged in securities fraud and
+money laundering activities. In addition, the Securities and Exchange
+Commission filed a complaint in the United States District Court for
+the Eastern District of New York alleging that Mr. Madden violated
+Section 17(a) of the Securities Exchange Act of 1934, as amended. On
+May 21, 2001, Steven Madden entered into a plea agreement with the U.S.
+Attorney's Office, pursuant to which he pled guilty to four of the
+federal charges filed against him. In addition, Mr. Madden reached a
+separate settlement agreement with the Securities and Exchange
+Commission regarding the allegations contained in its complaint. As a
+result, Mr. Madden resigned as the Company's Chief Executive Officer
+and as a member of the Company's Board of Directors effective July 1,
+2001. Mr. Madden has agreed to serve as the Company's Creative and
+Design Chief, a non-executive position. On April 4, 2002, Mr. Madden
+was sentenced in the United States District Court for the Southern
+District of New York to forty one (41) months' imprisonment in
+connection with two of the federal charges to which he pled guilty. On
+May 3, 2002, Mr. Madden was sentenced in the United States District
+court for the Eastern District of New York to forty one (41) months'
+imprisonment in connection with the remaining two charges to which he
+pled guilty. The sentences will run concurrently. Under the settlement
+agreement with the Securities and Exchange Commission, Mr. Madden has
+agreed to not serve as an officer or director of a publicly traded
+company for 7 years. Neither the indictments nor the Securities and
+Exchange Commission complaint allege any wrongdoing by the Company or
+its other officers and directors. Mr. Madden began serving his sentence
+in September of 2002.
+In December 2001, the Company purchased a loss mitigation policy to
+cover costs arising out of lawsuits related to the June 2000 federal
+indictment of Steven Madden described above. The policy covers the
+Company's anticipated damages and legal costs in connection with such
+lawsuits. The Company is obligated to pay for damages and costs in
+excess of the policy limits. The cost of the policy was $6,950,000.
+[2] Class action litigation:
+Between June and August 2000 several class action lawsuits were
+commenced in the United States District Court for the Eastern District
+of New York against the Company, Steven Madden personally, and, in some
+of the actions, the Company's then President and its Chief Financial
+Officer.
+A settlement in principle of these actions has been reached, subject to
+execution of definitive settlement documentation, notices to class
+members, a hearing and approval by the District Court. The tentative
+settlement is within the limits of insurance coverage described above.
+[3] Shareholder derivative actions:
+On or about September 26, 2000, a shareholder 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. An agreement in principle has been reached to resolve all claims
+in this action, subject to execution of definitive documentation, such
+notice to the Company's shareholders (if any) as may be required by the
+District Court, 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 as supplemented by the loss
+mitigation policy described above.
+F-17
+Steven Madden, Ltd. and Subsidiaries
+Notes to Financial Statements
+December 31, 2002 and 2001
+NOTE J - COMMITMENTS, CONTINGENCIES AND OTHER (CONTINUED)
+[3] Shareholder derivative actions: (continued)
+On or about November 28, 2001, a shareholder derivative complaint was
+filed in the United States District Court for the Eastern District of
+New York, captioned Herrera v. Karson, et al. Named as defendants
+therein are the Company and certain of the Company's present and/or
+former directors. An agreement in principle has been reached to resolve
+all claims in this action, subject to execution of definitive
+documentation, such notice to the Company's shareholders (if any) as
+may be required by the District Court, 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 as
+supplemented by the loss mitigation policy described above.
+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. 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
+shareholder class action and derivative cases referred to above. The
+ultimate outcome of this matter cannot presently be determined.
+[4] SEC investigation:
+In March 2001, the Company became aware that the SEC issued a formal
+order of investigation with respect to trading in the Company's
+securities. The SEC is investigating possible securities law
+violations. Certain current and former officers and directors of the
+Company sold shares of the Company's common stock prior to Mr. Madden's
+indictment in June 2000, as previously disclosed on Form 4's filed with
+the SEC. The ultimate effects of this matter, if any, cannot reasonably
+be determined at this time.
+[5] Other actions:
+(a) On or about January 22, 2002, an action was commenced against
+the Company in the United States District Court for the
+District of Oregon, captioned Adidas America, Inc. and Adidas
+Salomon AG v. Steven Madden, Ltd. and Steven Madden Retail,
+Inc. The complaint seeks injunctive relief and unspecified
+monetary damages for trademark infringement, trademark
+dilution, unfair competition and deceptive trade practices
+arising from the Company's use of four stripes as a design
+element on footwear. On or about September 3, 2002, Adidas
+commenced a second action against the Company in the United
+States District Court for the District of Oregon, captioned
+Adidas America, Inc. and Adidas Salomon AG v. Steven Madden,
+Ltd. and Steven Madden Retail, Inc. The second complaint seeks
+the same injunctive relief and unspecified monetary damages
+for various trademark infringement claims arising from the
+Company's use of two stripes as a design element on footwear.
+The Company believes it has substantial defenses to the claims
+asserted in both lawsuits and has filed answers denying the
+allegations of infringement in both cases. The Company is
+seeking to have both cases consolidated before a single judge.
+Discovery is continuing and trial is scheduled to begin in May
+2003. Court ordered non-binding mediation is scheduled for a
+future date. The ultimate outcome of this matter cannot be
+presently determined.
+F-18
+Steven Madden, Ltd. and Subsidiaries
+Notes to Financial Statements
+December 31, 2002 and 2001
+NOTE J - COMMITMENTS, CONTINGENCIES AND OTHER (CONTINUED)
+[5] Other actions: (continued)
+(b) On October 4, 2002, Skechers U.S.A., Inc. and Skechers U.S.A.,
+Inc. II, filed suit against Steven Madden Ltd. and R.S.V.
+Sport, Inc. in the United States District Court for the
+Central District of California. Skechers alleges claims for
+patent infringement, federal unfair competition, federal
+antidilution violation, California unfair competition,
+California antidilution violation, and common law unfair
+competition. Skechers seeks unspecified monetary damages. The
+Company has not yet answered or otherwise responded to the
+complaint, but believes that it has substantial defenses to
+the claims asserted in the lawsuit. The ultimate outcome of
+this matter cannot presently be determined.
+(c) On September 6, 2002, Ron Owen filed an action against Steven
+Madden Retail, Inc., which action is pending in the United
+States District Court for the Northern District of Texas -
+Dallas Division. Plaintiff alleges a cause of action for
+breach of contract and seeks unspecified monetary damages. On
+October 10, 2002, the Company answered the complaint. The
+Company believes that it has substantial defenses to the
+claims asserted in the lawsuit. The ultimate outcome of this
+matter cannot presently be determined.
+In connection with the above litigations, the Company has accrued
+$1,200,000. Management, based on the advice of counsel, believes such
+provision is adequate in the circumstances.
+[6] Employment agreements:
+The Company has an employment agreement with Steve Madden, its former
+CEO and President, to serve as the Company's Creative and Design Chief.
+The employment agreement, as amended, provides for an annual salary of
+$700,000 through June 30, 2011. The agreement also provides for an
+annual performance bonus, an annual option grant at exercise prices
+equal to market on the date of grant and a non-accountable expense
+allowance.
+The Company has employment agreements with other executives (the
+"executives") which expire between January 3, 2003 and December 31,
+2005. These agreements provide for cash bonuses based upon a percentage
+of year to year increases in earnings before interest taxes
+depreciation and amortization, option grants and non-accountable
+expense allowances as defined. Base salary commitments for these
+executives are as follows:
+2003 $ 1,639,000
+2004 1,545,000
+2005 641,000
+-----------
+$ 3,825,000
+===========
+In connection with their employment agreements, two executives received
+an aggregate of 20,000 shares of restricted common stock from the
+Company. The restricted shares vested over one year through July 2002.
+Accordingly, the Company has recorded a charge to operations in the
+amount of $188,000 for the 10,000 shares that vested during the year
+ended December 31, 2002 and 2001.
+[7] Letters of credit:
+At December 31, 2002 and 2001, the Company had open letters of credit
+for the purchase of imported merchandise of approximately $10,066,000
+and $6,252,000, respectively.
+F-19
+Steven Madden, Ltd. and Subsidiaries
+Notes to Financial Statements
+December 31, 2002 and 2001
+[8] Concentrations:
+The Company maintains cash and cash equivalents with various major
+financial institutions which at times are in excess of the amount
+insured.
+During the year ended December 31, 2002, the Company purchased
+approximately 29% of their merchandise from a supplier in Brazil and
+18% and 16% of their merchandise from two suppliers in China,
+respectively. Total inventory purchases for the year ended December 31,
+2002 from Brazil and China were approximately 30% and 54%,
+respectively.
+F-20
+Steven Madden, Ltd. and Subsidiaries
+Notes to Financial Statements
+December 31, 2002 and 2001
+NOTE J - COMMITMENTS, CONTINGENCIES AND OTHER (CONTINUED)
+[8] Concentrations: (continued)
+During the year ended December 31, 2001, the Company purchased
+approximately 28% and 21% of their inventory from a supplier in China
+and Brazil, respectively. Total inventory purchases for the year ended
+December 31, 2001 from Brazil and China were approximately 28% and 53%,
+respectively.
+During the year ended December 31, 2000, the Company purchased
+approximately 50% and 27% of their inventory from suppliers in China
+and Brazil, respectively.
+Sales to two customers accounted for 13% and 10% of net sales for the
+year ended December 31, 2002. These customers represented 17% and 10%
+of accounts receivable at December 31, 2002, respectively.
+Sales to two customers accounted for 13% and 11% of net sales for the
+year ended December 31, 2001. These customers represented 18% and 15%
+of accounts receivable at December 31, 2001, respectively.
+Sales to two customers accounted for 14% and 12% of net sales for the
+year ended December 31, 2000. These customers represented 22% and 21%
+of accounts receivable at December 31, 2000, respectively. One other
+customer represented 12% of accounts receivable at December 31, 2000.
+Sales to such customers are included in the wholesale segment (see Note
+K). Purchases are made primarily in United States dollars.
+[9] Consulting agreement:
+The Company had a consulting agreement with a financial advisory firm
+of which one of the Company's Board members is a managing director. The
+agreement provided for a fee of $150,000 over the one year agreement
+which expired in June 2002. The firm provided financial advisory and
+investment banking services to the Company. The Company recorded a
+charge to operations in the amount of $75,000 in each of the years
+ended December 31, 2002 and 2001 in connection with the agreement.
+[10] Valuation and qualifying accounts:
+The following is a summary of the allowance for doubtful accounts
+related to accounts receivable and the allowance for chargebacks
+related to the amount Due from Factor for the years ended December 31,:
+2002 2001 2000
+----------- ----------- -----------
+Balance at beginning of year $ 1,644,000 $ 1,640,000 $ 1,510,000
+Charged to expense 630,000 219,000 506,000
+Uncollectible accounts written off, net of recoveries (59,000) (215,000) (376,000)
+----------- ----------- -----------
+Balance at end of year $ 2,215,000 $ 1,644,000 $ 1,640,000
+=========== =========== ===========
+F-21
+Steven Madden, Ltd. and Subsidiaries
+Notes to Financial Statements
+December 31, 2002 and 2001
+NOTE J - COMMITMENTS, CONTINGENCIES AND OTHER (CONTINUED)
+[10] Valuation and qualifying accounts: (continued)
+The following is a summary of property and equipment and the related
+accounts of accumulated depreciation and amortization for the years
+ended December 31,:
+2002 2001 2000
+------------ ------------ ------------
+Cost basis
+Balance at beginning of year $ 27,512,000 $ 24,097,000 $ 16,164,000
+Additions 5,072,000 3,415,000 7,933,000
+Write-off of fully depreciated assets (5,077,000)
+------------ ------------ ------------
+Balance at end of year 27,507,000 27,512,000 24,097,000
+------------ ------------ ------------
+Accumulated depreciation and amortization
+Balance at beginning of year 11,805,000 8,497,000 5,050,000
+Depreciation and amortization 3,706,000 3,308,000 3,447,000
+Write-off of fully depreciated assets (5,077,000)
+------------ ------------ ------------
+Balance at end of year 10,434,000 11,805,000 8,497,000
+------------ ------------ ------------
+Property and equipment, net $ 17,073,000 $ 15,707,000 $ 15,600,000
+============ ============ ============
+The following is a summary of cost in excess of fair value of net
+assets acquired and the related accumulated amortization for the years
+ended December 31:
+2002 2001 2000
+------------ ------------ ------------
+Cost basis
+Balance at beginning and end of year $ 2,780,000 $ 2,780,000 $ 2,780,000
+------------ ------------ ------------
+Accumulated amortization
+Balance at beginning of year 714,000 575,000 436,000
+Amortization 0 139,000 139,000
+------------ ------------ ------------
+Balance at end of year 714,000 714,000 575,000
+------------ ------------ ------------
+Cost in excess of fair value of net assets acquired $ 2,066,000 $ 2,066,000 $ 2,205,000
+============ ============ ============
+NOTE K - OPERATING SEGMENT INFORMATION
+The Company's reportable segments are primarily based on methods used to
+distribute its products. The wholesale and retail segments derive revenue from
+sales of women's, men's and girl's footwear. The wholesale segment, through
+sales to department and specialty stores, and the retail segment, through
+operation of its own retail stores, derive revenue from sales of branded
+women's, men's and girl's footwear. In addition, the wholesale segment has a
+licensing program that extends the Steve Madden and Stevies brands to
+accessories and ready-to-wear apparel. The other segment represents activities
+of a subsidiary which earns commissions for serving as a buying agent to
+mass-market merchandisers, shoe chains and other off-price retailers with
+respect to their purchase of private label shoes.
+F-22
+Steven Madden, Ltd. and Subsidiaries
+Notes to Financial Statements
+December 31, 2002 and 2001
+NOTE K - OPERATING SEGMENT INFORMATION (CONTINUED)
+The accounting policies of the segments are the same as those described in the
+summary of significant accounting policies. The Company evaluates performance
+based on profit or loss from operations before other income (expense) and the
+provision for income taxes. The following is information for the Company's
+reportable segments:
+Wholesale Retail Other Consolidated
+------------- ------------- ------------ -------------
+Year ended December 31, 2002:
+Net sales to external customers (a) $ 234,253,000 $ 91,883,000 $ 326,136,000
+Gross profit 77,889,000 48,794,000 126,683,000
+Commissions and licensing fees 1,833,000 $ 4,770,000 6,603,000
+Income from operations 21,664,000 9,000,000 2,548,000 33,212,000
+Depreciation and amortization 739,000 2,966,000 1,000 3,706,000
+Other significant items:
+Deferred compensation 2,228,000 2,228,000
+Deferred rent expense (reversal) (14,000) 243,000 4,000 233,000
+Provision for doubtful accounts 570,000 1,000 571,000
+Segment assets (b) 113,477,000 36,166,000 857,000 150,500,000
+Capital expenditures 1,246,000 3,826,000 5,072,000
+Year ended December 31, 2001:
+Net sales to external customers (a) 163,904,000 79,487,000 243,391,000
+Gross profit 57,858,000 42,015,000 99,873,000
+Commissions and licensing fees 1,711,000 4,200,000 5,911,000
+Income from operations (c) 10,095,000 7,023,000 2,244,000 19,362,000
+Depreciation and amortization 869,000 2,577,000 1,000 3,447,000
+Other significant items:
+Deferred compensation 533,000 533,000
+Deferred rent expense (reversal) (21,000) 249,000 (3,000) 225,000
+Provision for doubtful accounts 219,000 219,000
+Segment assets (b) 90,061,000 30,922,000 879,000 121,862,000
+Capital expenditures 551,000 2,864,000 3,415,000
+Year ended December 31, 2000:
+Net sales to external customers (a) 135,481,000 69,632,000 205,113,000
+Gross profit 50,680,000 38,938,000 89,618,000
+Commissions and licensing fees 1,216,000 3,631,000 4,847,000
+Income from operations 15,996,000 8,001,000 1,635,000 25,632,000
+Depreciation and amortization 1,000,000 2,581,000 5,000 3,586,000
+Other significant items:
+Deferred compensation 382,000 382,000
+Deferred rent expense (reversal) (13,000) 310,000 297,000
+Provision for doubtful accounts 463,000 43,000 506,000
+Segment assets (b) 60,740,000 30,215,000 778,000 91,733,000
+Capital expenditures 1,044,000 6,889,000 7,933,000
+(a) Attributed to the United States, based on the location in which the sale
+originated.
+(b) All long-lived assets, consisting of property and equipment and cost in
+excess of fair value of net assets acquired, are located in the United
+States.
+(c) Loss mitigation coverage expense of $6,950,000 is reflected in the
+wholesale segment.
+F-23
+Steven Madden, Ltd. and Subsidiaries
+Notes to Financial Statements
+December 31, 2002 and 2001
+NOTE L - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
+The following is a summary of the quarterly results of operations for the years
+ended December 31, 2002 and 2001 (000's omitted):
+March 31 June 30 September 30 December 31
+------------ ------------ ------------ ------------
+2002:
+Net sales $ 66,611 $ 88,111 $ 93,018 $ 78,396
+Cost of sales 40,070 55,127 56,763 47,493
+Gross profit 26,541 32,984 36,255 30,903
+Commissions and licensing fee income 1,244 1,574 1,819 1,966
+Net income 4,093 5,262 6,268 4,218
+Net income per share:
+Basic 0.33 0.42 0.49 0.33
+Diluted 0.30 0.38 0.46 0.31
+2001:
+Net sales 53,395 59,563 70,245 60,188
+Cost of sales 31,314 34,245 40,517 37,442
+Gross profit 22,081 25,318 29,728 22,746
+Commissions and licensing fee income 1,134 1,235 1,637 1,905
+Net income (loss) 3,650 4,423 5,367 (1,324)
+Net income (loss) per share:
+Basic 0.33 0.38 0.46 (0.11)
+Diluted 0.29 0.34 0.41 (0.11)
+F-24
+(b) Reports on Form 8-K
+None.
+(c) Exhibits.
+EXHIBITS
+3.01* Certificate of Incorporation of the Company.
+3.02 *Amended & Restated By-Laws of the Company.
+4.01* Specimen Certificate for shares of Common Stock.
+4.02* Rights Agreement between the Company and American Stock Transfer
+and Trust Company.
+10.07* Employment Agreement of Arvind Dharia.
+10.08* Employment Agreement of Richard Olicker.
+10.09* Second Amended Employment Agreement between the Company and
+Steven Madden.
+10.10* Employment Agreement of Charles Koppelman.
+10.11* Employment Agreement of Jamieson Karson.
+10.12* Amendment No. 1 to Employment Agreement of Arvind Dharia.
+10.13* Employment Agreement between Adesso-Madden, Inc. and Gerald
+Mongeluzo.
+10.14* Employment Agreement between Steven Madden Retail, Inc. and Mark
+Jankowski.
+10.15* Amendment No. 1 to Employment Agreement of Richard Olicker.
+10.16* Amendment No. 2 to Employment Agreement of Arvind Dharia.
+21.01* Subsidiaries of Registrant.
+23.01 Consent of Eisner LLP.
+* Previously filed with the Securities and Exchange Commission.
+50
+SIGNATURE
+Pursuant to the requirements of Section 13 or 15(d) of the Securities
+Exchange Act of 1934, the registrant has duly caused this report to be signed on
+its behalf by the undersigned, thereunto duly authorized.
+Dated: New York, New York
+March 27, 2003
+STEVEN MADDEN, LTD.
+By: /s/ JAMIESON KARSON
+-----------------------
+Jamieson Karson
+Chief Executive Officer
+Pursuant to the requirements of the Securities Exchange Act of 1934, this
+report has been signed below by the following persons on behalf of the
+registrant in the capacities and on the dates indicated.
+Signature Title Date
+------------------------------ ------------------------------------------------------ --------------
+/s/ CHARLES KOPPELMAN Executive Chairman of the Board March 27, 2003
+------------------------------
+Charles Koppelman
+/s/ JAMIESON KARSON Chief Executive Officer and Vice Chairman of the Board March 27, 2003
+------------------------------
+Jamieson Karson
+/s/ ARVIND DHARIA Chief Financial Officer and Director March 27, 2003
+------------------------------
+Arvind Dharia
+/s/ GERALD MONGELUZO Director March 27, 2003
+------------------------------
+Gerald Mongeluzo
+/s/ JOHN L. MADDEN Director March 27, 2003
+------------------------------
+John L. Madden
+/s/ PETER MIGLIORINI Director March 27, 2003
+------------------------------
+Peter Migliorini
+/s/ HEYWOOD WILANSKY Director March 27, 2003
+------------------------------
+Heywood Wilansky
+/s/ MARC COOPER Director March 27, 2003
+------------------------------
+Marc Cooper
+51
+/s/ AWADHESH SINHA Director March 27, 2003
+------------------------------
+Awadhesh Sinha
+/s/ ROGER GLADSTONE Director March 27, 2003
+------------------------------
+Roger Gladstone
+52
+CERTIFICATION PURSUANT TO RULE 13A-14 OR 15D-14 OF THE SECURITIES
+EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE
+SARBANES-OXLEY ACT OF 2002
+I, Jamieson Karson, certify that:
+1. I have reviewed this annual report on Form 10-K of Steven Madden,
+Ltd.;
+2. Based on my knowledge, this annual report does not contain any untrue
+statement of a material fact or omit to state a material fact necessary to make
+the statements made, in light of the circumstances under which such statements
+were made, not misleading with respect to the period covered by this annual
+report;
+3. Based on my knowledge, the financial statements, and other financial
+information included in this annual report, fairly present in all material
+respects the financial condition, results of operations and cash flows of the
+registrant as of, and for, the periods presented in this annual report;
+4. The registrant's other certifying officer and I are responsible for
+establishing and maintaining disclosure controls and procedures (as defined in
+Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
+a. designed such disclosure controls and procedures to ensure that
+material information relating to the registrant, including its
+consolidated subsidiaries, is made known to us by others within
+those entities, particularly during the period in which this
+annual report is being prepared;
+b. evaluated the effectiveness of the registrant's disclosure
+controls and procedures as of a date within 90 days prior to the
+filing date of this annual report (the "Evaluation Date"); and
+c. presented in this annual report our conclusions about the
+effectiveness of the disclosure controls and procedures based on
+our evaluation as of the Evaluation Date;
+5. The registrant's other certifying officer and I have disclosed, based
+on our most recent evaluation, to the registrant's auditors and the audit
+committee of registrant's board of directors (or persons performing the
+equivalent function):
+a. all significant deficiencies in the design or operation of
+internal controls which could adversely affect the registrant's
+ability to record, process, summarize and report financial data
+and have identified for the registrant's auditors any material
+weaknesses in internal controls; and
+b. any fraud, whether or not material, that involves management or
+other employees who have a significant role in the registrant's
+internal controls; and
+6. The registrant's other certifying officer and I have indicated in this
+annual report whether or not there were significant changes in internal controls
+or in other factors that could significantly affect internal controls subsequent
+to the date of our most recent evaluation, including any corrective actions with
+regard to significant deficiencies and material weaknesses.
+Dated: March 27, 2003
+By: /s/ JAMIESON KARSON
+-----------------------
+Jamieson Karson
+Chief Executive Officer
+53
+CERTIFICATION PURSUANT TO RULE 13A-14 OR 15D-14 OF THE SECURITIES
+EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE
+SARBANES-OXLEY ACT OF 2002
+I, Arvind Dharia, certify that:
+1. I have reviewed this annual report on Form 10-K of Steven Madden,
+Ltd.;
+2. Based on my knowledge, this annual report does not contain any untrue
+statement of a material fact or omit to state a material fact necessary to make
+the statements made, in light of the circumstances under which such statements
+were made, not misleading with respect to the period covered by this annual
+report;
+3. Based on my knowledge, the financial statements, and other financial
+information included in this annual report, fairly present in all material
+respects the financial condition, results of operations and cash flows of the
+registrant as of, and for, the periods presented in this annual report;
+4. The registrant's other certifying officer and I are responsible for
+establishing and maintaining disclosure controls and procedures (as defined in
+Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
+a. designed such disclosure controls and procedures to ensure that
+material information relating to the registrant, including its
+consolidated subsidiaries, is made known to us by others within
+those entities, particularly during the period in which this
+annual report is being prepared;
+b. evaluated the effectiveness of the registrant's disclosure
+controls and procedures as of a date within 90 days prior to the
+filing date of this annual report (the "Evaluation Date"); and
+c. presented in this annual report our conclusions about the
+effectiveness of the disclosure controls and procedures based on
+our evaluation as of the Evaluation Date;
+5. The registrant's other certifying officer and I have disclosed, based
+on our most recent evaluation, to the registrant's auditors and the audit
+committee of registrant's board of directors (or persons performing the
+equivalent function):
+a. all significant deficiencies in the design or operation of
+internal controls which could adversely affect the registrant's
+ability to record, process, summarize and report financial data
+and have identified for the registrant's auditors any material
+weaknesses in internal controls; and
+b. any fraud, whether or not material, that involves management or
+other employees who have a significant role in the registrant's
+internal controls; and
+6. The registrant's other certifying officer and I have indicated in this
+annual report whether or not there were significant changes in internal controls
+or in other factors that could significantly affect internal controls subsequent
+to the date of our most recent evaluation, including any corrective actions with
+regard to significant deficiencies and material weaknesses.
+Dated: March 27, 2003
+By: /s/ ARVIND DHARIA
+-----------------------
+Arvind Dharia
+Chief Financial Officer
+54
+STEVEN MADDEN, LTD.
+FORM 10-K
+EXHIBIT INDEX
+Exhibit No Description
+---------- -----------
+99.1 Certification of Chief Executive Officer pursuant to 18
+U.S.C. Section 1350, as adopted pursuant to Section 906
+of the Sarbanes-Oxley Act of 2002
+99.2 Certification of Chief Financial Officer pursuant to 18
+U.S.C. Section 1350, as adopted pursuant to Section 906
+of the Sarbanes-Oxley Act of 2002
+55
\ No newline at end of file
diff --git a/raw/filings/0000913241/2002/0001019056-03-000273/filing_metadata.csv b/raw/filings/0000913241/2002/0001019056-03-000273/filing_metadata.csv
new file mode 100644
index 0000000000000000000000000000000000000000..ac3daf4ddc808a2b5994c9b8a06119633be75c01
--- /dev/null
+++ b/raw/filings/0000913241/2002/0001019056-03-000273/filing_metadata.csv
@@ -0,0 +1,2 @@
+cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing
+0000913241,SHOO,"STEVEN MADDEN, LTD.",10-K,2003-03-28,2002-12-31,2003-03-28T17:59:40.000Z,0001019056-03-000273,smadden_10k02.txt,FORM 10-K,214473,0,0,https://www.sec.gov/Archives/edgar/data/913241/000101905603000273/smadden_10k02.txt,https://www.sec.gov/Archives/edgar/data/913241/000101905603000273/,2002,2002,1
diff --git a/raw/filings/0000913241/2002/0001019056-03-000273/item1.txt b/raw/filings/0000913241/2002/0001019056-03-000273/item1.txt
new file mode 100644
index 0000000000000000000000000000000000000000..9283f16147a15b28bb0776a4f11ce3f47677b508
--- /dev/null
+++ b/raw/filings/0000913241/2002/0001019056-03-000273/item1.txt
@@ -0,0 +1,442 @@
+ITEM 1 BUSINESS
+Steven Madden, Ltd. (together with its subsidiaries, the "Company")
+designs, sources, markets and sells fashion-forward footwear brands for women,
+men and children. The Company distributes products through its retail stores,
+its e-commerce web site, catalogs and department and specialty store locations
+in 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 five (5)
+brands: Steve Madden(R), David Aaron(R), l.e.i.(R), Stevies(R) and the Steve
+Madden Mens brand. Steven Madden Retail, Inc., the Company's wholly-owned retail
+subsidiary, operates Steve Madden and David Aaron retail stores as well as the
+Company's outlet stores and e-commerce web site. The Company's wholly-owned
+private label subsidiary, Adesso-Madden, Inc., designs and sources footwear
+products under private labels for many of the country's largest mass
+merchandisers. The Company also licenses its Steve Madden(R) and Stevies(R)
+trademarks for several accessory and apparel categories.
+Steven Madden, Ltd., was incorporated as a New York corporation on July 9,
+1990 and reincorporated under the same name in Delaware in November 1998. The
+Company 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.
+Wholesale Divisions
+Madden Women's Wholesale
+The Steve Madden(R) Women's Wholesale Division ("Madden Women's
+Wholesale") sources, sells and markets the Company's Steve Madden(R) brand to
+major department stores, better specialty stores, and shoe stores throughout the
+United States and Canada. During the last few years the Steve Madden(R) product
+line has become a leading footwear brand in the fashion conscious junior
+marketplace. To serve its customers (primarily women ages 16 to 25), Madden
+Women's Wholesale creates and markets fashion forward footwear designed to
+appeal to customers seeking exciting, new footwear designs at reasonable prices.
+As the Company's largest division, Madden Women's Wholesale accounted for
+$108,577,000 of net sales in 2002, or approximately 33% of the Company's total
+sales. Many of Madden Women's Wholesale's newly created styles are test marketed
+at the Company's retail stores. Within a few days, the Company can determine if
+a test product appeals to customers. This enables the Company to use its
+flexible sourcing model to rapidly respond to changing preferences which the
+Company believes is essential for success in the fashion footwear marketplace.
+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 known for
+jeanswear in the junior marketplace and nationally through department and
+specialty stores. The Company's l.e.i.(R)footwear products are targeted to
+attract girls and young women ages 6 to 20 years old, a majority of which are
+younger than the typical Steve Madden(R)brand customer. The l.e.i. Wholesale
+Division generated net sales of $55,664,000 for the year ended December 31,
+2002, or approximately 17% of the Company's total revenues.
+1
+Madden Men's Wholesale
+The Steve Madden Men's Wholesale Division ("Madden Men's Wholesale")
+markets and sells a full collection of directional young men's shoes to major
+department stores, better specialty stores and independent shoe stores
+throughout the United States. Price points range from $70 to $100, targeted at
+men ages 18 to 44 years old.
+The Madden Men's Wholesale accounted for $45,153,000 of net sales in 2002,
+or approximately 14% of the Company's total sales. Steve Madden Men's, which is
+primarily sourced in China, takes open stock inventory positions in a variety of
+patterns and colors to serve the replenishment programs of its wholesale
+customers.
+Diva Acquisition Corp. - The David Aaron(R) Wholesale Division
+Diva Acquisition Corp. ("Diva") designs and markets fashion footwear to
+women under the "David Aaron(R)" trademark through major department stores and
+better footwear specialty stores and two (2) Company owned retail shoe stores
+located in New York, New York and in Paramus, New Jersey. Priced a tier above
+the Steve Madden(R) brand, Diva's products are designed to appeal principally to
+fashion conscious women, ages 26 to 45, who shop at department stores and
+footwear boutiques. The Company recorded wholesale sales from the David Aaron(R)
+brand of $11,194,000 for the year ended December 31, 2002, or approximately 3%
+of the Company's total net sales. Revenues from the sale of David Aaron footwear
+increased by approximately 50% compared to the preceding year due to the
+repositioning and reorganization of the David Aaron brand.
+Stevies Inc. - Wholesale Division
+The Company's Stevies Wholesale Division ("Stevies Wholesale") generated
+net sales of $13,664,000 for the year ended December 31, 2002, or approximately
+4% of the Company's total net sales. Stevies(R) now sells in store groups such
+as Nordstrom, Federated Department Stores, May Department Stores, Belk,
+Dillard's, Limited Too, as well as independent children's stores throughout the
+country.
+Steven Madden Retail, Inc. - Retail Division
+As of December 31, 2002, the Company owned and operated seventy-two (72)
+retail shoe stores under the Steve Madden(R) name, two (2) under the David
+Aaron(R) name, five (5) outlet stores and one (1) Internet store (through the
+www.stevemadden.com web site). In 2002, the Company elected to consolidate its
+three websites into one for better productivity. In 2002, the Company opened ten
+(10) 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,
+Maryland, Massachusetts, Michigan, Minnesota, Nevada, New Jersey, New York,
+Ohio, Pennsylvania, Puerto Rico, Rhode Island, Texas, Virginia and Wisconsin.
+The retail stores have been successful for the Company, generating annual sales
+in excess of $716 per square foot. Sales are primarily from the sale of the
+Company's Steve Madden(R) product line. Same store sales increased 6% in 2002
+over 2001 sales and total sales for the retail division were $92,000,000
+compared to $79,000,000 for 2001. Sales from the retail division for the year
+ended December 31, 2002 were approximately 28% of the Company's net sales.
+The Company believes that the Retail Division will continue to enhance
+overall sales and profits while building equity in the Steve Madden brand. It is
+for these reasons that the Company intends to add approximately eight to ten
+(8-10) new retail stores during the 2003 calendar year. Additionally, the
+expansion of the Retail Division enables the Company to test and react to new
+products and classifications which strengthens the product development efforts
+of the Steve Madden wholesale division.
+The Adesso-Madden, Inc. - Private Label Division
+In September 1995, the Company incorporated Adesso-Madden, Inc. as a
+wholly owned subsidiary ("A-M"). A-M was formed to serve as a buying agent to
+mass market merchandisers, shoe store chains and other off-price retailers in
+connection with their purchase of private label shoes. As a buying agent, A-M
+arranges for shoe manufacturers in Asia and South America to manufacture private
+label shoes to the specifications of its clients. The Company believes that by
+operating in the private label, mass merchandising market, the Company is able
+to maximize additional non-branded sales opportunities. This leverages the
+Company's overall sourcing, design and distribution capabilities. Currently,
+this division serves as a buying agent for the procurement of women's, men's and
+2
+children's footwear for large retailers including Sears, Payless, Wal-Mart and
+Target. A-M receives commissions in connection with the purchase of private
+label shoes by its clients. A-M also sources and sells footwear under the Soho
+Cobbler(R) brand name. The private label division generated commission income of
+$4,770,000 for the year ended December 31, 2002.
+Licensing
+As of December 31, 2002, the Company licensed the Steve Madden trademark
+for use in connection with the manufacturing, marketing and sale of outerwear
+(including leather outerwear), belts, handbags, sunglasses, eyewear and hosiery.
+Each license agreement requires the licensee to pay to the Company a royalty
+based on net sales, a minimum royalty in the event that net sales fail to reach
+specified targets and a percentage of sales for advertising of the Steve
+Madden(R) brand.
+During 2002, the Company licensed the Stevies trademark for use in
+connection with manufacturing, marketing and sale of sportswear, outerwear,
+belts, handbags, sunglasses and hosiery, fashion accessories.
+Design
+The Company has established a reputation for its creative designs, popular
+styles and quality products at accessible price points. The Company believes
+that its future success will depend in substantial part on its ability to
+continue to anticipate and react to changing consumer demands in a timely
+manner. To meet this objective, the Company has developed a unique design
+process that allows it to recognize and adapt quickly to changing consumer
+demands. The Company's design team works together to create designs which they
+believe fit the Company's image, reflect current or approaching trends and can
+be manufactured in a timely and cost-effective manner. Once the initial design
+is complete, a prototype is developed, which is reviewed and refined prior to
+the commencement of limited production. Most new Steve Madden designs are then
+tested in the Steve Madden(R) retail stores. Designs that prove popular are then
+scheduled for mass production overseas and wholesale and retail distribution
+nationwide. The Company believes that its unique design and testing process and
+flexible sourcing model is a significant competitive advantage allowing the
+Company to cut mass production lead times and avoid the costly production and
+distribution of unpopular designs.
+Product Sourcing and Distribution
+The Company sources each of its product lines separately based on the
+individual design, styling and quality specifications of such products. The
+Company does not own or operate any mass manufacturing facilities and sources
+its branded products through independently owned manufacturers in Brazil, China,
+Italy, Mexico, Spain, Taiwan and the United States. The Company has established
+relationships with a number of manufacturers in each country. The Company
+believes that this sourcing of footwear products minimizes its investment and
+inventory risk, and enables efficient and timely introduction of new product
+designs. Although the Company has not entered into any long-term manufacturing
+or supply contracts, the Company believes that a sufficient number of
+alternative sources exist for the manufacture of its products. The principal
+materials used in the Company's footwear are available from any number of
+sources, both within the United States and in foreign countries.
+The Company's design and distribution processes are intended to be
+flexible, allowing the Company to respond to and accommodate changing consumer
+demand. The Company's production staff tracks warehouse inventory on a daily
+basis, monitors sell-through data and incorporates input on product demand from
+wholesale customers. The Company can use product feedback to adjust production
+or manufacture new products in as little as five weeks. Constant inventory
+tracking allows the Company to manage inventory on a continuous flow basis with
+the goal of optimizing inventory turns.
+The Company distributes its products from two (2) third party distribution
+warehouse centers located in California and New Jersey and its own distribution
+facility located in Florida. The Company also distributes its Internet shipments
+from a third party fulfillment center located in Michigan. By utilizing
+distribution facilities that specialize in distributing products to certain
+customers (wholesale accounts, Steve Madden retail stores and Internet
+fulfillment), the Company believes that its customers are better served.
+3
+Customers
+The Company's customers purchasing shoes consist principally of department
+stores and specialty stores, including shoe boutiques. Presently, the Company
+sells approximately sixty-three percent (63%) of its products at wholesale to
+department stores, including Federated Department Stores (Bloomingdale's, Bon
+Marche, Burdines, Macy's and Rich's), May Department Stores (Famous Barr,
+Filene's, Foley's, Hecht's, Kaufmann's, Meier & Frank, Lord and Taylor and
+Robinsons May), Dillard's, Marshall Field's and Nordstrom; and approximately
+thirty-four percent (34%) to specialty stores, including Journeys, Limited Too
+and Mandees; and catalog retailers, including Victoria's Secret and Fingerhut.
+For the year ended December 31, 2002, May Department Stores, Federated
+Department Stores and Nordstrom accounted for approximately twenty-two percent
+(22%), seventeen percent (17%) and ten percent (10%) of the Company's wholesale
+sales, respectively.
+Distribution Channels
+The Company sells its products principally through its Company-owned
+retail stores, better department stores and specialty shoe stores in the United
+States and abroad. For the year 2002, retail stores and wholesale sales
+accounted for approximately twenty-eight percent (28%) and seventy-two percent
+(72%) of total sales, respectively. The following paragraphs describe each of
+these distribution channels:
+Steve Madden and David Aaron Retail Stores
+As of December 31, 2002, the Company operated seventy-three (73)
+Company-owned retail stores (including one Internet store) under the Steve
+Madden(R) name and two (2) under the David Aaron(R) name. The Company believes
+that its retail stores will continue to enhance overall sales, profitability,
+and its ability to react to changing consumer trends. The stores are used as a
+marketing tool which allows the Company to strengthen brand recognition and to
+showcase selected items from its full line of branded and licensed products.
+Furthermore, the retail stores provide the Company with a venue to test and
+introduce new products and merchandising strategies. Specifically, the Company
+often tests new designs at its Steve Madden(R) retail stores before scheduling
+them for mass production and wholesale distribution. In addition to these test
+marketing benefits, the Company has been able to leverage sales information
+gathered at Steve Madden(R) retail stores to assist its wholesale accounts in
+order placement and inventory management.
+A typical Steve Madden(R) store is approximately 1,400 to 1,600 square
+feet and is located in malls and street locations which attract the highest
+concentration of the Company's core demographic -- style-conscious young women
+ages 16 to 25 years old. The David Aaron(R) store has a more sophisticated
+design and format styled to appeal to its more mature target audience. In
+addition to carefully analyzing mall demographics, the Company also sets
+profitability guidelines for each potential store site. Specifically, the
+Company targets sites at which the demographics fit the consumer profile, the
+positioning of the site is well trafficked and the projected fixed annual rent
+expense does not exceed a specified percentage of sales over the life of the
+lease. By setting these standards, the Company believes that each store will
+contribute to the Company's overall profits both in the near- and longer-terms.
+Outlet Stores
+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, David
+Aaron, Stevies and l.e.i.(R) footwear, at lower prices than prices typically
+charged by other "full price" retailers.
+Department Stores
+The Company currently sells to over 2,750 locations of twenty-two (22)
+better department stores throughout the United States and Canada. The Company's
+top accounts include Federated Department Stores (Macy's, Bloomingdale's, Bon
+Marche, Burdine's and Rich's), May Department Stores (Filene's, Hecht's, Famous
+Barr, Foley's, Kaufmann's, Meier & Frank, Lord and Taylor and Robinsons May),
+Nordstrom, Dillard's and Marshall Field's.
+4
+Department store accounts are offered merchandising support which includes
+in-store fixtures and signage, supervision of displays and merchandising of the
+Company's various product lines. An important development in the Company's
+wholesale merchandising effort is the creation of in-store concept shops, where
+a broader collection of the Company's branded products are showcased. These
+in-store concept shops create an environment that is consistent with the
+Company's image and enable the retailer to display and stock a greater volume of
+the Company's products per square foot of retail space. In addition, these
+in-store concept shops encourage longer term commitment by the retailer to the
+Company's products and enhance consumer brand awareness.
+In addition to merchandising support, the Company's customer service
+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 top specialty store accounts include
+Journeys, Limited Too and Mandees. The Company offers its specialty store
+accounts the same merchandising, sell-through and inventory tracking support
+offered to its department store accounts. Sales of the Company's products are
+also made through various catalogs, such as Victoria's Secret.
+Internet Sales
+The Company operates one (1) Internet web site: www.stevemadden.com.
+Customers can purchase numerous styles of the Company's Steve Madden and Stevies
+footwear, accessory and clothing products. Sales derived from the Company's
+Internet store decreased 2% to $4,800,000 in 2002 from $4,900,000 in 2001.
+Distribution Agreements
+In June 2002, the Company and Dabsan International, S.A. ("Dabsan")
+entered into a written 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 minimum amounts of Steve Madden products.
+In February 2003, the Company and F.E.E.T. sas ("FEET") entered into a
+written 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 minimum amounts of Steve Madden products.
+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.
+5
+Marketing and Sales
+Prior to 1997, the Company's marketing plans relied heavily on its few
+Steve Madden(R) retail store locations and word-of-mouth referrals. In 1998, the
+Company continued to focus on creating a more integrated brand building program
+to establish Steve Madden as the leading designer of fashion footwear for
+style-conscious young women. As a result, the Company developed a national
+advertising campaign for lifestyle and fashion magazines which was also used in
+regional marketing programs such as radio advertisements, television
+commercials, outdoor media, college event sponsorship and live online chat
+forums. The Company also continues to promote its web site (www.stevemadden.com)
+where consumers can purchase Steve Madden(R), Stevies and Steve Madden Mens
+products and interact with both the Company and other customers.
+The Company commenced an aggressive marketing campaign for the Stevies
+brand with separate marketing, advertising, promotional events and in-store
+displays targeting the new Stevies customer. As for Steve Madden Mens, the
+Company supported the brand's roll-out with strategic marketing and advertising
+initiatives.
+In order to service its wholesale accounts, the Company retains a sales
+force of sixteen independent sales representatives. These sales representatives
+work on a commission basis and are responsible for placing the Company's
+products with its principal customers, including better department and specialty
+stores. The sales representatives are supported by the Company's senior
+executives, a staff of nine account executives, three merchandise coordinators
+and twenty-six customer service representatives who continually cultivate
+relationships with wholesale customers. This staff assists accounts in
+merchandising and assessing customer preferences and inventory requirements,
+which ultimately serves to increase sales and profitability.
+Management Information Systems (MIS) Operations
+Sophisticated information systems are essential to the Company's ability
+to maintain its competitive position and to support continued growth. The
+Company operates on a dual AS/400 system which provides system support for all
+aspects of its business including manufacturing purchase orders; customer
+purchase orders; order allocations; invoicing; accounts receivable management;
+real time inventory management; quick response replenishment; point-of-sale
+support; and financial and management reporting functions. The Company has a
+PKMS bar coded warehousing system which is integrated with the wholesale system
+in order to provide accurate inventory positions and quick response size
+replenishment for its customers. In addition, the Company has installed an EDI
+system which provides a computer link between the Company and certain wholesale
+customers that enables both the customer and the Company to monitor purchases,
+shipments and invoicing. The EDI system also improves the Company's ability to
+respond to customer inventory requirements on a weekly basis.
+Receivables Financing; Line of Credit
+Under the terms of a factoring agreement with Capital Factors, Inc., the
+Company is permitted to draw down 80% of its invoiced receivables at an interest
+rate of two points below the Prime Rate (as defined in such agreement). The
+agreement provides that Capital Factors is not required to purchase all the
+Company's receivables and requires the Company to pay an unused line fee of .25%
+of the average daily unused portion of the maximum amount of the credit line. On
+September 1, 1998, the Company and Capital Factors amended its Factoring
+Agreement to, among other things, provide the Company with a credit line of up
+to $15,000,000, subject to certain limitations. The Company has not recently
+borrowed funds under its credit line with Capital Factors. The agreement with
+Capital Factors was renewed 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),
+6
+SOHO COBBLER (Int'l. Cl. 9 for eyewear; and Int'l Cl. 25 for clothing and
+footwear), and SHOE BIZ By STEVE MADDEN (Int'l Cl. 25 for clothing and footwear;
+and Int'l Cl. 35 for retail store services). Additionally, the Company has
+several pending trademark and service mark applications 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 M. (Int'l Class 25 for clothing and footwear); and,
+STEVEN (Int'l Cl. 25 for clothing and 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, Brazil, Canada, Chile, China, Colombia, Hong Kong,
+Israel, Italy, Japan, Korea, Mexico, Panama, Saudi Arabia, South Africa, Taiwan,
+the 15 cooperating countries of Europe and the Benelux countries and has pending
+applications for registration of the STEVE MADDEN and STEVE MADDEN plus Design
+trademarks and service marks in Bahrain, Kuwait, Lebanon, Malaysia, Oman, Peru,
+Qatar, Turkey, the United Arab Emirates and Venezuela. There can be no
+assurance, however, that the Company will be able to effectively obtain rights
+to the STEVE MADDEN mark throughout all of the countries of the world. Moreover,
+no assurance can be given that others will not assert rights in, or ownership
+of, trademarks and other proprietary rights of the Company or that the Company
+will be able to successfully resolve such conflicts. The failure of the Company
+to protect such rights from unlawful and improper appropriation may have a
+material adverse effect on the Company's business and financial condition.
+Additionally, the Company, through its Diva Acquisition Corp. subsidiary,
+owns registrations for the DAVID AARON trademark and service mark in various
+International Classes in the United States (Int'l Cl. 25 for clothing and
+footwear; Int'l Cl. 18 for leather goods, such as handbags and wallets; and
+Int'l Cl. 35 for retail store services), Australia, Canada, Hong Kong, Israel,
+Japan, South Africa and the 15 cooperating countries in Europe and for its D.
+AARON trademark in Spain. The Company further has a pending application for
+registration of the DAVID AARON trademark and service mark in Panama. Also, the
+Company has three pending applications for registration of 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 Hong
+Kong, Israel, Mexico, Taiwan and the 15 cooperating countries in Europe.
+Additionally Stevies, Inc. has several pending trademark and service mark
+applications for registration of the STEVIES and STEVIES plus Design marks in
+various International Classes in the United States (Int'l Cl. 25 for clothing
+and footwear; Int'l Cl. 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 in Argentina,
+Bahrain, Brazil, Canada, China, Colombia, Indonesia, Japan, Korea, Kuwait,
+Lebanon, Malaysia, Mexico, Oman, Panama, Peru, Qatar, Saudi Arabia, South
+Africa, Thailand, Taiwan, 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
+At March 10, 2003, the Company employed approximately 1081 employees, of
+whom approximately 482 work on a full-time basis and approximately 599 work on a
+part-time basis. The management of the Company considers relations with its
+employees to be good.
+7
\ No newline at end of file
diff --git a/raw/filings/0000913241/2002/0001019056-03-000273/item13.txt b/raw/filings/0000913241/2002/0001019056-03-000273/item13.txt
new file mode 100644
index 0000000000000000000000000000000000000000..d2e3d76559dd3ffcb986fb1135efb04484f339e3
--- /dev/null
+++ b/raw/filings/0000913241/2002/0001019056-03-000273/item13.txt
@@ -0,0 +1,4 @@
+ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
+Incorporated herein by reference from the Company's definitive proxy
+statement to be filed pursuant to Regulation 14A under the Securities Exchange
+Act of 1934.
\ No newline at end of file
diff --git a/raw/filings/0000913241/2002/0001019056-03-000273/item9a.txt b/raw/filings/0000913241/2002/0001019056-03-000273/item9a.txt
new file mode 100644
index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391
diff --git a/raw/filings/0000913241/2002/0001019056-03-000273/rp_note.txt b/raw/filings/0000913241/2002/0001019056-03-000273/rp_note.txt
new file mode 100644
index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391
diff --git a/raw/filings/0000913241/2002/0001019056-03-000273/rpt_disclosure.txt b/raw/filings/0000913241/2002/0001019056-03-000273/rpt_disclosure.txt
new file mode 100644
index 0000000000000000000000000000000000000000..bde598d557d841760619910e2317be298421578a
--- /dev/null
+++ b/raw/filings/0000913241/2002/0001019056-03-000273/rpt_disclosure.txt
@@ -0,0 +1,8 @@
+Certain Relationships and Related Transactions
+In July 2001, the Company entered into a consulting agreement with Peter J.
+Solomon & Company, a financial advisory firm of which Marc Cooper, one of the
+Company's directors, is a managing director. Under this agreement, the firm
+provided financial advisory and investment banking services to the Company.
+Pursuant to this agreement, the Company paid fees to Peter J. Solomon & Company
+in the amount of $75,000 during 2001 and $150,000 during 2002.
+-16-
\ No newline at end of file
diff --git a/raw/filings/0000913241/2006/0001019056-07-000248/filing.txt b/raw/filings/0000913241/2006/0001019056-07-000248/filing.txt
new file mode 100644
index 0000000000000000000000000000000000000000..f5ec00f793ea36081fdfe73f9b60d4cab631c95e
--- /dev/null
+++ b/raw/filings/0000913241/2006/0001019056-07-000248/filing.txt
@@ -0,0 +1,3642 @@
+10-K
+1
+smadden_k2006.txt
+FORM 10-K
+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, 2006 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:
+Title of Each Class Name of Each Exchange on Which Registered
+------------------- -----------------------------------------
+Common Stock, par value $.000067 The NASDAQ Stock Market LLC
+per share
+Preferred Stock Purchase Rights The NASDAQ Stock Market LLC
+Securities Registered Pursuant to Section 12(g) of the Act: None
+Indicate by check mark if the registrant is a well-known seasoned issuer,
+as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
+Indicate by check mark if the registrant is not required to file reports
+pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
+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 a large accelerated filer,
+an accelerated filer, or a non-accelerated filer. See definition of "accelerated
+filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
+(Check one):
+Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]
+Indicate by check mark whether the registrant is a shell company (as
+defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
+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, 2006, the last business day of the registrant's most recently completed
+second fiscal quarter, was approximately $611,924,793 (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 5, 2007 was 21,108,748 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 TO BE HELD ON OR ABOUT MAY 25, 2007.
+TABLE OF CONTENTS
+PART I
+ITEM 1 BUSINESS............................................................1
+ITEM 1A RISK FACTORS.......................................................10
+ITEM 1B UNRSESOLVED STAFF COMMENTS.........................................14
+ITEM 2 PROPERTIES.........................................................14
+ITEM 3 LEGAL PROCEEDINGS..................................................15
+ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................16
+PART II
+ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
+MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES ...............16
+ITEM 6 SELECTED FINANCIAL DATA............................................17
+ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
+AND RESULTS OF OPERATIONS........................................18
+ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.........26
+ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................27
+ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
+AND FINANCIAL DISCLOSURE.........................................27
+ITEM 9A CONTROLS AND PROCEDURES............................................27
+ITEM 9B OTHER INFORMATION..................................................29
+PART III
+ITEM 10 DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.............29
+ITEM 11 EXECUTIVE COMPENSATION.............................................29
+ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
+AND RELATED STOCKHOLDER MATTERS..................................29
+ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
+INDEPENDENCE.....................................................29
+ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES.............................29
+PART IV
+ITEM 15 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.........................30
+PART I
+ITEM 1 BUSINESS
+Steven Madden, Ltd. (together with its subsidiaries, the "Company")
+designs, sources, markets and retails fashion-forward footwear for women, men
+and children. In addition, the Company designs, sources, markets and retails
+name brand and private label fashion handbags and accessories through its Daniel
+M. Friedman Division. 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, Central and South America, Australia and Indonesia. The Company's
+product line includes a broad range of updated styles which are designed to
+establish or capitalize on market trends, complemented by core products. The
+Company has established a reputation for its creative designs, popular styles
+and quality products at accessible price points.
+The Company's business is comprised of three (3) distinct segments
+(wholesale, retail and first cost divisions). The Wholesale Division includes
+six (6) core brands: Steve Madden(R), Steve Madden Mens, Candie's(R),
+SMNY/Madden Girl, Steven(R) and Stevies(R). In addition, the Daniel M. Friedman
+Wholesale Division, through license agreements, includes the Ellen Tracy, Betsey
+Johnson and Tracy Reese brands. Steven Madden Retail, Inc., the Company's
+wholly-owned retail subsidiary, operates Steve Madden(R) and Steven(R) retail
+stores as well as the Company's e-commerce website. The Company's wholly-owned
+subsidiary, Adesso-Madden, Inc., acts as a buying agent for footwear products
+under private labels for many of the country's large mass merchandisers. The
+Company also licenses its Steve Madden(R) and Steven(R) trademarks for several
+accessory and apparel categories.
+Steven Madden, Ltd. was incorporated as a New York corporation on July
+9, 1990 and reincorporated under the same name in Delaware in November 1998. The
+Company completed its initial public offering in December 1993 and its shares of
+Common Stock currently trade on The NASDAQ Global 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. The Company makes
+available, free of charge, on its website its Annual Reports on Form 10-K,
+Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, 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 (the "Exchange Act"), and its Proxy
+Statement for its Annual Meeting as soon as reasonably practicable after such
+material is electronically filed with, or furnished to, the Securities and
+Exchange Commission (the "Commission"). The Company will provide paper copies of
+such filings free of charge upon request.
+Wholesale Divisions
+Madden Women's Wholesale Division
+The Steve Madden(R) Women's Wholesale Division ("Madden Women's")
+designs, produces, sources and markets the Company's Steve Madden(R) brand to
+major department stores, better specialty stores and independently owned
+boutiques throughout the United States. The Steve Madden(R) brand has become a
+leading life-style brand in the fashion conscious marketplace. To serve its
+customers (primarily women ages 16 to 35), Madden Women's creates and markets
+fashion forward footwear designed to appeal to customers seeking exciting, new
+footwear designs at affordable prices.
+1
+As the Company's largest division, Madden Women's accounted for $150.3
+million of net sales in the year ended December 31, 2006, or approximately 32%
+of the Company's total net sales. Many new products for Madden Women's 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 trends which the
+Company believes is essential for success in the fashion arena.
+Madden Mens Wholesale Division
+The Steve Madden Mens Wholesale Division ("Madden Mens") designs,
+produces, sources and markets a full collection of directional 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 20 to 40 years old. Madden Mens accounted for $62.6
+million of net sales in the year ended December 31, 2006, or approximately 13%
+of the Company's total net sales. Madden Mens, 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 Wholesale Division
+Pursuant to the Company's license agreement with Candie's, Inc.,
+("Candie's"), the Company designs, produces, sources and markets Candie's(R)
+branded footwear for women and children worldwide through the Company's Candie's
+Wholesale Division ("Candie's Wholesale"). Candie's Wholesale generated net
+sales of $27.1 million for the year ended December 31, 2006, or approximately 6%
+of the Company's total net sales.
+On December 6, 2004, the license agreement with Candie's was amended to
+reflect Candie's decision to name Kohl's Corporation ("Kohl's") as the exclusive
+provider of a new line of Candie's apparel. Pursuant to the amendment,
+commencing on January 1, 2007, the Company no longer has the exclusive right to
+market Candie's(R) branded footwear and is permitted to sell Candie's(R) branded
+footwear only to Kohl's. Under the terms of the amendment, Candie's has
+guaranteed that the Company will achieve minimum sales levels with Kohl's during
+the term of the agreement, which runs through December 31, 2010. In the event
+such minimum sales levels are not achieved, Candie's is required to compensate
+the Company in an amount based on a percentage of the sales shortfall. For the
+year ended December 31, 2006, the minimum sales level was met.
+SM New York / Madden Girl - Wholesale Division
+The SM New York Wholesale Division ("SMNY/Madden Girl") designs,
+produces, sources and markets a full collection of directional young women's
+shoes. In order to consolidate brand identity, the SMNY(TM) brand will
+transition to "Madden Girl" beginning with the spring 2007 offerings.
+SMNY/Madden Girl is geared for young women ages 13 to 20 and is an "opening
+price point" brand that is currently being sold at department stores, mid-tier
+retailers and specialty stores. SMNY/Madden Girl accounted for $24.5 million of
+net sales in the year ended December 31, 2006 or approximately 5% of the
+Company's total net sales.
+Diva Acquisition Corp. - Steven(R) Wholesale Division
+Diva Acquisition Corp. ("Steven(R)") designs, produces, sources and
+markets women's fashion footwear under the Steven(R) trademark through major
+department and better footwear specialty stores throughout the United States.
+Priced a tier above the Steve Madden(R) brand, Steven(R) products are designed
+to appeal principally to fashion conscious women, ages 26 to 45, who shop at
+department stores and footwear boutiques. Steven(R) generated net sales of $22.1
+million for the year ended December 31, 2006, or approximately 5% of the
+Company's total net sales.
+2
+Stevies - Wholesale Division
+The Company's Stevies(R) Wholesale Division ("Stevies(R)") designs,
+produces, sources and markets footwear for young girls to major department
+stores, such as Federated Department Stores and Belk, better specialty stores
+and independent boutiques throughout the United States. Stevies(R) generated net
+sales of $7.6 million for the year ended December 31, 2006 or approximately 2%
+of the Company's total net sales.
+Daniel Friedman Wholesale Division
+On February 7, 2006, the Company acquired all of the equity interest of
+privately held Daniel M. Friedman and Associates, Inc. The acquisition was
+completed for consideration of $18.7 million, including transaction costs. In
+addition, the purchase agreement provides for certain earn out payments based on
+financial performance through 2010. The Company's Daniel M. Friedman Wholesale
+Division ("Daniel M. Friedman") designs, sources and markets name brand and
+private label fashion handbags and accessories to major department stores, value
+price retailers and better specialty stores throughout the United States. Daniel
+M. Friedman generated net sales of $51.3 million from the date of acquisition
+until December 31, 2006 or approximately 11% of the Company's total net sales.
+Retail Division
+Steven Madden Retail, Inc.
+As of December 31, 2006, the Company owned and operated ninety-three
+(93) retail shoe stores under the Steve Madden(R) name, two (2) under the
+Steven(R) name and one (1) Internet store (through the www.stevemadden.com
+website). In 2006, the Company opened four (4) new stores and closed six (6)
+under-performing stores. Steve Madden stores are located in major shopping malls
+and in street locations across the United States. In 2006, the retail stores
+generated annual sales in excess of $719 per square foot. Sales are primarily
+from the Company's Steve Madden(R) products. Comparative store sales (sales of
+those stores that were open for all of 2006 and 2005) increased 4% in 2006
+compared to 2005. Net sales for the Retail Division were $127.7 million for the
+year ended December 31, 2006, or approximately 27% of the Company's total net
+sales.
+The Company believes that the Retail Division will continue to enhance
+overall sales and profitability while building equity in the Steve Madden brand.
+The Company plans to add eight to ten (8 to 10) new retail stores during 2007.
+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.
+First Cost Division
+Adesso-Madden, Inc.
+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 merchants, shoe store chains and other value-priced retailers in
+connection with the procurement of their footwear needs. As a buying agent, A-M
+arranges for shoe manufacturers to produce private label shoes to its customers
+specifications. The Company believes that by operating in the private label,
+mass merchandising market, it 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 Target, Wal-Mart, Mervyns, J.C. Penney and Sears. A-M receives buying
+agent's commissions from its customers. In addition, the Company has leveraged
+the strength of its Steve Madden brands and product designs resulting in a
+3
+partial recovery of its design, product and development costs from its
+suppliers. The First Cost Division generated operating income of $11.3 million
+for the year ended December 31, 2006.
+Licensing
+As of December 31, 2006, the Company licensed its Steve Madden(R) and
+Steven(R) trademarks for use in connection with the manufacturing, marketing and
+sale of cold weather accessories, sunglasses, eyewear, watches, dresses and
+girl's apparel. Most of the license agreements require the licensee to pay to
+the Company a royalty based on actual net sales, a minimum royalty in the event
+that specified net sales targets are not achieved and a percentage of sales for
+advertising the brand. Licensing income for the year ended December 31, 2006 was
+$2.9 million.
+Design
+The Company has established a reputation for its creative designs,
+marketing and trendy products at affordable price points. The Company believes
+that its future success will substantially depend 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 an unparalleled design process that
+allows it to recognize and act quickly to changing consumer demands. The
+Company's design team strives to create designs which it believes 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 initial production. Most new products are then tested in selected Steve
+Madden(R) retail stores. Designs that prove popular are then offered for
+wholesale and retail distribution nationwide. The Company believes that its
+design and testing process and flexible sourcing model is a significant
+competitive advantage allowing the Company to mitigate the risk of production
+costs and the distribution of less desirable designs.
+Product Sourcing and Distribution
+The Company sources each of its product lines separately based on the
+individual design, styling and quality specifications of the products in such
+product lines. The Company does not own or operate manufacturing facilities;
+rather, it sources its branded products through agents with independently owned
+manufacturers in China, Brazil, Italy, Mexico, Spain, Portugal and the United
+States. The Company has established relationships with a number of manufacturers
+and agents in each of these countries. 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 Company continually monitors the availability of the principal
+materials used in the Company's footwear, which are available from a number of
+sources, both within the United States and in foreign countries. The Company
+tracks inventory flow on a regular basis, monitors sell-through data and
+incorporates input on product demand from wholesale customers. The Company uses
+retailers' feedback to adjust the production or manufacture of new products in
+as little as five weeks, which minimizes the close out of slow moving products.
+The Company distributes its products from three (3) third-party
+distribution warehouse centers located in California and New Jersey. By
+utilizing distribution facilities that specialize in distributing products to
+certain wholesale accounts, Steve Madden(R) retail stores and Internet
+fulfillment, the Company believes that its customers are better served.
+Customers
+The Company's wholesale customers consist principally of department
+stores and specialty stores, including independent boutiques. Approximately 82%
+of its wholesale revenue is generated from department and specialty stores,
+including Federated Department Stores (Macy's and Bloomingdale's) Lord and
+4
+Taylor, Dillard's, Nordstrom, Journeys, Limited Too and Mandees; and catalog
+retailers, including Victoria's Secret and Fingerhut. For the year ended
+December 31, 2006, Federated Department Stores accounted for approximately $60.7
+million, or 17% of the Company's wholesale net sales and 13% of the Company's
+total net sales.
+Distribution Channels
+The Company sells its products principally through its Company-owned
+retail stores and through department stores, specialty stores and discount
+stores in the United States and abroad. For the year ended December 31, 2006,
+net sales from the Company's Retail Division and the Company's Wholesale
+Division accounted for approximately $127.7 million (27%) and $347.5 million
+(73%) of the Company's total net sales, respectively. The following paragraphs
+describe each of these distribution channels.
+Steve Madden and Steven Retail Stores
+As of December 31, 2006, the Company operated ninety-four (94)
+Company-owned retail stores (including one Internet store) under the Steve
+Madden(R) name and two (2) 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 that 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 customers 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 a mall or street location that the Company expects will
+attract the highest concentration of the Company's core demographic,
+style-conscious customer base. The Steven(R) stores have a more sophisticated
+design and format styles to appeal to their more mature target audience. In
+addition to carefully analyzing mall demographics and locations, the Company
+also sets profitability guidelines for each potential store site. Specifically,
+the Company targets well trafficked sites at which the demographics fit the
+Company's consumer profile and seeks new locations where the projected fixed
+annual rent expense stays within Company guidelines. By setting these
+guidelines, the Company seeks to identify stores that will contribute to the
+Company's overall profitability both in the near- and longer-terms.
+Department Stores
+The Company currently sells to over 9,800 doors of 58 department stores
+throughout the United States and Canada. The major accounts include Federated
+Department Stores (Macy's and Bloomingdale's), Lord and Taylor, Nordstrom and
+Dillard'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 sell 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.
+5
+In addition to merchandising support, the Company's key 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, which minimizes markdown exposure at seasons end.
+Specialty Stores/Catalog Sales
+The Company currently sells to specialty store locations throughout the
+United States. The Company's major specialty store accounts include Journeys,
+Mandees, Famous Footwear and DSW. 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 an Internet website: www.stevemadden.com, where
+customers can purchase numerous styles of the Company's Steve Madden(R),
+Steven(R) and Steve Madden Mens footwear and accessory products.
+Distribution Agreements
+Steve Madden(R) products are available in many countries and
+territories worldwide via several retail selling and distribution agreements.
+Under the terms of the retail selling agreements, the distributors and retailers
+are required to open a minimum number of stores each year and to pay the Company
+a fee for each pair of footwear purchased, and in many cases, an additional
+fixed amount per pair or an additional amount based on a percentage of sales.
+Under the terms of the distribution agreements, the distributor is required to
+purchase certain minimum amounts of Steve Madden(R) shoes. These agreements,
+which expire at various times through December 31, 2012, are exclusive in their
+specific territories which include Canada, Australia, New Zealand, Israel, UAE,
+Bahrain, Qatar, Oman, Indonesia, Mexico, South Africa, Turkey and several
+countries in Central and South America.
+Competition
+The fashion footwear industry is highly competitive. The Company
+competes with specialty shoe companies as well as companies with diversified
+footwear product lines. Many of these competitors, including Diesel, Kenneth
+Cole, Nine West, DKNY, Skechers, Nike and Guess, may have 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.
+Marketing and Sales
+The Company has focused on creating an integrated brand building
+program to establish Steve Madden as a leading designer of fashion footwear for
+style-conscious young women and men. 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 customers can purchase Steve Madden(R), Steven(R) and Steve Madden Mens
+products and interact with the Company.
+6
+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 that 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
+On July 1, 2005, the Company entered into a factoring agreement with
+GMAC Commercial Finance LLC ("GMAC"). The agreement, which has no specific
+expiration date and can be terminated by either party with sixty (60) days
+written notice after June 30, 2007, provides the Company with a $25 million
+credit facility with a $15 million sub-limit on direct borrowings. Under the
+terms of the agreement, the Company may request advances from the factor up to
+80% of aggregate receivables purchased by the factor at an interest rate of two
+and one-half percent (2.5%) over the 30 day LIBOR. The Company also pays a fee
+equal to 0.325% of the gross invoice amount of each receivable purchased. Prior
+to July 1, 2005, the Company had a factoring agreement with Capital Factors,
+Inc. The Company sells and assigns a substantial portion of its receivables,
+principally without recourse, to the factor. As of December 31, 2006 and 2005,
+$260,000 and $555,000 of factored receivables, respectively, were sold by the
+Company with recourse. GMAC will maintain a lien on all of the Company's
+receivables and assume the credit risk for all assigned accounts approved by
+them with certain restrictions.
+The Company's Daniel M. Friedman Division has a factoring agreement
+with Wells Fargo Century. Under the terms of the agreement, the Company is
+eligible to draw down 85% of its invoiced receivables at an interest rate equal
+to the prime rate. The Company pays a fee equal to 0.45% of the gross invoice
+amount of each receivable purchased. Wells Fargo Century will maintain a lien on
+all of the Daniel M. Friedman's receivables and assume the credit risk for all
+assigned accounts approved by them with certain restrictions. The expiration
+date on this agreement is June 30, 2007 with automatic one-year renewals
+thereafter.
+Trademarks and Service Marks
+The STEVE MADDEN and/or STEVE MADDEN plus Design trademarks and service
+marks have been registered in numerous International Classes in the United
+States (Int'l Cl. 25 for clothing and footwear; Int'l Cl. 18 for leather goods,
+such as handbags and wallets; Int'l Cl. 9 for eyewear; Int'l Cl. 14 for jewelry;
+Int'l Cl. 3 for cosmetics and fragrances; Int'l Cl. 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). The Company also has pending trademark
+applications in the United States for the mark STEVE MADDEN and/or STEVE MADDEN
+(design) in numerous international classes (Class 2 for paints, Class 4 for
+candles, Class 6 for key chains and id bracelets, Class 11 for lamps, Class 14
+for jewelry and watches, Class 18 for bags and leather goods, Class 21 for
+housewares, Class 26 for hair accessories, Class 27 for rugs and carpets, Class
+28 for sporting goods, and Class 32 for light beverages).
+7
+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), SHOE BIZ BY STEVE MADDEN (Int'l Cl. 25 for
+clothing and footwear; and Int'l Cl. 35 for retail store services) STEVEN M.
+(Int'l Class 25 for clothing and footwear); and STEVEN (Int'l Cl. 25 for
+clothing and footwear, Class 3 for cosmetics and fragrances, Class 14 for
+jewelry, Class 18 for leather goods, Class 26 for hair accessories, Class 35 for
+retail store services, and Class 9 for eyewear). The Company also has pending
+applications for STEVEN in various international classes (Class 2 for paints,
+Class 4 for candles, Class 6 for key chains and id bracelets, Class 11 for
+lamps, Class 16 for printed matter, Class 20 for furniture, Class 21 for
+housewares, Class 26 for hair accessories, Class 27 for rugs and carpets, and
+Class 32 for light beverages). The Company also owns a registration for the mark
+SOHO COBBLER and SOHO COBBLER (design) in the U.S. in Class 25 for footwear.
+The Company also has several pending applications in the U.S. for
+MADDEN in a variety of international classes (Class 3 for cosmetics and
+fragrances, Class 9 for watches and CDs, Class 14 for jewelry and watches, Class
+18 for bags, , Class 14 for jewelry, Class 25 for clothing and footwear, and
+Class 28 for toys and sporting goods). The Company also has pending applications
+in the U.S. for STEVEN BY STEVE MADDEN in Classes 18 (bags) and 24 (bedding),
+and for MADDEN BY STEVE MADDEN in Class 2 for paints, Class 3 for perfume and
+cosmetics, Class 4 for candles, Class 6 for key rings and key chains, Class 9
+for eyewear and CDs, Class 11 for lamps, Class 14 for jewelry, Class 16 for
+stationery and notebooks, Class 18 for bags, Class 20 for furniture, Class 21
+for housewares, Class 24 for bedding, Class 25 for clothing and footwear, Class
+26 for hair accessories, Class 27 for carpets and rugs, Class 28 for toys and
+games, Class 32 for light beverages, and Class 35 for retail store services.
+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), STEVE MADDEN LUXE in Class
+14 for jewelry and watches and Class 25 for clothing and footwear. RULE STEVE
+MADDEN (in Class 2 for paints, Class 3 for perfume and cosmetics, Class 4 for
+candles, Class 6 for key rings and key chains, Class 9 for eyewear and CDs,
+Class 11 for lamps, Class 14 for jewelry, Class 16 for stationery and notebooks,
+Class 18 for bags, Class 20 for furniture, Class 21 for housewares, Class 24 for
+bedding, Class 25 for clothing and footwear, Class 26 for hair accessories,
+Class 27 for carpets and rugs, Class 28 for toys and games, Class 32 for light
+beverages, and Class 35 for retail store services), SM NEW YORK (in Class 3 for
+perfume and cosmetics, Class 9 for eyewear and CDs, Class 14 for jewelry, Class
+18 for bags, and Class 25 for clothing and footwear); and SMNY (in Class 3 for
+perfume and cosmetics, Class 9 for eyewear and CDs, Class 14 for jewelry, Class
+18 for bags, and Class 25 for clothing and footwear).
+The Company further owns registrations for the STEVE MADDEN and/or
+STEVE MADDEN plus Design trademarks and service marks in various International
+Classes in Argentina, Australia, Bahrain, Belize, Brazil, Canada, Chile, China,
+Colombia, El Salvador, Guatemala, Hong Kong, Israel, Italy, Japan, Korea,
+Lebanon, Mexico, New Zealand, the Netherlands, Nicaragua, Oman, Panama, the
+Philippines, Qatar, Russia, Saudi Arabia, Singapore, South Africa, Taiwan,
+Thailand, Turkey, the United Arab Emirates, Venezuela, the European Union, and
+the Benelux countries and has pending applications for registration of the STEVE
+MADDEN and/or STEVE MADDEN plus Design trademarks and service marks in
+Azerbaijan, Belarus, Canada, China, Costa Rica, Ecuador, Estonia, Georgia,
+Guatemala, Honduras, Indonesia, Kazakhstan, Korea, Kuwait, Kyrgyzstan, Latvia,
+Lithuania, Oman, Paraguay, Peru, Qatar, Tajikistan, Ukraine, the United Arab
+Emirates, and Uzbekistan .
+Additionally, the Company owns registrations for the STEVEN trademark
+and service mark in various International Classes in Australia, Bahrain, Belize,
+China, the Dominican Republic, El Salvador, the European Union, Hong Kong,
+Israel, Lebanon, Japan, New Zealand, Netherland Antilles, the Philippines, Saudi
+Arabia, Thailand, Taiwan, Turkey, and the United Arab Emirates and has pending
+applications for registration of the STEVEN trademark and service mark in China,
+8
+Columbia, Ecuador, the European Union, Guatemala, Indonesia, Israel, Italy,
+Korea, Malaysia, Nicaragua, Oman, Philippines, Qatar, Russia, South Africa,
+Taiwan, Thailand, Turkey, and Taiwan.
+The Company further owns registrations for the "torch stripe" design in
+Class 25 in the European Union and Panama, and has a pending application for the
+"torch stripe" design in Class 25 in China.
+The Company further owns registrations for the mark STEVEN BY STEVE
+MADDEN in various international classes in the European Union and Panama, and
+has pending applications for the mark STEVEN BY STEVE MADDEN in various
+international classes in Canada, China, Israel, and Korea.
+The Company further owns registrations for the mark SM NEW YORK in
+International Class 25 (clothing and footwear) in Belize, the Dominican
+Republic, El Salvador, Netherland Antilles, and New Zealand, and has pending
+applications for registration of the SM NEW YORK mark in International Class 25
+(clothing and footwear) in Australia, Columbia, Costa Rica, Ecuador, Guatemala,
+Nicaragua, Panama, South Africa, and Venezuela.
+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), and in Australia, Canada, the European
+Union, Hong Kong, Japan, Korea, Panama, and South Africa in some or all of
+Classes 3, 18, and 25, and for its D. AARON trademark in Class 25 Spain. Also,
+the Company owns registrations for the DAVID AARON trademark in the United
+States 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, through its Stevies, Inc. subsidiary, also owns various
+registrations for the STEVIES and /or 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; International Class 14 for
+jewelry; International Class 28 for toys; International Class 16 for paper
+goods; International Class 3 for perfume and cosmetics, International Class 9
+for CDs and eyewear, and International Class 26 for hair accessories), and for
+STEVIES BY STEVE MADDEN in Class 14 for jewelry, Class 9 for eyewear, Class 3
+for perfume and cosmetics, Class 28 for toys and games, Class 35 for retail
+services, Class 16 for stationery and notebooks, Class 18 for bags. The
+Company, through its Stevies, Inc. subsidiary, also owns registrations for its
+STEVIES and/or STEVIES plus Design mark for various goods in Argentina, Bahrain,
+Canada, China, Columbia, the European Union, Hong Kong, Israel, Japan, Korea,
+Lebanon, Malaysia, Mexico, Panama, Singapore, Taiwan and the United Arab
+Emirates. Additionally, Stevies, Inc. has several pending trademark and service
+mark applications for registration of the STEVIES and STEVIES plus Design marks
+in various International Classes in Brazil, Indonesia, Korea, Kuwait, Mexico,
+New Zealand, Oman, Peru, Qatar, Saudi Arabia, Singapore, South Africa, Thailand,
+Turkey, the United Arab Emirates and Venezuela. Finally, Stevies, Inc. also owns
+several trademark and service mark registrations 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. 28 for toys; and
+Int'l Cl. 35 for retail store services).
+The Company believes that its trademarks have a significant value and
+are important to the marketing of the Company's products. There can be no
+assurance, however, that the Company will be able to effectively obtain rights
+9
+to its marks 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.
+Employees
+On February 5, 2007, the Company employed approximately one thousand
+four hundred and ninety-eight (1,498) employees, of whom approximately four
+hundred eighty (480) work on a full-time basis and approximately one thousand
+and eighteen (1,018) work on a part-time basis, most of whom work in the Retail
+Division. The management of the Company considers relations with its employees
+to be good.
+Seasonality
+Historically, the Company's merchandising businesses have experienced
+holiday retail seasonality. In addition to seasonal fluctuations, the Company's
+operating results 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 for obsolescence, the cost of materials, the product mix between
+wholesale, retail 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.
+Backlog
+The Company had unfilled wholesale customer orders of $97.2 million and
+$88.3 million, as of February 18, 2007 and 2006, respectively. The Company's
+backlog at a particular time is affected by a number of factors, including
+seasonality, timing of market weeks, and wholesale customer purchases of its
+core basic products through the Company's open stock program. Accordingly, a
+comparison of backlog from period to period may not be indicative of eventual
+shipments.
+ITEM 1A RISK FACTORS
+You should carefully consider the risks and uncertainties we
+describe below and the other information in this Annual Report or incorporated
+by reference herein before deciding to invest in, or retain, shares of our
+common stock. These are not the only risks and uncertainties that we face.
+Additional risks and uncertainties that we do not currently know about or that
+we currently believe are immaterial, or that we have not predicted, may also
+harm our business operations or adversely affect us. If any of these risks or
+uncertainties actually occurs, our business, financial condition, operating
+results or liquidity could be materially harmed.
+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 for 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.
+10
+The industry in which the Company operates is cyclical, with purchases
+tending to decline during recessionary periods when disposable income is low.
+Purchases of contemporary shoes and accessories tend to decline during
+recessionary periods and also may decline at other times. While the Company has
+fared well in recent years in a difficult retail environment, there can be no
+assurance that the Company will be able to maintain its historical rate of
+growth in revenues and earnings, or remain profitable in the future. A recession
+in the national or regional economies or uncertainties regarding future economic
+prospects, among other things, could affect consumer-spending habits and have a
+material adverse effect on the Company's business, financial condition and
+results of operations.
+In recent years, the retail industry has experienced consolidation and
+other ownership changes. In the future, retailers in the United States and in
+foreign markets may further 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 Agreements between GMAC, Wells Fargo
+Century and the Company, the factors currently assume the credit risk related to
+approximately 89% 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. During the year ended December 31,
+2006, approximately 99% of the Company's products were purchased through
+arrangements with a number of foreign manufacturers, primarily from China,
+Brazil, Italy and Spain.
+11
+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
+custom 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 99% 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 would not be greater than those presently paid.
+The Company does not control its licensing partners or independent
+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 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
+12
+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 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(R),
+Steven(R), SMNY/Madden Girl, Steve Madden Mens, Natural Comfort and Candie's(R)
+brands, creating new product categories and businesses and operating
+Company-owned Steve Madden(R) and Steven(R) stores on a profitable basis. During
+the year ended December 31, 2006, the Company opened four (4) Steve Madden(R)
+retail stores and has plans to open eight to ten (8 to 10) additional stores in
+the year ending December 31, 2007. The Company's expansion plan 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.
+Management of Growth. 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, amongst 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 for
+obsolescence, the cost of materials, the product mix between wholesale, retail
+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.
+13
+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 makes approximately 98% of
+its purchases in U.S. dollars. However, the Company sources substantially all of
+its products overseas and, as such, the cost of these products may be affected
+by changes in the value of the relevant currencies. Changes in currency exchange
+rates may also affect the relative prices at which the Company and foreign
+competitors sell their products in the same market. There can be no assurance
+that foreign currency fluctuations will not have a material adverse effect on
+the Company's business, financial condition and results of operations.
+Outstanding Options. As of March 5, 2007, there were outstanding
+options to purchase an aggregate of approximately 1,396,000 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 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 the
+Company's 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 1B. UNRESOLVED STAFF COMMENTS
+None.
+ITEM 2 PROPERTIES
+The Company maintains approximately 37,000 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 and can be extended, at the option of the Company, through June 30,
+2013.
+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 9,917
+square foot space. The lease for the Company's showroom expires on February 28,
+2013.
+14
+The Company's Daniel M. Friedman Division maintains approximately
+17,000 square feet for its offices and showroom space at 10 West 33rd Street,
+New York, NY. The lease expires on December 31, 2014.
+The Company maintains approximately 7,200 square feet as a storage
+facility at 25-15 Borough Place, Woodside, NY. The lease for this space expires
+on October 31, 2008 and can be extended, at the option of the Company, through
+October 31, 2010.
+The Company also maintains an 807 square foot showroom located at
+Fashion Center Dallas in the World Trade Center, Dallas, Texas. The lease for
+this showroom expires on April 30, 2007. The Company does not expect to extend
+the lease but plans to rent space in the area for fashion shows as needed.
+The Company also currently engages three independent distributors to
+warehouse and distribute its products.
+All of the Company's retail stores are leased pursuant to leases that,
+under their original term, extend for an average of 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
+------------------------------ -------------------------
+2007 0
+2008 11
+2009 9
+2010 9
+2011 13
+2012 9
+2013 12
+2014 7
+2015 12
+2016 8
+2017 4
+2018 1
+ITEM 3 LEGAL PROCEEDINGS
+Except as set forth below, no material legal proceedings are pending to
+which the Company or any of its property is subject.
+On August 10, 2005, the U.S. Customs Department ("Customs") issued a
+report that asserts that certain commissions which the Company treated as buying
+agents' commissions (which are non-dutiable), should be treated as "selling
+agents' commissions" and hence are dutiable. In the report, Customs estimates
+that the Company had underpaid duties during the calendar years of 1998 through
+2004 in the amount of $1.1 million plus interest and penalties. Based on
+management's estimation earlier in the year, a reserve of $2 million covering
+15
+under-payments, interest and penalties, was recorded as of March 31, 2006 in the
+Condensed Consolidated Financial Statements. Based on a meeting held with
+Customs on November 8, 2006, and pursuant to discussions with legal counsel, the
+Company reasonably believes that the maximum liability in this case, including
+interest and penalties, will be no more than $1.5 million. Accordingly, the
+reserve was reduced to $1.5 million as of December 31, 2006. Such reserve may in
+the future be modified to reflect the status of this matter.
+The Company has been named as a defendant in certain other lawsuits in
+the normal course of business. In the opinion of management, after consulting
+with legal counsel, the liabilities, if any, resulting from these matters should
+not have a material effect on the Company's financial position or results of
+operations. It is the policy of management to disclose the amount or range of
+reasonably possible losses in excess of recorded amounts.
+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, 2006.
+PART II
+ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
+MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
+The Company's shares of common stock trade on The Nasdaq Global Market
+since August 1, 2006 and on The Nasdaq National Market prior to that date. The
+following table sets forth the range of high and low closing sales prices for
+the Company's Common Stock during each fiscal quarter during the two-year period
+ended December 31, 2006 as reported by The Nasdaq National Market and The Nasdaq
+Global Market. 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.
+Common Stock
+High Low High Low
+--------- ---------- ---------- ----------
+2006 2005
+Quarter ended Quarter ended
+March 31, 2006 24.53 18.63 March 31, 2005 12.93 10.81
+Quarter ended Quarter ended
+June 30, 2006 37.17 23.20 June 30, 2005 12.57 10.41
+Quarter ended Quarter ended
+September 30, 2006 40.69 26.59 September 30, 2005 16.43 11.85
+Quarter ended Quarter ended
+December 31, 2006 44.70 33.99 December 31, 2005 20.21 15.13
+As of March 5, 2007, there were 21,108,748 shares of Common Stock
+outstanding and 58 record holders.
+16
+Dividends. On October 30, 2006, the Board of Directors declared a
+special dividend of $1 per share payable to Steven Madden, Ltd. shareholders of
+record at the close of business on November 13, 2006. The dividend, which
+totaled $21.5 million ($421,000 of which is payable to holders of restricted
+stock pending the vesting of these shares) was paid on November 22, 2006.
+Equity Compensation Plans. Information regarding our equity
+compensation plans as of December 31, 2006 is disclosed in Item 12. "Security
+Ownership of Certain Beneficial Owners and Management and Related Stockholder
+Matters."
+Issuer Repurchases of Equity Securities. There were no shares of common
+stock repurchased by the Company during the fourth quarter of fiscal 2006. In
+February 2007, the Board of Directors authorized an increase of the Company's
+previously announced share repurchase program of $30 million, bringing the total
+authorization up to $59 million. The program has no set expiration or
+termination date.
+Pursuant to an agreement reached on February 2, 2005 with an 8%
+shareholder, the Company agreed to commit $25 million during the twelve months
+ended January 31, 2006 and $10 million during the twelve months ended January
+31, 2007 through a combination of share repurchases and/or dividends, such
+programs to be implemented at such time and such manner as determined by the
+board of directors in its sole discretion. As of January 31, 2007, the Company
+has satisfied this agreement by the repurchase of 909,000 shares for $14.7
+million and the payment of dividends in the amount of $34.9 million.
+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
+2006, 2005 and 2004, and the Balance Sheet Data as of December 31, 2006 and 2005
+should be read in conjunction with the Company's audited consolidated financial
+statements and notes thereto appearing elsewhere herein.
+17
+Year Ended December 31,
+---------------------------------------------------------------------------------
+2006 2005 2004 2003 2002
+------------- ------------- ------------- ------------- -------------
+INCOME STATEMENT DATA:
+Net sales $ 475,163,000 $ 375,786,000 $ 338,144,000 $ 324,204,000 $ 326,136,000
+Cost of sales 276,734,000 236,631,000 218,601,000 201,487,000 202,451,000
+Gross profit 198,429,000 139,155,000 119,543,000 122,717,000 123,685,000
+Commissions and licensing fee - net 14,246,000 7,119,000 4,588,000 5,742,000 4,381,000
+Operating expenses (134,377,000) (114,185,000) (105,150,000) (94,833,000) (94,854,000)
+Impairment of goodwill -- (519,000) -- -- --
+Income from operations 78,298,000 31,570,000 18,981,000 33,626,000 33,212,000
+Interest income 3,703,000 2,554,000 2,009,000 1,611,000 1,166,000
+Interest expense (100,000) (164,000) (68,000) (54,000) (16,000)
+Gain (loss) on sale of marketable
+securities (967,000) (500,000) 32,000 136,000 66,000
+Income before provision for income
+taxes 80,934,000 33,460,000 20,954,000 35,319,000 34,428,000
+Provision for income taxes 34,684,000 14,260,000 8,679,000 14,865,000 14,587,000
+Net Income $ 46,250,000 $ 19,200,000 $ 12,275,000 $ 20,454,000 $ 19,841,000
+Basic income per share $ 2.21 $ 0.95 $ 0.62 $ 1.05 $ 1.05
+Diluted income per share $ 2.09 $ 0.92 $ 0.58 $ 0.96 $ 0.96
+Basic weighted average common
+shares outstanding 20,905,673 20,111,576 19,723,304 19,477,898 18,892,292
+Effect of potential common shares
+from exercise of options and
+warrants 1,195,394 806,487 1,611,120 1,729,869 1,672,527
+Diluted weighted average common
+shares outstanding 22,101,067 20,918,063 21,334,424 21,207,767 20,564,819
+At December 31,
+BALANCE SHEET DATA ---------------------------------------------------------------------------------
+2006 2005 2004 2003 2002
+------------- ------------- ------------- ------------- -------------
+Total assets $ 251,392,000 $ 211,728,000 $ 186,430,000 $ 177,870,000 $ 150,500,000
+Working capital 151,711,000 114,066,000 101,417,000 105,140,000 86,461,000
+Noncurrent liabilities 3,136,000 2,757,000 2,088,000 1,828,000 1,532,000
+Stockholders' equity $ 211,924,000 $ 182,065,000 $ 164,665,000 $ 159,187,000 $ 130,075,000
+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 audited 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
+18
+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,"
+"projects" or "plans" and statements in the future tense to be uncertain
+forward-looking statements. The forward-looking statements contained herein are
+also subject generally to risks set forth herein under the caption "Risk
+Factors" and 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.
+Overview
+($ in thousands, except retail sales data per square foot and per share data)
+For the year ended December 31, 2006, diluted earnings per share increased 127%
+and net income increased 141% over the prior year. The earnings growth in the
+year is the result of a 26% increase in net sales, an increase in gross profit
+margins of 5% to 42% from 37% in the prior year, an increase in net commission
+and licensing fee income of 100%, and a decrease in operating expenses as a
+percentage of net sales of 3%.
+During the year, the Company made progress on its stated goal to evolve Steve
+Madden into a global lifestyle brand by expanding its product offerings though
+acquisitions and licensing agreements. On February 7, 2006, the Company acquired
+all of the equity interest of privately held Daniel M. Friedman and Associates,
+Inc. and D.M.F. International (collectively, "Daniel M. Friedman"). Founded in
+1995, Daniel M. Friedman (a former licensee of the Company) is a manufacturer
+and distributor of name brand fashion handbags and accessories. In 2006, Daniel
+M. Friedman contributed net sales of approximately $51,316. The Company has
+recently launched two new brands. SMNY, which began shipping in the fourth
+quarter of 2005, contributed net sales of approximately $24,451, and is now in
+over 5,200 doors. In order to consolidate brand identity, the SMNY brand will
+transition to Madden Girl beginning with the spring 2007 collection. Natural
+Comfort delivered initial shipments in the second quarter of 2006. Natural
+Comfort is an owned brand of fashion-forward comfort footwear. On the licensing
+front, the Company signed four new licensing agreements during the year for
+"watches" under the Steve Madden and Steven by Steve Madden brands, "girls'
+apparel" marketed through J.C. Penney under the Stevies brand, "dresses" under
+the Steve Madden and Steven by Steve Madden brands and "cold weather
+accessories" under the Steve Madden and Steven by Steve Madden brands.
+In line with prior commitments to enhance shareholders value, the Board of
+Directors approved a special one-time cash dividend of $1.00 per share of
+outstanding common stock that was paid on November 22, 2006. Combined with the
+$8.3 million of share repurchased in 2006, the total amount of capital returned
+to shareholders in 2006 amounted to approximately $29.4 million, which is in
+addition to the approximately $21.5 million returned to shareholders in 2005.
+The Company was able to provide this special dividend and repurchase of stock
+while still reinvesting in the business and funding management's initiatives for
+future growth.
+The Retail Division continued its strong performance. Gross profit margin in the
+Retail Division increased to 54% of net sales in 2006 compared to 50% in 2005.
+This 400 basis point increase in gross profit was the result of more trendy
+product assortment, improved inventory controls and reduced freight costs
+resulting in a decrease of promotional activity, and the closure of six under
+performing stores. Same store sales (sales in stores that were in operation
+throughout all of 2006 and 2005) increased 4%. Store sales productivity remained
+high with sales per square foot of $719. The Company is planning to open eight
+to ten new stores in 2007.
+The Company's annualized inventory turnover was 7.2 times in 2006 compared to
+7.9 times in 2005, reflecting the slower turnover rate inherent in Daniel M.
+Friedman Division because of its replenishment business. The Company's accounts
+receivable average collection days increased to 59 days in 2006 compared to 57
+days in 2005 because of the longer payment terms of the Daniel M. Friedman
+Division. As of December 31, 2006, the Company had $108,885 in cash, cash
+equivalents and marketable securities, no short or long-term debt, and total
+stockholders equity of $211,924. Working capital increased to $151,711 as of
+December 31, 2006, compared to $114,066 on December 31, 2005. During the year
+ended December 31, 2006, net cash provided by operating activities increased to
+$43,408 as compared to $38,138 in the same period last year.
+19
+The following tables set forth information on operations for the periods
+indicated:
+Years Ended
+December 31
+($ in thousands)
+2006 2005 2004
+------------------- ------------------- -------------------
+CONSOLIDATED:
+------------
+Net sales $475,163 100% $375,786 100% $338,144 100%
+Cost of sales 276,734 58 236,631 63 218,601 65
+Gross profit 198,429 42 139,155 37 119,543 35
+Other operating income - net of expenses 14,246 3 7,119 2 4,588 1
+Operating expenses 134,377 28 114,185 31 105,150 31
+Impairment of goodwill -- -- 519 0 -- --
+Income from operations 78,298 16 31,570 8 18,981 5
+Interest and other income, net 2,636 1 1,890 1 1,973 1
+Income before income taxes 80,934 17 33,460 9 20,954 6
+Net income 46,250 10 19,200 5 12,275 4
+By Segment:
+WHOLESALE DIVISION:
+------------------
+Net sales $347,509 100% $254,275 100% $230,347 100%
+Cost of sales 218,014 63 175,292 69 166,724 72
+Gross profit 129,495 37 78,983 31 63,623 28
+Other operating income 2,925 1 2,286 1 2,310 1
+Operating expenses 75,328 22 59,958 24 57,661 25
+Income from operations 57,092 16 21,311 8 8,272 4
+RETAIL DIVISION:
+---------------
+Net sales $127,654 100% $121,511 100% $107,797 100%
+Cost of sales 58,720 46 61,339 50 51,877 48
+Gross profit 68,934 54 60,172 50 55,920 52
+Operating expenses 59,049 46 54,227 45 47,489 44
+Impairment of goodwill -- -- 519 0 -- --
+Income from operations 9,885 8 5,426 5 8,431 8
+Number of stores 96 98 91
+FIRST COST DIVISION:
+-------------------
+Other commission income - net of expenses $ 11,321 100% $ 4,833 100% $ 2,278 100%
+20
+RESULTS OF OPERATIONS
+($ in thousands)
+Year Ended December 31, 2006 vs. Year Ended December 31, 2005
+Consolidated:
+------------
+Total net sales for the year ended December 31, 2006 increased by 26% to
+$475,163 from $375,786 for the comparable period of 2005. The total increase
+resulted from a 37% growth in the Wholesale Division combined with a 5% growth
+in the Retail Division.
+Gross profit margin increased to 42% for the year ended December 31, 2006 from
+37% for the prior year. Both the Wholesale and the Retail Divisions achieved
+significant increases in their gross profit margins. The gross profit margin for
+the Wholesale Division increased to 37% for the year ended December 31, 2006
+from 31% for the comparable period of 2005, and in the Retail Division, the
+gross profit margin increased to 54% as compared to 50% for the comparable
+period of 2005. A portion of the increased gross margin was the result of
+improved inventory management which resulted in fewer markdowns.
+Operating expenses increased to $134,377 in the year ended December 31, 2006
+from $114,185 in the same period of 2005. The increase in dollars was primarily
+caused by the incremental costs associated with the acquisition of Daniel M.
+Friedman and the addition of the SMNY/Madden Girl division, an increase in sales
+growth related variable expenses such as warehouse and distribution costs, and
+an increase in incentive based employee compensation. As a percentage of net
+sales, operating expenses decreased to 28% for the year ended December 31, 2006
+from 31% in the same period of 2005, reflecting the Company's ability to
+leverage its expense structure against the increase in sales.
+Income from operations was $78,298 for the year ended December 31, 2006 compared
+to $31,570 for the comparable period of 2005. Net income increased by 141% to
+$46,250 for the year ended December 31, 2006 compared to $19,200 for the year
+ended December 31, 2005. This increase in income was primarily due to the
+increase in net sales, the higher gross profit margin, a substantial increase in
+commission income and the contribution of the Daniel M. Friedman Division.
+Wholesale Division:
+-------------------
+Net sales from the Wholesale Division accounted for $347,509 or 73%, and
+$254,275 or 68% of total net sales for the years ended December 31, 2006 and
+2005, respectively. This increase resulted from the incremental sales
+contributed by the recently acquired Daniel M. Friedman and significant sales
+growth in Madden Womens, Madden Mens, Candie's and Steven as well as the
+contribution of the new brands, SMNY/Madden Girl and Natural Comfort. Gross
+profit margin increased to 37% of net sales for the year ended December 31, 2006
+from 31% in the prior year, primarily due to a significant decrease in off-price
+sales and lower inventory markdowns and allowances. Operating expenses increased
+to $75,328 for the year ended December 31, 2006 from $59,958 in the comparable
+period of 2005. This increase is primarily due to an increase in direct selling
+expenses reflective of the 37% growth in sales, incentive bonuses and the
+incremental costs associated with the new brands SMNY/Madden Girl and Natural
+Comfort, as well as the acquisition of Daniel M. Friedman. As a percentage of
+net sales, operating expenses decreased to 22% for the year ended December 31,
+2006 from 24% for the prior year, reflecting the Company's ability to leverage
+its expense structure against the increase in sales. Income from operations for
+the Wholesale Division increased to $57,092 for the year ended December 31, 2006
+compared to $21,311 for the year ended December 31, 2005.
+Retail Division:
+----------------
+Net sales from the Retail Division accounted for $127,654 or 27% and $121,511 or
+32% of total net sales for the years ended December 31, 2006 and 2005,
+respectively. The Company opened four new stores and closed six under-performing
+stores during the current year. As a result, the Company had 96 retail stores as
+of December 31, 2006 compared to 98 stores as of December 31, 2005. The 96
+stores currently in operation include 93 under the Steve Madden name, two under
+the Steven name and one internet store. Comparable store sales (sales of those
+stores, including the internet store, that were open for all of 2006 and 2005)
+for the year ended December 31, 2006 increased 4% over the same period of 2005.
+21
+Gross profit as a percentage of net sales increased to 54% for the year ended
+December 31, 2006 from 50% in the comparable period of 2005, primarily due to a
+significant decrease in promotional sales, improved inventory controls and
+freight savings. Operating expenses for the Retail Division were $59,049 for the
+year ended December 31, 2006 and $54,227 for the comparable period of 2005. This
+increase was primarily due to the non-cash write off of unamortized assets
+associated with the remodeling of nine stores and the closing of six stores in
+the current period that accounted for $1,858. Income from operations for the
+Retail Division was $9,885 for the year ended December 31, 2006 compared to
+$5,426 for the same period in 2005.
+First Cost Division:
+--------------------
+The First Cost Division generated net commission income and design fees of
+$11,321 for year ended December 31, 2006, compared to $4,833 for the comparable
+period of 2005. The increase was the result of growth in the private label
+business and, in addition, the Company's ability to leverage the strength of its
+Steve Madden brands and product designs resulting in a partial recovery of its
+design, product and development costs through its suppliers.
+Year Ended December 31, 2005 vs. Year Ended December 31, 2004
+Consolidated:
+-------------
+Total net sales for the year ended December 31, 2005 increased by 11% to
+$375,786 from $338,144 for the comparable period of 2004. Significant sales
+increases from Madden Mens, Candie's, and the Retail Division and a modest
+increase from Madden Womens as well as net sales of $1,576 generated by the
+Company's new division, SMNY/Madden Girl were partially offset by declines in
+Steven, l.e.i. and Stevies.
+Gross profit margin increased to 37% for the year ended December 31, 2005 from
+35% for the year ended December 31, 2004. This increase is the result of an
+increase in the gross profit margin in the Wholesale Division to 31% for the
+year ended December 31, 2005 from 28% for the comparable period of 2004,
+primarily due to a significant decrease in off-price sales and improved
+efficiencies in inventory management resulting in lower inventory costs. This
+was partially offset by a decline in gross profit margin in the Retail Division
+attributed to the liquidation of slow moving inventory combined with the
+liquidation of inventory at four outlet stores (three of which were temporary
+locations) that were closed during the third quarter.
+Operating expenses increased to $114,185 in the year ended December 31, 2005
+from $105,150 in the same period of 2004. The increase in dollars is primarily
+due to an increase in direct selling expenses reflective of the 11% growth in
+sales and the incremental payroll and occupancy costs associated with the
+operation of an additional seven retail stores (net). Other contributing factors
+were an increase of accounting fees incurred by the Company in connection with
+management's assessment and the external audit of internal controls pursuant to
+Section 404 of the Sarbanes-Oxley Act of 2002, and the settlement of the LaRue
+lawsuit in the amount of $1,500.
+Income from operations was $31,570 for the year ended December 31, 2005 compared
+to $18,981 for the comparable period of 2004. Net income increased by 56% to
+$19,200 for the year ended December 31, 2005 compared to $12,275 for the year
+ended December 31, 2004. This increase in income was primarily due to the
+increase in sales, the higher gross margin and a substantial increase in
+commission income.
+Wholesale Division:
+-------------------
+Net sales from the Wholesale Division accounted for $254,275 or 68%, and
+$230,347 or 68% of total net sales for the year ended December 31, 2005 and
+2004, respectively. This increase resulted from the higher sales contributed by
+Madden Mens, Candies and Steve Madden Womens as well as the contribution of the
+new SMNY brand. Gross profit margin in the Wholesale Division increased to 31%
+of net sales for the year ended December 31, 2005 from 28% for the year ended
+December 31 2004, primarily due to better product offerings and improved
+efficiencies in inventory management resulting in a significant reduction of
+inventory markdowns and allowances. Operating expenses increased to $59,958 for
+the year ended December 31, 2005 from $57,661 in the comparable period of 2004.
+This increase is primarily due to an increase in direct selling expenses
+reflective of the 10% growth in sales, incentive bonuses and the incremental
+costs associated with the new brands SMNY/Madden Girl. As a percentage of net
+sales, operating expenses decreased to 24% for the year ended December 31, 2005
+22
+from 25% for the year ended December 31, 2004, reflecting the Company's ability
+to control costs and leverage its expense structure against the increase in
+sales. Income from operations for the Wholesale Division increased to $21,311
+for the year ended December 31, 2005 compared to $8,272 for the prior year.
+Retail Division:
+----------------
+Net sales from the Retail Division accounted for $121,511 or 32% and $107,797 or
+32% of total sales for the years ended December 31, 2005 and 2004, respectively.
+As of December 31, 2005, there were 98 retail stores compared to 91 retail
+stores as of December 31, 2004. The 98 stores in operation as of December 31,
+2005 included 94 under the Steve Madden name, two under the Steven name, one
+outlet under the Shoe Biz name and one internet store. Comparable store sales
+(sales of those stores that were open for all of 2005 and 2004) for the year
+ended December 31, 2005 increased 5% over the same period of 2004. This increase
+was achieved through the early release and success of opened up sandals in
+spring, strong boot sales in the fall, and a substantial growth in Madden Mens
+volume at the stores. Gross profit margin decreased to 50% for the year ended
+December 31, 2005 from 52% in the comparable period of 2004, primarily due to an
+increase in the liquidation of slow moving inventory combined with the
+liquidation of inventory at five stores that were closed during the year 2005.
+Operating expenses for the Retail Division were $54,227 for the year ended
+December 31, 2005 and $47,489 for the comparable period of 2004. This increase
+was primarily due to increased payroll and payroll related expenses and higher
+occupancy expenses associated with the operation of seven additional stores in
+2005 and an increase in direct selling expenses. Income from operations for the
+Retail Division was $5,426 for the year ended December 31, 2005 compared to
+$8,431 for the same period of 2004.
+First Cost Division:
+--------------------
+Adesso-Madden, Inc. generated net commission income of $4,833 for the year ended
+December 31, 2005, compared to $2,278 for the comparable period of 2004. The
+increase was the result of the growth in first cost business with existing as
+well as new customers, the expansion of the Company's private label business in
+men's footwear, the transition of Unionbay to a first cost commission based
+model and the cumulative contribution of commissions on international sales made
+on a direct-from-factory basis.
+LIQUIDITY AND CAPITAL RESOURCES
+($ in thousands)
+The Company had working capital of $151,711 at December 31, 2006 compared to
+$114,066 at December 31, 2005. The Company's net income for the year ended
+December 31, 2006 contributed to the increase in working capital. Additionally,
+during the year ended December 31, 2006, a significant amount of the Company's
+bond portfolio moved to within one year of maturity resulting in a
+reclassification of these bonds to current assets.
+Under the terms of a factoring agreement with GMAC, the Company is eligible to
+borrow 80% of its invoiced receivables at an interest rate of two and one-half
+percent (2.5%) over the 30 day London Inter-Bank Offered Rate ("LIBOR"). The
+agreement, which has no specific expiration date and can be terminated by either
+party with 60 days written notice after June 30, 2007, provides the Company with
+a $25 million credit facility with a $15 million sub-limit on direct borrowings.
+GMAC maintains a lien on all of the Company's receivables and assumes the credit
+risk for all assigned accounts approved by them.
+The Company's Daniel M. Friedman Division has a factoring agreement with Wells
+Fargo Century. Under the terms of the agreement, the Company is eligible to
+borrow 85% of its invoiced receivables at an interest rate equal to the prime
+rate.
+As of December 31, 2006, the Company held marketable securities valued at
+$89,681, consisting primarily of corporate and municipal bonds, U.S. Treasury
+notes, government asset-backed securities, certificates of deposits and
+equities.
+The Company believes that based upon its current financial position and
+available cash and marketable securities, it will meet all of its financial
+commitments and operating needs for at least the next twelve months.
+23
+OPERATING ACTIVITIES
+($ in thousands)
+During the year ended December 31, 2006, net cash provided by operating
+activities was $43,408. Sources of cash were provided primarily by the net
+income of $46,250, an increase in accrued incentive compensation of $6,163 and
+decrease in inventories of $635. The primary uses of cash were increases in
+factored receivables of $10,136 and non-factored receivables of $2,275 caused by
+a substantial increase in sales in 2006 including the incremental sales from the
+acquisition of Daniel M. Friedman. Other uses of cash include an increase in
+prepaid expenses, prepaid taxes, deposits and other assets of $2,133 and a
+decrease in accounts payable and accrued expenses of $6,136.
+CONTRACTUAL OBLIGATIONS
+($ in thousands)
+The Company's contractual obligations as of December 31, 2006 were as follows:
+Payment due by period
+Contractual Obligations Total 2007 2008-2009 2010-2011 2012 and after
+---------------------------- --------- --------- --------- --------- --------------
+Operating lease
+obligations $ 94,649 $ 13,595 $ 25,282 $ 22,303 $ 33,469
+Purchase obligations 50,991 50,991
+Other long-term liabilities
+(future minimum royalty
+payments) 1,318 778 540
+--------- --------- --------- --------- --------------
+Total $ 146,958 $ 65,364 $ 25,822 $ 22,303 $ 33,469
+========= ========= ========= ========= ==============
+At December 31, 2006, the Company had un-negotiated open letters of credit for
+the purchase of inventory of approximately $1,981.
+The Company has an employment agreement with Steven Madden, its Creative and
+Design Chief, which provides for an annual base salary of $600 subject to
+certain specified adjustments through June 30, 2015. The agreement also provides
+for annual bonuses based on EBITDA, revenue of any new business, and royalty
+income over $2 million, plus an equity grant and a non-accountable expense
+allowance.
+On February 7, 2006, the Company acquired all of the equity interest of Daniel
+M. Friedman. The acquisition was completed for consideration of $18,710,
+including transaction costs. In addition, the purchase agreement includes
+certain earn-out provisions based on financial performance through 2010.
+The Company has employment agreements with certain executives, which provide for
+the payment of compensation aggregating approximately $1,643 in 2007, $1,192 in
+2008 and $480 in 2009. In addition, some of the employment agreements provide
+for a discretionary bonus and some provide for incentive compensation based on
+various performance criteria as well as other benefits. The Chief Operating
+Officer of the Company is entitled to deferred compensation calculated as a
+percentage of his base salary.
+Ninety-nine percent (99%) of the Company's products are produced at overseas
+locations, the majority of which are located in China, with a small percentage
+located in Brazil, Italy and Spain. The Company has not entered into any
+long-term manufacturing or supply contracts with any of these foreign companies.
+The Company believes that a sufficient number of alternative sources exist
+outside of the United States for the manufacture of its products. In addition,
+the Company currently makes approximately 98% of its purchases in U.S. dollars.
+24
+INVESTING ACTIVITIES
+($ in thousands)
+During the year ended December 31, 2006, the Company invested $44,690 in
+marketable securities and received $21,434 from the maturities and sales of
+securities. Also, the Company invested $15,357 in the acquisition of Daniel M.
+Friedman. Additionally, the Company made capital expenditures of $9,511,
+principally for leasehold improvements for three new stores, remodeling of nine
+existing stores, additional office space and upgrades to its computer systems.
+FINANCING ACTIVITIES
+($ in thousands)
+During the year ended December 31, 2006, the Company paid dividends of $21,106
+and repurchased 349,000 shares of the Company's common stock at an average price
+of $23.68 for a total cost of $8,264. The Company received $6,837 in cash and
+also realized a tax benefit of $3,611 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.
+CRITICAL ACCOUNTING POLICIES AND THE USE OF ESTIMATES
+Management's Discussion and Analysis of Financial Condition and Results of
+Operations is based upon the Company's consolidated financial statements which
+have been prepared in accordance with Generally Accepted Accounting Principles.
+The preparation of these financial statements requires management to make
+estimates and judgments that affect the reported amounts of assets, liabilities,
+sales and expenses, and related disclosure of contingent assets and liabilities.
+Estimates by their nature are based on judgments and available information.
+Estimates are made based upon historical factors, current circumstances and the
+experience and judgment of management. Assumptions and estimates are evaluated
+on an ongoing basis and the Company may employ outside experts to assist in
+evaluations. Therefore, actual results could materially differ from those
+estimates under different assumptions and conditions. Management believes the
+following critical accounting estimates are more significantly affected by
+judgments and estimates used in the preparation of the Company's condensed
+consolidated financial statements: allowance for bad debts, returns, and
+customer chargebacks; inventory reserves; valuation of intangible assets;
+litigation reserves and cost of sales.
+Allowances for bad debts, returns and customer chargebacks. The Company provides
+reserves against its trade accounts receivables for future customer chargebacks,
+co-op advertising allowances, discounts, returns and other miscellaneous
+deductions that relate to the current period. The reserve against the Company's
+non-factored trade receivables also includes estimated losses that may result
+from customers' inability to pay. The amount of the reserve for bad debts,
+returns, discounts and compliance chargebacks are determined by analyzing aged
+receivables, current economic conditions, the prevailing retail environment and
+historical dilution levels for customers. As a result of a reevaluation of the
+retail environment, the Company revised its method for evaluating its allowance
+for customer markdowns and advertising chargebacks in the fourth quarter of
+2005. In the past, the Company would look at historical dilution levels for
+customers to determine the allowance amount. Under the new methodology, the
+Company evaluates anticipated chargebacks by reviewing several performance
+indicators for its major customers. These performance indicators (which include
+inventory levels at the retail floors, sell through rates and gross margin
+levels) are analyzed by key account executives and the Vice President of
+Wholesale Sales to estimate the amount of the anticipated customer allowance.
+Failure to correctly estimate the amount of the reserve could materially impact
+the Company's results of operations and financial position.
+Inventory reserves. Inventories are stated at lower of cost or market, on a
+first-in, first-out basis. The Company reviews inventory on a regular basis for
+excess and slow moving inventory. The review is based on an analysis of
+inventory on hand, prior sales, and expected net realizable value through future
+sales. The analysis includes a review of inventory quantities on hand at
+period-end in relation to year-to-date sales and projections for sales in the
+foreseeable future as well as subsequent sales. The Company considers quantities
+25
+on hand in excess of estimated future sales to be at risk for market impairment.
+The net realizable value, or market value, is determined based on the estimate
+of sales prices of such inventory through off-price or discount store channels.
+The likelihood of any material inventory write-down is dependent primarily on
+the expectation of future consumer demand for the Company's product. A
+misinterpretation or misunderstanding of future consumer demand for the
+Company's product, the economy, or other failure to estimate correctly, in
+addition to abnormal weather patterns, could result in inventory valuation
+changes, either favorably or unfavorably, compared to the valuation determined
+to be appropriate as of the balance sheet date.
+Valuation of intangible assets. SFAS No. 142, "Goodwill and Other Intangible
+Assets", which was adopted by the Company on January 1, 2002, requires that
+goodwill and intangible assets with indefinite lives no longer be amortized, but
+rather be tested for impairment at least annually. This pronouncement also
+requires that intangible assets with finite lives be amortized over their
+respective lives to their estimated residual values, and reviewed for impairment
+in accordance with SFAS No. 144 "Accounting for Impairment or Disposal of
+Long-lived Assets." In accordance with SFAS No. 144, long-lived assets, such as
+property, equipment, leasehold improvements and goodwill subject to
+amortization, are reviewed for impairment annually or whenever events or changes
+in circumstances indicate that the carrying amount of an asset may not be
+recoverable. Recoverability of assets to be held and used is measured by a
+comparison of the carrying amount of an asset to the estimated undiscounted
+future cash flows expected to be generated by the asset. If the carrying amount
+of an asset exceeds its estimated future cash flows, an impairment charge is
+recognized by the amount by which the carrying amount of the asset exceeds the
+fair value of the asset.
+Litigation reserves. Estimated amounts for litigation claims that are probable
+and can be reasonably estimated are recorded as liabilities in the Company's
+consolidated financial statements. The likelihood of a material change in these
+estimated reserves would be dependent on new claims as they may arise and the
+favorable or unfavorable events of a particular litigation. As additional
+information becomes available, management will assess the potential liability
+related to the pending litigation and revise their estimates. Such revisions in
+management's estimates of the contingent liability could materially impact the
+Company's results of operation and financial position.
+Cost of sales. All costs incurred to bring finished products to the Company's
+distribution center and, in the retail division, the costs to bring products to
+the company's stores, are included in the cost of sales line item on the
+Company's Consolidated Statement of Operations. These include the cost of
+finished products, purchase commissions, letter of credit fees, brokerage fees,
+material and labor and related items, sample expenses, custom duty, inbound
+freight, royalty payments on licensed products, labels and product packaging.
+All warehouse and distribution costs are included in the operating expenses line
+item of the Company's Consolidated Statement of Operations. The Company
+classifies shipping costs, if any, to customers as operating expenses. The
+Company's gross profit margins may not be comparable to other companies in the
+industry because some companies may include warehouse and distribution as a
+component of cost of sales, while other companies report on the same basis as
+the Company and include them in operating expenses.
+ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
+($ in thousands)
+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 LIBOR. An analysis of the
+Company's credit agreement with GMAC and Wells Fargo Century can be found in
+Note C, "Due From Factors" to the Consolidated Financial Statements included in
+this Annual Report on Form 10-K.
+As of December 31, 2006, the Company held marketable securities valued at
+$89,681, which consist primarily of corporate and municipal bonds, U.S. treasury
+notes, certificates of deposit and government asset-backed securities that have
+various maturities through December 2009, as well as marketable equity
+securities. 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. In addition, any decline
+in interest rates would be expected to reduce the Company's interest income.
+26
+ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
+See the 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
+Disclosure Controls and Procedures
+As required by Rule 13a-15(b) of 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.
+Management's Annual Report on Internal Control Over Financial Reporting
+Management of Steve Madden, Ltd. is responsible for establishing and maintaining
+adequate internal control over financial reporting (as defined in Rule 13a-15(f)
+of the Securities Exchange Act of 1934).
+The Company's internal control over financial reporting is a process designed to
+provide reasonable assurance regarding the reliability of financial reporting
+and the preparation of financial statements for external purpose in accordance
+with U.S. generally accepted accounting principles. The Company's internal
+control over financial reporting includes those policies and procedures that (1)
+pertain to maintenance of records that, in reasonable detail, accurately and
+fairly reflect the transaction and dispositions of the assets of the company;
+(2) provide reasonable assurance that transactions are recorded as necessary to
+permit preparation of financial statements in accordance with U.S. generally
+accepted accounting principles, and that receipts and expenditures of the
+company are being made only in accordance with authorizations of management and
+directors of the company; and (3) provide reasonable assurance regarding
+prevention or timely detection of unauthorized acquisition, use, or disposition
+of the company's assets that could have a material effect on the financial
+statements.
+Because of its inherent limitations, internal control over financial reporting
+may not prevent or detect misstatements. Also, projections of any evaluation of
+effectiveness to future periods are subject to the risk that controls may become
+inadequate because of changes in conditions, or that the degree of compliance
+with the policies or procedures may deteriorate.
+We acquired Daniel M. Friedman & Associates, Inc. in February 2006. We have
+excluded Daniel M. Friedman & Associates, Inc. from the scope of our annual
+report on internal control over financial reporting as of December 31, 2006.
+These operations represent approximately 11% of our total assets at December 31,
+2006 and approximately 11% and 5% of our revenues and net income for the year
+ended December 31, 2006, respectively.
+Under the supervision of and with the participation of the Chief Executive
+Officer and the Chief Financial Officer, the Company's management conducted an
+assessment of the effectiveness of the Company's internal control over financial
+reporting based on the frame work and criteria established in Internal Control -
+Integrated Framework, issued by the Committee of Sponsoring Organizations of the
+Tradeway Commission. Based on this assessment, the Company's management has
+concluded that, as of December 31, 2006, the Company's internal control over
+financial reporting was effective.
+27
+Attestation Report of the Company's Independent Registered Public Accounting
+Firm
+The Company's Independent Registered Public Accounting Firm, Eisner
+LLP, has audited and issued a report on management's assessment of the Company's
+internal control over financial reporting. The report of Eisner LLP appears
+below.
+To the Board of Directors and Shareholders of
+Steven Madden, Ltd.
+We have audited management's assessment, included in the accompanying
+Management's Annual Report on Internal Control Over Financial Reporting, that
+Steven Madden, Ltd. and subsidiaries (the "Company") maintained effective
+internal control over financial reporting as of December 31, 2006, based on
+criteria established in Internal Control - Integrated Framework issued by the
+Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). The
+Company's management is responsible for maintaining effective internal control
+over financial reporting and for its assessment of the effectiveness of internal
+control over financial reporting. Our responsibility is to express an opinion on
+management's assessment and an opinion on the effectiveness of the Company's
+internal control over financial reporting based on our audit.
+We conducted our audit in accordance with the standards of the Public
+Company Accounting Oversight Board (United States). Those standards require that
+we plan and perform the audit to obtain reasonable assurance about whether
+effective internal control over financial reporting was maintained in all
+material respects. Our audit included obtaining an understanding of internal
+control over financial reporting, evaluating management's assessment, testing
+and evaluating the design and operating effectiveness of internal control, and
+performing such other procedures as we considered necessary in the
+circumstances. We believe that our audit provides a reasonable basis for our
+opinion.
+A company's internal control over financial reporting is a process
+designed to provide reasonable assurance regarding the reliability of financial
+reporting and the preparation of financial statements for external purposes in
+accordance with generally accepted accounting principles. A company's internal
+control over financial reporting includes those policies and procedures that (i)
+pertain to the maintenance of records that, in reasonable detail, accurately and
+fairly reflect the transactions and dispositions of the assets of the company;
+(ii) provide reasonable assurance that transactions are recorded as necessary to
+permit preparation of financial statements in accordance with generally accepted
+accounting principles, and that receipts and expenditures of the company are
+being made only in accordance with authorizations of management and directors of
+the company; and (iii) provide reasonable assurance regarding prevention or
+timely detection of unauthorized acquisition, use, or disposition of the
+company's assets that could have a material effect on the financial statements.
+Because of its inherent limitations, internal control over financial
+reporting may not prevent or detect misstatements. Also, projections of any
+evaluation of effectiveness to future periods are subject to the risk that
+controls may become inadequate because of changes in conditions, or that the
+degree of compliance with the policies or procedures may deteriorate.
+As indicated in the accompanying Management's Annual Report on Internal
+Control over Financial Reporting, management's assessment of the effectiveness
+of internal control over financial reporting as of December 31, 2006 did not
+include the internal controls of Daniel M. Friedman and Associates, Inc. and
+D.M.F. International (collectively, "Daniel M. Friedman") because they were
+acquired by the Company in purchase business combinations during 2006. Daniel M.
+Friedman constituted approximately 11% of total assets and approximately 11% and
+5% of revenues and net income, respectively, of the related consolidated
+financial statement amounts as of and for the year ended December 31, 2006. Our
+audit of internal control over financial reporting of the Company also did not
+include an evaluation of the internal control over financial reporting of Daniel
+M. Friedman.
+In our opinion, management's assessment that the Company maintained
+effective internal control over financial reporting as of December 31, 2006, is
+fairly stated, in all material respects, based on criteria established in
+Internal Control-Integrated Framework issued by the COSO. Also, in our opinion,
+Steven Madden, Ltd. and subsidiaries maintained, in all material respects,
+effective internal control over financial reporting as of December 31, 2006,
+based on criteria established in Internal Control-Integrated Framework issued by
+COSO.
+28
+We also have audited, in accordance with the standards of the Public
+Company Accounting Oversight Board (United States), the consolidated balance
+sheets of Steven Madden, Ltd. and subsidiaries as of December 31, 2006 and 2005,
+and the related consolidated statements of income, changes in stockholders'
+equity, and cash flows for the years in the three-year period ended December
+31,2006, and our report dated March 7, 2007 expressed an unqualified opinion on
+those consolidated financial statements.
+Eisner LLP
+New York, New York
+March 7, 2007
+Changes in Internal Control Over Financial Reporting
+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 2006 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 material change during the fourth quarter of 2006.
+ITEM 9B OTHER INFORMATION
+None.
+PART III
+ITEM 10 DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
+The information required to be furnished pursuant to this item will be set
+forth in the Company's proxy statement for the 2007 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 2007 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 2007 Annual Meeting of
+Stockholders, and is incorporated herein by reference.
+ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
+INDEPENDENCE
+The information required to be furnished pursuant to this item will be set
+forth in the Company's proxy statement for the 2007 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 2007 Annual Meeting of
+Stockholders, and is incorporated herein by reference.
+29
+PART IV
+ITEM 15 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
+(a)(1) Financial Statements
+The following consolidated financial statements of Steven Madden, Ltd. and
+subsidiaries are included in Item 8:
+30
+STEVE MADDEN, LTD. AND SUBSIDIARIES
+Contents
+Page
+----
+Consolidated Financial Statements
+Report of Independent Registered Public Accounting Firm F-2
+Balance sheets as of December 31, 2006 and 2005 F-3
+Statements of income for the years ended December 31, 2006, 2005
+and 2004 F-4
+Statements of changes in stockholders' equity for the years ended
+December 31, 2006, 2005 and 2004 F-5
+Statements of cash flows for the years ended December 31, 2006,
+2005 and 2004 F-7
+Notes to financial statements F-8
+F-1
+REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
+To the Board of Directors and Stockholders
+Steven Madden, Ltd.
+We have audited the accompanying consolidated balance sheets of Steven Madden,
+Ltd. and subsidiaries (the "Company") as of December 31, 2006 and 2005, and the
+related consolidated statements of income, changes in stockholders' equity and
+cash flows for the years in the three-year period ended December 31, 2006. 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 the standards of the Public Company
+Accounting Oversight Board (United States). Those standards require that we plan
+and perform the audit 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.
+As discussed in Note F to the financial statements effective January 1, 2006,
+the Company changed its method of accounting for stock based compensation in
+accordance with Statement of Financial Accounting Standards No. 123 (Revised
+2004), "Shared-Based Payment".
+In our opinion, the financial statements referred to above present fairly, in
+all material respects, the consolidated financial position of Steven Madden,
+Ltd. and subsidiaries as of December 31, 2006 and 2005, 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, 2006 in conformity with U.S.
+generally accepted accounting principles.
+We also have audited, in accordance with the standards of the Public Company
+Accounting Oversight Board (United States), the effectiveness of Steven Madden,
+Ltd. and subsidiaries' internal control over financial reporting as of December
+31, 2006, based on criteria established in Internal Control - Integrated
+Framework issued by the Committee of Sponsoring Organizations of the Treadway
+Commission (COSO), and our report dated March 7, 2007 expressed an unqualified
+opinion on management's assessment of, and the effective operation of, internal
+control over financial reporting.
+Eisner LLP
+New York, New York
+March 7, 2007
+F-2
+STEVEN MADDEN, LTD. AND SUBSIDIARIES
+Consolidated Balance Sheets
+(in thousands) December 31,
+----------------------------
+2006 2005
+------------ ------------
+ASSETS
+Current assets:
+Cash and cash equivalents $ 19,204 $ 42,842
+Accounts receivable - net of allowances of $1,009 and $813 7,317 3,294
+Due from factors - net of allowances of $11,499 and $7,587 40,208 31,785
+Inventories 33,660 28,412
+Marketable securities - available for sale 72,542 24,092
+Prepaid expenses and other current assets 5,929 2,435
+Prepaid taxes 1,084 2,512
+Deferred taxes 8,099 5,600
+------------ ------------
+Total current assets 188,043 140,972
+Property and equipment, net 23,375 20,898
+Deferred taxes 6,794 5,568
+Deposits and other 2,432 586
+Marketable securities - available for sale 17,139 42,157
+Goodwill - net 6,465 1,547
+Intangibles - net 7,144 --
+------------ ------------
+$ 251,392 $ 211,728
+============ ============
+LIABILITIES
+Current liabilities:
+Accounts payable $ 12,784 $ 15,579
+Accrued expenses 14,056 7,998
+Accrued incentive compensation 9,492 3,329
+------------ ------------
+Total current liabilities 36,332 26,906
+Deferred rent 3,136 2,757
+------------ ------------
+39,468 29,663
+------------ ------------
+Commitments, contingencies and other - see notes J & L
+STOCKHOLDERS' EQUITY
+Preferred stock - $.0001 par value, 5,000 shares authorized; none issued Series
+A Junior Participating preferred stock - $.0001 par value, 60 shares
+authorized; none issued
+Common stock - $.000067 par value, 90,000 shares authorized, 24,806 and
+24,225 shares issued, 21,106 and 20,874 shares outstanding at
+December 31, 2006 and 2005, respectively 2 2
+Additional paid-in capital 112,692 99,950
+Retained earnings 133,561 108,838
+Other comprehensive loss:
+Unrealized loss on marketable securities (net of taxes) (641) (1,299)
+Treasury stock - 3,700 and 3,351 shares at cost at December 31, 2006 and
+2005, respectively (33,690) (25,426)
+------------ ------------
+211,924 182,065
+------------ ------------
+$ 251,392 $ 211,728
+============ ============
+See notes to financial statements
+F-3
+STEVEN MADDEN, LTD. AND SUBSIDIARIES
+Consolidated Statements of Income
+(in thousands, except per share data) Year Ended December 31,
+--------------------------------------------
+2006 2005 2004
+------------ ------------ ------------
+Net sales:
+Wholesale $ 347,509 $ 254,275 $ 230,347
+Retail 127,654 121,511 107,797
+------------ ------------ ------------
+475,163 375,786 338,144
+------------ ------------ ------------
+Cost of sales:
+Wholesale 218,014 175,292 166,724
+Retail 58,720 61,339 51,877
+------------ ------------ ------------
+276,734 236,631 218,601
+------------ ------------ ------------
+Gross profit:
+Wholesale 129,495 78,983 63,623
+Retail 68,934 60,172 55,920
+------------ ------------ ------------
+198,429 139,155 119,543
+Commission and licensing fee income - net 14,246 7,119 4,588
+Operating expenses (134,377) (114,185) (105,150)
+Impairment of goodwill -- (519) --
+------------ ------------ ------------
+Income before other income (expenses) and provision for
+income taxes 78,298 31,570 18,981
+Other income (expenses):
+Interest income 3,703 2,554 2,009
+Interest expense (100) (164) (68)
+Gain (loss) on sale of marketable securities (967) (500) 32
+------------ ------------ ------------
+Income before provision for income taxes 80,934 33,460 20,954
+Provision for income taxes 34,684 14,260 8,679
+------------ ------------ ------------
+Net income $ 46,250 $ 19,200 $ 12,275
+============ ============ ============
+Basic income per share $ 2.21 $ 0.95 $ 0.62
+============ ============ ============
+Diluted income per share $ 2.09 $ 0.92 $ 0.58
+============ ============ ============
+Basic weighted average common shares outstanding 20,906 20,112 19,724
+Effect of dilutive securities - options 1,195 806 1,611
+------------ ------------ ------------
+Diluted weighted average common shares outstanding 22,101 20,918 21,335
+============ ============ ============
+Dividends paid per common share $ 1.00 $ 0.67 $ 0.00
+============ ============ ============
+See notes to financial statements
+F-4
+STEVEN MADDEN, LTD. AND SUBSIDIARIES
+Consolidated Statements of Changes in Stockholders' Equity
+(in thousands)
+Common Stock Additional
+------------------------------- Paid-in Retained Unearned
+Shares Amount Capital Earnings Compensation
+-------------- -------------- -------------- -------------- --------------
+Balance - December 31, 2003 21,688 $ 1 $ 79,136 $ 91,176 $ (3,008)
+Exercise of stock options 194 454
+Tax benefit from exercise of options 1,004
+Issuance of fully vested restricted stock 30
+Forfeiture of restricted stock (183) 121
+Cash in lieu of restricted stock (378)
+Deferred compensation in connection with
+issuance of stock options and
+restricted stock 598 (598)
+Amortization of unearned compensation 2,782
+Unrealized holding loss on marketable
+securities (net of taxes of $741)
+Net income 12,275
+Comprehensive income
+Common stock purchased for treasury
+-------------- -------------- -------------- -------------- --------------
+Balance - December 31, 2004 21,912 1 80,631 103,451 (703)
+Exercise of stock options 2,133 1 16,482
+Tax benefit from exercise of options 4,604
+Issuance of fully vested restricted stock 180
+Cash in lieu of restricted stock (1,767)
+Amortization of unearned compensation 703
+Unrealized holding loss on marketable
+securities (net of taxes of $199)
+Net income 19,200
+Comprehensive income
+Cash dividend paid (13,813)
+Common stock purchased for treasury
+-------------- -------------- -------------- -------------- --------------
+Balance - December 31, 2005 24,225 2 99,950 108,838 --
+Exercise of stock options 551 6,837
+Tax benefit from exercise of options 3,611
+Issuance of fully vested restricted stock 30
+Stock-based compensation 2,294
+Unrealized holding loss on marketable
+securities (net of taxes of $476)
+Net income 46,250
+Comprehensive income
+Cash dividend paid (21,527)
+Common stock purchased for treasury
+-------------- -------------- -------------- -------------- --------------
+Balance - December 31, 2006 24,806 $ 2 $ 112,692 $ 133,561 $ --
+============== ============== ============== ============== ==============
+See notes to financial statements
+F-5
+STEVEN MADDEN, LTD. AND SUBSIDIARIES
+Consolidated Statements of Changes in Stockholders' Equity (Continued)
+(in thousands)
+Accumulated
+Other Treasury Stock Total
+Comprehensive ------------------------------- Stockholders' Comprehensive
+Gain (Loss) Shares Amount Equity Income
+-------------- -------------- -------------- -------------- --------------
+Balance - December 31, 2003 $ (127) 1,867 $ (7,991) $ 159,187
+Exercise of stock options 454
+Tax benefit from exercise of options 1,004
+Issuance of fully vested restricted stock
+Forfeiture of restricted stock (62)
+Cash in lieu of restricted stock (378)
+Deferred compensation in connection with
+issuance of stock options and
+restricted stock
+Amortization of unearned compensation 2,782
+Unrealized holding loss on marketable
+securities (net of taxes of $741) (897) (897) (897)
+Net income 12,275 12,275
+--------------
+Comprehensive income $ 11,378
+==============
+Common stock purchased for treasury 818 (9,700) (9,700)
+-------------- -------------- -------------- --------------
+Balance - December 31, 2004 (1,024) 2,685 (17,691) 164,665
+Exercise of stock options 16,483
+Tax benefit from exercise of options 4,604
+Issuance of fully vested restricted stock
+Cash in lieu of restricted stock (1,767)
+Amortization of unearned compensation 703
+Unrealized holding loss on marketable
+securities (net of taxes of $199) (275) (275) (275)
+Net income 19,200 19,200
+--------------
+Comprehensive income $ 18,925
+==============
+Cash dividend paid (13,813)
+Common stock purchased for treasury 666 (7,735) (7,735)
+-------------- -------------- -------------- --------------
+Balance - December 31, 2005 (1,299) 3,351 (25,426) 182,065
+Exercise of stock options 6,837
+Tax benefit from exercise of options 3,611
+Issuance of fully vested restricted stock
+Stock-based compensation 2,294
+Unrealized holding gain on marketable
+securities (net of taxes of $476) 658 658 658
+Net income 46,250 46,250
+--------------
+Comprehensive income $ 46,908
+==============
+Cash dividend paid ($421 of which is
+payable to holders of restricted
+stock pending the vesting of
+these shares) (21,527)
+Common stock purchased for treasury 349 (8,264) (8,264)
+-------------- -------------- -------------- --------------
+Balance - December 31, 2006 $ (641) 3,700 $ (33,690) $ 211,924
+============== ============== ============== ==============
+See notes to financial statements
+F-6
+STEVEN MADDEN, LTD. AND SUBSIDIARIES
+Consolidated Statements of Cash Flows
+(in thousands) Year Ended December 31,
+--------------------------------------------
+2006 2005 2004
+------------ ------------ ------------
+Cash flows from operating activities:
+Net income $ 46,250 $ 19,200 $ 12,275
+Adjustments to reconcile net income to net cash provided by
+operating activities:
+Stock-based compensation 2,294 703 2,719
+Depreciation and amortization 6,705 5,120 4,865
+Loss on disposal of fixed assets 1,857 535 198
+Impairment of goodwill -- 519 --
+Deferred taxes (4,210) (2,691) (227)
+Provision for doubtful accounts and chargebacks 3,048 5,485 537
+Deferred rent expense 379 669 260
+Realized (gain) loss on sale of marketable securities 967 500 (32)
+Changes in:
+Accounts receivable (2,275) (1,197) 1,824
+Due from factors (10,136) (3,282) (5,416)
+Inventories 635 5,972 (10,526)
+Prepaid expenses, prepaid taxes, deposits and other
+assets (2,133) (624) 2,559
+Accounts payable and accrued expenses (6,136) 4,320 2,870
+Accrued incentive compensation 6,163 2,909 (47)
+------------ ------------ ------------
+Net cash provided by operating activities 43,408 38,138 11,859
+------------ ------------ ------------
+Cash flows from investing activities:
+Purchase of property and equipment (9,511) (5,822) (7,387)
+Purchases of marketable securities (44,690) (27,252) (27,779)
+Maturity/sale of marketable securities 21,434 9,153 9,708
+Acquisition, net of cash acquired (15,357) -- --
+------------ ------------ ------------
+Net cash used in investing activities (48,124) (23,921) (25,458)
+------------ ------------ ------------
+Cash flows from financing activities:
+Proceeds from exercise of stock options 6,837 16,483 454
+Tax benefit from exercise of options 3,611 4,604 1,004
+Cash dividend paid (21,106) (13,813) --
+Cash in lieu of restricted stock -- (1,767) (378)
+Common stock purchased for treasury (8,264) (7,735) (9,700)
+Payments of lease obligations -- -- (1)
+------------ ------------ ------------
+Net cash used in financing activities (18,922) (2,228) (8,621)
+------------ ------------ ------------
+Net (decrease) increase in cash and cash equivalents (23,638) 11,989 (22,220)
+Cash and cash equivalents - beginning of year 42,842 30,853 53,073
+------------ ------------ ------------
+Cash and cash equivalents - end of year $ 19,204 $ 42,842 $ 30,853
+============ ============ ============
+Supplemental disclosures of cash flow information:
+Cash paid during the year for:
+Interest $ 100 $ 164 $ 68
+Income taxes $ 33,886 $ 12,536 $ 5,855
+Non-cash transactions
+Dividend accrual related to restricted stock $ 421 $ -- $ --
+See notes to financial statements
+F-7
+STEVEN MADDEN, LTD. AND SUBSIDIARIES
+Notes to Financial Statements
+December 31, 2006 and 2005
+($ in thousands except per share data)
+NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
+[1] Organization:
+Steven Madden, Ltd., a Delaware corporation, designs and sources
+women's, men's and childrens shoes, for sale through its wholesale and
+retail channels under the Steve Madden, Steven, Madden Mens and Natural
+Comfort brands and through its wholesale channels under the Stevies,
+SMNY/Madden Girl and Candie's (under license) brand names. In addition,
+the Company designs, sources, markets and sells name brand and private
+label fashion handbags and accessories through its Daniel M. Friedman
+Division. Revenue is generated predominately through the sale of the
+Company's brand name merchandise and certain licensed products. At
+December 31, 2006 and 2005, the Company operated 96 and 98 retail
+stores (including its website as a store), respectively. Revenue is
+subject to seasonal fluctuations. See Note M for operating segment
+information.
+[2] Principles of consolidation:
+The consolidated financial statements include the accounts of Steven
+Madden, Ltd. and its wholly owned subsidiaries Steven Madden Retail,
+Inc., Diva Acquisition Corp., Adesso-Madden, Inc., Unionbay Men's
+Footwear, Inc., Stevies, Inc. and Daniel M. Friedman and Associates,
+Inc. (collectively referred to as the "Company"). All significant
+intercompany balances and transactions have been eliminated.
+[3] Stock split:
+On April 27, 2006, the Board of Directors declared a 3-for-2 stock
+split of its outstanding shares of common stock, which was effected in
+the form of a stock dividend of one share of stock for every two shares
+outstanding. The dividend was paid on May 26, 2006 to stockholders of
+record at the close of business on May 11, 2006. All share and per
+share data provided herein gives effect to this stock split, applied
+retroactively.
+[4] Use of estimates:
+The preparation of financial statements in conformity with accounting
+principles generally accepted in the United States of America requires
+management to make estimates and assumptions that affect the reported
+amounts of assets and liabilities and disclosure of contingent assets
+and liabilities at the date of the financial statements and the
+reported amounts of revenue and expenses during the reporting period.
+Actual results could differ from those estimates.
+Allowances for bad debts, returns and customer chargebacks: The Company
+provides reserves on trade accounts receivables for future and existing
+customer chargebacks and markdown allowances, discounts, returns and
+other miscellaneous compliance related deductions that relate to the
+current period sales. As a result of a reevaluation of the retail
+environment, the Company revised its method for evaluating its estimate
+of the allowance for customer chargebacks in 2005. In the past, the
+Company would look at historical dilution levels for customers to
+determine the allowance amount. Under the new method of estimation, the
+Company evaluates anticipated chargebacks by reviewing several
+performance indicators at its major customers. These performance
+indicators, which include inventory levels, sell through rates and
+gross margin levels, are analyzed by key account executives and the
+Vice President of Wholesale Sales to estimate the amount of the
+anticipated customer allowance. This change in accounting estimate
+resulted in an increase of our reserve by approximately $1,700 in the
+fourth quarter of 2005.
+F-8
+STEVEN MADDEN, LTD. AND SUBSIDIARIES
+Notes to Financial Statements
+December 31, 2006 and 2005
+($ in thousands except per share data)
+NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
+[5] Cash equivalents:
+Cash equivalents at December 31, 2006 and 2005, amounted to
+approximately $11,121 and $33,290, respectively, and consisted of money
+market accounts and commercial paper. The Company considers all highly
+liquid instruments with an original maturity of three months or less
+when purchased to be cash equivalents.
+[6] Marketable securities:
+Marketable securities consist primarily of corporate bonds, U.S.
+treasury notes, certificates of deposit and government asset-backed
+securities with maturities greater than three months and up to five
+years at the time of purchase, as well as marketable equity securities.
+These securities, which are classified as available for sale, are
+carried at fair value, with unrealized gains and losses net of any tax
+effect reported in stockholders' equity as accumulated other
+comprehensive income, and are held at an investment bank with the
+schedule of maturities at December 31, 2006 as follows:
+Maturities
+-------------------------------
+1 Year or Less 1 to 5 Years
+-------------- --------------
+Schedule of maturities:
+Municipal bonds $ 21,869 $ 7,072
+US Government and Federal agency
+bonds 1,980 3,175
+Corporate bonds 7,326 4,849
+Fixed income securities 36,286 --
+Certificates of deposit -- 2,043
+-------------- --------------
+67,461 17,139
+Marketable equity securities 5,081 --
+-------------- --------------
+$ 72,542 $ 17,139
+============== ==============
+[7] Inventories:
+Inventories, which consist of finished goods on hand and in transit,
+are stated at the lower of cost (first-in, first-out method) or market.
+[8] Property and equipment:
+Property and equipment are stated at cost less accumulated depreciation
+and amortization. Depreciation is computed utilizing the straight-line
+method based on estimated useful lives ranging from three to ten years.
+Leasehold improvements are amortized utilizing the straight-line method
+over the shorter of their estimated useful lives or the remaining lease
+term. Depreciation and amortization include amounts relating to
+property and equipment under capital leases.
+Impairment losses are recognized for long-lived assets, including
+certain intangibles, used in operations when indicators of impairment
+are present and the undiscounted cash flows estimated to be generated
+by those assets are not sufficient to recover the assets' carrying
+amount. Impairment losses are measured by comparing the fair value of
+the assets to their carrying amount. No impairment losses have been
+incurred for the years presented other than the impairment of goodwill
+as described in Note A[9].
+F-9
+STEVEN MADDEN, LTD. AND SUBSIDIARIES
+Notes to Financial Statements
+December 31, 2006 and 2005
+($ in thousands except per share data)
+NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
+[9] Goodwill:
+The Company accounts for goodwill and intangible assets in accordance
+with SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142").
+Under SFAS 142, amortization of goodwill and indefinite lived
+intangible assets are not amortized, rather they are tested for
+impairment on an annual basis or more often if events or circumstances
+change that could cause these assets to become impaired.
+On May 1, 1998, the Company purchased certain assets from and assumed
+certain liabilities of Daniel Scott, Inc. which operated two retail
+outlet stores under the name Shoe Biz. The acquisition was recorded at
+a total cost of approximately $703, including related expenses, of
+which $635 was allocated to cost in excess of fair value of the
+identifiable net assets acquired ("goodwill"). Prior to the adoption of
+SFAS 142, the Company had amortized approximately $116 of the goodwill,
+resulting in a net value of $519. During the year ended December 31,
+2004, the Company operated four stores under the Shoe Biz name. In
+order to consolidate its resources to the Steve Madden brand, the
+Company decided to discontinue using the Shoe Biz name. As a result, as
+of June 30, 2005, one Shoe Biz store was converted to a Steve Madden
+store, while two other Shoe Biz stores were closed. The remaining store
+operating under the Shoe Biz was closed in the first quarter of 2006.
+As a result, the entire balance of the goodwill of $519 is considered
+impaired and was recognized as a reduction of income in the second
+quarter of 2005.
+[10] Net income per share:
+Basic income per share is based on the weighted average number of
+common shares outstanding during the year. Diluted income per share
+reflects: a) the potential dilution assuming common shares were issued
+upon the exercise of outstanding in-the-money options and the proceeds
+thereof were used to purchase treasury stock at the average market
+price during the period, and b) the vesting of granted nonvested
+restricted stock awards for which the assumed proceeds upon grant are
+deemed to be the amount of compensation cost attributable to future
+services and are not yet recognized using the treasury stock method, to
+the extent dilutive. For the years ended December 31, 2006 and 2005, no
+options exercisable into shares of common stock have been excluded in
+the calculation of diluted income per share, whereas options to
+purchase 1,878,000 shares of common stock were excluded from the
+calculation of diluted income per share in 2004 because the result
+would have been antidilutive. For the years ended December 31, 2006,
+2005 and 2004, the unvested restricted stock awards were dilutive.
+[11] Advertising costs:
+The Company expenses costs of print, radio and billboard advertisements
+as of the first date the advertisements take place. Advertising expense
+included in operating expenses amounted to approximately $7,187 in
+2006, $8,354 in 2005 and $8,993 in 2004.
+[12] Fair value of financial instruments:
+The carrying value of the Company's financial instruments approximates
+fair value due to their short-term nature or their underlying terms.
+Marketable securities are carried at quoted market prices which
+represent fair value.
+[13] Stock-based compensation:
+At December 31, 2006, the Company had various stock-based compensation
+plans. Effective January 1, 2006, the Company adopted the provisions of
+Statement of Financial Accounting Standards No. 123R, "Accounting for
+Stock-Based Compensation" ("SFAS 123R"), which requires stock-based
+compensation to be measured based on the fair value of the awards on
+the grant date. Prior to adopting SFAS 123R, the Company's equity-based
+compensation expense was accounted for under the provisions of APB
+Opinion
+F-10
+STEVEN MADDEN, LTD. AND SUBSIDIARIES
+Notes to Financial Statements
+December 31, 2006 and 2005
+($ in thousands except per share data)
+NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
+Opinion No. 25, "Accounting for Stock Issued to Employees", as
+permitted by SFAS No. 123. Refer to Note F for additional information
+regarding the Company's stock-based compensation plans.
+[14] Revenue recognition:
+The Company recognizes revenue on wholesale sales when products are
+shipped pursuant to our standard terms which are freight on board (FOB)
+warehouse or when products are delivered to the consolidators as per
+the terms of the customer's purchase order. Sales reductions for
+anticipated discounts, allowances and other deductions are recognized
+when sales are recorded. Customers retain the right to deduct the
+amount of loss sustained for poor quality or improper or short
+shipments, which have historically been immaterial. Retail sales are
+recognized when the payment is received from customers and are recorded
+net of returns. The Company earns commission income acting in the
+capacity of an agent through its Adesso-Madden Division by arranging to
+produce private label shoes to the specifications of its clients. In
+addition, the Company has leveraged the strength of its Steve Madden
+brands and product designs resulting in a partial recovery of its
+design, product and development costs through its suppliers. Commission
+revenue and product and development cost recoveries are recognized as
+earned when title of the product transfers from the manufacturer to the
+customer and is reported on a net basis after deducting operating
+expenses.
+The Company licenses its trademarks for use in connection with the
+manufacturing, marketing and sale of cold weather accessories,
+sunglasses, eyewear, outerwear, watches, children's apparel and
+dresses. The license agreements require the licensee to pay to the
+Company a royalty and, in substantially all of the agreements, an
+advertising fee based on the higher of a minimum or a net sales
+percentage as defined in the various agreements. Licensing revenue is
+recognized on the basis of net sales reported by the licensees or
+minimum guaranteed royalties, if higher. In substantially all of the
+Company's license agreements, the minimum guaranteed royalty is earned
+and payable on a quarterly basis.
+[15] Sales deductions:
+The Company supports retailers' initiatives to maximize sales of the
+Company's products on the retail floor by subsidizing the co-op
+advertising programs of such retailers, providing them with inventory
+markdown allowances and participating in various other marketing
+initiatives of its major customers. Such expenses are reflected in the
+financial statements as deductions to net sales. For the years ended
+December 31, 2006, 2005 and 2004 the total deductions to net sales for
+these expenses were $35,267, $36,356 and $30,027, respectively.
+[16] Cost of sales:
+All costs incurred to bring finished products to the Company's
+distribution center and, in the retail division, the costs to bring
+products to the Company's stores, are included in the cost of sales
+line item on the Consolidated Statement of Income. These include the
+cost of finished products, purchase commissions, letter of credit fees,
+brokerage fees, material and labor and related items, sample expenses,
+custom duty, inbound freight, royalty payments on licensed products,
+labels and product packaging. All warehouse and distribution costs and
+freight to customers, if any, are included in the operating expenses
+line item of the Company's Consolidated Statement of Income. The
+Company's gross margins may not be comparable to other companies in the
+industry because some companies may include warehouse and distribution
+costs as a component of cost of sales, while other companies report on
+the same basis as the Company and include them in operating expenses.
+F-11
+STEVEN MADDEN, LTD. AND SUBSIDIARIES
+Notes to Financial Statements
+December 31, 2006 and 2005
+($ in thousands except per share data)
+NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
+[17] Warehouse and shipping costs:
+The Company includes all warehouse and distribution costs in the
+Operating Expenses line on the Consolidated Statements of Income. For
+the years ended December 31, 2006, 2005 and 2004, the total warehouse
+and distribution costs included in Operating Expenses were $8,901,
+$6,229 and $5,819 respectively. The Company's standard terms of sales
+are "FOB Steve Madden warehouse" and thus the Company's wholesale
+customers absorb most shipping costs. Shipping costs to wholesale
+customers incurred by the Company are not considered significant and
+are included in the Operating Expense line in the Consolidated
+Statements of Income.
+[18] Impairment of long-lived assets:
+The Company reviews long-lived assets, including amortizable intangible
+assets, for impairment whenever events or changes in business
+circumstances indicate that the carrying amount of the asset may not be
+fully recoverable. If facts and circumstances indicate that the
+Company's long-lived assets might be impaired, the estimated future
+undiscounted cash flows associated with the long-lived asset would be
+compared to its carrying amounts to determine if a write-down to fair
+value is necessary. If a write-down is required, the amount is
+determined by estimation of the present value of net discounted cash
+flows in accordance with SFAS No. 144, "Accounting for the Impairment
+or Disposal of Long-Lived Assets".
+[19] 401(k) Plan:
+The Company maintains a tax-qualified, 401(k) plan which is available
+to each of the Company's eligible employees who elect to participate
+after meeting certain length-of-service requirements. The Company makes
+discretionary matching contributions of 25% of employees' contributions
+up to a maximum of 6% of employees' compensation which vest to the
+employees over a period of time. Effective February 7, 2007, the
+Company began matching 50% of employees' contributions. Total matching
+contributions to the plan for 2006, 2005 and 2004 were approximately
+$180, $176 and $187, respectively.
+[20] Prior years' reclassifications:
+Royalty payments. The Company has reclassified royalty payments on its
+Consolidated Statement of Income from operating expenses to cost of
+sales. This reclassification resulted in an increase in the wholesale
+cost of sales for the years ended December 31, 2005 and 2004 of $3,345
+and $3,126 respectively, with a corresponding decrease to operating
+expenses in the same periods. This reclassification had no impact on
+the net income of the Company.
+Revision in the Classification of Auction Rate Bonds. During the first
+quarter of 2006, the Company revised its presentation of its auction
+rate bonds to short-term investments. Previously, such investments had
+been classified as cash and cash equivalents. Accordingly, the Company
+has revised the classification to report these securities as short-term
+investments on its Consolidated Balance Sheet as of December 31, 2005.
+As previously reported at December 31, 2005, $10,000 of these auction
+rate municipal bonds were classified as cash and cash equivalents on
+the Company's Consolidated Balance Sheet.
+F-12
+STEVEN MADDEN, LTD. AND SUBSIDIARIES
+Notes to Financial Statements
+December 31, 2006 and 2005
+($ in thousands except per share data)
+NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
+[21] Recently issued accounting standards:
+In July 2006, the Financial Accounting Standards Board ("FASB") issued
+Interpretation No. 48, "Accounting for Uncertainty In Income Taxes"
+("FIN 48"), which addresses the accounting for uncertainty in income
+taxes recognized in the financial statements in accordance with FASB
+Statement No. 109, "Accounting for Income Taxes". FIN 48 provides
+guidance on the financial statement recognition and measurement of a
+tax position taken on the Company's tax return. FIN 48 also provides
+guidance on classification, interest and penalties, accounting in
+interim periods, disclosure and transition. FIN 48 is effective for
+interim periods of fiscal years beginning after December 15, 2006. The
+Company is evaluating the requirements of FIN 48 and expects that its
+adoption will not have a material impact on the Company's results of
+operations and earnings per share.
+In September 2006, the FASB issued Statement of Financial Accounting
+Standards No. 157, "Fair Value Measurements" ("SFAS No. 157"). SFAS No.
+157 clarifies the principle that fair value should be based on the
+assumptions market participants would use when pricing an asset or
+liability and establishes a fair value hierarchy that prioritizes the
+information used to develop those assumptions. Under the standard, fair
+value measurements would be separately disclosed by level within the
+fair value hierarchy. SFAS No. 157 is effective for financial
+statements issued for fiscal years beginning after November 15, 2007,
+and interim periods within those fiscal years, with early adoption
+permitted. We have not yet determined the impact, if any, that the
+implementation of SFAS No. 157 will have on our results of operations
+or financial condition.
+In September 2006, the Securities and Exchange Commission ("SEC")
+issued Staff Accounting Bulletin No. 108, "Considering the Effects of
+Prior Year Misstatements when Quantifying Misstatements in Current Year
+Financial Statements" ("SAB 108"). SAB 108 requires registrants to use
+both a balance sheet approach and an income statement approach when
+evaluating and quantifying the materiality of a misstatement. SAB 108
+provides guidance on correcting errors under the dual approach as well
+as providing transition guidance for correcting errors. The Company
+adopted the provisions of SAB 108 as of December 31, 2006. The adoption
+of SAB 108 did not have an effect on our results of financial
+operations or financial position.
+In February 2007, the FASB issued Statement of Financial Accounting
+Standards No. 159, "The Fair Value Option for Financial Assets and
+Financial Liabilities" ("SFAS No. 159"). SFAS No. 159 permits entities
+to choose to measure many financial instruments and certain other items
+at fair value that are not currently required to be measured at fair
+value. SFAS 159 also establishes presentation and disclosure
+requirements designed to facilitate comparisons between entities that
+chose different measurement attributes for similar assets and
+liabilities. SFAS No. 159 is effective for financial statements issued
+for fiscal years beginning after November 15, 2007. We have not yet
+determined the impact, if any, that the implementation of SFAS No. 159
+will have on our results of operations or financial condition.
+NOTE B - ACQUISITION
+On February 7, 2006, the Company acquired all of the equity interest of
+privately held Daniel M. Friedman and Associates, Inc. and D.M.F. International
+(collectively, "Daniel M. Friedman"). Founded in 1995, Daniel M. Friedman
+designs, sources, and markets name brand fashion handbags and accessories. The
+acquisition was completed for consideration of $18,710, including transaction
+costs. In addition, the purchase agreement includes certain earn-out provisions
+based on financial performance through 2010.
+The Daniel M. Friedman acquisition was accounted for using the purchase method
+of accounting as required by SFAS Statement No. 141, "Business Combinations".
+Accordingly, the assets and liabilities of Daniel M. Friedman were adjusted to
+their fair values, and the excess of the purchase price over the fair value of
+the assets acquired, including identified intangible assets, was recorded as
+goodwill. The fair values assigned to tangible and intangible
+F-13
+STEVEN MADDEN, LTD. AND SUBSIDIARIES
+Notes to Financial Statements
+December 31, 2006 and 2005
+($ in thousands except per share data)
+NOTE B - ACQUISITION (CONTINUED)
+assets acquired and liabilities assumed are based on management's estimates and
+assumptions, as well as third-party independent valuations. The total purchase
+price has been allocated as follows:
+Current assets $ 9,772
+Property and equipment 289
+Deposits 62
+Intangible assets 8,400
+Goodwill 4,918
+Liabilities assumed (4,731)
+-------------
+Net assets acquired $ 18,710
+=============
+The purchase price and related allocation may be revised as a result of
+adjustments made to the purchase price pursuant to the earn-out provisions.
+Pursuant to the acquisition, the Company has a note receivable from the former
+owner and namesake of Daniel M. Friedman in the amount of $1,250. The note,
+which has an interest rate of 5%, is due and payable on the same day that the
+final earn-out payment is due. The note allows the maker to offset the principal
+and interest due on the note against any earn-out monies that might be due to
+him. The note is included in the "Deposits and other" category on the Company's
+Consolidated Balance Sheets.
+The results of operations for Daniel M. Friedman have been included in the
+Company's Consolidated Statements of Income from the date of the acquisition.
+The following unaudited pro forma information presents the results of the
+Company's operations as though the Daniel M. Friedman acquisition had occurred
+on January 1, 2004. The pro forma information, as presented below, is not
+indicative of the results that would have been obtained had the transaction
+occurred on January 1, 2004, nor is it indicative of the Company's future
+results.
+Year Ended December 31,
+(unaudited)
+----------------------------------
+2006 2005 2004
+-------- -------- --------
+Net sales $479,195 $417,299 $364,089
+Operating income $78,993 $31,216 $18,238
+Net income $46,631 $18,988 $11,844
+Basic earnings per share $2.23 $0.94 $0.60
+Diluted earnings per share $2.11 $0.91 $0.56
+NOTE C - DUE FROM FACTORS
+On July 1, 2005, the Company entered into a factoring agreement with GMAC
+Commercial Finance LLC ("GMAC"). The agreement, which has no specific expiration
+date and can be terminated by either party with sixty (60) days written notice
+after June 30, 2007, provides the Company with a $25 million credit facility
+with a $15 million sub-limit on direct borrowings. Under the terms of the
+agreement, the Company may request advances from the factor up to 80% of
+aggregate receivables purchased by the factor at an interest rate of two and
+one-half percent (2.5%) over the 30 day LIBOR. The Company also pays a fee equal
+to 0.325% of the gross invoice amount of each receivable purchased. Prior to
+July 1, 2005, the Company had a factoring agreement with Capital Factors, Inc.
+The Company sells and assigns a substantial portion of its receivables,
+principally without recourse, to the factor. As of December 31, 2006 and 2005,
+$260 and $555 of factored receivables, respectively, were sold by the Company
+with recourse. GMAC will maintain a lien on all of the Company's receivables and
+assume the credit risk for all assigned accounts approved by them with certain
+restrictions.
+F-14
+STEVEN MADDEN, LTD. AND SUBSIDIARIES
+Notes to Financial Statements
+December 31, 2006 and 2005
+($ in thousands except per share data)
+NOTE C - DUE FROM FACTOR (CONTINUED)
+The Company's Daniel M. Friedman Division has a factoring agreement with Wells
+Fargo Century. Under the terms of the agreement, the Company is eligible to draw
+down 85% of its invoiced receivables at an interest rate equal to the prime
+rate. The Company pays a fee equal to 0.45% of the gross invoice amount of each
+receivable purchased. Wells Fargo Century will maintain a lien on all of Daniel
+M. Friedman's receivables and assume the credit risk for all assigned accounts
+approved by them with certain restrictions. The expiration date on this
+agreement is June 30, 2007 with automatic one-year renewals thereafter.
+A "factored" sale (whether "with" or "without" recourse) is substantially the
+same as a non-factored sale and the Company accounts for its factored
+sales/receivables in the same manner as its non-factored sales/receivables. The
+factor services the collection of the Company's accounts receivable. Funds
+collected by the factor are applied against advances owed to the factor (if
+any), and the balance is due and payable to the Company, net of any fees. The
+allowance against "due from factor" is a projected provision based on certain
+formulas and prior approvals for markdowns, allowances, discounts, advertising
+and other deductions that customers may deduct against their payments.
+NOTE D - PROPERTY AND EQUIPMENT
+The major classes of assets and total accumulated depreciation and
+amortization are as follows:
+December 31,
+----------------------------
+2006 2005
+------------ ------------
+Leasehold improvements $ 32790 $ 31,690
+Machinery and equipment 1,119 1,001
+Furniture and fixtures 4,563 4,823
+Computer equipment 9,238 5,458
+------------ ------------
+47,710 42,972
+Less accumulated depreciation and amortization (24,335) (22,074)
+------------ ------------
+Property and equipment - net $ 23,375 $ 20,898
+============ ============
+NOTE E - GOODWILL AND INTANGIBLE ASSETS
+The following is a summary of the carrying amount of goodwill by segment for the
+year ended December 31, 2006:
+Steven by Daniel M.
+Steve Madden Friedman Total
+------------ ------------ ------------
+Balance at December 31, 2005 $ 1,547 $ 0 $ 1,547
+Acquisition of Daniel M. Friedman -- 4,918 4,918
+------------ ------------ ------------
+Balance at December 31, 2006
+$ 1,547 $ 4,918 $ 6,465
+------------ ------------ ------------
+F-15
+STEVEN MADDEN, LTD. AND SUBSIDIARIES
+Notes to Financial Statements
+December 31, 2006 and 2005
+($ in thousands except per share data)
+NOTE E - GOODWILL AND INTANGIBLE ASSETS (CONTINUED)
+The following table details identifiable intangible assets acquired on February
+7, 2006 in the Daniel M. Friedman transaction as of December 31, 2006:
+Accumulated Net carrying
+Cost basis amortization amount
+------------ ------------ ------------
+Trade name $ 200 $ 31 $ 169
+Customer relationships 2,600 240 2,360
+License agreements 5,600 985 4,615
+------------ ------------ ------------
+$ 8,400 $ 1,256 $ 7,144
+------------ ------------ ------------
+The amortization of intangible assets is included in operating expenses on the
+Company's Consolidated Statement of Income. The estimated future amortization
+expense of purchased intangibles as of December 31, 2006 is as follows:
+2007 $ 1,370
+2008 1,370
+2009 1,267
+2010 1,267
+2011 820
+Thereafter 1,050
+--------
+$ 7,144
+========
+NOTE F - STOCK-BASED COMPENSATION
+In March 2006, the Board of Directors approved the Steven Madden, Ltd. Stock
+Incentive Plan (the "Plan") under which nonqualified stock options, stock
+appreciation rights, performance shares, restricted stock, other stock-based
+awards and performance-based cash awards may be granted to employees,
+consultants and non-employee directors. The shareholders approved the Plan on
+May 26, 2006. The number of shares that may be issued or used under the Plan
+cannot exceed 1,200,000 shares. Management believes that the Plan will better
+align the interests of its recipients with those of the Company's shareholders.
+The following table summarizes the number of Common Stock shares authorized for
+use in the Plan, the amount of Stock based awards issued (net of expired or
+cancelled) and the amount of Common Stock available for the grant of Stock based
+awards under the Plan:
+Common Stock authorized 1,200,000
+Stock based awards (restricted stock) granted
+net of expired or cancelled 421,000
+---------
+Common Stock available for grant of stock
+based awards as of December 31, 2006 779,000
+=========
+The Company has established various stock option plans entitled "The 1993
+Incentive Stock Option Plan", "The 1995 Stock Plan", "The 1996 Stock Plan", "The
+1997 Stock Plan" and "The 1999 Stock Plan" under which options to purchase
+shares of common stock may be granted to employees, directors, officers, agents,
+consultants and independent contractors. The plans provide that the option price
+shall not be less than the fair market value of the common stock on the date of
+grant and that no portion of the option may be exercised beyond ten years from
+that date. No incentive stock option can be granted and exercised beyond five
+years to a stockholder owning 10% or
+F-16
+STEVEN MADDEN, LTD. AND SUBSIDIARIES
+Notes to Financial Statements
+December 31, 2006 and 2005
+($ in thousands except per share data)
+NOTE F - STOCK-BASED COMPENSATION (CONTINUED)
+more of the Company's outstanding common stock. Options granted under the plans
+during the three years ended December 31, 2006 vest between four months and one
+year from the date of grant. The 1993 Incentive Stock Option Plan, the 1995
+Stock Plan and the 1996 Stock Plan expired in 2003, 2005 and 2006, respectively.
+The following table summarizes the amount of options authorized, the amount of
+options granted (net of expired or cancelled options) and the amount of options
+available for grant for the 1997 Plan and the 1999 Plan:
+1997 Plan 1999 Plan
+--------- ---------
+Options authorized 1,500,000 4,830,000
+Options granted net of
+expired or cancelled 1,492,800 4,828,500
+--------- ---------
+Available for grant as of
+December 31, 2006 7,200 1,500
+========= =========
+Effective January 1, 2006, the Company adopted the provisions of Statement of
+Financial Accounting Standards No. 123R, "Accounting for Stock-Based
+Compensation" ("SFAS No. 123R"), which requires stock-based compensation to be
+measured based on the fair value of the awards on the grant date. The Company
+elected the "modified prospective method" of transition as permitted by SFAS No.
+123R. Under this transition method, the Company is required to record
+compensation expense for all awards granted after the date of adoption and for
+the unvested portion of previously granted awards that were outstanding at the
+date of adoption, and accordingly, periods prior to adoption are not restated.
+For the year ended December 31, 2006, total equity-based compensation of $2,294
+was comprised of $2,174 in compensation related to restricted stock and $120 in
+compensation related to stock options. For the years ended December 31, 2005 and
+2004, total equity-based compensation of $703 and $2,782, respectively, was
+related to stock options. Equity-based compensation is included in operating
+expenses on the Company's Consolidated Statements of Income.
+SFAS No. 123R requires the Company to apply an estimated forfeiture rate in
+calculating the period expense (and revised, if necessary, in subsequent periods
+if actual forfeitures differ from those estimates), as opposed to recognizing
+forfeitures as an expense reduction as they occur, which was the method used by
+the Company prior to adoption. The adjustment to apply estimated forfeitures to
+previously recognized stock-based compensation was considered immaterial and, as
+such, was not classified as a cumulative effect of a change in accounting
+principle.
+Prior to the adoption of SFAS No. 123R, the Company presented cash flows
+resulting from the tax benefits of deductions from the exercise of stock options
+as operating cash flows in the Statements of Cash Flows. SFAS No. 123R requires
+cash flows resulting from the tax benefits from tax deductions in excess of the
+compensation costs recognized for those options (tax benefits) to be classified
+as financing cash flows. The Company realized a tax benefit from the exercise of
+stock options of $3,611 during the year ended December 31, 2006.
+Prior to adopting SFAS No. 123R, the Company's equity-based compensation expense
+was accounted for under the provisions of APB Opinion No. 25, "Accounting for
+Stock Issued to Employees", as permitted by SFAS No. 123. The following table
+illustrates the effect on net income and earnings per share if the Company had
+applied the fair value recognition provision of SFAS No. 123R to equity-based
+employee compensation for the years ended December 31, 2005 and 2004:
+F-17
+STEVEN MADDEN, LTD. AND SUBSIDIARIES
+Notes to Financial Statements
+December 31, 2006 and 2005
+($ in thousands except per share data)
+NOTE F - STOCK-BASED COMPENSATION (CONTINUED)
+2005 2004
+------------ ------------
+Reported net income $ 19,200 $ 12,275
+Stock-based employee compensation included in
+reported net income, net of tax 407 1,577
+Stock-based employee compensation determined under
+the fair value based method, net of tax (2,246) (4,815)
+------------ ------------
+Pro forma net income $ 17,361 $ 9,037
+============ ============
+Basic income per share:
+As reported $ 0.95 $ 0.62
+Pro forma $ 0.86 $ 0.46
+Diluted income per share:
+As reported $ 0.92 $ 0.58
+Pro forma $ 0.83 $ 0.42
+Stock Options
+During the years ended December 31, 2006 and 2005, there were 551,000 and
+2,133,000 options exercised, respectively, with a total intrinsic value of
+$10,674 and $13,013 for the corresponding periods. During the year ended
+December 31, 2006, 30,000 options vested with a weighted average exercise price
+of $11.84, compared to 726,000 options with a weighted average exercise price of
+$11.90 that vested during the prior year. As of December 31, 2006, there were no
+unvested options. There were no options granted during the year ended December
+31, 2006.
+In connection with the amended employment agreement of the former Chief
+Executive Officer ("CEO"), who is now the Company's Creative and Design Chief,
+the Company issued options to purchase 750,000 shares of its common stock. The
+options, which vested in August 1998, had an exercise price of $2.21 and were
+exercisable over 10 years expiring in March 2005. The last of these options was
+exercised in January of 2005. Unearned compensation was recorded in the amount
+of $1,345, which represented the difference between the exercise price and the
+fair value of the stock on the date of grant, and was classified as a component
+of stockholders' equity. Through December 31, 2003, the unearned compensation
+was being amortized over the ten-year term of the amended agreement. During the
+year ended December 31, 2004, the Company reevaluated its policy on amortizing
+unearned compensation relating to the issuance of stock options. The Company
+concluded that deferred compensation was to be amortized over the shorter of the
+vesting period of the option or the term of the employment agreement.
+Accordingly, the balance in unearned compensation was expensed, resulting in a
+charge to operations of $512 in 2004.
+In May 2003, the Company granted 150,000 options to Charles Koppelman, a
+director, exercisable at $9.00 per share which vested over one year on a
+quarterly basis. The difference between the market price of $12.67 per share and
+the option exercise price was reflected as unearned compensation and was
+amortized over the one-year vesting period. In May of 2004, pursuant to a
+consulting agreement with this former director, the Company granted 150,000
+options exercisable at $9.00 per share which vested over one year on a quarterly
+basis. The difference between the market price of $12.73 per share and the
+option exercise price was amortized over the one-year vesting period.
+F-18
+STEVEN MADDEN, LTD. AND SUBSIDIARIES
+Notes to Financial Statements
+December 31, 2006 and 2005
+($ in thousands except per share data)
+NOTE F - STOCK-BASED COMPENSATION (CONTINUED)
+The Company estimates the fair value of options granted using the Black-Scholes
+option-pricing model, which requires several assumptions. The expected term of
+the options represents the estimated period of time until exercise and is based
+on historical experience of similar awards. Expected volatility is based on the
+historical volatility of the Company's stock. The risk free interest rate is
+based on the U.S Treasury yield curve in effect at the time of the grant. With
+the exception of a special dividend paid in November of 2005 and a special
+dividend paid on November 22, 2006, the Company historically has not paid
+dividends and thus the expected dividend rate is assumed to be zero. The
+weighted average fair value of options granted in 2005 and 2004 was
+approximately $4.07 and $6.51, respectively, using the Black-Scholes
+option-pricing model with the following assumptions:
+2005 2004
+-------------- --------------
+Volatility 43% 65%
+Risk free interest rate 3.86% 3.32% - 3.51%
+Expected life in years 3 5
+Dividend yield 0 0
+Activity relating to stock options granted under the Company's plans and outside
+the plans during the three years ended December 31, 2006 is as follows:
+Weighted
+Weighted Average
+Average Remaining Aggregate
+Number of Exercise Contractual Intrinsic
+Shares Price Term Value
+----------- ------- ----------- ---------
+Outstanding at January 1, 2004 3,411,000 $ 7.57
+Granted 570,000 11.89
+Exercised (193,000) 2.17
+Cancelled/Forfeited (18,000) 12.67
+----------- -------
+Outstanding at December 31, 2004 3,770,000 8.47
+Granted 478,000 11.93
+Exercised (2,133,000) 7.73
+Cancelled/Forfeited (165,000) 12.55
+----------- -------
+Outstanding at December 31, 2005 1,950,000 $ 9.79
+Granted -- --
+Exercised (551,000) 12.41
+Cancelled/Forfeited (3,000) 8.00
+----------- -------
+Outstanding at December 31, 2006 1,396,000 $ 8.75 4.4 $20,980
+=========== ======= === =======
+Exercisable at December 31, 2006 1,396,000 $ 8.75 4.4 $20,980
+=========== ======= === =======
+F-19
+STEVEN MADDEN, LTD. AND SUBSIDIARIES
+Notes to Financial Statements
+December 31, 2006 and 2005
+($ in thousands except per share data)
+NOTE F - STOCK-BASED COMPENSATION (CONTINUED)
+The following table summarizes information about stock options at December 31,
+2006:
+Options Outstanding Options Exercisable
+---------------------------------------------------- --------------------------
+Weighted Average Weighted
+Remaining Weighted Average
+Number Contractual Life Average Number Exercise
+Range of Exercise Price Outstanding (in Years) Exercise Price Exercisable Price
+------------------------------ ------------- ------------------ ---------------- ------------- ----------
+under $2.22 480,000 0.5 $2.21 480,000 $2.21
+$3.67 to $6.37 52,000 2.1 4.52 52,000 4.52
+$11.61 to $12.50 259,000 8.1 11.99 259,000 11.99
+$12.65 to $13.99 605,000 6.1 12.93 605,000 12.93
+------------- -------------
+1,396,000 4.4 8.75 1,396,000 8.75
+============= =============
+Restricted Stock
+The following table summarizes restricted stock activity during the year ended
+December 31, 2006:
+Weighted
+Average Fair
+Number of Value at Grant
+Shares Date
+----------- ----------------
+Outstanding at December 31, 2005 30,000 $11.28
+Granted 428,000 32.45
+Vested (30,000) 11.28
+Forfeited (7,000) 29.28
+-----------
+Outstanding at December 31, 2006 421,000 $32.51
+===========
+As of December 31, 2006, there was $10,900 of total unrecognized compensation
+cost related to restricted stock awards granted under the Plan. This cost is
+expected to be recognized over a weighted-average of 3.6 years. During the year
+ended December 31, 2006, 165,000 restricted stock awards were granted to the
+Company's Creative and Design Chief. The Company determines the fair value of
+its restricted stock awards based on the market price of its common stock on the
+date of grant.
+In July 2004, the Company and several of its salesmen mutually agreed to replace
+restricted stock awards due to vest in January 2006 with cash awards to be paid
+on the vesting date. No shares had been issued under the original award. These
+cash rewards retained the same characteristics as the original restricted stock
+awards. The vesting date (i.e. the payment date) of the cash awards was the same
+as the vesting date of the restricted stock, and the payment was contingent upon
+the recipient still being employed with the Company on the vesting date. The
+cash awards, which totaled $183, were charged to operations through December 31,
+2005. In April of 2004, an employee of the Company received shares of the
+Company's common stock pursuant to the vesting of his restricted stock award.
+These shares were unregistered, and in August 2004 the Company agreed to
+purchase the shares back from the employee for $378, which was equal to the
+value of the restricted stock when originally issued. In April and October of
+2002, two executives of the Company were granted restricted stock awards
+pursuant to their employment agreements. The awards vested on June 30, 2005 and
+were contingent on the employee's continuous employment
+F-20
+STEVEN MADDEN, LTD. AND SUBSIDIARIES
+Notes to Financial Statements
+December 31, 2006 and 2005
+($ in thousands except per share data)
+NOTE F - STOCK-BASED COMPENSATION (CONTINUED)
+through the vesting date. Under the terms of the agreements, the issuance of the
+shares of common stock required shareholder approval. At the annual meeting of
+stockholders held on May 27 of 2005, the shareholders did not approve the
+issuance of the shares. As stated in the Company's proxy statement, the
+executives were paid $1,776 equal to the fair value of the restricted stock when
+first granted.
+NOTE G - PREFERRED STOCK
+The Company has authorized 5,000,000 shares of preferred stock. The Board of
+Directors has designated 60,000 shares of such preferred stock as Series A
+Junior Participating Preferred Stock ("Series A Preferred"). Holders of the
+shares of Series A Preferred are entitled to dividends equal to 1,000 times
+dividends declared or paid on the Company's common stock. Each share of Series A
+preferred entitles the holder to 1,000 votes on all matters submitted to the
+holders of common stock. The Series A Preferred has a liquidation preference of
+$1,000 per share, and is not redeemable by the Company. No preferred shares have
+been issued.
+NOTE H - RIGHTS AGREEMENT
+On October 30, 2001, the Company declared a dividend distribution of one
+preferred stock purchase right (a "Right") for each outstanding share of common
+stock. Each Right entitles the holder to purchase from the Company seven
+ten-thousandths (7/10,000) of a share of Series A Preferred at a price of $50
+per seven ten-thousandths (7/10,000) of a share. Initially, the Rights will not
+be exercisable and will automatically trade with the common stock. The Rights
+become exercisable, in general, ten days following the announcement of a person
+or group acquiring beneficial ownership of at least 15% of the outstanding
+voting stock of the Company.
+NOTE I - COMMON STOCK DIVIDEND
+On October 30, 2006, the Board of Directors declared a special dividend of $1
+per share payable to Steven Madden, Ltd. shareholders of record at the close of
+business on November 13, 2006. The dividend was paid on November 22, 2006.
+NOTE J - OPERATING LEASES
+The Company leases office, showroom and retail facilities under noncancelable
+operating leases with terms expiring at various times through 2018. Future
+minimum annual lease payments under noncancelable operating leases consist of
+the following at December 31:
+2007 $ 13,595
+2008 12,875
+2009 12,407
+2010 11,557
+2011 10,746
+Thereafter 33,469
+---------
+$ 94,649
+=========
+A majority of the retail store leases provide for contingent rental payments if
+gross sales exceed certain targets. In addition, many of the leases contain rent
+escalation clauses to compensate for increases in operating costs and real
+estate taxes.
+F-21
+STEVEN MADDEN, LTD. AND SUBSIDIARIES
+Notes to Financial Statements
+December 31, 2006 and 2005
+($ in thousands except per share data)
+NOTE J - OPERATING LEASES (CONTINUED)
+Rent expense for the years ended December 31, 2006, 2005 and 2004 was
+approximately $16,419, $15,592 and $13,520, respectively. Included in such
+amounts are contingent rents of $240, $182 and $105 in 2006, 2005 and 2004,
+respectively.
+Rent expense is calculated by amortizing total rental payments (net of any
+rental abatements, construction allowances and other rental concessions), on a
+straight-line basis, over the lease term. Accordingly, rent expense charged to
+operations differs from rent paid resulting in the Company recording deferred
+rent.
+NOTE K - INCOME TAXES
+The components of income before income taxes is as follows:
+2006 2005 2004
+------------ ------------ ------------
+Domestic $ 77,686 $ 33,460 $ 20,954
+Foreign 3,248 -- --
+------------ ------------ ------------
+$ 80,934 $ 33,460 $ 20,954
+------------ ------------ ------------
+The income tax provision (benefit) consists of the following:
+2006 2005 2004
+------------ ------------ ------------
+Current:
+Federal $ 27,929 $ 12,690 $ 6,422
+State and local 10,437 4,260 2,484
+Foreign 520 -- --
+------------ ------------ ------------
+38,886 16,950 8,906
+------------ ------------ ------------
+Deferred:
+Federal (3,500) (2,241) (189)
+State and local (702) (449) (38)
+------------ ------------ ------------
+(4,202) (2,690) (227)
+------------ ------------ ------------
+$ 34,684 $ 14,260 $ 8,679
+============ ============ ============
+A reconciliation between taxes computed at the federal statutory rate and the
+effective tax rate is as follows:
+December 31,
+---------------------------------
+2006 2005 2004
+-------- -------- --------
+Income taxes at federal statutory rate 35.0% 35.0% 35.0%
+State and local income taxes - net of
+federal income tax benefit 7.8 7.4 7.6
+Nondeductible items 0.1 0.3 0.1
+Nondeductible impairment charges -- 0.5 --
+Other -- (0.6) (1.3)
+-------- -------- --------
+Effective rate 42.9% 42.6% 41.4%
+======== ======== ========
+F-22
+STEVEN MADDEN, LTD. AND SUBSIDIARIES
+Notes to Financial Statements
+December 31, 2006 and 2005
+($ in thousands except per share data)
+NOTE K - INCOME TAXES (CONTINUED)
+The Company applies the asset and liability method of accounting for income
+taxes. Under this method, deferred tax assets and liabilities are determined
+based on differences between financial reporting and tax bases of assets and
+liabilities and are measured using the enacted tax rates and laws that are
+expected to be in effect when the differences are expected to reverse.
+Realization of deferred tax assets depends on generating sufficient future
+taxable income. Although realization is not assured, management believes it is
+more likely than not that all of the deferred tax assets will be realized.
+However, the amount of deferred tax assets considered realizable could be
+reduced in the near term if estimates of future taxable income are reduced.
+The components of deferred tax assets and liabilities are as follows:
+December 31,
+------------------------
+2006 2005
+---------- ----------
+Current deferred tax assets:
+Receivable allowances $ 5,262 $ 3,537
+Inventory 1,434 1,321
+Unrealized loss 112 316
+Deferred accruals 675 --
+Other 616 426
+---------- ----------
+8,099 5,600
+---------- ----------
+Non-current deferred tax assets:
+Depreciation and amortization 3,868 3,364
+Deferred compensation 1,379 609
+Deferred rent 1,320 971
+Amortization of goodwill (126) --
+Unrealized loss 353 624
+---------- ----------
+6,794 5,568
+---------- ----------
+Deferred tax assets $ 14,893 $ 11,168
+========== ==========
+NOTE L - COMMITMENTS, CONTINGENCIES AND OTHER
+[1] Legal proceedings:
+(a) On July 28, 2005, adidas America, Inc., and adidas-Salomon AG
+(together, "adidas") filed a Demand for Arbitration (the
+"Demand") against Steven Madden, Ltd., and Steven Madden Retail,
+Inc. before the American Arbitration Association. In its Demand,
+adidas alleged that the parties had previously been engaged in a
+lawsuit over the Company's sale of sneakers that allegedly
+infringed adidas' "three stripe" mark. The parties settled that
+lawsuit by entering into a settlement agreement dated August 4,
+2003 that prohibited the Company from selling shoes that
+contained adidas' "three-stripe" mark either with one additional
+stripe or with one less stripe. Adidas alleged in the Demand that
+the Company was selling three shoes that adidas contends violate
+the settlement agreement and infringe adidas' "three-stripe"
+mark. The Company has settled the matter with no material effect
+on the Company's financial statements.
+(b) On August 10, 2005, the U.S. Customs Department ("Customs")
+issued a report that asserts that certain commissions which the
+Company treated as buying agents' commissions (which are
+non-dutiable) should be treated as "selling agents' commissions"
+and hence are dutiable. In the report,
+F-23
+STEVEN MADDEN, LTD. AND SUBSIDIARIES
+Notes to Financial Statements
+December 31, 2006 and 2005
+($ in thousands except per share data)
+NOTE L - COMMITMENTS, CONTINGENCIES AND OTHER (CONTINUED)
+Customs estimates that the Company had underpaid duties during
+the calendar years of 1998 through 2004 in the amount of $1,051.
+At December 31, 2005, the Company had recorded a reserve of
+$1,051 based on management's estimate at that time. Based on
+management's estimation earlier in the year, the reserve was
+increased to $2,047 covering under-payments, interest and
+penalties, as of March 31, 2006. Based on a meeting held with
+Customs on November 8, 2006, and pursuant to discussions with
+legal counsel, the Company believes that the maximum liability in
+this case, including interest and penalties, will be no more than
+$1,500. Accordingly, the reserve was reduced to $1,500 in the
+quarter ended December 31, 2006. Such reserve is subject to
+change to reflect the status of this matter.
+(c) On or about January 23, 2006, the Company and Steven Madden,
+Jamieson Karson, Arvind Dharia and Amelia Newton Varela were
+named as defendants in a lawsuit filed by Jojeli, Inc. ("Jojeli")
+and Alan Rick Friedman in the United States District Court for
+the Southern District of New York. In their complaint, Jojeli and
+Mr. Friedman asserted claims arising from the Company's decision
+to terminate Jojeli's services on or about November 28, 2005. Mr.
+Friedman, Jojeli's principal, served as a senior salesperson for
+the Company, and provided his services to the Company pursuant to
+an April 26, 2004 written agreement. In their complaint, Jojeli
+and Mr. Friedman alleged eight claims against the Company and/or
+three of its executives and/or one of its managers, including
+breach of contract, violation of the New York Labor Law, tortuous
+interference with contract, civil conspiracy, defamation, and
+prima facie tort. They sought damages on their various claims of
+approximately $2,700 and they also sought a declaration that they
+were not bound by the restrictive covenant in the parties'
+contract. On or about March 1, 2006, the individual defendants
+and the Company moved to dismiss the tort claims contained in the
+complaint and to strike Mr. Friedman's claim for punitive damages
+in connection with his contract claims. More specifically, the
+defendants moved to dismiss the claims alleging defamation,
+interference with contract, prima facie tort and civil
+conspiracy. If the motion was granted in its entirety, the
+individual defendants would have been dismissed from the suit and
+Mr. Friedman's remaining claims would have consisted of breach of
+contract and alleged violations of the New York Labor Law. On or
+about April 13, 2006, Mr. Friedman filed an amended complaint in
+the action. In his amended complaint, Mr. Friedman (i) dropped
+his defamation claim against the Company's Executive Vice
+President of Wholesale Sales, Amelia Newton Varela, (ii) dropped
+all claim(s) against the Company's Chief Financial Officer,
+Arvind Dharia, and (iii) supplemented certain allegations
+concerning the remaining defendants in an effort to strengthen or
+preserve his remaining tort claims. On June 5, 2006, the Court
+dismissed the plaintiffs' tort claims against the Company and the
+remaining individual defendants. More specifically, the Court
+dismissed Mr. Friedman's tortuous interference and conspiracy
+claims against Mr. Karson, Mr. Madden and Ms. Newton, and
+dismissed Mr. Friedman's prima facie tort claim against Mr.
+Karson, Mr. Madden and the Company. On or about June 28, 2006,
+the Company and the individual defendants filed an answer in
+which they denied the remaining counts of the Amended Complaint,
+which consisted of claims for breach of contract, breach of the
+implied covenant of good faith and fair dealing, and for
+violations of certain provisions of the New York Labor Law. On
+June 30, 2006, the parties appeared before the court for a status
+conference at which time the Court established a pre-trial
+schedule requiring that non-expert discovery be completed by
+December 29, 2006 and that dispositive motions be filed by
+February 2, 2007. Effective September 27, 2006, the Company and
+the individual defendants reached an agreement to resolve the
+claims asserted by Jojeli, Inc. and Alan Rick Friedman. Pursuant
+to the terms of the parties' settlement agreement, the terms of
+which are confidential, the Company agreed to pay certain sums of
+money to Jojeli. As a result of the parties' settlement, the
+lawsuit has been dismissed with prejudice. The settlement, which
+was provided for in prior periods, did not have a material effect
+on the Company's financial statements.
+F-24
+STEVEN MADDEN, LTD. AND SUBSIDIARIES
+Notes to Financial Statements
+December 31, 2006 and 2005
+($ in thousands except per share data)
+NOTE L - COMMITMENTS, CONTINGENCIES AND OTHER (CONTINUED)
+(d) The Company has been named as a defendant in certain other
+lawsuits in the normal course of business. In the opinion of
+management, after consulting with legal counsel, the liabilities,
+if any, resulting from these matters should not have a material
+effect on the Company's financial position or results of
+operations. It is the policy of management to disclose the amount
+or range of reasonably possible losses in excess of recorded
+amounts.
+[2] Employment agreements:
+Effective as of July 1, 2005, the Company amended its employment
+agreement with Steven Madden, the Company's Creative and Design Chief.
+The agreement provides for an annual salary of $600, subject to certain
+specified adjustments, through June 30, 2015. The agreement also
+provides for annual bonuses based on EBITDA, on revenue for any new
+business, and royalty income over $2,000, and an annual option grant at
+exercise prices equal to the market price on the date of grant and a
+non-accountable expense allowance.
+Effective as of July 1, 2005, the Company entered into an employment
+agreement with Awadhesh Sinha, pursuant to which Mr. Sinha will serve
+as the Company's Chief Operating Officer. The initial term of the
+agreement is three years through June 30, 2008, with successive
+one-year automatic renewal terms. The agreement provides for an annual
+salary of $425 with annual increases and performance bonuses. The
+agreement requires the Company to accrue deferred cash compensation
+equal to 25% of the annual salary, payable to Mr. Sinha at the end of
+the term of the agreement.
+Effective January 1, 2006, the Company amended its employment agreement
+with Jamieson Karson, the Company's Chief Executive Officer and
+Chairman of the Board. The agreement provides for an annual salary of
+$500 through December 31, 2008. The agreement also provides for an
+annual bonus at the discretion of the Board of Directors.
+Effective February 1, 2006, the Company amended its employment
+agreement with Arvind Dharia, the Company's Chief Financial Officer.
+The agreement provides for an annual salary of $425, with annual
+increases through December 31, 2009. The agreement also provides for an
+annual bonus at the discretion of the Board of Directors.
+The Company has employment agreements with other executives (the
+"executives") which expire between June 30, 2007 and December 31, 2009.
+These agreements provide for cash bonuses based primarily upon a
+percentage of year-to-year increases in earnings before interest,
+taxes, depreciation and amortization, option grants and non-accountable
+expense allowances as defined. Base salary commitments for these
+executives are as follows:
+2007 $ 1,643
+2008 1192
+2009 480
+--------
+$ 3,315
+========
+In connection with their employment agreements, five executives
+received an aggregate of 132,000 shares of restricted common stock from
+the Company in 2006. The restricted shares vest equally each year over
+a four-year period and, accordingly, the Company has recorded a charge
+to operations in the amount of $680 for the year ended December 31,
+2006. In 2002, two executives received an aggregate of 60,000 shares of
+restricted stock. The restricted shares vested equally each quarter
+over the period of their employment agreements through December 2005.
+Accordingly, the Company recorded a charge to operations in the amount
+of $104 and $254 for the 30,000 and 30,000 shares that vested during
+the years ended December 31, 2005 and 2004, respectively. Further, one
+executive received 150,000 stock options exercisable at $12.67 per
+share, the market price on the date of grant. 30,000 of these options
+vested on
+F-25
+STEVEN MADDEN, LTD. AND SUBSIDIARIES
+Notes to Financial Statements
+December 31, 2006 and 2005
+($ in thousands except per share data)
+NOTE L - COMMITMENTS, CONTINGENCIES AND OTHER (CONTINUED)
+June 30, 2003 and the balance vested equally, each quarter, through
+June 30, 2005. In addition, the Company accrued aggregate cash
+obligations of approximately $2,112 for bonuses under these agreements
+for the year ended December 31, 2006.
+[4] Letters of credit:
+At December 31, 2006 and 2005, the Company had open letters of credit
+for the purchase of imported merchandise of approximately $1,981 and
+$3,302, respectively.
+[5] Royalty agreements:
+On January 7, 2003, the Company entered into a long-term license
+agreement with Seattle Pacific Industries, Inc., under which the
+Company has the right to use the Unionbay trademark in connection with
+the sale and marketing of footwear for men and boys. The agreement
+required the Company to make royalty and advertising payments equal to
+a percentage of net sales and a minimum royalty and advertising payment
+in the event that specified net sales targets were not achieved. The
+agreement expired on December 31, 2006.
+On May 12, 2003, the Company entered into a long-term license agreement
+with Candie's, Inc. to design, manufacture, and distribute Candie's
+branded footwear for women and children worldwide. The initial term of
+the agreement expired on December 31, 2009, with four 3-year renewal
+terms, the last of which expired on December 31, 2021. The agreement
+required the Company to make royalty and advertising payments equal to
+a percentage of net sales of licensed products and a minimum royalty
+and advertising payment in the event that specified net sales targets
+were not achieved. On December 6, 2004, the agreement was amended to
+reflect Candie's decision to name Kohl's Corporation the exclusive
+provider of a new line of Candie's apparel. The amendment extended the
+initial term of the agreement to December 31, 2010, and eliminated the
+renewal term options. Pursuant to the amendment, commencing on January
+1, 2007, the Company will no longer have the exclusive right to market
+Candie's branded footwear and will be permitted to sell Candie's
+branded footwear only to Kohl's. Under the terms of the amendment,
+Candie's guarantees that the Company will achieve minimum sales levels
+with Kohl's during the term of the agreement. In the event such minimum
+sales levels are not achieved, Candie's is required to compensate the
+Company in an amount based on a percentage of the sales shortfall.
+Effective January 1, 2005, all royalty and advertising payments were
+eliminated. As an inducement to execute the amendment, the Company is
+required to pay Candie's a total of $3,000 payable in eight equal
+quarterly installments beginning in February of 2005.
+On September 14, 2006, the Company, through its Daniel M. Friedman
+Division, entered into a license agreement to design, manufacture and
+distribute handbags and belts and related accessories under the "Tracy
+Reese" and the "Plenty" brands. In addition, the Company has the right
+to use the phrase "Plenty by Tracy Reese". The agreement requires the
+Company to pay the licensor a royalty based on net sales and a minimum
+royalty in the event that specified net sales targets are not achieved.
+On July 20, 2004, Daniel M. Friedman entered into a long-term license
+agreement with B.J. Vines, Inc., under which the Company has the right
+to use the "Betsey Johnson" trademark in connection with the sale and
+marketing of handbags, small leather goods, belts and umbrellas. The
+agreement requires the Company to make royalty and advertising payments
+equal to a percentage of net sales and a minimum royalty and
+advertising payment in the event that specified net sales targets are
+not achieved. The agreement expires on December 31, 2007, with a
+three-year renewal term at the option of the Company.
+F-26
+STEVEN MADDEN, LTD. AND SUBSIDIARIES
+Notes to Financial Statements
+December 31, 2006 and 2005
+($ in thousands except per share data)
+NOTE L - COMMITMENTS, CONTINGENCIES AND OTHER (CONTINUED)
+Royalty expenses are included in the "operating expenses" section of
+the Company's Consolidated Statements of Income. Aggregate minimum
+future royalties under these agreements are as follows:
+Year Ending
+December 31,
+------------
+2007 $ 778
+2008 220
+2009 320
+--------
+$ 1,318
+========
+[6] Related Party Transactions:
+In January 2004, the Company entered into an agreement with JLM
+Consultants, a company wholly-owned by John Madden, one of the
+Company's directors. Under this agreement, Mr. Madden provides
+consulting services with respect to the development of international
+sales of the Company. Pursuant to this agreement, JLM Consultants
+received a fee and expenses of $511, $392 and $252 in 2006, 2005 and
+2004 respectively, in addition to fees that Mr. Madden received for
+service to the Company as a director.
+In July 2001, the Company entered into a consulting agreement with
+Peter J. Solomon & Company, a financial advisory firm of which Marc
+Cooper, one of the Company's directors, is a managing director. Under
+this agreement, the firm provided financial advisory and investment
+banking services to the Company. This agreement, which was amended in
+March 2004, was terminated on July 11, 2006. Pursuant to this
+agreement, the Company paid fees and expenses to Peter J. Solomon &
+Company of $412 (related to the acquisition of Daniel M. Friedman), $66
+and $161 for 2006, 2005 and 2004, respectively.
+In October 2002, the Company entered into an arrangement with Jeff
+Birnbaum, one of the Company's directors. Under this arrangement, Mr.
+Birnbaum provided consulting services with respect to the design and
+manufacturing of shoes and general consulting services to the Company.
+Pursuant to this arrangement, Mr. Birnbaum received a fee of $200, $200
+and $250 in 2006, 2005 and 2004 respectively, in addition to fees
+received for service to the Company as a director. Mr. Birnbaum has
+been the Product Development Manager of Dolphin Shoe Company since
+August 1982. Dolphin Shoe Company, which is equally owned by Mr.
+Birnbaum, his father and his brother, is one of the Company's domestic
+suppliers. In July of 2006, the Company acquired Natural Comfort brand
+from Dolphin Shoe Company for $100.
+[7] Concentrations:
+The Company maintains cash and cash equivalents with various major
+financial institutions which at times are in excess of the amount
+insured. In addition, the Company's marketable securities and money
+market accounts are principally held at two brokerage companies.
+During the year ended December 31, 2006, the Company purchased
+approximately 36% and 16% of its merchandise from two suppliers in
+China. Total inventory purchases for the year ended December 31, 2006
+from China was approximately 88%.
+During the year ended December 31, 2005, the Company purchased
+approximately 21% and 12% of its merchandise from two suppliers in
+China. Total inventory purchases for the year ended December 31, 2005
+from China was approximately 82%.
+F-27
+STEVEN MADDEN, LTD. AND SUBSIDIARIES
+Notes to Financial Statements
+December 31, 2006 and 2005
+($ in thousands except per share data)
+NOTE L - COMMITMENTS, CONTINGENCIES AND OTHER (CONTINUED)
+During the year ended December 31, 2004, the Company purchased
+approximately 25% of its merchandise from a supplier in Brazil and 17%
+and 10% of its merchandise from two suppliers in China. Total inventory
+purchases for the year ended December 31, 2004 from Brazil and China
+were approximately 26% and 41%, respectively.
+Sales to one customer accounted for 13% of total net sales for the year
+ended December 31, 2006. This customer represented 18% of accounts
+receivable at December 31, 2006.
+Sales to one customer accounted for 19% of total net sales for the year
+ended December 31, 2005. This customer represented 24% of accounts
+receivable at December 31, 2005.
+Sales to two customers accounted for 10% and 9% of total net sales for
+the year ended December 31, 2004. These customers each represented 13%
+of accounts receivable at December 31, 2004.
+Sales to such customers are included in the wholesale segment (see Note
+M). Purchases are made primarily in United States dollars.
+[8] Valuation and qualifying accounts:
+The following is a summary of the allowance for doubtful accounts
+related to accounts receivable and the allowance for chargebacks
+related to the amount Due from Factor for the years ended December 31:
+2006 2005 2004
+------------ ------------ ------------
+Balance at beginning of year $ 8,400 $ 2,915 $ 2,378
+Increase in reserve 4,108 5,485 537
+------------ ------------ ------------
+Balance at end of year $ 12,508 $ 8,400 $ 2,915
+============ ============ ============
+The following is a summary of the reserve for slow moving inventory for
+the years ended December 31:
+2006 2005 2004
+------------ ------------ ------------
+Balance at beginning of year $ 1,143 $ 608 $ 663
+Charged to reserve -- -- 55
+Increase to the reserve 922 535 --
+------------ ------------ ------------
+Balance at end of year $ 2,065 $ 1,143 $ 608
+============ ============ ============
+F-28
+STEVEN MADDEN, LTD. AND SUBSIDIARIES
+Notes to Financial Statements
+December 31, 2006 and 2005
+($ in thousands except per share data)
+NOTE L - COMMITMENTS, CONTINGENCIES AND OTHER (CONTINUED)
+The following is a summary of goodwill and the related accumulated
+amortization for the years ended December 31:
+2006 2005 2004
+------------ ------------ ------------
+Cost basis
+Balance at beginning of year $ 2,145 $ 2,780 $ 2,780
+Acquisition of Daniel M. Friedman 4,918 -- --
+Write-off of impaired assets -- (635) --
+------------ ------------ ------------
+Balance at end of year 7,063 2,145 2,780
+------------ ------------ ------------
+Accumulated amortization
+Balance at beginning of year 598 714 714
+Write-off of impaired assets -- (116) --
+------------ ------------ ------------
+Balance at end of year 598 598 714
+------------ ------------ ------------
+Goodwill $ 6,465 $ 1,547 $ 2,066
+============ ============ ============
+[9] Other:
+Pursuant to an agreement reached on February 2, 2005 with an 8%
+shareholder, the Company agreed to commit $25 million during the twelve
+months ended January 31, 2006 and $10 million during the twelve months
+ended January 31, 2007 to a combination of share repurchases and/or
+dividends, such programs to be implemented at such time and such manner
+as determined by the board of directors in its sole discretion. As of
+January 31, 2006, the Company has satisfied this agreement via the
+repurchase of 909,000 shares for $14,680 and the payment of dividends
+of $34,919.
+NOTE M - OPERATING SEGMENT INFORMATION
+The Company's reportable segments are primarily determined based on distribution
+channels of its various brands. The wholesale segment markets its products
+through department and specialty stores throughout the country and the retail
+segment thru the operation of various Company owned stores and the Company's
+website. The First Cost segment represents activities of a subsidiary which
+earns commissions for acting as a buying agent to mass-market merchandisers,
+shoe chains and other off-price retailers with respect to their purchase of
+footwear.
+The accounting policies of the segments are the same as those described in the
+summary of significant accounting policies. The Company evaluates performance
+based on profit or loss from operations before other income (expense) and the
+provision for income taxes. The following is information for the Company's
+reportable segments:
+F-29
+STEVEN MADDEN, LTD. AND SUBSIDIARIES
+Notes to Financial Statements
+December 31, 2006 and 2005
+($ in thousands except per share data)
+NOTE M - OPERATING SEGMENT INFORMATION (CONTINUED)
+-----------------Wholesale divisions-----------------
+Other
+footwear Daniel M. Total
+Year ended, Womens Mens brands Friedman Wholesale Retail First Cost Consolidated
+------------ ----------- ------------ ------------ ------------ ----------- ----------- ------------
+December 31, 2006:
+Net sales to external
+customers $ 150,255 $ 62,629 $ 83,309 $ 51,316 $ 347,509 $ 127,654 $ 475,163
+Gross profit 55,118 26,112 34,289 13,976 129,495 68,934 198,429
+Commissions and
+licensing fees - net 2,925 -- -- -- 2,925 -- $ 11,321 14,246
+Income from operations 28,665 10,668 13,793 3,966 57,092 9,885 11,321 78,298
+Depreciation and
+amortization 513 307 519 1,316 2,655 4,025 26 6,706
+Segment assets $ 149,433 $ 10,621 $ 16,110 $ 27,022 203,186 41,933 6,273 251,392
+Capital expenditures $ 3,739 $ 5,765 $ 7 $ 9,511
+December 31, 2005:
+Net sales to external
+customers $ 120,333 $ 54,611 $ 79,331 -- $ 254,275 $ 121,511 $ 375,786
+Gross profit 33,768 22,021 23,194 -- 78,983 60,172 139,155
+Commissions and
+licensing fees - net 2,286 -- -- -- 2,286 -- $ 4,833 7,119
+Income from operations 6,661 9,100 5,550 -- 21,311 5,426 4,833 31,570
+Depreciation and
+amortization 939 160 262 1,361 3,750 9 5,120
+Segment assets $ 149,914 $ 18,709 $ 2,693 -- 171,316 38,576 1,836 211,728
+Capital expenditures $ 1,456 $ 4,366 $ -- $ 5,822
+December 31, 2004:
+Net sales to external
+customers $ 113,879 $ 31,301 $ 85,167 -- $ 230,347 $ 107,797 $ 338,144
+Gross profit 31,465 9,773 22,385 -- 63,623 55,920 119,543
+Commissions and
+licensing fees - net 2,310 -- -- -- 2,310 -- $ 2,278 4,588
+Income from operations 4,947 1,034 2,291 -- 8,272 8,431 2,278 18,981
+Depreciation and
+amortization 822 242 394 1,458 3,405 7 4,870
+Segment assets $ 114,012 $ 10,243 $ 11,107 -- 135,362 44,048 891 180,301
+Capital expenditures $ 1,965 $ 5,414 $ 8 $ 7,387
+F-30
+STEVEN MADDEN, LTD. AND SUBSIDIARIES
+Notes to Financial Statements
+December 31, 2006 and 2005
+($ in thousands except per share data)
+NOTE N - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
+The following is a summary of the quarterly results of operations for the years
+ended December 31, 2006 and 2005:
+March 31, June 30, September 30, December 31,
+------------ ------------ ------------ ------------
+2006:
+Wholesale, net $ 82,982 $ 96,194 $ 91,751 $ 76,582
+Retail, net 25,333 33,306 31,489 37,526
+------------ ------------ ------------ ------------
+Net sales 108,315 129,500 123,240 114,108
+Cost of sales 62,032 74,945 72,217 67,540
+------------ ------------ ------------ ------------
+Gross profit 46,283 54,555 51,023 46,568
+Commissions and licensing fee income - net 3,762 2,825 3,850 3,809
+Net income 10,860 12,696 12,647 10,047
+Net income per share:
+Basic 0.52 0.61 0.61 0.47
+Diluted 0.49 0.58 0.57 0.45
+2005:
+Wholesale, net $ 56,861 $ 68,331 $ 71,018 $ 58,065
+Retail, net 26,475 32,627 29,049 33,360
+------------ ------------ ------------ ------------
+Net sales 83,336 100,958 100,067 91,425
+Cost of sales 55,984 63,348 64,805 52,494
+------------ ------------ ------------ ------------
+Gross profit 27,352 37,610 35,262 38,931
+Commissions and licensing fee income - net 1,225 1,799 2,217 1,878
+Net income 962 5,286 5,513 7,439
+Net income per share:
+Basic 0.05 0.27 0.27 0.36
+Diluted 0.05 0.26 0.26 0.34
+F-31
+(b) Exhibits.
+3.01 Certificate of Incorporation of the Company (incorporated by reference
+to Exhibit 1 to the Company's Current Report on Form 8-K filed with the
+Commission on November 23, 1998).
+3.02 Amended & Restated By-Laws of the Company (incorporated by reference to
+Exhibit 3.02 to the Company's Annual Report on Form 10-K for its fiscal
+year ended December 31. 2001).
+4.01 Specimen Certificate for shares of Common Stock (incorporated by
+reference to Exhibit 4.01 to the Company's Registration Statement on
+Form SB-2/A filed with the Commission on September 29, 1993 (File No.
+033-67162)).
+4.02 Rights Agreement between the Company and American Stock Transfer and
+Trust Company (incorporated by reference to Exhibit 4.1 to the
+Company's Current Report on Form 8-K filed with the Commission on
+November 16, 2001).
+10.01 Third Amended Employment Agreement between the Company and Steven
+Madden (incorporated by reference to Exhibit 10.1 to the Company's
+Current Report on Form 8-K filed with the Commission on July 20,
+2005).#
+10.02 Employment Agreement of Jamieson Karson (incorporated by reference to
+Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the
+Commission on January 6, 2006).#
+10.03 Employment Agreement of Arvind Dharia (incorporated by reference to
+Exhibit 10.07 to the Company's Annual Report on Form 10-K for its
+fiscal year ending December 31, 2000).#
+10.04 Amendment No. 1 to Employment Agreement of Arvind Dharia (incorporated
+by reference to Exhibit 99.4 to the Company's Quarterly Report on Form
+10-Q for its fiscal quarter ending June 30, 2001).#
+10.05 Amendment No. 2 to Employment Agreement of Arvind Dharia (incorporated
+by reference to Exhibit 10.16 to the Company's Quarterly Report on Form
+10-Q for its fiscal quarter ending September 30, 2002).#
+10.06 Amendment No. 3 to Employment Agreement of Arvind Dharia (incorporated
+by reference to Exhibit 10.1 to the Company's Current Report on Form
+8-K filed with the Commission on February 3, 2006).#
+10.07 Employment Agreement between the Company and Awadhesh Sinha, dated as
+of June 15, 2005 (incorporated by reference to Exhibit 10.1 to the
+Company's Current Report on Form 8-K filed with the Commission on June
+21, 2005).#
+10.08 Consulting Agreement, effective as of August 1, 2004, between the
+Company, John Madden and J.L.M. Consultants Inc. (incorporated by
+reference to Exhibit 10.09 to the Company's Annual Report on Form 10-K
+for its fiscal year ended December 31, 2005).
+10.09 Amendment No. 1 to Consulting Agreement, dated as of March 10, 2005,
+between the Company, John Madden and J.L.M. Consultants Inc.
+(incorporated by reference to Exhibit 10.09 to the Company's Annual
+Report on Form 10-K for its fiscal year ended December 31, 2005).
+10.10 Amendment No. 2 to Consulting Agreement, dated as of April 14, 2005,
+between the Company, John Madden and J.L.M. Consultants Inc.
+(incorporated by reference to Exhibit 10.09 to the Company's Annual
+Report on Form 10-K for its fiscal year ended December 31, 2005).
+10.11 Employment Agreement with Robert Schmertz dated March 11, 2005
+(incorporated by reference to Exhibit 10.1 to the Company's Quarterly
+Report on Form 10-Q for its fiscal quarter ending March 31, 2005).#
+10.12 Employment Agreement with Andrew Shames dated March 8, 2004
+(incorporated by reference to Exhibit 10.2 to the Company's Quarterly
+Report on Form 10-Q for its fiscal quarter ending March 31, 2005).#
+10.13 Commission Agreement between the Company and Hev Sales, Inc. dated
+March 8, 2004 (incorporated by reference to Exhibit 10.3 to the
+Company's Quarterly Report on Form 10-Q for its fiscal quarter ending
+March 31, 2005).
+10.14 Employment Agreement between the Company, Adesso Madden, Inc. and
+Joseph Masella and T.J.M. Sales Corporation dated May 7, 2002
+(incorporated by reference to Exhibit 10.4 to the Company's Quarterly
+Report on Form 10-Q for its fiscal quarter ending March 31, 2005).#
+10.15 Amendment No. 1 to Employment Agreement between the Company, Adesso
+Madden, Inc. and Joseph Masella and T.J.M. Sales Corporation dated
+September 2, 2002 (incorporated by reference to Exhibit 10.5 to the
+Company's Quarterly Report on Form 10-Q for its fiscal quarter ending
+March 31, 2005).#
+10.16 Amendment No. 2 to Employment Agreement between the Company, Adesso
+Madden, Inc. and Joseph Masella and T.J.M. Sales Corporation dated
+September 27, 2002 (incorporated by reference to Exhibit 10.6 to the
+Company's Quarterly Report on Form 10-Q for its fiscal quarter ending
+March 31, 2005).#
+10.17 Settlement Agreement, dated February 2, 2005, among Barington Companies
+Equity Partners, L.P., Barington Companies Investors, LLC, James
+Mitarotonda, Barington Companies Offshore Fund, Ltd., Barington
+Companies Advisors, LLC, Barington Capital Group, L.P., LNA Capital
+Corp., Parche, LLC, Starboard Value & Opportunity Fund, LLC, Admiral
+Advisors, LLC, Ramius Capital Group, LC, C4S & Co., LLC, Peter A.
+Cohen, Morgan B. Stark, Jeffrey M. Solomon, Thomas W. Strauss, RJG
+Capital Partners, LP, RJG Capital Management, LLC, Ronald Gross and
+Steven Madden, Ltd. (incorporated by reference to Exhibit 99.1 to the
+Company's Current Report on Form 8-K filed with the Commission on
+February 2, 2005).
+10.18 Stock Purchase Agreement, dated as of February 7, 2006, by and between
+the Company and Daniel M. Friedman (incorporated by reference to
+Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the
+Commission on February 13, 2006).
+10.19 Earn-Out Agreement, dated as of February 7, 2006, by and among the
+Company, Daniel M. Friedman, Daniel M. Friedman & Associates, Inc. and
+DMF International, Ltd. (incorporated by reference to Exhibit 10.2 to
+the Company's Current Report on Form 8-K filed with the Commission on
+February 13, 2006).
+10.20 Amendment to Earn-Out Agreement, dated as of April 10, 2006, by and
+between the Company and Daniel M. Friedman (incorporated by reference
+to Exhibit 10.1 to the Company's Current Report on Form 8-K filed with
+the Commission on April 13, 2006).
+10.21 1996 Stock Plan, approved and adopted on March 6, 1996 (incorporated by
+reference to Exhibit 10.27 to the Company's Registration Statement on
+Form S-8 filed with the Commission on November 3, 1997).#
+10.22 The 1997 Stock Plan, approved and adopted on May 10, 1997 (incorporated
+by reference to Exhibit 10.28 to the Company's Registration Statement
+on Form S-8 filed with the Commission on November 3, 1997).#
+10.23 The 1998 Stock Plan, approved and adopted on January 16, 1998
+(incorporated by reference to Exhibit 10.2 to the Company's
+Registration Statement on Form S-8 filed with the Commission on July
+28, 1998).#
+10.24 The 1999 Stock Plan, approved and adopted on March 15, 1999, amended as
+of March 20, 2000 and March 30, 2001 (incorporated by reference to
+Exhibit 10.A to the Company's Registration Statement on Form S-8 filed
+with the Commission on July 26, 2004).#
+10.25 Employment Agreement between the Company and Amelia Newton Varela,
+effective as of October 1, 2004 (incorporated by reference to Exhibit
+10.29 to the Company's Annual Report on Form 10-K/A for its fiscal year
+ended December 31. 2005). #
+21.01 Subsidiaries of Registrant. +
+23.01 Consent of Eisner LLP+
+24.01 Power of Attorney (included on signature page hereto).
+31.01 Certification of Chairman Chief Executive Officer pursuant to Rule
+13a-14 or 15d-14 of the Securities Exchange Act of 1934, as adopted
+pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.+
+31.02 Certification of Chief Financial Officer pursuant to Rule 13a-14 or
+15d-14 of the Securities Exchange Act of 1934, as adopted pursuant to
+Section 302 of the Sarbanes-Oxley Act of 2002.+
+32.01 Certification of Chairman & Chief Executive Officer pursuant to 18
+U.S.C. Section 1350 Adopted Pursuant to Section 906 of the
+Sarbanes-Oxley Act of 2002.+
+32.02 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section
+1350 Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
+2002.+
+--------------------------
++ Filed herewith.
+# Indicates management contract or compensatory plan or arrangement required
+to be identified pursuant to Item 15(b).
+SIGNATURE
+Pursuant to the requirements of Section 13 or 15(d) of the Securities
+Exchange Act of 1934, the registrant has duly caused this report to be signed on
+its behalf by the undersigned, thereunto duly authorized.
+Dated: New York, New York
+March 9, 2007
+STEVEN MADDEN, LTD.
+By: /s/ JAMIESON A. KARSON
+------------------------------------
+Jamieson A. Karson
+Chairman and Chief Executive Officer
+KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
+below constitutes and appoints Jamieson A. Karson and Arvind Dharia, and each of
+them, as his true and lawful attorneys-in-fact and agents, with full power of
+substitution and re-substitution, for him in any and all capacities, to sign any
+and all amendments to this Annual Report on Form 10-K and to file the same, with
+all exhibits thereto, and other documents in connection therewith, with the
+Securities and Exchange Commission hereby ratifying and confirming that each of
+said attorneys-in-fact and agents, or his substitute or substitutes, may
+lawfully do or cause to be done by virtue hereof.
+Pursuant to the requirements of the Securities Exchange Act of 1934, this
+report has been signed below by the following persons on behalf of the
+registrant in the capacities and on the dates indicated.
+Signature Title Date
+-------------------------- ------------------------------------- -------------
+/s/ JAMIESON A. KARSON Chairman and Chief Executive Officer March 9, 2007
+--------------------------
+Jamieson Karson
+/s/ ARVIND DHARIA Chief Financial Officer March 9, 2007
+--------------------------
+Arvind Dharia
+/s/ JEFFREY BIRNBAUM Director March 9, 2007
+--------------------------
+Jeffrey Birnbaum
+/s/ MARC COOPER Director March 9, 2007
+--------------------------
+Marc Cooper
+/s/ JOHN L. MADDEN Director March 9, 2007
+--------------------------
+John L. Madden
+/s/ HAROLD KAHN Director March 9, 2007
+--------------------------
+Harold Kahn
+/s/ PETER MIGLIORINI Director March 9, 2007
+--------------------------
+Peter Migliorini
+/s/ RICHARD P. RANDALL Director March 9, 2007
+--------------------------
+Richard P. Randall
+/s/ THOMAS H. SCHWARTZ Director March 9, 2007
+--------------------------
+Thomas H. Schwartz
+/s/ WALTER YETNIKOFF Director March 9, 2007
+--------------------------
+Walter Yetnikoff
\ No newline at end of file
diff --git a/raw/filings/0000913241/2006/0001019056-07-000248/filing_metadata.csv b/raw/filings/0000913241/2006/0001019056-07-000248/filing_metadata.csv
new file mode 100644
index 0000000000000000000000000000000000000000..ce16d898f320de85090d3a9314815f758c6e6e29
--- /dev/null
+++ b/raw/filings/0000913241/2006/0001019056-07-000248/filing_metadata.csv
@@ -0,0 +1,2 @@
+cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing
+0000913241,SHOO,"STEVEN MADDEN, LTD.",10-K,2007-03-09,2006-12-31,2007-03-09T20:58:45.000Z,0001019056-07-000248,smadden_k2006.txt,FORM 10-K,282015,0,0,https://www.sec.gov/Archives/edgar/data/913241/000101905607000248/smadden_k2006.txt,https://www.sec.gov/Archives/edgar/data/913241/000101905607000248/,2006,2006,1
diff --git a/raw/filings/0000913241/2006/0001019056-07-000248/item1.txt b/raw/filings/0000913241/2006/0001019056-07-000248/item1.txt
new file mode 100644
index 0000000000000000000000000000000000000000..6aba411712ad0a7b4ccb859f7d9d2aa0c6ea4a17
--- /dev/null
+++ b/raw/filings/0000913241/2006/0001019056-07-000248/item1.txt
@@ -0,0 +1,534 @@
+ITEM 1 BUSINESS
+Steven Madden, Ltd. (together with its subsidiaries, the "Company")
+designs, sources, markets and retails fashion-forward footwear for women, men
+and children. In addition, the Company designs, sources, markets and retails
+name brand and private label fashion handbags and accessories through its Daniel
+M. Friedman Division. 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, Central and South America, Australia and Indonesia. The Company's
+product line includes a broad range of updated styles which are designed to
+establish or capitalize on market trends, complemented by core products. The
+Company has established a reputation for its creative designs, popular styles
+and quality products at accessible price points.
+The Company's business is comprised of three (3) distinct segments
+(wholesale, retail and first cost divisions). The Wholesale Division includes
+six (6) core brands: Steve Madden(R), Steve Madden Mens, Candie's(R),
+SMNY/Madden Girl, Steven(R) and Stevies(R). In addition, the Daniel M. Friedman
+Wholesale Division, through license agreements, includes the Ellen Tracy, Betsey
+Johnson and Tracy Reese brands. Steven Madden Retail, Inc., the Company's
+wholly-owned retail subsidiary, operates Steve Madden(R) and Steven(R) retail
+stores as well as the Company's e-commerce website. The Company's wholly-owned
+subsidiary, Adesso-Madden, Inc., acts as a buying agent for footwear products
+under private labels for many of the country's large mass merchandisers. The
+Company also licenses its Steve Madden(R) and Steven(R) trademarks for several
+accessory and apparel categories.
+Steven Madden, Ltd. was incorporated as a New York corporation on July
+9, 1990 and reincorporated under the same name in Delaware in November 1998. The
+Company completed its initial public offering in December 1993 and its shares of
+Common Stock currently trade on The NASDAQ Global 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. The Company makes
+available, free of charge, on its website its Annual Reports on Form 10-K,
+Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, 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 (the "Exchange Act"), and its Proxy
+Statement for its Annual Meeting as soon as reasonably practicable after such
+material is electronically filed with, or furnished to, the Securities and
+Exchange Commission (the "Commission"). The Company will provide paper copies of
+such filings free of charge upon request.
+Wholesale Divisions
+Madden Women's Wholesale Division
+The Steve Madden(R) Women's Wholesale Division ("Madden Women's")
+designs, produces, sources and markets the Company's Steve Madden(R) brand to
+major department stores, better specialty stores and independently owned
+boutiques throughout the United States. The Steve Madden(R) brand has become a
+leading life-style brand in the fashion conscious marketplace. To serve its
+customers (primarily women ages 16 to 35), Madden Women's creates and markets
+fashion forward footwear designed to appeal to customers seeking exciting, new
+footwear designs at affordable prices.
+1
+As the Company's largest division, Madden Women's accounted for $150.3
+million of net sales in the year ended December 31, 2006, or approximately 32%
+of the Company's total net sales. Many new products for Madden Women's 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 trends which the
+Company believes is essential for success in the fashion arena.
+Madden Mens Wholesale Division
+The Steve Madden Mens Wholesale Division ("Madden Mens") designs,
+produces, sources and markets a full collection of directional 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 20 to 40 years old. Madden Mens accounted for $62.6
+million of net sales in the year ended December 31, 2006, or approximately 13%
+of the Company's total net sales. Madden Mens, 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 Wholesale Division
+Pursuant to the Company's license agreement with Candie's, Inc.,
+("Candie's"), the Company designs, produces, sources and markets Candie's(R)
+branded footwear for women and children worldwide through the Company's Candie's
+Wholesale Division ("Candie's Wholesale"). Candie's Wholesale generated net
+sales of $27.1 million for the year ended December 31, 2006, or approximately 6%
+of the Company's total net sales.
+On December 6, 2004, the license agreement with Candie's was amended to
+reflect Candie's decision to name Kohl's Corporation ("Kohl's") as the exclusive
+provider of a new line of Candie's apparel. Pursuant to the amendment,
+commencing on January 1, 2007, the Company no longer has the exclusive right to
+market Candie's(R) branded footwear and is permitted to sell Candie's(R) branded
+footwear only to Kohl's. Under the terms of the amendment, Candie's has
+guaranteed that the Company will achieve minimum sales levels with Kohl's during
+the term of the agreement, which runs through December 31, 2010. In the event
+such minimum sales levels are not achieved, Candie's is required to compensate
+the Company in an amount based on a percentage of the sales shortfall. For the
+year ended December 31, 2006, the minimum sales level was met.
+SM New York / Madden Girl - Wholesale Division
+The SM New York Wholesale Division ("SMNY/Madden Girl") designs,
+produces, sources and markets a full collection of directional young women's
+shoes. In order to consolidate brand identity, the SMNY(TM) brand will
+transition to "Madden Girl" beginning with the spring 2007 offerings.
+SMNY/Madden Girl is geared for young women ages 13 to 20 and is an "opening
+price point" brand that is currently being sold at department stores, mid-tier
+retailers and specialty stores. SMNY/Madden Girl accounted for $24.5 million of
+net sales in the year ended December 31, 2006 or approximately 5% of the
+Company's total net sales.
+Diva Acquisition Corp. - Steven(R) Wholesale Division
+Diva Acquisition Corp. ("Steven(R)") designs, produces, sources and
+markets women's fashion footwear under the Steven(R) trademark through major
+department and better footwear specialty stores throughout the United States.
+Priced a tier above the Steve Madden(R) brand, Steven(R) products are designed
+to appeal principally to fashion conscious women, ages 26 to 45, who shop at
+department stores and footwear boutiques. Steven(R) generated net sales of $22.1
+million for the year ended December 31, 2006, or approximately 5% of the
+Company's total net sales.
+2
+Stevies - Wholesale Division
+The Company's Stevies(R) Wholesale Division ("Stevies(R)") designs,
+produces, sources and markets footwear for young girls to major department
+stores, such as Federated Department Stores and Belk, better specialty stores
+and independent boutiques throughout the United States. Stevies(R) generated net
+sales of $7.6 million for the year ended December 31, 2006 or approximately 2%
+of the Company's total net sales.
+Daniel Friedman Wholesale Division
+On February 7, 2006, the Company acquired all of the equity interest of
+privately held Daniel M. Friedman and Associates, Inc. The acquisition was
+completed for consideration of $18.7 million, including transaction costs. In
+addition, the purchase agreement provides for certain earn out payments based on
+financial performance through 2010. The Company's Daniel M. Friedman Wholesale
+Division ("Daniel M. Friedman") designs, sources and markets name brand and
+private label fashion handbags and accessories to major department stores, value
+price retailers and better specialty stores throughout the United States. Daniel
+M. Friedman generated net sales of $51.3 million from the date of acquisition
+until December 31, 2006 or approximately 11% of the Company's total net sales.
+Retail Division
+Steven Madden Retail, Inc.
+As of December 31, 2006, the Company owned and operated ninety-three
+(93) retail shoe stores under the Steve Madden(R) name, two (2) under the
+Steven(R) name and one (1) Internet store (through the www.stevemadden.com
+website). In 2006, the Company opened four (4) new stores and closed six (6)
+under-performing stores. Steve Madden stores are located in major shopping malls
+and in street locations across the United States. In 2006, the retail stores
+generated annual sales in excess of $719 per square foot. Sales are primarily
+from the Company's Steve Madden(R) products. Comparative store sales (sales of
+those stores that were open for all of 2006 and 2005) increased 4% in 2006
+compared to 2005. Net sales for the Retail Division were $127.7 million for the
+year ended December 31, 2006, or approximately 27% of the Company's total net
+sales.
+The Company believes that the Retail Division will continue to enhance
+overall sales and profitability while building equity in the Steve Madden brand.
+The Company plans to add eight to ten (8 to 10) new retail stores during 2007.
+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.
+First Cost Division
+Adesso-Madden, Inc.
+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 merchants, shoe store chains and other value-priced retailers in
+connection with the procurement of their footwear needs. As a buying agent, A-M
+arranges for shoe manufacturers to produce private label shoes to its customers
+specifications. The Company believes that by operating in the private label,
+mass merchandising market, it 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 Target, Wal-Mart, Mervyns, J.C. Penney and Sears. A-M receives buying
+agent's commissions from its customers. In addition, the Company has leveraged
+the strength of its Steve Madden brands and product designs resulting in a
+3
+partial recovery of its design, product and development costs from its
+suppliers. The First Cost Division generated operating income of $11.3 million
+for the year ended December 31, 2006.
+Licensing
+As of December 31, 2006, the Company licensed its Steve Madden(R) and
+Steven(R) trademarks for use in connection with the manufacturing, marketing and
+sale of cold weather accessories, sunglasses, eyewear, watches, dresses and
+girl's apparel. Most of the license agreements require the licensee to pay to
+the Company a royalty based on actual net sales, a minimum royalty in the event
+that specified net sales targets are not achieved and a percentage of sales for
+advertising the brand. Licensing income for the year ended December 31, 2006 was
+$2.9 million.
+Design
+The Company has established a reputation for its creative designs,
+marketing and trendy products at affordable price points. The Company believes
+that its future success will substantially depend 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 an unparalleled design process that
+allows it to recognize and act quickly to changing consumer demands. The
+Company's design team strives to create designs which it believes 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 initial production. Most new products are then tested in selected Steve
+Madden(R) retail stores. Designs that prove popular are then offered for
+wholesale and retail distribution nationwide. The Company believes that its
+design and testing process and flexible sourcing model is a significant
+competitive advantage allowing the Company to mitigate the risk of production
+costs and the distribution of less desirable designs.
+Product Sourcing and Distribution
+The Company sources each of its product lines separately based on the
+individual design, styling and quality specifications of the products in such
+product lines. The Company does not own or operate manufacturing facilities;
+rather, it sources its branded products through agents with independently owned
+manufacturers in China, Brazil, Italy, Mexico, Spain, Portugal and the United
+States. The Company has established relationships with a number of manufacturers
+and agents in each of these countries. 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 Company continually monitors the availability of the principal
+materials used in the Company's footwear, which are available from a number of
+sources, both within the United States and in foreign countries. The Company
+tracks inventory flow on a regular basis, monitors sell-through data and
+incorporates input on product demand from wholesale customers. The Company uses
+retailers' feedback to adjust the production or manufacture of new products in
+as little as five weeks, which minimizes the close out of slow moving products.
+The Company distributes its products from three (3) third-party
+distribution warehouse centers located in California and New Jersey. By
+utilizing distribution facilities that specialize in distributing products to
+certain wholesale accounts, Steve Madden(R) retail stores and Internet
+fulfillment, the Company believes that its customers are better served.
+Customers
+The Company's wholesale customers consist principally of department
+stores and specialty stores, including independent boutiques. Approximately 82%
+of its wholesale revenue is generated from department and specialty stores,
+including Federated Department Stores (Macy's and Bloomingdale's) Lord and
+4
+Taylor, Dillard's, Nordstrom, Journeys, Limited Too and Mandees; and catalog
+retailers, including Victoria's Secret and Fingerhut. For the year ended
+December 31, 2006, Federated Department Stores accounted for approximately $60.7
+million, or 17% of the Company's wholesale net sales and 13% of the Company's
+total net sales.
+Distribution Channels
+The Company sells its products principally through its Company-owned
+retail stores and through department stores, specialty stores and discount
+stores in the United States and abroad. For the year ended December 31, 2006,
+net sales from the Company's Retail Division and the Company's Wholesale
+Division accounted for approximately $127.7 million (27%) and $347.5 million
+(73%) of the Company's total net sales, respectively. The following paragraphs
+describe each of these distribution channels.
+Steve Madden and Steven Retail Stores
+As of December 31, 2006, the Company operated ninety-four (94)
+Company-owned retail stores (including one Internet store) under the Steve
+Madden(R) name and two (2) 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 that 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 customers 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 a mall or street location that the Company expects will
+attract the highest concentration of the Company's core demographic,
+style-conscious customer base. The Steven(R) stores have a more sophisticated
+design and format styles to appeal to their more mature target audience. In
+addition to carefully analyzing mall demographics and locations, the Company
+also sets profitability guidelines for each potential store site. Specifically,
+the Company targets well trafficked sites at which the demographics fit the
+Company's consumer profile and seeks new locations where the projected fixed
+annual rent expense stays within Company guidelines. By setting these
+guidelines, the Company seeks to identify stores that will contribute to the
+Company's overall profitability both in the near- and longer-terms.
+Department Stores
+The Company currently sells to over 9,800 doors of 58 department stores
+throughout the United States and Canada. The major accounts include Federated
+Department Stores (Macy's and Bloomingdale's), Lord and Taylor, Nordstrom and
+Dillard'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 sell 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.
+5
+In addition to merchandising support, the Company's key 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, which minimizes markdown exposure at seasons end.
+Specialty Stores/Catalog Sales
+The Company currently sells to specialty store locations throughout the
+United States. The Company's major specialty store accounts include Journeys,
+Mandees, Famous Footwear and DSW. 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 an Internet website: www.stevemadden.com, where
+customers can purchase numerous styles of the Company's Steve Madden(R),
+Steven(R) and Steve Madden Mens footwear and accessory products.
+Distribution Agreements
+Steve Madden(R) products are available in many countries and
+territories worldwide via several retail selling and distribution agreements.
+Under the terms of the retail selling agreements, the distributors and retailers
+are required to open a minimum number of stores each year and to pay the Company
+a fee for each pair of footwear purchased, and in many cases, an additional
+fixed amount per pair or an additional amount based on a percentage of sales.
+Under the terms of the distribution agreements, the distributor is required to
+purchase certain minimum amounts of Steve Madden(R) shoes. These agreements,
+which expire at various times through December 31, 2012, are exclusive in their
+specific territories which include Canada, Australia, New Zealand, Israel, UAE,
+Bahrain, Qatar, Oman, Indonesia, Mexico, South Africa, Turkey and several
+countries in Central and South America.
+Competition
+The fashion footwear industry is highly competitive. The Company
+competes with specialty shoe companies as well as companies with diversified
+footwear product lines. Many of these competitors, including Diesel, Kenneth
+Cole, Nine West, DKNY, Skechers, Nike and Guess, may have 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.
+Marketing and Sales
+The Company has focused on creating an integrated brand building
+program to establish Steve Madden as a leading designer of fashion footwear for
+style-conscious young women and men. 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 customers can purchase Steve Madden(R), Steven(R) and Steve Madden Mens
+products and interact with the Company.
+6
+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 that 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
+On July 1, 2005, the Company entered into a factoring agreement with
+GMAC Commercial Finance LLC ("GMAC"). The agreement, which has no specific
+expiration date and can be terminated by either party with sixty (60) days
+written notice after June 30, 2007, provides the Company with a $25 million
+credit facility with a $15 million sub-limit on direct borrowings. Under the
+terms of the agreement, the Company may request advances from the factor up to
+80% of aggregate receivables purchased by the factor at an interest rate of two
+and one-half percent (2.5%) over the 30 day LIBOR. The Company also pays a fee
+equal to 0.325% of the gross invoice amount of each receivable purchased. Prior
+to July 1, 2005, the Company had a factoring agreement with Capital Factors,
+Inc. The Company sells and assigns a substantial portion of its receivables,
+principally without recourse, to the factor. As of December 31, 2006 and 2005,
+$260,000 and $555,000 of factored receivables, respectively, were sold by the
+Company with recourse. GMAC will maintain a lien on all of the Company's
+receivables and assume the credit risk for all assigned accounts approved by
+them with certain restrictions.
+The Company's Daniel M. Friedman Division has a factoring agreement
+with Wells Fargo Century. Under the terms of the agreement, the Company is
+eligible to draw down 85% of its invoiced receivables at an interest rate equal
+to the prime rate. The Company pays a fee equal to 0.45% of the gross invoice
+amount of each receivable purchased. Wells Fargo Century will maintain a lien on
+all of the Daniel M. Friedman's receivables and assume the credit risk for all
+assigned accounts approved by them with certain restrictions. The expiration
+date on this agreement is June 30, 2007 with automatic one-year renewals
+thereafter.
+Trademarks and Service Marks
+The STEVE MADDEN and/or STEVE MADDEN plus Design trademarks and service
+marks have been registered in numerous International Classes in the United
+States (Int'l Cl. 25 for clothing and footwear; Int'l Cl. 18 for leather goods,
+such as handbags and wallets; Int'l Cl. 9 for eyewear; Int'l Cl. 14 for jewelry;
+Int'l Cl. 3 for cosmetics and fragrances; Int'l Cl. 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). The Company also has pending trademark
+applications in the United States for the mark STEVE MADDEN and/or STEVE MADDEN
+(design) in numerous international classes (Class 2 for paints, Class 4 for
+candles, Class 6 for key chains and id bracelets, Class 11 for lamps, Class 14
+for jewelry and watches, Class 18 for bags and leather goods, Class 21 for
+housewares, Class 26 for hair accessories, Class 27 for rugs and carpets, Class
+28 for sporting goods, and Class 32 for light beverages).
+7
+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), SHOE BIZ BY STEVE MADDEN (Int'l Cl. 25 for
+clothing and footwear; and Int'l Cl. 35 for retail store services) STEVEN M.
+(Int'l Class 25 for clothing and footwear); and STEVEN (Int'l Cl. 25 for
+clothing and footwear, Class 3 for cosmetics and fragrances, Class 14 for
+jewelry, Class 18 for leather goods, Class 26 for hair accessories, Class 35 for
+retail store services, and Class 9 for eyewear). The Company also has pending
+applications for STEVEN in various international classes (Class 2 for paints,
+Class 4 for candles, Class 6 for key chains and id bracelets, Class 11 for
+lamps, Class 16 for printed matter, Class 20 for furniture, Class 21 for
+housewares, Class 26 for hair accessories, Class 27 for rugs and carpets, and
+Class 32 for light beverages). The Company also owns a registration for the mark
+SOHO COBBLER and SOHO COBBLER (design) in the U.S. in Class 25 for footwear.
+The Company also has several pending applications in the U.S. for
+MADDEN in a variety of international classes (Class 3 for cosmetics and
+fragrances, Class 9 for watches and CDs, Class 14 for jewelry and watches, Class
+18 for bags, , Class 14 for jewelry, Class 25 for clothing and footwear, and
+Class 28 for toys and sporting goods). The Company also has pending applications
+in the U.S. for STEVEN BY STEVE MADDEN in Classes 18 (bags) and 24 (bedding),
+and for MADDEN BY STEVE MADDEN in Class 2 for paints, Class 3 for perfume and
+cosmetics, Class 4 for candles, Class 6 for key rings and key chains, Class 9
+for eyewear and CDs, Class 11 for lamps, Class 14 for jewelry, Class 16 for
+stationery and notebooks, Class 18 for bags, Class 20 for furniture, Class 21
+for housewares, Class 24 for bedding, Class 25 for clothing and footwear, Class
+26 for hair accessories, Class 27 for carpets and rugs, Class 28 for toys and
+games, Class 32 for light beverages, and Class 35 for retail store services.
+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), STEVE MADDEN LUXE in Class
+14 for jewelry and watches and Class 25 for clothing and footwear. RULE STEVE
+MADDEN (in Class 2 for paints, Class 3 for perfume and cosmetics, Class 4 for
+candles, Class 6 for key rings and key chains, Class 9 for eyewear and CDs,
+Class 11 for lamps, Class 14 for jewelry, Class 16 for stationery and notebooks,
+Class 18 for bags, Class 20 for furniture, Class 21 for housewares, Class 24 for
+bedding, Class 25 for clothing and footwear, Class 26 for hair accessories,
+Class 27 for carpets and rugs, Class 28 for toys and games, Class 32 for light
+beverages, and Class 35 for retail store services), SM NEW YORK (in Class 3 for
+perfume and cosmetics, Class 9 for eyewear and CDs, Class 14 for jewelry, Class
+18 for bags, and Class 25 for clothing and footwear); and SMNY (in Class 3 for
+perfume and cosmetics, Class 9 for eyewear and CDs, Class 14 for jewelry, Class
+18 for bags, and Class 25 for clothing and footwear).
+The Company further owns registrations for the STEVE MADDEN and/or
+STEVE MADDEN plus Design trademarks and service marks in various International
+Classes in Argentina, Australia, Bahrain, Belize, Brazil, Canada, Chile, China,
+Colombia, El Salvador, Guatemala, Hong Kong, Israel, Italy, Japan, Korea,
+Lebanon, Mexico, New Zealand, the Netherlands, Nicaragua, Oman, Panama, the
+Philippines, Qatar, Russia, Saudi Arabia, Singapore, South Africa, Taiwan,
+Thailand, Turkey, the United Arab Emirates, Venezuela, the European Union, and
+the Benelux countries and has pending applications for registration of the STEVE
+MADDEN and/or STEVE MADDEN plus Design trademarks and service marks in
+Azerbaijan, Belarus, Canada, China, Costa Rica, Ecuador, Estonia, Georgia,
+Guatemala, Honduras, Indonesia, Kazakhstan, Korea, Kuwait, Kyrgyzstan, Latvia,
+Lithuania, Oman, Paraguay, Peru, Qatar, Tajikistan, Ukraine, the United Arab
+Emirates, and Uzbekistan .
+Additionally, the Company owns registrations for the STEVEN trademark
+and service mark in various International Classes in Australia, Bahrain, Belize,
+China, the Dominican Republic, El Salvador, the European Union, Hong Kong,
+Israel, Lebanon, Japan, New Zealand, Netherland Antilles, the Philippines, Saudi
+Arabia, Thailand, Taiwan, Turkey, and the United Arab Emirates and has pending
+applications for registration of the STEVEN trademark and service mark in China,
+8
+Columbia, Ecuador, the European Union, Guatemala, Indonesia, Israel, Italy,
+Korea, Malaysia, Nicaragua, Oman, Philippines, Qatar, Russia, South Africa,
+Taiwan, Thailand, Turkey, and Taiwan.
+The Company further owns registrations for the "torch stripe" design in
+Class 25 in the European Union and Panama, and has a pending application for the
+"torch stripe" design in Class 25 in China.
+The Company further owns registrations for the mark STEVEN BY STEVE
+MADDEN in various international classes in the European Union and Panama, and
+has pending applications for the mark STEVEN BY STEVE MADDEN in various
+international classes in Canada, China, Israel, and Korea.
+The Company further owns registrations for the mark SM NEW YORK in
+International Class 25 (clothing and footwear) in Belize, the Dominican
+Republic, El Salvador, Netherland Antilles, and New Zealand, and has pending
+applications for registration of the SM NEW YORK mark in International Class 25
+(clothing and footwear) in Australia, Columbia, Costa Rica, Ecuador, Guatemala,
+Nicaragua, Panama, South Africa, and Venezuela.
+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), and in Australia, Canada, the European
+Union, Hong Kong, Japan, Korea, Panama, and South Africa in some or all of
+Classes 3, 18, and 25, and for its D. AARON trademark in Class 25 Spain. Also,
+the Company owns registrations for the DAVID AARON trademark in the United
+States 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, through its Stevies, Inc. subsidiary, also owns various
+registrations for the STEVIES and /or 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; International Class 14 for
+jewelry; International Class 28 for toys; International Class 16 for paper
+goods; International Class 3 for perfume and cosmetics, International Class 9
+for CDs and eyewear, and International Class 26 for hair accessories), and for
+STEVIES BY STEVE MADDEN in Class 14 for jewelry, Class 9 for eyewear, Class 3
+for perfume and cosmetics, Class 28 for toys and games, Class 35 for retail
+services, Class 16 for stationery and notebooks, Class 18 for bags. The
+Company, through its Stevies, Inc. subsidiary, also owns registrations for its
+STEVIES and/or STEVIES plus Design mark for various goods in Argentina, Bahrain,
+Canada, China, Columbia, the European Union, Hong Kong, Israel, Japan, Korea,
+Lebanon, Malaysia, Mexico, Panama, Singapore, Taiwan and the United Arab
+Emirates. Additionally, Stevies, Inc. has several pending trademark and service
+mark applications for registration of the STEVIES and STEVIES plus Design marks
+in various International Classes in Brazil, Indonesia, Korea, Kuwait, Mexico,
+New Zealand, Oman, Peru, Qatar, Saudi Arabia, Singapore, South Africa, Thailand,
+Turkey, the United Arab Emirates and Venezuela. Finally, Stevies, Inc. also owns
+several trademark and service mark registrations 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. 28 for toys; and
+Int'l Cl. 35 for retail store services).
+The Company believes that its trademarks have a significant value and
+are important to the marketing of the Company's products. There can be no
+assurance, however, that the Company will be able to effectively obtain rights
+9
+to its marks 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.
+Employees
+On February 5, 2007, the Company employed approximately one thousand
+four hundred and ninety-eight (1,498) employees, of whom approximately four
+hundred eighty (480) work on a full-time basis and approximately one thousand
+and eighteen (1,018) work on a part-time basis, most of whom work in the Retail
+Division. The management of the Company considers relations with its employees
+to be good.
+Seasonality
+Historically, the Company's merchandising businesses have experienced
+holiday retail seasonality. In addition to seasonal fluctuations, the Company's
+operating results 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 for obsolescence, the cost of materials, the product mix between
+wholesale, retail 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.
+Backlog
+The Company had unfilled wholesale customer orders of $97.2 million and
+$88.3 million, as of February 18, 2007 and 2006, respectively. The Company's
+backlog at a particular time is affected by a number of factors, including
+seasonality, timing of market weeks, and wholesale customer purchases of its
+core basic products through the Company's open stock program. Accordingly, a
+comparison of backlog from period to period may not be indicative of eventual
+shipments.
\ No newline at end of file
diff --git a/raw/filings/0000913241/2006/0001019056-07-000248/item13.txt b/raw/filings/0000913241/2006/0001019056-07-000248/item13.txt
new file mode 100644
index 0000000000000000000000000000000000000000..6af70e2042138fd5f4e8626d13a9cff88bd8a342
--- /dev/null
+++ b/raw/filings/0000913241/2006/0001019056-07-000248/item13.txt
@@ -0,0 +1,5 @@
+ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
+INDEPENDENCE
+The information required to be furnished pursuant to this item will be set
+forth in the Company's proxy statement for the 2007 Annual Meeting of
+Stockholders, and is incorporated herein by reference.
\ No newline at end of file
diff --git a/raw/filings/0000913241/2006/0001019056-07-000248/item9a.txt b/raw/filings/0000913241/2006/0001019056-07-000248/item9a.txt
new file mode 100644
index 0000000000000000000000000000000000000000..0133ce13a24d19b9f905972016182188640ac640
--- /dev/null
+++ b/raw/filings/0000913241/2006/0001019056-07-000248/item9a.txt
@@ -0,0 +1,136 @@
+ITEM 9A CONTROLS AND PROCEDURES
+Disclosure Controls and Procedures
+As required by Rule 13a-15(b) of 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.
+Management's Annual Report on Internal Control Over Financial Reporting
+Management of Steve Madden, Ltd. is responsible for establishing and maintaining
+adequate internal control over financial reporting (as defined in Rule 13a-15(f)
+of the Securities Exchange Act of 1934).
+The Company's internal control over financial reporting is a process designed to
+provide reasonable assurance regarding the reliability of financial reporting
+and the preparation of financial statements for external purpose in accordance
+with U.S. generally accepted accounting principles. The Company's internal
+control over financial reporting includes those policies and procedures that (1)
+pertain to maintenance of records that, in reasonable detail, accurately and
+fairly reflect the transaction and dispositions of the assets of the company;
+(2) provide reasonable assurance that transactions are recorded as necessary to
+permit preparation of financial statements in accordance with U.S. generally
+accepted accounting principles, and that receipts and expenditures of the
+company are being made only in accordance with authorizations of management and
+directors of the company; and (3) provide reasonable assurance regarding
+prevention or timely detection of unauthorized acquisition, use, or disposition
+of the company's assets that could have a material effect on the financial
+statements.
+Because of its inherent limitations, internal control over financial reporting
+may not prevent or detect misstatements. Also, projections of any evaluation of
+effectiveness to future periods are subject to the risk that controls may become
+inadequate because of changes in conditions, or that the degree of compliance
+with the policies or procedures may deteriorate.
+We acquired Daniel M. Friedman & Associates, Inc. in February 2006. We have
+excluded Daniel M. Friedman & Associates, Inc. from the scope of our annual
+report on internal control over financial reporting as of December 31, 2006.
+These operations represent approximately 11% of our total assets at December 31,
+2006 and approximately 11% and 5% of our revenues and net income for the year
+ended December 31, 2006, respectively.
+Under the supervision of and with the participation of the Chief Executive
+Officer and the Chief Financial Officer, the Company's management conducted an
+assessment of the effectiveness of the Company's internal control over financial
+reporting based on the frame work and criteria established in Internal Control -
+Integrated Framework, issued by the Committee of Sponsoring Organizations of the
+Tradeway Commission. Based on this assessment, the Company's management has
+concluded that, as of December 31, 2006, the Company's internal control over
+financial reporting was effective.
+27
+Attestation Report of the Company's Independent Registered Public Accounting
+Firm
+The Company's Independent Registered Public Accounting Firm, Eisner
+LLP, has audited and issued a report on management's assessment of the Company's
+internal control over financial reporting. The report of Eisner LLP appears
+below.
+To the Board of Directors and Shareholders of
+Steven Madden, Ltd.
+We have audited management's assessment, included in the accompanying
+Management's Annual Report on Internal Control Over Financial Reporting, that
+Steven Madden, Ltd. and subsidiaries (the "Company") maintained effective
+internal control over financial reporting as of December 31, 2006, based on
+criteria established in Internal Control - Integrated Framework issued by the
+Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). The
+Company's management is responsible for maintaining effective internal control
+over financial reporting and for its assessment of the effectiveness of internal
+control over financial reporting. Our responsibility is to express an opinion on
+management's assessment and an opinion on the effectiveness of the Company's
+internal control over financial reporting based on our audit.
+We conducted our audit in accordance with the standards of the Public
+Company Accounting Oversight Board (United States). Those standards require that
+we plan and perform the audit to obtain reasonable assurance about whether
+effective internal control over financial reporting was maintained in all
+material respects. Our audit included obtaining an understanding of internal
+control over financial reporting, evaluating management's assessment, testing
+and evaluating the design and operating effectiveness of internal control, and
+performing such other procedures as we considered necessary in the
+circumstances. We believe that our audit provides a reasonable basis for our
+opinion.
+A company's internal control over financial reporting is a process
+designed to provide reasonable assurance regarding the reliability of financial
+reporting and the preparation of financial statements for external purposes in
+accordance with generally accepted accounting principles. A company's internal
+control over financial reporting includes those policies and procedures that (i)
+pertain to the maintenance of records that, in reasonable detail, accurately and
+fairly reflect the transactions and dispositions of the assets of the company;
+(ii) provide reasonable assurance that transactions are recorded as necessary to
+permit preparation of financial statements in accordance with generally accepted
+accounting principles, and that receipts and expenditures of the company are
+being made only in accordance with authorizations of management and directors of
+the company; and (iii) provide reasonable assurance regarding prevention or
+timely detection of unauthorized acquisition, use, or disposition of the
+company's assets that could have a material effect on the financial statements.
+Because of its inherent limitations, internal control over financial
+reporting may not prevent or detect misstatements. Also, projections of any
+evaluation of effectiveness to future periods are subject to the risk that
+controls may become inadequate because of changes in conditions, or that the
+degree of compliance with the policies or procedures may deteriorate.
+As indicated in the accompanying Management's Annual Report on Internal
+Control over Financial Reporting, management's assessment of the effectiveness
+of internal control over financial reporting as of December 31, 2006 did not
+include the internal controls of Daniel M. Friedman and Associates, Inc. and
+D.M.F. International (collectively, "Daniel M. Friedman") because they were
+acquired by the Company in purchase business combinations during 2006. Daniel M.
+Friedman constituted approximately 11% of total assets and approximately 11% and
+5% of revenues and net income, respectively, of the related consolidated
+financial statement amounts as of and for the year ended December 31, 2006. Our
+audit of internal control over financial reporting of the Company also did not
+include an evaluation of the internal control over financial reporting of Daniel
+M. Friedman.
+In our opinion, management's assessment that the Company maintained
+effective internal control over financial reporting as of December 31, 2006, is
+fairly stated, in all material respects, based on criteria established in
+Internal Control-Integrated Framework issued by the COSO. Also, in our opinion,
+Steven Madden, Ltd. and subsidiaries maintained, in all material respects,
+effective internal control over financial reporting as of December 31, 2006,
+based on criteria established in Internal Control-Integrated Framework issued by
+COSO.
+28
+We also have audited, in accordance with the standards of the Public
+Company Accounting Oversight Board (United States), the consolidated balance
+sheets of Steven Madden, Ltd. and subsidiaries as of December 31, 2006 and 2005,
+and the related consolidated statements of income, changes in stockholders'
+equity, and cash flows for the years in the three-year period ended December
+31,2006, and our report dated March 7, 2007 expressed an unqualified opinion on
+those consolidated financial statements.
+Eisner LLP
+New York, New York
+March 7, 2007
+Changes in Internal Control Over Financial Reporting
+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 2006 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 material change during the fourth quarter of 2006.
\ No newline at end of file
diff --git a/raw/filings/0000913241/2006/0001019056-07-000248/rp_note.txt b/raw/filings/0000913241/2006/0001019056-07-000248/rp_note.txt
new file mode 100644
index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391
diff --git a/raw/filings/0000913241/2006/0001019056-07-000248/rpt_disclosure.txt b/raw/filings/0000913241/2006/0001019056-07-000248/rpt_disclosure.txt
new file mode 100644
index 0000000000000000000000000000000000000000..94c79964105bd9dcb8e0c9770dbb4617958cce05
--- /dev/null
+++ b/raw/filings/0000913241/2006/0001019056-07-000248/rpt_disclosure.txt
@@ -0,0 +1,138 @@
+CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
+In July 2001, the Company entered into a consulting agreement with
+Peter J. Solomon & Company, a financial advisory firm of which Marc S. Cooper,
+one of the Company's directors, is a managing director. Under this agreement,
+the firm provides financial advisory and investment banking services to the
+Company. This agreement was amended in March 2004. The amended agreement expired
+on March 31, 2005, but pursuant to its terms has been automatically renewed
+until such time that the Company terminates it. The Company terminated the
+agreement on July 11, 2006. During 2006, the Company retained Peter J. Solomon &
+Company as an advisor in connection with the Company's acquisition of all the
+capital stock of each of Daniel M. Friedman & Associates, Inc. and DMF
+International, Ltd. In February 2006, the Company paid Peter J. Solomon &
+Company an advisory fee in the amount equal to $412,000 for services provided
+and expenses incurred in connection with such acquisition. No other fees were
+paid to Peter J. Solomon & Company in 2006.
+In October 2002, the Company entered into an agreement with Jeffrey
+Birnbaum, one of the Company's directors. Under this agreement, Mr. Birnbaum
+provides consulting services with respect to the designing and manufacturing of
+shoes and general consulting services to the Company, pursuant to which, Mr.
+Birnbaum received a fee of $200,000 in 2006. Mr. Birnbaum has been a partner and
+the Product Development Manager of Dolphin Footwear Company since August 1982.
+Dolphin Footwear Company is one of the Company's largest domestic and foreign
+suppliers. In 2006, the Company paid Dolphin Footwear Company and Ming Well,
+Dolphin's Hong Kong affiliate, approximately $77.7 million for the purchase of
+goods.
+24
+In January 2004, the Company entered into an agreement with John Madden
+and JLM Consultants, a company wholly-owned by John Madden, one of the Company's
+directors, which was amended in 2005. Under this agreement, Mr. Madden provided
+consulting services with respect to the development of international sales of
+the Company. This agreement expired on December 31, 2005 but the parties have
+continued the consulting arrangement under the terms of the expired agreement.
+Under the agreement, JLM Consultants receives a commission equal to 4% on
+International Sales (as defined in the Agreement) up to $6.0 million and 3% on
+International Sales in excess of $6.0 million. The agreement provides for a
+monthly draw in the amount of $20,000 with recourse against such commissions, as
+well as a $1,000 per month travel allowance and $1,700 per month toward health
+insurance premiums. Pursuant to this arrangement, JLM Consultants received a
+total of $478,865 in 2006.
+Effective as of July 1, 2005, the Company amended its employment
+agreement with Steven Madden, pursuant to which Mr. Madden agreed to serve as
+the Company's Creative and Design Chief. The term of Mr. Madden's employment
+under his amended employment agreement commenced July 1, 2005 and ends on June
+30, 2015. The agreement provides for an annual salary of $600,000, with a 7%
+increase of base salary on a compound basis in each of the third, fifth, seventh
+and ninth years of the agreement. The agreement also provides for an annual
+bonus in an amount determined by the Board of Directors, which will be at least
+2% of the Company's EBITDA (the "Annual Bonus"). Additionally, the Company shall
+pay Mr. Madden an annual cash bonus in relation to "new business" (as defined in
+the agreement) in an amount to be determined by the Board of Directors, which
+will be at least (i) 2.5% of new business gross direct revenues and (ii) 10% of
+all license or other fee income above $2,000,000.00 (the "New Business Bonus").
+In addition, Mr. Madden is eligible to receive annually an option grant to
+purchase shares of Common Stock in an amount equal to not less than 100% of the
+largest aggregate amount of options granted to any other continuing full-time
+employee of the Company during the annual period; provided, however, a grant in
+excess of 150% of the options grant to such other continuing full-time employee
+shall require shareholder approval. The agreement provides for, in the event of
+Mr. Madden's death, the payment to Mr. Madden's estate of his base salary for
+the 12-month period immediately subsequent to the date of Mr. Madden's death. In
+the event that Mr. Madden's employment agreement is terminated due to Mr.
+Madden's total disability (as defined in the agreement), "for cause" (as defined
+in the agreement) or due to Mr. Madden's resignation, the Company is obligated
+to pay Mr. Madden the amount of compensation that is accrued and unpaid through
+the date of termination. In the event Mr. Madden's employment agreement is
+terminated for any reason (other than "for cause" or due to his death or total
+disability or due to Mr. Madden's resignation), the Company is obligated to pay
+Mr. Madden, in installments, the balance of his base salary that would have been
+paid by the Company under the agreement for the full term of the agreement. In
+the event that there is a "change of control" (as defined in the agreement)
+transaction, all unvested options to purchase shares of Common Stock held by Mr.
+Madden will vest on the date of termination and Mr. Madden will be entitled to
+receive a lump sum cash payment equal to (1) the amount of compensation that is
+accrued and unpaid through the date of termination, (2) an amount equal to the
+product of (A) the number of years remaining in the term of the agreement (but
+not less than 5) and (B) the sum of (w) the base salary for the 12-month period
+ended on the preceding December 31 (or for the 12-month period ending on
+December 31, 2002, if greater), (x) the amount of the Annual Bonus earned (paid
+or accrued or which should have been paid or accrued) for the 12-month period
+ended on the preceding December 31 (or for the 12-month period ended on December
+31, 2002, if greater), (y) the non-accountable expense allowance provided for
+under the agreement for the 12-month period ended on the preceding December 31,
+and (z) the amount of the New Business Bonus earned (paid or accrued or which
+should have been paid or accrued) for the 12-month period ended on the preceding
+December 31 (or for the 12-month period ending on December 31 during the
+agreement in which Mr. Madden received the greatest New Business Bonus, if
+greater). Mr. Madden's employment agreement contains other customary provisions,
+including provisions regarding expenses reimbursement, confidentiality,
+solicitation and competition. For the fiscal year ending December 31, 2006, Mr.
+Madden
+25
+earned (i) $600,000 in base salary, (ii) $200,000 in non-accountable expense
+allowance, (iii) a bonus of $1,700,060 representing 2% of the Company's earnings
+before interest, tax, depreciation and amortization (iv) a bonus of $2,526,868
+earned based on 2.5% of the Company's new business and (v) a bonus of $92,462
+based on 10% of Royalty/Licensing income over $2,000,000. In addition, Mr.
+Madden was awarded 30,000 shares of restricted stock with a market value of
+$1,081,800 on the date of the award which vests one fourth per year over a four
+year period and 135,000 shares of restricted stock with a market value of
+$3,800,250 on the date of the award which vests one-fifth per year over a five
+year period.
+REVIEW, APPROVAL OR RATIFICATION OF TRANSACTIONS WITH RELATED PERSONS
+The Company's Conduct Code and "Employee Handbook" prohibit all
+conflicts of interest. Under the Conduct Code, conflicts of interest occur when
+private or family interests interfere in any way, or even appear to interfere,
+with the interests of the Company. The Company's prohibition on conflicts of
+interest under the Conduct Code includes any related person transaction.
+Related person transactions must be approved by the Board, or by a
+committee of the Board consisting solely of independent directors, who will
+approve the transaction only if they determine that it is in the best interests
+of the Company. In considering the transaction, the Board or committee will
+consider all relevant factors, including as applicable (i) the Company's
+business rationale for entering into the transaction; (ii) the alternatives to
+entering into a related person transaction; (iii) whether the transaction is on
+terms comparable to those available to third parties or, in the case of
+employment relationships, to employees generally; (iv) the potential for the
+transaction to lead to an actual or apparent conflict of interest and any
+safeguards imposed to prevent such actual or apparent conflicts; and (v) the
+overall fairness of the transaction to the Company.
+The Company has multiple processes for reporting conflicts of
+interests, including related person transactions. Under the Conduct Code, all
+employees are required to report any actual or apparent conflict of interest, or
+potential conflict of interest, to management. The chief financial officer
+quarterly distributes a questionnaire to the Company's executive officers and
+management personnel and annually distributes a questionnaire to the members of
+the Board of Directors requesting certain information regarding, among other
+things, their immediate family members, employment and beneficial ownership
+interests, which information is then reviewed for any conflicts of interest
+under the Conduct Code.
+The Audit Committee, Disclosure Committee and Board of Directors
+discuss the related party transactions and they are reviewed as part of the
+Forms 10-K and 10-Q review process, including related party transaction
+disclosures.
+If a director is involved in the transaction, he will be recused from
+all discussions and decisions about the transaction. The transaction must be
+approved in advance whenever practicable, and if not practicable, must be
+ratified as promptly as practicable.
+26
\ No newline at end of file
diff --git a/raw/filings/0000913241/2008/0001019056-09-000306/filing.txt b/raw/filings/0000913241/2008/0001019056-09-000306/filing.txt
new file mode 100644
index 0000000000000000000000000000000000000000..732d1c93933b5a15c77bf97167968bcd6b900d76
--- /dev/null
+++ b/raw/filings/0000913241/2008/0001019056-09-000306/filing.txt
@@ -0,0 +1,3504 @@
+10-K
+1
+smadden_10k08.htm
+FORM 10-K
+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 
+o 
+TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 
+For the fiscal year ended December 31, 2008 
+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 
+incorporation or organization) 
+(I.R.S. employer identification no.) 
+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: 
+Title of Each Class 
+Name of Each Exchange on Which Registered 
+Common Stock, par value $.0001 per share 
+The NASDAQ Stock Market LLC 
+Preferred Stock Purchase Rights 
+The NASDAQ Stock Market LLC 
+Securities Registered Pursuant to Section 12(g) of the Act: None 
+Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x 
+Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Act. 
+Yes o No x 
+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
+o 
+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. o 
+Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. 
+(Check one): 
+Large accelerated filer o Accelerated filer x Non-accelerated filer o Smaller reporting company o 
+Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). 
+Yes o No x 
+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, 2008, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $283,436,000 (based on the closing sale
+price of the registrant’s common stock on that date as reported on The NASDAQ Global Select Market). 
+The number of outstanding shares of the registrant’s common stock as of March 6, 2009 was 17,877,552 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 TO BE HELD ON OR ABOUT MAY 22, 2009. 
+TABLE OF CONTENTS 
+FORWARD-LOOKING STATEMENTS 
+1 
+PART I 
+ITEM 1 
+BUSINESS 
+1 
+ITEM 1A 
+RISK FACTORS 
+11 
+ITEM 1B 
+UNRESOLVED STAFF COMMENTS 
+15 
+ITEM 2 
+PROPERTIES 
+16 
+ITEM 3 
+LEGAL PROCEEDINGS 
+17 
+ITEM 4 
+SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 
+17 
+PART II 
+ITEM 5 
+MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES 
+17 
+ITEM 6 
+SELECTED FINANCIAL DATA 
+20 
+ITEM 7 
+MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 
+21 
+ITEM 7A 
+QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 
+31 
+ITEM 8 
+FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 
+32 
+ITEM 9 
+CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 
+32 
+ITEM 9A 
+CONTROLS AND PROCEDURES 
+32 
+ITEM 9B 
+OTHER INFORMATION 
+34 
+PART III 
+ITEM 10 
+DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 
+34 
+ITEM 11 
+EXECUTIVE COMPENSATION 
+34 
+ITEM 12 
+SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS 
+34 
+ITEM 13 
+CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE 
+34 
+ITEM 14 
+PRINCIPAL ACCOUNTANT FEES AND SERVICES 
+35 
+PART IV 
+ITEM 15 
+EXHIBITS AND FINANCIAL STATEMENT SCHEDULES 
+35 
+PART I 
+Forward-Looking Statements 
+This Annual Report on Form 10-K contains forward-looking statements as that term is defined in the federal securities laws. The events described in forward-looking statements contained in this Annual Report on Form 10-K may not occur. Generally these statements relate to business plans or strategies, projected or anticipated benefits or other consequences of our plans or strategies, projected or anticipated
+benefits from acquisitions to be made by us, or projections involving anticipated revenues, earnings or other aspects of our operating results. The words “may,” “will,” “expect,” “believe,” “anticipate,” “project,” “plan,” “intend,” “estimate,” and “continue,” and their opposites and similar expressions are intended to identify forward-looking statements. We caution
+you that these statements are not guarantees of future performance or events and are subject to a number of uncertainties, risks and other influences, many of which are beyond our control that may influence the accuracy of the statements and the projections upon which the statements are based. Factors which may affect our results include, but are not limited to, the risks and uncertainties discussed in Item 1A of this Annual Report on Form 10-K. 
+Any one or more of these uncertainties, risks and other influences could materially affect our results of operations and whether forward-looking statements made by us ultimately prove to be accurate. Our actual results, performance and achievements could differ materially from those expressed or implied in these forward-looking statements. We undertake no obligation to publicly update or revise any
+forward-looking statements, whether from new information, future events or otherwise. 
+ITEM 1 
+BUSINESS 
+Steven Madden, Ltd. (and its subsidiaries) designs, sources, markets and retails fashion-forward footwear for women, men and children. In addition, we design, source, market and retail name brand and private label fashion handbags and accessories through our Daniel M. Friedman Division. We distribute products through our retail stores, our e-commerce website, department and specialty stores throughout the
+United States and through special distribution arrangements in Canada, Europe, Central and South America, Australia and Asia. Our product line includes a broad range of updated styles which are designed to establish or capitalize on market trends, complemented by core products. We have established a reputation for our creative designs, popular styles and quality products at affordable price points. 
+Our business is comprised of three (3) distinct segments (Wholesale, Retail and First Cost). Our Wholesale segment includes ten (10) core divisions: Steve Madden Womens, Steve Madden Mens, Candie’s, Madden Girl, Steve Madden’s Fix, Steven, Stevies,Fabulosity, Elizabeth and James and our accessories division. Our accessories division, through license agreements, includes the Daisy Fuentes, Betsey
+Johnson and Fabulosity accessories brands. Steven Madden Retail, Inc., our wholly owned retail subsidiary, operates Steve Madden and Steven retail stores as well as our e-commerce website. Our wholly owned subsidiary, Adesso-Madden, Inc., acts as a buying agent for footwear products under private labels and licensed brands (such as l.e.i and Candie’s) for many of the country’s large mass merchandisers and mid-tier department stores. We also license our Steve Madden and
+Steven trademarks for several accessory and apparel categories. 
+Steven Madden, Ltd. was incorporated as a New York corporation on July 9, 1990 and reincorporated under the same name in Delaware in November 1998. We completed our initial public offering in December 1993 and our shares of common stock currently trade on The NASDAQ Global Select Market under the symbol “SHOO”. 
+1 
+We maintain our principal executive offices at 52-16 Barnett Avenue, Long Island City, NY 11104 and our telephone number (718) 446-1800. 
+Our website is http://www.stevemadden.com. We file our annual, quarterly and current reports and other information with the Securities and Exchange Commission. We make available, free of charge, on our website, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, 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, and our Proxy Statement for our Annual Meeting as soon as reasonably practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission. We will provide paper copies of such filings free of charge upon request. The public may read and copy any materials filed by us with the Securities and Exchange Commission at the Securities and Exchange Commission’s Public Reference Room at 100 R Street, NE,
+Washington, DC, 20549. The public may also obtain information on the operation of the Public Reference Room by calling the Securities and Exchange Commission at 1-800-SEC-0330. In addition, the Securities and Exchange Commission maintains an Internet site that contains reports, proxy and information statements and other information regarding us, which is available at http://www.sec.gov. 
+See “Item 8 Financial Statements and Supplementary Data” for additional information relating to our operating segments. 
+Wholesale Segment 
+Steve Madden Womens Wholesale Division 
+The Steve Madden Womens Wholesale Division designs, sources and markets our Steve Madden brand to major department stores, better specialty stores and independently owned boutiques throughout the United States. The Steve Madden brand has become a leading life-style brand in the fashion conscious marketplace. To serve our customers (primarily women ages 16 to 35), Madden Womens creates and markets fashion
+forward footwear designed to appeal to customers seeking exciting, new footwear designs at affordable prices. 
+As our largest division, Madden Womens generated net sales of $135.6 million for the year ended December 31, 2008, or approximately 30% of our total net sales. New products for Madden Womens are test marketed at our retail stores. Typically, within a few days, we can determine if the test product appeals to customers. This enables us to use our flexible sourcing model to rapidly respond to changing trends,
+which we believe is essential for success in the fashion arena. 
+Accessories Division 
+Our accessories division designs, sources and markets name brand and private label fashion handbags and accessories to major department stores, value price retailers and better specialty stores throughout the United States. Our accessories division generated net sales of $66.9 million for the year ended December 31, 2008, or approximately 15% of our total net sales. 
+Madden Girl Wholesale Division 
+The Madden Girl Wholesale Division designs, sources and markets a full collection of directional young women’s shoes. Madden Girl is geared for young women ages 13 to 20 and is an “opening price point” brand that is currently being sold at department stores, mid-tier retailers and specialty stores. Madden Girl generated net sales of $48.7 million for the year ended December 31, 2008, or
+approximately 11% of our total net sales. 
+2 
+Steve Madden Mens Wholesale Division 
+The Steve Madden Mens Wholesale Division designs, sources and markets a full collection of directional men’s shoes and fashion forward athletic shoes to 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 20 to 40 years old. Madden Mens generated net sales of $38.0 million for the
+year ended December 31, 2008, or approximately 8% of our total net sales. Madden Mens maintains open stock inventory positions in select patterns to serve the replenishment programs of its wholesale customers. 
+Diva Acquisition Corp. – Steven Wholesale Division 
+Diva Acquisition Corp. designs, sources and markets women’s fashion footwear under the Steven trademark through major department and better footwear specialty stores throughout the United States. Priced a tier above the Steve Madden brand, Steven products are designed to appeal principally to fashion conscious women, ages 25 to 45, who shop at department stores and footwear boutiques. Steven generated
+net sales of $18.5 million for the year ended December 31, 2008, or approximately 4% of our total net sales. 
+Candie’s Wholesale Division 
+Pursuant to our license agreement with Candie’s, Inc., we design, source and market Candie’s branded footwear for women and kids through our Candie’s Wholesale Division. Our Candie’s Wholesale Division generated net sales of $14.3 million for the year ended December 31, 2008, or approximately 3% of our total net sales. During the second half of 2008, we transitioned Candie’s
+business to our First Cost segment which resulted in a change of our classification of Candie’s revenues from the net sales line on our Consolidated Statement of Income to the commission income line. 
+On December 6, 2004, the license agreement with Candie’s was amended to reflect Candie’s decision to name Kohl’s Corporation as the exclusive provider of a new line of Candie’s apparel. Pursuant to the amendment, commencing on January 1, 2007, we no longer had the exclusive right to market Candie’s branded footwear and we are permitted to sell Candie’s branded footwear only
+to Kohl’s. Under the terms of the amendment, Candie’s has guaranteed that we will achieve minimum sales levels with Kohl’s during the term of the agreement, which runs through December 31, 2010. In the event such minimum sales levels are not achieved, Candie’s is required to compensate us in an amount based on a percentage of the sales shortfall. For the year ended December 31, 2008, the minimum sales level was met. 
+Stevies Wholesale Division 
+Our Stevies Wholesale Division designs, sources and markets footwear for young girls to department stores, specialty stores and independent boutiques throughout the United States. Stevies generated net sales of $5.0 million for the year ended December 31, 2008, or approximately 1% of our total net sales. 
+Steve Madden’s Fix Wholesale Division 
+We introduced Steve Madden’s Fix in the fourth quarter of 2007. The Fix Division designs, sources and markets a line of fashion-forward athletic sneakers to better department stores, better specialty stores and independently owned boutiques throughout the United States. Fix is targeted at women ages 16 to 35 with average price points that range from $50 to $70 at retail. Fix generated net sales of $3.2
+million for the year ended December 31, 2008, or approximately 1% of our total net sales. 
+3 
+Fabulosity Wholesale Division 
+In July 2008, we entered into a license agreement to design, manufacture and distribute women’s footwear, handbags and belts and related accessories under the Fabulosity brand. Fabulosity is an urban lifestyle brand that targets young women ages 13 to 25. It is marketed through JC Penny with average retail prices ranging from $30 to $65. Fabulosity, which began shipping in December of this year,
+generated net sales of $1.2 million for the year ended December 31, 2008. 
+Elizabeth and James 
+On September 10, 2008, we entered into a license agreement with Dualstar Entertainment Group, LLC, under which we have the right to use the Elizabeth and James trademark in connection with the sale and marketing of footwear. Elizabeth and James, which was created by Mary-Kate and Ashley Olsen, is distributed through luxury retailers to women ages 25 to 36 years with average retail price points from $200 to
+$350 for shoes and from $350 to $500 for boots. We anticipate that we will begin shipping Elizabeth and James product in the second quarter of 2009. 
+Retail Segment 
+Steven Madden Retail, Inc. 
+As of December 31, 2008, we owned and operated ninety-seven (97) retail stores including ninety-two (92) stores under the Steve Madden name and four (4) under the Steven name. In addition, we operate one (1) e-commerce website (through the www.stevemadden.com website). In 2008, we opened three (3) new stores and closed seven (7) underperforming stores. Steve Madden stores are located in major shopping malls
+and in urban street locations across the United States, primarily focused in New York, California and Florida. In 2008, the retail stores generated annual sales in excess of $628 per square foot. Comparative store sales (sales of those stores, including the e-commerce website, that were open for all of 2008 and 2007) were unchanged in 2008 compared to 2007. The Retail segment generated net sales of $125.6 million for the year ended December 31, 2008, or approximately 27% of our total
+net sales. 
+We believe that the Retail segment will continue to enhance overall sales and profitability while building equity in the Steve Madden brand. We plan to add two (2) new retail stores and close approximately ten (10) underperforming stores during 2009. Our Retail stores enable us to test and react to new products and classifications which, in turn, strengthens the product development efforts of the Steve Madden
+Wholesale Division. 
+First Cost Segment 
+Adesso-Madden, Inc. 
+Adesso-Madden, Inc (“A-M”) is our first cost, commission based division. During the second half of 2008, we transitioned our Candie’s business from our Wholesale segment to A-M. This resulted in a decrease in net sales in our Candie’s Wholesale Division and an increase of commission revenue in A-M. In addition, pursuant to a license agreement dated July of 2008 with Jones Investment Co.
+Inc., beginning in the first quarter of 2009, A-M intends to design and market women’s footwear under the l.e.i. brand exclusively to Wal-mart. In addition, A-M serves as a buying agent to mass-market merchants, shoe store chains and other value-priced retailers in connection with the procurement of footwear. As a buying agent, A-M utilizes its expertise and its relationships with shoe manufacturers to facilitate the production of private label shoes to its customers’
+specifications. We believe that by operating in the private label, mass merchandising market, we are able to maximize additional non-branded sales opportunities. This leverages our 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 Target, Wal-Mart, J.C. Penney and Sears. A-M receives buying agent’s commissions from its customers.
+In addition, we have leveraged the strength of our Steve Madden brands and product designs resulting in a partial recovery of our design, product and development costs from our suppliers. The First Cost segment generated operating income of $11.6 million for the year ended December 31, 2008. 
+4 
+Licensing 
+As of December 31, 2008, we licensed our Steve Madden and Steven trademarks for use in connection with the manufacturing, marketing and sale of cold weather accessories, sunglasses, eyewear, outerwear, bedding and hosiery. Most of the license agreements require the licensee to pay us a royalty based on actual net sales, a minimum royalty in the event that specified net sales targets are not achieved and a
+percentage of sales for advertising the brand. Licensing income for the year ended December 31, 2008 was $2.7 million. 
+Design 
+We have established a reputation for our creative designs, marketing and trendy products at affordable price points. We believe that our future success will substantially depend on our ability to continue to anticipate and react to changing consumer demands in a timely manner. To meet this objective, we have developed an unparalleled design process that allows us to recognize and act quickly to changing
+consumer demands. Our design team strives to create designs which it believes fit our 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, primarily in our Long Island City facility, which is reviewed and refined prior to the commencement of initial production. Most new products are then tested in selected Steve Madden retail stores. Based on these tests, among other things,
+management selects the products that are then offered for wholesale and retail distribution nationwide. We believe that our design and testing process and flexible sourcing model is a significant competitive advantage allowing us to mitigate the risk of production costs and the distribution of less desirable designs. 
+Product Sourcing and Distribution 
+We source each of our product lines separately based on the individual design, styling and quality specifications of the products in such product lines. We do not own or operate manufacturing facilities; rather, we source our branded products through agents and our own sourcing office with independently owned manufacturers in China, Mexico, Brazil, Italy, Spain and India. We have established relationships with
+a number of manufacturers and agents in each of these countries. Although we have not entered into any long-term manufacturing or supply contracts, we believe that a sufficient number of alternative sources exist for the manufacture of our products. We continually monitor the availability of the principal materials used in our footwear, which are available from a number of sources in various parts of the world. We track inventory flow on a regular basis, monitor sell-through data and
+incorporate input on product demand from wholesale customers. We use retailers’ feedback to adjust the production or manufacture of new products on a timely basis, which helps reduce the close out of slow-moving products. 
+We distribute our products from three (3) third-party distribution warehouse centers located in California and New Jersey. By utilizing distribution facilities that specialize in distributing products to certain wholesale accounts, Steve Madden retail stores and internet fulfillment, we believe that our customers are better served. 
+5 
+Customers 
+Our wholesale customers consist principally of department stores and specialty stores, including independent boutiques. Approximately 88% of our wholesale revenue is generated from department and specialty stores, including Macy’s, Nordstrom, DSW, Kohl’s, Famous Footwear, and Dillard’s and catalog retailers, including Victoria’s Secret. For the year ended December 31, 2008, Macy’s
+accounted for approximately $45.5 million, or 14% of our wholesale net sales and 10% of our total net sales. 
+Distribution Channels 
+We sell our products principally through department stores, specialty stores and discount stores in the United States and through our company-owned retail stores. For the year ended December 31, 2008, our Retail segment and our Wholesale segment generated net sales of approximately $125.6 million and $331.4 million, or 27% and 73% of our total net sales, respectively. Each of these distribution channels are
+described below. 
+Steve Madden and Steven Retail Stores 
+As of December 31, 2008, we operated ninety-two (92) company-owned retail stores under the Steve Madden name and four (4) under the Steven name and one (1) e-commerce website (through the www.stevemadden.com website). We believe that our retail stores will continue to enhance overall sales, profitability, and our ability to react to changing consumer trends. The stores are also a marketing tool that allows us
+to strengthen brand recognition and to showcase selected items from our full line of branded and licensed products. Furthermore, the retail stores provide us with a venue to test and introduce new products and merchandising strategies. Specifically, we often test new designs at our Steve Madden retail stores before scheduling them for mass production and wholesale distribution. In addition to these test marketing benefits, we have been able to leverage sales information gathered at
+Steve Madden retail stores to assist our wholesale customers in order placement and inventory management. 
+A typical Steve Madden store is approximately 1,400 to 1,600 square feet and is located in a mall or street location that we expect will attract the highest concentration of our core demographic, style-conscious customer base. The Steven stores, which are generally the same size as our Steve Madden stores, have a more sophisticated design and format styled to appeal to their more mature target audience. In
+addition to carefully analyzing mall demographics and locations, we also set profitability guidelines for each potential store site. Specifically, we target well trafficked sites at which the demographics fit our consumer profile and seek new locations where the projected fixed annual rent expense stays within our guidelines. By setting these guidelines, we seek to identify stores that will contribute to our overall profitability both in the near and longer terms. 
+Department Stores 
+We currently sell to over 3,700 doors of 17 department stores throughout the United States. Our major accounts include Macy’s, Nordstrom, Dillard’s and Lord & Taylor. 
+We provide merchandising support to our department store customers which includes in-store fixtures and signage, supervision of displays and merchandising of our various product lines. Our wholesale merchandising effort includes the creation of in-store concept shops, where a broader collection of our branded products are showcased. These in-store concept shops create an environment that is consistent with our
+image and are designed to enable the retailer to display and sell a greater volume of our products per square foot of retail space. In addition, these in-store concept shops encourage longer term commitment by the retailer to our products and enhance consumer brand awareness. 
+6 
+In addition to merchandising support, our key account executives maintain weekly communications with their respective accounts to guide them in placing orders and to assist them in managing inventory, assortment and retail sales. We leverage our sell-through data gathered at our 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, which reduces markdown exposure at season’s end. 
+Specialty Stores/Catalog Sales 
+We currently sell to specialty store locations throughout the United States. Our major specialty store accounts include DSW, Famous Footwear and Journeys. We offer our specialty store accounts the same merchandising, sell-through and inventory tracking support offered to our department store accounts. Sales of our products are also made through various catalogs, such as Victoria’s Secret. 
+Internet Sales 
+We operate an Internet website, www.stevemadden.com, where customers can purchase numerous styles of our Steve Madden, Steven, Steve Madden Mens and selected styles from Madden Girl, footwear and accessory products. 
+Distribution Agreements 
+Steve Madden products are available in many countries and territories worldwide via several retail selling and distribution agreements. Under the terms of the agreements, the distributors and retailers are required to open a minimum number of stores each year and to pay us a fee for each pair of footwear purchased, and in many cases, an additional sales royalty as a percentage of sales or a predetermined
+amount per unit of sale. Under the terms of the distribution agreements, the distributor is required to purchase certain minimum amounts of Steve Madden shoes. These agreements, which expire at various times through December 31, 2012 with renewal options at the election of the distributors and retailers, are exclusive in their specific territories which include China, Canada, Turkey, Mexico, Australia, Israel, UAE, The United Kingdom, Korea, Morocco, Greece, several countries in
+southeast Asia, including Indonesia and Thailand, Morocco, and several countries in Central and South America. 
+Competition 
+The fashion footwear industry is highly competitive. We compete with specialty shoe companies as well as companies with diversified footwear product lines, such as Nine West, Skechers, Kenneth Cole, Nike, Guess and Jessica Simpson who may have greater financial and other resources than us. We believe effective advertising and marketing, fashionable styling, high quality, value and fast manufacturing turnaround
+are the most important competitive factors and intend to continue to employ these elements as we develop our products. 
+Marketing and Sales 
+We have focused on creating an integrated brand building program to establish Steve Madden as a leading designer of fashion footwear for style-conscious young women and men. Principal marketing activities include product placements in lifestyle and fashion magazines, personal appearances by Creative and Design Chief, Steve Madden, and in-store promotions. In addition, we continue to promote our website
+(www.stevemadden.com) where customers can purchase Steve Madden, Steven, Steve Madden Mens and selected styles from Madden Girl footwear, as well as view exclusive content, participate in contests and “live chat” with customer service representatives. 
+7 
+Management Information Systems (MIS) Operations 
+Sophisticated information systems are essential to our ability to maintain our competitive position and to support continued growth. We operate on a dual AS/400 system which provides system support for all aspects of our business, including manufacturing purchase orders, customer purchase orders, order allocations, invoicing, accounts receivable management, quick response replenishment, point-of-sale support
+and financial and management reporting functions. We have a PKMS bar coded warehousing system that is integrated with the wholesale system in order to provide accurate inventory positions and quick response size replenishment for our customers. In addition, we have installed an EDI system which provides a computer link between us and certain wholesale customers that enables both the customer and us to monitor purchases, shipments and invoicing. The EDI system also improves our ability
+to respond to customer inventory requirements on a weekly basis. 
+Receivables Financing; Line of Credit 
+Under the terms of our factoring agreement with GMAC Commercial Finance LLC, as amended, we may request advances from the factor of up to 85% of aggregate receivables factored by GMAC. The agreement, which has no specific expiration date and can be terminated by us effective on or after June 30, 2009 with sixty (60) days prior written notice, provides us with a $50 million credit facility with a $25 million
+sub-limit for Letters of Credit. The agreement can be terminated by GMAC upon the occurrence, and in certain instances continuance after notice, of certain specified defaults. We also pay a fee that varies depending on the customer of between 0.15% and 0.25% of the gross invoice amount factored with GMAC. Prior to the amendment to the factoring agreement discussed in the next paragraph, we sold a substantial portion of our receivables, principally without recourse, to GMAC. As of
+December 31, 2008 and 2007, $92 and $272 of factored receivables, respectively, were sold by us with recourse. GMAC maintains a lien on all of our receivables to secure our obligations and assumes the credit risk for all purchased accounts approved by them with certain exceptions. 
+In November of 2008, GMAC announced that it did not have enough capital to qualify to become a bank holding company and thereby qualify to access certain government funding sources. GMAC stated that failure to become a bank holding company would have a near-term material adverse effect on its business and its financial position. In light of these statements and the worsening financial climate, we were
+concerned about GMAC’s ability to maintain our cash flow, and if needed, to fund advances. In addition, we were concerned that in a GMAC bankruptcy proceeding, our accounts receivable sold to GMAC under the factoring agreement in effect prior to January 1, 2009, might be deemed an asset of GMAC’s and thus the future cash collections on same would not be available to us. To hedge against these concerns, in November of 2008, we borrowed the maximum amount allowed by the terms
+of the agreement, which had the effect of mitigating, to the extent of the borrowings, the possible financial effect of any GMAC bankruptcy filing. As of December 31, 2008, we had advances payable due to GMAC of $30,168 against gross factored receivables of $44,082. The interest rate on the advances, which has changed from time to time by amendments to the agreement and which is currently a variable rate based on the 30-day London Interbank Offered Rate (LIBOR), averaged 4.2% in 2008.
+We had no advances payable due to GMAC as of December 31, 2007. On January 2, 2009, GMAC announced that it had qualified as a bank holding company and that it received $5 billion from the U.S. Department of Treasury under the Troubled Asset Relief Program. Effective January 1, 2009, the factoring agreement was amended so that we retained title to our factored accounts receivable, which would keep our outstanding receivables from being the property of GMAC subject to administration in a
+future GMAC bankruptcy proceeding, if any. Subsequent to the year end, we began reducing the loan balance with the proceeds from the collections of factored accounts receivable, and as of February 17, 2009, the loan was completely paid off. 
+8 
+Our Daniel M. Friedman Division had a factoring agreement with Wells Fargo Century that expired on June 30, 2007. As of July 1, 2007, Daniel M. Friedman has been incorporated into the GMAC agreement. 
+Trademarks and Service Marks 
+The STEVE MADDEN and/or STEVE MADDEN plus Design trademarks and service marks have been registered in numerous International Classes in the United States (Int’l Cl. 25 for clothing and footwear; Int’l Cl. 18 for leather goods, such as handbags and wallets; Int’l Cl. 9 for eyewear; Int’l Cl. 14 for jewelry; Int’l Cl. 3 for cosmetics and fragrances; Int’l Cl. 20 for picture
+frames; Int’l Cl. 16 for paper goods; and Int’l Cl. 35 for retail store services). We also have pending trademark applications in the United States for the mark STEVE MADDEN and/or STEVE MADDEN plus Design in numerous international classes (Class 9 for CDs and Class 25 for sleepwear). 
+We also have trademark registrations in the United States for the marks EYESHADOWS BY STEVE MADDEN (Int’l Cl. 9 for eyewear), STEVEN M. (Int’l Class 25 for clothing and footwear); STEVEN BY STEVE MADDEN (Int’l Cl. 25 for footwear and Int’l Cl. 18 for small leather goods); NATURAL COMFORT (Int’l Cl. 25 for footwear); STEVE MADDEN LUXE (Int’l Cl. 25 for clothing and footwear);
+STEVEN (Int’l Cl. 3 for cosmetics and fragrances; Int’l Cl. 9 for eyewear; Int’l Cl. 14 for jewelry; Int’l Cl. 18 for bags; Int’l Cl. 25 for clothing and footwear; Int’l Cl. 26 for hair accessories; and Int’l Cl. 35 for retail store services); CIRCLE WITH ASTERISK DESIGN (in Class 25 for clothing and footwear); FIX (in Class 25 for footwear); FIX* (in Class 25 for footwear); STEVE MADDEN’S FIX (in Class 25 for clothing and footwear); and,
+STEVE MADDEN’S FIX AND DESIGN (in Class 25 for clothing and footwear). We also own a registration for the mark SOHO COBBLER plus Design in the U.S. in Class 25 for footwear. 
+We also have several pending applications in the U.S. for MADDEN in international classes (Class 14 for jewelry and watches, Class 18 for bags, and Class 25 for clothing and footwear). We also have pending applications in the U.S. for MADDEN BY STEVE MADDEN in Class 18 for bags. 
+Additionally, we have several pending trademark and service mark applications in the United States for various marks, MADDEN GIRL (in Class 18 for bags and in Class 25 for clothing and footwear); MADDEN GIRLZ (in Class 25 for clothing and footwear); MADDEN BOYZ (in Class 25 for clothing and footwear); MADDEN KIDZ for clothing and footwear); MADDEN NEW YORK (in Class 25 for clothing and footwear); MADDEN ACTIVE
+(in Class 25 for clothing and footwear); MADDEN SPORT (in Class 25 for clothing and footwear); STEVEN BY STEVE MADDEN (in Class 18 for bags and Class 25 for belts); FINA FIRENZE (in Class 18 for bags and in Class 25 for belts and footwear); STEVE MADDEN DESIGN PLUS PEACE LOVE SHOES (in Class 25 for footwear); PEACE LOVE SHOES (STANDARD CHARACTERS) (in Class 25 for footwear); PEACE LOVE SHOES LOGO (in Class 24 for towels and in Class 25 for footwear, clothing and belts); and, STEVE
+MADDEN DESIGN PLUS PEACE LOVE SHOES LOGO PLUS PEACE LOVE SHOES (in Class 25 for footwear). 
+We further own registrations for the STEVE MADDEN and/or STEVE MADDEN plus Design trademarks and service marks in various International Classes in Argentina, Armenia, Aruba, Australia, Azerbaijan, Bahrain, Belize, Brazil, Canada, Chile, China, Colombia, El Salvador, Estonia, Georgia, Guatemala, Hong Kong, Indonesia, Israel, Italy, Japan, Kazakhstan, Korea, Kyrgyzstan, Latvia, Lebanon, Lithuania, Malaysia,
+Mexico, Moldova, Netherland Antilles, New Zealand, the Netherlands, Nicaragua, Norway, Oman, Panama, Paraguay, the Philippines, Qatar, Russia, Saudi Arabia, Singapore, South Africa, Taiwan, Thailand, Turkey, Turkmenistan, Ukraine, the United Arab Emirates, Uzbekistan, the European Union, and the Benelux countries and has pending applications for registration of the STEVE MADDEN and/or STEVE MADDEN plus Design trademarks and service marks in Argentina, Aruba, Bahamas, Belarus, Canada,
+China, Costa Rica, Ecuador, Egypt, Guatemala, Honduras, India, Indonesia, Jordan, Korea, Kuwait, Morocco, Oman, Peru, Saudi Arabia, Tajikistan, Turkey, Venezuela, and the United Arab Emirates. 
+9 
+Additionally, we own registrations for the STEVEN trademark and service mark in various International Classes in Australia, Bahrain, Belize, China, the Dominican Republic, El Salvador, the European Union, Hong Kong, Israel, Japan, Kuwait, Lebanon, Malaysia, New Zealand, Netherland Antilles, Norway, Panama, the Philippines, Qatar, Russia, Saudi Arabia, South Africa, Thailand, Taiwan, Turkey, and the United Arab
+Emirates and have pending applications for STEVEN trademark and service mark in Armenia, Azerbaijan, China, Columbia, Costa Rica, Egypt, Guatemala, India, Italy, Jordan, Korea, Malaysia, Nicaragua, Oman, Taiwan, Thailand, and Venezuela. 
+We further own registrations for the “torch stripe” design in Class 25 in the European Union and Panama, and China. 
+We further own registrations for the mark STEVEN BY STEVE MADDEN in various international classes in Aruba, Australia, China, the European Union, Hong Kong, Korea, New Zealand, and Taiwan and have pending applications for the mark STEVEN BY STEVE MADDEN in various international classes in Canada, China, Ecuador, Egypt, India, Israel, Korea, Taiwan, Turkey, Saudi Arabia, and Venezuela. 
+We further own registrations for the mark STEVE MADDEN’S FIX* in international class 25 in the European Union, Mexico, and Turkey and have pending applications for the mark STEVE MADDEN’S FIX* in international class 25 in Canada, China, Morocco, Panama and The United Arab Emirates. 
+We further have pending applications for the mark MADDEN GIRL in international class 25 in Egypt, India, Kuwait, Saudi Arabia and Turkey. 
+We further have pending applications for the mark NATURAL COMFORT in various international classes in Egypt, India, Kuwait, and Saudi Arabia. 
+We further own registrations for the mark SM NEW YORK and/or SM NEW YORK PLUS DESIGN in International Class 25 (clothing and footwear) in Aruba, Australia, Belize, Costa Rica, the Dominican Republic, Ecuador, El Salvador, Guatemala, Hong Kong, Netherland Antilles, Nicaragua, New Zealand, Panama, Taiwan and have pending applications for registration of the SM NEW YORK and/or SM NEW YORK PLUS DESIGN mark in
+International Class 25 (clothing and footwear) in Columbia, Honduras, India, Indonesia, Kuwait, Saudi Arabia, South Africa, and Venezuela. 
+Additionally, we, through our Diva Acquisition Corp. subsidiary, own 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 in Australia, Canada, the European Union, Hong Kong and South Africa in some or all of Classes 3, 18, and 25.
+Also, we own registrations for our 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. 
+We, through our Stevies, Inc. subsidiary, also own various registrations for the STEVIES and /or STEVIES plus Design trademark and service mark in a number of International Classes in the United States (Int’l Class 25 for clothing and footwear; Int’l Class 18 for leather goods, such as handbags and wallets; International Class 14 for jewelry; International Class 28 for toys; Int’l Class 16
+for paper goods; Int’l Class 3 for perfume and cosmetics, Int’l Class 9 for CDs and eyewear; and Int’l Cl. 27 for rugs and carpets; and for STEVIES BY STEVE MADDEN in Class 14 for jewelry, Class 9 for eyewear, Class 3 for perfume and cosmetics, Class 25 for clothing and footwear, Class 28 for toys and games, Class 35 for retail services, Class 16 for stationery and notebooks, Class 18 for bags. 
+10 
+Additionally, Stevies, Inc. has pending trademark and service mark applications and/or existing registrations for the STEVIES and STEVIES plus Design marks in various International Classes in Aruba, Argentina, Australia, Bahrain, Brazil, Canada, China, Chile, Colombia, Costa Rica, Dominican Republic, Egypt, El Salvador, European Union, Guatemala, Hong Kong, Honduras, Indonesia, India, Israel, Japan, Korea,
+Kuwait, Lebanon, Malaysia, Mexico, Netherland Antilles, Nicaragua, New Zealand, Oman, Panama, Peru, Qatar, Saudi Arabia, Singapore, South Africa, Taiwan, Thailand, Turkey, the United Arab Emirates and Venezuela. 
+We believe that our trademarks have a significant value and are important to the marketing of our products. There can be no assurance, however, that we will be able to effectively obtain rights to our marks throughout all of the countries of the world. Moreover, no assurance can be given that others will not assert rights in, or ownership of, our trademarks and other proprietary rights of or that we will be
+able to successfully resolve such conflicts. Our failure to protect such rights from unlawful and improper appropriation may have a material adverse effect on our business, financial condition, results of operations and liquidity. 
+Employees 
+On February 5, 2009, we employed approximately one thousand five hundred and ten (1,510) employees, of whom approximately seven hundred forty (740) work on a full-time basis and approximately seven hundred seventy (770) work on a part-time basis, most of whom work in the Retail segment. Our management considers relations with our employees to be good. 
+Seasonality 
+Historically, our merchandising businesses have experienced holiday retail seasonality. In addition to seasonal fluctuations, our operating results fluctuate quarter to quarter as a result of the timing of holidays, weather, the timing of larger shipments of footwear, market acceptance of our products, the mix, pricing and presentation of the products offered and sold, the hiring and training of additional
+personnel, inventory write downs for obsolescence, the cost of materials, the product mix between wholesale, retail and licensing businesses, the incurrence of other operating costs and factors beyond our control, such as general economic conditions and actions of competitors. 
+Backlog 
+We had unfilled wholesale customer orders of $90.5 million and $113.8 million, as of February 21, 2009 and 2008, respectively. Due to the realignment of our Candie’s business from our Wholesale segment to our commission based First Cost segment, there are no Candie’s orders included this year as compared to $10.8 million of Candie’s orders included last year. Our backlog at a particular time
+is affected by a number of factors, including seasonality, timing of market weeks and wholesale customer purchases of our core basic products through our open stock program. Accordingly, a comparison of backlog from period to period may not be indicative of eventual shipments. 
+ITEM 1A 
+RISK FACTORS 
+You should carefully consider the risks and uncertainties we describe below and the other information in this Annual Report on Form 10-K before deciding to invest in, sell or retain shares of our common stock. These are not the only risks and uncertainties that we face. Additional risks and uncertainties that we do not currently know about or that we currently believe are immaterial, or that we have not
+predicted, may also harm our business operations or adversely affect us. If any of these risks or uncertainties actually occurs, our business, financial condition, results of operations and liquidity could be materially harmed. 
+11 
+Fashion Industry Risks . Our success depends in significant part upon our 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 our products will correspond to the changes in taste and demand or that we will be able to successfully market products that respond
+to such trends. If we misjudge the market for our products, we may be faced with significant excess inventories for some products and missed opportunities for others. In addition, misjudgments in merchandise selection could adversely affect our image with our customers resulting in lower sales and increased markdown allowances for customers which could have a material adverse effect on our business, financial condition, results of operations and liquidity. 
+The industry in which we operate 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. There can be no assurance that we will be able to grow or even maintain our current level of 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 our business, financial condition, results of operations and liquidity. 
+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 further consolidate, undergo restructurings or reorganizations, or realign their affiliations, any of which could decrease the number of stores that carry our 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 our business or financial condition, results of operations and liquidity, there can be no assurance as to the future effect of any such changes. 
+Economic Uncertainty and Political Risks. Our opportunities for long-term growth and profitability are accompanied by significant challenges and risks, particularly in the near term. Specifically, our business is dependent on consumer demand for our products. We believe that declining consumer confidence accompanied with changes in credit availability, interest rates, energy prices, unemployment
+rates and consumers’ disposable income negatively impacted the level of consumer spending for discretionary items during the year ended December 31, 2008. Despite the worsening retail environment, we achieved a revenue growth in both our Wholesale and Retail segments in 2008. A continued weak economic environment could have a negative effect on the Company’s sales and results of operations during the year ending December 31, 2009 and thereafter. 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 a material adverse effect on our business, financial condition, results of operations and liquidity. 
+Inventory Management . The fashion-oriented nature of our products and the rapid changes in customer preferences leave us vulnerable to an increased risk of inventory obsolescence. Thus, our ability to manage our inventories properly is an important factor in our 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. Our inability to effectively manage our inventory could have a material adverse effect on our business, financial condition, results of operations and liquidity. 
+12 
+Dependence upon Customers and Risks Related to Extending Credit to Customers . Our customers consist principally of department stores and specialty stores, including shoe boutiques. Certain of our department store customers, including some under common ownership, account for significant portions of our wholesale business. 
+We generally enter into a number of purchase order commitments with our customers for each of our lines every season and do not enter into long-term agreements with any of our customers. Therefore, a decision by a significant customer of ours, whether motivated by competitive conditions, financial difficulties or otherwise, to decrease the amount of merchandise purchased from us or to change its manner of
+doing business could have a material adverse effect on our business, financial condition, results of operations and liquidity. We sell our products primarily to retail stores across the United States and extend credit based on an evaluation of each customer’s financial condition, usually without collateral. While various retailers, including some of our customers, have experienced financial difficulties in the past few years which increased the risk of extending credit to such
+retailers, our losses due to bad debts have been limited. Pursuant to the terms of our factoring agreement, GMAC currently assumes the credit risk related to approximately 85% of our accounts receivable. However, financial difficulties of a customer could cause us to curtail business with such customer or require us to assume more credit risk relating to such customer’s accounts receivable. 
+Impact of Foreign Manufacturers . During the year ended December 31, 2008, virtually all of our products were purchased through arrangements with a number of foreign manufacturers, primarily from China, Mexico, Brazil, Italy, Spain and India. 
+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 our 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 our business, financial condition, results of operations and liquidity. We do not believe that any such economic or political condition will materially affect our ability to purchase products, since a variety of materials and alternative sources are available. We cannot be certain, however, that we will be able to
+identify such alternative sources without delay (if ever) or without greater cost to us. Our inability to identify and secure alternative sources of supply in this situation could have a material adverse effect on our business, financial condition, results of operations and liquidity. 
+Our imported products are also subject to United States custom duties. The United States and the countries in which our 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 our business, financial condition, results of operations and
+liquidity. 
+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, we contract for the manufacture of virtually all of our products to our specifications through foreign manufacturers. We do not own or operate any manufacturing facilities and we are therefore
+dependent upon independent third parties for the manufacture of all of our products. Our products are manufactured to our specifications by our international manufacturers. The inability of a manufacturer to ship orders of our products in a timely manner or to meet our quality standards could cause us to miss the delivery date requirements of our 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 our business, financial condition, results of operations and liquidity. 
+13 
+Although we enter 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, we do 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 we believe that other facilities
+are available for the manufacture of our products, there can be no assurance that such facilities would be available to us on an immediate basis, if at all, or that the costs charged to us by such manufacturers would not be greater than those presently paid. 
+We do not control our licensing partners or independent manufacturers or their labor practices. The violation of labor or other laws by an independent manufacturer of ours or by one of our 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
+our business, financial condition, results of operations and liquidity. 
+Intense Industry Competition . The fashion footwear industry is highly competitive and barriers to entry are low. Our competitors include specialty companies as well as companies with diversified product lines. The recent market 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 Nine West, Skechers, Kenneth Cole, Nike, Guess and Jessica Simpson may have significantly greater financial and other resources than us and there can be no assurance that we 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 our business, financial condition, results of operations and liquidity.
+We believe effective advertising and marketing, branding of the Steve Madden name, fashionable styling, high quality and value are the most important competitive factors and we plan to continually employ these elements as we develop our products. Our inability to effectively advertise and market our products could have a material adverse effect on our business, financial condition, results of operations and liquidity. 
+Expansion of Retail Business . Our continued growth depends to a significant degree on further developing the Steve Madden, Stevies, Steven, Madden Girl, Steve Madden Mens, Steve Madden Fix, Candies, Fabulosity, Elizabeth and James and l.e.i. brands, creating new product categories and businesses and operating company-owned Steve Madden and Steven stores on a profitable basis. Due to the downturn
+in the economy, during the year ended December 31, 2008, we opened three (3) and closed seven (7) Steve Madden retail stores and have plans to open two (2) and close approximately ten (10) stores in the year ending December 31, 2009. Our future expansion plan 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 us in our existing markets. There can be no assurance that we 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. Our retail expansion is dependent on a number of factors, including our ability to locate and obtain favorable store sites, the performance of our wholesale and retail operations, and our ability 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 our comparable store sales results can be maintained or will increase in the future. In addition, there can be no assurance that our strategies to increase other sources of revenue, which may include expansion of our licensing activities, will be successful or that our overall sales or profitability will increase or not be adversely affected as a result of the
+implementation of such retail strategies. 
+14 
+Management of Growth . Our operations have increased and will continue to increase demand on our managerial, operational and administrative resources. We have recently invested significant resources in, amongst other things, our management information systems and hiring and training new personnel. However, in order to manage currently anticipated levels of future demand, we may be required
+to, among other things, expand our distribution facilities, establish relationships with new manufacturers to produce our product, and continue to expand and improve our financial, management and operating systems. There can be no assurance that we will be able to manage future growth effectively and a failure to do so could have a material adverse effect on our business, financial condition, results of operations and liquidity. 
+Seasonal and Quarterly Fluctuations . Our 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 our products, the mix, pricing and presentation of the products offered and sold, the hiring and training of additional personnel, inventory write downs for obsolescence, the cost of materials, the
+product mix between wholesale, retail and licensing businesses, the incurrence of other operating costs and factors beyond our control, such as general economic conditions and actions of competitors. In addition, we expect that our 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 . We believe that our trademarks and service marks and other proprietary rights are important to our success and our competitive position. Accordingly, we devote substantial resources to the establishment and protection of our trademarks on a worldwide basis. Nevertheless, there can be no assurance that the actions taken by us to establish and protect
+our trademarks and other proprietary rights will be adequate to prevent imitation of our products by others or to prevent others from seeking to block sales of our 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 ours or that we 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. Our failure to establish and then protect such proprietary rights from unlawful and improper utilization could have a material adverse effect on our business, financial condition, results of operations and liquidity. 
+Foreign Currency Fluctuations . We make approximately 99% of our purchases in U.S. dollars. However, we source substantially all of our products overseas and, as such, the cost of these products may be affected by changes in the value of the relevant currencies. Changes in currency exchange rates may also affect the relative prices at which we and our foreign competitors sell products in the same
+market. There can be no assurance that foreign currency fluctuations will not have a material adverse effect on our business, financial condition, results of operations and liquidity. 
+Outstanding Options. As of March 6, 2009, there were outstanding options to purchase an aggregate of approximately 804,000 shares of our common stock. Holders of such options are likely to exercise them when, in all likelihood, the market price of our stock is significantly higher than the exercise price of the options. Further, while options are outstanding, they may adversely affect the terms
+on which we could obtain additional capital, if required. 
+ITEM 1B 
+UNRESOLVED STAFF COMMENTS 
+None. 
+15 
+ITEM 2 
+PROPERTIES 
+We maintain approximately 40,000 square feet for our corporate offices and sample production facilities at 52-16 Barnett Avenue, Long Island City, NY 11104. The lease for our headquarters expires on June 30, 2013. 
+The Steve Madden showroom is located at 1370 Avenue of the Americas, New York, NY. All of our brands are displayed for sale from this 9,917 square foot space. The lease for our showroom expires on February 28, 2013. 
+Our accessories division maintains approximately 20,000 square feet for its offices and showroom space at 10 West 33rd Street, New York, NY. The lease expires on December 31, 2014. 
+We maintain approximately 7,200 square feet as a storage facility at 25-15 Borough Place, Woodside, NY. The lease for this space expires on October 31, 2013. 
+We maintain approximately 1,400 square feet as a design facility in Boston, Massachusetts. The lease for this space expires on February 28, 2010. 
+We maintain approximately 1,800 square feet for office space in Los Angeles, California. The lease for this space expires on June 30, 2011. 
+We also maintain an 807 square foot showroom located at Fashion Center Dallas in the World Trade Center, Dallas, Texas. The lease for this showroom expires on April 30, 2010. We also currently engage three independent distributors to warehouse and distribute our products. 
+We own a building that is approximately 2,200 square feet that is located across the street from our executive offices at 38-35 Woodside Avenue, Long Island City, NY 11104. 
+In addition, we maintain approximately 4,825 square feet for office space in Kuangdong Province, China. This lease will expire on January 31, 2013. 
+All of our retail stores are leased pursuant to leases that, under their original term, extend for an average of 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 us and/or the landlord to terminate the lease in the event that our 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 our retail store leases expire as follows: 
+Years Lease Terms Expire 
+Number of Stores 
+2009 
+11 
+2010 
+7 
+2011 
+13 
+2012 
+8 
+2013 
+13 
+2014 
+5 
+2015 
+11 
+2016 
+7 
+2017 
+14 
+2018 
+10 
+2019 
+3 
+16 
+ITEM 3 
+LEGAL PROCEEDINGS 
+Except as set forth below, no material legal proceedings are pending to which we or any of our property is subject. 
+On or about August 7, 2008, the Company was named in a class action lawsuit filed in the San Diego County Superior Court, California. The Complaint, which sought unspecified damages, alleged violation of the Song-Beverly Credit Card Act, which prohibits retailers from accumulating personal information on customers who complete their purchase with a credit card. Specifically, it is alleged that the Company
+collected zip codes on its credit card transactions in California. The case was dismissed on December 19, 2008 with prejudice. 
+On August 10, 2005, the U.S. Customs Department (“Customs”) issued a report that asserts that certain commissions which the Company treated as “buying agents’ commissions” (which are non-dutiable) should be treated as “selling agents’ commissions” and hence are dutiable. In the report, Customs estimates that the Company had underpaid duties during the calendar
+years of 1998 through 2004 in the amount of $1,051. As of June 30, 2006, based on discussions with legal counsel, the Company believed that the liability in this case, including interest, was not likely to exceed $1,500. Accordingly, as of December 31, 2006 the Company recorded a reserve of $1,500. In September of 2007, Customs notified the Company that it had finalized its assessment of the underpaid duties to be $1,400. Pursuant to this assessment, the Company, with the advice of
+legal counsel, re-evaluated the liability in the case, including interest and penalties, and believes that it is not likely to exceed $2,700. Therefore, the Company increased the reserve by $1,200 in 2007, bringing the total reserve to $2,700, and further increased the reserve by $256 in 2008 to reflect anticipated additional interest costs, bringing the reserve to $2,956 as of December 31, 2008. Such reserve is subject to change to reflect the status of this matter. 
+We have been named as a defendant in certain other lawsuits in the normal course of business. In the opinion of management, after consulting with legal counsel, the liabilities, if any, resulting from these matters should not have a material effect on our financial position or results of operations. It is the policy of management to disclose the amount or range of reasonably possible losses in excess of
+recorded amounts. 
+ITEM 4 
+SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 
+No matters were submitted to a vote of the holders of our common stock during the last quarter of our fiscal year ended December 31, 2008. 
+ITEM 5 
+MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES 
+Market Information. Our shares of common stock have traded on the NASDAQ Global Select Market since August 1, 2007 and were traded on the NASDAQ National Market prior to that date. The following table sets forth the range of high and low closing sales prices for our common stock during each fiscal quarter during the two-year period ended December 31, 2008 as reported by the NASDAQ Global Select and the
+NASDAQ National Market. The trading volume of our securities fluctuates and may be limited during certain periods. As a result, the liquidity of an investment in our securities may be adversely affected. 
+17 
+Common Stock 
+High 
+Low 
+High 
+Low 
+2008 
+2007 
+Quarter ended March 31, 2008 
+$ 
+19.52 
+$ 
+14.98 
+Quarter ended March 31, 2007 
+$ 
+37.00 
+$ 
+28.12 
+Quarter ended June 30, 2008 
+$ 
+22.74 
+$ 
+16.05 
+Quarter ended June 30, 2007 
+$ 
+33.51 
+$ 
+29.49 
+Quarter ended September 30, 2008 
+$ 
+28.36 
+$ 
+18.13 
+Quarter ended September 30, 2007 
+$ 
+32.96 
+$ 
+18.11 
+Quarter ended December 31, 2008 
+$ 
+24.60 
+$ 
+14.20 
+Quarter ended December 31, 2007 
+$ 
+24.01 
+$ 
+17.50 
+Holders. As of March 6, 2009, there were 17,877,552 shares of common stock outstanding and 87 holders of record. 
+Dividends . With the exception of a special dividend paid in November 2005 and in November 2006, we have not declared or paid any dividends in the past to the holders of our Common Stock and do not currently anticipate declaring or paying any dividends in the foreseeable future. We intend to retain earnings, if any, to finance the development and expansion of our business. Future dividend policy will be
+subject to the discretion of our Board of Directors and will be contingent upon future earnings, if any, our financial condition, capital requirements, general business conditions, and other factors. Therefore, we can give no assurance that any dividends of any kind will ever be paid to holders of our common stock. 
+Equity Compensation Plans . Information regarding our equity compensation plans as of December 31, 2008 is disclosed in Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters”. 
+Issuer Repurchases of Equity Securities. We did not repurchase any shares of common stock during the fourth quarter of fiscal 2008. In February and August of 2007, our Board of Directors authorized increases of our previously announced share repurchase program of $30 million and $37 million, respectively. At December 31, 2008, an aggregate of $2 million remained authorized to repurchase our Common
+Stock. The program has no set expiration or termination date. 
+Pursuant to an agreement reached on February 2, 2005 with an 8% stockholder, we agreed to commit $25 million during the twelve months ended January 31, 2006 and $10 million during the twelve months ended January 31, 2007 to a combination of share repurchases and/or dividends, such programs to be implemented at such time and such manner as determined by the board of directors in its sole discretion. As of
+January 31, 2007, we satisfied this agreement by the repurchase of 909,000 shares for $14.7 million and the payment of dividends in the amount of $34.9 million. 
+Performance Graph . The following graph compares the yearly percentage change in the cumulative total stockholder return on our common stock during the period beginning on December 31, 2003, and ending on December 31, 2008, with the cumulative total return on the Russell 2000 Index and the S&P 500 Footwear Index. The comparison assumes that $100 was invested on December 31, 2003 in our common stock
+and in the foregoing indices and assumes the reinvestment of dividends. 
+18 
+12/31/2003 
+12/31/2004 
+12/31/2005 
+12/31/2006 
+12/31/2007 
+12/31/2008 
+Steven Madden, Ltd. 
+$ 
+100.00 
+$ 
+92.45 
+$ 
+143.28 
+$ 
+258.01 
+$ 
+147.06 
+$ 
+156.76 
+Russell 2000 Index 
+$ 
+100.00 
+$ 
+117.00 
+$ 
+120.88 
+$ 
+141.43 
+$ 
+137.55 
+$ 
+89.68 
+S&P 500 Footwear Index 
+$ 
+100.00 
+$ 
+130.10 
+$ 
+129.35 
+$ 
+149.58 
+$ 
+194.06 
+$ 
+154.07 
+19 
+ITEM 6 
+SELECTED FINANCIAL DATA 
+The following selected financial data has been derived from our audited Consolidated Financial Statements. The Income Statement Data relating to 2008, 2007 and 2006, and the Balance Sheet Data as of December 31, 2008 and 2007 should be read in conjunction with our audited Consolidated Financial Statements and notes thereto appearing elsewhere herein. 
+Year Ended December 31, 
+(in thousands, except per share data) 
+2008 
+2007 
+2006 
+2005 
+2004 
+INCOME STATEMENT DATA: 
+Net sales 
+$ 
+457,046 
+$ 
+431,050 
+$ 
+475,163 
+$ 
+375,786 
+$ 
+338,144 
+Cost of sales 
+270,222 
+257,646 
+276,734 
+236,631 
+218,601 
+Gross profit 
+186,824 
+173,404 
+198,429 
+139,155 
+119,543 
+Commissions and licensing fee income - net 
+14,294 
+18,351 
+14,246 
+7,119 
+4,588 
+Operating expenses 
+(156,212 
+) 
+(138,841 
+) 
+(134,377 
+) 
+(114,185 
+) 
+(105,150 
+) 
+Impairment of goodwill 
+— 
+— 
+— 
+(519 
+) 
+— 
+Income from operations 
+44,906 
+52,914 
+78,298 
+31,570 
+18,981 
+Interest income 
+2,620 
+3,876 
+3,703 
+2,554 
+2,009 
+Interest expense 
+(207 
+) 
+(65 
+) 
+(100 
+) 
+(164 
+) 
+(68 
+) 
+Gain (loss) on sale of marketable securities 
+(1,013 
+) 
+(589 
+) 
+(967 
+) 
+(500 
+) 
+32 
+Income before provision for income taxes 
+46,306 
+56,136 
+80,934 
+33,460 
+20,954 
+Provision for income taxes 
+18,330 
+20,446 
+34,684 
+14,260 
+8,679 
+Net Income 
+$ 
+27,976 
+$ 
+35,690 
+$ 
+46,250 
+$ 
+19,200 
+$ 
+12,275 
+Basic income per share 
+$ 
+1.53 
+$ 
+1.73 
+$ 
+2.21 
+$ 
+0.95 
+$ 
+0.62 
+Diluted income per share 
+$ 
+1.51 
+$ 
+1.68 
+$ 
+2.09 
+$ 
+0.92 
+$ 
+0.58 
+Basic weighted average shares of common stock 
+18,325 
+20,647 
+20,906 
+20,112 
+19,723 
+Effect of potential shares of common stock from exercise of options 
+194 
+645 
+1,195 
+806 
+1,611 
+Diluted weighted average shares of common stock outstanding 
+18,519 
+21,292 
+22,101 
+20,918 
+21,334 
+Dividends paid per share of common stock 
+$ 
+0.00 
+$ 
+0.00 
+$ 
+1.00 
+$ 
+0.67 
+$ 
+0.00 
+At December 31, 
+2008 
+2007 
+2006 
+2005 
+2004 
+BALANCE SHEET DATA: 
+Total assets 
+$ 
+284,693 
+$ 
+266,521 
+$ 
+251,392 
+$ 
+211,728 
+$ 
+186,430 
+Working capital 
+122,086 
+121,138 
+151,711 
+114,066 
+101,417 
+Noncurrent liabilities 
+5,801 
+3,470 
+3,136 
+2,757 
+2,088 
+Stockholders’ equity 
+$ 
+206,242 
+$ 
+215,334 
+$ 
+211,924 
+$ 
+182,065 
+$ 
+164,665 
+20 
+ITEM 7 
+MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 
+The following discussion of our financial condition and results of operations should be read in conjunction with the audited Consolidated Financial Statements and Notes thereto appearing elsewhere in this document. 
+Overview 
+($ in thousands, except retail sales data per square foot and earnings per share data) 
+Despite the ongoing weakness in the economy, our consolidated net sales for the year ended December 31, 2008 increased 6% over the prior year. Consolidated net sales for 2008 were $457,046 as compared to $431,050 in 2007. Our gross margin increased in the year ended December 31, 2008 to 41%, 100 basis points greater than the 40% achieved last year. Net income decreased to $27,976 in 2008 from $35,690 in 2007.
+Diluted EPS for the current year was $1.51 per share on 18,519,000 diluted weighted average shares outstanding compared to $1.68 per share on 21,292,000 diluted weighted average shares outstanding last year. 
+On March 24, 2008, our then Chief Executive Officer and Chairman of the Board of Directors resigned his position. For the purposes of determining any payments to which the former CEO was entitled following his resignation, it was mutually agreed to treat the resignation as a termination without Cause, as defined in his employment agreement. Upon a termination without Cause, the agreement required us to pay
+$4,000, which was included in operating expenses in the first quarter of 2008. In addition, 42,500 shares of restricted stock that were due to vest in varying amounts over the next four years, vested on the date of termination as per his agreement. Accordingly, the balance of unamortized stock-based compensation related to his restricted stock of $921 was included as a one-time charge in operating expenses during the year ended December 31, 2008. The total charges related to this
+resignation of $4,921 ($3,002 net of taxes) reduced fully diluted earnings per share by $0.16 in the year ended December 31, 2008. 
+On March 24, 2008, Edward Rosenfeld was appointed by the Board of Directors as the Company’s Chief Executive Officer and, on August 8, 2008 he was appointed Chairman of the Board. Prior to assuming the CEO position, Mr. Rosenfeld was the Executive Vice President of Strategic Planning and Finance since joining the Company in May 2005. Mr. Rosenfeld was also serving as a member of the Board of Directors
+since February 2008. 
+We continued to expand our brand portfolio by entering into three new license agreements during the third quarter. These new licenses, which include Fabulosity, l.e.i and Elizabeth and James, have positioned us to market merchandise across a broader retail spectrum. Fabulosity, which we began shipping in the latter part of December, contributed $1,166 in net sales in 2008. 
+In our Retail segment, same store sales (sales of those stores, including the e-commerce website, that were in operation throughout 2008 and 2007) were unchanged from last year. As of December 31, 2008, we had 97 stores in operation, compared to 101 stores last year. During the year ended December 31, 2008, sales per square foot declined to $628 compared to sales per square foot of $655 achieved in 2007.
+Our annualized inventory turnover in 2008 was unchanged from 2007 at 8.1 times. Our accounts receivable average collection days improved to 47 days in 2008 compared to 48 days last year. 
+21 
+In November of 2008, GMAC announced that it did not have enough capital to qualify to become a bank holding company and thereby qualify to access certain government funding sources. GMAC stated that failure to become a bank holding company would have a near-term material adverse effect on its business and its financial position. In light of these statements and the worsening financial climate, we were
+concerned about GMAC’s ability to maintain our cash flow, and if needed, to fund advances. In addition, we were concerned that in a GMAC bankruptcy proceeding, our accounts receivable sold to GMAC under the factoring agreement in effect prior to January 1, 2009 might be deemed an asset of GMAC’s and thus the future cash collections on same would not be available to us. To hedge against these concerns, in November of 2008, we borrowed the maximum amount allowed by the terms
+of the agreement, which had the effect of mitigating, to the extent of the borrowings, the possible financial effect of any GMAC bankruptcy filing. As of December 31, 2008, we had advances payable due to GMAC of $30,168 against gross factored receivables of $44,082. The interest rate on the advances, which has changed from time to time by amendments to the agreement and which is currently a variable rate based on the 30-day London Interbank Offered Rate (LIBOR), averaged 4.2% in 2008.
+We had no advances payable due to GMAC as of December 31, 2007. On January 2, 2009, GMAC announced that it had qualified as a bank holding company and that it received $5 billion from the U.S. Department of Treasury under the Troubled Asset Relief Program. Effective January 1, 2009, the factoring agreement was amended so that we retained title to our factored accounts receivable, which would keep our outstanding receivables from being the property of GMAC subject to administration in a
+future GMAC bankruptcy proceeding, if any. Subsequent to the year end, we began reducing the loan balance with the proceeds from the collections of factored accounts receivable, and as of February 17, 2009, the loan was completely paid off. 
+On March 25, 2008, we completed a tender offer to purchase 2,600,000 shares of our common stock for treasury at a total cost of $44,200 or $17.00 per share. As of December 31, 2008, including the proceeds from the advances payable to GMAC of $30,168, we had $124,812 in cash, cash equivalents and marketable securities, and total stockholders’ equity of $206,242. Working capital increased to $122,086 as of
+December 31, 2008, compared to $121,138 on December 31, 2007, primarily due to the net income for the year that was partially offset by the funds used to complete the aforementioned tender offer. 
+22 
+The following tables set forth information on operations for the periods indicated: 
+Years Ended 
+December 31 
+($ in thousands) 
+2008 
+2007 
+2006 
+CONSOLIDATED : 
+Net sales 
+$ 
+457,046 
+100 
+% 
+$ 
+431,050 
+100 
+% 
+$ 
+475,163 
+100 
+% 
+Cost of sales 
+270,222 
+59 
+257,646 
+60 
+276,734 
+58 
+Gross profit 
+186,824 
+41 
+173,404 
+40 
+198,429 
+42 
+Other operating income – net of expenses 
+14,294 
+3 
+18,351 
+4 
+14,246 
+3 
+Operating expenses 
+156,212 
+34 
+138,841 
+32 
+134,377 
+28 
+Income from operations 
+44,906 
+10 
+52,914 
+12 
+78,298 
+16 
+Interest and other income – net 
+1,400 
+— 
+3,222 
+1 
+2,636 
+1 
+Income before income taxes 
+46,306 
+10 
+56,136 
+13 
+80,934 
+17 
+Net income 
+27,976 
+6 
+35,690 
+8 
+46,250 
+10 
+By Segment: 
+WHOLESALE DIVISION : 
+Net sales 
+$ 
+331,407 
+100 
+% 
+$ 
+310,405 
+100 
+% 
+$ 
+347,509 
+100 
+% 
+Cost of sales 
+215,026 
+65 
+205,584 
+66 
+218,014 
+63 
+Gross profit 
+116,381 
+35 
+104,821 
+34 
+129,495 
+37 
+Other operating income 
+2,727 
+1 
+3,677 
+1 
+2,925 
+1 
+Operating expenses 
+81,593 
+25 
+73,362 
+24 
+75,328 
+22 
+Income from operations 
+37,515 
+11 
+35,136 
+11 
+57,092 
+16 
+RETAIL DIVISION : 
+Net sales 
+$ 
+125,639 
+100 
+% 
+$ 
+120,645 
+100 
+% 
+$ 
+127,654 
+100 
+% 
+Cost of sales 
+55,196 
+44 
+52,062 
+43 
+58,720 
+46 
+Gross profit 
+70,443 
+56 
+68,583 
+57 
+68,934 
+54 
+Operating expenses 
+74,619 
+59 
+65,479 
+54 
+59,049 
+46 
+Income (loss) from operations 
+(4,176 
+) 
+(3 
+) 
+3,104 
+3 
+9,885 
+8 
+Number of stores 
+97 
+101 
+96 
+FIRST COST DIVISION : 
+Other commission income - net of expenses 
+$ 
+11,567 
+100 
+% 
+$ 
+14,674 
+100 
+% 
+$ 
+11,321 
+100 
+% 
+23 
+RESULTS OF OPERATIONS 
+($ in thousands) 
+Year Ended December 31, 2008 vs. Year Ended December 31, 2007 
+Consolidated : 
+Total net sales for the year ended December 31, 2008 increased by 6% to $457,046 from $431,050 for the comparable period of 2007. A net sales increase of 7% generated by the Wholesale segment was complemented by a 4% increase in net sales generated by the Retail segment. Overall gross profit margin increased to 41% for the year ended December 31, 2008 from 40% for the prior year. An increase in the Wholesale gross profit margin to 35% in 2008 compared to 34% in 2007
+was partially offset by a decrease in the Retail gross profit margin to 56% in 2008 from 57% in the same period last year. Operating expenses increased in 2008 to $156,212, or 34% of net sales, from $138,841, or 32% of net sales, in 2007. $4,921 of this increase is due to the charges related to the resignation of our former Chief Executive Officer and Chairman of the Board in March of this year. Additional expenses associated with our Compo internet business acquired in the second
+quarter of last year and our new Steve Madden’s Fix Division, which began shipping product in the fourth quarter of last year, also contributed to the increase in operating expenses. The additional stores in operation during the first half of this year (which ranged from a net of five additional stores on January 1, 2008 to a net of two additional stores on June 30, 2008) resulted in an increase in payroll, rent and depreciation expenses. Finally, we recorded $1,325 of charges
+related to the closing of two stores prior to the end of their prospective lease terms, net of anticipated revenues from sub-letting. Commission and licensing fee income decreased to $14,294 for the year ended December 31, 2008, compared to $18,351 for the prior year. The decrease was due to the decision of several of our private label customers to scale back their orders in response to the soft retail environment. Including the one-time charge of $4,921 related to the resignation of
+the CEO, operating income for the year ended December 31, 2008 was $44,906 compared to $52,914 in the same period of last year. Including the above-mentioned one-time charge of $4,921 ($3,002 net of tax effect) related to the resignation of our CEO, net income for 2008 was $27,976, compared to $35,690 in 2007. The decrease in net income was primarily due to the decrease in commission and licensing fee income and the increase in operating expenses. 
+Wholesale Segment : 
+Net sales generated by the Wholesale segment was $331,407, or 73%, and $310,405, or 72%, of our total net sales for the years ended December 31, 2008 and 2007, respectively. The increase in sales was primarily driven by a significant sales growth in two of our wholesale divisions. In the Madden Girl Division, a 66% increase in net sales was the result of a deeper market penetration and a strong product performance at retail. A 23% increase in net sales in the
+Accessories Division was due to the strong performance of Betsey Johnson handbags and net sales increases in Steve Madden and Steven handbags. In addition, strong boot sales during the second half of 2008 combined with a decrease in allowances helped our Steven and Steve Madden Womens Divisions achieve a 15% and 6% increase in net sales, respectively. Finally, our two new divisions, Madden Fix, which began shipping product during the fourth quarter of 2007, and Fabulosity, contributed
+incremental net sales of $3,171 and $1,166, respectively, during the year ended December 31, 2008. These net sales increases were partially offset by net sales decreases in the Mens and Stevies Divisions. These net sales decreases are primarily the result of the challenging economic environment. During the second half of 2008, we began to migrate the Candie’s Division to our commission based First Cost segment, which caused sales to decrease in the Candie’s
+Division. 
+24 
+Gross profit margin increased to 35% in the year ended December 31, 2008 from 34% in the prior year, primarily due to a significant decrease in markdown allowances in the Candie’s and Steven Divisions. Our accessories and Steve Madden Womens Divisions also experienced a decrease in markdown activity reflective of their strong sales performance and inventory management during the year. Operating expenses increased in 2008 to $81,593 compared to $73,362 in the
+prior year. The increase is primarily due to the $4,921 of charges related to the resignation of our former Chief Executive Officer and Chairman of the Board in March of this year. An increase in variable selling and selling related expenses reflective of the increase in sales also contributed to the increase in operating expenses. Income from operations for the Wholesale segment increased to $37,515 for the year ended December 31, 2008, compared to $35,136 for the year ended December
+31, 2007. 
+Retail Segment : 
+Net Sales generated by the Retail segment accounted for $125,639, or 27%, and $120,645, or 28%, of total Company net sales for the years ended December 31, 2008 and 2007, respectively. We opened three new stores and closed seven under-performing stores during the year ended December 31, 2008. As a result, we had 97 retail stores as of December 31, 2008, compared to 101 stores as of December 31, 2007. The 97 stores currently in operation include 92 under the Steve
+Madden brand, four under the Steven brand and one e-commerce website. Comparable store sales (sales of those stores, including the e-commerce website, that were open for all of 2008 and 2007) for the year ended December 31, 2008 were flat when compared to last year. The gross margin in the Retail segment decreased to 56% in 2008 from 57% in 2007 primarily due to an increase in promotional activity reflective of the challenging economic environment. During the year ended December 31,
+2008, operating expenses increased to $74,619 from $65,479 in the same period of last year. Several factors contributed to the increase of operating expenses during 2008. The additional stores in operation during the first half of this year (which ranged from a net of five additional stores on January 1, 2008 to a net of two additional stores on June 30, 2008) resulted in an increase in payroll, rent and depreciation expenses. In addition, a non-cash write-off of unamortized assets
+associated with the closing of seven stores added to the increase in operating expenses. Finally, we recorded $1,325 in charges related to the closing of two stores prior to the end of their prospective lease terms, net of anticipated revenues from sub-letting. Loss from operations for the Retail segment was $(4,176) in 2008 compared to income from operations of $3,104 for 2007. 
+First Cost Segment : 
+The First Cost segment generated income from operations of $11,567 for the year ended December 31, 2008, compared to $14,674 for the year ended December 31, 2007. The decrease was due to the decision of several of our private label customers to scale back their orders in response to the soft retail environment. The decrease was partially offset by an increase in our international business. 
+Year Ended December 31, 2007 vs. Year Ended December 31, 2006 
+Consolidated : 
+Total net sales for the year ended December 31, 2007 decreased by 9% to $431,050 from $475,163 for the comparable period of 2006. Net sales generated by the Retail segment decreased by 5% while net sales generated by the Wholesale segment decreased by 11%. Overall gross profit margin decreased to 40% for the year ended December 31, 2007 from 42% for the prior year. A decrease in the Wholesale gross profit margin to 34% in 2007 compared to 37% in the same period in the
+prior year was partially offset by an increase in the Retail gross profit margin to 57% in 2007 from 54% in the same period last year. Operating expenses increased in 2007 to $138,841, or 32% of net sales, from $134,377, or 28% of net 
+25 
+sales, in 2006, primarily due to the incremental costs associated with the new retail stores opened this year. Commission and licensing fee income was $18,351 for the year ended December 31, 2007 compared to $14,246 for the prior year. Including a one-time charge of $1,208 related to the provision for prior years’ custom duties, operating income for the year ended December 31, 2007 was $52,914, compared to $78,298 in the prior year. Our effective tax rate
+decreased to 36.4% in 2007 compared to 42.9% in the prior year due to a reduction in the effective tax rate and a one-time tax benefit related to prior periods, connected to our election to file combined tax returns for both New York State and New York City and certain recent changes in tax law. Including the above-mentioned one-time tax benefit of $2,498 and the one-time charge of $1,208 ($737 net of tax effect) related to prior years’ custom duties, net income for the year ended
+December 31, 2007 was $33,929, compared to $46,250 in 2006. The decrease in income was primarily due to the decrease in net sales and gross profit margins. 
+Wholesale Segment : 
+Net sales generated by the Wholesale segment was $310,405, or 72%, and $347,509, or 73%, of our total net sales for the years ended December 31, 2007 and 2006, respectively. The decrease in sales was driven primarily by declines in four of our wholesale brands. In the Steve Madden Womens Division and the Steven Division, the decrease in sales was due primarily to an absence of fashion trends in the marketplace and the lack of big items that would drive significant
+sales volume. In the Steve Madden Mens Division, the continued weakness in the sport casual business resulted in disappointing net sales. Net sales in the Candie’s Division decreased due to a significant increase in markdown allowances to Kohl’s. In addition, net sales for the year ended December 31, 2006 included approximately $15,251 in net sales from Rule, l.e.i. and Jump, three brands that were discontinued late in 2006. These decreases were partially offset by the
+double-digit net sales increases achieved in both the Madden Girl and the Stevies Divisions and a 6% net sales increase in our accessories division. 
+Gross profit margin decreased to 34% in the year ended December 31, 2007 from 37% in the prior year, due primarily to a significant increase in markdown allowances in the Candie’s and Steven Divisions. Our remaining wholesale divisions also experienced increases in markdown activities as well as an increase in promotional selling reflective of the difficult retail environment in 2007. Operating expenses decreased in 2007 to $73,362 compared to $75,328 in the
+prior year due to a decrease in variable selling expenses that were partially offset by an increase in non-cash stock based compensation. Income from operations for the Wholesale segment decreased to $35,136 for the year ended December 31, 2007 compared to $57,092 for the year ended December 31, 2006. 
+Retail Segment : 
+Net Sales generated by the Retail segment accounted for $120,645, or 28%, and $127,654, or 27%, of total Company net sales for the years ended December 31, 2007 and 2006, respectively. We opened seven new stores and closed two under-performing stores during the year ended December 31, 2007. As a result, we had 101 retail stores as of December 31, 2007 compared to 96 stores as of December 31, 2006. The 101 stores currently in operation include 94 under the Steve Madden
+brand, six under the Steven brand and one e-commerce website. Comparable store sales (sales of those stores, including the e-commerce website, that were open for all of 2007 and 2006) decreased 8% for the year ended December 31, 2007 due primarily to the lack of any significant fashion trends and the softening retail environment in the second half of the year. We have pursued a number of initiatives to enhance gross margins such as reducing freight costs, closeouts, store-to-store
+transfers and inventory shrinkage combined with better inventory controls. As a result, the gross margin in the Retail segment has increased to 57% for the year ended December 31, 2007 from 54% in the comparable period of 2006. Income from operations for the Retail Division was $3,104 for the current year compared to $9,885 for the same period of 2006. 
+26 
+First Cost Segment : 
+The First Cost segment generated net commission income and design fees of $14,674 for the year ended December 31, 2007, compared to $11,321 for the comparable period of 2006. The increase was the result of the continued growth in our private label business as well as the recent expansion of our international business. 
+LIQUIDITY AND CAPITAL RESOURCES 
+($ in thousands) 
+Working capital was $122,086 on December 31, 2008 compared to $121,138 at December 31, 2007. The contribution of net income for the year was offset by the funds used to complete the tender offer. 
+Under the terms of our factoring agreement with GMAC, as amended, we can request advances from the factor of up to 85% against our receivables factored with GMAC. This agreement, which has no specific expiration date and can be terminated by us effective on or after June 30, 2009 with 60 days written notice, provides us with a $50 million credit facility with a $25 million sub-limit on the aggregate face amount of Letters of Credit with some other stipulations. The
+agreement can be terminated by GMAC upon the occurrence, and in certain instances continuance after notice, of certain specified defaults. 
+In November of 2008, GMAC announced that it did not have enough capital to qualify to become a bank holding company and thereby qualify to access certain government funding sources. GMAC stated that failure to become a bank holding company would have a near-term material adverse effect on its business and its financial position. In light of these statements and the worsening financial climate, we were
+concerned about GMAC’s ability to maintain our cash flow, and if needed, to fund advances. In addition, we were concerned that in a GMAC bankruptcy proceeding, our accounts receivable sold to GMAC under the factoring agreement in effect prior to January 1, 2009, might be deemed an asset of GMAC’s and thus the future cash collections on same would not be available to us. To hedge against these concerns, in November of 2008, we borrowed the maximum amount allowed by the terms
+of the agreement, which had the effect of mitigating, to the extent of the borrowings, the possible financial effect of any GMAC bankruptcy filing. As of December 31, 2008, we had advances payable due to GMAC of $30,168 against gross factored receivables of $44,082. The interest rate on the advances, which has changed from time to time by amendments to the agreement and which is currently a variable rate based on the 30-day London Interbank Offered Rate (LIBOR), averaged 4.2% in 2008.
+We had no advances payable due to GMAC as of December 31, 2007. On January 2, 2009, GMAC announced that it had qualified as a bank holding company and that it received $5 billion from the U.S. Department of Treasury under the Troubled Asset Relief Program. Effective January 1, 2009, the factoring agreement was amended so that we retained title to our factored accounts receivable, which would keep our outstanding receivables from being the property of GMAC subject to administration in a
+future GMAC bankruptcy proceeding, if any. Subsequent to the year end, we began reducing the loan balance with the proceeds from the collections of factored accounts receivable, and as of February 17, 2009, the loan was completely paid off. 
+As of December 31, 2008, we held marketable securities valued at $35,224, consisting primarily of corporate and municipal bonds, U.S. Treasury notes, certificates of deposit and equities. 
+27 
+At December 31, 2007, we held $37,325 in auction rate securities. The contractual maturities of the investments underlying the auction rate securities mature at various dates through 2046, however, all of our auction rate securities, or ARSs, had a reset period of 28 days. Subsequent to December 31, 2007, we reduced the amount of our ARSs via successful auctions to $16,300, however, in February of 2008, the liquidity in the ARS market evaporated causing the ARSs to
+fail at auction, resulting in our continuing to hold these securities and the issuers paying interest at the maximum contractual rate. Accordingly, $16,300 of the auction rate securities were classified as long term as of December 31, 2007. During the months of June through December, we were able to liquidate our entire portfolio of ARSs at full face value, and as a result, we do not have any ARSs as of December 31, 2008. We did not incur any losses with respect to our investments in
+ARSs and thus the unrealized loss of $230 provided for in the first quarter of this year was reversed in the second quarter of the year. 
+Management believes that, based upon our current financial position and available cash, cash equivalents and marketable securities, as augmented by cash flow from operations in 2009, we will meet all of our financial commitments and operating needs for at least the next twelve months. 
+OPERATING ACTIVITIES 
+($ in thousands) 
+During the year ended December 31, 2008, net cash provided by operating activities was $41,779. The primary sources of cash were net income of $27,976, a decrease in prepaid expenses, prepaid taxes, deposits and other assets of $3,887, a decrease in accounts receivable of $3,221, a decrease in due from factors of $2,216 and an increase of accrued incentive compensation. The primary uses of cash were a decrease in accounts payable and accrued expenses of $9,941 and an
+increase in inventory of $4,400. 
+INVESTING ACTIVITIES 
+($ in thousands) 
+During the year ended December 31, 2008, we invested $31,005 in marketable securities and received $74,844 from the maturities and sales of securities. We also invested $4,923 in additional acquisition costs for Daniel Friedman. Additionally, we made capital expenditures of $8,314, principally for the three new stores opened during the year, the remodeling of seven existing stores, for upgrades to our computer systems and for leasehold improvements to corporate office
+space. 
+FINANCING ACTIVITIES 
+($ in thousands) 
+During the year ended December 31, 2008, we received $30,168 in advances from our factor. We completed a Tender Offer to purchase 2,600,000 shares of our common stock for treasury at a total cost of $44,200 or $17.00 per share. We also received $2,051 in cash and incurred a tax cost of $258 in connection with the exercise of stock options. 
+28 
+CONTRACTUAL OBLIGATIONS 
+($ in thousands) 
+Our contractual obligations as of December 31, 2008 were as follows: 
+Payment due by period 
+Contractual Obligations 
+Total 
+2009 
+2010-2011 
+2012-2013 
+2014 and after 
+Operating lease obligations 
+$ 
+126,182 
+$ 
+17,776 
+$ 
+34,421 
+$ 
+30,072 
+$ 
+43,913 
+Advances payable - factor 
+30,168 
+30,168 
+0 
+0 
+0 
+Purchase obligations 
+41,211 
+41,211 
+0 
+0 
+0 
+Other long-term liabilities (future minimum royalty payments) 
+5,660 
+1,362 
+4,135 
+163 
+0 
+Total 
+$ 
+203,221 
+$ 
+90,517 
+$ 
+38,556 
+$ 
+30,235 
+$ 
+43,913 
+At December 31, 2008, we had un-negotiated open letters of credit for the purchase of inventory of approximately $2,445. 
+We have an employment agreement with Steven Madden, our founder and Creative and Design Chief, which provides for an annual base salary of $600 subject to certain specified adjustments through June 30, 2015. The agreement also provides for annual bonuses based on EBITDA, revenue of any new business, and royalty income over $2 million, plus an equity grant and a non-accountable expense allowance. 
+We have employment agreements with certain executive officers, which provide for the payment of compensation aggregating approximately $2,420 in 2009 and $940 in 2010. In addition, some of the employment agreements provide for a discretionary bonus and some provide for incentive compensation based on various performance criteria as well as other benefits including stock options. Our Chief Operating Officer is entitled to deferred compensation calculated as a percentage
+of his base salary. 
+Virtually all of our products are produced at overseas locations, the majority of which are located in China, with a small percentage located in Mexico, Brazil, Italy, Spain and India. We have not entered into any long-term manufacturing or supply contracts with any of these foreign companies. We believe that a sufficient number of alternative sources exist outside of the United States for the manufacture of our products. We currently make approximately 99% of our
+purchases in U.S. dollars. 
+INFLATION 
+We do not believe that the inflation experienced over the last few years in the United Sates, where we primarily compete, has had a significant effect on sales or profitability. Historically, we have minimalized the impact of product cost increases by improving operating efficiencies, changing suppliers and increasing prices. However, no assurance can be given that we will be able to offset such inflationary cost increases in the future. 
+29 
+CRITICAL ACCOUNTING POLICIES AND THE USE OF ESTIMATES 
+Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our Consolidated Financial Statements which have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, sales and expenses, and related disclosure of contingent assets and
+liabilities. Estimates by their nature are based on judgments and available information. Estimates are made based upon historical factors, current circumstances and the experience and judgment of management. Assumptions and estimates are evaluated on an ongoing basis and we may employ outside experts to assist in evaluations. Therefore, actual results could materially differ from those estimates under different assumptions and conditions. Management believes the following critical
+accounting estimates are more significantly affected by judgments and estimates used in the preparation of our Consolidated Financial Statements: allowance for bad debts, returns and customer chargebacks; inventory reserves; valuation of intangible assets; litigation reserves and cost of sales. 
+Allowances for bad debts, returns and customer chargebacks . We provide reserves against our trade accounts receivables for future customer chargebacks, co-op advertising allowances, discounts, returns and other miscellaneous deductions that relate to the current period. The reserve against our non-factored trade receivables also includes estimated losses that may result from customers’ inability to pay. The amount of the reserve for bad debts, returns,
+discounts and compliance chargebacks are determined by analyzing aged receivables, current economic conditions, the prevailing retail environment and historical dilution levels for customers. We evaluate anticipated chargebacks by reviewing several performance indicators for our major customers. These performance indicators (which include inventory levels at the retail floors, sell-through rates and gross margin levels) are analyzed by key account executives and the Vice President of
+Wholesale Sales to estimate the amount of the anticipated customer allowance. Failure to correctly estimate the amount of the reserve could materially impact our results of operations and financial position. 
+Inventory reserves . Inventories are stated at lower of cost or market, on a first-in, first-out basis. We review inventory on a regular basis for excess and slow moving inventory. The review is based on an analysis of inventory on hand, prior sales and expected net realizable value through future sales. The analysis includes a review of inventory quantities on hand at period-end in relation to year-to-date sales and projections for sales in the foreseeable
+future as well as subsequent sales. We consider quantities on hand in excess of estimated future sales to be at risk for market impairment. The net realizable value, or market value, is determined based on the estimate of sales prices of such inventory through off-price or discount store channels. The likelihood of any material inventory write-down is dependent primarily on the expectation of future consumer demand for our product. A misinterpretation or misunderstanding of future
+consumer demand for our product, the economy, or other failure to estimate correctly, in addition to abnormal weather patterns, could result in inventory valuation changes, either favorably or unfavorably, compared to the valuation determined to be appropriate as of the balance sheet date. 
+Valuation of intangible assets . SFAS No. 142, “Goodwill and Other Intangible Assets”, which was adopted by us on January 1, 2002, requires that goodwill and intangible assets with indefinite lives no longer be amortized, but rather be tested for impairment at least annually. This pronouncement also requires that intangible assets with finite lives be amortized over their respective lives to their estimated residual values, and reviewed for impairment
+in accordance with SFAS No. 144, “Accounting for Impairment or Disposal of Long-lived Assets”. In accordance with SFAS No. 144, long-lived assets, such as property, equipment, leasehold improvements and goodwill subject to amortization, are reviewed for impairment annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying
+amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. 
+30 
+Litigation reserves . Estimated amounts for litigation claims that are probable and can be reasonably estimated are recorded as liabilities in our Consolidated Financial Statements. The likelihood of a material change in these estimated reserves would be dependent on new claims as they may arise and the favorable or unfavorable events of a particular litigation. As additional information becomes available, management will assess the potential liability related to
+the pending litigation and revise its estimates. Such revisions in management’s estimates of the contingent liability could materially impact our results of operation and financial position. 
+Cost of sales . All costs incurred to bring finished products to our distribution center and, in the Retail segment, the costs to bring products to our stores, are included in the cost of sales line on the Consolidated Statement of Income. These include the cost of finished products, purchase commissions, letter of credit fees, brokerage fees, sample expenses, customs duties, inbound freight, royalty payments on licensed products, labels and product packaging.
+All warehouse and distribution costs related to the Wholesale segment and freight to customers, if any, are included in the operating expenses line item of our Consolidated Statements of Income. Our gross margins may not be comparable to other companies in the industry because some companies may include warehouse and distribution costs as a component of cost of sales, while other companies report on the same basis as we do and include them in operating expenses. 
+ITEM 7A 
+QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ($ in thousands) 
+We do not engage in the trading of market risk sensitive instruments in the normal course of business. Our financing arrangements are subject to variable interest rates primarily based on the prime rate and LIBOR. An analysis of our credit agreement with GMAC can be found in Note C, “Due From Factors” to the Consolidated Financial Statements included in this Annual Report on Form 10-K. 
+As of December 31, 2008, we held marketable securities valued at $35,224, which consist primarily of corporate and municipal bonds, U.S. treasury notes, certificates of deposit, as well as marketable equity securities. These securities are subject to interest rate risk and will decrease in value if interest rates increase. We currently have the ability to hold these securities until maturity. In addition, any decline in interest rates would be expected to reduce our
+interest income. 
+At December 31, 2007, we held $37,325 in auction rate securities. The contractual maturities of the investments underlying the auction rate securities matured at various dates through 2046, however, all of our auction rate securities, or ARSs, had a reset period of 28 days. Subsequent to December 31, 2007, we reduced the amount of our ARSs via successful auctions to $16,300, however, in February of 2008, the liquidity in the ARS market evaporated causing the ARSs to
+fail at auction, resulting in our continuing to hold these securities and the issuers paying interest at the maximum contractual rate. Accordingly, $16,300 of the auction rate securities were classified as long term as of December 31, 2007. The lack of liquidity in the ARS market continued during the first quarter of 2008, and as a result, we recorded an unrealized loss in other comprehensive loss on our ARSs of $230 as of March 31, 2008. Beginning in June of 2008, a market developed
+for certain ARSs based on the quality and the collateral of the underlying securities. During the months of June through December, we were able to liquidate our entire portfolio of ARSs at full face value, and as a result, we do not have any ARSs as of December 31, 2008. We did not incur any losses with respect to our investments in ARSs and thus the unrealized loss of $230 provided for in the first quarter of this year was reversed in the second quarter of the year. 
+31 
+ITEM 8 
+FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 
+See the 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 
+Disclosure Controls and Procedures 
+As required by Rule 13a-15(b) of the Exchange Act, our management, including our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of the end of the fiscal year covered by this Annual Report on Form 10-K. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that our 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 on Form 10-K. 
+Management’s Annual Report on Internal Control Over Financial Reporting 
+Management of Steven Madden, Ltd. is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act). 
+Our internal control over financial reporting is a process designed by, or under the supervision of, our principal executive officer and principal financial officer, and effected by the board of directors, management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Our internal control
+over financial reporting includes those policies and procedures that (1) pertain to maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with
+authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements. 
+Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. 
+With the participation of the Chief Executive Officer and the Chief Financial Officer, our management conducted an evaluation of the effectiveness as of the end of our fiscal year ended December 31, 2008, of our internal control over financial reporting based on the framework and criteria established in Internal Control–Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation our management has
+concluded that, as of December 31, 2008, our internal control over financial reporting was effective. 
+32 
+The independent registered public accounting firm that audited the financial statements included in this Annual Report on Form 10-K has issued an attestation report on our internal control over financial reporting. 
+Attestation Report of our Independent Registered Public Accounting Firm 
+Our Independent Registered Public Accounting Firm, Eisner LLP, has audited and issued a report on our internal control over financial reporting. The report of Eisner LLP appears below. 
+To the Board of Directors and Stockholders 
+Steven Madden, Ltd. 
+We have audited Steven Madden, Ltd. and subsidiaries’ (the “Company”) internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of
+the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. 
+We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and
+testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. 
+A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail,
+accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding
+prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. 
+Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. 
+In our opinion, Steven Madden, Ltd. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control - Integrated Framework issued by COSO. 
+33 
+We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Steven Madden, Ltd. and subsidiaries as of December 31, 2008 and 2007, 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, 2008, and our report dated March 10, 2009 expressed an
+unqualified opinion on those consolidated financial statements and included an explanatory paragraph regarding the adoption of the provisions of Financial Accounting Standards Board Interpretation No. 48 “Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109”, effective January 1, 2007. 
+/s/ Eisner LLP 
+New York, New York 
+March 10, 2009 
+Changes in Internal Control Over Financial Reporting 
+There was no change in our internal control over financial reporting, identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 of the Exchange Act, that occurred during the fiscal quarter ended December 31, 2008, has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 
+ITEM 9B 
+OTHER INFORMATION 
+None. 
+PART III 
+ITEM 10 
+DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 
+The information required to be furnished pursuant to this item will be set forth in our proxy statement for the 2009 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 our proxy statement for the 2009 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 our proxy statement for the 2009 Annual Meeting of Stockholders, and is incorporated herein by reference. 
+ITEM 13 
+CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE 
+The information required to be furnished pursuant to this item will be set forth in our proxy statement for the 2009 Annual Meeting of Stockholders, and is incorporated herein by reference. 
+34 
+ITEM 14 
+PRINCIPAL ACCOUNTANT FEES AND SERVICES 
+The information required to be furnished pursuant to this item will be set forth in our proxy statement for the 2009 Annual Meeting of Stockholders, and is incorporated herein by reference. 
+PART IV 
+ITEM 15 
+EXHIBITS AND FINANCIAL STATEMENT SCHEDULES 
+(a)(1) Financial Statements 
+The following consolidated financial statements of Steven Madden, Ltd. and subsidiaries are included in Item 8: 
+Report of Independent Registered Public Accounting Firm 
+F-1 
+Balance sheets as of December 31, 2008 and 2007 
+F-2 
+Statements of income for the years ended December 31, 2008, 2007 and 2006 
+F-3 
+Statements of changes in stockholders’ equity for the years ended December 31, 2008, 2007 and 2006 
+F-4 
+Statements of cash flows for the years ended December 31, 2008, 2007 and 2006 
+F-6 
+Notes to financial statements 
+F-7 
+(b) Exhibits. 
+3.01 
+Certificate of Incorporation of Steven Madden, Ltd. (incorporated by reference to Exhibit 1 to Steven Madden, Ltd.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on November 23, 1998, File Number 000-23702, Film Number 98757800). 
+3.02 
+Amended & Restated By-Laws of Steven Madden, Ltd. (incorporated by reference to Exhibit 99.1 to Steven Madden, Ltd.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 28, 2008). 
+4.01 
+Specimen Certificate for shares of Common Stock (incorporated by reference to Exhibit 4.01 to Steven Madden, Ltd.’s Registration Statement on Form SB-2/A filed with the Securities and Exchange Commission on September 29, 1993 (File No. 033-67162)). 
+4.02 
+Rights Agreement between Steven Madden, Ltd. and American Stock Transfer and Trust Company, Ltd. (incorporated by reference to Exhibit 4.1 to Steven Madden, Ltd.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on November 16, 2001). 
+10.01 
+Third Amended Employment Agreement between Steven Madden, Ltd. and Steven Madden (incorporated by reference to Exhibit 10.1 to Steven Madden, Ltd.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 20, 2005).# 
+10.02 
+Employment Agreement of Arvind Dharia (incorporated by reference to Exhibit 10.07 to Steven Madden, Ltd.’s Annual Report on Form 10-K for its fiscal year ending December 31, 2000, File Number 000-23702, Film Number 1588220).# 
+35 
+10.03 
+Amendment No. 1 to Employment Agreement of Arvind Dharia (incorporated by reference to Exhibit 99.4 to Steven Madden, Ltd.’s Quarterly Report on Form 10-Q for its fiscal quarter ending June 30, 2001, File Number 000-23702, Film Number 1713851).# 
+10.04 
+Amendment No. 2 to Employment Agreement of Arvind Dharia (incorporated by reference to Exhibit 10.16 to Steven Madden, Ltd.’s Quarterly Report on Form 10-Q for its fiscal quarter ending September 30, 2002, File Number 000-23702, Film Number 02825492).# 
+10.05 
+Amendment No. 3 to Employment Agreement of Arvind Dharia (incorporated by reference to Exhibit 10.1 to Steven Madden, Ltd.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 3, 2006).# 
+10.06 
+Employment Agreement between Steven Madden, Ltd. and Awadhesh Sinha, dated as of June 15, 2005 (incorporated by reference to Exhibit 10.1 to Steven Madden, Ltd.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 21, 2005).# 
+10.07 
+Amendment No. 1 to Employment Agreement between Steven Madden, Ltd. and Awadhesh Sinha, dated as of November 6, 2007 (incorporated by reference to Exhibit 10.1 to Steven Madden, Ltd.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on November 6, 2007).# 
+10.08 
+Amendment No. 2 to Employment Agreement between Steven Madden, Ltd. and Awadhesh Sinha, effective as of October 1, 2008 (incorporated by reference to Exhibit 10.1 to Steven Madden, Ltd.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 20, 2008).# 
+10.09 
+Stock Purchase Agreement, dated as of February 7, 2006, by and between Steven Madden, Ltd. and the sole shareholder of Daniel M. Friedman & Associates, Inc. and DMF International, Ltd. (incorporated by reference to Exhibit 10.1 to Steven Madden, Ltd.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 13, 2006). 
+10.10 
+Earn-Out Agreement, dated as of February 7, 2006, by and among Steven Madden, Ltd., Daniel M. Friedman & Associates, Inc., DMF International, Ltd. and Daniel M. Friedman (incorporated by reference to Exhibit 10.2 to Steven Madden, Ltd.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 13, 2006). 
+10.11 
+Membership Interest Purchase Agreement, dated as of May 16, 2007, by and among Steven Madden, Ltd. and the members of Compo Enhancements, LLC (incorporated by reference to Exhibit 10.1 to Steven Madden, Ltd.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 18, 2007). 
+10.12 
+Earn-Out Agreement, dated as of May 16, 2007, by and among Steven Madden, Ltd. and the members of Compo Enhancements, LLC (incorporated by reference to Exhibit 10.2 to Steven Madden, Ltd.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 18, 2007). 
+10.13 
+Employment Agreement with Robert Schmertz, dated March 9, 2007 (incorporated by reference to Exhibit 10.1 to Steven Madden, Ltd.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 13, 2007).# 
+10.14 
+Employment Agreement, dated as of May 16, 2007, by and between Steven Madden, Ltd. and Jeffrey Silverman (incorporated by reference to Exhibit 10.3 to Steven Madden, Ltd.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 18, 2007).# 
+10.15 
+Amendment to Employment Agreement, dated as of December 21, 2007, by and between Steven Madden, Ltd. and Jeffrey Silverman (incorporated by reference to Exhibit 10.3 to Steven Madden, Ltd.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 21, 2007).# 
+10.16 
+Settlement and Release Agreement, dated as of December 21, 2007, by and between Steven Madden, Ltd. and Jeffrey Silverman (incorporated by reference to Exhibit 10.1 to Steven Madden, Ltd.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 21, 2007). 
+36 
+10.17 
+Termination Agreement, dated as of April 11, 2008, by and between Steven Madden, Ltd. and Jeffrey Silverman (incorporated by reference to Exhibit 10.1 to Steven Madden, Ltd.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 15, 2008). 
+10.18 
+Settlement and Release Agreement, dated as of December 21, 2007, by and between Steven Madden, Ltd. and James Randel (incorporated by reference to Exhibit 10.2 to Steven Madden, Ltd.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 21, 2007). 
+10.19 
+1996 Stock Plan, approved and adopted on March 6, 1996 (incorporated by reference to Exhibit 10.27 to Steven Madden, Ltd.’s Registration Statement on Form S-8 filed with the Securities and Exchange Commission on November 3, 1997).# 
+10.20 
+The 1997 Stock Plan, approved and adopted on May 10, 1997 (incorporated by reference to Exhibit 10.28 to Steven Madden, Ltd.’s Registration Statement on Form S-8 filed with the Securities and Exchange Commission on November 3, 1997).# 
+10.21 
+The 1998 Stock Plan, approved and adopted on January 16, 1998 (incorporated by reference to Exhibit 10.2 to Steven Madden, Ltd.’s Registration Statement on Form S-8 filed with the Securities and Exchange Commission on July 28, 1998).# 
+10.22 
+The 1999 Stock Plan, approved and adopted on March 15, 1999, amended as of March 20, 2000 and March 30, 2001 (incorporated by reference to Exhibit 10.A to Steven Madden, Ltd.’s Registration Statement on Form S-8 filed with the Securities and Exchange Commission on July 26, 2004).# 
+10.23 
+2006 Stock Incentive Plan approved and adopted on May 26, 2006 (incorporated by reference to Exhibit 10.1 to Steven Madden, Ltd.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 3, 2006).# 
+10.24 
+Secured Promissory Note dated June 25, 2007, of Steven Madden to Steven Madden, Ltd. (incorporated by reference to Exhibit 10.1 to Steven Madden, Ltd.’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 9, 2007). 
+10.25 
+Amended and Restated Secured Promissory Note dated December 19, 2007, of Steven Madden to Steven Madden, Ltd. (incorporated by reference to Exhibit 10.1 to Steven Madden, Ltd.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 12, 2008). 
+10.26 
+Form of Non-Qualified Stock Option Agreement (Chief Executive Officer) under Steven Madden, Ltd.’s 2006 Stock Incentive Plan, as amended (the “Plan”), as adopted October 30, 2007 (incorporated by reference to Exhibit 10.2 to Steven Madden, Ltd.’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 9, 2007).# 
+10.27 
+Form of Non-Qualified Stock Option Agreement (Employee without Employment Agreement) under the Plan, as adopted October 30, 2007 (incorporated by reference to Exhibit 10.3 to Steven Madden, Ltd.’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 9, 2007).# 
+10.28 
+Form of Non-Qualified Stock Option Agreement (Employee with Employment Agreement) under the Plan, as adopted October 30, 2007 (incorporated by reference to Exhibit 10.4 to Steven Madden, Ltd.’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 9, 2007).# 
+10.29 
+Form of Restricted Stock Agreement (Chief Executive Officer) under the Plan, as adopted October 30, 2007 (incorporated by reference to Exhibit 10.5 to Steven Madden, Ltd.’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 9, 2007).# 
+37 
+10.30 
+Form of Restricted Stock Agreement (Employee without Employment Agreement) under the Plan, as adopted October 30, 2007 (incorporated by reference to Exhibit 10.6 to Steven Madden, Ltd.’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 9, 2007).# 
+10.31 
+Form of Restricted Stock Agreement (Employee with Employment Agreement) under the Plan, as adopted October 30, 2007 (incorporated by reference to Exhibit 10.7 to Steven Madden, Ltd.’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 9, 2007).# 
+10.32 
+Form of Restricted Stock Agreement under the Plan used for grants made to non- employee directors from March 2006 through May 2007, with a schedule setting forth the name of each of the recipients, the date of the grant and the number of shares (incorporated by reference to Exhibit 10.8 to Steven Madden, Ltd.’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 9, 2007).# 
+10.33 
+Restricted Stock Agreement dated March 24, 2006, between Jamieson A. Karson and Steven Madden, Ltd. (incorporated by reference to Exhibit 10.9 to Steven Madden, Ltd.’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 9, 2007).# 
+10.34 
+Restricted Stock Agreement dated March 27, 2007, between Jamieson A. Karson and Steven Madden, Ltd. (incorporated by reference to Exhibit 10.10 to Steven Madden, Ltd.’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 9, 2007).# 
+10.35 
+Amendments to Restricted Stock Agreements, dated as of March 23, 2007, between Jamieson A. Karson and Steven Madden, Ltd. (incorporated by reference to Exhibit 10.11 to Steven Madden, Ltd.’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 9, 2007).# 
+10.36 
+Restricted Stock Agreement dated March 24, 2006, between Steven H. Madden and Steven Madden, Ltd. (incorporated by reference to Exhibit 10.12 to Steven Madden, Ltd.’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 9, 2007).# 
+10.37 
+Restricted Stock Agreement dated June 9, 2006, between Steven H. Madden and Steven Madden, Ltd. (incorporated by reference to Exhibit 10.13 to Steven Madden, Ltd.’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 9, 2007).# 
+10.38 
+Restricted Stock Agreement dated March 24, 2006, between Arvind Dharia and Steven Madden, Ltd. (incorporated by reference to Exhibit 10.14 to Steven Madden, Ltd.’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 9, 2007).# 
+10.39 
+Restricted Stock Agreement dated March 20, 2006, between Amelia Newton Varela and Steven Madden, Ltd. (incorporated by reference to Exhibit 10.15 to Steven Madden, Ltd.’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 9, 2007).# 
+10.40 
+Restricted Stock Agreement dated March 20, 2006, between Robert Schmertz and Steven Madden, Ltd. (incorporated by reference to Exhibit 10.16 to Steven Madden, Ltd.’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 9, 2007).# 
+10.41 
+Restricted Stock Agreement dated March 6, 2007, between Arvind Dharia and Steven Madden, Ltd. (incorporated by reference to Exhibit 10.17 to Steven Madden, Ltd.’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 9, 2007).# 
+10.42 
+Restricted Stock Agreement dated March 9, 2007, between Robert Schmertz and Steven Madden, Ltd. (incorporated by reference to Exhibit 10.18 to Steven Madden, Ltd.’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 9, 2007).# 
+38 
+10.43 
+Restricted Stock Agreement dated April 25, 2007, between Awadhesh Sinha and Steven Madden, Ltd. (incorporated by reference to Exhibit 10.19 to Steven Madden, Ltd.’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 9, 2007).# 
+10.44 
+Non-Qualified Stock Option Agreement dated May 16, 2007, between Jeffrey Silverman and Steven Madden, Ltd. (incorporated by reference to Exhibit 10.20 to Steven Madden, Ltd.’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 9, 2007).# 
+10.45 
+Non-Qualified Stock Option Agreement dated May 16, 2007, between Jeffrey Silverman and Steven Madden, Ltd. (incorporated by reference to Exhibit 10.21 to Steven Madden, Ltd.’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 9, 2007).# 
+10.46 
+Employment Agreement between Steven Madden, Ltd. and Amelia Newton Varela, effective as of April 29, 2008 (incorporated by reference to Exhibit 10.1 to Steven Madden, Ltd.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 5, 2008). # 
+10.47 
+Employment Agreement between Steven Madden, Ltd. and Edward Rosenfeld (incorporated by reference to Exhibit 10.1 to Steven Madden, Ltd.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 11, 2008).# 
+10.48 
+Letter Agreement between Steven Madden, Ltd. and Walter Yetnikoff (incorporated by reference to Exhibit 10.2 to Steven Madden, Ltd.’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 12, 2008). 
+21.01 
+Subsidiaries of Registrant. † 
+23.01 
+Consent of Eisner LLP† 
+31.01 
+Certification of Chairman and Chief Executive Officer pursuant to Rule 13a-14 or 15d-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.† 
+31.02 
+Certification of Chief Financial Officer pursuant to Rule 13a-14 or 15d-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.† 
+32.01 
+Certification of Chairman and Chief Executive Officer pursuant to 18 U.S.C. Section 1350 Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.† 
+32.02 
+Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.† 
+† 
+Filed herewith. 
+# 
+Indicates management contract or compensatory plan or arrangement required to be identified pursuant to Item 15(b) of this Annual Report on Form 10-K. 
+39 
+REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 
+To the Board of Directors and Stockholders 
+Steven Madden, Ltd. 
+We have audited the accompanying consolidated balance sheets of Steven Madden, Ltd. and subsidiaries (the “Company”) as of December 31, 2008 and 2007, 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, 2008. 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles
+used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. 
+In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Steven Madden, Ltd. and subsidiaries as of December 31, 2008 and 2007, 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, 2008 in conformity with accounting principles generally accepted in the United States of
+America. 
+As discussed in Note K to the consolidated financial statements, the Company adopted the provisions of Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109”, effective January 1, 2007. 
+We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Steven Madden, Ltd. and subsidiaries’ internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated March 10, 2009 expressed an
+unqualified opinion on the Company’s internal control over financial reporting. 
+/s/ Eisner LLP 
+New York, New York 
+March 10, 2009 
+F-1 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Consolidated Balance Sheets 
+(in thousands, except per share data) 
+December 31, 
+2008 
+2007 
+ASSETS 
+Current assets: 
+Cash and cash equivalents 
+$ 
+89,588 
+$ 
+29,446 
+Accounts receivable - net of allowances of $1,530 and $1,967 
+5,567 
+8,351 
+Due from factors - net of allowances of $9,771 and $13,479 
+34,311 
+32,819 
+Note receivable – related party 
+3,370 
+— 
+Inventories - net 
+31,597 
+27,197 
+Marketable securities - available for sale 
+14,609 
+51,028 
+Prepaid expenses and other current assets 
+5,645 
+5,840 
+Prepaid taxes 
+2,069 
+4,819 
+Deferred taxes 
+7,980 
+9,355 
+Total current assets 
+194,736 
+168,855 
+Note receivable – related party 
+— 
+3,126 
+Property and equipment, net 
+28,209 
+28,653 
+Deferred taxes 
+7,112 
+7,232 
+Deposits and other 
+2,260 
+3,202 
+Marketable securities - available for sale 
+20,615 
+29,383 
+Goodwill - net 
+23,574 
+15,922 
+Intangibles - net 
+8,187 
+10,148 
+Total assets 
+$ 
+284,693 
+$ 
+266,521 
+LIABILITIES 
+Current liabilities: 
+Advances payable - factor 
+$ 
+30,168 
+$ 
+— 
+Accounts payable 
+18,018 
+24,827 
+Accrued expenses 
+16,595 
+16,757 
+Accrued incentive compensation 
+7,869 
+6,133 
+Total current liabilities 
+72,650 
+47,717 
+Deferred rent 
+4,773 
+3,470 
+Other liabilities 
+1,028 
+— 
+Total liabilities 
+78,451 
+51,187 
+Commitments, contingencies and other – (notes J & L) 
+STOCKHOLDERS’ EQUITY 
+Preferred stock - $.0001 par value, 5,000 shares authorized; none issued; Series A Junior Participating preferred stock - $.0001 par value, 60 shares authorized; none issued 
+Common stock - $.0001 par value, 90,000 shares authorized, 26,135 and 25,780 shares issued, 17,873 and 20,118 shares outstanding at December 31, 2008 and 2007, respectively 
+3 
+3 
+Additional paid-in capital 
+137,362 
+129,913 
+Retained earnings 
+197,257 
+169,263 
+Other comprehensive loss: 
+Unrealized loss on marketable securities (net of taxes) 
+(396 
+) 
+(61 
+) 
+Treasury stock – 8,262 and 5,662 shares at cost at December 31, 2008 and 2007, respectively 
+(127,984 
+) 
+(83,784 
+) 
+Total stockholders’ equity 
+206,242 
+215,334 
+Total liabilities and stockholders’ equity 
+$ 
+284,693 
+$ 
+266,521 
+See notes to financial statements 
+F-2 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Consolidated Statements of Income 
+(in thousands, except per share data) 
+Years Ended December 31, 
+2008 
+2007 
+2006 
+Net sales: 
+Wholesale 
+$ 
+331,407 
+$ 
+310,405 
+$ 
+347,509 
+Retail 
+125,639 
+120,645 
+127,654 
+457,046 
+431,050 
+475,163 
+Cost of sales: 
+Wholesale 
+215,026 
+205,584 
+218,014 
+Retail 
+55,196 
+52,062 
+58,720 
+270,222 
+257,646 
+276,734 
+Gross profit: 
+Wholesale 
+116,381 
+104,821 
+129,495 
+Retail 
+70,443 
+68,583 
+68,934 
+186,824 
+173,404 
+198,429 
+Commission and licensing fee income – net 
+14,294 
+18,351 
+14,246 
+Operating expenses 
+(156,212 
+) 
+(138,841 
+) 
+(134,377 
+) 
+Income before other income (expenses) and provision for income taxes 
+44,906 
+52,914 
+78,298 
+Other income (expenses): 
+Interest income 
+2,620 
+3,876 
+3,703 
+Interest expense 
+(207 
+) 
+(65 
+) 
+(100 
+) 
+Loss on sale of marketable securities 
+(1,013 
+) 
+(589 
+) 
+(967 
+) 
+Income before provision for income taxes 
+46,306 
+56,136 
+80,934 
+Provision for income taxes 
+18,330 
+20,446 
+34,684 
+Net income 
+$ 
+27,976 
+$ 
+35,690 
+$ 
+46,250 
+Basic income per share 
+$ 
+1.53 
+$ 
+1.73 
+$ 
+2.21 
+Diluted income per share 
+$ 
+1.51 
+$ 
+1.68 
+$ 
+2.09 
+Basic weighted average shares of common stock outstanding 
+18,325 
+20,647 
+20,906 
+Effect of dilutive securities – options and restricted stock 
+194 
+645 
+1,195 
+Diluted weighted average shares of common stock outstanding 
+18,519 
+21,292 
+22,101 
+Dividends paid per share of common stock 
+$ 
+0.00 
+$ 
+0.00 
+$ 
+1.00 
+See notes to financial statements 
+F-3 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Consolidated Statements of Changes in Stockholders’ Equity 
+(in thousands) 
+Common Stock 
+Additional 
+Shares 
+Amount 
+Paid-in Capital 
+Retained Earnings 
+Balance - December 31, 2005 
+24,225 
+$ 
+2 
+$ 
+99,950 
+$ 
+108,838 
+Exercise of stock options 
+551 
+6,837 
+Tax benefit from exercise of options 
+3,611 
+Issuance of fully vested restricted stock 
+30 
+Stock-based compensation 
+2,294 
+Unrealized holding gain on marketable securities (net of taxes of $476) 
+Net income 
+46,250 
+Comprehensive income 
+Cash dividend paid 
+(21,527 
+) 
+Common stock purchased for treasury 
+Balance - December 31, 2006 
+24,806 
+2 
+112,692 
+133,561 
+Exercise of stock options 
+863 
+1 
+5,607 
+Tax benefit from exercise of options 
+7,180 
+Issuance of fully vested restricted stock 
+111 
+Stock-based compensation 
+4,434 
+Unrealized holding gain on marketable securities (net of taxes of $426) 
+Net income 
+35,690 
+Comprehensive income 
+Forfeiture of accrued dividends 
+12 
+Common stock purchased for treasury 
+Balance - December 31, 2007 
+25,780 
+3 
+129,913 
+169,263 
+Exercise of stock options 
+171 
+2,051 
+Tax expense from stock based compensation 
+(258 
+) 
+Issuance of fully vested restricted stock 
+184 
+Stock-based compensation 
+5,656 
+Unrealized holding loss on marketable securities (net of tax benefits of $253) 
+Net income 
+27,976 
+Comprehensive income 
+Forfeiture of accrued dividends 
+18 
+Common stock purchased for treasury 
+Balance - December 31, 2008 
+26,135 
+$ 
+3 
+$ 
+137,362 
+$ 
+197,257 
+See notes to financial statements 
+F-4 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Consolidated Statements of Changes in Stockholders’ Equity (Continued) 
+(in thousands) 
+Accumulated 
+Other 
+Treasury Stock 
+Total 
+Comprehensive 
+Stockholders’ 
+Comprehensive 
+Gain (Loss) 
+Shares 
+Amount 
+Equity 
+Income 
+Balance - December 31, 2005 
+$ 
+(1,299 
+) 
+3,351 
+$ 
+(25,426 
+) 
+$ 
+182,065 
+Exercise of stock options 
+6,837 
+Tax benefit from exercise of options 
+3,611 
+Issuance of fully vested restricted stock 
+Stock-based compensation 
+2,294 
+Unrealized holding gain on marketable securities (net of taxes of $476) 
+658 
+658 
+658 
+Net income 
+46,250 
+46,250 
+Comprehensive income 
+$ 
+46,908 
+Cash dividend paid ($421 of which is payable to holders of restricted stock pending the vesting of these shares) 
+(21,527 
+) 
+Common stock purchased for treasury 
+349 
+(8,264 
+) 
+(8,264 
+) 
+Balance - December 31, 2006 
+(641 
+) 
+3,700 
+(33,690 
+) 
+211,924 
+Exercise of stock options 
+5,608 
+Tax benefit from exercise of options 
+7,180 
+Issuance of fully vested restricted stock 
+Stock-based compensation 
+4,434 
+Unrealized holding gain on marketable securities (net of taxes of $426) 
+580 
+580 
+580 
+Net income 
+35,690 
+35,690 
+Comprehensive income 
+$ 
+36,270 
+Forfeiture of accrued dividends 
+12 
+Common stock purchased for treasury 
+1,962 
+(50,094 
+) 
+(50,094 
+) 
+Balance - December 31, 2007 
+(61 
+) 
+5,662 
+(83,784 
+) 
+215,334 
+Exercise of stock options 
+2,051 
+Tax expense from exercise of options 
+(258 
+) 
+Issuance of fully vested restricted stock 
+Stock-based compensation 
+5,656 
+Unrealized holding loss on marketable securities (net of tax benefits of $253) 
+(335 
+) 
+(335 
+) 
+(335 
+) 
+Net income 
+27,976 
+27,976 
+Comprehensive income 
+$ 
+27,641 
+Forfeiture of accrued dividends 
+18 
+Common stock purchased for treasury 
+2,600 
+(44,200 
+) 
+(44,200 
+) 
+Balance - December 31, 2008 
+$ 
+(396 
+) 
+8,262 
+$ 
+(127,984 
+) 
+$ 
+206,242 
+See notes to financial statements 
+F-5 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Consolidated Statements of Cash Flows 
+(in thousands) 
+Years Ended December 31, 
+2008 
+2007 
+2006 
+Cash flows from operating activities: 
+Net income 
+$ 
+27,976 
+$ 
+35,690 
+$ 
+46,250 
+Adjustments to reconcile net income to net cash provided by operating activities: 
+Stock-based compensation 
+5,656 
+4,434 
+2,294 
+Tax expense (benefits) from stock based compensation 
+258 
+(7,180 
+) 
+(3,611 
+) 
+Depreciation and amortization 
+9,101 
+8,435 
+6,705 
+Loss on disposal of fixed assets 
+1,619 
+760 
+1,857 
+Deferred taxes 
+1,495 
+(2,120 
+) 
+(4,210 
+) 
+Provision for doubtful accounts and chargebacks 
+(4,145 
+) 
+2,938 
+3,048 
+Deferred rent expense and other non-current liabilities 
+2,331 
+334 
+379 
+Loss on sale of marketable securities 
+1,013 
+589 
+967 
+Changes in: 
+Accounts receivable 
+3,221 
+(1,992 
+) 
+(2,275 
+) 
+Due from factor – excluding advances 
+2,216 
+5,409 
+(10,136 
+) 
+Notes receivable – related party 
+(244 
+) 
+(3,126 
+) 
+— 
+Inventories 
+(4,400 
+) 
+6,463 
+635 
+Prepaid expenses, prepaid taxes, deposits and other assets 
+3,887 
+3,189 
+1,478 
+Accounts payable and accrued expenses 
+(9,941 
+) 
+9,443 
+(6,136 
+) 
+Accrued incentive compensation 
+1,736 
+(3,359 
+) 
+6,163 
+Net cash provided by operating activities 
+41,779 
+59,907 
+43,408 
+Cash flows from investing activities: 
+Purchase of property and equipment 
+(8,314 
+) 
+(12,965 
+) 
+(9,511 
+) 
+Purchases of marketable securities 
+(31,005 
+) 
+(66,505 
+) 
+(44,690 
+) 
+Maturity/sale of marketable securities 
+74,844 
+76,192 
+21,434 
+Acquisitions, net of cash acquired * 
+(4,923 
+) 
+(9,080 
+) 
+(15,357 
+) 
+Net cash used in investing activities 
+30,602 
+(12,358 
+) 
+(48,124 
+) 
+Cash flows from financing activities: 
+Advances from factor - net 
+30,168 
+— 
+— 
+Proceeds from exercise of stock options 
+2,051 
+5,607 
+6,837 
+Tax benefits from stock based compensation 
+(258 
+) 
+7,180 
+3,611 
+Cash dividend paid 
+— 
+— 
+(21,106 
+) 
+Common stock purchased for treasury 
+(44,200 
+) 
+(50,094 
+) 
+(8,264 
+) 
+Net cash used in financing activities 
+(12,239 
+) 
+(37,307 
+) 
+(18,922 
+) 
+Net increase (decrease) in cash and cash equivalents 
+60,142 
+10,242 
+(23,638 
+) 
+Cash and cash equivalents - beginning of year 
+29,446 
+19,204 
+42,842 
+Cash and cash equivalents – end of year 
+$ 
+89,588 
+$ 
+29,446 
+$ 
+19,204 
+Supplemental disclosures of cash flow information: 
+Cash paid during the year for: 
+Interest 
+$ 
+207 
+$ 
+65 
+$ 
+100 
+Income taxes 
+$ 
+23,306 
+$ 
+20,178 
+$ 
+33,886 
+Non-cash transactions 
+Dividend accrual (forfeitures) related to restricted stock 
+$ 
+(18 
+) 
+$ 
+(16 
+) 
+$ 
+421 
+* Amounts for 2008 include $3,903 which was accrued at December 31, 2007 
+See notes to financial statements 
+F-6 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Financial Statements 
+December 31, 2008 and 2007 
+($ in thousands except per share data) 
+N OTE A - S UMMARY OF S IGNIFICANT A CCOUNTING P OLICIES 
+[1] 
+Organization: 
+Steven Madden, Ltd., a Delaware corporation, designs, sources, markets and retails women’s, men’s and children’s shoes, for sale through its wholesale and retail channels under the Steve Madden, Steven and Madden Mens brand names and through its wholesale channels under the Stevies, Madden Girl, Candie’s (under license), l.e.i. (under license), Fabulosity (under license) and Elizabeth and James (under license) brand names. In
+addition, the Company designs, sources, markets and sells name brand and private label fashion handbags and accessories to customers located in the United States through its Daniel M. Friedman domestic and foreign Divisions. Revenue is generated predominately through the sale of the Company’s brand name merchandise and certain licensed products. At December 31, 2008 and 2007, the Company operated 97 and 101 retail stores (including its website as a store),
+respectively. Revenue is subject to seasonal fluctuations. See Note M for operating segment information. 
+[2] 
+Principles of consolidation: 
+The Consolidated Financial Statements include the accounts of Steven Madden, Ltd. and its wholly owned subsidiaries Steven Madden Retail, Inc., Diva Acquisition Corp., Adesso Madden, Inc., Stevies, Inc. and Daniel M. Friedman and Associates, Inc. (collectively referred to as the “Company”). All significant intercompany balances and transactions have been eliminated. 
+[3] 
+Use of estimates: 
+The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those
+estimates. 
+Significant areas involving management estimates include allowances for bad debts, returns and customer chargebacks, and deferred tax asset valuation allowance. The Company provides reserves on trade accounts receivables and due from factors for future customer chargebacks and markdown allowances, discounts, returns and other miscellaneous compliance related deductions that relate to the current period sales. The Company evaluates anticipated chargebacks by
+reviewing several performance indicators of its major customers. These performance indicators, which include retailers’ inventory levels, sell-through rates and gross margin levels, are analyzed by key account executives and the Vice President of Wholesale Sales to estimate the amount of the anticipated customer allowance. 
+[4] 
+Cash equivalents: 
+Cash equivalents at December 31, 2008 and 2007 amounted to approximately $78,639 and $10,765, respectively, and consisted of money market accounts. The Company considers all highly liquid instruments with an original maturity of three months or less when purchased to be cash equivalents. 
+[5] 
+Marketable securities: 
+Marketable securities consist primarily of corporate and municipal bonds, U.S. treasury notes and certificates of deposit with maturities greater than three months and up to five years at the time of purchase, as well as marketable equity securities. These securities, which are classified as available for sale, are carried at fair value, with unrealized gains and losses net of any tax effect reported in stockholders’ equity as accumulated other
+comprehensive loss, and are held at financial institutions with the schedule of maturities at December 31, 2008 as follows: 
+F-7 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Financial Statements 
+December 31, 2008 and 2007 
+($ in thousands except per share data) 
+Note A - Summary of Significant Accounting Policies (continued) 
+Maturities as of 
+December 31, 2008 
+Maturities as of 
+December 31, 2007 
+1 Year or Less 
+1 to 5 Years 
+1 Year or Less 
+1 to 5 Years 
+Municipal bonds 
+$ 
+6,635 
+$ 
+726 
+$ 
+12,227 
+$ 
+7,682 
+U.S. Government and federal agency bonds 
+4,997 
+— 
+3,240 
+— 
+Corporate bonds 
+491 
+19,889 
+3,475 
+5,401 
+Auction rate securities 
+— 
+— 
+21,025 
+16,300 
+Certificates of deposit 
+1,108 
+— 
+2,320 
+— 
+13,231 
+20,615 
+42,287 
+29,383 
+Marketable equity securities 
+1,378 
+— 
+8,741 
+— 
+$ 
+14,609 
+$ 
+20,615 
+$ 
+51,028 
+$ 
+29,383 
+At December 31, 2007, the Company held $37,325 in auction rate securities. The contractual maturities of the investments underlying the auction rate securities matured at various dates through 2046, however, all the Company’s auction rate securities, or ARSs, had a reset period of 28 days. Subsequent to December 31, 2007, the Company reduced the amount of its ARSs via successful auctions to $16,300, however, in February of 2008, the liquidity in the
+ARS market evaporated causing the ARSs to fail at auction, resulting in the Company continuing to hold these securities and the issuers paying interest at the maximum contractual rate. Accordingly, $16,300 of the auction rate securities were classified as long term as of December 31, 2007. Beginning in June of 2008, a market developed for certain ARSs based on the quality and the collateral of the underlying securities. During the months of June through December of 2008, the
+Company was able to liquidate its entire portfolio of ARSs at full face value, and as a result, the Company did not hold any ARSs as of December 31, 2008. The Company did not incur any losses with respect to its investments in ARSs. See note A[20] for a discussion of fair value accounting. 
+[6] 
+Inventories: 
+Inventories, which consist of finished goods on hand and in transit, are stated at the lower of cost (first-in, first-out method) or market. 
+[7] 
+Property and equipment: 
+Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed utilizing the straight-line method based on estimated useful lives ranging from three to ten years. Leasehold improvements are amortized utilizing the straight-line method over the shorter of their estimated useful lives or the remaining lease term. Depreciation and amortization include amounts relating to property and equipment under capital
+leases. 
+Impairment losses are recognized for long-lived assets, including certain intangibles, used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are not sufficient to recover the assets’ carrying amount. Impairment losses are measured by comparing the fair value of the assets to their carrying amount. 
+F-8 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Financial Statements 
+December 31, 2008 and 2007 
+($ in thousands except per share data) 
+Note A - Summary of Significant Accounting Policies (continued) 
+[8] 
+Goodwill: 
+The Company accounts for goodwill and intangible assets in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). Under SFAS 142, goodwill and indefinite lived intangible assets are not amortized, rather they are tested for impairment on an annual basis or more often if events or circumstances change that could cause these assets to become impaired. 
+The Company completed its annual impairment tests on the goodwill relating to the Compo Enhancements and Daniel M. Friedman (see Note B) acquisitions in the second and third quarters of 2008, respectively. No impairments were recognized. 
+[9] 
+Net income per share: 
+Basic income per share is based on the weighted average number of shares of common stock outstanding during the year. Diluted income per share reflects: a) the potential dilution assuming shares of common stock were issued upon the exercise of outstanding in-the-money options and the proceeds thereof were used to purchase treasury stock at the average market price during the period, and b) the vesting of granted nonvested restricted stock awards for which
+the assumed proceeds upon grant are deemed to be the amount of compensation cost attributable to future services and are not yet recognized using the treasury stock method, to the extent dilutive. For the year ended December 31, 2008, options exercisable into approximately 50,000 shares of common stock have been excluded in the calculation of diluted income per share as the result would have been antidilutive, whereas for the years ended December 31, 2007 and 2006,
+no options exercisable into shares of common stock have been excluded in the calculation of diluted income per share. For the years ended December 31, 2008, 2007 and 2006, all unvested restricted stock awards were dilutive. 
+[10] 
+Advertising costs: 
+The Company expenses costs of print, radio and billboard advertisements as of the first date the advertisements take place. Advertising expense included in operating expenses amounted to approximately $5,019 in 2008, $4,831 in 2007 and $7,187 in 2006. 
+[11] 
+Revenue recognition: 
+The Company recognizes revenue on wholesale sales when products are shipped pursuant to its standard terms which are freight on board (FOB) warehouse or when products are delivered to the consolidators as per the terms of the customers’ purchase order. Sales reductions for anticipated discounts, allowances and other deductions are recognized during the period when sales are recorded. Customers retain the right to replacement of the product for poor
+quality or improper or short shipments, which have historically been immaterial. Retail sales are recognized when the payment is received from customers and are recorded net of returns. The Company also generates commission income acting as a buying agent by arranging to manufacture private label shoes to the specifications of its clients. The Company’s commission revenue includes partial recovery of its design, product and development costs for the services provided
+to certain suppliers in connection with the Company’s private label business. Commission revenue and product and development cost recoveries are recognized as earned when title of the product transfers from the manufacturer to the customer and is reported on a net basis after deducting related operating expenses. 
+F-9 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Financial Statements 
+December 31, 2008 and 2007 
+($ in thousands except per share data) 
+Note A - Summary of Significant Accounting Policies (continued) 
+The Company licenses its trademarks for use in connection with the manufacturing, marketing and sale of cold weather accessories, sunglasses, eyewear, outerwear, bedding and hosiery. The license agreements require the licensee to pay the Company a royalty and, in substantially all of the agreements, an advertising fee based on the higher of a minimum or a net sales percentage as defined in the various agreements. In addition, under the terms of retail
+selling agreements, most of the Company’s international distributors are required to pay the Company a royalty based on a percentage of net sales, in addition to a commission on the purchases of the Company’s products. Licensing revenue is recognized on the basis of net sales reported by the licensees and international distributors, or the minimum guaranteed royalties, if higher. In substantially all of the Company’s license agreements, the minimum
+guaranteed royalty is earned and payable on a quarterly basis. 
+[12] 
+Taxes collected from customers: 
+The Company accounts for certain taxes collected from its customers in accordance with the FASB’s Emerging Issues Task Force 06-03, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement” (“EITF 06-03”). EITF 06-03 allows companies to adopt a policy of presenting taxes in the income statement on either a gross basis (included in revenues and costs) or net basis
+(excluded from revenues). Taxes within the scope of EITF 06-03 would include taxes that are imposed on a revenue transaction between a seller and a customer, for example, sales taxes, use taxes, value-added taxes and some types of excise taxes. The Company has consistently recorded all taxes within the scope of EITF 06-03 on a net basis. 
+[13] 
+Sales deductions: 
+The Company supports retailers’ initiatives to maximize sales of the Company’s products on the retail floor by subsidizing the co-op advertising programs of such retailers, providing them with inventory markdown allowances and participating in various other marketing initiatives of its major customers. Such expenses are reflected in the financial statements as deductions to net sales. For the years ended December 31, 2008, 2007 and 2006 the
+total deductions to net sales for these expenses were $37,291, $43,691 and $35,267, respectively. 
+[14] 
+Cost of sales: 
+All costs incurred to bring finished products to the Company’s distribution center and, in the Retail segment, the costs to bring products to the Company’s stores, are included in the cost of sales line on the Consolidated Statement of Income. These include the cost of finished products, purchase commissions, letter of credit fees, brokerage fees, sample expenses, custom duty, inbound freight, royalty payments on licensed products, labels and
+product packaging. All warehouse and distribution costs related to the Wholesale segment and freight to customers, if any, are included in the operating expenses line item of the Company’s Consolidated Statement of Income. The Company’s gross margins may not be comparable to other companies in the industry because some companies may include warehouse and distribution costs as a component of cost of sales, while other companies report on the same basis as the
+Company and include them in operating expenses. 
+F-10 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Financial Statements 
+December 31, 2008 and 2007 
+($ in thousands except per share data) 
+Note A - Summary of Significant Accounting Policies (continued) 
+[15] 
+Warehouse and shipping costs: 
+The Company includes all warehouse and distribution costs for the Wholesale segment in the Operating Expenses line on the Consolidated Statements of Income. For the years ended December 31, 2008, 2007 and 2006, the total warehouse and distribution costs included in Operating Expenses were $9,229, $8,957 and $8,901 respectively. The Company’s standard terms of sales are “FOB Steve Madden warehouse” and thus the Company’s wholesale
+customers absorb most shipping costs. Shipping costs to wholesale customers incurred by the Company are not considered significant and are included in the Operating Expense line in the Consolidated Statements of Income. 
+[16] 
+Impairment of long-lived assets: 
+The Company reviews long-lived assets, including amortizable intangible assets, for impairment whenever events or changes in business circumstances indicate that the carrying amount of the asset may not be fully recoverable. If facts and circumstances indicate that the Company’s long-lived assets might be impaired, the estimated future undiscounted cash flows associated with the long-lived asset would be compared to its carrying amounts to determine
+if a write-down to fair value is necessary. If a write-down is required, the amount is determined by estimation of the present value of net discounted cash flows in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. 
+[17] 
+Exit or disposal activity costs: 
+The Company accounts for its exit and disposal costs in accordance with SFAS No. 146, “Accounting Associated with Exit of Disposal Activities” (“SFAS 146”). SFAS 146 requires the Company to make an accrual for the liability for lease costs that will continue to be incurred without economic benefit to the Company upon the date that the Company ceases using the leased property. As of December 31, 2008, the Company accrued approximately
+$1,325 in lease exit costs associated with two stores that were closed prior to the end of their prospective lease terms. 
+[18] 
+401(k) Plan: 
+The Company maintains a tax-qualified 401(k) plan which is available to each of the Company’s eligible employees who elect to participate after meeting certain length-of-service requirements. The Company made discretionary matching contributions of 50% in 2008 and 2007, and 25% in 2006, of employees’ contributions up to a maximum of 6% of employees’ compensation which vest to the employees over a period of time. Total matching
+contributions to the plan for 2008, 2007 and 2006 were approximately $570, $513 and $180, respectively. 
+[19] 
+Fair Value of Financial Instruments 
+The carrying value of certain financial instruments such as accounts receivable, due from factors, accounts payable and advances payable to factor approximate their fair values due to their short-term nature of their underlying terms. The fair values of the financial instruments and investments are determined by reference to market data and other valuation techniques, as appropriate. Fair value of the note receivable approximates its carrying value based on
+the value of collateral. 
+F-11 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Financial Statements 
+December 31, 2008 and 2007 
+($ in thousands except per share data) 
+Note A - Summary of Significant Accounting Policies (continued) 
+[20] 
+Accounting Standards Adopted In Fiscal 2008 
+In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 clarifies the principle that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. On February 12, 2008, the
+FASB issued FASB Staff Position (FSP) FAS 157-2, “Effective Date of FASB Statement No. 157”. The FSP amended FASB Statement No. 157 to delay the effective date of SFAS No. 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (that is, at least annually), to fiscal years beginning after November 15, 2008. The Company adopted SFAS No. 157
+for financial assets and liabilities in the first quarter of 2008. The Statement utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. A brief description of those three levels is as follows: 
+• 
+Level 1: Observable inputs such as quoted prices in active markets for identical assets or liabilities. 
+• 
+Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. 
+• 
+Level 3: Significant unobservable inputs. 
+The Company’s financial assets subject to fair value measurements as of December 31, 2008 are as follows: 
+Fair Value Measurements 
+Using Fair Value Hierarchy 
+Fair value 
+Level 1 
+Level 2 
+Level 3 
+Cash and cash equivalents 
+$ 
+89,588 
+$ 
+89,588 
+— 
+— 
+Current marketable securities – available for sale 
+14,609 
+14,609 
+— 
+— 
+Long-term marketable securities – available for sale 
+20,615 
+20,615 
+— 
+— 
+Total 
+$ 
+124,812 
+$ 
+124,812 
+— 
+— 
+The reconciliation of the Company’s assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) is as follows: 
+Investments in Auction Rate Securities 
+Balance at January 1, 2008 
+$ 
+— 
+Transfers to level 3 
+16,300 
+Sales/redemptions 
+(16,300 
+) 
+Unrealized losses recorded to other comprehensive income 
+— 
+Losses deemed to be other than temporary recorded in earnings 
+— 
+Transfers to level 1 
+— 
+Balance at December 31, 2008 
+$ 
+— 
+F-12 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Financial Statements 
+December 31, 2008 and 2007 
+($ in thousands except per share data) 
+Note A - Summary of Significant Accounting Policies (continued) 
+As of December 31, 2008, the Company does not have any financial liabilities. No gains or losses resulting from the fair value measurement of financial assets were included in the Company’s earnings. The adoption of SFAS No. 157 has not impacted the Company’s results of operations and financial position. 
+In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”). SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS No. 159 also establishes presentation and disclosure
+requirements designed to facilitate comparisons between entities that chose different measurement attributes for similar assets and liabilities. SFAS No. 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company has elected not to measure any eligible items at fair value. Accordingly, the adoption of SFAS No. 159 has not impacted the Company’s results of operations and financial position. 
+[21] 
+Recently issued Accounting Standards 
+In December of 2007, the FASB issued Statement of Financial Accounting Standards No. 141R, “Business Combinations” (“SFAS No. 141R”), which replaces FASB Statement No. 141. Under SFAS No. 141R, an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. SFAS No. 141R establishes principles and requirements for how
+an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non-controlling interest in the acquiree and the goodwill acquired. This statement also establishes disclosure requirements which will enable users to evaluate the nature and financial effects of the business combination. SFAS No. 141R is effective for financial statements issued for acquisitions in fiscal years beginning after December 15,
+2008. Early adoption is prohibited. 
+In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, “Noncontrolling Interests in Consolidated Financial Statements – An Amendment of ARB No. 51” (“SFAS No. 160”). SFAS No. 160 establishes new accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. Specifically, this statement requires the recognition of a non-controlling
+interest (minority interest) as equity in the Consolidated Financial Statements and separate from the parent’s equity. The amount of net income attributable to the non-controlling interest will be included in consolidated net income on the face of the income statement. SFAS No. 160 clarifies that changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation are equity transactions if the parent retains its controlling financial
+interest. In addition, this statement requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. Such gain or loss will be measured using the fair value of the non-controlling equity investment on the deconsolidation date. SFAS No. 160 also includes expanded disclosure requirements regarding the interests of the parent and its non-controlling interest. SFAS No. 160 is effective for fiscal years beginning on or after December 15, 2008.
+Earlier adoption is prohibited. The Company has not yet determined the impact, if any, that the implementation of SFAS No. 160 will have on its results of operations or financial condition. 
+F-13 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Financial Statements 
+December 31, 2008 and 2007 
+($ in thousands except per share data) 
+Note A - Summary of Significant Accounting Policies (continued) 
+In April 2008, the FASB issued FSP No. 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP 142-3”). FSP 142-3 amends the factors to be considered in developing renewal or extension assumptions used to determine the useful life of intangible assets under SFAS No. 142, “Goodwill and other Intangible Assets”. Its intent is to improve the consistency between the useful life of an intangible asset and the
+period of expected cash flows used to measure its fair value. This FSP is effective prospectively for intangible assets acquired or renewed after January 1, 2009. The Company does not expect it to have a material impact on its Consolidated Financial Statements. 
+In October 2008, the FASB issued FSP No. 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active” (“FSP 157-3”). FSP 157-3 clarifies the application of SFAS 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. FSP 157-3 was effective upon
+issuance for all financial assets and liabilities recognized or disclosed at fair value in our Consolidated Financial Statements on a recurring basis (at least annually). The adoption of FSP 157-3 did not have a material impact on our Consolidated Financial Statements. 
+Note B - Acquisitions 
+Compo Enhancements 
+On May 16, 2007, the Company acquired all of the outstanding membership interests of privately held Compo Enhancements, LLC (“Compo”), a Connecticut limited liability company. Compo was founded by a third party in late 2005 as a provider of e-commerce solutions for the Company. The acquisition enables the Company to fully integrate its e-commerce business into the Company’s Retail segment and operate its online business internally. The acquisition,
+which was accounted for using the purchase method of accounting as required by SFAS Statement No.141, “Business Combinations”, was completed for a consideration of $8,982, inclusive of transaction costs, subject to adjustments which include certain earn-out provisions based on the Company’s financial performance through 2012. In December 2007, the founder and Chief Executive Officer of Compo, reached an agreement with the Company to surrender his rights under the
+earn-out agreement in exchange for a cash payment which, combined with other purchase adjustments, increased the total consideration to $9,679. The total purchase price has been allocated as follows: 
+Current assets 
+$ 
+50 
+Property and equipment 
+143 
+Intangible assets 
+4,744 
+Goodwill 
+5,501 
+Liabilities assumed 
+(759 
+) 
+Net assets acquired 
+$ 
+9,679 
+The results of operations of Compo have been included in the Company’s Consolidated Statements of Income from the date of the acquisition. Unaudited pro forma information related to this acquisition is not included, as the impact of this transaction is not material to the Company’s consolidated results. In connection with the acquisition, the former President of Compo was appointed President of the Company. His contract, which was to expire on December 31,
+2009, provided for an annual salary of $600 and an annual bonus based on EBIT. In addition, he was granted 150,000 stock options with an exercise price of $45 and an additional 150,000 stock options with an exercise price of $50, all of which were to vest over three years. In December of 2007, an amendment to the President’s employment contract shortened the expiration date to June 30, 2008, eliminated the bonus provision of the contract and cancelled all of the stock options. He
+resigned his position with the Company effective as of April 4, 2008. The Company retained the former President to act as a consultant to the Company in connection with the Company’s on-line and internet business operations for the period beginning April 19, 2008 and ended June 30, 2008. In consideration of such services, the former President received $141. 
+F-14 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Financial Statements 
+December 31, 2008 and 2007 
+($ in thousands except per share data) 
+Note B - Acquisitions (continued) 
+Daniel M. Friedman 
+On February 7, 2006, the Company acquired all of the equity interest of privately held Daniel M. Friedman and Associates, Inc. and D.M.F. International (collectively, “Daniel M. Friedman”). Founded in 1995, Daniel M. Friedman designs, sources and markets name brand fashion handbags and accessories. The acquisition was completed for consideration of $18,710, including transaction costs. In addition, the purchase agreement includes certain earn-out provisions
+based on financial performance through 2010. On April 10, 2007, an amendment to the agreement shortened the earn-out period by one year through December 31, 2008 and advanced the earn-out payments from 2008 to 2007. On December 31, 2007, a preliminary earn-out provision for 2007 of $3,956 was charged to goodwill which increased the total acquisition cost to $22,666. On March 31, 2008, the 2007 earn-out provision was finalized at $4,923 resulting in an additional $1,020 charge to
+goodwill which increased the total acquisition cost to $23,686. On December 31, 2008, a preliminary earn-out provision for 2008 of $6,632 was charged to goodwill which increased the total acquisition cost to $30,318. 
+The Daniel M. Friedman acquisition was accounted for using the purchase method of accounting as required by SFAS Statement No. 141, “Business Combinations”. Accordingly, the assets and liabilities of Daniel M. Friedman were adjusted to their fair values, and the excess of the purchase price over the fair value of the assets acquired, including identified intangible assets, was recorded as goodwill. The fair values assigned to tangible and intangible assets
+acquired and liabilities assumed are based on management’s estimates and assumptions. The total purchase price has been allocated as follows: 
+Current assets 
+$ 
+9,772 
+Property, plant and equipment 
+289 
+Deposits 
+62 
+Intangible assets 
+8,400 
+Goodwill 
+16,526 
+Liabilities assumed 
+(4,731 
+) 
+Net assets acquired 
+$ 
+30,318 
+The purchase price and related allocation may be revised as a result of adjustments made to the 2008 earn-out provision. 
+Pursuant to the acquisition, the Company has a note receivable from the former owner and namesake of Daniel M. Friedman in the amount of $1,250. The note, which has an interest rate of 5%, is due and payable on the same day that the final earn-out payment is due. The note allows the maker to offset the principal and interest due on the note against any earn-out monies that might be due to him. The note is included in the “Prepaid expenses and other current
+assets” category on the Company’s Consolidated Balance Sheets. 
+The results of operations for Daniel M. Friedman have been included in the Company’s Consolidated Statements of Income from the date of the acquisition. The following unaudited pro forma information presents the results of the Company’s operations for the year ended December 31, 2006 as though the Daniel M. Friedman acquisition had occurred on January 1, 2006. The pro forma information for the year ended December 31, 2006, as presented below, is not
+indicative of the results that would have been obtained had the transaction occurred on January 1, 2006, nor is it indicative of the Company’s future results. 
+F-15 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Financial Statements 
+December 31, 2008 and 2007 
+($ in thousands except per share data) 
+Note B - Acquisitions (continued) 
+unaudited 
+Net sales 
+$ 
+479,195 
+Operating income 
+$ 
+78,993 
+Net income 
+$ 
+46,631 
+Basic earnings per share 
+$ 
+2.23 
+Diluted earnings per share 
+$ 
+2.11 
+Note C - Due From Factors 
+Under the terms of its factoring agreement with GMAC Commercial Finance LLC (“GMAC”), as amended, the Company may request advances from the factor of up to 85% of aggregate receivables factored by GMAC. The agreement, which has no specific expiration date and can be terminated by the Company effective on or after June 30, 2009 with sixty (60) days prior written notice, provides the Company with a $50 million credit facility with a $25 million sub-limit for
+Letters of Credit. The agreement can be terminated by GMAC upon the occurrence, and in certain instances continuance after notice, of certain specified defaults. The Company also pays a fee that varies depending on the customer of between 0.15% and 0.25% of the gross invoice amount factored by GMAC. Prior to the amendment to the factoring agreement discussed in the next paragraph, the Company sold a substantial portion of its receivables, principally without recourse, to GMAC. As of
+December 31, 2008 and 2007, $93 and $272 of factored receivables, respectively, were sold by the Company with recourse. GMAC maintains a lien on all of the Company’s receivables to secure the Company's obligations and assumes the credit risk for all purchased accounts approved by them with certain restrictions. 
+In November of 2008, the Company borrowed the maximum amount allowed by the terms of the agreement. As of December 31, 2008, the Company had advances payable due to GMAC of $30,168 against gross factored receivables of $44,082. The interest rate on the advances, which has changed from time to time by amendments to the agreement and which is currently a variable rate based on the 30-day London Interbank Offered Rate (LIBOR), averaged 4.2% in 2008. The Company had no
+advances payable due to GMAC as of December 31, 2007. Effective January 1, 2009, the factoring agreement was amended so that the Company retained title to its factored accounts receivable, which would keep its outstanding receivables from being the property of GMAC. Subsequent to the year end, the Company began reducing the loan balance with the proceeds from the collections of factored accounts receivable, and as of February 17, 2009, the loan was completely paid off. 
+The Company’s Daniel M. Friedman Division had a factoring agreement with Wells Fargo Century that expired on June 30, 2007. As of July 1, 2007, Daniel M. Friedman has been incorporated into the GMAC agreement. 
+A “factored” sale (whether “with” or “without” recourse) is substantially the same as a non-factored sale and the Company accounts for its factored sales/receivables in the same manner as its non-factored sales/receivables. The factor services the collection of the Company’s accounts receivable. Funds collected by the factor are applied against advances owed to the factor (if any), and the balance is due and payable to the
+Company, net of any fees. The allowance against “due from factor” is a projected provision based on certain formulas and prior approvals for markdowns, allowances, discounts, advertising and other deductions that customers may deduct against their payments. 
+F-16 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Financial Statements 
+December 31, 2008 and 2007 
+($ in thousands except per share data) 
+Note D - Note Receivable – related party 
+On June 25, 2007, the Company made a loan to Steve Madden, its founder and Creative and Design Chief and a principal stockholder of the Company, in the amount of $3,000, in order for Mr. Madden to exercise options that were due to expire and retain the underlying Company stock, which he pledged to the Company as collateral. Mr. Madden executed a secured promissory note in favor of the Company that bears interest at an annual rate of 8% and is due on the earlier of the
+date Mr. Madden ceases to be employed by the Company or December 31, 2007. An amendment to the note dated December 19, 2007 extended the due date to March 31, 2009. As of December 31, 2008 and 2007, $370 and $126 of interest, respectively, has accrued on the note and has been reflected on the Company’s Consolidated Financial Statements. Pursuant to a pledge agreement between the Company and Mr. Madden, the note is secured by 510,000 shares of the Company’s common
+stock. 
+Note E - Property and Equipment 
+The major classes of assets and total accumulated depreciation and amortization are as follows: 
+December 31, 
+2008 
+2007 
+Land and building 
+$ 
+767 
+$ 
+— 
+Leasehold improvements 
+37,913 
+37,421 
+Machinery and equipment 
+3,660 
+3,620 
+Furniture and fixtures 
+4,605 
+4,595 
+Computer equipment 
+14,522 
+11,578 
+61,467 
+57,214 
+Less accumulated depreciation and amortization 
+(33,258 
+) 
+(28,561 
+) 
+Property and equipment - net 
+$ 
+28,209 
+$ 
+28,653 
+Depreciation expense included in operating expenses amounted to approximately $7,140 in 2008, $6,537 in 2007, and $5,466 in 2006. 
+Note F - Goodwill and Intangible Assets 
+The following is a summary of the carrying amount of goodwill by segment for the year ended December 31, 2008: 
+Wholesale 
+Net Carrying 
+Women’s 
+Accessories 
+Retail 
+Amount 
+Balance at January 1, 2008 
+$ 
+1,547 
+$ 
+8,874 
+$ 
+5,501 
+$ 
+15,922 
+Additional purchase price (earn out) – 
+Daniel M. Friedman 
+0 
+7,652 
+0 
+7,652 
+Balance at December 31, 2008 
+$ 
+1,547 
+$ 
+16,526 
+$ 
+5,501 
+$ 
+23,574 
+F-17 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Financial Statements 
+December 31, 2008 and 2007 
+($ in thousands except per share data) 
+Note F - Goodwill and Intangible Assets (continued) 
+The following table details identifiable intangible assets as of December 31, 2008: 
+Estimated lives 
+Cost basis 
+Accumulated Amortization 
+Net Carrying Amount 
+Trade name 
+6 years 
+$ 
+200 
+$ 
+98 
+$ 
+102 
+Customer relationships 
+10 years 
+6,400 
+1,382 
+5,018 
+License agreements 
+3-6 years 
+5,600 
+3,133 
+2,467 
+Non-compete agreement 
+5 years 
+930 
+336 
+594 
+Other 
+3 years 
+14 
+8 
+6 
+$ 
+13,144 
+$ 
+4,957 
+$ 
+8,187 
+The amortization of intangible assets is included in operating expenses on the Company’s Consolidated Statements of Income. The estimated future amortization expense of intangibles as of December 31, 2008 is as follows: 
+2009 
+$ 
+1,859 
+2010 
+1,856 
+2011 
+1,381 
+2012 
+642 
+2013 
+642 
+Thereafter 
+1,807 
+$ 
+8,187 
+Note G - Stock-Based Compensation 
+In March 2006, the Board of Directors approved the Steven Madden, Ltd. Stock Incentive Plan (the “Plan”) under which nonqualified stock options, stock appreciation rights, performance shares, restricted stock, other stock-based awards and performance-based cash awards may be granted to employees, consultants and non-employee directors. The stockholders approved the Plan on May 26, 2006. The number of shares that may be issued or used under the Plan cannot
+exceed 1,200,000 shares. On May 25, 2007, the stockholders approved an amendment to the Plan to increase the maximum number of shares that may be issued under the Plan to 1,550,000. The following table summarizes the number shares of common stock authorized for use in the Plan, the amount of stock-based awards issued (net of expired or cancelled) and the amount of common stock available for the grant of stock-based awards under the Plan: 
+Common Stock authorized 
+1,550,000 
+Stock based awards, including restricted stock and stock options, granted net of expired or cancelled 
+1,064,000 
+Common stock available for grant of stock based awards as of December 31, 2008 
+486,000 
+F-18 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Financial Statements 
+December 31, 2008 and 2007 
+($ in thousands except per share data) 
+Note G - Stock-Based Compensation (continued) 
+In June of 1999, the Company adopted The 1999 Stock Plan which, as amended, authorized the issuance of up to 4,830,000 shares. The plan provides that the option price shall not be less than the fair market value of the common stock on the date of grant. The following table summarizes the amount of options authorized, the amount of options granted (net of expired or cancelled options) and the amount of options available for grant for The 1999 Stock Plan: 
+Options authorized 
+4,830,000 
+Options granted net of expired or cancelled 
+4,828,500 
+Available for grant as of December 31, 2008 
+1,500 
+Effective January 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards No. 123R, “Accounting for Stock-Based Compensation” (“SFAS No. 123R”), which requires stock-based compensation to be measured based on the fair value of the awards on the grant date. The Company elected the “modified prospective method” of transition as permitted by SFAS No. 123R. Under this transition method, the Company is
+required to record compensation expense for all awards granted after the date of adoption and for the unvested portion of previously granted awards that were outstanding at the date of adoption, and accordingly, periods prior to adoption are not restated. Equity-based compensation is included in operating expenses on the Company’s Consolidated Statements of Income. For the years ended December 31, 2008, 2007 and 2006, total equity-based compensation was as follows: 
+Years Ended December 31, 
+2008 
+2007 
+2006 
+Stock options 
+$ 
+486 
+$ 
+5 
+$ 
+120 
+Restricted stock 
+5,170 
+4,429 
+2,174 
+Total 
+$ 
+5,656 
+$ 
+4,434 
+$ 
+2,294 
+On March 24, 2008, the Chief Executive Officer and Chairman of the Board of Directors of the Company resigned from his positions. For the purposes of determining any payments to which such former executive was entitled following his resignation, it was mutually agreed to treat his resignation as a termination without cause, as defined in his employment agreement. Pursuant to an agreement with the Company, 42,500 shares of restricted stock that were due to vest in
+varying amounts over four years vested on the date of termination. Accordingly, the balance of unamortized stock-based compensation related to the former executive’s restricted stock of $921 was included as a charge in operating expenses during the quarter ended March 31, 2008. 
+SFAS No. 123R requires the Company to apply an estimated forfeiture rate in calculating the period expense (and revise, if necessary, in subsequent periods if actual forfeitures differ from those estimates), as opposed to recognizing forfeitures as an expense reduction as they occur, which was the method used by the Company prior to adoption. The adjustment to apply estimated forfeitures to previously recognized stock-based compensation was considered immaterial and,
+as such, was not classified as a cumulative effect of a change in accounting principle. 
+SFAS No. 123R requires cash flows resulting from the tax benefits from tax deductions in excess of the compensation costs recognized for those options (tax benefits) to be classified as financing cash flows. For the years ended December 31, 2008, 2007 and 2006, the Company realized a tax (cost), benefit from the exercise of stock options of ($258), $7,180 and $3,611, respectively. 
+F-19 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Financial Statements 
+December 31, 2008 and 2007 
+($ in thousands except per share data) 
+Note G - Stock-Based Compensation (continued) 
+Stock Options 
+The total intrinsic value of options exercised during 2008, 2007 and 2006 amounted to $2,361, $20,825 and $10,674 respectively. During the year ended December 31, 2008, 25,000 options with a weighted average exercise price of $18.07 vested, no options vested in 2007, and 30,000 options with a weighted average exercise price of $11.84 vested during the year ended December 31, 2006. As of December 31, 2008, there were 385,000 unvested options with a total unrecognized
+compensation cost of $2,177 that is expected to be recognized over a weighted-average of 3.6 years. 
+The Company estimates the fair value of options granted using the Black-Scholes option-pricing model, which requires several assumptions. The expected term of the options represents the estimated period of time until exercise and is based on historical experience of similar awards. Expected volatility is based on the historical volatility of the Company’s stock. The risk free interest rate is based on the U.S Treasury yield curve in effect at the time of the
+grant. With the exception of a special dividend paid in November of 2005 and in November of 2006, the Company historically has not paid dividends and thus the expected dividend rate is assumed to be zero. The weighted average fair value of options granted in 2008 and 2007 (no options were granted in 2006) was approximately $6.93 and $5.02, respectively, using the Black-Scholes option-pricing model with the following assumptions: 
+2008 
+2007 
+Volatility 
+43% to 45% 
+37% to 40% 
+Risk free interest rate 
+2.17% to 3.12% 
+4.29% to 4.73% 
+Expected life in years 
+3 to 4 
+3 
+Dividend yield 
+0 
+0 
+Activity relating to stock options granted under the Company’s plans and outside the plans during the three years ended December 31, 2008 is as follows: 
+Number of Shares 
+Weighted Average Exercise Price 
+Weighted Average Remaining Contractual Term 
+Aggregate Intrinsic Value 
+Outstanding at January 1, 2006 
+1,950,000 
+$ 
+9.79 
+Granted 
+— 
+— 
+Exercised 
+(551,000 
+) 
+12.41 
+Cancelled/Forfeited 
+(3,000 
+) 
+8.00 
+Outstanding at December 31, 2006 
+1,396,000 
+$ 
+8.75 
+Granted 
+305,000 
+47.01 
+Exercised 
+(863,000 
+) 
+6.50 
+Cancelled/Forfeited 
+(300,000 
+) 
+47.50 
+Outstanding at December 31, 2007 
+538,000 
+$ 
+12.45 
+Granted 
+405,000 
+19.34 
+Exercised 
+(171,000 
+) 
+11.95 
+Cancelled/Forfeited 
+— 
+— 
+Outstanding at December 31, 2008 
+772,000 
+$ 
+16.18 
+7.2 
+$ 
+4,077 
+Exercisable at December 31, 2008 
+387,000 
+$ 
+12.97 
+4.9 
+$ 
+3,229 
+F-20 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Financial Statements 
+December 31, 2008 and 2007 
+($ in thousands except per share data) 
+Note G - Stock-Based Compensation (continued) 
+The following table summarizes information about stock options at December 31, 2008: 
+Options Outstanding 
+Options Exercisable 
+Range of Exercise Price 
+Number Outstanding 
+Weighted Average Remaining Contractual Life (in Years) 
+Weighted Average Exercise Price 
+Number Exercisable 
+Weighted Average Exercise Price 
+$11.61 to $13.11 
+282,000 
+5.1 
+$ 
+12.55 
+282,000 
+$ 
+12.55 
+$13.87 to $16.74 
+113,000 
+4.6 
+14.14 
+100,000 
+13.92 
+$17.54 to $19.32 
+292,000 
+9.3 
+18.75 
+5,000 
+17.68 
+$20.01 to $23.46 
+85,000 
+9.8 
+22.04 
+— 
+— 
+772,000 
+7.2 
+$ 
+16.18 
+387,000 
+$ 
+12.97 
+Restricted Stock 
+The following table summarizes restricted stock activity during the year ended December 31, 2008: 
+Number of Shares 
+Weighted Average Fair Value at Grant Date 
+Outstanding at December 31, 2007 
+507,000 
+$ 
+30.90 
+Granted 
+45,000 
+21.59 
+Vested 
+(184,000 
+) 
+31.10 
+Forfeited 
+(10,000 
+) 
+34.05 
+Outstanding at December 31, 2008 
+358,000 
+$ 
+29.53 
+As of December 31, 2008, there was $7,710 of total unrecognized compensation cost related to restricted stock awards granted under the Plan. This cost is expected to be recognized over a weighted-average of 2.2 years. During the year ended December 31, 2006, 165,000 restricted stock awards were granted to the Company’s Creative and Design Chief. The Company determines the fair value of its restricted stock awards based on the market price of its common stock on
+the date of grant. 
+Note H - Preferred Stock 
+The Company has authorized 5,000,000 shares of preferred stock. The Board of Directors has designated 60,000 shares of such preferred stock as Series A Junior Participating Preferred Stock (“Series A Preferred”). Holders of the shares of Series A Preferred are entitled to dividends equal to 1,000 times dividends declared or paid on the Company’s common stock. Each share of Series A preferred entitles the holder to 1,000 votes on all matters submitted
+to the holders of common stock. The Series A Preferred has a liquidation preference of $1,000 per share, and is not redeemable by the Company. No preferred shares have been issued. 
+F-21 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Financial Statements 
+December 31, 2008 and 2007 
+($ in thousands except per share data) 
+Note I - Rights Agreement 
+On October 30, 2001, the Company declared a dividend distribution of one preferred stock purchase right (a “Right”) for each outstanding share of common stock. Each Right entitles the holder to purchase from the Company seven ten-thousandths (7/10,000) of a share of Series A Preferred at a price of $50 per seven ten-thousandth (7/10,000) of a share. Initially, the Rights will not be exercisable and will automatically trade with the common stock. The Rights
+become exercisable, in general, ten days following the announcement of a person or group acquiring beneficial ownership of at least 15% of the outstanding voting stock of the Company. 
+Note J - Operating Leases 
+The Company leases office, showroom and retail facilities under noncancelable operating leases with terms expiring at various times through 2019. Future minimum annual lease payments under noncancelable operating leases consist of the following at December 31: 
+2009 
+$ 
+17,776 
+2010 
+17,542 
+2011 
+16,879 
+2012 
+16,125 
+2013 
+13,947 
+Thereafter 
+43,913 
+$ 
+126,182 
+A majority of the retail store leases provide for contingent rental payments if gross sales exceed certain targets. In addition, many of the leases contain rent escalation clauses to compensate for increases in operating costs and real estate taxes. 
+Rent expense for the years ended December 31, 2008, 2007 and 2006 was approximately $21,808, $18,071 and $16,419, respectively. Included in such amounts are contingent rents of $44, $29 and $240 in 2008, 2007 and 2006, respectively. For the year ended December 31, 2008, the Company recorded approximately $1,325 in lease exit costs associated with two leases that were terminated prior to the end of their prospective terms. 
+Rent expense is calculated by amortizing total rental payments (net of any rental abatements, construction allowances and other rental concessions), on a straight-line basis, over the lease term. Accordingly, rent expense charged to operations differs from rent paid resulting in the Company recording deferred rent. 
+Note K - Income Taxes 
+The components of income before income taxes is as follows: 
+2008 
+2007 
+2006 
+Domestic 
+$ 
+31,395 
+$ 
+48,456 
+$ 
+77,686 
+Foreign 
+14,911 
+7,680 
+3,248 
+$ 
+46,306 
+$ 
+56,136 
+$ 
+80,934 
+F-22 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Financial Statements 
+December 31, 2008 and 2007 
+($ in thousands except per share data) 
+Note K - Income Taxes (continued) 
+The income tax provision (benefit) consists of the following: 
+2008 
+2007 
+2006 
+Current: 
+Federal 
+$ 
+11,932 
+$ 
+21,850 
+$ 
+27,929 
+State and local 
+2,548 
+517 
+10,437 
+Foreign 
+2,609 
+1,229 
+520 
+17,089 
+23,596 
+38,886 
+Deferred: 
+Federal 
+1,114 
+(2,827 
+) 
+(3,500 
+) 
+State and local 
+127 
+(323 
+) 
+(702 
+) 
+1,241 
+(3,150 
+) 
+(4,202 
+) 
+$ 
+18,330 
+$ 
+20,446 
+$ 
+34,684 
+The Company re-evaluated its tax strategies in connection with 2007 tax returns for New York based income, combined with revisions in state and local tax laws. As a result, the Company determined that electing to file each of the New York State and New York City tax returns on a combined basis would maximize the tax benefits to the Company. The election to file combined returns in concert with other tax strategies has reduced the Company’s expected effective tax
+rate to approximately 39.6% in 2008 from 42.9% in 2006. The Company filed combined returns in 2006 and was able to amend New York State and New York City returns for 2003 through 2005 resulting in an additional one-time tax benefit recognized in 2007. In November of 2008, the Company was notified that the amended returns for 2003 were disallowed, resulting in a partial reversal of the one-time benefit recognized in 2007. 
+A reconciliation between taxes computed at the federal statutory rate and the effective tax rate is as follows: 
+December 31, 
+2008 
+2007 
+2006 
+Income taxes at federal statutory rate 
+35.0 
+% 
+35.0 
+% 
+35.0 
+% 
+State and local income taxes - net of federal income tax benefit 
+3.0 
+4.3 
+7.8 
+Nondeductible items 
+0.4 
+0.2 
+0.1 
+Valuation allowance 
+0.9 
+— 
+— 
+One-time adjustment for filing prior years’ NY State and NY City amended returns on a combined basis 
+0.7 
+(2.3 
+) 
+— 
+Other 
+(0.4 
+) 
+(0.8 
+) 
+— 
+Effective rate 
+39.6 
+% 
+36.4 
+% 
+42.9 
+% 
+The Company applies the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. 
+F-23 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Financial Statements 
+December 31, 2008 and 2007 
+($ in thousands except per share data) 
+Note K - Income Taxes (continued) 
+Effective January 1, 2007, the Company adopted the provisions of the Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), which addresses the accounting for uncertainty in income taxes recognized in the financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes”. FIN 48 provides guidance on the financial statement
+recognition and measurement of a tax position taken on the Company’s tax return. Pursuant to FIN 48, the Company has opted to classify interest and penalties that would accrue according to the provisions of relevant tax law as income tax expense on the Consolidated Statements of Income. The Company determines the amount of interest expense to be recognized by applying the applicable statutory rate of interest to the difference between the tax position recognized in accordance with
+FIN 48 and the amount previously taken or expected to be taken on a tax return. As required by FIN 48, the Company applied the “more-likely-than-not” recognition threshold to all tax positions at the adoption date, which resulted in no required adjustment to the opening balance of retained earnings. The adoption of FIN 48 did not have a material impact on the Company’s results of operations and earnings per share. The Company’s tax returns for 2004 through 2006
+are currently under examination by the Internal Revenue Service. The Company’s tax years 2004 through 2007 remain open to examination for most taxing authorities. 
+As of December 31, 2008, the Company has unrealized investment losses of $2,801 available to offset future investment gains and thus reduce future taxable income. A deferred tax asset has been established from recognized capital losses on securities which can only be offset to the extent of capital gains. These losses have a five year carryforward. Due to uncertainty in the market place, the Company has set up a valuation allowance of $468 to reduce the deferred tax
+asset to the amount that it is more likely than not that the Company will generate sufficient capital gains to offset previously recognized capital losses. 
+The components of deferred tax assets and liabilities are as follows: 
+December 31, 
+2008 
+2007 
+Current deferred tax assets: 
+Receivable allowances 
+$ 
+4,415 
+$ 
+6,032 
+Inventory 
+1,523 
+1,594 
+Unrealized (gain) loss 
+226 
+(66 
+) 
+Deferred accruals 
+1,192 
+1,098 
+Other 
+1,092 
+697 
+Gross current deferred tax asset 
+8,448 
+9,355 
+Valuation allowance 
+(468 
+) 
+— 
+7,980 
+9,355 
+Non-current deferred tax assets: 
+Depreciation and amortization 
+4,276 
+4,973 
+Deferred compensation 
+1,082 
+1,169 
+Deferred rent 
+1,861 
+1,353 
+Amortization of goodwill 
+(652 
+) 
+(368 
+) 
+Other 
+545 
+105 
+7,112 
+7,232 
+Deferred tax assets 
+$ 
+15,092 
+$ 
+16,587 
+F-24 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Financial Statements 
+December 31, 2008 and 2007 
+($ in thousands except per share data) 
+Note L - Commitments, Contingencies and Other 
+[1] 
+Legal proceedings: 
+(a) 
+On or about August 7, 2008, the Company was named in a class action lawsuit filed in the San Diego County Superior Court, California. The Complaint, which sought unspecified damages, alleged violation of the Song-Beverly Credit Card Act, which prohibits retailers from accumulating personal information on customers who complete their purchase with a credit card. Specifically, it is alleged that the Company collected zip codes on its credit card transactions
+in California. The case was dismissed on December 19, 2008 with prejudice. 
+(b) 
+On August 10, 2005, the U.S. Customs Department (“Customs”) issued a report that asserts that certain commissions which the Company treated as “buying agents’ commissions” (which are non-dutiable) should be treated as “selling agents’ commissions” and hence are dutiable. In the report, Customs estimates that the Company had underpaid duties during the calendar years of 1998 through 2004 in the amount of
+$1,051. As of June 30, 2006, based on discussions with legal counsel, the Company believed that the liability in this case, including interest, was not likely to exceed $1,500. Accordingly, as of December 31, 2006 the Company recorded a reserve of $1,500. In September of 2007, Customs notified the Company that it had finalized its assessment of the underpaid duties to be $1,400. Pursuant to this assessment, the Company, with the advice of legal counsel, re-evaluated the
+liability in the case, including interest and penalties, and believes that it is not likely to exceed $2,700. Therefore, the Company increased the reserve by $1,200 in 2007, bringing the total reserve to $2,700, and further increased the reserve by $256 in 2008 to reflect anticipated additional interest costs, bringing the reserve to $2,956 as of December 31, 2008. Such reserve is subject to change to reflect the status of this matter. 
+(c) 
+The Company has been named as a defendant in certain other lawsuits in the normal course of business. In the opinion of management, after consulting with legal counsel, the liabilities, if any, resulting from these matters should not have a material effect on the Company’s financial position or results of operations. It is the policy of management to disclose the amount or range of reasonably possible losses in excess of recorded amounts. 
+[2] 
+Employment agreements: 
+Effective as of July 1, 2005, the Company amended its employment agreement with Steven Madden, the Company’s founder and Creative and Design Chief. The agreement provides for an annual salary of $600, subject to certain specified adjustments, through June 30, 2015. The agreement also provides for annual bonuses based on EBITDA, on revenue for any new business, and royalty income over $2,000, and an annual option grant at exercise prices equal to the
+market price on the date of grant and a non-accountable expense allowance. 
+Effective February 1, 2006, the Company amended its employment agreement with Arvind Dharia, the Company’s Chief Financial Officer. The agreement provides for an annual salary of $425, with annual increases through December 31, 2009. The agreement also provides for an annual bonus at the discretion of the Board of Directors. 
+Effective April 7, 2008, the Company entered into an employment agreement with Edward Rosenfeld pursuant to which Mr. Rosenfeld will serve as the Company’s Chief Executive Officer. The agreement, which expires on December 31, 2009, provides for an annual salary of $400. In addition, Mr. Rosenfeld received 40,000 stock options that will vest annually over five years. 
+F-25 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Financial Statements 
+December 31, 2008 and 2007 
+($ in thousands except per share data) 
+Note L - Commitments, Contingencies and Other (Continued) 
+Effective April 29, 2008, the Company entered into an employment agreement with Amelia Newton Varela, the Company’s Executive Vice President. The agreement provides for an annual salary of $350, with annual increases through December 31, 2010. The agreement also provides for annual incentive bonuses. In addition, Ms. Varela received 50,000 stock options on the date of the agreement, and will receive an additional 25,000 in April of 2009 and 2010, all
+of which will vest over a five year period. 
+Effective October 1, 2008, the Company amended its employment agreement with Awadhesh Sinha, the Company’s Chief Operating Officer. The agreement provides for an annual salary of $540 through December 31, 2010, with successive one-year automatic renewal terms thereafter. The agreement also provides for an annual incentive bonus and requires the Company to accrue deferred cash compensation equal to from 7.5% to 25% of annual salary. 
+The Company has employment agreements with other executives (the “executives”) which expire between June 30, 2008 and December 31, 2009. Some of these agreements provide for cash bonuses at the discretion of the Board of Directors, and some provide for cash bonuses based primarily upon a percentage of year-to-year increases in earnings before interest, taxes, depreciation and amortization, option grants and non-accountable expense allowances as
+defined. Base salary commitments for these executives are as follows: 
+2008 
+$ 
+2,420 
+2009 
+940 
+$ 
+3,452 
+In connection with their employment agreements, five executives received an aggregate of 170,000 and 132,000 shares of restricted common stock from the Company in 2007 and 2006, respectively. The restricted shares vest equally each year over a period of between four to five years and, accordingly, the Company has recorded a charge to operations in the amount of $1,335, $1,726 and $680 for the years ended December 31, 2008, 2007 and 2006, respectively.
+[3] 
+Letters of credit: 
+At December 31, 2008 and 2007, the Company had open letters of credit for the purchase of imported merchandise of approximately $2,445 and $1,974, respectively. 
+[4] 
+Royalty agreements: 
+On September 10, 2008, the Company entered into a license agreement with Dualstar Entertainment Group, LLC, under which the Company has the right to use the “Elizabeth and James” trademark in connection with the sale and marketing of footwear. The agreement requires the Company to make royalty and advertising payments equal to a percentage of net sales and a minimum royalty and advertising payment in the event that specified net sales targets
+are not achieved. The agreement expires on March 31, 2012, with one three-year renewal period if certain provisions are met. 
+On July 31, 2008, the Company entered into a license agreement to design, manufacture and distribute women’s footwear, handbags and belts and related accessories under the “Fabulosity” brand. The agreement requires the Company to pay the licensor a royalty and advertising payments equal to a percentage of net sales and a minimum royalty and advertising payment in the event that specified net sales targets are not achieved. The agreement
+expires on December 31, 2011, with one three-year renewal period if certain provisions are met. 
+F-26 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Financial Statements 
+December 31, 2008 and 2007 
+($ in thousands except per share data) 
+Note L - Commitments, Contingencies and Other (Continued) 
+On July 1, 2008, the Company entered into a license agreement with Jones Investment Co. Inc., under which the Company has the right to use the “l.e.i.” trademark in connection with the sale and marketing of women’s footwear exclusively to Wal-Mart. The agreement requires the Company to pay the licensor a royalty and advertising payments equal to a percentage of net sales and a minimum royalty and advertising payment in the event that
+specified net sales targets are not achieved. The agreement expires on December 31, 2011, with one three-year renewal period if certain provisions are met. 
+On March 28, 2007, the Company, through its Daniel M. Friedman Division, entered into a license agreement to design, manufacture and distribute handbags and belts and related accessories under the “DF Daisy Fuentes” and the “Daisy Fuentes” brands. The agreement requires the Company to pay the licensor a royalty and brand management fees based on a percentage of net sales and a minimum royalty in the event that specified net sales
+targets are not achieved. The agreement expires on December 31, 2010. 
+On September 14, 2006, the Company, through its Daniel M. Friedman Division, entered into a license agreement to design, manufacture and distribute handbags and belts and related accessories under the “Tracy Reese” and the “Plenty” brands. In addition, the Company has the right to use the phrase “Plenty by Tracy Reese”. The agreement requires the Company to pay the licensor a royalty based on net sales and a minimum
+royalty in the event that specified net sales targets are not achieved. The agreement was terminated by mutual assent in 2008. 
+On July 20, 2004, Daniel M. Friedman entered into a long-term license agreement with B.J. Vines, Inc., under which the Company has the right to use the “Betsey Johnson” trademark in connection with the sale and marketing of handbags, small leather goods, belts and umbrellas. The agreement requires the Company to make royalty and advertising payments equal to a percentage of net sales and a minimum royalty and advertising payment in the event
+that specified net sales targets are not achieved. The initial term of the agreement expired on December 31, 2007, however, the Company exercised its option to extend the agreement until December 31, 2010. 
+On May 12, 2003, the Company entered into a long-term license agreement with Candie’s, Inc. to design, manufacture and distribute Candie’s branded footwear for women and children worldwide. The initial term of the agreement expires on December 31, 2009, with four 3-year renewal terms, the last of which expires on December 31, 2021. The agreement required the Company to make royalty and advertising payments equal to a percentage of net sales of
+licensed products and a minimum royalty and advertising payment in the event that specified net sales targets were not achieved. On December 6, 2004, the agreement was amended to reflect Candie’s decision to name Kohl’s Corporation the exclusive provider of a new line of Candie’s apparel. The amendment extended the initial term of the agreement to December 31, 2010, and eliminated the renewal term options. Pursuant to the amendment, commencing on January 1,
+2007, the Company no longer has the exclusive right to market Candie’s branded footwear and will be permitted to sell Candie’s branded footwear only to Kohl’s. Under the terms of the amendment, Candie’s guarantees that the Company will achieve minimum sales levels with Kohl’s during the term of the agreement. In the event such minimum sales levels are not achieved, Candie’s is required to compensate the Company in an amount based on a
+percentage of the sales shortfall. Effective January 1, 2005, all royalty and advertising payments were eliminated. As an inducement to execute the amendment, the Company was required to pay Candie’s a total of $3,000 payable in eight equal quarterly installments that began in February of 2005 and concluded with a final payment in May 2007. 
+F-27 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Financial Statements 
+December 31, 2008 and 2007 
+($ in thousands except per share data) 
+Note L - Commitments, Contingencies and Other (Continued) 
+Royalty expenses are included in the “cost of goods sold” section of the Company’s Consolidated Statements of Income. Aggregate minimum future royalties excluding renewal options, under these agreements are as follows: 
+Year Ending 
+December 31, 
+2009 
+$ 
+1,362 
+2010 
+2,102 
+2011 
+2,033 
+2012 
+163 
+$ 
+5,660 
+[5] 
+Related Party Transactions: 
+In January 2004, the Company entered into an agreement with JLM Consultants, a company wholly owned by John Madden, one of the Company’s directors and the brother of Steven Madden, the Company’s founder and Creative Design Chief. Under this agreement, Mr. Madden provides consulting services with respect to the development of international sales of the Company. Pursuant to this agreement, JLM Consultants received a fee and expenses of $760, $661
+and $511 in 2008, 2007 and 2006 respectively, in addition to fees that Mr. Madden received for service to the Company as a director. 
+In July 2001, the Company entered into a consulting agreement with Peter J. Solomon & Company (“Solomon”), a financial advisory firm of which Marc Cooper, a former director of the Company from July 2001 through February of 2008, is a managing director. Under this agreement, the firm provided financial advisory and investment banking services to the Company. This agreement, which was amended in March 2004, was terminated on July 11, 2006.
+Pursuant to this agreement, the Company paid fees and expenses to Solomon of $412 (related to the acquisition of Daniel M. Friedman), in 2006. The Company paid fees and expenses of $46 and $67 to Solomon in 2008 and 2007, respectively, for limited consulting engagements. 
+In October 2002, the Company entered into an arrangement with Jeff Birnbaum, a director of the Company from June 2003 through October 2007. Under this arrangement, which was terminated on October of 2007, Mr. Birnbaum provided consulting services with respect to the design and manufacturing of shoes and general consulting services to the Company. Pursuant to this arrangement, Mr. Birnbaum received a fee of $200 in both 2007 and 2006, in addition to fees
+received for service to the Company as a director. Mr. Birnbaum has been the Product Development Manager of Dolphin Shoe Company since August 1982. Dolphin Shoe Company, which is equally owned by Mr. Birnbaum, his father and his brother, is one of the Company’s domestic suppliers. In July of 2006, the Company acquired the Natural Comfort brand from Dolphin Shoe Company for $100. 
+[6] 
+Concentrations: 
+The Company maintains cash and cash equivalents with various major financial institutions which at times are in excess of the amount insured. In addition, the Company’s marketable securities and money market accounts are principally held at three brokerage companies. 
+During the year ended December 31, 2008, the Company purchased approximately 21%, 14% and 10% of its merchandise from three suppliers in China. Total inventory purchases from China for the year ended December 31, 2008 was approximately 93%. 
+F-28 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Financial Statements 
+December 31, 2008 and 2007 
+($ in thousands except per share data) 
+Note L - Commitments, Contingencies and Other (Continued) 
+During the year ended December 31, 2007, the Company purchased approximately 24% and 12% of its merchandise from two suppliers in China. Total inventory purchases from China for the year ended December 31, 2007 was approximately 81%. 
+During the year ended December 31, 2006, the Company purchased approximately 36% and 16% of its merchandise from two suppliers in China. Total inventory purchases from China for the year ended December 31, 2006 was approximately 88%. 
+Sales to one customer accounted for 10% of total net sales for the year ended December 31, 2008. This customer represented 15% while two other customers represented 15% and 11% of accounts receivable at December 31, 2008. 
+Sales to one customer accounted for 12% of total net sales for the year ended December 31, 2007. This customer represented 17% of accounts receivable at December 31, 2007. 
+Sales to one customer accounted for 13% of total net sales for the year ended December 31, 2006. This customer represented 18% of accounts receivable at December 31, 2006. 
+Sales to such customers are included in the wholesale segment (see Note M). Purchases are made primarily in United States dollars. 
+[7] 
+Valuation and qualifying accounts: 
+The following is a summary of the allowance for doubtful accounts related to accounts receivable and the allowance for chargebacks related to the amount Due from Factor for the years ended December 31: 
+2008 
+2007 
+2006 
+Balance at beginning of year 
+$ 
+15,446 
+$ 
+12,508 
+$ 
+8,400 
+Charged to reserve 
+4,145 
+— 
+— 
+Increase in reserve 
+— 
+2,938 
+4,108 
+Balance at end of year 
+$ 
+11,301 
+$ 
+15,446 
+$ 
+12,508 
+The following is a summary of the reserve for slow moving inventory for the years ended December 31: 
+2008 
+2007 
+2006 
+Balance at beginning of year 
+$ 
+2,140 
+$ 
+2,065 
+$ 
+1,143 
+Charged to reserve 
+— 
+— 
+— 
+Increase to the reserve 
+313 
+75 
+922 
+Balance at end of year 
+$ 
+2,453 
+$ 
+2,140 
+$ 
+2,065 
+F-29 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Financial Statements 
+December 31, 2008 and 2007 
+($ in thousands except per share data) 
+Note L - Commitments, Contingencies and Other (Continued) 
+The following is a summary of goodwill and the related accumulated amortization for the years ended December 31: 
+2008 
+2007 
+2006 
+Cost basis 
+Balance at beginning of year 
+$ 
+16,520 
+$ 
+7,063 
+$ 
+2,145 
+Acquisitions and purchase price adjustments 
+7,652 
+9,457 
+4,918 
+Write-off of impaired assets 
+— 
+— 
+— 
+Balance at end of year 
+24,172 
+16,520 
+7,063 
+Accumulated amortization 
+Balance at beginning of year 
+598 
+598 
+598 
+Write-off of impaired assets 
+— 
+— 
+— 
+Balance at end of year 
+598 
+598 
+598 
+Goodwill 
+$ 
+23,574 
+$ 
+15,922 
+$ 
+6,465 
+Note M - Operating Segment Information 
+The Company’s reportable segments are primarily determined based on distribution channels of its various brands. The Wholesale segment markets its products through department and specialty stores throughout the country and the Retail segment through the operation of various Company owned stores and the Company’s website. The First Cost segment represents activities of a subsidiary which earns commissions for acting as a buying agent to mass-market
+merchandisers, shoe chains and other off-price retailers with respect to their purchase of footwear. 
+The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance based on profit or loss from operations before other income (expense) and the provision for income taxes. The following is information for the Company’s reportable segments: 
+F-30 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Financial Statements 
+December 31, 2008 and 2007 
+($ in thousands except per share data) 
+Note M - Operating Segment Information (continued) 
+Wholesale Segments 
+Year ended, 
+Women’s 
+Men’s 
+Accessories 
+Total Wholesale 
+Retail 
+First Cost 
+Consolidated 
+December 31, 2008: 
+Net sales to external customers 
+$ 
+226,438 
+$ 
+38,041 
+$ 
+66,928 
+$ 
+331,407 
+$ 
+125,639 
+$ 
+457,046 
+Gross profit 
+78,601 
+14,302 
+23,478 
+116,381 
+70,443 
+186,824 
+Commissions, royalty and licensing fees - net 
+2,727 
+— 
+— 
+2,727 
+— 
+$ 
+11,567 
+14,294 
+Income (loss) from operations 
+27,055 
+1,371 
+9,089 
+37,515 
+(4,176 
+) 
+11,567 
+44,906 
+Depreciation and amortization 
+3,751 
+5,285 
+55 
+9,101 
+Segment assets 
+$ 
+136,963 
+$ 
+22,170 
+$ 
+36,453 
+195,586 
+52,536 
+36,571 
+284,693 
+Capital expenditures 
+$ 
+3,551 
+$ 
+4,707 
+$ 
+56 
+$ 
+8,314 
+December 31, 2007: 
+Net sales to external customers 
+$ 
+204,699 
+$ 
+51,237 
+$ 
+54,469 
+$ 
+310,405 
+$ 
+120,645 
+$ 
+431,050 
+Gross profit 
+68,074 
+19,862 
+16,885 
+104,821 
+68,583 
+173,404 
+Commissions, royalty and licensing fees - net 
+3,677 
+— 
+— 
+3,677 
+— 
+$ 
+14,674 
+18,351 
+Income from operations 
+24,884 
+5,771 
+4,481 
+35,136 
+3,104 
+14,674 
+52,914 
+Depreciation and amortization 
+3,668 
+4,766 
+1 
+8,435 
+Segment assets 
+$ 
+130,342 
+$ 
+22,031 
+$ 
+29,618 
+181,991 
+56,120 
+28,410 
+266,521 
+Capital expenditures 
+$ 
+3,210 
+$ 
+9,513 
+$ 
+242 
+$ 
+12,965 
+December 31, 2006: 
+Net sales to external customers 
+$ 
+233,564 
+$ 
+62,629 
+$ 
+51,316 
+$ 
+347,509 
+$ 
+127,654 
+$ 
+475,163 
+Gross profit 
+89,407 
+26,112 
+13,976 
+129,495 
+68,934 
+198,429 
+Commissions, royalty and licensing fees - net 
+2,925 
+— 
+— 
+2,925 
+— 
+$ 
+11,321 
+14,246 
+Income from operations 
+42,458 
+10,668 
+3,966 
+57,092 
+9,885 
+11,321 
+78,298 
+Depreciation and amortization 
+2,655 
+4,025 
+26 
+6,705 
+Segment assets 
+$ 
+165,543 
+$ 
+10,621 
+$ 
+27,022 
+203,186 
+41,933 
+6,273 
+251,392 
+Capital expenditures 
+$ 
+3,739 
+$ 
+5,765 
+$ 
+7 
+$ 
+9,511 
+F-31 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Financial Statements 
+December 31, 2008 and 2007 
+($ in thousands except per share data) 
+Note N - Quarterly Results of Operations (unaudited) 
+The following is a summary of the quarterly results of operations for the years ended December 31, 2008 and 2007: 
+March 31, 
+June 30, 
+September 30, 
+December 31, 
+2008: 
+Wholesale, net 
+$ 
+75,560 
+79,426 
+$ 
+97,343 
+$ 
+79,078 
+Retail, net 
+24,979 
+29,891 
+30,750 
+40,019 
+Net sales 
+100,539 
+109,317 
+128,093 
+119,097 
+Cost of sales 
+60,324 
+63,780 
+75,114 
+71,004 
+Gross profit 
+40,215 
+45,537 
+52,979 
+48,093 
+Commissions, royalty and licensing fee income - net 
+3,356 
+3,203 
+4,497 
+3,238 
+Net income 
+$ 
+2,052 
+$ 
+7,634 
+$ 
+11,088 
+$ 
+7,202 
+Net income per share: 
+Basic 
+0.10 
+0.43 
+0.62 
+0.40 
+Diluted 
+0.10 
+0.43 
+0.62 
+0.40 
+2007: 
+Wholesale, net 
+$ 
+82,299 
+$ 
+78,616 
+$ 
+85,998 
+$ 
+63,492 
+Retail, net 
+24,355 
+29,640 
+27,397 
+39,253 
+Net sales 
+106,654 
+108,256 
+113,395 
+102,745 
+Cost of sales 
+64,460 
+62,836 
+66,577 
+63,773 
+Gross profit 
+42,194 
+45,420 
+46,818 
+38,972 
+Commissions, royalty and licensing fee income - net 
+5,446 
+5,669 
+4,335 
+2,901 
+Net income 
+$ 
+9,533 
+$ 
+10,518 
+$ 
+10,939 
+$ 
+4,700 
+Net income per share: 
+Basic 
+0.45 
+0.51 
+0.52 
+0.23 
+Diluted 
+0.43 
+0.49 
+0.52 
+0.23 
+F-32 
+SIGNATURES 
+Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. 
+Dated: 
+New York, New York 
+March 12, 2009 
+STEVEN MADDEN, LTD. 
+By: 
+/s/ EDWARD R. ROSENFELD 
+Edward R. Rosenfeld 
+Chairman and Chief Executive Officer 
+By: 
+/s/ ARVIND DHARIA 
+Arvind Dharia 
+Chief Financial Officer 
+Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated. 
+Signature 
+Title 
+Date 
+/s/ EDWARD R. ROSENFELD 
+Chairman, Chief Executive Officer and Director 
+March 12, 2009 
+Edward R. Rosenfeld 
+/s/ ARVIND DHARIA 
+Chief Financial Officer 
+March 12, 2009 
+Arvind Dharia 
+/s/ JOHN L. MADDEN 
+Director 
+March 12, 2009 
+John L. Madden 
+/s/ PETER MIGLIORINI 
+Director 
+March 12, 2009 
+Peter Migliorini 
+/s/ RICHARD P. RANDALL 
+Director 
+March 12, 2009 
+Richard P. Randall 
+/s/ RAVI SACHDEV 
+Director 
+March 12, 2009 
+Ravi Sachdev 
+/s/ THOMAS H. SCHWARTZ 
+Director 
+March 12, 2009 
+Thomas H. Schwartz
\ No newline at end of file
diff --git a/raw/filings/0000913241/2008/0001019056-09-000306/filing_metadata.csv b/raw/filings/0000913241/2008/0001019056-09-000306/filing_metadata.csv
new file mode 100644
index 0000000000000000000000000000000000000000..dbf82571f7d6c2239d12641acea147848a39f829
--- /dev/null
+++ b/raw/filings/0000913241/2008/0001019056-09-000306/filing_metadata.csv
@@ -0,0 +1,2 @@
+cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing
+0000913241,SHOO,"STEVEN MADDEN, LTD.",10-K,2009-03-12,2008-12-31,2009-03-12T19:59:46.000Z,0001019056-09-000306,smadden_10k08.htm,FORM 10-K,1546552,0,0,https://www.sec.gov/Archives/edgar/data/913241/000101905609000306/smadden_10k08.htm,https://www.sec.gov/Archives/edgar/data/913241/000101905609000306/,2008,2008,1
diff --git a/raw/filings/0000913241/2008/0001019056-09-000306/item1.txt b/raw/filings/0000913241/2008/0001019056-09-000306/item1.txt
new file mode 100644
index 0000000000000000000000000000000000000000..5b969f54a2e449d7a2940b5c89d7170f99c704d7
--- /dev/null
+++ b/raw/filings/0000913241/2008/0001019056-09-000306/item1.txt
@@ -0,0 +1,165 @@
+ITEM 1 
+BUSINESS 
+Steven Madden, Ltd. (and its subsidiaries) designs, sources, markets and retails fashion-forward footwear for women, men and children. In addition, we design, source, market and retail name brand and private label fashion handbags and accessories through our Daniel M. Friedman Division. We distribute products through our retail stores, our e-commerce website, department and specialty stores throughout the
+United States and through special distribution arrangements in Canada, Europe, Central and South America, Australia and Asia. Our product line includes a broad range of updated styles which are designed to establish or capitalize on market trends, complemented by core products. We have established a reputation for our creative designs, popular styles and quality products at affordable price points. 
+Our business is comprised of three (3) distinct segments (Wholesale, Retail and First Cost). Our Wholesale segment includes ten (10) core divisions: Steve Madden Womens, Steve Madden Mens, Candie’s, Madden Girl, Steve Madden’s Fix, Steven, Stevies,Fabulosity, Elizabeth and James and our accessories division. Our accessories division, through license agreements, includes the Daisy Fuentes, Betsey
+Johnson and Fabulosity accessories brands. Steven Madden Retail, Inc., our wholly owned retail subsidiary, operates Steve Madden and Steven retail stores as well as our e-commerce website. Our wholly owned subsidiary, Adesso-Madden, Inc., acts as a buying agent for footwear products under private labels and licensed brands (such as l.e.i and Candie’s) for many of the country’s large mass merchandisers and mid-tier department stores. We also license our Steve Madden and
+Steven trademarks for several accessory and apparel categories. 
+Steven Madden, Ltd. was incorporated as a New York corporation on July 9, 1990 and reincorporated under the same name in Delaware in November 1998. We completed our initial public offering in December 1993 and our shares of common stock currently trade on The NASDAQ Global Select Market under the symbol “SHOO”. 
+1 
+We maintain our principal executive offices at 52-16 Barnett Avenue, Long Island City, NY 11104 and our telephone number (718) 446-1800. 
+Our website is http://www.stevemadden.com. We file our annual, quarterly and current reports and other information with the Securities and Exchange Commission. We make available, free of charge, on our website, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, 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, and our Proxy Statement for our Annual Meeting as soon as reasonably practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission. We will provide paper copies of such filings free of charge upon request. The public may read and copy any materials filed by us with the Securities and Exchange Commission at the Securities and Exchange Commission’s Public Reference Room at 100 R Street, NE,
+Washington, DC, 20549. The public may also obtain information on the operation of the Public Reference Room by calling the Securities and Exchange Commission at 1-800-SEC-0330. In addition, the Securities and Exchange Commission maintains an Internet site that contains reports, proxy and information statements and other information regarding us, which is available at http://www.sec.gov. 
+See “Item 8 Financial Statements and Supplementary Data” for additional information relating to our operating segments. 
+Wholesale Segment 
+Steve Madden Womens Wholesale Division 
+The Steve Madden Womens Wholesale Division designs, sources and markets our Steve Madden brand to major department stores, better specialty stores and independently owned boutiques throughout the United States. The Steve Madden brand has become a leading life-style brand in the fashion conscious marketplace. To serve our customers (primarily women ages 16 to 35), Madden Womens creates and markets fashion
+forward footwear designed to appeal to customers seeking exciting, new footwear designs at affordable prices. 
+As our largest division, Madden Womens generated net sales of $135.6 million for the year ended December 31, 2008, or approximately 30% of our total net sales. New products for Madden Womens are test marketed at our retail stores. Typically, within a few days, we can determine if the test product appeals to customers. This enables us to use our flexible sourcing model to rapidly respond to changing trends,
+which we believe is essential for success in the fashion arena. 
+Accessories Division 
+Our accessories division designs, sources and markets name brand and private label fashion handbags and accessories to major department stores, value price retailers and better specialty stores throughout the United States. Our accessories division generated net sales of $66.9 million for the year ended December 31, 2008, or approximately 15% of our total net sales. 
+Madden Girl Wholesale Division 
+The Madden Girl Wholesale Division designs, sources and markets a full collection of directional young women’s shoes. Madden Girl is geared for young women ages 13 to 20 and is an “opening price point” brand that is currently being sold at department stores, mid-tier retailers and specialty stores. Madden Girl generated net sales of $48.7 million for the year ended December 31, 2008, or
+approximately 11% of our total net sales. 
+2 
+Steve Madden Mens Wholesale Division 
+The Steve Madden Mens Wholesale Division designs, sources and markets a full collection of directional men’s shoes and fashion forward athletic shoes to 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 20 to 40 years old. Madden Mens generated net sales of $38.0 million for the
+year ended December 31, 2008, or approximately 8% of our total net sales. Madden Mens maintains open stock inventory positions in select patterns to serve the replenishment programs of its wholesale customers. 
+Diva Acquisition Corp. – Steven Wholesale Division 
+Diva Acquisition Corp. designs, sources and markets women’s fashion footwear under the Steven trademark through major department and better footwear specialty stores throughout the United States. Priced a tier above the Steve Madden brand, Steven products are designed to appeal principally to fashion conscious women, ages 25 to 45, who shop at department stores and footwear boutiques. Steven generated
+net sales of $18.5 million for the year ended December 31, 2008, or approximately 4% of our total net sales. 
+Candie’s Wholesale Division 
+Pursuant to our license agreement with Candie’s, Inc., we design, source and market Candie’s branded footwear for women and kids through our Candie’s Wholesale Division. Our Candie’s Wholesale Division generated net sales of $14.3 million for the year ended December 31, 2008, or approximately 3% of our total net sales. During the second half of 2008, we transitioned Candie’s
+business to our First Cost segment which resulted in a change of our classification of Candie’s revenues from the net sales line on our Consolidated Statement of Income to the commission income line. 
+On December 6, 2004, the license agreement with Candie’s was amended to reflect Candie’s decision to name Kohl’s Corporation as the exclusive provider of a new line of Candie’s apparel. Pursuant to the amendment, commencing on January 1, 2007, we no longer had the exclusive right to market Candie’s branded footwear and we are permitted to sell Candie’s branded footwear only
+to Kohl’s. Under the terms of the amendment, Candie’s has guaranteed that we will achieve minimum sales levels with Kohl’s during the term of the agreement, which runs through December 31, 2010. In the event such minimum sales levels are not achieved, Candie’s is required to compensate us in an amount based on a percentage of the sales shortfall. For the year ended December 31, 2008, the minimum sales level was met. 
+Stevies Wholesale Division 
+Our Stevies Wholesale Division designs, sources and markets footwear for young girls to department stores, specialty stores and independent boutiques throughout the United States. Stevies generated net sales of $5.0 million for the year ended December 31, 2008, or approximately 1% of our total net sales. 
+Steve Madden’s Fix Wholesale Division 
+We introduced Steve Madden’s Fix in the fourth quarter of 2007. The Fix Division designs, sources and markets a line of fashion-forward athletic sneakers to better department stores, better specialty stores and independently owned boutiques throughout the United States. Fix is targeted at women ages 16 to 35 with average price points that range from $50 to $70 at retail. Fix generated net sales of $3.2
+million for the year ended December 31, 2008, or approximately 1% of our total net sales. 
+3 
+Fabulosity Wholesale Division 
+In July 2008, we entered into a license agreement to design, manufacture and distribute women’s footwear, handbags and belts and related accessories under the Fabulosity brand. Fabulosity is an urban lifestyle brand that targets young women ages 13 to 25. It is marketed through JC Penny with average retail prices ranging from $30 to $65. Fabulosity, which began shipping in December of this year,
+generated net sales of $1.2 million for the year ended December 31, 2008. 
+Elizabeth and James 
+On September 10, 2008, we entered into a license agreement with Dualstar Entertainment Group, LLC, under which we have the right to use the Elizabeth and James trademark in connection with the sale and marketing of footwear. Elizabeth and James, which was created by Mary-Kate and Ashley Olsen, is distributed through luxury retailers to women ages 25 to 36 years with average retail price points from $200 to
+$350 for shoes and from $350 to $500 for boots. We anticipate that we will begin shipping Elizabeth and James product in the second quarter of 2009. 
+Retail Segment 
+Steven Madden Retail, Inc. 
+As of December 31, 2008, we owned and operated ninety-seven (97) retail stores including ninety-two (92) stores under the Steve Madden name and four (4) under the Steven name. In addition, we operate one (1) e-commerce website (through the www.stevemadden.com website). In 2008, we opened three (3) new stores and closed seven (7) underperforming stores. Steve Madden stores are located in major shopping malls
+and in urban street locations across the United States, primarily focused in New York, California and Florida. In 2008, the retail stores generated annual sales in excess of $628 per square foot. Comparative store sales (sales of those stores, including the e-commerce website, that were open for all of 2008 and 2007) were unchanged in 2008 compared to 2007. The Retail segment generated net sales of $125.6 million for the year ended December 31, 2008, or approximately 27% of our total
+net sales. 
+We believe that the Retail segment will continue to enhance overall sales and profitability while building equity in the Steve Madden brand. We plan to add two (2) new retail stores and close approximately ten (10) underperforming stores during 2009. Our Retail stores enable us to test and react to new products and classifications which, in turn, strengthens the product development efforts of the Steve Madden
+Wholesale Division. 
+First Cost Segment 
+Adesso-Madden, Inc. 
+Adesso-Madden, Inc (“A-M”) is our first cost, commission based division. During the second half of 2008, we transitioned our Candie’s business from our Wholesale segment to A-M. This resulted in a decrease in net sales in our Candie’s Wholesale Division and an increase of commission revenue in A-M. In addition, pursuant to a license agreement dated July of 2008 with Jones Investment Co.
+Inc., beginning in the first quarter of 2009, A-M intends to design and market women’s footwear under the l.e.i. brand exclusively to Wal-mart. In addition, A-M serves as a buying agent to mass-market merchants, shoe store chains and other value-priced retailers in connection with the procurement of footwear. As a buying agent, A-M utilizes its expertise and its relationships with shoe manufacturers to facilitate the production of private label shoes to its customers’
+specifications. We believe that by operating in the private label, mass merchandising market, we are able to maximize additional non-branded sales opportunities. This leverages our 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 Target, Wal-Mart, J.C. Penney and Sears. A-M receives buying agent’s commissions from its customers.
+In addition, we have leveraged the strength of our Steve Madden brands and product designs resulting in a partial recovery of our design, product and development costs from our suppliers. The First Cost segment generated operating income of $11.6 million for the year ended December 31, 2008. 
+4 
+Licensing 
+As of December 31, 2008, we licensed our Steve Madden and Steven trademarks for use in connection with the manufacturing, marketing and sale of cold weather accessories, sunglasses, eyewear, outerwear, bedding and hosiery. Most of the license agreements require the licensee to pay us a royalty based on actual net sales, a minimum royalty in the event that specified net sales targets are not achieved and a
+percentage of sales for advertising the brand. Licensing income for the year ended December 31, 2008 was $2.7 million. 
+Design 
+We have established a reputation for our creative designs, marketing and trendy products at affordable price points. We believe that our future success will substantially depend on our ability to continue to anticipate and react to changing consumer demands in a timely manner. To meet this objective, we have developed an unparalleled design process that allows us to recognize and act quickly to changing
+consumer demands. Our design team strives to create designs which it believes fit our 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, primarily in our Long Island City facility, which is reviewed and refined prior to the commencement of initial production. Most new products are then tested in selected Steve Madden retail stores. Based on these tests, among other things,
+management selects the products that are then offered for wholesale and retail distribution nationwide. We believe that our design and testing process and flexible sourcing model is a significant competitive advantage allowing us to mitigate the risk of production costs and the distribution of less desirable designs. 
+Product Sourcing and Distribution 
+We source each of our product lines separately based on the individual design, styling and quality specifications of the products in such product lines. We do not own or operate manufacturing facilities; rather, we source our branded products through agents and our own sourcing office with independently owned manufacturers in China, Mexico, Brazil, Italy, Spain and India. We have established relationships with
+a number of manufacturers and agents in each of these countries. Although we have not entered into any long-term manufacturing or supply contracts, we believe that a sufficient number of alternative sources exist for the manufacture of our products. We continually monitor the availability of the principal materials used in our footwear, which are available from a number of sources in various parts of the world. We track inventory flow on a regular basis, monitor sell-through data and
+incorporate input on product demand from wholesale customers. We use retailers’ feedback to adjust the production or manufacture of new products on a timely basis, which helps reduce the close out of slow-moving products. 
+We distribute our products from three (3) third-party distribution warehouse centers located in California and New Jersey. By utilizing distribution facilities that specialize in distributing products to certain wholesale accounts, Steve Madden retail stores and internet fulfillment, we believe that our customers are better served. 
+5 
+Customers 
+Our wholesale customers consist principally of department stores and specialty stores, including independent boutiques. Approximately 88% of our wholesale revenue is generated from department and specialty stores, including Macy’s, Nordstrom, DSW, Kohl’s, Famous Footwear, and Dillard’s and catalog retailers, including Victoria’s Secret. For the year ended December 31, 2008, Macy’s
+accounted for approximately $45.5 million, or 14% of our wholesale net sales and 10% of our total net sales. 
+Distribution Channels 
+We sell our products principally through department stores, specialty stores and discount stores in the United States and through our company-owned retail stores. For the year ended December 31, 2008, our Retail segment and our Wholesale segment generated net sales of approximately $125.6 million and $331.4 million, or 27% and 73% of our total net sales, respectively. Each of these distribution channels are
+described below. 
+Steve Madden and Steven Retail Stores 
+As of December 31, 2008, we operated ninety-two (92) company-owned retail stores under the Steve Madden name and four (4) under the Steven name and one (1) e-commerce website (through the www.stevemadden.com website). We believe that our retail stores will continue to enhance overall sales, profitability, and our ability to react to changing consumer trends. The stores are also a marketing tool that allows us
+to strengthen brand recognition and to showcase selected items from our full line of branded and licensed products. Furthermore, the retail stores provide us with a venue to test and introduce new products and merchandising strategies. Specifically, we often test new designs at our Steve Madden retail stores before scheduling them for mass production and wholesale distribution. In addition to these test marketing benefits, we have been able to leverage sales information gathered at
+Steve Madden retail stores to assist our wholesale customers in order placement and inventory management. 
+A typical Steve Madden store is approximately 1,400 to 1,600 square feet and is located in a mall or street location that we expect will attract the highest concentration of our core demographic, style-conscious customer base. The Steven stores, which are generally the same size as our Steve Madden stores, have a more sophisticated design and format styled to appeal to their more mature target audience. In
+addition to carefully analyzing mall demographics and locations, we also set profitability guidelines for each potential store site. Specifically, we target well trafficked sites at which the demographics fit our consumer profile and seek new locations where the projected fixed annual rent expense stays within our guidelines. By setting these guidelines, we seek to identify stores that will contribute to our overall profitability both in the near and longer terms. 
+Department Stores 
+We currently sell to over 3,700 doors of 17 department stores throughout the United States. Our major accounts include Macy’s, Nordstrom, Dillard’s and Lord & Taylor. 
+We provide merchandising support to our department store customers which includes in-store fixtures and signage, supervision of displays and merchandising of our various product lines. Our wholesale merchandising effort includes the creation of in-store concept shops, where a broader collection of our branded products are showcased. These in-store concept shops create an environment that is consistent with our
+image and are designed to enable the retailer to display and sell a greater volume of our products per square foot of retail space. In addition, these in-store concept shops encourage longer term commitment by the retailer to our products and enhance consumer brand awareness. 
+6 
+In addition to merchandising support, our key account executives maintain weekly communications with their respective accounts to guide them in placing orders and to assist them in managing inventory, assortment and retail sales. We leverage our sell-through data gathered at our 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, which reduces markdown exposure at season’s end. 
+Specialty Stores/Catalog Sales 
+We currently sell to specialty store locations throughout the United States. Our major specialty store accounts include DSW, Famous Footwear and Journeys. We offer our specialty store accounts the same merchandising, sell-through and inventory tracking support offered to our department store accounts. Sales of our products are also made through various catalogs, such as Victoria’s Secret. 
+Internet Sales 
+We operate an Internet website, www.stevemadden.com, where customers can purchase numerous styles of our Steve Madden, Steven, Steve Madden Mens and selected styles from Madden Girl, footwear and accessory products. 
+Distribution Agreements 
+Steve Madden products are available in many countries and territories worldwide via several retail selling and distribution agreements. Under the terms of the agreements, the distributors and retailers are required to open a minimum number of stores each year and to pay us a fee for each pair of footwear purchased, and in many cases, an additional sales royalty as a percentage of sales or a predetermined
+amount per unit of sale. Under the terms of the distribution agreements, the distributor is required to purchase certain minimum amounts of Steve Madden shoes. These agreements, which expire at various times through December 31, 2012 with renewal options at the election of the distributors and retailers, are exclusive in their specific territories which include China, Canada, Turkey, Mexico, Australia, Israel, UAE, The United Kingdom, Korea, Morocco, Greece, several countries in
+southeast Asia, including Indonesia and Thailand, Morocco, and several countries in Central and South America. 
+Competition 
+The fashion footwear industry is highly competitive. We compete with specialty shoe companies as well as companies with diversified footwear product lines, such as Nine West, Skechers, Kenneth Cole, Nike, Guess and Jessica Simpson who may have greater financial and other resources than us. We believe effective advertising and marketing, fashionable styling, high quality, value and fast manufacturing turnaround
+are the most important competitive factors and intend to continue to employ these elements as we develop our products. 
+Marketing and Sales 
+We have focused on creating an integrated brand building program to establish Steve Madden as a leading designer of fashion footwear for style-conscious young women and men. Principal marketing activities include product placements in lifestyle and fashion magazines, personal appearances by Creative and Design Chief, Steve Madden, and in-store promotions. In addition, we continue to promote our website
+(www.stevemadden.com) where customers can purchase Steve Madden, Steven, Steve Madden Mens and selected styles from Madden Girl footwear, as well as view exclusive content, participate in contests and “live chat” with customer service representatives. 
+7 
+Management Information Systems (MIS) Operations 
+Sophisticated information systems are essential to our ability to maintain our competitive position and to support continued growth. We operate on a dual AS/400 system which provides system support for all aspects of our business, including manufacturing purchase orders, customer purchase orders, order allocations, invoicing, accounts receivable management, quick response replenishment, point-of-sale support
+and financial and management reporting functions. We have a PKMS bar coded warehousing system that is integrated with the wholesale system in order to provide accurate inventory positions and quick response size replenishment for our customers. In addition, we have installed an EDI system which provides a computer link between us and certain wholesale customers that enables both the customer and us to monitor purchases, shipments and invoicing. The EDI system also improves our ability
+to respond to customer inventory requirements on a weekly basis. 
+Receivables Financing; Line of Credit 
+Under the terms of our factoring agreement with GMAC Commercial Finance LLC, as amended, we may request advances from the factor of up to 85% of aggregate receivables factored by GMAC. The agreement, which has no specific expiration date and can be terminated by us effective on or after June 30, 2009 with sixty (60) days prior written notice, provides us with a $50 million credit facility with a $25 million
+sub-limit for Letters of Credit. The agreement can be terminated by GMAC upon the occurrence, and in certain instances continuance after notice, of certain specified defaults. We also pay a fee that varies depending on the customer of between 0.15% and 0.25% of the gross invoice amount factored with GMAC. Prior to the amendment to the factoring agreement discussed in the next paragraph, we sold a substantial portion of our receivables, principally without recourse, to GMAC. As of
+December 31, 2008 and 2007, $92 and $272 of factored receivables, respectively, were sold by us with recourse. GMAC maintains a lien on all of our receivables to secure our obligations and assumes the credit risk for all purchased accounts approved by them with certain exceptions. 
+In November of 2008, GMAC announced that it did not have enough capital to qualify to become a bank holding company and thereby qualify to access certain government funding sources. GMAC stated that failure to become a bank holding company would have a near-term material adverse effect on its business and its financial position. In light of these statements and the worsening financial climate, we were
+concerned about GMAC’s ability to maintain our cash flow, and if needed, to fund advances. In addition, we were concerned that in a GMAC bankruptcy proceeding, our accounts receivable sold to GMAC under the factoring agreement in effect prior to January 1, 2009, might be deemed an asset of GMAC’s and thus the future cash collections on same would not be available to us. To hedge against these concerns, in November of 2008, we borrowed the maximum amount allowed by the terms
+of the agreement, which had the effect of mitigating, to the extent of the borrowings, the possible financial effect of any GMAC bankruptcy filing. As of December 31, 2008, we had advances payable due to GMAC of $30,168 against gross factored receivables of $44,082. The interest rate on the advances, which has changed from time to time by amendments to the agreement and which is currently a variable rate based on the 30-day London Interbank Offered Rate (LIBOR), averaged 4.2% in 2008.
+We had no advances payable due to GMAC as of December 31, 2007. On January 2, 2009, GMAC announced that it had qualified as a bank holding company and that it received $5 billion from the U.S. Department of Treasury under the Troubled Asset Relief Program. Effective January 1, 2009, the factoring agreement was amended so that we retained title to our factored accounts receivable, which would keep our outstanding receivables from being the property of GMAC subject to administration in a
+future GMAC bankruptcy proceeding, if any. Subsequent to the year end, we began reducing the loan balance with the proceeds from the collections of factored accounts receivable, and as of February 17, 2009, the loan was completely paid off. 
+8 
+Our Daniel M. Friedman Division had a factoring agreement with Wells Fargo Century that expired on June 30, 2007. As of July 1, 2007, Daniel M. Friedman has been incorporated into the GMAC agreement. 
+Trademarks and Service Marks 
+The STEVE MADDEN and/or STEVE MADDEN plus Design trademarks and service marks have been registered in numerous International Classes in the United States (Int’l Cl. 25 for clothing and footwear; Int’l Cl. 18 for leather goods, such as handbags and wallets; Int’l Cl. 9 for eyewear; Int’l Cl. 14 for jewelry; Int’l Cl. 3 for cosmetics and fragrances; Int’l Cl. 20 for picture
+frames; Int’l Cl. 16 for paper goods; and Int’l Cl. 35 for retail store services). We also have pending trademark applications in the United States for the mark STEVE MADDEN and/or STEVE MADDEN plus Design in numerous international classes (Class 9 for CDs and Class 25 for sleepwear). 
+We also have trademark registrations in the United States for the marks EYESHADOWS BY STEVE MADDEN (Int’l Cl. 9 for eyewear), STEVEN M. (Int’l Class 25 for clothing and footwear); STEVEN BY STEVE MADDEN (Int’l Cl. 25 for footwear and Int’l Cl. 18 for small leather goods); NATURAL COMFORT (Int’l Cl. 25 for footwear); STEVE MADDEN LUXE (Int’l Cl. 25 for clothing and footwear);
+STEVEN (Int’l Cl. 3 for cosmetics and fragrances; Int’l Cl. 9 for eyewear; Int’l Cl. 14 for jewelry; Int’l Cl. 18 for bags; Int’l Cl. 25 for clothing and footwear; Int’l Cl. 26 for hair accessories; and Int’l Cl. 35 for retail store services); CIRCLE WITH ASTERISK DESIGN (in Class 25 for clothing and footwear); FIX (in Class 25 for footwear); FIX* (in Class 25 for footwear); STEVE MADDEN’S FIX (in Class 25 for clothing and footwear); and,
+STEVE MADDEN’S FIX AND DESIGN (in Class 25 for clothing and footwear). We also own a registration for the mark SOHO COBBLER plus Design in the U.S. in Class 25 for footwear. 
+We also have several pending applications in the U.S. for MADDEN in international classes (Class 14 for jewelry and watches, Class 18 for bags, and Class 25 for clothing and footwear). We also have pending applications in the U.S. for MADDEN BY STEVE MADDEN in Class 18 for bags. 
+Additionally, we have several pending trademark and service mark applications in the United States for various marks, MADDEN GIRL (in Class 18 for bags and in Class 25 for clothing and footwear); MADDEN GIRLZ (in Class 25 for clothing and footwear); MADDEN BOYZ (in Class 25 for clothing and footwear); MADDEN KIDZ for clothing and footwear); MADDEN NEW YORK (in Class 25 for clothing and footwear); MADDEN ACTIVE
+(in Class 25 for clothing and footwear); MADDEN SPORT (in Class 25 for clothing and footwear); STEVEN BY STEVE MADDEN (in Class 18 for bags and Class 25 for belts); FINA FIRENZE (in Class 18 for bags and in Class 25 for belts and footwear); STEVE MADDEN DESIGN PLUS PEACE LOVE SHOES (in Class 25 for footwear); PEACE LOVE SHOES (STANDARD CHARACTERS) (in Class 25 for footwear); PEACE LOVE SHOES LOGO (in Class 24 for towels and in Class 25 for footwear, clothing and belts); and, STEVE
+MADDEN DESIGN PLUS PEACE LOVE SHOES LOGO PLUS PEACE LOVE SHOES (in Class 25 for footwear). 
+We further own registrations for the STEVE MADDEN and/or STEVE MADDEN plus Design trademarks and service marks in various International Classes in Argentina, Armenia, Aruba, Australia, Azerbaijan, Bahrain, Belize, Brazil, Canada, Chile, China, Colombia, El Salvador, Estonia, Georgia, Guatemala, Hong Kong, Indonesia, Israel, Italy, Japan, Kazakhstan, Korea, Kyrgyzstan, Latvia, Lebanon, Lithuania, Malaysia,
+Mexico, Moldova, Netherland Antilles, New Zealand, the Netherlands, Nicaragua, Norway, Oman, Panama, Paraguay, the Philippines, Qatar, Russia, Saudi Arabia, Singapore, South Africa, Taiwan, Thailand, Turkey, Turkmenistan, Ukraine, the United Arab Emirates, Uzbekistan, the European Union, and the Benelux countries and has pending applications for registration of the STEVE MADDEN and/or STEVE MADDEN plus Design trademarks and service marks in Argentina, Aruba, Bahamas, Belarus, Canada,
+China, Costa Rica, Ecuador, Egypt, Guatemala, Honduras, India, Indonesia, Jordan, Korea, Kuwait, Morocco, Oman, Peru, Saudi Arabia, Tajikistan, Turkey, Venezuela, and the United Arab Emirates. 
+9 
+Additionally, we own registrations for the STEVEN trademark and service mark in various International Classes in Australia, Bahrain, Belize, China, the Dominican Republic, El Salvador, the European Union, Hong Kong, Israel, Japan, Kuwait, Lebanon, Malaysia, New Zealand, Netherland Antilles, Norway, Panama, the Philippines, Qatar, Russia, Saudi Arabia, South Africa, Thailand, Taiwan, Turkey, and the United Arab
+Emirates and have pending applications for STEVEN trademark and service mark in Armenia, Azerbaijan, China, Columbia, Costa Rica, Egypt, Guatemala, India, Italy, Jordan, Korea, Malaysia, Nicaragua, Oman, Taiwan, Thailand, and Venezuela. 
+We further own registrations for the “torch stripe” design in Class 25 in the European Union and Panama, and China. 
+We further own registrations for the mark STEVEN BY STEVE MADDEN in various international classes in Aruba, Australia, China, the European Union, Hong Kong, Korea, New Zealand, and Taiwan and have pending applications for the mark STEVEN BY STEVE MADDEN in various international classes in Canada, China, Ecuador, Egypt, India, Israel, Korea, Taiwan, Turkey, Saudi Arabia, and Venezuela. 
+We further own registrations for the mark STEVE MADDEN’S FIX* in international class 25 in the European Union, Mexico, and Turkey and have pending applications for the mark STEVE MADDEN’S FIX* in international class 25 in Canada, China, Morocco, Panama and The United Arab Emirates. 
+We further have pending applications for the mark MADDEN GIRL in international class 25 in Egypt, India, Kuwait, Saudi Arabia and Turkey. 
+We further have pending applications for the mark NATURAL COMFORT in various international classes in Egypt, India, Kuwait, and Saudi Arabia. 
+We further own registrations for the mark SM NEW YORK and/or SM NEW YORK PLUS DESIGN in International Class 25 (clothing and footwear) in Aruba, Australia, Belize, Costa Rica, the Dominican Republic, Ecuador, El Salvador, Guatemala, Hong Kong, Netherland Antilles, Nicaragua, New Zealand, Panama, Taiwan and have pending applications for registration of the SM NEW YORK and/or SM NEW YORK PLUS DESIGN mark in
+International Class 25 (clothing and footwear) in Columbia, Honduras, India, Indonesia, Kuwait, Saudi Arabia, South Africa, and Venezuela. 
+Additionally, we, through our Diva Acquisition Corp. subsidiary, own 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 in Australia, Canada, the European Union, Hong Kong and South Africa in some or all of Classes 3, 18, and 25.
+Also, we own registrations for our 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. 
+We, through our Stevies, Inc. subsidiary, also own various registrations for the STEVIES and /or STEVIES plus Design trademark and service mark in a number of International Classes in the United States (Int’l Class 25 for clothing and footwear; Int’l Class 18 for leather goods, such as handbags and wallets; International Class 14 for jewelry; International Class 28 for toys; Int’l Class 16
+for paper goods; Int’l Class 3 for perfume and cosmetics, Int’l Class 9 for CDs and eyewear; and Int’l Cl. 27 for rugs and carpets; and for STEVIES BY STEVE MADDEN in Class 14 for jewelry, Class 9 for eyewear, Class 3 for perfume and cosmetics, Class 25 for clothing and footwear, Class 28 for toys and games, Class 35 for retail services, Class 16 for stationery and notebooks, Class 18 for bags. 
+10 
+Additionally, Stevies, Inc. has pending trademark and service mark applications and/or existing registrations for the STEVIES and STEVIES plus Design marks in various International Classes in Aruba, Argentina, Australia, Bahrain, Brazil, Canada, China, Chile, Colombia, Costa Rica, Dominican Republic, Egypt, El Salvador, European Union, Guatemala, Hong Kong, Honduras, Indonesia, India, Israel, Japan, Korea,
+Kuwait, Lebanon, Malaysia, Mexico, Netherland Antilles, Nicaragua, New Zealand, Oman, Panama, Peru, Qatar, Saudi Arabia, Singapore, South Africa, Taiwan, Thailand, Turkey, the United Arab Emirates and Venezuela. 
+We believe that our trademarks have a significant value and are important to the marketing of our products. There can be no assurance, however, that we will be able to effectively obtain rights to our marks throughout all of the countries of the world. Moreover, no assurance can be given that others will not assert rights in, or ownership of, our trademarks and other proprietary rights of or that we will be
+able to successfully resolve such conflicts. Our failure to protect such rights from unlawful and improper appropriation may have a material adverse effect on our business, financial condition, results of operations and liquidity. 
+Employees 
+On February 5, 2009, we employed approximately one thousand five hundred and ten (1,510) employees, of whom approximately seven hundred forty (740) work on a full-time basis and approximately seven hundred seventy (770) work on a part-time basis, most of whom work in the Retail segment. Our management considers relations with our employees to be good. 
+Seasonality 
+Historically, our merchandising businesses have experienced holiday retail seasonality. In addition to seasonal fluctuations, our operating results fluctuate quarter to quarter as a result of the timing of holidays, weather, the timing of larger shipments of footwear, market acceptance of our products, the mix, pricing and presentation of the products offered and sold, the hiring and training of additional
+personnel, inventory write downs for obsolescence, the cost of materials, the product mix between wholesale, retail and licensing businesses, the incurrence of other operating costs and factors beyond our control, such as general economic conditions and actions of competitors. 
+Backlog 
+We had unfilled wholesale customer orders of $90.5 million and $113.8 million, as of February 21, 2009 and 2008, respectively. Due to the realignment of our Candie’s business from our Wholesale segment to our commission based First Cost segment, there are no Candie’s orders included this year as compared to $10.8 million of Candie’s orders included last year. Our backlog at a particular time
+is affected by a number of factors, including seasonality, timing of market weeks and wholesale customer purchases of our core basic products through our open stock program. Accordingly, a comparison of backlog from period to period may not be indicative of eventual shipments.
\ No newline at end of file
diff --git a/raw/filings/0000913241/2008/0001019056-09-000306/item13.txt b/raw/filings/0000913241/2008/0001019056-09-000306/item13.txt
new file mode 100644
index 0000000000000000000000000000000000000000..8e5be97df835fd0c3b4b9835da6e2f9a076cc71b
--- /dev/null
+++ b/raw/filings/0000913241/2008/0001019056-09-000306/item13.txt
@@ -0,0 +1,4 @@
+ITEM 13 
+CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE 
+The information required to be furnished pursuant to this item will be set forth in our proxy statement for the 2009 Annual Meeting of Stockholders, and is incorporated herein by reference. 
+34
\ No newline at end of file
diff --git a/raw/filings/0000913241/2008/0001019056-09-000306/item9a.txt b/raw/filings/0000913241/2008/0001019056-09-000306/item9a.txt
new file mode 100644
index 0000000000000000000000000000000000000000..c3c8573093ae2d2cb9dab374b32a18a8757e92ed
--- /dev/null
+++ b/raw/filings/0000913241/2008/0001019056-09-000306/item9a.txt
@@ -0,0 +1,36 @@
+ITEM 9A 
+CONTROLS AND PROCEDURES 
+Disclosure Controls and Procedures 
+As required by Rule 13a-15(b) of the Exchange Act, our management, including our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of the end of the fiscal year covered by this Annual Report on Form 10-K. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that our 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 on Form 10-K. 
+Management’s Annual Report on Internal Control Over Financial Reporting 
+Management of Steven Madden, Ltd. is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act). 
+Our internal control over financial reporting is a process designed by, or under the supervision of, our principal executive officer and principal financial officer, and effected by the board of directors, management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Our internal control
+over financial reporting includes those policies and procedures that (1) pertain to maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with
+authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements. 
+Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. 
+With the participation of the Chief Executive Officer and the Chief Financial Officer, our management conducted an evaluation of the effectiveness as of the end of our fiscal year ended December 31, 2008, of our internal control over financial reporting based on the framework and criteria established in Internal Control–Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation our management has
+concluded that, as of December 31, 2008, our internal control over financial reporting was effective. 
+32 
+The independent registered public accounting firm that audited the financial statements included in this Annual Report on Form 10-K has issued an attestation report on our internal control over financial reporting. 
+Attestation Report of our Independent Registered Public Accounting Firm 
+Our Independent Registered Public Accounting Firm, Eisner LLP, has audited and issued a report on our internal control over financial reporting. The report of Eisner LLP appears below. 
+To the Board of Directors and Stockholders 
+Steven Madden, Ltd. 
+We have audited Steven Madden, Ltd. and subsidiaries’ (the “Company”) internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of
+the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. 
+We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and
+testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. 
+A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail,
+accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding
+prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. 
+Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. 
+In our opinion, Steven Madden, Ltd. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control - Integrated Framework issued by COSO. 
+33 
+We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Steven Madden, Ltd. and subsidiaries as of December 31, 2008 and 2007, 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, 2008, and our report dated March 10, 2009 expressed an
+unqualified opinion on those consolidated financial statements and included an explanatory paragraph regarding the adoption of the provisions of Financial Accounting Standards Board Interpretation No. 48 “Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109”, effective January 1, 2007. 
+/s/ Eisner LLP 
+New York, New York 
+March 10, 2009 
+Changes in Internal Control Over Financial Reporting 
+There was no change in our internal control over financial reporting, identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 of the Exchange Act, that occurred during the fiscal quarter ended December 31, 2008, has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
\ No newline at end of file
diff --git a/raw/filings/0000913241/2008/0001019056-09-000306/rp_note.txt b/raw/filings/0000913241/2008/0001019056-09-000306/rp_note.txt
new file mode 100644
index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391
diff --git a/raw/filings/0000913241/2008/0001019056-09-000306/rpt_disclosure.txt b/raw/filings/0000913241/2008/0001019056-09-000306/rpt_disclosure.txt
new file mode 100644
index 0000000000000000000000000000000000000000..8fa62932b448456b0bdc4e81d3f929ddf2caf0d1
--- /dev/null
+++ b/raw/filings/0000913241/2008/0001019056-09-000306/rpt_disclosure.txt
@@ -0,0 +1,12 @@
+Certain Relationships and Related Party Transactions 
+In January 2004, the Company entered into an agreement with John L. Madden, one of the Company’s directors, and JLM Consultants, a company wholly-owned by John L. Madden. Under this agreement, which was amended in 2005, Mr. Madden agreed to provide consulting services to the Company with respect to the development of international sales of the Company. This agreement expired by its terms on December 31, 2005, but Mr. Madden continues to provide consulting services and the Company continues to make payments to JLM Consultants consistent with those that would have been required under the expired consulting agreement. In accordance with the foregoing, for the 2009 Fiscal Year, JLM Consultants received the following from the Company: (a) a commission equal to 2.5% on international sales, (b) a monthly draw in the amount of $25,000 with recourse against such commissions, (c) a $1,000 per month travel allowance and (d) $2,812 per month toward health insurance premiums for health insurance coverage for John L. Madden. Pursuant to this arrangement, JLM Consultants received a total of $759,180 from the Company in the 2009 Fiscal Year. 
+12 
+Effective as of July 1, 2005, the Company amended and restated its employment agreement with Steven Madden, pursuant to which Mr. Madden agreed to serve as the Company’s Creative and Design Chief. The term of Mr. Madden’s employment under his employment agreement commenced on July 1, 2005 and, in accordance with a December 14, 2009 amendment thereto, will end on December 31, 2019. The agreement provides for an annual salary of $600,000, with a 7% increase of base salary on a compound basis in each of the third, fifth, seventh and ninth years of the agreement. Mr. Madden also receives an annual $200,000 non-accountable expense allowance. The agreement provides for an annual cash bonus in an amount determined by the Board of Directors, which will be at least 2% of the Company’s EBITDA (the “Annual Bonus”). Additionally, the Company agreed to pay Mr. Madden an annual cash bonus in relation to “new business” (as defined in the agreement) in an amount to be determined by the Board of Directors, but which is at least (i) 2.5% of new business gross direct revenues plus (ii) 10% of all license or other fee income above $2,000,000 (the “New Business Bonus”). In addition, Mr. Madden is eligible to receive annually, on or about the date of the Company’s annual meeting of stockholders, an option grant (the “Annual Option”) to purchase a number of shares of Common Stock, with such number to be equal to not less than 100% of the largest aggregate number of shares of Common Stock available upon the exercise of an option or options granted to any other continuing full-time employee of the Company during the preceding twelve-month period; provided, however, that a grant to Mr. Madden in excess of 150% of the number of shares of Common Stock available upon the exercise of an option or options granted to such other continuing full-time employee shall require stockholder approval. Any Annual Option received by Mr. Madden will vest quarterly over a one-year period following the grant date and will be exercisable, at a price equal to the closing price of the Company’s Common Stock on the grant date, for a period of five years following the date of the grant. In the event of Mr. Madden’s death, the agreement provides for the payment to Mr. Madden’s estate of his base salary for the 12-month period immediately subsequent to the date of Mr. Madden’s death. In the event that Mr. Madden’s employment agreement is terminated due to Mr. Madden’s total disability (as defined in the agreement), “for cause” (as defined in the agreement) or due to Mr. Madden’s resignation, the Company is obligated to pay Mr. Madden the amount of compensation that is accrued and unpaid through the date of termination. In the event Mr. Madden’s employment agreement is terminated for any reason (other than “for cause” or due to his death, total disability or resignation), the Company is obligated to pay Mr. Madden, in installments, the balance of his base salary that would have been paid by the Company under the agreement for the full term of the agreement. If, during the period commencing 120 days prior to a “change of control” (as defined in the employment agreement) transaction and ending on the first anniversary of a change of control transaction, Mr. Madden’s employment is terminated by the Company other than for cause or by the resignation of Mr. Madden for “good reason” (as defined in the employment agreement), or if Mr. Madden resigns for good reason or without good reason within 30 days following a change of control transaction, all unvested options to purchase shares of Common Stock held by Mr. Madden will vest on the date of termination or resignation and Mr. Madden will be entitled to receive a lump sum cash payment equal to (1) the amount of compensation that is accrued and unpaid through the date of termination, (2) an amount equal to the product of (A) the number of years remaining in the term of the agreement (but not less than 5), and (B) the sum of (w) the base salary for the 12-month period ended on the preceding December 31 (or for the 12-month period ending on December 31, 2002, if greater), (x) the amount of the Annual Bonus earned (paid or accrued or which should have been paid or accrued) for the 12-month period ended on the preceding December 31 (or for the 12-month period ended on December 31, 2002, if greater), (y) the non-accountable expense allowance provided for under the agreement for the 12-month period ended on the preceding December 31, and (z) the amount of the New Business Bonus earned (paid or accrued or which should have been paid or accrued) for the 12-month period ended on the preceding December 31 (or for the 12-month period ending on December 31 during the agreement in which Mr. Madden received the greatest New Business Bonus, if greater). Mr. Madden’s employment agreement contains other customary provisions, including provisions regarding expense reimbursement, confidentiality, solicitation and competition. For Fiscal Year 2009, Mr. Madden earned (i) $664,470 in base salary; (ii) $200,000 in non-accountable expense allowance; (iii) a bonus of $1,752,665, representing 2% of the Company’s earnings before interest, tax, depreciation and amortization; (iv) a bonus of $3,995,600, earned based on 2.5% of the Company’s new business; and (v) a bonus of $100,101, based on 10% of Royalty/Licensing income over $2,000,000. 
+On June 25, 2007, the Company made a loan to Steven Madden, its Creative and Design Chief and a principal stockholder of the Company, in the amount of $3,000,000, in order for Mr. Madden to exercise an option, which was due to expire, and hold the underlying Common Stock. Mr. Madden executed a promissory note in favor of the Company, which is secured by a pledge of 510,000 shares of the Company’s Common Stock beneficially owned by Mr. Madden. There have been successive amendments to the note, the most recent of which occurred on April 6, 2009, at which time the note was amended and restated to (i) extend the maturity date to the earlier of the date that Mr. Madden ceases to be employed by the Company and June 30, 2015 (the “Maturity Date”), and (ii) reflect the rate of interest as 8% per annum for the period from June 25, 2007 until April 6, 2010, and 6% per annum for the period from April 7, 2010 until the Maturity Date. As of December 31, 2009, interest in the amount of $568,000 has accrued on the note. Mr. Madden is the brother of John L. Madden, who has been a director of the Company since the Company’s inception in 1990. 
+Review, Approval or Ratification of Transactions with Related Persons 
+The Company’s written Conduct Code and Employee Handbook prohibit all conflicts of interest. Under the Conduct Code, conflicts of interest occur when private or family interests interfere in any way, or even appear to interfere, with the interests of the Company. The Company’s prohibition on conflicts of interest under the Conduct Code includes any related person transaction. 
+13 
+Related person transactions must be approved by the Board, or by a committee of the Board consisting solely of independent directors, who will approve the transaction only if they determine that it is in the best interests of the Company. In considering the transaction, the Board or committee will consider all relevant factors, including as applicable (i) the Company’s business rationale for entering into the transaction; (ii) the alternatives to entering into a related person transaction; (iii) whether the transaction is on terms comparable to those available to third parties or, in the case of employment relationships, to employees generally; (iv) the potential for the transaction to lead to an actual or apparent conflict of interest and any safeguards imposed to prevent such actual or apparent conflicts; and (v) the overall fairness of the transaction to the Company. 
+The Company has multiple processes for reporting conflicts of interests, including related person transactions. Under the Conduct Code, all employees are required to report any actual or apparent conflict of interest, or potential conflict of interest, to management. The Chief Financial Officer distributes a questionnaire to the Company’s executive officers and management personnel on a quarterly basis and distributes a questionnaire to the members of the Board of Directors on an annual basis requesting certain information regarding, among other things, their immediate family members, employment and beneficial ownership interests, which information is then reviewed for any conflicts of interest under the Conduct Code. 
+The Board of Directors, the Audit Committee and the Disclosure Committee, which is comprised of management personnel, discuss the related party transactions, specifically, and in connection with the regular review processes attendant to the Company’s periodic filings, including related party transaction disclosures. 
+If a director is a party to or in some manner involved in a transaction involving the Company, he will be recused from all discussions and decisions about the transaction. The transaction must be approved in advance whenever practicable, and if not practicable, must be ratified as promptly as practicable.
\ No newline at end of file
diff --git a/raw/filings/0000913241/2009/0001019056-10-000302/filing.txt b/raw/filings/0000913241/2009/0001019056-10-000302/filing.txt
new file mode 100644
index 0000000000000000000000000000000000000000..ed20a1210cd85e837a1514b026f032c32045982f
--- /dev/null
+++ b/raw/filings/0000913241/2009/0001019056-10-000302/filing.txt
@@ -0,0 +1,7159 @@
+10-K
+1
+smadden_10k09.htm
+FORM 10-K
+smadden_10k09.htm 
+UNITED
+STATES 
+SECURITIES
+AND EXCHANGE COMMISSION 
+WASHINGTON,
+D.C. 20549 
+FORM
+10-K 
+(Mark
+One) 
+x ANNUAL REPORT PURSUANT TO
+SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
+For
+the fiscal year ended December 31, 2009 
+or 
+o TRANSITION REPORT PURSUANT
+TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF
+1934 
+For the
+transition period from to 
+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 
+incorporation
+or organization) 
+(I.R.S.
+employer identification no.) 
+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: 
+Title of Each Class 
+Name of Each Exchange on Which
+Registered 
+Common
+Stock, par value $.0001 per share 
+The
+NASDAQ Stock Market LLC 
+Preferred
+Stock Purchase Rights 
+The
+NASDAQ Stock Market LLC 
+Securities
+Registered Pursuant to Section 12(g) of the Act: None 
+Indicate
+by check mark if the registrant is a well-known seasoned issuer, as defined in
+Rule 405 of the Securities Act. 
+Yes 
+o No
+x 
+Indicate
+by check mark if the registrant is not required to file reports pursuant to
+Section 13 or 15(d) of the Securities Act. 
+Yes o No
+x 
+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 o 
+Indicate by check mark whether the registrant has submitted electronically and
+posted on its corporate website, if any, every Interactive Data File required to
+be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of
+this chapter) during the preceding 12 months (or for such shorter period that
+the registrant was required to submit and post such files). 
+Yes o No o 
+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. o 
+Indicate
+by check mark whether the registrant is a large accelerated filer, an
+accelerated filer, a non-accelerated filer or a smaller reporting company. See
+the definitions of “large accelerated filer”, “accelerated filer” and “smaller
+reporting company” in Rule 12b-2 of the Exchange Act. 
+Large
+accelerated filer o 
+Accelerated
+filer x 
+Non-accelerated
+filer o 
+Smaller
+reporting company o 
+Indicate
+by check mark whether the registrant is a shell company (as defined in Rule
+12b-2 of the Exchange Act). 
+Yes o No x 
+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, 2009, the last business day of the registrant’s most recently completed
+second fiscal quarter, was approximately $385,532,000 (based on the closing sale
+price of the registrant’s common stock on that date as reported on The NASDAQ
+Global Select Market). 
+The
+number of outstanding shares of the registrant’s common stock as of March 9,
+2010 was 18,348,786 shares. 
+DOCUMENTS
+INCORPORATED BY REFERENCE: 
+PART III
+INCORPORATES CERTAIN INFORMATION BY REFERENCE FROM THE REGISTRANT’S DEFINITIVE
+PROXY STATEMENT FOR THE REGISTRANT’S 2010 ANNUAL MEETING OF
+STOCKHOLDERS. 
+TABLE OF CONTENTS 
+SPECIAL
+NOTE REGARDING FORWARD-LOOKING STATEMENTS 
+1 
+PART
+I 
+ITEM
+1 
+BUSINESS 
+1 
+ITEM
+1A 
+RISK
+FACTORS 
+9 
+ITEM
+1B 
+UNRESOLVED
+STAFF COMMENTS 
+12 
+ITEM
+2 
+PROPERTIES 
+12 
+ITEM
+3 
+LEGAL
+PROCEEDINGS 
+13 
+ITEM
+4 
+SUBMISSION
+OF MATTERS TO A VOTE OF SECURITY HOLDERS 
+14 
+PART
+II 
+ITEM
+5 
+MARKET FOR
+REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
+PURCHASES OF EQUITY SECURITIES 
+14 
+ITEM
+6 
+SELECTED
+FINANCIAL DATA 
+17 
+ITEM
+7 
+MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
+CONDITION AND RESULTS OF OPERATIONS 
+18 
+ITEM
+7A 
+QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
+MARKET RISK 
+27 
+ITEM
+8 
+FINANCIAL
+STATEMENTS AND SUPPLEMENTARY DATA 
+28 
+ITEM
+9 
+CHANGES IN
+AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
+DISCLOSURE 
+28 
+ITEM
+9A 
+CONTROLS
+AND PROCEDURES 
+28 
+ITEM
+9B 
+OTHER
+INFORMATION 
+30 
+PART
+III 
+ITEM
+10 
+DIRECTORS,
+EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 
+30 
+ITEM
+11 
+EXECUTIVE
+COMPENSATION 
+30 
+ITEM
+12 
+SECURITY
+OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
+STOCKHOLDER MATTERS 
+30 
+ITEM
+13 
+CERTAIN
+RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
+INDEPENDENCE 
+30 
+ITEM
+14 
+PRINCIPAL
+ACCOUNTANT FEES AND SERVICES 
+30 
+PART
+IV 
+ITEM
+15 
+EXHIBITS
+AND FINANCIAL STATEMENT SCHEDULES 
+31 
+SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS 
+This
+Annual Report on Form 10-K contains forward-looking statements as that term is
+defined in the federal securities laws that are made pursuant to the safe harbor
+provisions of the Private Securities Litigation Reform Act of 1995, which
+include statements with regard to future revenue, projected 2010 results,
+earnings, spending, margins, cash flow, orders, expected timing of shipment of
+products, inventory levels, future growth or success in specific countries,
+categories or market sectors, continued or expected distribution to specific
+retailers, liquidity, capital resources and market risk, strategies and
+objectives and other future events. Forward-looking statements include, without
+limitation, any statement that may predict, forecast, indicate or simply state
+future results, performance or achievements, and can be identified by the use of
+forward looking language such as “believe,” “anticipate,”
+“expect,” “estimate,” “intend,” “plan,” “project,” “will be,” “will continue,”
+“will result,” “could,” “may,” “might,” or any variations of such words with
+similar meanings. Factors that may affect our results include, but are not
+limited to, the risks and uncertainties discussed in Item 1A of this Annual
+Report on Form 10-K. 
+Any such
+statements are subject to risks and uncertainties, many of which are beyond our
+control, that may influence the accuracy of the statements and the projections
+upon which the statements are based that could cause actual results to differ
+materially from those projected in forward-looking statements. As such, we
+caution you that these statements are not guarantees of future performance or
+events. Our actual results, performance and achievements could differ materially
+from those expressed or implied in these forward-looking statements. We
+undertake no obligation to publicly update or revise any forward-looking
+statements, whether from new information, future events or
+otherwise. 
+PART I 
+ITEM
+1 
+BUSINESS 
+Steven
+Madden, Ltd. and its subsidiaries (collectively, the “Company”) design, source,
+market and sell fashion-forward footwear for women, men and children. In
+addition, we design, source, market and sell name brand and private label
+fashion handbags and accessories through our Accessories Division. We distribute
+products through our retail stores, our e-commerce website, department and
+specialty stores throughout the United States and through special distribution
+arrangements in Asia, Canada, Europe, Central and South America, Australia and
+Africa. Our product line includes a broad range of updated styles designed to
+establish or capitalize on market trends, complemented by core products. We have
+established a reputation for our creative designs, popular styles and quality
+products at affordable price points. 
+Fiscal
+year 2009 was a record year for Steven Madden, Ltd. Consolidated net sales for
+2009 increased to a record $503.6 million from $457.0 million during 2008. Our
+gross margin increased in fiscal year 2009 to 42.9%, 200 basis points greater
+than the 40.9% achieved in 2008. Net income increased 79% in 2009 to a record
+$50.1 million from $28.0 million in 2008. Diluted earnings per share for the
+year ended December 31, 2009 increased 81% to a record $2.73 per share on
+18,323,000 diluted weighted average shares outstanding compared to $1.51 per
+share on 18,519,000 diluted weighted average shares outstanding in 2008. Net
+cash provided by operating activities increased to a record $64.3 million in
+2009 compared to $41.8 million in 2008. 
+We have expanded our accessories
+portfolio through two recent acquisitions. In July, 2009, we acquired certain
+assets constituting the Zone 88 and Shakedown Street (together “Zone 88”) lines
+of SML Brands, LLC, a subsidiary of Aimee Lynn, Inc, which designs and markets
+primarily private label accessories, principally handbags, for mass merchants
+and mid-tier retailers. The acquisition was completed for $1.3 million in cash.
+We believe this acquisition will enable us to expand our accessories business in
+the private label arena with value priced customers. 
+Most recently, subsequent to our year
+end, on February 10, 2010, the Company acquired all of the outstanding shares of
+stock of Big Buddha, Inc. (“Big Buddha”) from its sole stockholder, Jeremy
+Bassan. Founded in 2003, Big Buddha designs and markets fashion-forward handbags
+to specialty retailers and better department stores. The acquisition was
+completed for $11.0 million in cash plus potential earn out payments based on
+annual financial performance of Big Buddha through March 31, 2013. 
+1 
+On
+September 2, 2009, the Company expanded its brand portfolio by entering into an
+additional license agreement with Dualstar Entertainment Group, LLC, under which
+the Company has the right to use the Olsenboye® trademark in connection with the
+sale and marketing of footwear and accessories exclusively to J.C. Penney. The
+agreement requires the Company to make royalty and advertising payments equal to
+a percentage of net sales and a minimum royalty and advertising payment in the
+event that specified net sales targets are not achieved. The agreement expires
+on December 31, 2011, but is renewable, at our option, for one three-year term,
+if certain conditions are met. 
+In addition, we made progress on our
+stated goal to evolve Steve Madden® into a global lifestyle brand by entering
+into two new license agreements. On October 20, 2009, we signed a license
+agreement to license our Steve Madden® trademark for the design, manufacture and
+worldwide distribution of women’s fashion apparel. On January 7, 2010, we signed
+a license agreement to license our Steve Madden® and Steven by Steve Madden®
+trademarks for the design, manufacture and worldwide distribution of women’s
+fashion jewelry. The new fashion apparel and jewelry lines, which will initially
+ship in the spring and fall of 2010, respectively, join our existing licenses
+for cold weather accessories, sunglasses, eyewear, outerwear, bedding and
+hosiery offerings. Management is pleased to be expanding the Company’s presence
+beyond footwear and accessories and believes the new apparel and jewelry lines
+mark very logical extensions of the Company’s brands. 
+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. We completed
+our initial public offering in December 1993 and our shares of common stock,
+$.0001 par value per share, currently trade on the NASDAQ Global Select Market
+under the symbol “SHOO”. 
+We
+maintain our principal executive offices at 52-16 Barnett Avenue, Long Island
+City, NY 11104 and our telephone number is (718) 446-1800. 
+Our
+website is http://www.stevemadden.com. We file Annual Reports on Form 10-K,
+Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other reports
+and information with the Securities and Exchange Commission (the “SEC”) pursuant
+to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended,
+(the “Exchange Act”). We make these reports, any amendments to such reports, and
+our proxy statements for our stockholders’ meetings available free of charge, on
+our website as soon as reasonably practicable after such material is
+electronically filed with, or furnished to, the SEC. We will provide paper
+copies of such filings free of charge upon request. The public may read and copy
+any materials filed by us with the SEC at the SEC’s Public Reference Room at 100
+R Street, NE, Washington, D.C. 20549. The public may also obtain information on
+the operation of the SEC’s Public Reference Room by calling the SEC at
+1-800-SEC-0330. In addition, the SEC maintains an Internet site that contains
+reports, proxy and information statements and other information regarding us,
+which is available at http://www.sec.gov. 
+Product
+Distribution Segments 
+Our business is comprised of five
+distinct segments (Wholesale Footwear, Wholesale Accessories, Retail, First Cost
+and Licensing). Our Wholesale Footwear segment includes seven core divisions:
+Steve Madden Women’s, Steve Madden Men’s, Madden Girl, Steven, Stevies,
+Elizabeth and James and our international business. Our Wholesale Accessories
+segment, through license agreements, includes Betsey Johnson®, Daisy Fuentes®
+and Olsenboye® accessories brands. Steven Madden Retail, Inc., our wholly owned
+retail subsidiary, operates Steve Madden and Steven retail stores as well as our
+e-commerce website. There are also three stores licensed to a third party. The
+First Cost segment represents activities of a subsidiary which earns commissions
+for serving as a buying agent for footwear products under private labels and
+licensed brands (such as l.e.i.®, Candie’s® and Olsenboye®) for many of the
+country’s large mass-market merchandisers, shoe chains and other off-price
+retailers. In the Licensing segment, the Company licenses its Steve Madden® and
+Steven by Steve Madden® trademarks for use in connection with the manufacturing,
+marketing and sale of cold weather accessories, sunglasses, eyewear, outerwear,
+bedding, hosiery, women’s fashion apparel and jewelry. 
+2 
+Wholesale
+Footwear Segment 
+Steve Madden Women’s Division.
+The Steve Madden Women’s Division (“Madden Women’s”) designs, sources and
+markets our Steve Madden brand to major department stores, mid-tier department
+stores, better specialty stores and independently owned boutiques throughout the
+United States. The Steve Madden brand has become a leading life-style brand in
+the fashion conscious marketplace. To serve our customers (primarily women ages
+16 to 35), Madden Women’s creates and markets fashion forward footwear designed
+to appeal to customers seeking exciting, new footwear designs at affordable
+prices. 
+As our
+largest division, Madden Women’s generated net sales of $148.0
+million for the year ended December 31, 2009, or approximately 29% of
+our total net sales. New products for Madden Women’s are test marketed at our
+retail stores. Typically, within a few days, we can determine if the test
+product appeals to our customers. This enables us to use our flexible sourcing
+model to rapidly respond to changing trends, which we believe is essential for
+success in the fashion arena. 
+Madden Girl Division. The
+Madden Girl Division (“Madden Girl”) designs, sources and markets a full
+collection of directional young women’s shoes. Madden Girl is geared for young
+women ages 13 to 20 and is an “opening price point” brand that is currently sold
+at major department stores, mid-tier retailers and specialty stores. Madden Girl
+generated net sales of $62.5 million for the year ended December 31, 2009, or
+approximately 12% of our total net sales. 
+Steve Madden Men’s Division. 
+The Steve Madden Men’s Division (“Madden Men’s”) designs, sources and markets a
+full collection of directional men’s shoes and fashion forward athletic shoes to
+major department stores, mid-tier 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 20 to 40 years old. Madden Men’s
+generated net sales of $40.0 million for the year ended December 31,
+2009, or approximately 8% of our total net sales. Madden Men’s maintains
+open stock inventory positions in select patterns to serve the replenishment
+programs of its wholesale customers. 
+Steven Division. The Steven
+Division designs, sources and markets women’s fashion footwear under the Steven®
+trademark through major department and better footwear specialty stores
+throughout the United States. Priced a tier above the Steve Madden brand, Steven
+products are designed to appeal principally to fashion conscious women, ages 25
+to 45, who shop at department stores and footwear boutiques. The Steven
+Division generated
+net sales of $23.6 million for the year ended December 31, 2009, or
+approximately 5% of our total net sales. 
+International Division. Prior
+to 2009, our international business (the “International Division”) operated
+under the “first cost” model and, thus, the revenues derived from our
+international business were included in Commissions and Licensing Fees in the
+Consolidated Statements of Income of our Financial Statements. In order to
+improve operating efficiencies, and to give our international partners better
+visibility in the process, as of January 2009, we have changed the operating
+model for our international business to the “wholesale” model. Our International
+Division ships products to China, Canada, Mexico, the United Kingdom, Israel,
+UAE, Turkey, Australia, Korea, Morocco, and several countries in southeast Asia,
+Europe and Central and South America. Our International Division generated net
+sales of $22.1 million for the year ended December 31, 2009 or 4% of our total
+net sales. 
+Elizabeth and James Division. 
+On September 10, 2008, we entered into a license agreement with Dualstar
+Entertainment Group, LLC, under which we have the right to use the Elizabeth and
+James trademark in connection with the sale and marketing of footwear. The
+Elizabeth and James brand, which was created by Mary-Kate and Ashley Olsen, is
+distributed through luxury retailers to women ages 25 to 36 years with average
+retail price points from $200 to $350 for shoes and from $350 to $500 for boots.
+Our Elizabeth and James Division, which began shipping in April 2009, generated
+net sales of $4.3 million for the year ended December 31, 2009 or 1% of our
+total net sales. 
+Steve Madden Kids Division. 
+Our Steve Madden Kids Division (“Madden Kids”) designs, sources and markets
+footwear for young girls to department stores, specialty stores and independent
+boutiques throughout the United States. Madden Kids generated net sales
+of $7.3 million for the year ended December 31, 2009, or
+approximately 1% of our total net sales. 
+3 
+Wholesale
+Accessories Segment 
+Our
+Wholesale Accessories segment designs, sources and markets name brand (including
+Betsey Johnson®, Daisy Fuentes® and Olsenboye® in addition to our Steve Madden®
+and Steven by Steve Madden® brands) and private label fashion handbags and
+accessories to major department stores, mid-tier department stores, value price
+retailers and independent stores throughout the United States. The Wholesale
+Accessories segment generated net sales of $70.4 million for the year
+ended December 31, 2009, or approximately 14% of our total net
+sales. 
+Retail
+Segment 
+Steven Madden Retail, Inc. As
+of December 31, 2009, the Company, through our wholly owned subsidiary Steven
+Madden Retail, Inc., owned and operated 89 retail stores including 84
+stores under the Steve Madden name, four under the Steven name and our
+e-commerce website (at www.stevemadden.com). In 2009, we opened two new stores,
+closed seven underperforming stores and licensed out three stores. Steve
+Madden stores are located in major shopping malls and in urban street locations
+across the United States, primarily focused in New York, California and Florida.
+In 2009, our retail stores generated annual sales in excess of $640 per square
+foot. Comparative store sales (sales of those stores, including the
+e-commerce website, that were open for all of 2009 and 2008) increased 1%
+in fiscal year 2009 compared to fiscal year 2008. The Retail segment generated
+net sales of $123.7 million for the year ended December 31, 2009, or
+approximately 25% of our total net sales. 
+We
+believe that the Retail segment will continue to enhance overall sales and
+profitability while increasing recognition for the Steve Madden brand. We plan
+to open one to three new retail stores and close six to nine
+underperforming stores during 2010. Our retail stores enable us to test and
+react to new products and classifications which, in turn, strengthens the
+product development efforts of the Steve Madden Wholesale segments. 
+First
+Cost Segment 
+The First
+Cost segment represents activities of a subsidiary which earns commissions for
+serving as a buying agent for footwear products under private labels and
+licensed brands (such as l.e.i.®, Candie’s® and Olsenboye®) for many of the
+country’s large mass-market merchandisers, shoe chains and other mid-tier
+retailers. As a buying agent, we utilize our expertise and our relationships
+with shoe manufacturers to facilitate the production of private label shoes to
+our customers’ specifications. We believe that by operating in the private
+label, mass merchandising market, we are able to maximize additional non-branded
+sales opportunities. This leverages our overall sourcing and design
+capabilities. Currently, this segment serves as a buying agent for the
+procurement of women’s, men’s and children’s footwear for large retailers,
+including Target, Wal-Mart, Kohl’s, J.C. Penney and Sears. The First Cost
+segment receives buying agent’s commissions from its customers. In addition, we
+have leveraged the strength of our Steve Madden brands and product designs
+resulting in a partial recovery of our design, product and development costs
+from our suppliers. The First Cost segment generated operating income of
+$16.8 million for the year ended December 31, 2009. 
+Licensing
+Segment 
+We
+license our Steve Madden® and Steven by Steve Madden® trademarks for use in
+connection with the manufacturing, marketing and sale of cold weather
+accessories, sunglasses, eyewear, outerwear, bedding, hosiery, women’s fashion
+apparel and jewelry. Most of our license agreements require the licensee to pay
+us a royalty based on actual net sales, a minimum royalty in the event that
+specified net sales targets are not achieved and a percentage of sales for
+advertising the brand. Licensing income for the year ended December 31, 2009
+was $3.1 million. 
+See Note
+N to our Consolidated Financial Statements for additional information relating
+to our five operating segments. 
+4 
+Product
+Design and Development 
+We have
+established a reputation for our creative designs, marketing and trendy products
+at affordable price points. We believe that our future success will
+substantially depend on our ability to continue to anticipate and react to
+changing consumer demands in a timely manner. To meet this objective, we have
+developed an unparalleled design process that allows us to recognize and act
+quickly to changing consumer demands. Our design team strives to create designs
+which it believes fit our 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, primarily in our Long Island City facility,
+which is reviewed and refined prior to the commencement of initial production.
+Most new products are then tested in selected Steve Madden retail stores. Based
+on these tests, among other things, management selects the products that are
+then offered for wholesale and retail distribution nationwide. We believe that
+our design and testing process and flexible sourcing model is a significant
+competitive advantage allowing us to mitigate the risk of production costs and
+the distribution of less desirable designs. 
+Product
+Sourcing and Distribution 
+We source
+each of our product lines separately based on the individual design, style and
+quality specifications of the products in such product lines. We do not own or
+operate manufacturing facilities; rather, we source our products through agents
+and our own sourcing office with independently owned manufacturers in China,
+Mexico, Brazil, Italy, Spain and India. We have established relationships with a
+number of manufacturers and agents in each of these countries. Although we have
+not entered into any long-term manufacturing or supply contracts, we believe
+that a sufficient number of alternative sources exist for the manufacture of our
+products. We continually monitor the availability of the principal materials
+used in our footwear, which are available from a number of sources in various
+parts of the world. We track inventory flow on a regular basis, monitor
+sell-through data and incorporate input on product demand from wholesale
+customers. We use retailers’ feedback to adjust the production or manufacture of
+new products on a timely basis, which helps reduce the close out of slow-moving
+products. 
+We
+distribute our products from three third-party distribution warehouse centers
+located in California and New Jersey. By utilizing distribution facilities that
+specialize in distributing products to certain wholesale accounts, Steve Madden
+retail stores and Internet fulfillment, we believe that our customers are better
+served. 
+Customers 
+Our
+wholesale customers consist principally of department stores and specialty
+stores, including independent boutiques. Approximately 69% of our wholesale
+revenue is generated from department and specialty stores, including Macy’s,
+DSW, Nordstrom, Famous Footwear, Dillard’s and Lord & Taylor as well as
+mid-tier department stores and catalog retailers, including Victoria’s Secret.
+For the year ended December 31, 2009, DSW accounted for approximately $52.9
+million, or 14% of our wholesale net sales and 11% of our total net sales.
+Macy’s accounted for approximately $39.0 million, or 10% of our wholesale net
+sales and 8% of our total net sales in 2009. 
+Distribution
+Channels 
+United
+States 
+We sell
+our products principally through department stores, specialty stores and
+discount stores and through our company-owned retail stores. For the year ended
+December 31, 2009, our Retail segment and our Wholesale segment generated net
+sales of approximately $123.7 million and $379.8 million, or 25% and 75% of our
+total net sales, respectively. Each of these distribution channels are described
+below. 
+5 
+Steve Madden and Steven Retail
+Stores. As of December 31, 2009, we operated 84 company-owned retail
+stores under the Steve Madden name and four under the Steven name and our
+e-commerce website (at www.stevemadden.com). We believe that our retail stores
+will continue to enhance overall sales, profitability, and our ability to react
+to changing consumer trends. The stores are also a marketing tool that allows us
+to strengthen brand recognition and to showcase selected items from our full
+line of branded and licensed products. Furthermore, the retail stores provide us
+with a venue to test and introduce new products and merchandising strategies.
+Specifically, we often test new designs at our Steve Madden retail stores before
+scheduling them for mass production and wholesale distribution. In addition to
+these test marketing benefits, we have been able to leverage sales information
+gathered at Steve Madden retail stores to assist our wholesale customers in
+order placement and inventory management. 
+A typical
+Steve Madden store is approximately 1,400 to 1,600 square feet and is located in
+a mall or street location that we expect will attract the highest concentration
+of our core demographic, style-conscious customer base. The Steven stores, which
+are generally the same size as our Steve Madden stores, have a more
+sophisticated design and format styled to appeal to their more mature target
+audience. In addition to carefully analyzing mall demographics and locations, we
+set profitability guidelines for each potential store site. Specifically, we
+target well trafficked sites at which the demographics fit our consumer profile
+and seek new locations where the projected fixed annual rent expense stays
+within our guidelines. By setting these guidelines, we seek to identify stores
+that will contribute to our overall profitability both in the near and longer
+terms. 
+Department Stores. We
+currently sell to over 1,900 doors of 17 department stores throughout the United
+States. Our major accounts include Macy’s, Nordstrom, Dillard’s and Lord &
+Taylor. 
+We
+provide merchandising support to our department store customers which includes
+in-store fixtures and signage, supervision of displays and merchandising of our
+various product lines. Our wholesale merchandising effort includes the creation
+of in-store concept shops, where a broader collection of our branded products
+are showcased. These in-store concept shops create an environment that is
+consistent with our image and are designed to enable the retailer to display and
+sell a greater volume of our products per square foot of retail space. In
+addition, these in-store concept shops encourage longer term commitment by the
+retailer to our products and enhance consumer brand awareness. 
+In
+addition to merchandising support, our key account executives maintain weekly
+communications with their respective accounts to guide them in placing orders
+and to assist them in managing inventory, assortment and retail sales. We
+leverage our sell-through data gathered at our 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,
+which reduces markdown exposure at season’s end. 
+Specialty Stores/Catalog
+Sales. We currently sell to specialty store locations throughout the
+United States. Our major specialty store accounts include DSW, Famous Footwear
+and Journeys. We offer our specialty store accounts the same merchandising,
+sell-through and inventory tracking support offered to our department store
+accounts. Sales of our products are also made through various catalogs,
+such as Victoria’s Secret. 
+Internet Sales. We operate an
+Internet website, www.stevemadden.com, where customers can purchase numerous
+styles of our Madden Women’s, Steven and Madden Men’s as well as selected styles
+of Madden Girl, footwear and accessory products. 
+International 
+Our
+products are available in many countries and territories worldwide via several
+retail selling and distribution agreements. Under the terms of the various
+agreements, the distributors and retailers are generally required to open a
+minimum number of stores each year and to pay us a fee for each pair of footwear
+purchased, and in many cases, an additional sales royalty as a percentage of
+sales or a predetermined amount per unit of sale. Distributors are required to
+purchase a specified minimum number of products within specified periods. The
+agreements we have in place expire at various times through December 31, 2014
+and include renewal options. These agreements are exclusive in their specific
+territories, which include China, Canada, Mexico, the United Kingdom,
+Israel, UAE, Turkey, Australia, Korea, Morocco, and several countries in
+Southeast Asia, Europe and Central and South America. 
+6 
+Competition 
+The
+fashion industry is highly competitive. We compete with specialty shoe and
+accessory companies as well as companies with diversified footwear product
+lines, such as Nine West, Skechers, Kenneth Cole, Nike, Guess and Jessica
+Simpson. Our competitors may have greater financial and other resources than us.
+We believe effective advertising and marketing, fashionable styling, high
+quality, value and fast manufacturing turnaround are the most important
+competitive factors and intend to continue to employ these elements as we
+develop our products. However, we cannot be certain that we will be able to
+compete successfully against our current and future competitors, or that
+competitive pressures will not have a material adverse effect on our business,
+financial condition and results of operations. 
+Marketing
+and Sales 
+We have
+focused on creating an integrated brand building program to establish Steve
+Madden as a leading designer of fashion footwear for style-conscious young women
+and men. Principal marketing activities include product placements in lifestyle
+and fashion magazines, personal appearances by our founder and Creative and
+Design Chief, Steve Madden, and in-store promotions. In addition, we continue to
+promote our e-commerce website (www.stevemadden.com) where customers can
+purchase products under the brands Steve Madden, Steven, Steve Madden Men’s and
+selected styles from Madden Girl footwear, as well as view exclusive content,
+participate in contests and “live chat” with customer service
+representatives. 
+Management
+Information Systems (MIS) Operations 
+Sophisticated
+information systems are essential to our ability to maintain our competitive
+position and to support continued growth. We operate on a dual AS/400 system
+which provides system support for all aspects of our business, including
+manufacturing purchase orders, customer purchase orders, order allocations,
+invoicing, accounts receivable management, quick response replenishment,
+point-of-sale support and financial and management reporting functions. We have
+a PKMS bar coded warehousing system that is integrated with the wholesale system
+in order to provide accurate inventory positions and quick response size
+replenishment for our customers. In addition, we have installed an EDI system
+which provides a computer link between us and certain wholesale customers that
+enables both the customer and us to monitor purchases, shipments and invoicing.
+The EDI system also improves our ability to respond to customer inventory
+requirements on a weekly basis. 
+Intellectual
+Property 
+Trademarks 
+We own
+numerous trademarks including Steve Madden®, Steve Madden plus Design®, Steven
+by Steve Madden® and various PEACE LOVE SHOES designs. As of December 31, 2009,
+we have 216 U.S. and internationally registered trademarks or trademark
+applications pending in the trademark offices of 67 countries around the
+world including the U.S. From time to time we adopt new trademarks in connection
+with the marketing of new product lines. We believe that our trademarks have
+significant value and are important to the marketing of our products,
+identifying the Company and distinguishing our products from the products of
+others. We consider our Steve Madden ® , Steve
+Madden plus Design®, Steven by Steve Madden® and the various PEACE LOVE SHOES
+design marks to be among our most valuable assets and have registered these
+marks in numerous countries and in numerous International Classes. We act
+aggressively to register and vigorously to protect our trademarks against
+infringement. There can be no assurance, however, that we will be able to
+effectively obtain rights to our marks throughout all of the countries of the
+world. Moreover, no assurance can be given that others will not assert rights in
+or ownership of, our marks and other proprietary rights or that we will be able
+to resolve any such conflicts successfully. Our failure to protect such rights
+from unlawful and improper appropriation may have a material adverse effect on
+our business, financial condition, results of operations and
+liquidity. 
+7 
+Trademark
+Licensing 
+We
+believe that expanding the Company’s presence beyond footwear and accessories is
+a logical extension of the Company’s brands. Therefore, on October 20, 2009, we
+licensed our Steve Madden® mark for the design, manufacture and worldwide
+distribution of women’s fashion apparel and, on January 7, 2010, we licensed our
+Steve Madden® and Steven by Steve Madden® marks for the design, manufacture and
+worldwide distribution of women’s fashion jewelry. The new fashion apparel and
+jewelry lines, which will initially ship in the spring and fall of 2010,
+respectively, join our existing licenses for cold weather accessories,
+sunglasses, eyewear, outerwear, bedding and hosiery offerings. Our licensees pay
+us a royalty and, in substantially all of our license agreements, an advertising
+fee equal to a percentage of net sales and a minimum royalty and advertising fee
+in the event that specified net sales targets are not achieved. See Note A[13]
+to our Consolidated Financial Statements included in this Annual Report on Form
+10-K for additional disclosure regarding these licensing
+arrangements. 
+In addition to out-licenses of our
+trademarks, we also license from third parties certain marks used in connection
+with certain of our product lines. We have a license from Betsey Johnson LLC
+providing the right to use the Betsey Johnson® and Betseyville® trademarks in
+connection with the sale and marketing of handbags, small leather goods, belts
+and umbrellas. In addition, we have licenses from Dualstar Entertainment Group,
+LLC under which the Company has the right to use the Olsenboye® trademark in
+connection with the sale and marketing of footwear and accessories and the
+Elizabeth and James® trademark in connection with the sale and marketing of
+footwear. We also hold a license from Phat Fashions LLC to design, manufacture
+and distribute women’s footwear, handbags and belts and related accessories
+under the Fabulosity® brand and a license from Jones Investment Co. Inc. to use
+the l.e.i.® trademark in connection with the marketing and sale of women’s
+footwear exclusively to Wal-Mart. We also hold a license from Dafu Licensing,
+Inc. to design, manufacture and distribute handbags and belts and related
+accessories under the DF Daisy Fuentes® and the Daisy Fuentes® brands. We also
+hold a license from IP Holdings LLC to sell Candie’s® banded footwear to Kohl’s.
+Substantially all of these licensing agreements require us to make royalty and
+advertising payments to the licensor equal to a percentage of our net sales and
+a minimum royalty and advertising payment in the event that specified net sales
+targets are not achieved. 
+See Item
+7, “Management’s Discussion and Analysis of Financial Condition and Results of
+Operations” and Note L[4] to our Consolidated Financial Statements included in
+this Annual Report on Form 10-K for additional information relating to each of
+the above referenced licensing arrangements. 
+Employees 
+On
+February 5, 2010, we employed approximately 1,370 employees, of whom
+approximately 700 work on a full-time basis and approximately 670 work on a
+part-time basis, most of whom work in the Retail segment. All of our employees
+are located in the United States with the exception of approximately 30
+employees located in Hong Kong and China who perform quality control and
+administrative duties. None of our employees are represented by a union. Our
+management considers relations with our employees to be good. The Company has
+never experienced a material interruption of its operations due to a labor
+dispute. 
+Seasonality 
+Historically,
+our merchandising businesses have experienced holiday retail seasonality. In
+addition to seasonal fluctuations, our operating results fluctuate quarter to
+quarter as a result of the timing of holidays, weather, the timing of larger
+shipments of footwear, market acceptance of our products, product mix, pricing
+and presentation of the products offered and sold, the hiring and training of
+additional personnel, inventory write downs for obsolescence, the cost of
+materials, the product mix between wholesale, retail and licensing businesses,
+the incurrence of other operating costs and factors beyond our control, such as
+general economic conditions and actions of competitors. 
+Backlog 
+We had
+unfilled wholesale customer orders of $151.7 million and $90.5 million, as of
+February 21, 2010 and 2009, respectively. Our backlog at a particular time
+is affected by a number of factors, including seasonality, timing of market
+weeks and wholesale customer purchases of our core basic products through our
+open stock program. Accordingly, a comparison of backlog from period to period
+may not be indicative of eventual shipments. 
+8 
+ITEM
+1A 
+RISK
+FACTORS 
+You
+should carefully consider the risks and uncertainties we describe below and the
+other information in this Annual Report on Form 10-K before deciding to invest
+in, sell or retain shares of our common stock. These are not the only risks and
+uncertainties that we face. Additional risks and uncertainties that we do not
+currently know about or that we currently believe are immaterial, or that we
+have not predicted, may also harm our business operations or adversely affect
+us. If any of these risks or uncertainties actually occurs, our business,
+financial condition, results of operations and liquidity could be materially
+harmed. 
+Fashion Industry
+Risks . Our
+success depends in significant part upon our 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 our
+products will correspond to the changes in taste and demand or that we will be
+able to successfully market products that respond to such trends. If we misjudge
+the market for our products, we may be faced with significant excess inventories
+for some products and missed opportunities for others. In addition, misjudgments
+in merchandise selection could adversely affect our image with our customers
+resulting in lower sales and increased markdown allowances for customers which
+could have a material adverse effect on our business, financial condition,
+results of operations and liquidity. 
+The
+industry in which we operate 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. There can be no assurance that we will be
+able to grow or even maintain our current level of 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. The recent volatility and
+disruption of global economic and financial market conditions has led to
+declines in consumer confidence and spending in the United States and
+internationally. Further deterioration or a continued weakness of economic and
+financial market conditions for an extended period of time could have a material
+adverse effect on our business, financial condition, results of operations and
+liquidity. 
+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 further consolidate, undergo restructurings or reorganizations, or realign
+their affiliations, any of which could decrease the number of stores that carry
+our 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 our business or financial condition, results of operations and
+liquidity, there can be no assurance as to the future effect of any such
+changes. 
+Economic
+Uncertainty and Political Risks. Our opportunities for long-term growth
+and profitability are accompanied by significant challenges and risks,
+particularly in the near term. Specifically, our business is dependent on
+consumer demand for our products. We believe that declining consumer confidence
+accompanied with changes in credit availability, interest rates, energy prices,
+unemployment rates and consumers’ disposable income negatively impacted the
+level of consumer spending for discretionary items during the years ended
+December 31, 2008 and 2009. Despite the worsening retail environment, in 2009 we
+achieved a substantial revenue growth in the Wholesale segment that was
+partially offset by a small decrease in revenues in the Retail segment. A
+continued weak economic environment could have a negative effect on the
+Company’s sales and results of operations during the year ending December 31,
+2010 and thereafter. In addition, unstable political conditions in some parts of
+the world, including potential or actual international conflicts, or the
+continuation or escalation of terrorism, could have a material adverse effect on
+our business, financial condition, results of operations and
+liquidity. 
+Inventory
+Management . The
+fashion-oriented nature of our products and the rapid changes in customer
+preferences leave us vulnerable to an increased risk of inventory obsolescence.
+Thus, our ability to manage our inventories properly is an important factor in
+our 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. Our inability to
+effectively manage our inventory could have a material adverse effect on our
+business, financial condition, results of operations and liquidity. 
+9 
+Dependence upon
+Customers and Risks Related to Extending Credit to Customers . Our customers consist
+principally of major department stores, mid-tier department stores, better
+specialty stores and independently-owned boutiques. Certain of our department
+store customers, including some under common ownership, account for significant
+portions of our wholesale business. 
+We
+generally enter into a number of purchase order commitments with our customers
+for each of our lines every season and do not enter into long-term agreements
+with any of our customers. Therefore, a decision by a significant customer,
+whether motivated by competitive conditions, financial difficulties or
+otherwise, to decrease the amount of merchandise purchased from us or to change
+its manner of doing business could have a material adverse effect on our
+business, financial condition, results of operations and liquidity. 
+We sell
+our products primarily to retail stores across the United States and extend
+credit based on an evaluation of each customer’s financial condition, usually
+without collateral. While various retailers, including some of our customers,
+have experienced financial difficulties in the past few years which increased
+the risk of extending credit to such retailers, our losses due to bad debts have
+been limited. Pursuant to the terms of our factoring agreement, our factor,
+Rosenthal & Rosenthal, Inc., currently assumes the credit risk related to
+approximately 83% of our accounts receivable. However, financial
+difficulties of a customer could cause us to curtail business with such customer
+or require us to assume more credit risk relating to such customer’s accounts
+receivable. 
+Impact of Foreign
+Manufacturers; Custom Duties . Virtually all of our products are
+purchased through arrangements with a number of foreign manufacturers, primarily
+from China, Mexico, Brazil, Italy, Spain and India. 
+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 our 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 our business, financial condition, results of
+operations and liquidity. We do not believe that any such economic or political
+condition will materially affect our ability to purchase products, since a
+variety of materials and alternative sources are available. However, we cannot
+be certain that we will be able to identify such alternative sources without
+delay, if at all, or without greater cost to us. Our inability to identify and
+secure alternative sources of supply in this situation could have a material
+adverse effect on our business, financial condition, results of operations and
+liquidity. 
+Our
+imported products are also subject to United States custom duties. The United
+States and the countries in which our 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 our business, financial condition, results of
+operations and liquidity. 
+Possible Adverse
+Impact of Manufacturers’ Inability to Manufacture in a Timely Manner, Meet
+Quality Standards or to Use Acceptable Labor Practices . As is common in
+the footwear industry, we contract for the manufacture of virtually all of
+our products to our specifications through foreign manufacturers. We do not own
+or operate any manufacturing facilities and, therefore, we are dependent upon
+third parties for the manufacture of all of our products. The inability of a
+manufacturer to ship orders of our products in a timely manner or to meet our
+quality standards could cause us to miss the delivery date requirements of our
+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 our business, financial condition, results of
+operations and liquidity. 
+Although
+we enter 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, we do 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 we believe that other
+facilities are available for the manufacture of our products, there can be no
+assurance that such facilities would be available to us on an immediate basis,
+if at all, or that the costs charged to us by such manufacturers would not be
+greater than those presently paid. 
+10 
+We do not
+control our licensing partners or independent manufacturers or their labor
+practices. The violation of labor or other laws by an independent manufacturer
+of ours or by one of our licensing partners, or the divergence of a
+manufacturer’s or a licensing partner’s labor practices from those generally
+accepted as ethical in the United States, could have a material adverse effect
+on our business, financial condition, results of operations and
+liquidity. 
+Intense Industry
+Competition . The
+fashion footwear industry is highly competitive and barriers to entry are low.
+Our competitors include specialty companies as well as companies with
+diversified product lines. The recent market 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
+Nine West, Skechers, Kenneth Cole, Nike, Guess and Jessica Simpson may have
+significantly greater financial and other resources than we do and there can be
+no assurance that we 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 our business, financial condition, results of
+operations and liquidity. We believe effective advertising and marketing,
+branding of the Steve Madden® trademark, fashionable styling, high quality and
+value are the most important competitive factors and we plan to continue to
+employ these elements as we develop our products. Our inability to effectively
+advertise and market our products could have a material adverse effect on our
+business, financial condition, results of operations and liquidity. 
+Expansion of
+Retail Business . 
+Our continued growth depends to a significant degree on further developing the
+Steve Madden, Stevies, Steven, Madden Girl, Steve Madden Men’s, Steve Madden
+Fix, Candies, Elizabeth and James, Olsenboye and l.e.i. brands, creating new
+product categories and businesses and operating company-owned Steve Madden and
+Steven stores on a profitable basis. During the year ended December 31, 2009, we
+opened two, closed seven and licensed out three Steve Madden retail stores and
+have plans to open one to three and close six to nine stores in the year ending
+December 31, 2010. We also remodeled seven existing stores. Our future
+expansion plan 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 us in our existing markets. There can be no
+assurance that we 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. Our retail expansion is dependent on a number of
+factors, including our ability to locate and obtain favorable store sites, the
+performance of our wholesale and retail operations, and our ability 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 our
+comparable store sales results can be maintained or will increase in the future.
+In addition, there can be no assurance that our strategies to increase other
+sources of revenue, which may include expansion of our licensing activities,
+will be successful or that our overall sales or profitability will increase or
+not be adversely affected as a result of the implementation of such retail
+strategies. 
+Management of
+Growth . Our
+operations have increased and will continue to increase demand on our
+managerial, operational and administrative resources. We have recently invested
+significant resources in, among other things, our management information systems
+and hiring and training new personnel. However, in order to manage currently
+anticipated levels of future demand, we may be required to, among other things,
+expand our distribution facilities, establish relationships with new
+manufacturers to produce our product, and continue to expand and improve our
+financial, management and operating systems. There can be no assurance that we
+will be able to manage future growth effectively and a failure to do so could
+have a material adverse effect on our business, financial condition, results of
+operations and liquidity. 
+Seasonal and
+Quarterly Fluctuations .
+Our 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 our products, the mix, pricing and presentation of the products offered and
+sold, the hiring and training of additional personnel, inventory write downs for
+obsolescence, the cost of materials, the product mix between wholesale, retail
+and licensing businesses, the incurrence of other operating costs and factors
+beyond our control, such as general economic conditions and actions of
+competitors. In addition, we expect that our 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. 
+11 
+Trademark
+Protection . We
+believe that our trademarks and other proprietary rights are important to our
+success and our competitive position. Accordingly, we devote substantial
+resources to the establishment and protection of our marks on a worldwide basis.
+Nevertheless, there can be no assurance that the actions taken by us to
+establish and protect our marks and other proprietary rights will be adequate to
+prevent imitation of our products by others or to prevent others from seeking to
+block sales of our products on the basis that our products 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 ours or that we 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. Our
+failure to establish and then protect such proprietary rights from unlawful and
+improper utilization could have a material adverse effect on our business,
+financial condition, results of operations and liquidity. 
+Foreign Currency
+Fluctuations . We
+make approximately 99% of our purchases in U.S. dollars. However, we source
+substantially all of our products overseas and, as such, the cost of these
+products may be affected by changes in the value of the relevant currencies.
+Changes in currency exchange rates may also affect the relative prices at which
+we and our foreign competitors sell products in the same market. There can be no
+assurance that foreign currency fluctuations will not have a material adverse
+effect on our business, financial condition, results of operations and
+liquidity. 
+Dependence on Key
+Personnel. The future of our
+business depends to a significant degree on the skills and efforts of our
+Creative and Design Chief, Steven Madden, and our senior executives. If we lose
+the services of our Creative and Design Chief or any of our senior executives,
+and especially if any of our executives joins a competitor or forms a competing
+company, our business and financial performance could be seriously harmed. A
+loss of our Creative and Design Chief’s or any of our executive officers’
+skills, knowledge of the industry, contacts and expertise could cause a setback
+to our operating plan and strategy. 
+Outstanding
+Options . As of
+March 9, 2010, there were outstanding options to purchase an aggregate of
+approximately 1,076,000 shares of our common stock. Holders of such
+options are likely to exercise them when the market price of our stock is
+significantly higher than the exercise price of the options. Further, while
+options are outstanding, they may adversely affect the terms on which we could
+obtain additional capital, if required. 
+ITEM
+1B 
+UNRESOLVED STAFF
+COMMENTS 
+None. 
+ITEM
+2 
+PROPERTIES 
+We lease
+approximately 41,900 square feet for our corporate headquarters and sample
+production facilities at 52-16 Barnett Avenue, Long Island City, NY 11104
+pursuant to a lease which expires on June 30, 2013. The Steve Madden showroom is
+located at 1370 Avenue of the Americas, New York, NY. All of our brands are
+displayed for sale from this 9,917 square foot space. The lease for our showroom
+expires on February 28, 2013. 
+We lease
+approximately 20,000 square feet for our Accessories Division’s offices and
+showroom space at 10 West 33rd Street, New York, NY. The lease expires on
+December 31, 2014. 
+We lease
+approximately 6,500 square feet for our Madden Zone Division’s office space at
+17-19 West 34th Street, New York, NY. The initial term of the lease expires on
+April 30, 2010 with an option, at our election, to extend it on a month-to-month
+basis that can be terminated by either party with 30 days’ prior written
+notice. 
+We
+maintain approximately 7,200 square feet as a storage facility at 25-15 Borough
+Place, Woodside, NY. The lease for this space expires on October 31,
+2013. 
+We own a
+building that is approximately 2,200 square feet that is located across the
+street from our executive offices at 38-35 Woodside Avenue, Long Island City, NY
+11104. 
+12 
+We lease
+approximately 3,600 square feet for office space in Kwai Chung, Hong Kong. This
+lease will expire on March 4, 2011. 
+In
+addition, we lease approximately 4,825 square feet for office space in Kuangdong
+Province, China. This lease will expire on January 31, 2013. 
+All of
+our retail stores are leased pursuant to leases that, under their original
+terms, extend for an average of ten years. A majority of the leases include
+clauses that provide for contingent rental payments if gross sales exceed
+certain targets and, as such, a majority of the leases enable us and/or the
+landlord to terminate the lease in the event that our 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 our retail store leases, including our three
+licensed stores and two unoccupied locations, expire as follows: 
+Years
+Lease Terms Expire 
+Number
+of Stores 
+2010 
+12 
+2011 
+14 
+2012 
+8 
+2013 
+13 
+2014 
+5 
+2015 
+5 
+2016 
+6 
+2017 
+14 
+2018 
+10 
+2019 
+6 
+2020 
+1 
+ITEM
+3 
+LEGAL
+PROCEEDINGS 
+On June
+24, 2009, The Center For Environmental Health filed a lawsuit, Center for Environmental Health v.
+Lulu NYC, LLC, Steve Madden, Ltd., Steve Madden Retail, Inc., et al. ,
+Case No. RG09459448, in California Superior Court, Alameda County, against the
+Company and dozens of other California retailers and vendors of leather, vinyl,
+and/or imitation leather handbags, belts, and shoes alleging that the retailers
+and vendors failed to warn that certain of such products may expose California
+citizens to lead and lead compounds. The parties have been in negotiations to
+resolve the matters informally and have finalized the substance of a consent
+judgment, the terms of which are not material to the Company’s Consolidated
+Financial Statements. 
+On June
+24, 2009, a class action lawsuit Shahrzad Tahvilian, et al. v. Steve
+Madden Retail, Inc. and Steve Madden, Ltd. , Case No. BC 414217, was filed
+in the Superior Court of California, Los Angeles County, against the Company and
+its wholly-owned subsidiary, Steven Madden Retail, Inc.. The complaint, which
+seeks unspecified damages, alleges violations of California labor laws,
+including, among other things, that the Company failed to provide mandated meal
+breaks to its employees and failed to provide overtime pay as required. The
+Company filed an answer in the litigation denying all allegations stated in the
+complaint. The parties have agreed to submit the claim to private mediation,
+which is scheduled for March 29, 2010. The Company, with the advice of legal
+counsel, has evaluated the liability in this case and believes that it is not
+likely to exceed $1 million. Accordingly, the Company accrued $1 million in the
+fiscal year 2009. The accrual is subject to change to reflect the status of this
+matter. 
+13 
+On August
+10, 2005, following the conclusion of an audit of the Company conducted by
+auditors of U.S. Customs and Border Protection (“U.S. Customs”) during 2004 and
+2005, U.S. Customs issued a report that asserts that certain commissions that
+the Company treated as “buying agents’ commissions” (which are non-dutiable)
+should be treated as “selling agents’ commissions” and hence are dutiable. In
+September of 2007, U.S. Customs notified the Company that it had finalized its
+assessment of the underpaid duties to be $1.4 million. On October 20, 2005, U.S.
+Immigration and Customs Enforcement notified the Company’s legal counsel that a
+formal investigation of the Company’s importing practices had been commenced as
+a result of the audit. The Company has contested the conclusions of the U.S.
+Customs audit and filed a request for review and issuance of rulings thereon by
+U.S. Customs Headquarters, Office of Regulations and Rulings, under internal
+advice procedures. On November 28, 2007, U.S. Customs Headquarters informed the
+Company that its request for internal advice had been accepted and was under
+review. All efforts by U.S. Customs to collect additional duties, fees, interest
+or penalties have been stayed pending final decision of U.S. Customs
+Headquarters. In the event that the U.S. Customs auditors’ position is
+ultimately upheld, the Company may be subject to monetary penalties. A final
+determination of the matter may not occur for several months or even years. The
+Company, with the advice of legal counsel, has evaluated the Company’s potential
+liability in this matter, including additional duties, interest and penalties,
+and believes that it is not likely to exceed $2.7 million. Therefore, as of
+December 31, 2007, the Company had recorded a total reserve of $2.7 million that
+was increased by $256 thousand in 2008 and $89 thousand in 2009 to reflect
+anticipated additional interest costs, bringing the reserve to $3 million as of
+December 31, 2009. Such reserve is subject to change to reflect the status of
+this matter. 
+We have
+been named as a defendant in certain other lawsuits in the normal course of
+business. In the opinion of management, after consulting with legal counsel, the
+liabilities, if any, resulting from these matters should not have a material
+effect on our financial position or results of operations. 
+ITEM
+4 
+SUBMISSION OF MATTERS TO A VOTE
+OF SECURITY HOLDERS 
+No
+matters were submitted to a vote of the holders of our common stock during the
+last quarter of our fiscal year ended December 31, 2009. 
+PART II 
+ITEM
+5 
+MARKET FOR REGISTRANT’S COMMON
+EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
+SECURITIES 
+Market Information. Our
+shares of common stock have traded on the NASDAQ Global Select Market since
+August 1, 2007 and were traded on the NASDAQ National Market prior to that date.
+The following table sets forth the range of high and low closing sales prices
+for our common stock during each fiscal quarter during the two-year period ended
+December 31, 2009 as reported by the NASDAQ Global Select. The trading volume of
+our securities fluctuates and may be limited during certain periods. As a
+result, the liquidity of an investment in our securities may be adversely
+affected. 
+Common
+Stock 
+High 
+Low 
+High 
+Low 
+2009 
+2008 
+Quarter
+ended March 31, 2009 
+$ 
+22.80 
+$ 
+13.57 
+Quarter
+ended March 31, 2008 
+$ 
+19.52 
+$ 
+14.98 
+Quarter
+ended June 30, 2009 
+$ 
+30.15 
+$ 
+19.04 
+Quarter
+ended June 30, 2008 
+$ 
+22.74 
+$ 
+16.05 
+Quarter
+ended September 30, 2009 
+$ 
+37.25 
+$ 
+23.87 
+Quarter
+ended September 30, 2008 
+$ 
+28.36 
+$ 
+18.13 
+Quarter
+ended December 31, 2009 
+$ 
+42.91 
+$ 
+35.68 
+Quarter
+ended December 31, 2008 
+$ 
+24.60 
+$ 
+14.20 
+Holders. As of March 9, 2010,
+there were 18,348,786 shares of common stock outstanding and 76 holders of
+record. 
+14 
+Dividends . With the exception
+of a special cash dividend paid in November 2005 and in November 2006, we have
+not declared or paid any cash dividends in the past to the holders of our common
+stock and do not currently anticipate declaring or paying any cash dividends in
+the foreseeable future. We intend to retain earnings, if any, to finance the
+development and expansion of our business. Future dividend policy will be
+subject to the discretion of our Board of Directors and will be contingent upon
+future earnings, if any, our financial condition, capital requirements, general
+business conditions, and other factors. Therefore, we can give no assurance that
+any cash dividends of any kind will be paid to holders of our common stock in
+the future. 
+Equity Compensation Plans .
+Information regarding our equity compensation plans as of December 31, 2009 is
+disclosed in Item 12 ,
+“Security Ownership of Certain Beneficial Owners and Management and Related
+Stockholder Matters.” 
+Issuer Repurchases of Equity
+Securities. We did not repurchase any shares of our common stock during
+the fourth quarter of fiscal 2009. In February and August of 2007, our Board of
+Directors authorized increases of our previously announced share repurchase
+program of $30 million and $37 million, respectively. At December 31, 2009, an
+aggregate of $2 million remained authorized to repurchase our common stock. The
+program has no set
+expiration date. 
+15 
+Performance Graph . The
+following graph compares the yearly percentage change in the cumulative total
+stockholder return on our common stock during the period beginning on December
+31, 2004, and ending on December 31, 2009, with the cumulative total return on
+the Russell 2000 Index and the S&P 500 Footwear Index. The comparison
+assumes that $100 was invested on December 31, 2004 in our common stock and in
+the foregoing indices and assumes the reinvestment of dividends. 
+12/31/2004 
+12/31/2005 
+12/31/2006 
+12/31/2007 
+12/31/2008 
+12/31/2009 
+Steven
+Madden, Ltd. 
+$ 
+100.00 
+$ 
+154.98 
+$ 
+279.08 
+$ 
+159.07 
+$ 
+169.57 
+$ 
+328.00 
+Russell
+2000 Index 
+$ 
+100.00 
+$ 
+103.32 
+$ 
+120.89 
+$ 
+117.57 
+$ 
+76.65 
+$ 
+95.98 
+S&P
+500 Footwear Index 
+$ 
+100.00 
+$ 
+99.42 
+$ 
+114.97 
+$ 
+149.17 
+$ 
+118.42 
+$ 
+153.42 
+16 
+ITEM 6 
+SELECTED
+FINANCIAL DATA 
+The following selected financial data has been derived from our audited
+Consolidated Financial Statements. The Income Statement Data relating to 2009,
+2008 and 2007, and the Balance Sheet data as of December 31, 2009 and 2008
+should be read in conjunction with the information provided in Item 7,
+“Management’s Discussion and Analysis of Financial Condition and Results of
+Operations” and the notes to our Consolidated Financial Statements appearing
+elsewhere in this Annual Report on Form 10-K. 
+INCOME
+STATEMENT DATA 
+Year
+Ended December 31, 
+(in
+thousands, except per share data) 
+2009 
+2008 
+2007 
+2006 
+2005 
+Net
+sales 
+$ 
+503,550 
+$ 
+457,046 
+$ 
+431,050 
+$ 
+475,163 
+$ 
+375,786 
+Cost
+of sales 
+287,361 
+270,222 
+257,646 
+276,734 
+236,631 
+Gross
+profit 
+216,189 
+186,824 
+173,404 
+198,429 
+139,155 
+Commissions
+and licensing fee income - net 
+19,928 
+14,294 
+18,351 
+14,246 
+7,119 
+Operating
+expenses 
+(157,149 
+) 
+(156,212 
+) 
+(138,841 
+) 
+(134,377 
+) 
+(114,185 
+) 
+Impairment
+of goodwill 
+— 
+— 
+— 
+— 
+(519 
+) 
+Income
+from operations 
+78,968 
+44,906 
+52,914 
+78,298 
+31,570 
+Interest
+income 
+2,096 
+2,620 
+3,876 
+3,703 
+2,554 
+Interest
+expense 
+(93 
+) 
+(207 
+) 
+(65 
+) 
+(100 
+) 
+(164 
+) 
+Loss
+on sale of marketable securities 
+(182 
+) 
+(1,013 
+) 
+(589 
+) 
+(967 
+) 
+(500 
+) 
+Income
+before provision for income taxes 
+80,789 
+46,306 
+56,136 
+80,934 
+33,460 
+Provision
+for income taxes 
+30,682 
+18,330 
+20,446 
+34,684 
+14,260 
+Net
+Income 
+$ 
+50,107 
+$ 
+27,976 
+$ 
+35,690 
+$ 
+46,250 
+$ 
+19,200 
+Basic
+income per share 
+$ 
+2.78 
+$ 
+1.53 
+$ 
+1.73 
+$ 
+2.21 
+$ 
+0.95 
+Diluted
+income per share 
+$ 
+2.73 
+$ 
+1.51 
+$ 
+1.68 
+$ 
+2.09 
+$ 
+0.92 
+Basic
+weighted average shares of common stock 
+18,045 
+18,325 
+20,647 
+20,906 
+20,112 
+Effect
+of potential shares of common stock from exercise of
+options 
+278 
+194 
+645 
+1,195 
+806 
+Diluted
+weighted average shares of common stock outstanding 
+18,323 
+18,519 
+21,292 
+22,101 
+20,918 
+Dividends
+paid per share of common stock 
+$ 
+0.00 
+$ 
+0.00 
+$ 
+0.00 
+$ 
+1.00 
+$ 
+0.67 
+BALANCE
+SHEET DATA 
+At
+December 31, 
+2009 
+2008 
+2007 
+2006 
+2005 
+Total
+assets 
+$ 
+326,859 
+$ 
+284,693 
+$ 
+266,521 
+$ 
+251,392 
+$ 
+211,728 
+Working
+capital 
+139,007 
+122,086 
+121,138 
+151,711 
+114,066 
+Noncurrent
+liabilities 
+6,710 
+5,801 
+3,470 
+3,136 
+2,757 
+Stockholders’
+equity 
+$ 
+267,787 
+$ 
+206,242 
+$ 
+215,334 
+$ 
+211,924 
+$ 
+182,065 
+17 
+ITEM 7 
+MANAGEMENT’S
+DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
+OPERATIONS 
+The
+following discussion of our Financial Condition and Results of Operations should
+be read in conjunction with our audited Consolidated Financial Statements and
+notes thereto appearing elsewhere in this Annual Report on Form
+10-K. 
+Overview 
+($
+in thousands, except retail sales data per square foot and earnings per share
+data) 
+Steven
+Madden, Ltd. and its subsidiaries (collectively the “Company”) design, source,
+market and sell fashion-forward footwear for women, men and children. In
+addition, we design, source, market and sell name brand and private label
+fashion handbags and accessories, through our Accessories Division. We
+distribute products through department and specialty stores, our retail stores
+and our e-commerce website throughout the United States and through special
+distribution arrangements in Asia, Canada, Europe, Central and South America,
+Australia and Africa. Our product line includes a broad range of updated styles
+which are designed to establish or capitalize on market trends, complemented by
+core products. We have established a reputation for our creative designs,
+popular styles and quality products at accessible price points. 
+Our
+business is comprised of five distinct segments (Wholesale Footwear, Wholesale
+Accessories, Retail, First Cost and Licensing). Our Wholesale Footwear segment
+includes seven core divisions: Steve Madden Women’s, Steve Madden Men’s, Madden
+Girl, Steven, Steve Madden Kids, Elizabeth and James and our international
+business. Our Wholesale Accessories segment, through license agreements,
+includes Betsey Johnson®, Daisy Fuentes® and Olsenboye® accessories brands.
+Steven Madden Retail, Inc., our wholly owned retail subsidiary, operates Steve
+Madden and Steven retail stores as well as our e-commerce website. The First
+Cost segment represents activities of a subsidiary which earns commissions for
+serving as a buying agent for footwear products under private labels and
+licensed brands (such as l.e.i.®, Candie’s® and Olsenboye®) for many of the
+country’s large mass-market merchandisers, shoe chains and other off-price
+retailers. In the Licensing segment, the Company licenses its Steve Madden® and
+Steven by Steve Madden® trademarks for use in connection with the manufacturing,
+marketing and sale of cold weather accessories, sunglasses, eyewear, outerwear,
+bedding, hosiery, women’s fashion apparel and jewelry. 
+Prior to
+2009, our international business operated under the “first cost” model and,
+thus, the revenues derived from our international business were included in
+Commissions and Licensing Fees in the Consolidated Statements of Income. In
+order to improve operating efficiencies, and to give our international partners
+better visibility in the process, as of January of 2009, we have changed the
+operating model for our international business to the “wholesale” model. Under
+the “wholesale” model, we will be able to manage inventory levels, improve
+delivery times, and increase our ability to receive payments on a timely basis.
+As a result of this change, commencing with the first quarter of 2009,
+international revenues are now included in the Net Sales line in the
+Consolidated Statements of Income. For the year ended December 31, 2009, our
+international business contributed net sales of $22,055, or 4% of our total net
+sales. 
+Net sales
+for the year ended December 31, 2009 also reflect shifts related to our
+Candie’s® business, which we distribute exclusively to Kohl’s. Pursuant to an
+agreement with Kohl’s, Candie’s® has been transitioned from a wholesale model to
+a “first cost” model and, therefore, revenues for 2009 are included in
+Commissions and Licensing Fees in the Consolidated Statements of Income. As a
+result of this change, net sales for 2009 does not reflect Candies revenue while
+net sales for 2008 reflected revenue of $14,308 for the Candie’s®
+business. 
+Fiscal
+year 2009 was a record year for Steven Madden, Ltd. Consolidated net sales for
+2009 increased to a record $503,550 from $457,046 during 2008. Our gross margin
+increased in the year ended December 31, 2009 to 42.9%, 200 basis points greater
+than the 40.9% achieved in 2008. Net income increased 79% to a record $50,107 in
+2009 from $27,976 in 2008. Diluted earnings per share for the year ended
+December 31, 2009 increased 81% to a record $2.73 per share on 18,323,000
+diluted weighted average shares outstanding compared to $1.51 per share on
+18,519,000 diluted weighted average shares outstanding in 2008. Net cash
+provided by operating activities increased to a record $64,342 in 2009 compared
+to $41,779 in 2008. 
+18 
+We have
+expanded our accessories portfolio through two recent acquisitions. On July 8,
+2009, we acquired certain assets constituting the Zone 88 and Shakedown Street
+(together “Zone 88”) lines of SML Brands, LLC, a subsidiary of Aimee Lynn, Inc,
+which designs and markets primarily private label accessories, principally
+handbags, for mass merchants and mid-tier retailers. The acquisition was
+completed for $1,348 in cash. We believe this acquisition will enable us to
+expand our accessories business in the private label arena with value priced
+customers. Subsequent to our year-end, on February 10, 2010, the Company
+acquired all of the outstanding shares of stock of Big Buddha, Inc. (“Big
+Buddha”) from its sole stockholder, Jeremy Bassan. Founded in 2003, Big Buddha
+designs and markets fashion-forward handbags to specialty retailers, better
+department stores and online retailers. The acquisition was completed for
+$11,000 in cash plus potential earn out payments to Mr. Bassan based on
+financial performance of Big Buddha through March 31, 2013. 
+In
+September 2009, the Company expanded its brand portfolio by entering into a
+license agreement with Dualstar Entertainment Group, LLC, under which the
+Company has the right to use the Olsenboye® trademark in connection with the
+sale and marketing of footwear and accessories exclusively to J.C. Penney. The
+agreement requires the Company to make royalty and advertising payments equal to
+a percentage of net sales and a minimum royalty and advertising payment in the
+event that specified net sales targets are not achieved. The agreement expires
+on December 31, 2011, but is renewable, at our option, for one three-year term,
+if certain conditions are met. 
+In
+addition, we made progress on our stated goal to evolve Steve Madden into a
+global lifestyle brand by entering into two new license agreements. On October
+20, 2009, we signed a license agreement to license our Steve Madden® trademark
+for the design, manufacture and worldwide distribution of women’s fashion
+apparel. On January 7, 2010, we signed a license agreement to license our Steve
+Madden® and Steven by Steve Madden® trademarks for the design, manufacture and
+worldwide distribution of women’s fashion jewelry. The new fashion apparel and
+jewelry lines, which will initially ship in the spring and fall of 2010,
+respectively, join our existing licenses for cold weather accessories,
+sunglasses, eyewear, outerwear, bedding and hosiery offerings. Management is
+pleased to be expanding the Company’s presence beyond footwear and accessories
+and believes the new apparel and jewelry lines mark a very logical extension of
+the Company’s brands. 
+In our
+Retail segment, same store sales (sales of those stores, including the
+e-commerce website, that were in operation throughout 2009 and 2008) increased
+1% in 2009. As of December 31, 2009, we had 89 stores in operation,
+compared to 97 stores as of December 31, 2008. During the year ended
+December 31, 2009, sales per square foot increased to $640 compared to sales per
+square foot of $628 achieved in 2008. 
+As of
+December 31, 2009, our total inventory decreased to $30,453 from $31,597 as of
+December 31, 2008, and our annualized inventory turnover improved to 9.8 times
+in 2009 compared to 8.1 times in 2008. Our accounts receivable average
+collection days improved to 54 days in 2009 compared to 55 days in 2008. As
+of December 31, 2009, we had $154,950 in cash, cash equivalents and marketable
+securities, no short- or long-term debt, and total stockholders’ equity of
+$267,787. 
+19 
+The following tables set forth information on operations for the periods
+indicated: 
+Years
+Ended 
+December
+31 
+($
+in thousands) 
+2009 
+2008 
+2007 
+CONSOLIDATED : 
+Net
+sales 
+$ 
+503,550 
+100 
+% 
+$ 
+457,046 
+100 
+% 
+$ 
+431,050 
+100 
+% 
+Cost
+of sales 
+287,361 
+57 
+270,222 
+59 
+257,646 
+60 
+Gross
+profit 
+216,189 
+43 
+186,824 
+41 
+173,404 
+40 
+Other
+operating income – net of expenses 
+19,928 
+4 
+14,294 
+3 
+18,351 
+4 
+Operating
+expenses 
+157,149 
+31 
+156,212 
+34 
+138,841 
+32 
+Income
+from operations 
+78,968 
+16 
+44,906 
+10 
+52,914 
+12 
+Interest
+and other income – net 
+1,821 
+— 
+1,400 
+— 
+3,222 
+1 
+Income
+before income taxes 
+80,789 
+16 
+46,306 
+10 
+56,136 
+13 
+Net
+income 
+50,107 
+10 
+27,976 
+6 
+35,690 
+8 
+By
+Segment: 
+WHOLESALE SEGMENT : 
+Net
+sales 
+$ 
+379,845 
+100 
+% 
+$ 
+331,407 
+100 
+% 
+$ 
+310,405 
+100 
+% 
+Cost
+of sales 
+232,932 
+61 
+215,026 
+65 
+205,584 
+66 
+Gross
+profit 
+146,913 
+39 
+116,381 
+35 
+104,821 
+34 
+Operating
+expenses 
+86,354 
+23 
+81,593 
+25 
+73,362 
+24 
+Income
+from operations 
+60,559 
+16 
+34,788 
+10 
+31,459 
+10 
+RETAIL SEGMENT : 
+Net
+sales 
+$ 
+123,705 
+100 
+% 
+$ 
+125,639 
+100 
+% 
+$ 
+120,645 
+100 
+% 
+Cost
+of sales 
+54,429 
+44 
+55,196 
+44 
+52,062 
+43 
+Gross
+profit 
+69,276 
+56 
+70,443 
+56 
+68,583 
+57 
+Operating
+expenses 
+70,795 
+57 
+74,619 
+59 
+65,479 
+54 
+Income
+(loss) from operations 
+(1,519 
+) 
+(1 
+) 
+(4,176 
+) 
+(3 
+) 
+3,104 
+3 
+Number
+of stores 
+89 
+97 
+101 
+FIRST COST SEGMENT : 
+Other
+commission income - net of expenses 
+$ 
+16,803 
+100 
+% 
+$ 
+11,567 
+100 
+% 
+$ 
+14,674 
+100 
+% 
+LICENSING SEGMENT: 
+Licensing
+income – 
+net of expenses 
+$ 
+3,125 
+100 
+% 
+$ 
+2,727 
+100 
+% 
+$ 
+3,677 
+100 
+% 
+20 
+RESULTS
+OF OPERATIONS 
+($
+in thousands) 
+Year
+Ended December 31, 2009 vs. Year Ended December 31, 2008 
+Consolidated : 
+Total net
+sales for the year ended December 31, 2009 increased by 10% to $503,550 from
+$457,046 for the comparable period of 2008. A net sales increase of 15%
+generated by the Wholesale segment was partially offset by a 2% decrease in net
+sales generated by the Retail segment. Overall gross profit margin increased to
+42.9% for the year ended December 31, 2009 from 40.9% for the prior year. The
+increase was primarily due to the increase in the Wholesale segment gross profit
+margin to 39% in 2009 compared to 35% in 2008. For the years ended December 31,
+2009 and 2008, operating expenses were $157,149 and $156,212, respectively. As a
+percentage of net sales, operating expenses decreased to 31% compared to 34% in
+2008. Commission and licensing fee income increased to $19,928 for the year
+ended December 31, 2009, compared to $14,294 for the prior year. Net income for
+2009 was $50,107, compared to $27,976 in 2008. 
+Wholesale
+Segment : 
+Net sales
+generated by the Wholesale segment was $379,845, or 75%, and $331,407, or 73%,
+of our total net sales for the years ended December 31, 2009 and 2008,
+respectively. All divisions realized an increase in net sales during the year
+ended December 31, 2009. The Madden Girl Division led the way by posting a 28%
+increase in net sales in 2009. This increase in net sales was the result of a
+deeper market penetration and the strong performance of flat shoes and sandals
+in the second quarter combined with the strong performance of dress boots and
+booties in the second half of the year. Net sales in our Steven Division
+increased by 27% in 2009, primarily due to a significant increase in shipments
+to the Steven Division’s largest customer Nordstrom, combined with the strong
+performance of casual boots during the second half of the year. A 12% increase
+in net sales in 2009 by our Steve Madden Women’s Division was driven by the
+strong performance of flat sandals and wedges during the spring selling season
+and by boots in the third and fourth quarters. A 5% increase in net sales in
+2009 in our Wholesale Accessories segment was due to the $9,279 of nets sales
+contributed by our new Madden Zone Division (established through our Zone 88
+acquisition) combined with an increase in sales of Steve Madden® and Steven by
+Steve Madden® handbags that was partially offset by a decrease of net sales of
+Betsey Johnson® and Betseyville® handbags. Net sales in 2009 for our Madden
+Men’s Division increased 5% primarily due to the strong performance of dress and
+casual shoes during the second half of the year. Finally, the Elizabeth and
+James Division, our new brand that began shipping in the first quarter of 2009,
+contributed net sales of $4,298 in 2009. Net sales for 2009 were also impacted
+by the previously mentioned shifts related to our Candies® and international
+businesses. The net effect of the shift of our Candies® business from a
+“wholesale” model to a “first cost” model, and the reverse shift of our
+international business from a “first cost” model to a “wholesale” model, was an
+increase of net sales in $7,746 during the year ended December 31,
+2009. 
+Gross
+profit margin in the Wholesale segment increased to 39% in 2009 from 35% in the
+prior year, primarily due to a decrease in close out sales combined with
+improved operating efficiencies. For the year ended December 31, 2009, operating
+expenses increased to $86,354 from $81,593 last year, primarily resulting from
+an increase in variable costs due to an increase in sales. As a percentage of
+net sales, operating expenses decreased to 23% in 2009 from 25% in 2008. As a
+result of the increases in net sales and gross margin as offset by higher
+operating expenses, income from operations for the Wholesale segment increased
+74% to $60,559 in 2009 compared to $34,788 in 2008. 
+Retail
+Segment : 
+Net sales
+generated by the Retail segment accounted for $123,705, or 25%, and $125,639, or
+27%, of total Company net sales for the years ended December 31, 2009 and 2008,
+respectively. We opened two new stores, remodeled seven existing stores, closed
+seven under-performing stores and licensed three stores during the year ended
+December 31, 2009. As a result, we had 89 retail stores as of December 31, 2009,
+compared to 97 stores as of December 31, 2008. The 89 stores currently in
+operation include 84 under the Steve Madden brand, four under the Steven brand
+and one e-commerce website. Comparable store sales (sales of those stores,
+including the e-commerce website, that were open for all of 2009 and 2008) for
+the year ended December 31, 2009 increased 1% when compared to the prior year.
+The gross margin in the Retail segment remained at 56% in 2009 and 2008. During
+the year ended December 31, 2009, operating expenses decreased to $70,795, or
+57% of net sales, from $74,619, or 59% of nets sales, in 2008. This decrease is
+due to the reduction of rent, payroll and other operating expenses related to
+the net reduction of eight stores during the year ended December 31, 2009, as
+well as other operational initiatives put in place. 
+21 
+First Cost
+Segment : 
+Income
+from operations in the First Cost segment increased 45% to $16,803 in 2009
+compared to $11,567 in 2008. The main drivers of the increase were the
+growth of our new l.e.i.® brand at Wal-mart, which began shipping in the fourth
+quarter of 2008, followed by the shift of our Candies® business to the First
+Cost segment. In addition, growth in our private label business with Sears
+contributed to this increase in income. These increases were partially offset by
+the shift in our international business from the “first cost” model to a
+“wholesale” model in 2009. 
+Licensing
+Segment: 
+During
+the year ended December 31, 2009, licensing income increased to $3,125 from
+$2,727 last year, primarily due to an increase in sales by several of our
+licensees combined with the incremental revenue provided by our new bedding and
+bath license. 
+Year
+Ended December 31, 2008 vs. Year Ended December 31, 2007 
+Consolidated : 
+Total net
+sales for the year ended December 31, 2008 increased by 6% to $457,046 from
+$431,050 for the comparable period of 2007. A net sales increase of 7% generated
+by the Wholesale segment was complemented by a 4% increase in net sales
+generated by the Retail segment. Overall gross profit margin increased to 41%
+for the year ended December 31, 2008 from 40% for the prior year. An increase in
+the Wholesale gross profit margin to 35% in 2008 compared to 34% in 2007 was
+partially offset by a decrease in the Retail gross profit margin to 56% in 2008
+from 57% in the same period in the prior year. Operating expenses increased in
+2008 to $156,212, or 34% of net sales, from $138,841, or 32% of net sales, in
+2007. $4,921 of this increase is due to the charges related to the resignation
+of our former Chief Executive Officer and Chairman of the Board (“CEO”) in March
+of 2008. Additional expenses associated with our Compo internet business
+acquired in the second quarter of the prior year and our new Steve Madden’s Fix
+Division, which began shipping product in the fourth quarter of the prior year,
+also contributed to the increase in operating expenses. The additional stores in
+operation during the first half of 2008 (which ranged from a net of five
+additional stores on January 1, 2008 to a net of two additional stores on June
+30, 2008) resulted in an increase in payroll, rent and depreciation expenses.
+Finally, we recorded $1,325 of charges related to the closing of two stores
+prior to the end of their prospective lease terms, net of anticipated revenues
+from sub-letting. Commission and licensing fee income decreased to $14,294 for
+the year ended December 31, 2008, compared to $18,351 for the prior
+year. The decrease was due to the decision of several of our private label
+customers to scale back their orders in response to the soft retail environment.
+Including the one-time charge of $4,921 related to the resignation of our former
+CEO, operating income for the year ended December 31, 2008 was $44,906 compared
+to $52,914 in the same period of the prior year. Including the above-mentioned
+one-time charge of $4,921 ($3,002 net of tax effect) related to the resignation
+of our former CEO, net income for 2008 was $27,976, compared to $35,690 in 2007.
+The decrease in net income was primarily due to the decrease in commission and
+licensing fee income and the increase in operating expenses. 
+Wholesale
+Segment : 
+Net sales
+generated by the Wholesale segment was $331,407, or 73%, and $310,405, or 72%,
+of our total net sales for the years ended December 31, 2008 and 2007,
+respectively. The increase in sales was primarily driven by a significant
+sales growth in two of our wholesale divisions. In the Madden Girl Division, a
+66% increase in net sales was the result of a deeper market penetration and a
+strong product performance at retail. A 23% increase in net sales in the
+Accessories Division was due to the strong performance of Betsey Johnson®
+handbags and net sales increases in Steve Madden® and Steven by Steve Madden®
+handbags. In addition, strong boot sales during the second half of 2008 combined
+with a decrease in allowances helped our Steven and Steve Madden Women’s
+Divisions achieve a 15% and 6% increase in net sales, respectively. Finally, our
+two new divisions, Madden Fix, which began shipping product during the fourth
+quarter of 2007, and Fabulosity, contributed incremental net sales of $3,171 and
+$1,166, respectively, during the year ended December 31, 2008. These net
+sales increases were partially offset by net sales decreases in the Steve Madden
+Men’s and Steve Madden Kids Divisions. These net sales decreases are primarily
+the result of the challenging economic environment. During the second half of
+2008, we began to migrate the Candie’s® Division to our commission based First
+Cost segment, which caused sales to decrease in the Candie’s®
+Division. 
+22 
+Gross
+profit margin increased to 35% in the year ended December 31, 2008 from 34% in
+the prior year, primarily due to a significant decrease in markdown allowances
+in the Candie’s® and Steven Divisions. Our Accessories and Steve Madden Women’s
+Divisions also experienced a decrease in markdown activity reflective of their
+strong sales performance and inventory management during the year. Operating
+expenses increased in 2008 to $81,593 compared to $73,362 in the prior year. The
+increase is primarily due to the $4,921 of charges related to the resignation of
+our former Chief Executive Officer and Chairman of the Board in March of 2008.
+An increase in variable selling and selling related expenses reflective of the
+increase in sales also contributed to the increase in operating expenses. Income
+from operations for the Wholesale segment increased to $34,788 for the year
+ended December 31, 2008, compared to $31,459 for the year ended December 31,
+2007. 
+Retail
+Segment : 
+Net sales
+generated by the Retail segment accounted for $125,639, or 27%, and $120,645, or
+28%, of total Company net sales for the years ended December 31, 2008 and 2007,
+respectively. We opened three new stores and closed seven under-performing
+stores during the year ended December 31, 2008. As a result, we had 97 retail
+stores as of December 31, 2008, compared to 101 stores as of December 31, 2007.
+The 97 stores in operation as of December 31, 2008 included 92 under the Steve
+Madden brand, four under the Steven brand and one e-commerce
+website. Comparable store sales (sales of those stores, including the
+e-commerce website, that were open for all of 2008 and 2007) for the year ended
+December 31, 2008 were flat when compared to the prior year. The gross
+margin in the Retail segment decreased to 56% in 2008 from 57% in 2007 primarily
+due to an increase in promotional activity reflective of the challenging
+economic environment. During the year ended December 31, 2008, operating
+expenses increased to $74,619 from $65,479 in the same period of the prior year.
+Several factors contributed to the increase of operating expenses during 2008.
+The additional stores in operation during the first half of the year (which
+ranged from a net of five additional stores on January 1, 2008 to a net of two
+additional stores on June 30, 2008) resulted in an increase in payroll, rent and
+depreciation expenses. In addition, a non-cash write-off of unamortized assets
+associated with the closing of seven stores added to the increase in operating
+expenses. Finally, we recorded $1,325 in charges related to the closing of two
+stores prior to the end of their prospective lease terms, net of anticipated
+revenues from sub-letting. Loss from operations for the Retail segment was
+$(4,176) in 2008 compared to income from operations of $3,104 for
+2007. 
+First Cost
+Segment : 
+The First
+Cost segment generated income from operations of $11,567 for the year ended
+December 31, 2008, compared to $14,674 for the year ended December 31, 2007. The
+decrease was due to the decision of several of our private label customers to
+scale back their orders in response to the soft retail environment. The decrease
+was partially offset by an increase in our international business. 
+LIQUIDITY
+AND CAPITAL RESOURCES 
+($
+in thousands) 
+On July
+10, 2009, we entered into a collection agency agreement with Rosenthal &
+Rosenthal, Inc. (“Rosenthal”) that became effective on September 15, 2009. The
+agreement provides us with a credit facility in the amount of $30,000, having a
+sub-limit of $15,000 on the aggregate face amount of letters of credit, at an
+interest rate based, at our election, upon either the prime rate or LIBOR. The
+agreement can be terminated by Rosenthal at any time with 60 days’ prior written
+notice, or by us at any time after the expiration of the first contract year
+with 60 days’ prior written notice. 
+23 
+As of
+December 31, 2009, we had working capital of $139,007. We had cash and cash
+equivalents of $69,266, investments in marketable securities of $85,684 and we
+did not have any long term debt. 
+Management
+believes that, based upon our current financial position and available cash,
+cash equivalents and marketable securities, as augmented by cash flow from
+operations in 2010, we will meet all of our financial commitments and operating
+needs for at least the next twelve months. 
+OPERATING
+ACTIVITIES 
+($
+in thousands) 
+During
+the year ended December 31, 2009, net cash provided by operating activities was
+$64,342. The primary sources of cash were net income of $49,567, an increase in
+accounts payable and accrued expenses of $10,561 and an increase of accrued
+incentive compensation of $4,445. The primary uses of cash were an increase of
+accounts receivable of $5,169 and an increase in due from factor of
+$15,939. 
+INVESTING
+ACTIVITIES 
+($
+in thousands) 
+During
+the year ended December 31, 2009, we invested $67,265 in marketable securities
+and received $17,543 from the maturities and sales of securities. We also
+paid $4,526 representing the final earn-out payment payable in connection with
+our acquisition of our Daniel M. Friedman Division and paid $1,348 as part of
+the acquisition cost of Zone 88. Additionally, we made capital expenditures of
+$3,399, principally for the remodeling of seven existing stores, the two
+new stores opened during the fiscal year 2009, leasehold improvements to
+our corporate office space and enhancements to operating systems. 
+FINANCING
+ACTIVITIES 
+($
+in thousands) 
+During
+the year ended December 31, 2009, we repaid advances from our factor totaling
+$30,168. We also received $3,904 in cash and realized a tax benefit of $497
+in connection with the exercise of stock options. 
+CONTRACTUAL
+OBLIGATIONS 
+($
+in thousands) 
+Our
+contractual obligations as of December 31, 2009 were as follows: 
+Payment
+due by period 
+Contractual
+Obligations 
+Total 
+2010 
+2011-2012 
+2013-2014 
+2015
+and 
+after 
+Operating
+lease obligations 
+$ 
+104,422 
+$ 
+16,824 
+$ 
+31,635 
+$ 
+25,139 
+$ 
+30,824 
+Purchase
+obligations 
+58,642 
+58,642 
+0 
+0 
+0 
+Other
+long-term liabilities (future minimum royalty payments) 
+8,062 
+2,788 
+4,374 
+900 
+0 
+Total 
+$ 
+171,126 
+$ 
+78,254 
+$ 
+36,009 
+$ 
+26,039 
+$ 
+30,824 
+24 
+At
+December 31, 2009, we had un-negotiated open letters of credit for the purchase
+of inventory of approximately $3,050. 
+The
+Company has an employment agreement with Steven Madden, our founder and Creative
+and Design Chief, which provides for an annual base salary of $600 subject to
+certain specified adjustments through December 31, 2019. The agreement also
+provides for annual bonuses based on EBITDA, revenue of any new business, and
+royalty income over $2 million, plus an equity grant and a non-accountable
+expense allowance. 
+In
+addition, we have employment agreements with certain executive officers, which
+provide for the payment of compensation aggregating approximately $4,379 in
+2010, $2,334 in 2011 and $1,503 in 2012. In addition, some of the employment
+agreements provide for a discretionary bonus and some provide for incentive
+compensation based on various performance criteria as well as other benefits
+including stock options. Our Chief Operating Officer is entitled to deferred
+compensation calculated as a percentage of his base salary. 
+Our acquisition of Big Buddha Inc. on February 10, 2010 includes potential earn out payments based on annual financial performance through March 31, 2013. 
+Virtually
+all of our products are produced at overseas locations, the majority of which
+are located in China, with a small percentage located in Mexico, Brazil, Italy,
+Spain and India. We have not entered into any long-term manufacturing or supply
+contracts with any of these foreign companies. We believe that a sufficient
+number of alternative sources exist outside of the United States for the
+manufacture of our products. We currently make approximately 99% of our
+purchases in U.S. dollars. 
+INFLATION 
+We do not
+believe that the inflation experienced over the last few years in the United
+Sates, where we primarily compete, has had a significant effect on the Company’s
+sales or profitability. Historically, we have minimalized the impact of product
+cost increases by improving operating efficiencies, changing suppliers and
+increasing prices. However, no assurance can be given that we will be able to
+offset such inflationary cost increases in the future. 
+OFF-BALANCE
+SHEET ARRANGEMENTS 
+The
+Company has no off-balance sheet arrangements. 
+CRITICAL
+ACCOUNTING POLICIES AND THE USE OF ESTIMATES 
+Management’s
+Discussion and Analysis of Financial Condition and Results of Operations is
+based upon our Consolidated Financial Statements included in this Annual Report
+on Form 10-K, which have been prepared in accordance with generally accepted
+accounting principles (“GAAP”) in the United States. The preparation of these
+financial statements requires management to make estimates and judgments that
+affect the reported amounts of assets, liabilities, sales and expenses, and
+related disclosure of contingent assets and liabilities. Estimates by their
+nature are based on judgments and available information. Estimates are made
+based upon historical factors, current circumstances and the experience and
+judgment of management. Assumptions and estimates are evaluated on an ongoing
+basis and we may employ outside experts to assist in evaluations. Therefore,
+actual results could materially differ from those estimates under different
+assumptions and conditions. Management believes the following critical
+accounting estimates are more significantly affected by judgments and estimates
+used in the preparation of our Consolidated Financial Statements: allowance for
+bad debts, returns and customer chargebacks; inventory valuation; valuation of
+intangible assets; litigation reserves and cost of sales. 
+Allowances for bad debts, returns
+and customer chargebacks . We provide reserves against our accounts
+receivables for future customer chargebacks, co-op advertising allowances,
+discounts, returns and other miscellaneous deductions that relate to the current
+period. The reserve against our non-factored trade receivables also includes
+estimated losses that may result from customers’ inability to pay. The amount of
+the reserve for bad debts, returns, discounts and compliance chargebacks are
+determined by analyzing aged receivables, current economic conditions, the
+prevailing retail environment and historical dilution levels for customers. We
+evaluate anticipated chargebacks by reviewing several performance indicators for
+our major customers. These performance indicators (which include inventory
+levels at the retail floors, sell-through rates and gross margin levels) are
+analyzed by key account executives and the Vice President of Wholesale Sales to
+estimate the amount of the anticipated customer allowance. Failure to correctly
+estimate the amount of the reserve could materially impact our results of
+operations and financial position. 
+25 
+Inventory valuation .
+Inventories are stated at lower of cost or market, on a first-in, first-out
+basis. We review inventory on a regular basis for excess and slow moving
+inventory. The review is based on an analysis of inventory on hand, prior sales
+and expected net realizable value through future sales. The analysis includes a
+review of inventory quantities on hand at period-end in relation to year-to-date
+sales and projections for sales in the foreseeable future as well as subsequent
+sales. We consider quantities on hand in excess of estimated future sales to be
+at risk for market impairment. The net realizable value, or market value, is
+determined based on the estimate of sales prices of such inventory through
+off-price or discount store channels. The likelihood of any material inventory
+write-down is dependent primarily on the expectation of future consumer demand
+for our product. A misinterpretation or misunderstanding of future consumer
+demand for our product, the economy, or other failure to estimate correctly, in
+addition to abnormal weather patterns, could result in inventory valuation
+changes compared to the valuation determined to be appropriate as of the balance
+sheet date. 
+Valuation of intangible
+assets . ASC Topic 350, “Intangible - Goodwill and Other”, requires that
+goodwill and intangible assets with indefinite lives no longer be amortized, but
+rather be tested for impairment at least annually. This pronouncement also
+requires that intangible assets with finite lives be amortized over their
+respective lives to their estimated residual values, and reviewed for impairment
+in accordance with ASC Topic 360 “Property, Plant and Equipment” (“ASC Topic
+360”). In accordance with ASC Topic 360, long-lived assets, such as property,
+equipment, leasehold improvements and goodwill subject to amortization, are
+reviewed for impairment annually or whenever events or changes in circumstances
+indicate that the carrying amount of an asset may not be recoverable.
+Recoverability of assets to be held and used is measured by a comparison of the
+carrying amount of an asset to the estimated undiscounted future cash flows
+expected to be generated by the asset. If the carrying amount of an asset
+exceeds its estimated future cash flows, an impairment charge is recognized in
+the amount by which the carrying amount of the asset exceeds the fair value of
+the asset. 
+Litigation reserves .
+Estimated amounts for litigation claims that are probable and can be reasonably
+estimated are recorded as liabilities in our Consolidated Financial Statements.
+The likelihood of a material change in these estimated reserves would be
+dependent on new claims as they may arise and the favorable or unfavorable
+events of a particular litigation. As additional information becomes available,
+management will assess the potential liability related to the pending litigation
+and revise its estimates. Such revisions in management’s estimates of the
+contingent liability could materially impact our results of operation and
+financial position. 
+Cost of sales . All costs
+incurred to bring finished products to our distribution center and, in the
+Retail segment, the costs to bring products to our stores, are included in the
+cost of sales line on the Consolidated Statement of Income. These include the
+cost of finished products, purchase commissions, letter of credit fees,
+brokerage fees, sample expenses, customs duties, inbound freight, royalty
+payments on licensed products, labels and product packaging. All warehouse and
+distribution costs related to the Wholesale segment and freight to customers, if
+any, are included in the operating expenses line item of our Consolidated
+Statements of Income. Our gross margins may not be comparable to other companies
+in the industry because some companies may include warehouse and distribution
+costs as a component of cost of sales, while other companies report on the same
+basis as we do and include them in operating expenses. 
+Accounting
+Standards Adopted In Fiscal 2009: 
+Effective
+July 1, 2009, the Company adopted the Financial Accounting Standards Board
+(“FASB”) Accounting Standards Codification (“ASC” or the “Codification”) 105-10,
+“Generally Accepted Accounting Principles” (“ASC 105-10”). ASC 105-10
+establishes the Accounting Standards Codification as the source of authoritative
+generally accepted accounting principles in the United States of America
+(“GAAP”) recognized by the FASB to be applied by non-governmental entities in
+the preparation of financial statements. Rules and interpretive releases of the
+Securities and Exchange Commission (“SEC”) under authority of federal securities
+laws are also sources of authoritative GAAP for SEC registrants. The FASB will
+no longer issue standards in the form of Statements, FASB Staff Positions, or
+Emerging Issues Task Force Abstracts; instead, the FASB will issue Accounting
+Standards Updates (“ASU”). The Codification did not affect the accounting
+policies followed by the Company. 
+26 
+Effective
+January 1, 2009, the Company adopted ASC 805-10, “Business Combinations” (“ASC
+805-10”). Under ASC 805-10, an acquiring entity is required to recognize all the
+assets acquired and liabilities assumed in a transaction at the acquisition-date
+fair value. ASC 805-10 establishes principles and requirements for how an
+acquirer recognizes and measures in its financial statements the identifiable
+assets acquired, the liabilities assumed, any non-controlling interest in the
+acquiree and the goodwill acquired. This statement also establishes disclosure
+requirements which will enable users to evaluate the nature and financial
+effects of the business combination. The adoption of ASC 805-10 did not have a
+material impact on our Consolidated Financial Statements. 
+Effective
+January 1, 2009, the Company adopted ASC 810-10, “Consolidation” (“ASC 810-10”).
+ASC 810-10 establishes accounting and reporting standards for the
+non-controlling interest in a subsidiary and for the deconsolidation of a
+subsidiary. Specifically, this statement requires the recognition of a
+non-controlling interest (minority interest) as equity in the Consolidated
+Financial Statements and separate from the parent’s equity. The amount of net
+income attributable to the noncontrolling interest is required to be included in
+consolidated net income on the face of the income statement. ASC 810-10
+clarifies that changes in a parent’s ownership interest in a subsidiary that do
+not result in deconsolidation are equity transactions if the parent retains its
+controlling financial interest. In addition, this statement requires that a
+parent recognize a gain or loss in net income when a subsidiary is
+deconsolidated. Such gain or loss will be measured using the fair value of the
+non-controlling equity investment on the deconsolidation date. ASC 810-10 also
+includes expanded disclosure requirements regarding the interests of the parent
+and its non-controlling interest. The adoption of ASC 810-10 had no material
+impact on our Consolidated Financial Statements. 
+The
+Company adopted the provisions of ASC 350-30, “General Intangibles Other Than
+Goodwill” (“ASC 350-30”) on January 1, 2009. ASC 350-30 specifies the factors to
+be considered in developing renewal or extension assumptions used to determine
+the useful life of intangible assets. Its intent is to improve the consistency
+between the useful life of an intangible asset and the period of expected cash
+flows used to measure its fair value. The adoption of ASC 350-30 had no material
+impact on our Consolidated Financial Statements. 
+In May
+2009, the FASB amended ASC 855, “Subsequent Events” (“ASC855”), effective for
+reporting periods ending after June 15, 2009, to establish general standards of
+accounting for and disclosures of events that occur after the balance sheet date
+but before financial statements are issued or are available to be issued. The
+adoption of the amendment did not have a material impact on the Company’s
+Consolidated Financial Statements. 
+In August
+of 2009, the FASB issued ASU 2009-5, an update to Topic ASC 820, “Fair Value
+Measurements and Disclosures”. This update provides amendments to reduce
+potential ambiguity in financial reporting when measuring the fair value of
+liabilities. Among other provisions, this update provides clarification in
+circumstances in which a quoted price in an active market for the identical
+liability is not available, a reporting entity is required to measure fair value
+using one or more of the valuation techniques described in ASU 2009-5. ASU
+2009-5 became effective October 1, 2009. The adoption of ASU 2009-5 had no
+impact on our Consolidated Financial Statements. 
+ITEM 7A 
+QUANTITATIVE
+AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 
+($ in
+thousands) 
+We do not
+engage in the trading of market risk sensitive instruments in the normal course
+of business. Our financing arrangements are subject to variable interest rates
+primarily based on the prime rate and LIBOR. An analysis of our collection
+agency agreement with Rosenthal can be found in the “Liquidity and Capital
+Resources” section under Part II, Item 7, and in Note C, “Due From Factors” to
+the Consolidated Financial Statements included in this Annual Report on Form
+10-K. 
+As of
+December 31, 2009, we held marketable securities valued at $85,684, which
+consist primarily of corporate and U.S. government and federal agency bonds.
+These securities are subject to interest rate risk and will decrease in value if
+interest rates increase. We currently have the ability to hold these securities
+until maturity. In addition, any decline in interest rates would be expected to
+reduce our interest income. 
+27 
+ITEM 8 
+FINANCIAL
+STATEMENTS AND SUPPLEMENTARY DATA 
+The
+information required by this Item is incorporated herein by reference to the
+Consolidated Financial Statements listed in response to Item 15 of Part IV 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 
+Disclosure
+Controls and Procedures 
+As
+required by Rule 13a-15(b) of the Exchange Act, our management, including our
+Chief Executive Officer and Chief Financial Officer, has evaluated the
+effectiveness of our disclosure controls and procedures as of the end of the
+fiscal year covered by this Annual Report on Form 10-K. Based on that
+evaluation, the Chief Executive Officer and Chief Financial Officer have
+concluded that our 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 on Form 10-K. 
+Management’s
+Annual Report on Internal Control Over Financial Reporting 
+Management
+of Steven Madden, Ltd. is responsible for establishing and maintaining adequate
+internal control over financial reporting (as defined in Rule 13a-15(f) of the
+Exchange Act). 
+Our
+internal control over financial reporting is a process designed by, or under the
+supervision of, our principal executive officer and principal financial officer,
+and effected by the board of directors, management, and other personnel, to
+provide reasonable assurance regarding the reliability of financial reporting
+and the preparation of financial statements for external purposes in accordance
+with U.S. generally accepted accounting principles. Our internal control over
+financial reporting includes those policies and procedures that (1) pertain to
+maintenance of records that, in reasonable detail, accurately and fairly reflect
+the transactions and dispositions of our assets; (2) provide reasonable
+assurance that transactions are recorded as necessary to permit preparation of
+financial statements in accordance with U.S. generally accepted accounting
+principles, and that our receipts and expenditures are being made only in
+accordance with authorizations of our management and directors; and (3) provide
+reasonable assurance regarding prevention or timely detection of unauthorized
+acquisition, use, or disposition of our assets that could have a material effect
+on the financial statements. 
+Because
+of its inherent limitations, internal control over financial reporting may not
+prevent or detect misstatements. Also, projections of any evaluation of
+effectiveness to future periods are subject to the risk that controls may become
+inadequate because of changes in conditions, or that the degree of compliance
+with the policies or procedures may deteriorate. 
+With the
+participation of the Chief Executive Officer and the Chief Financial Officer,
+our management conducted an evaluation of the effectiveness as of the end of our
+fiscal year ended December 31, 2009, of our internal control over financial
+reporting based on the framework and criteria established in Internal
+Control–Integrated Framework, issued by the Committee of Sponsoring
+Organizations of the Treadway Commission. Based on this evaluation our
+management has concluded that, as of December 31, 2009, our internal control
+over financial reporting was effective. 
+The
+independent registered public accounting firm that audited the financial
+statements included in this Annual Report on Form 10-K has issued an attestation
+report on our internal control over financial reporting. 
+28 
+Attestation
+Report of our Independent Registered Public Accounting Firm 
+Our
+Independent Registered Public Accounting Firm, Eisner LLP, has audited and
+issued a report on our internal control over financial reporting. The report of
+Eisner LLP appears below. 
+To the
+Board of Directors and Stockholders 
+Steven
+Madden, Ltd. and subsidiaries 
+We have
+audited Steven Madden, Ltd. and subsidiaries’ (the “Company”) internal control
+over financial reporting as of December 31, 2009, based on criteria established
+in Internal Control - Integrated Framework issued by the Committee of Sponsoring
+Organizations of the Treadway Commission (“COSO”). The Company’s management is
+responsible for maintaining effective internal control over financial reporting
+and for its assessment of the effectiveness of internal control over financial
+reporting, included in the accompanying Management’s Annual Report on Internal
+Control over Financial Reporting. Our responsibility is to express an opinion on
+the Company’s internal control over financial reporting based on our
+audit. 
+We
+conducted our audit in accordance with the standards of the Public Company
+Accounting Oversight Board (United States). Those standards require that we plan
+and perform the audit to obtain reasonable assurance about whether effective
+internal control over financial reporting was maintained in all material
+respects. Our audit included obtaining an understanding of internal control over
+financial reporting, assessing the risk that a material weakness exists, and
+testing and evaluating the design and operating effectiveness of internal
+control based on the assessed risk. Our audit also included performing such
+other procedures as we considered necessary in the circumstances. We believe
+that our audit provides a reasonable basis for our opinion. 
+A
+company’s internal control over financial reporting is a process designed to
+provide reasonable assurance regarding the reliability of financial reporting
+and the preparation of financial statements for external purposes in accordance
+with generally accepted accounting principles. A company’s internal control over
+financial reporting includes those policies and procedures that (i) pertain to
+the maintenance of records that, in reasonable detail, accurately and fairly
+reflect the transactions and dispositions of the assets of the company; (ii)
+provide reasonable assurance that transactions are recorded as necessary to
+permit preparation of financial statements in accordance with generally accepted
+accounting principles, and that receipts and expenditures of the company are
+being made only in accordance with authorizations of management and directors of
+the company; and (iii) provide reasonable assurance regarding prevention or
+timely detection of unauthorized acquisition, use, or disposition of the
+company’s assets that could have a material effect on the financial
+statements. 
+Because
+of its inherent limitations, internal control over financial reporting may not
+prevent or detect misstatements. Also, projections of any evaluation of
+effectiveness to future periods are subject to the risk that controls may become
+inadequate because of changes in conditions, or that the degree of compliance
+with the policies or procedures may deteriorate. 
+In our
+opinion, Steven Madden, Ltd. and subsidiaries maintained, in all material
+respects, effective internal control over financial reporting as of December 31,
+2009, based on criteria established in Internal Control - Integrated Framework
+issued by COSO. 
+We also
+have audited, in accordance with the standards of the Public Company Accounting
+Oversight Board (United States), the consolidated balance sheets of Steven
+Madden, Ltd. and subsidiaries as of December 31, 2009 and 2008, 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, 2009,
+and our report dated March 11, 2010 expressed an unqualified opinion on those
+consolidated financial statements and included an explanatory paragraph
+regarding the adoption of the provisions of the accounting guidance relating to
+the uncertainty in income taxes, effective January 1, 2007. 
+/S/ Eisner LLP 
+New York, New York 
+March 11,
+2010 
+29 
+Changes
+in Internal Control Over Financial Reporting 
+There was
+no change in our internal control over financial reporting, identified in
+connection with the evaluation required by paragraph (d) of Rule 13a-15 of the
+Exchange Act, that occurred during the fiscal quarter ended December 31, 2009,
+which has materially affected, or is reasonably likely to materially affect, our
+internal control over financial reporting. 
+ITEM 9B 
+OTHER
+INFORMATION 
+None. 
+PART III 
+ITEM 10 
+DIRECTORS,
+EXECUTIVE OFFICERS AND CORPORATE
+GOVERNANCE 
+The
+information required to be furnished pursuant to this Item will be set forth in
+our proxy statement for the 2010 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
+our proxy statement for the 2010 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
+our proxy statement for the 2010 Annual Meeting of Stockholders, and is
+incorporated herein by reference. 
+ITEM 13 
+CERTAIN
+RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
+INDEPENDENCE 
+The
+information required to be furnished pursuant to this Item will be set forth in
+our proxy statement for the 2010 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
+our proxy statement for the 2010 Annual Meeting of Stockholders, and is
+incorporated herein by reference. 
+30 
+PART IV 
+ITEM 15 
+EXHIBITS
+AND FINANCIAL STATEMENT SCHEDULES 
+(a)(1)
+Financial Statements 
+The
+Consolidated Financial Statements of Steven Madden, Ltd. and subsidiaries are
+included in Item 8: 
+Report
+of Independent Registered Public Accounting Firm 
+F-1 
+Balance
+sheets as of December 31, 2009 and 2008 
+F-2 
+Statements
+of income for the years ended December 31, 2009, 2008 and
+2007 
+F-3 
+Statements
+of changes in stockholders’ equity for the years ended December 31, 2009,
+2008 and 2007 
+F-4 
+Statements
+of cash flows for the years ended December 31, 2009, 2008 and
+2007 
+F-6 
+Notes
+to financial statements 
+F-7 
+(2)
+Financial Statement Schedules 
+None. 
+(3)
+Exhibits. 
+3.01 
+Certificate
+of Incorporation of Steven Madden, Ltd. (incorporated by reference to
+Exhibit 1 to the Company’s Current Report on Form 8-K filed with the
+Securities and Exchange Commission on November 23,
+1998). 
+3.02 
+Amended
+& Restated By-Laws of Steven Madden, Ltd. (incorporated by reference
+to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed with the
+Securities and Exchange Commission on March 28, 2008). 
+4.01 
+Specimen
+Certificate for shares of Common Stock (incorporated by reference to
+Exhibit 4.1 to the Company’s Registration Statement on Form SB-2/A filed
+with the Securities and Exchange Commission on September 29,
+1993). 
+4.02 
+Rights
+Agreement dated November 14, 2001 between the Company and American Stock
+Transfer and Trust Company (incorporated by reference to Exhibit 4.1 to
+the Company’s Current Report on Form 8-K filed with the Securities and
+Exchange Commission on November 16, 2001). 
+10.01 
+Amended
+and Restated Secured Promissory Note dated December 19, 2007 of Steven
+Madden to the Company (incorporated by reference to Exhibit 10.1 to the
+Company’s Current Report on Form 8-K filed with the Securities and
+Exchange Commission on May 12, 2008). 
+10.02 
+Second
+Amended and Restated Secured Promissory Note dated April 6, 2009 of Steven
+Madden to the Company (incorporated by reference to Exhibit 10.1 to the
+Company’s Current Report on Form 8-K filed with the Securities and
+Exchange Commission on April 10, 2009. 
+10.03 
+Consulting
+Agreement effective August 1, 2004 among the Company, John Madden and
+J.L.M. Consultants Inc., as amended by Amendment No. 1 dated March 10,
+2005 and Amendment No. 2 dated April 14, 2005 (incorporated by reference
+to Exhibits 10.9, 10.10 and 10.11 to the Company’s Annual Report on Form
+10-K for its fiscal year ended December 31, 2005 filed with the Securities
+and Exchange Commission on March 14, 2006). 
+10.04 
+Collection
+Agency Agreement dated July 10, 2009 between Rosenthal & Rosenthal,
+Inc. and the Company (incorporated by reference to Exhibit 10.1 to the
+Company’s Current Report on Form 8-K filed with the Securities and
+Exchange Commission on July 16, 2009). 
+31 
+10.05 
+Collection
+Agency Agreement dated July 10, 2009 between Rosenthal & Rosenthal,
+Inc. and Daniel Friedman & Associates, Inc. (incorporated by reference
+to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the
+Securities and Exchange Commission on July 16, 2009). 
+10.06 
+Collection
+Agency Agreement dated July 10, 2009 between Rosenthal & Rosenthal,
+Inc. and Diva Acquisition Corp. (incorporated by reference to Exhibit 10.3
+to the Company’s Current Report on Form 8-K filed with the Securities and
+Exchange Commission on July 16, 2009). 
+10.07 
+Collection
+Agency Agreement dated July 10, 2009 between Rosenthal & Rosenthal,
+Inc. and Steven Madden Retail, Inc. (incorporated by reference to Exhibit
+10.4 to the Company’s Current Report on Form 8-K filed with the Securities
+and Exchange Commission on July 16, 2009). 
+10.08 
+Collection
+Agency Agreement dated July 10, 2009 between Rosenthal & Rosenthal,
+Inc. and Stevies, Inc. (incorporated by reference to Exhibit 10.5 to the
+Company’s Current Report on Form 8-K filed with the Securities and
+Exchange Commission on July 16, 2009). 
+10.09 
+Collection
+Agency Agreement dated July 10, 2009 between Rosenthal & Rosenthal,
+Inc. and SML Acquisition Corp. (incorporated by reference to Exhibit 10.6
+to the Company’s Current Report on Form 8-K filed with the Securities and
+Exchange Commission on July 16, 2009). 
+10.10 
+Amendment
+to Collection Agency Agreement dated February 16, 2010 between Rosenthal
+& Rosenthal, Inc. and the Company. † 
+10.11 
+Letter
+Agreement dated July 10, 2009 among Rosenthal & Rosenthal, Inc., the
+Company, Daniel Friedman & Associates, Inc., Diva Acquisition Corp.,
+Steven Madden Retail, Inc., Stevies, Inc., and SML Acquisition Corp.
+(incorporated by reference to Exhibit 10.7 to the Company’s Current Report
+on Form 8-K filed with the Securities and Exchange Commission on July 16,
+2009). 
+10.12 
+Guarantee
+dated July 10, 2009 of the Company, Daniel Friedman & Associates,
+Inc., Diva Acquisition Corp., Steven Madden Retail, Inc., Stevies, Inc.,
+and SML Acquisition Corp. in favor of Rosenthal & Rosenthal, Inc.
+(incorporated by reference to Exhibit 10.8 to the Company’s Current Report
+on Form 8-K filed with the Securities and Exchange Commission on July 16,
+2009). 
+10.13 
+Stock
+Purchase Agreement dated February 10, 2010 between the Company and Jeremy
+Bassan (incorporated by reference to Exhibit 10.1 to the Company’s Current
+Report on Form 8-K filed with the Securities and Exchange Commission on
+February 11, 2010). 
+10.14 
+Earn-Out
+Agreement dated February 10, 2010 among the Company, Jeremy Bassan and Big
+Buddha, Inc. (incorporated by reference to Exhibit 10.2 to the Company’s
+Current Report on Form 8-K filed with the Securities and Exchange
+Commission on February 11, 2010). 
+10.15 
+Third
+Amended Employment Agreement dated July 15, 2005 between the Company and
+Steven Madden (incorporated by reference to Exhibit 10.1 to the Company’s
+Current Report on Form 8-K filed with the Securities and Exchange
+Commission on July 20, 2005). 
+# 
+10.16 
+Amendment
+dated December 14, 2009 to Third Amended Employment Agreement between the
+Company and Steven Madden (incorporated by reference to Exhibit 10.1 to
+the Company’s Current Report on Form 8-K filed with the Securities and
+Exchange Commission on December 17, 2009). 
+# 
+10.17 
+Employment
+Agreement dated January 1, 1998 between the Company and Arvind Dharia
+(incorporated by reference to Exhibit 10.07 to the Company’s Annual Report
+on Form 10-K for its fiscal year ended December 31, 2000 filed with the
+Securities and Exchange Commission on March 30, 2001. 
+# 
+10.18 
+Amendment
+No. 1 dated June 29, 2001 to Employment Agreement between the Company and
+Arvind Dharia (incorporated by reference to Exhibit 99.4 to the Company’s
+Quarterly Report on Form 10-Q for its fiscal quarter ended June 30, 2001
+filed August 14, 2001. 
+# 
+10.19 
+Amendment
+No. 2 dated October 30, 2002 to Employment Agreement between the Company
+and Arvind Dharia (incorporated by reference to Exhibit 10.16 to the
+Company’s Quarterly Report on Form 10-Q for its fiscal quarter ended
+September 30, 2002 filed with the Securities and Exchange Commission on
+November 14, 2002. # 
+32 
+10.20 
+Amendment
+No. 3 dated February 1, 2006 to Employment Agreement between the Company
+and Arvind Dharia (incorporated by reference to Exhibit 10.1 to the
+Company’s Current Report on Form 8-K filed with the Securities and
+Exchange Commission on February 3, 2006). # 
+10.21 
+Amendment
+No. 4 dated October 7, 2009 to Employment Agreement of Arvind Dharia
+between the Company and Arvind Dharia (incorporated by reference to
+Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the
+Securities and Exchange Commission on October 13, 2009). # 
+10.22 
+Employment
+Agreement dated June 15, 2005 between the Company and Awadhesh Sinha
+(incorporated by reference to Exhibit 10.1 to the Company’s Current Report
+on Form 8-K filed with the Securities and Exchange Commission on June 21,
+2005). # 
+10.23 
+Amendment
+No. 1 dated November 6, 2007 to Employment Agreement between the Company
+and Awadhesh Sinha (incorporated by reference to Exhibit 10.1 to the
+Company’s Current Report on Form 8-K filed with the Securities and
+Exchange Commission on November 6, 2007). # 
+10.24 
+Amendment
+No. 2 dated October 14, 2008 and effective October 1, 2008 to Employment
+Agreement between the Company and Awadhesh Sinha (incorporated by
+reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K
+filed with the Securities and Exchange Commission on October 20,
+2008). # 
+10.25 
+Employment
+Agreement dated October 7, 2009 between the Company and Robert Schmertz
+(incorporated by reference to Exhibit 10.1 to the Company’s Current Report
+on Form 8-K filed with the Securities and Exchange Commission on October
+13, 2009). # 
+10.26 
+Employment
+Agreement effective as of April 29, 2008 between the Company and Amelia
+Newton Varela (incorporated by reference to Exhibit 10.1 to the Company’s
+Current Report on Form 8-K filed with the Securities and Exchange
+Commission on May 5, 2008). # 
+10.27 
+Employment
+Agreement dated April 7, 2008 between the Company and Edward Rosenfeld
+(incorporated by reference to Exhibit 10.1 to the Company’s Current Report
+on Form 8-K filed with the Securities and Exchange Commission on April 11,
+2008). # 
+10.28 
+Employment
+Agreement dated November 6, 2009 between the Company and Edward R.
+Rosenfeld (incorporated by reference to Exhibit 10.1 to the Company’s
+Current Report on Form 8-K filed with the Securities and Exchange
+Commission on November 10, 2009). # 
+10.29 
+Amendment
+No. 1 dated March 8, 2010 to Employment Agreement between the Company and
+Edward R. Rosenfeld. † # 
+10.30 
+Letter
+Agreement dated March 27, 2008 between the Company and Walter Yetnikoff
+(incorporated by reference to Exhibit 10.2 to the Company’s Quarterly
+Report on Form 10-Q for its fiscal quarter ended March 31, 2008 filed with
+the Securities and Exchange Commission on May 12, 2008). # 
+10.31 
+Employment
+Agreement dated May 16, 2007 between the Company and Jeffrey Silverman
+(incorporated by reference to Exhibit 10.3 to the Company’s Current Report
+on Form 8-K filed with the Securities and Exchange Commission on May 18,
+2007). # 
+10.32 
+Amendment
+to Employment Agreement dated as of December 21 2007 between the Company
+and Jeffrey Silverman (incorporated by reference to Exhibit 10.3 to the
+Company’s Current Report on Form 8-K filed with the Securities and
+Exchange Commission on December 21, 2007). # 
+10.33 
+Settlement
+and Release Agreement dated December 21, 2007 between the Company and
+Jeffrey Silverman (incorporated by reference to Exhibit 10.1 to the
+Company’s Current Report on Form 8-K filed with the Securities and
+Exchange Commission on December 21, 2007). 
+10.34 
+Termination
+Agreement dated as of April 11, 2008 between the Company and Jeffrey
+Silverman (incorporated by reference to Exhibit 10.1 to the Company’s
+Current Report on Form 8-K filed with the Securities and Exchange
+Commission on April 15, 2008). 
+33 
+10.35 
+The
+1999 Stock Plan, approved and adopted on March 15, 1999, amended as of
+March 20, 2000 and March 30, 2001 (incorporated by reference to Exhibit
+10.A to the Company’s Registration Statement on Form S-8 filed with the
+Securities and Exchange Commission on July 26, 2004). # 
+10.36 
+2006
+Stock Incentive Plan (Amended and Restated Effective May 22, 2009),
+approved and adopted on May 22, 2009 (incorporated by reference to Exhibit
+10.1 to the Company’s Current Report on Form 8-K filed with the Securities
+and Exchange Commission on May 28, 2009. # 
+10.37 
+Form
+of Non-Qualified Stock Option Agreement (Chief Executive Officer) under
+the Company’s 2006 Stock Incentive Plan, as amended, as adopted October
+30, 2007 (incorporated by reference to Exhibit 10.2 to the Company’s
+Quarterly Report on Form 10-Q for its fiscal quarter ended September 30,
+2007 filed with the Securities and Exchange Commission on November 9,
+2007). # 
+10.38 
+Form
+of Non-Qualified Stock Option Agreement (Employee without Employment
+Agreement) under the Company’s 2006 Stock Incentive Plan, as adopted
+October 30, 2007 (incorporated by reference to Exhibit 10.3 to the
+Company’s Quarterly Report on Form 10-Q for its fiscal quarter ended
+September 30, 2007 filed with the Securities and Exchange Commission on
+November 9, 2007). # 
+10.39 
+Form
+of Non-Qualified Stock Option Agreement (Employee with Employment
+Agreement) under the Company’s 2006 Stock Incentive Plan, as adopted
+October 30, 2007 (incorporated by reference to Exhibit 10.4 to the
+Company’s Quarterly Report on Form 10-Q for its fiscal quarter ended
+September 30, 2007 filed with the Securities and Exchange Commission on
+November 9, 2007). # 
+10.40 
+Form
+of Restricted Stock Agreement (Chief Executive Officer) under the
+Company’s 2006 Stock Incentive Plan, as adopted October 30, 2007
+(incorporated by reference to Exhibit 10.5 to the Company’s Quarterly
+Report on Form 10-Q for its fiscal quarter ended September 30, 2007 filed
+with the Securities and Exchange Commission on November 9, 2007). # 
+10.41 
+Form
+of Restricted Stock Agreement (Employee without Employment Agreement)
+under the Company’s 2006 Stock Incentive Plan, as adopted October 30, 2007
+(incorporated by reference to Exhibit 10.6 to the Company’s Quarterly
+Report on Form 10-Q for its fiscal quarter ended September 30, 2007 filed
+with the Securities and Exchange Commission on November 9, 2007). # 
+10.42 
+Form
+of Restricted Stock Agreement (Employee with Employment Agreement) under
+the Company’s 2006 Stock Incentive Plan, as adopted October 30, 2007
+(incorporated by reference to Exhibit 10.7 to the Company’s Quarterly
+Report on Form 10-Q for its fiscal quarter ended September 30, 2007 filed
+with the Securities and Exchange Commission on November 9, 2007). # 
+10.43 
+Form
+of Restricted Stock Agreement under the Company’s 2006 Stock Incentive
+Plan used for grants made to non- employee directors from March 2006
+through May 2007, with a schedule setting forth the name of each of the
+recipients, the date of the grant and the number of shares (incorporated
+by reference to Exhibit 10.8 to the Company’s Quarterly Report on Form
+10-Q for its fiscal quarter ended September 30, 2007 filed with the
+Securities and Exchange Commission on November 9, 2007). # 
+10.44 
+Restricted
+Stock Agreement dated March 24, 2006 between Steven Madden and the Company
+(incorporated by reference to Exhibit 10.12 to the Company’s Quarterly
+Report on Form 10-Q for its fiscal quarter ended September 30, 2007 filed
+with the Securities and Exchange Commission on November 9, 2007). # 
+10.45 
+Restricted
+Stock Agreement dated June 9, 2006 between Steven Madden and the Company
+(incorporated by reference to Exhibit 10.13 to the Company’s Quarterly
+Report on Form 10-Q for its fiscal quarter ended September 30, 2007 filed
+with the Securities and Exchange Commission on November 9, 2007). # 
+10.46 
+Restricted
+Stock Agreement dated March 24, 2006 between Arvind Dharia and the Company
+(incorporated by reference to Exhibit 10.14 to the Company’s Quarterly
+Report on Form 10-Q for its fiscal quarter ended September 30, 2007 filed
+with the Securities and Exchange Commission on November 9, 2007). # 
+34 
+10.47 
+Restricted
+Stock Agreement dated March 20, 2006 between Amelia Newton Varela and the
+Company (incorporated by reference to Exhibit 10.15 to the Company’s
+Quarterly Report on Form 10-Q for its fiscal quarter ended September 30,
+2007 filed with the Securities and Exchange Commission on November 9,
+2007). # 
+10.48 
+Restricted
+Stock Agreement dated March 20, 2006 between Robert Schmertz and the
+Company (incorporated by reference to Exhibit 10.16 to the Company’s
+Quarterly Report on Form 10-Q for its fiscal quarter ended September 30,
+2007 filed with the Securities and Exchange Commission on November 9,
+2007). # 
+10.49 
+Restricted
+Stock Agreement dated March 6, 2007 between Arvind Dharia and the Company
+(incorporated by reference to Exhibit 10.17 to the Company’s Quarterly
+Report on Form 10-Q for its fiscal quarter ended September 30, 2007 filed
+with the Securities and Exchange Commission on November 9, 2007). # 
+10.50 
+Restricted
+Stock Agreement dated March 9, 2007 between Robert Schmertz and the
+Company (incorporated by reference to Exhibit 10.18 to the Company’s
+Quarterly Report on Form 10-Q for its fiscal quarter ended September 30,
+2007 filed with the Securities and Exchange Commission on November 9,
+2007). # 
+10.51 
+Restricted
+Stock Agreement dated April 25, 2007 between Awadhesh Sinha and the
+Company (incorporated by reference to Exhibit 10.19 to the Company’s
+Quarterly Report on Form 10-Q for its fiscal quarter ended September 30,
+2007 filed with the Securities and Exchange Commission on November 9,
+2007). # 
+10.52 
+Non-Qualified
+Stock Option Agreement dated May 16, 2007 between Jeffrey Silverman and
+the Company (incorporated by reference to Exhibit 10.20 to the Company’s
+Quarterly Report on Form 10-Q for its fiscal quarter ended September 30,
+2007 filed with the Securities and Exchange Commission on November 9,
+2007). # 
+10.53 
+Non-Qualified
+Stock Option Agreement dated May 16, 2007 between Jeffrey Silverman and
+the Company (incorporated by reference to Exhibit 10.21 to the Company’s
+Quarterly Report on Form 10-Q for its fiscal quarter ended September 30,
+2007 filed with the Securities and Exchange Commission on November 9,
+2007). # 
+21.01 
+Subsidiaries
+of the Registrant† 
+23.01 
+Consent
+of Eisner LLP† 
+24.01 
+Power
+of Attorney (included on signature page hereto) 
+31.01 
+Certification
+of Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the
+Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
+Sarbanes-Oxley Act of 2002. † 
+31.02 
+Certification
+of Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the
+Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
+Sarbanes-Oxley Act of 2002. † 
+32.01 
+Certification
+of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 Adopted
+Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. † 
+32.02 
+Certification
+of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 Adopted
+Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. † 
+† 
+Filed
+herewith. 
+# 
+Indicates
+management contract or compensatory plan or arrangement required to be
+identified pursuant to Item 15(b) of this Annual Report on Form
+10-K. 
+35 
+SIGNATURES 
+Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
+Act of 1934, the registrant has duly caused this report to be signed on its
+behalf by the undersigned, thereunto duly authorized. 
+Dated: 
+New
+York, New York 
+March
+12, 2010 
+STEVEN
+MADDEN, LTD. 
+By: 
+/S/
+EDWARD R. ROSENFELD 
+Edward
+R. Rosenfeld 
+Chairman
+and Chief Executive Officer 
+By: 
+/S/
+ARVIND DHARIA 
+Arvind
+Dharia 
+Chief
+Financial Officer 
+POWER
+OF ATTORNEY 
+KNOW ALL
+PERSONS BY THESE PRESENTS, that each of the undersigned constitutes and appoints
+Edward R. Rosenfeld and Arvind Dharia, and each of them, as attorneys-in-fact
+and agents, with full power of substitute and resubstitution, for and in the
+name, place and stead of the undersigned, in any and all capacities, to sign any
+and all amendments to this Annual Report on Form 10-K, and to file the same,
+with all exhibits thereto and all other documents in connection therewith, with
+the Securities and Exchange Commission, granting unto said attorneys-in-fact and
+agents full power and authority to do and perform each and every act and thing
+requisite and necessary to be done in and about the premises, as fully to all
+intents and purposes as the undersigned might or could do in person, hereby
+ratifying and confirming all that each of said attorney-in-fact or substitute or
+substitutes, may lawfully do or cause to be done by virtue hereof. 
+36 
+Pursuant
+to the requirements of the Securities Exchange Act of 1934, this report has been
+signed below by the following persons on behalf of the registrant in the
+capacities and on the dates indicated. 
+Signature 
+Title 
+Date 
+/S/ EDWARD R. ROSENFELD 
+Chairman,
+Chief Executive Officer and Director 
+March
+12, 2010 
+Edward
+R. Rosenfeld 
+/S/ ARVIND DHARIA 
+Chief
+Financial Officer 
+March
+12, 2010 
+Arvind
+Dharia 
+/S/ JOHN L. MADDEN 
+Director 
+March
+12, 2010 
+John
+L. Madden 
+/S/ PETER MIGLIORINI 
+Director 
+March
+12, 2010 
+Peter
+Migliorini 
+/S/ RICHARD P. RANDALL 
+Director 
+March
+12, 2010 
+Richard
+P. Randall 
+/S/ RAVI SACHDEV 
+Director 
+March
+12, 2010 
+Ravi
+Sachdev 
+/S/ THOMAS H. SCHWARTZ 
+Director 
+March
+12, 2010 
+37 
+STEVEN
+MADDEN, LTD. 
+INDEX
+TO CONSOLIDATED FINANCIAL STATEMENTS 
+Report of Independent Registered Public Accounting
+Firm 
+F-1 
+Balance sheets as of December 31, 2009 and
+2008 
+F-2 
+Statements of income for the years ended December 31, 2009,
+2008 and 2007 
+F-3 
+Statements of changes in stockholders’ equity for the years
+ended December 31, 2009, 2008 and 2007 
+F-4 
+Statements of cash flows for the years ended December 31,
+2009, 2008 and 2007 
+F-6 
+Notes to financial statements 
+F-7 
+38 
+REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
+FIRM 
+To the
+Board of Directors and Stockholders 
+Steven
+Madden, Ltd. and subsidiaries 
+We have
+audited the accompanying consolidated balance sheets of Steven Madden, Ltd. and
+subsidiaries (the “Company”) as of December 31, 2009 and 2008, 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, 2009.
+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 the standards of the Public Company
+Accounting Oversight Board (United States). Those standards require that we plan
+and perform the audits to obtain reasonable assurance about whether the
+financial statements are free of material misstatement. An audit includes
+examining, on a test basis, evidence supporting the amounts and disclosures in
+the financial statements. An audit also includes assessing the accounting
+principles used and significant estimates made by management, as well as
+evaluating the overall financial statement presentation. We believe that our
+audits provide a reasonable basis for our opinion. 
+In our
+opinion, the financial statements referred to above present fairly, in all
+material respects, the consolidated financial position of Steven Madden, Ltd.
+and subsidiaries as of December 31, 2009 and 2008, 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, 2009 in conformity with accounting
+principles generally accepted in the United States of America. 
+As
+discussed in Note A to the consolidated financial statements, the Company
+adopted the provisions of the accounting guidance relating to the uncertainty in
+income taxes, effective January 1, 2007. 
+We also
+have audited, in accordance with the standards of the Public Company Accounting
+Oversight Board (United States), Steven Madden, Ltd. and subsidiaries’ internal
+control over financial reporting as of December 31, 2009, based on criteria
+established in Internal Control - Integrated Framework issued by the Committee
+of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report
+dated March 11, 2010 expressed an unqualified opinion on the Company’s internal
+control over financial reporting. 
+/S/ Eisner LLP 
+New York, New York 
+March 11, 2010 
+F -
+1 
+STEVEN
+MADDEN, LTD. AND SUBSIDIARIES 
+Consolidated Balance Sheets 
+(in
+thousands, except per share data) 
+December
+31, 
+2009 
+2008 
+ASSETS 
+Current
+assets: 
+Cash
+and cash equivalents 
+$ 
+69,266 
+$ 
+89,588 
+Accounts
+receivable - net of allowances of $1,195 and $1,530 
+11,071 
+5,567 
+Due
+from factors - net of allowances of $12,487 and $9,771 
+47,534 
+34,311 
+Note
+receivable – related party 
+— 
+3,370 
+Inventories
+- net 
+30,453 
+31,597 
+Marketable
+securities - available for sale 
+17,971 
+14,609 
+Prepaid
+expenses and other current assets 
+6,295 
+5,645 
+Prepaid
+taxes 
+— 
+2,069 
+Deferred
+taxes 
+8,779 
+7,980 
+Total
+current assets 
+191,369 
+194,736 
+Note
+receivable – related party 
+3,568 
+— 
+Property
+and equipment, net 
+23,793 
+28,209 
+Deferred
+taxes 
+7,543 
+7,112 
+Deposits
+and other 
+1,844 
+2,260 
+Marketable
+securities - available for sale 
+67,713 
+20,615 
+Goodwill
+- net 
+24,313 
+23,574 
+Intangibles
+- net 
+6,716 
+8,187 
+Total
+assets 
+$ 
+326,859 
+$ 
+284,693 
+LIABILITIES 
+Current
+liabilities: 
+Advances
+payable - factor 
+$ 
+— 
+$ 
+30,168 
+Accounts
+payable 
+24,544 
+18,018 
+Accrued
+expenses 
+15,338 
+16,595 
+Income
+taxes payable 
+166 
+— 
+Accrued
+incentive compensation 
+12,314 
+7,869 
+Total
+current liabilities 
+52,362 
+72,650 
+Deferred
+rent 
+5,044 
+4,773 
+Other
+liabilities 
+1,666 
+1,028 
+Total
+liabilities 
+59,072 
+78,451 
+Commitments,
+contingencies and other – (notes J & L) 
+STOCKHOLDERS’
+EQUITY 
+Preferred
+stock - $.0001 par value, 5,000 shares authorized; none issued; Series A
+Junior Participating preferred stock - $.0001 par value, 60 shares
+authorized; none issued 
+Common
+stock - $.0001 par value, 90,000 shares authorized, 26,545 and 26,135
+shares issued, 18,283 and 17,873 shares outstanding at December 31, 2009
+and 2008, respectively 
+3 
+3 
+Additional
+paid-in capital 
+147,703 
+137,362 
+Retained
+earnings 
+247,365 
+197,257 
+Other
+comprehensive income (loss): 
+Unrealized
+gain (loss) on marketable securities (net of taxes) 
+700 
+(396 
+) 
+Treasury
+stock – 8,262 and 8,262 shares at cost at December 31, 2009 and 2008,
+respectively 
+(127,984 
+) 
+(127,984 
+) 
+Total
+stockholders’ equity 
+267,787 
+206,242 
+Total
+liabilities and stockholders’ equity 
+$ 
+326,859 
+$ 
+284,693 
+See
+notes to consolidated financial statements 
+F -
+2 
+STEVEN
+MADDEN, LTD. AND SUBSIDIARIES 
+Consolidated Statements of Income 
+(in
+thousands, except per share data) 
+Years
+Ended December 31, 
+2009 
+2008 
+2007 
+Net
+sales 
+$ 
+503,550 
+$ 
+457,046 
+$ 
+431,050 
+Cost
+of sales 
+287,361 
+270,222 
+257,646 
+Gross
+profit 
+216,189 
+186,824 
+173,404 
+Commission
+and licensing fee income – net 
+19,928 
+14,294 
+18,351 
+Operating
+expenses 
+(157,149 
+) 
+(156,212 
+) 
+(138,841 
+) 
+Income
+before other income (expenses) and provision for income
+taxes 
+78,968 
+44,906 
+52,914 
+Other
+income (expenses): 
+Interest
+income 
+2,096 
+2,620 
+3,876 
+Interest
+expense 
+(93 
+) 
+(207 
+) 
+(65 
+) 
+Loss
+on sale of marketable securities 
+(182 
+) 
+(1,013 
+) 
+(589 
+) 
+Income
+before provision for income taxes 
+80,789 
+46,306 
+56,136 
+Provision
+for income taxes 
+30,682 
+18,330 
+20,446 
+Net
+income 
+$ 
+50,107 
+$ 
+27,976 
+$ 
+35,690 
+Basic
+income per share 
+$ 
+2.78 
+$ 
+1.53 
+$ 
+1.73 
+Diluted
+income per share 
+$ 
+2.73 
+$ 
+1.51 
+$ 
+1.68 
+Basic
+weighted average shares of common stock outstanding 
+18,045 
+18,325 
+20,647 
+Effect
+of dilutive securities – options and restricted stock 
+278 
+194 
+645 
+Diluted
+weighted average shares of common stock outstanding 
+18,323 
+18,519 
+21,292 
+See
+notes to consolidated financial statements 
+F -
+3 
+STEVEN
+MADDEN, LTD. AND SUBSIDIARIES 
+Consolidated Statements of Changes in Stockholders’
+Equity 
+(in
+thousands) 
+Common
+Stock 
+Additional 
+Paid-in 
+Retained 
+Shares 
+Amount 
+Capital 
+Earnings 
+Balance - December 31,
+2006 
+$ 
+24,806 
+$ 
+2 
+$ 
+112,692 
+$ 
+133,561 
+Exercise
+of stock options 
+863 
+1 
+5,607 
+Tax
+benefit from exercise of options 
+7,180 
+Issuance
+of fully vested restricted stock 
+111 
+Stock-based
+compensation 
+4,434 
+Unrealized
+holding gain on marketable securities (net of taxes of
+$426) 
+Net
+income 
+35,690 
+Comprehensive
+income 
+Forfeiture
+of accrued dividends 
+12 
+Common
+stock purchased for treasury 
+Balance
+- December 31, 2007 
+25,780 
+3 
+129,913 
+169,263 
+Exercise
+of stock options 
+171 
+2,051 
+Tax
+expense from stock based compensation 
+(258 
+) 
+Issuance
+of fully vested restricted stock 
+184 
+Stock-based
+compensation 
+5,656 
+Unrealized
+holding loss on marketable securities (net of tax benefits of
+$253) 
+Net
+income 
+27,976 
+Comprehensive
+income 
+Forfeiture
+of accrued dividends 
+18 
+Common
+stock purchased for treasury 
+Balance
+- December 31, 2008 
+26,135 
+3 
+137,362 
+197,257 
+Exercise
+of stock options 
+264 
+3,904 
+Tax
+benefit from exercise of options 
+497 
+Issuance
+of fully vested restricted stock 
+146 
+Stock-based
+compensation 
+5,940 
+Unrealized
+holding gain on marketable securities (net of taxes of
+$698) 
+Net
+income 
+50,107 
+Comprehensive
+income 
+Forfeiture
+of accrued dividends 
+1 
+Balance
+- December 31, 2009 
+26,545 
+$ 
+3 
+$ 
+147,703 
+$ 
+247,365 
+See notes to consolidated financial
+statements 
+F -
+4 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Consolidated
+Statements of Changes in Stockholders’ Equity (Continued) 
+(in
+thousands) 
+Accumulated 
+Other
+Comprehensive 
+Treasury
+Stock 
+Total 
+Stockholders’
+Comprehensive 
+Gain
+(Loss) 
+Shares 
+Amount 
+Equity 
+Income 
+Balance
+- December 31, 2006 
+$ 
+(641 
+) 
+3,700 
+$ 
+(33,690 
+) 
+$ 
+211,924 
+Exercise
+of stock options 
+5,608 
+Tax
+benefit from exercise of options 
+7,180 
+Issuance
+of fully vested restricted stock 
+Stock-based
+compensation 
+4,434 
+Unrealized
+holding gain on marketable securities (net of taxes of
+$426) 
+580 
+580 
+580 
+Net
+income 
+35,690 
+35,690 
+Comprehensive
+income 
+$ 
+36,270 
+Forfeiture
+of accrued dividends 
+12 
+Common
+stock purchased for treasury 
+1,962 
+(50,094 
+) 
+(50,094 
+) 
+Balance
+- December 31, 2007 
+(61 
+) 
+5,662 
+(83,784 
+) 
+215,334 
+Exercise
+of stock options 
+2,051 
+Tax
+expense from exercise of options 
+(258 
+) 
+Issuance
+of fully vested restricted stock 
+Stock-based
+compensation 
+5,656 
+Unrealized
+holding loss on marketable securities (net of tax benefits of
+$253) 
+(335 
+) 
+(335 
+) 
+(335 
+) 
+Net
+income 
+27,976 
+27,976 
+Comprehensive
+income 
+$ 
+27,641 
+Forfeiture
+of accrued dividends 
+18 
+Common
+stock purchased for treasury 
+2,600 
+(44,200 
+) 
+(44,200 
+) 
+Balance
+- December 31, 2008 
+(396 
+) 
+8,262 
+(127,984 
+) 
+206,242 
+Exercise
+of stock options 
+3,904 
+Tax
+benefit from exercise of options 
+497 
+Issuance
+of fully vested restricted stock 
+Stock-based
+compensation 
+5,940 
+Unrealized
+holding gain on marketable securities (net of taxes of
+$698) 
+1,096 
+1,096 
+1,096 
+Net
+income 
+50,107 
+50,107 
+Comprehensive
+income 
+$ 
+51,203 
+Forfeiture
+of accrued dividends 
+1 
+Balance
+- December 31, 2009 
+$ 
+700 
+8,262 
+$ 
+(127,984 
+) 
+$ 
+267,787 
+See
+notes to consolidated financial statements 
+F -
+5 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Consolidated Statements of Cash Flows 
+(in
+thousands) 
+Years
+Ended December 31, 
+2009 
+2008 
+2007 
+Cash
+flows from operating activities: 
+Net
+income 
+$ 
+50,107 
+$ 
+27,976 
+$ 
+35,690 
+Adjustments
+to reconcile net income to net cash provided by operating
+activities: 
+Stock-based
+compensation 
+5,940 
+5,656 
+4,434 
+Tax
+expense (benefits) from stock based compensation 
+(497 
+) 
+258 
+(7,180 
+) 
+Depreciation
+and amortization 
+9,560 
+9,101 
+8,435 
+Loss
+on disposal of fixed assets 
+1,153 
+1,619 
+760 
+Deferred
+taxes 
+(1,928 
+) 
+1,495 
+(2,120 
+) 
+Provision
+for doubtful accounts and chargebacks 
+2,381 
+(4,145 
+) 
+2,938 
+Accrued
+interest on notes receivable – related party 
+(198 
+) 
+(244 
+) 
+(126 
+) 
+Deferred
+rent expense and other non-current liabilities 
+271 
+2,331 
+334 
+Loss
+on sale of marketable securities 
+182 
+1,013 
+589 
+Changes
+in: 
+Accounts
+receivable 
+(5,169 
+) 
+3,221 
+(1,992 
+) 
+Due
+from factor – excluding advances 
+(15,939 
+) 
+2,216 
+5,409 
+Notes
+receivable – related party 
+— 
+— 
+(3,000 
+) 
+Inventories 
+1,144 
+(4,400 
+) 
+6,463 
+Prepaid
+expenses, prepaid taxes, deposits and other assets 
+1,691 
+3,887 
+3,189 
+Accounts
+payable and accrued expenses 
+10,561 
+(10,969 
+) 
+9,443 
+Accrued
+incentive compensation 
+4,445 
+1,736 
+(3,359 
+) 
+Other
+liabilities 
+638 
+1,028 
+— 
+Net
+cash provided by operating activities 
+64,342 
+41,779 
+59,907 
+Cash
+flows from investing activities: 
+Purchase
+of property and equipment 
+(3,399 
+) 
+(8,314 
+) 
+(12,965 
+) 
+Purchases
+of marketable securities 
+(67,265 
+) 
+(31,005 
+) 
+(66,505 
+) 
+Maturity/sale
+of marketable securities 
+17,543 
+74,844 
+76,192 
+Acquisitions,
+net of cash acquired * 
+(5,776 
+) 
+(4,923 
+) 
+(9,080 
+) 
+Net
+cash (used in) provided by investing activities 
+(58,897 
+) 
+30,602 
+(12,358 
+) 
+Cash
+flows from financing activities: 
+Advances
+from factor - net 
+(30,168 
+) 
+30,168 
+— 
+Proceeds
+from exercise of stock options 
+3,904 
+2,051 
+5,607 
+Tax
+benefits from stock based compensation 
+497 
+(258 
+) 
+7,180 
+Common
+stock purchased for treasury 
+— 
+(44,200 
+) 
+(50,094 
+) 
+Net
+cash used in financing activities 
+(25,767 
+) 
+(12,239 
+) 
+(37,307 
+) 
+Net
+(decrease) increase in cash and cash equivalents 
+(20,322 
+) 
+60,142 
+10,242 
+Cash
+and cash equivalents - beginning of year 
+89,588 
+29,446 
+19,204 
+Cash
+and cash equivalents – end of year 
+$ 
+69,266 
+$ 
+89,588 
+$ 
+29,446 
+Supplemental
+disclosures of cash flow information: 
+Cash
+paid during the year for: 
+Interest 
+$ 
+93 
+$ 
+207 
+$ 
+65 
+Income
+taxes 
+$ 
+30,508 
+$ 
+23,306 
+$ 
+20,178 
+Non-cash
+transactions 
+Dividend
+accrual (forfeitures) related to restricted stock 
+$ 
+(1 
+) 
+$ 
+(18 
+) 
+$ 
+(16 
+) 
+* The
+amount for 2009 includes $4,526 which was accrued at December 31, 2008. The
+amount for 2008 includes $3,903 which was accrued at December 31,
+2007. 
+See
+notes to consolidated financial statements 
+F -
+6 
+STEVEN
+MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Consolidated Financial Statements 
+December
+31, 2009 and 2008 
+($
+in thousands except per share data) 
+Note
+A - Summary of Significant Accounting Policies 
+[1] Organization: 
+Steven
+Madden, Ltd. and its subsidiaries (collectively, the “Company”), a Delaware
+corporation, design, source, market and sell women’s, men’s and children’s
+shoes, for sale worldwide through its wholesale and retail channels under the
+Steve Madden, Steven and Madden Men’s brand names and through its wholesale
+channels under the Steve Madden Kids, Madden Girl, Candie’s (under license),
+l.e.i. (under license), Elizabeth and James (under license) and Olsenboye (under
+license) brand names. In addition, the Company designs, sources, markets and
+sells name brand and private label fashion handbags and accessories to customers
+worldwide through its Accessories Division. The Company licenses the Betsey
+Johnson, Daisy Fuentes and Olsenboye brand names for its accessories business.
+Revenue is generated predominately through the sale of the Company’s brand name
+merchandise and certain licensed products. At December 31, 2009 and 2008, the
+Company operated 89 and 97 retail stores (including its e-commerce website as a
+store), respectively. Revenue is subject to seasonal fluctuations. See Note N
+for operating segment information. 
+[2] Accounting
+Standards Adopted In Fiscal 2009: 
+Effective
+July 1, 2009, the Company adopted the Financial Accounting Standards Board
+(“FASB”) Accounting Standards Codification (“ASC” or the “Codification”) 105-10,
+“Generally Accepted Accounting Principles” (“ASC 105-10”). ASC 105-10
+establishes the Accounting Standards Codification as the source of authoritative
+generally accepted accounting principles in the United States of America
+(“GAAP”) recognized by the FASB to be applied by non-governmental entities in
+the preparation of financial statements. Rules and interpretive releases of the
+Securities and Exchange Commission (“SEC”) under authority of federal securities
+laws are also sources of authoritative GAAP for SEC registrants. The FASB will
+no longer issue standards in the form of Statements, FASB Staff Positions, or
+Emerging Issues Task Force Abstracts; instead the FASB will issue Accounting
+Standards Updates (“ASU”). The Codification did not affect the accounting
+policies followed by the Company. 
+Effective
+January 1, 2009, the Company adopted ASC 805-10, “Business Combinations” (“ASC
+805-10”). Under ASC 805-10, an acquiring entity is required to recognize all the
+assets acquired and liabilities assumed in a transaction at the acquisition-date
+fair value. ASC 805-10 establishes principles and requirements for how an
+acquirer recognizes and measures in its financial statements the identifiable
+assets acquired, the liabilities assumed, any non-controlling interest in the
+acquiree and the goodwill acquired. This statement also establishes disclosure
+requirements which will enable users to evaluate the nature and financial
+effects of the business combination. The adoption of ASC 805-10 did not have a
+material impact on our Consolidated Financial Statements. 
+Effective
+January 1, 2009, the Company adopted ASC 810-10, “Consolidation” (“ASC 810-10”).
+ASC 810-10 establishes accounting and reporting standards for the
+non-controlling interest in a subsidiary and for the deconsolidation of a
+subsidiary. Specifically, this statement requires the recognition of a
+non-controlling interest (minority interest) as equity in the Consolidated
+Financial Statements and separate from the parent’s equity. The amount of net
+income attributable to the noncontrolling interest is required to be included in
+consolidated net income on the face of the income statement. ASC 810-10
+clarifies that changes in a parent’s ownership interest in a subsidiary that do
+not result in deconsolidation are equity transactions if the parent retains its
+controlling financial interest. In addition, this statement requires that a
+parent recognize a gain or loss in net income when a subsidiary is
+deconsolidated. Such gain or loss will be measured using the fair value of the
+non-controlling equity investment on the deconsolidation date. ASC 810-10 also
+includes expanded disclosure requirements regarding the interests of the parent
+and its non-controlling interest. The adoption of ASC 810-10 had no material
+impact on our Consolidated Financial Statements. 
+F -
+7 
+STEVEN
+MADDEN, LTD. AND SUBSIDIARIES 
+Notes
+to Consolidated Financial Statements 
+December
+31, 2009 and 2008 
+($
+in thousands except per share data) 
+Note
+A - Summary of Significant Accounting Policies (continued) 
+The
+Company adopted the provisions of ASC 350-30, “General Intangibles Other Than
+Goodwill” (“ASC 350-30”) on January 1, 2009. ASC 350-30 specifies the factors to
+be considered in developing renewal or extension assumptions used to determine
+the useful life of intangible assets. Its intent is to improve the consistency
+between the useful life of an intangible asset and the period of expected cash
+flows used to measure its fair value. The adoption of ASC 350-30 had no material
+impact on our Consolidated Financial Statements. 
+In May
+2009, the FASB amended ASC 855, “Subsequent Events” (“ASC855”), effective for
+reporting periods ending after June 15, 2009, to establish general standards of
+accounting for and disclosures of events that occur after the balance sheet date
+but before financial statements are issued or are available to be issued. The
+adoption of the amendment did not have a material impact on the Company’s
+Consolidated Financial Statements. 
+In August
+of 2009, the FASB issued ASU 2009-5, an update to Topic ASC 820, “Fair Value
+Measurements and Disclosures”. This update provides amendments to reduce
+potential ambiguity in financial reporting when measuring the fair value of
+liabilities. Among other provisions, this update provides clarification in
+circumstances in which a quoted price in an active market for the identical
+liability is not available, a reporting entity is required to measure fair value
+using one or more of the valuation techniques described in ASU 2009-5. ASU
+2009-5 became effective October 1, 2009. The adoption of ASU 2009-5 had no
+impact on our Consolidated Financial Statements. 
+[3] Recently
+issued Accounting Standards: 
+A new
+accounting pronouncement amending the consolidation guidance relating to
+variable interest entities (“VIE”) will become effective for the Company on
+January 1, 2010. The new guidance replaces the current quantitative model for
+determining the primary beneficiary of a VIE with a qualitative approach that
+considers which entity has the power to direct activities that most
+significantly impact the VIE’s performance and whether the entity has an
+obligation to absorb losses or the right to receive benefits that could
+potentially be significant to the VIE. The adoption of the accounting
+pronouncement is not expected to have a material impact on the Company’s Consolidated Financial
+Statements. 
+[4] Principles
+of consolidation: 
+The
+Consolidated Financial Statements include the accounts of Steven Madden, Ltd.
+and its wholly owned subsidiaries Steven Madden Retail, Inc., Diva Acquisition
+Corp., Adesso Madden, Inc., Stevies, Inc. and Daniel M. Friedman and Associates,
+Inc. (collectively referred to as the “Company”). All significant intercompany
+balances and transactions have been eliminated. 
+[5] Use
+of estimates: 
+The
+preparation of financial statements in conformity with accounting principles
+generally accepted in the United States of America requires management to make
+estimates and assumptions that affect the reported amounts of assets and
+liabilities and disclosure of contingent assets and liabilities at the date of
+the financial statements and the reported amounts of revenue and expenses during
+the reporting period. Actual results could differ from those
+estimates. 
+F -
+8 
+STEVEN
+MADDEN, LTD. AND SUBSIDIARIES 
+Notes
+to Consolidated Financial Statements 
+December
+31, 2009 and 2008 
+($
+in thousands except per share data) 
+Note
+A
+- Summary of Significant Accounting Policies
+(continued) 
+Significant
+areas involving management estimates include allowances for bad debts, returns
+and customer chargebacks. The Company provides reserves on trade accounts
+receivables and due from factors for future customer chargebacks and markdown
+allowances, discounts, returns and other miscellaneous compliance related
+deductions that relate to the current period sales. The Company evaluates
+anticipated chargebacks by reviewing several performance indicators of its major
+customers. These performance indicators, which include retailers’ inventory
+levels, sell-through rates and gross margin levels, are analyzed by management
+to estimate the amount of the anticipated customer allowance. 
+[6] Cash
+equivalents: 
+Cash
+equivalents at December 31, 2009 and 2008 amounted to approximately $30,962
+and $78,639, respectively, and consisted of money market accounts. The
+Company considers all highly liquid instruments with an original maturity of
+three months or less when purchased to be cash equivalents. 
+[7] Marketable
+securities: 
+Marketable
+securities consist primarily of corporate and U.S. government and federal agency
+bonds with maturities greater than three months and up to six years at the time
+of purchase, as well as marketable equity securities. These securities, which
+are classified as available for sale, are carried at fair value, with unrealized
+gains and losses net of any tax effect reported in stockholders’ equity as
+accumulated other comprehensive income (loss) until realized. The schedule of
+maturities at December 31, 2009 and 2008 are as follows: 
+Maturities
+as of 
+December
+31, 2009 
+Maturities
+as of 
+December
+31, 2008 
+1
+Year or Less 
+1
+to 5 Years 
+1
+Year or Less 
+1
+to 5 Years 
+Municipal
+bonds 
+$ 
+— 
+$ 
+— 
+$ 
+6,635 
+$ 
+726 
+U.S.
+Government and federal agency bonds 
+— 
+9,479 
+4,997 
+— 
+Corporate
+bonds 
+17,971 
+58,234 
+491 
+19,889 
+Certificates
+of deposit 
+— 
+— 
+1,108 
+— 
+17,971 
+67,713 
+13,231 
+20,615 
+Marketable
+equity securities 
+— 
+— 
+1,378 
+— 
+$ 
+17,971 
+$ 
+67,713 
+$ 
+14,609 
+$ 
+20,615 
+As of
+March 31, 2008, the Company held $16,070 in auction rate securities (“ARS”). In
+the first quarter of 2008, the liquidity in the ARS market evaporated causing
+the ARSs to fail at auction and accordingly, the auction rate securities were
+classified as long term as of March 31, 2008. As a result of the lack of
+liquidity in the ARS market, the Company recorded an unrealized loss on its ARSs
+of $230 for the three months ended March 31, 2008. During the months of June
+through December of 2008, the Company was able to liquidate its entire portfolio
+of ARSs at full face value, and as a result, the Company did not hold any ARSs
+as of December 31, 2008. The Company did not incur any losses with respect to
+its investments in ARSs and hence, the unrealized loss of $230 was reversed in
+the second quarter of 2008. 
+F -
+9 
+STEVEN
+MADDEN, LTD. AND SUBSIDIARIES 
+Notes
+to Consolidated Financial Statements 
+December
+31, 2009 and 2008 
+($
+in thousands except per share data) 
+Note
+A - Summary of Significant Accounting Policies (continued) 
+[8] Inventories: 
+Inventories,
+which consist of finished goods on hand and in transit, are stated at the lower
+of cost (first-in, first-out method) or market. 
+[9] Property
+and equipment: 
+Property
+and equipment are stated at cost less accumulated depreciation and amortization.
+Depreciation is computed utilizing the straight-line method based on estimated
+useful lives ranging from three to ten years. Leasehold improvements are
+amortized utilizing the straight-line method over the shorter of their estimated
+useful lives or the remaining lease term. Depreciation and amortization include
+amounts relating to property and equipment under capital leases. 
+Impairment
+losses are recognized for long-lived assets, including certain intangibles, used
+in operations when indicators of impairment are present and the undiscounted
+cash flows estimated to be generated by those assets are not sufficient to
+recover the assets’ carrying amount. Impairment losses are measured by comparing
+the fair value of the assets to their carrying amount. 
+[10] Goodwill: 
+The
+Company’s goodwill and indefinite lived intangible assets are not amortized,
+rather they are tested for impairment on an annual basis or more often if events
+or circumstances change that could cause these assets to become impaired. The
+Company completed its annual impairment tests on the goodwill relating to the
+Compo Enhancements, Daniel M. Friedman and Diva Acquisition Corp. acquisitions.
+No impairments were recognized. 
+[11] Net
+income per share: 
+Basic
+income per share is based on the weighted average number of shares of common
+stock outstanding during the year. Diluted income per share reflects: a) the
+potential dilution assuming shares of common stock were issued upon the exercise
+of outstanding in-the-money options and the proceeds thereof were used to
+purchase treasury stock at the average market price during the period, and b)
+the vesting of granted nonvested restricted stock awards for which the assumed
+proceeds upon grant are deemed to be the amount of compensation cost
+attributable to future services and are not yet recognized using the treasury
+stock method, to the extent dilutive. For the years ended December 31, 2009
+and 2008, options exercisable into approximately 10,000 and 50,000 shares of
+common stock, respectively, have been excluded in the calculation of diluted
+income per share as the result would have been antidilutive, whereas no options
+exercisable into shares of common stock have been excluded in the calculation of
+diluted income per share for the year ended December 31, 2007. For the
+years ended December 31, 2009, 2008 and 2007, all unvested restricted stock
+awards were dilutive. 
+[12] Advertising
+costs: 
+The
+Company expenses costs of print, radio and billboard advertisements as of the
+first date the advertisements take place. Advertising expense included in
+operating expenses amounted to approximately $4,713 in 2009, $5,019 in
+2008 and $4,831 in 2007. 
+F -
+10 
+STEVEN
+MADDEN, LTD. AND SUBSIDIARIES 
+Notes
+to Consolidated Financial Statements 
+December
+31, 2009 and 2008 
+($
+in thousands except per share data) 
+Note
+A - Summary of Significant Accounting Policies (continued) 
+[13] Revenue
+recognition: 
+The
+Company recognizes revenue on wholesale sales when products are shipped pursuant
+to its standard terms which are freight on board (“FOB”) warehouse or when
+products are delivered to the consolidators as per the terms of the customers’
+purchase order. Sales reductions for anticipated discounts, allowances and other
+deductions are recognized during the period when sales are recorded. Customers
+retain the right to replacement of the product for poor quality or improper or
+short shipments, which have historically been immaterial. Retail sales are
+recognized when the payment is received from customers and are recorded net of
+returns. The Company also generates commission income acting as a buying agent
+by arranging to manufacture private label shoes to the specifications of its
+clients. The Company’s commission revenue includes partial recovery of its
+design, product and development costs for the services provided to certain
+suppliers in connection with the Company’s private label business. Commission
+revenue and product and development cost recoveries are recognized as earned
+when title of the product transfers from the manufacturer to the customer,
+collections are reasonably assured, and is reported on a net basis after
+deducting related operating expenses. 
+The
+Company licenses its trademarks for use in connection with the manufacturing,
+marketing and sale of cold weather accessories, sunglasses, eyewear, outerwear,
+bedding, hosiery, women’s fashion apparel and jewelry. The license agreements
+require the licensee to pay the Company a royalty and, in substantially all of
+the agreements, an advertising fee based on the higher of a minimum or a net
+sales percentage as defined in the various agreements. In addition, under the
+terms of retail selling agreements, most of the Company’s international
+distributors are required to pay the Company a royalty based on a percentage of
+net sales, in addition to a commission on the purchases of the Company’s
+products. Licensing revenue is recognized on the basis of net sales reported by
+the licensees and international distributors, or the minimum guaranteed
+royalties, if higher. In substantially all of the Company’s license agreements,
+the minimum guaranteed royalty is earned and payable on a quarterly
+basis. 
+[14] Taxes
+collected from customers: 
+The
+Company accounts for certain taxes collected from its customers in accordance
+with the FASB ASC 605-45-50, “Revenue Recognition – Principal Agent
+Considerations – Disclosure” (“ASC 605-45-50”). ASC 605-45-50 allows companies
+to adopt a policy of presenting taxes in the income statement on either a gross
+basis (included in revenues and costs) or net basis (excluded from revenues).
+Taxes within the scope of ASC 605-45-50 would include taxes that are imposed on
+a revenue transaction between a seller and a customer, for example, sales taxes,
+use taxes, value-added taxes and some types of excise taxes. The Company has
+consistently recorded all taxes within the scope of ASC 605-45-50 on a net
+basis. 
+[15] Sales
+deductions: 
+The
+Company supports retailers’ initiatives to maximize sales of the Company’s
+products on the retail floor by subsidizing the co-op advertising programs of
+such retailers, providing them with inventory markdown allowances and
+participating in various other marketing initiatives of its major customers.
+Such expenses are reflected in the financial statements as deductions to net
+sales. For the years ended December 31, 2009, 2008 and 2007 the total deductions
+to net sales for these expenses were $31,078, $37,291 and $43,691,
+respectively. 
+F -
+11 
+STEVEN
+MADDEN, LTD. AND SUBSIDIARIES 
+Notes
+to Consolidated Financial Statements 
+December
+31, 2009 and 2008 
+($
+in thousands except per share data) 
+Note
+A - Summary of Significant Accounting Policies (continued) 
+[16] Cost
+of sales: 
+All costs
+incurred to bring finished products to the Company’s distribution center and, in
+the Retail Division, the costs to bring products to the Company’s stores, are
+included in the cost of sales line on the Consolidated Statement of Income.
+These include the cost of finished products and related handling costs, purchase
+commissions, letter of credit fees, brokerage fees, sample expenses, customs
+duties, inbound freight, royalty payments on licensed products, labels and
+product packaging. All warehouse and distribution costs related to the Wholesale
+Division and freight to customers, if any, are included in the operating
+expenses line item of the Company’s Consolidated Statements of Income. The
+Company’s gross margins may not be comparable to other companies in the industry
+because some companies may include warehouse and distribution costs as a
+component of cost of sales, while other companies report on the same basis as
+the Company and include them in operating expenses. 
+[17] Warehouse
+and shipping costs: 
+The
+Company includes all warehouse and distribution costs for the Wholesale segment
+in the Operating Expenses line on the Consolidated Statements of Income. For the
+years ended December 31, 2009, 2008 and 2007, the total warehouse and
+distribution costs included in Operating Expenses were $8,488, $9,229 and $8,957
+respectively. The Company’s standard terms of sales are “FOB Steve Madden
+warehouse” and thus the Company’s wholesale customers absorb most shipping
+costs. Shipping costs to wholesale customers incurred by the Company are not
+considered significant and are included in the Operating Expense line in the
+Consolidated Statements of Income. 
+[18] Impairment
+of long-lived assets: 
+The
+Company reviews long-lived assets, including amortizable intangible assets, for
+impairment whenever events or changes in business circumstances indicate that
+the carrying amount of the asset may not be fully recoverable. If facts and
+circumstances indicate that the Company’s long-lived assets might be impaired,
+the estimated future undiscounted cash flows associated with the long-lived
+asset would be compared to its carrying amounts to determine if a write-down to
+fair value is necessary. If a write-down is required, the amount is determined
+by estimation of the present value of net discounted cash flows. 
+[19] Exit
+or disposal activity costs: 
+The
+Company accounts for its exit and disposal costs by recording an accrual for the
+liability for lease costs that will continue to be incurred without economic
+benefit to the Company upon the date that the Company ceases using the leased
+property. As of December 31, 2009, the Company accrued approximately $1,830 in
+lease exit costs associated with two stores that were closed prior to the end of
+their prospective lease terms. 
+[20] 401(k)
+Plan: 
+The
+Company maintains a tax-qualified 401(k) plan which is available to each of the
+Company’s eligible employees who elect to participate after meeting certain
+length-of-service requirements. The Company made discretionary matching
+contributions of 50% of employees’ contributions up to a maximum of 6% of
+employees’ compensation which vest to the employees over a period of time. Total
+matching contributions to the plan for 2009, 2008 and 2007 were
+approximately $601, $570 and $513, respectively. 
+F -
+12 
+STEVEN
+MADDEN, LTD. AND SUBSIDIARIES 
+Notes
+to Consolidated Financial Statements 
+December
+31, 2009 and 2008 
+($
+in thousands except per share data) 
+Note
+A - Summary of Significant Accounting Policies (continued) 
+[21] Fair
+Value of Financial Instruments: 
+The
+carrying value of certain financial instruments such as accounts receivable, due
+from factors, accounts payable and advances payable to factor approximate their
+fair values due to their short-term nature of their underlying terms. The fair
+values of the financial instruments and investments are determined by reference
+to market data and other valuation techniques, as appropriate. Fair value of the
+note receivable approximates its carrying value based upon its interest rate,
+which approximates current market interest rates. 
+[22] Fair value Measurement:
+The
+Company adopted the provisions of FASB ASC 820-10, “Fair Value Measurements and
+Disclosures” (“ASC 820-10”) for financial assets and liabilities effective
+January 1, 2008, and adopted ASC 820-10 for non-financial assets and
+non-financial liabilities effective January 1, 2009. ASC 820-10 clarifies the
+principle that fair value should be based on the assumptions market participants
+would use when pricing an asset or liability and establishes a fair value
+hierarchy that prioritizes the information used to develop those assumptions.
+ASC 820-10 utilizes a fair value hierarchy that prioritizes the inputs to
+valuation techniques used to measure fair value into three broad levels. A brief
+description of those three levels is as follows: 
+● 
+Level
+1: Observable inputs such as quoted prices in active markets for identical
+assets or liabilities. 
+● 
+Level
+2: Inputs other than quoted prices that are observable for the asset or
+liability, either directly or indirectly. 
+● 
+Level
+3: Significant unobservable
+inputs. 
+The
+Company’s financial assets subject to fair value measurements as of December 31,
+2009 are as follows: 
+Fair
+Value Measurements 
+Using
+Fair Value Hierarchy 
+Fair
+value 
+Level
+1 
+Level
+2 
+Level
+3 
+Cash
+equivalents 
+$ 
+30,962 
+$ 
+30,962 
+— 
+— 
+Current
+marketable securities – available for sale 
+17,971 
+17,971 
+— 
+— 
+Long-term
+marketable securities – available for sale 
+67,713 
+67,713 
+— 
+— 
+Total 
+$ 
+116,646 
+$ 
+116,646 
+— 
+— 
+During
+the year ended December 31, 2009, the Company had no assets measured at fair
+value on a recurring basis using significant unobservable inputs (Level 3). As
+of December 31, 2009, the Company does not have any long-term financial
+liabilities. No gains or losses resulting from the fair value measurement of
+financial assets were included in the Company’s earnings. 
+In April
+2009, the FASB issued additional guidance for estimating fair value in
+accordance with ASC Topic 820. The additional guidance addresses determining
+fair value when the volume and level of activity for an asset or liability have
+significantly decreased and identifying transactions that are not orderly. The
+adoption of this guidance did not have a material affect on the Company’s
+Consolidated Financial Statements. 
+F -
+13 
+STEVEN
+MADDEN, LTD. AND SUBSIDIARIES 
+Notes
+to Consolidated Financial Statements 
+December
+31, 2009 and 2008 
+($
+in thousands except per share data) 
+Note
+A - Summary of Significant Accounting Policies (continued) 
+The
+Company adopted the provisions of FASB ASC 825-10, “Financial Instruments” (“ASC
+825-10”) on January 1, 2008. ASC 825-10 permits entities to choose to measure
+many financial instruments and certain other items at fair value that are not
+currently required to be measured at fair value. ASC 825-10 also establishes
+presentation and disclosure requirements designed to facilitate comparisons
+between entities that chose different measurement attributes for similar assets
+and liabilities. The Company has elected not to measure any eligible items at
+fair value. 
+Note
+B – Acquisitions 
+Zone
+88 and Shakedown Street 
+On July
+8, 2009, the Company acquired certain of the assets constituting the Zone 88 and
+Shakedown Street (together “Zone 88”) lines of SML Brands, LLC, a subsidiary of
+Aimee Lynn, Inc. SML Brands designs, sources and markets primarily private label
+accessories and licensed brands, principally handbags, belts and small leather
+goods, for mass merchants and mid-tier retailers. The acquisition was completed
+for $1,348 in cash. The fair values assigned
+to tangible and intangible assets acquired and liabilities assumed are based on
+management’s estimates. The Company allocated $220 to current assets, $409 to
+the value of customer relationships, $841 to goodwill and $122 to liabilities
+assumed. The value of customer relationships is being amortized over ten years.
+The results of operations of Zone 88 have been included in the Company’s
+Consolidated Statements of Income from the date of the acquisition. Unaudited
+pro forma information related to this acquisition is not included, as the impact
+of this transaction is not material to the Company’s consolidated
+results. 
+Daniel
+M. Friedman 
+On
+February 7, 2006, the Company acquired all of the equity interests of privately
+held Daniel M. Friedman and Associates, Inc. and D.M.F. International
+(collectively, “Daniel M. Friedman”). Founded in 1995, Daniel M. Friedman
+designs, sources and markets name brand fashion handbags and accessories. The
+acquisition was completed for consideration of $18,710, including transaction
+costs. In addition, the purchase agreement includes certain earn-out provisions
+based on financial performance through 2010. On April 10, 2007, an amendment to
+the agreement shortened the earn-out period by one year through December 31,
+2008 and advanced the earn-out payments from 2008 to 2007. On December 31, 2007,
+a preliminary earn-out provision for 2007 of $3,956 was charged to goodwill and
+on March 31, 2008, the 2007 earn-out provision was finalized at $4,923, which
+increased the total acquisition cost to $23,686. On December 31, 2008, a
+preliminary earn-out provision for 2008 of $6,632 was charged to goodwill which
+increased the total acquisition cost to $30,318. On March 31, 2009, the parties
+agreed to a tentative 2008 earn-out provision of $6,530, and accordingly,
+goodwill was reduced by $102 bringing the total acquisition cost to $30,216. In
+December of 2009, the parties finalized the 2008 provision at
+$6,530. 
+The
+Daniel M. Friedman acquisition was accounted for using the purchase method of
+accounting as required by Business Combinations accounting standards as
+promulgated. Accordingly, the assets and liabilities of Daniel M. Friedman were
+adjusted to their fair values, and the excess of the purchase price over the
+fair value of the assets acquired, including identified intangible assets, was
+recorded as goodwill. The fair values assigned to tangible and intangible assets
+acquired and liabilities assumed are based on management’s estimates and
+assumptions. The total purchase price has been allocated as
+follows: 
+Current
+assets 
+$ 
+9,772 
+Property,
+plant and equipment 
+289 
+Deposits 
+62 
+Intangible
+assets 
+8,400 
+Goodwill 
+16,424 
+Liabilities
+assumed 
+(4,731 
+) 
+Net
+assets acquired 
+$ 
+30,216 
+F -
+14 
+STEVEN
+MADDEN, LTD. AND SUBSIDIARIES 
+Notes
+to Consolidated Financial Statements 
+December
+31, 2009 and 2008 
+($
+in thousands except per share data) 
+Note
+B – Acquisitions (continued) 
+Pursuant
+to the acquisition, the Company had a note receivable from the former owner and
+namesake of Daniel M. Friedman in the amount of $1,250. The note, which had an
+interest rate of 5%, was due and payable on the same day that the final earn-out
+payment was due. The note allowed the maker to offset the principal and interest
+due on the note against any earn-out monies that might be owed to him. On March
+31, 2009, the note was offset against the final earn-out payment. 
+Note
+C - Due From Factors 
+On July
+10, 2009, the Company entered into a collection agency agreement with Rosenthal
+& Rosenthal, Inc (“Rosenthal”) that became effective on September 15, 2009.
+The agreement can be terminated by Rosenthal at any time upon 60 days’ prior
+written notice, or by us at any time after the expiration of the first contract
+year upon 60 days’ prior written notice. Under the agreement, the Company can
+request advances from the factor of up to 85% of aggregate receivables factored
+by Rosenthal. The agreement provides the Company with a $30 million credit
+facility with a $15 million sub-limit for letters of credit. The Company also
+pays a fee of 0.275% of the gross invoice amount factored with Rosenthal.
+Rosenthal assumes the credit risk on a substantial portion of the receivables
+the Company refers to it and Rosenthal maintains a lien on all of the Company’s
+receivables to secure the Company's obligations. On February 10, 2010, the agreement was
+amended to include foreign accounts receivable. 
+Under the
+terms of our prior factoring agreement, as amended, which the agreement with
+Rosenthal replaces, the Company could request advances from the factor of up to
+85% of aggregate factored receivables. The agreement provided the Company with a
+$50 million credit facility with a $25 million sub-limit for letters of credit.
+The Company paid a fee that varied depending on the customer of between 0.15%
+and 0.25% of the gross invoice amount. Prior to the amendment to the factoring
+agreement discussed in the next paragraph, the Company sold a substantial portion of its
+receivables, principally without recourse, to the factor. The prior factor
+maintained a lien on all of the Company's receivables to secure the Company's obligations and
+assumed the credit risk for all purchased accounts approved by them with certain
+exceptions. On July 13, 2009, the Company terminated the prior factoring
+agreement, effective on September 14, 2009. 
+In
+November of 2008, the Company borrowed from its former factor the maximum amount
+allowed by the terms of the agreement. As of December 31, 2008, the Company had
+advances payable due to the factor of $30,168 against gross factored receivables
+of $44,082. Subsequent to the year end, the Company began reducing the loan
+balance with the proceeds from the collections of factored accounts receivable,
+and as of February 17, 2009, the loan was completely paid off. The interest rate
+on the advances averaged 3.9% through the date of repayment. Effective January
+1, 2009, the factoring agreement was amended so that the Company retained title
+to its factored accounts receivable, which would keep its outstanding
+receivables from being the property of the previous factor. 
+As of
+December 31, 2009 and 2008, the Company assumed the credit risk on approximately
+$178 and $93 of factored receivables, respectively. 
+F -
+15 
+STEVEN
+MADDEN, LTD. AND SUBSIDIARIES 
+Notes
+to Consolidated Financial Statements 
+December
+31, 2009 and 2008 
+($
+in thousands except per share data) 
+Note
+C - Due From Factors (continued) 
+A
+“factored” sale (whether “with” or “without” recourse) is substantially the same
+as a non-factored sale and the Company accounts for its factored
+sales/receivables in the same manner as its non-factored sales/receivables. The
+factor services the collection of the Company’s accounts receivable. Funds
+collected by the factor are applied against advances owed to the factor (if
+any), and the balance is due and payable to the Company, net of any fees. The
+allowance against “due from factor” is a projected provision based on certain
+formulas and prior approvals for markdowns, allowances, discounts, advertising
+and other deductions that customers may deduct against their
+payments. 
+Note
+D - Note Receivable – related party 
+On June
+25, 2007, the Company made a loan to Steven Madden, its Creative and Design
+Chief and a principal stockholder of the Company, in the amount of $3,000, in
+order for Mr. Madden to satisfy a personal tax obligation resulting from the
+exercise of options that were due to expire and retain the underlying Company
+common stock, which he pledged to the Company as collateral in connection with
+the loan. Mr. Madden executed a secured promissory note in favor of the Company
+that bears interest at an annual rate of 8% and was due on the earlier of the
+date Mr. Madden ceases to be employed by the Company or December 31, 2007. The
+note was amended and restated pursuant to an Amended and Restated Secured
+Promissory Note dated December 19, 2007 which extended the due date to March 31,
+2009. A second Amended and Restated Secured Promissory Note dated April 1, 2009
+changed the interest rate to 6% and extended the due date of both principal and
+interest to June 30, 2015. As of December 31, 2009 and 2008, $568 and $370 of
+interest, respectively, has accrued on the note and has been reflected on the
+Company’s Consolidated Financial Statements. Pursuant to a pledge agreement
+between the Company and Mr. Madden, the note is secured by 510,000 shares of the
+Company’s common stock. 
+Note
+E - Property and Equipment 
+The major
+classes of assets and total accumulated depreciation and amortization are as
+follows: 
+December
+31, 
+2009 
+2008 
+Land
+and building 
+$ 
+767 
+$ 
+767 
+Leasehold
+improvements 
+36,181 
+37,913 
+Machinery
+and equipment 
+3,619 
+3,660 
+Furniture
+and fixtures 
+4,395 
+4,605 
+Computer
+equipment 
+15,617 
+14,522 
+60,579 
+61,467 
+Less
+accumulated depreciation and amortization 
+(36,786 
+) 
+(33,258 
+) 
+Property
+and equipment - net 
+$ 
+23,793 
+$ 
+28,209 
+Depreciation
+and amortization expense included in operating expenses amounted to
+approximately $6,628 in 2009, $7,140 in 2008, and $6,537 in 2007. 
+F -
+16 
+STEVEN
+MADDEN, LTD. AND SUBSIDIARIES 
+Notes
+to Consolidated Financial Statements 
+December
+31, 2009 and 2008 
+($
+in thousands except per share data) 
+Note
+F – Goodwill and Intangible Assets 
+The
+following is a summary of the carrying amount of goodwill by segment for the
+year ended December 31, 2009: 
+Wholesale 
+Net
+Carrying 
+Footwear 
+Accessories 
+Retail 
+Amount 
+Balance
+at January 1, 2009 
+$ 
+1,547 
+$ 
+16,526 
+$ 
+5,501 
+$ 
+23,574 
+Acquisition
+of Zone 88 
+841 
+841 
+Adjustment
+of purchase price – 
+Daniel M. Friedman 
+0 
+(102 
+) 
+0 
+(102 
+) 
+Balance
+at December 31, 2009 
+$ 
+1,547 
+$ 
+17,265 
+$ 
+5,501 
+$ 
+24,313 
+The
+following table details identifiable intangible assets as of December 31,
+2009: 
+Estimated
+lives 
+Cost
+basis 
+Accumulated
+Amortization 
+Net
+Carrying Amount 
+Trade
+name 
+6
+years 
+$ 
+200 
+$ 
+132 
+$ 
+68 
+Customer
+relationships 
+10
+years 
+6,809 
+2,045 
+4,764 
+License
+agreements 
+3-6
+years 
+5,600 
+4,105 
+1,495 
+Non-compete
+agreement 
+5
+years 
+930 
+542 
+388 
+Other 
+3
+years 
+14 
+13 
+1 
+$ 
+13,553 
+$ 
+6,837 
+$ 
+6,716 
+The
+amortization of intangible assets is included in operating expenses on the
+Company’s Consolidated Statements of Income. The estimated future amortization
+expense of intangibles as of December 31, 2009 is as follows: 
+2010 
+$ 
+1,897 
+2011 
+1,422 
+2012 
+683 
+2013 
+683 
+2014 
+683 
+Thereafter 
+1,348 
+Total 
+$ 
+6,716 
+F -
+17 
+STEVEN
+MADDEN, LTD. AND SUBSIDIARIES 
+Notes
+to Consolidated Financial Statements 
+December
+31, 2009 and 2008 
+($
+in thousands except per share data) 
+Note
+G – Stock-Based
+Compensation 
+In March
+2006, the Board of Directors approved the Steven Madden, Ltd. Stock Incentive
+Plan (the “Plan”) under which nonqualified stock options, stock appreciation
+rights, performance shares, restricted stock, other stock-based awards and
+performance-based cash awards may be granted to employees, consultants and
+non-employee directors. The stockholders approved the Plan on May 26, 2006.
+Initially, the number of shares that could be issued or used under the Plan
+could not exceed 1,200,000 shares. On May 25, 2007, the stockholders approved an
+amendment to the Plan to increase the maximum number of shares that could be
+issued under the Plan to 1,550,000. On May 22, 2009, the stockholders approved a
+second amendment to the Plan that increased the maximum number of shares that
+may be issued under the Plan to 4,064,000. The following table summarizes the
+number of shares of common stock authorized for use under the Plan, the amount
+of stock-based awards issued (net of expired or cancelled) and the amount of
+common stock available for the grant of stock-based awards under the
+Plan: 
+Common
+Stock authorized 
+4,064,000 
+Stock
+based awards, including restricted stock and stock options granted, net of
+expired or cancelled 
+1,774,000 
+Common
+Stock available for grant of stock based awards as of December 31,
+2009 
+2,290,000 
+In June
+of 1999, the Company adopted the 1999 Stock Plan which, as amended, authorized
+the issuance of up to 4,830,000 shares. The plan, which expired in June of 2009,
+provided that the option price could not be less than the fair market value of
+the common stock on the date of grant. Options to purchase 4,829,000 shares of
+the Company’s common stock were granted under the 1999 Stock Plan. 
+In
+accordance with accounting guidance relating to stock-based compensation, the
+Company records compensation for all awards based on the fair value of options
+and restricted stock on the date of grant. Equity-based compensation is included
+in operating expenses on the Company’s Consolidated Statements of Income. For
+the years ended December 31, 2009, 2008 and 2007, total equity-based
+compensation was as follows: 
+Years
+Ended December 31, 
+2009 
+2008 
+2007 
+Stock
+options 
+$ 
+1,560 
+$ 
+486 
+$ 
+5 
+Restricted
+stock 
+4,380 
+5,170 
+4,429 
+Total 
+$ 
+5,940 
+$ 
+5,656 
+$ 
+4,434 
+On March
+24, 2008, the Chief Executive Officer and Chairman of the Board of Directors of
+the Company (the “former CEO”) resigned from his positions. For the purposes of
+determining any payments to which such former CEO was entitled following his
+resignation, it was mutually agreed to treat his resignation as a termination
+without cause, as defined in his employment agreement. Pursuant to an agreement
+with the Company, 42,500 shares of restricted stock that were due to vest in
+varying amounts over four years vested on the date of termination. Accordingly,
+the balance of unamortized stock-based compensation related to the former CEO’s
+restricted stock of $921 was included as a charge in operating expenses during
+the quarter ended March 31, 2008. 
+The
+Company classifies cash flows resulting from the tax benefits from tax
+deductions in excess of the compensation costs recognized for those options (tax
+benefits) as financing cash flows. For the years ended December 31, 2009, 2008
+and 2007, the Company realized a tax benefit (expense) from the exercise of
+stock options of $497, $(258) and $7,180, respectively. 
+F -
+18 
+STEVEN
+MADDEN, LTD. AND SUBSIDIARIES 
+Notes
+to Consolidated Financial Statements 
+December
+31, 2009 and 2008 
+($
+in thousands except per share data) 
+Note
+G - Stock-Based Compensation (continued) 
+Stock
+Options 
+The total
+intrinsic value of options exercised during 2009, 2008 and 2007 amounted to
+$5,300, $2,361 and $20,825 respectively. During the years ended December 31,
+2009 and 2008, 95,000 options with a weighted average exercise price of $19.56
+and 25,000 options with a weighted average exercise price of $18.07 vested,
+respectively, while no options vested in 2007. As of December 31, 2009,
+there were 858,000 unvested options with a total unrecognized compensation cost
+of $5,818 that is expected to be recognized over a weighted-average of 3.3
+years. 
+The
+Company estimates the fair value of options granted using the Black-Scholes
+option-pricing model, which requires several assumptions. The expected term of
+the options represents the estimated period of time until exercise and is based
+on historical experience of similar awards. Expected volatility is based on the
+historical volatility of the Company’s stock. The risk free interest rate is
+based on the U.S. Treasury yield curve in effect at the time of the grant. With
+the exception of a special dividend paid in November of 2005 and in November of
+2006, the Company historically has not paid dividends and thus the expected
+dividend rate is assumed to be zero. The weighted average fair value of options
+granted in 2009, 2008 and 2007 was approximately $9.43, $6.93 and $5.02,
+respectively, using the Black-Scholes option-pricing model with the following
+assumptions: 
+2009 
+2008 
+2007 
+Volatility 
+49%
+to 52% 
+43%
+to 45% 
+37%
+to 40% 
+Risk
+free interest rate 
+1.39%
+to 2.09% 
+2.17%
+to 3.12% 
+4.29%
+to 4.73% 
+Expected
+life in years 
+3
+to 4 
+3
+to 4 
+3 
+Dividend
+yield 
+0 
+0 
+0 
+Activity
+relating to stock options granted under the Company’s plans and outside the
+plans during the three years ended December 31, 2009 is as follows: 
+Number
+of Shares 
+Weighted
+Average Exercise Price 
+Weighted
+Average Remaining Contractual Term 
+Aggregate
+Intrinsic Value 
+Outstanding
+at January 1, 2007 
+1,396,000 
+$ 
+8.75 
+Granted 
+305,000 
+47.01 
+Exercised 
+(863,000 
+) 
+6.50 
+Cancelled/Forfeited 
+(300,000 
+) 
+47.50 
+Outstanding
+at December 31, 2007 
+538,000 
+12.45 
+Granted 
+405,000 
+19.34 
+Exercised 
+(171,000 
+) 
+11.95 
+Cancelled/Forfeited 
+— 
+— 
+Outstanding
+at December 31, 2008 
+772,000 
+16.18 
+Granted 
+587,000 
+23.44 
+Exercised 
+(264,000 
+) 
+14.49 
+Cancelled/Forfeited 
+(18,000 
+) 
+17.40 
+Outstanding
+at December 31, 2009 
+1,077,000 
+$ 
+20.52 
+5.4 
+$ 
+22,306 
+Exercisable
+at December 31, 2009 
+225,000 
+$ 
+14.16 
+3.6 
+$ 
+6,092 
+F -
+19 
+STEVEN
+MADDEN, LTD. AND SUBSIDIARIES 
+Notes
+to Consolidated Financial Statements 
+December
+31, 2009 and 2008 
+($
+in thousands except per share data) 
+Note
+G - Stock-Based Compensation (continued) 
+The
+following table summarizes information about stock options at December 31,
+2009: 
+Options
+Outstanding 
+Options
+Exercisable 
+Range
+of Exercise Price 
+Number
+Outstanding 
+Weighted
+Average Remaining Contractual Life 
+(in
+Years) 
+Weighted
+Average Exercise Price 
+Number
+Exercisable 
+Weighted
+Average Exercise Price 
+$11.61
+to $16.00 
+178,000 
+3.3 
+$ 
+12.82 
+177,000 
+$ 
+12.80 
+$16.01
+to $22.00 
+659,000 
+5.6 
+18.81 
+48,000 
+19.17 
+$22.01
+to $28.00 
+41,000 
+5.6 
+23.56 
+— 
+— 
+$28.01
+to $34.00 
+134,000 
+6.4 
+30.05 
+— 
+— 
+$34.01
+to $40.50 
+65,000 
+6.6 
+37.62 
+— 
+— 
+1,077,000 
+5.4 
+$ 
+20.52 
+225,000 
+$ 
+14.16 
+Restricted
+Stock 
+The
+following table summarizes restricted stock activity during the year ended
+December 31, 2009: 
+Number
+of Shares 
+Weighted
+Average Fair Value at Grant Date 
+Outstanding
+at January 1, 2009 
+358,000 
+$ 
+29.53 
+Granted 
+89,000 
+35.11 
+Vested 
+(147,000 
+) 
+25.85 
+Forfeited 
+(3,000 
+) 
+36.59 
+Outstanding
+at December 31, 2009 
+297,000 
+$ 
+31.47 
+As of
+December 31, 2009, there was $6,195 of total unrecognized compensation cost
+related to restricted stock awards granted under the Plan. This cost is expected
+to be recognized over a weighted-average of 2.6 years. During the year
+ended December 31, 2006, 165,000 restricted stock awards were granted to
+the Company’s Creative and Design Chief of which 61,500 remain restricted as of
+December 31, 2009. On November 6, 2009, an award of 50,000 shares of restricted
+stock were granted to Edward R. Rosenfeld, the Company’s Chief Executive Officer
+and Chairman of the Board. The Company determines the fair value of its
+restricted stock awards based on the market price of its common stock on the
+date of grant. The fair value of the restricted stock that vested during the
+years ended December 31, 2009, 2008 and 2007 was $3,786, $5,741 and $3,604,
+respectively. 
+Note
+H - Preferred Stock 
+The
+Company has authorized 5,000,000 shares of preferred stock. The Board of
+Directors has designated 60,000 shares of such preferred stock as Series A
+Junior Participating Preferred Stock (“Series A Preferred”). Holders of the
+shares of Series A Preferred are entitled to dividends equal to 1,000 times
+dividends declared or paid on the Company’s common stock. Each share of Series A
+Preferred entitles the holder to 1,000 votes on all matters submitted to the
+holders of common stock. The Series A Preferred has a liquidation preference of
+$1,000 per share, and is not redeemable by the Company. No shares of preferred
+stock have been issued. 
+F -
+20 
+STEVEN
+MADDEN, LTD. AND SUBSIDIARIES 
+Notes
+to Consolidated Financial Statements 
+December
+31, 2009 and 2008 
+($
+in thousands except per share data) 
+Note
+I – Rights Agreement 
+On
+October 30, 2001, the Company declared a dividend distribution of one preferred
+stock purchase right (a “Right”) for each outstanding share of common stock.
+Each Right entitles the holder to purchase from the Company seven
+ten-thousandths (7/10,000) of a share of Series A Preferred at a price of $50
+per seven ten-thousandth (7/10,000) of a share. Initially, the Rights will not
+be exercisable and will automatically trade with the common stock. The Rights
+become exercisable, in general, ten days following the announcement of a person
+or group acquiring beneficial ownership of at least 15% of the outstanding
+voting stock of the Company. 
+Note
+J - Operating Leases 
+The
+Company leases office, showroom and retail facilities under noncancelable
+operating leases with terms expiring at various times through
+2020. Future minimum annual lease payments under noncancelable operating
+leases consist of the following at December 31: 
+2010 
+$ 
+16,824 
+2011 
+16,211 
+2012 
+15,424 
+2013 
+13,186 
+2014 
+11,953 
+Thereafter 
+30,824 
+Total 
+$ 
+104,422 
+A
+majority of the retail store leases provide for contingent rental payments if
+gross sales exceed certain targets. In addition, many of the leases contain rent
+escalation clauses to compensate for increases in operating costs and real
+estate taxes. 
+Rent
+expense for the years ended December 31, 2009, 2008 and 2007 was
+approximately $21,087, $21,808 and $18,071, respectively. Included in
+such amounts are contingent rents of $23, $44 and $29 in 2009, 2008 and 2007,
+respectively. For the years ended December 31, 2009 and 2008 the Company
+recorded approximately $1,541 and $1,325 in lease exit costs associated with
+leases that were terminated prior to the end of their prospective
+terms. 
+Rent
+expense is calculated by amortizing total rental payments (net of any rental
+abatements, construction allowances and other rental concessions), on a
+straight-line basis, over the lease term. Accordingly, rent expense charged to
+operations differs from rent paid resulting in the Company recording deferred
+rent. 
+Note
+K - Income Taxes 
+The
+components of income before income taxes is as follows: 
+2009 
+2008 
+2007 
+Domestic 
+$ 
+54,666 
+$ 
+31,395 
+$ 
+48,456 
+Foreign 
+26,123 
+14,911 
+7,680 
+$ 
+80,789 
+$ 
+46,306 
+$ 
+56,136 
+F -
+21 
+STEVEN
+MADDEN, LTD. AND SUBSIDIARIES 
+Notes
+to Consolidated Financial Statements 
+December
+31, 2009 and 2008 
+($
+in thousands except per share data) 
+Note
+K - Income Taxes (continued) 
+The
+income tax provision (benefit) consists of the following: 
+2009 
+2008 
+2007 
+Current: 
+Federal 
+$ 
+23,896 
+$ 
+11,932 
+$ 
+21,850 
+State
+and local 
+4,403 
+2,548 
+517 
+Foreign 
+4,310 
+2,609 
+1,229 
+32,609 
+17,089 
+23,596 
+Deferred: 
+Federal 
+(1,748 
+) 
+1,114 
+(2,827 
+) 
+State
+and local 
+(179 
+) 
+127 
+(323 
+) 
+(1,927 
+) 
+1,241 
+(3,150 
+) 
+$ 
+30,682 
+$ 
+18,330 
+$ 
+20,446 
+A
+reconciliation between taxes computed at the federal statutory rate and the
+effective tax rate is as follows: 
+December
+31, 
+2009 
+2008 
+2007 
+Income
+taxes at federal statutory rate 
+35.0 
+% 
+35.0 
+% 
+35.0 
+% 
+State
+and local income taxes - net of federal income tax benefit 
+2.9 
+3.0 
+4.3 
+Nondeductible
+items 
+0.2 
+0.4 
+0.2 
+Valuation
+allowance 
+— 
+0.9 
+— 
+One-time
+adjustment for filing prior years’ NY State and NY City amended returns on
+a combined basis 
+— 
+0.7 
+(2.3 
+) 
+Other 
+(0.1 
+) 
+(0.4 
+) 
+(0.8 
+) 
+Effective
+rate 
+38.0 
+% 
+39.6 
+% 
+36.4 
+% 
+The
+Company applies the asset and liability method of accounting for income taxes.
+Under this method, deferred tax assets and liabilities are determined based on
+differences between financial reporting and tax bases of assets and liabilities
+and are measured using the enacted tax rates and laws that are expected to be in
+effect when the differences are expected to reverse. 
+Effective
+January 1, 2007, the Company adopted the provisions of a new accounting
+pronouncement that addresses the accounting for uncertainty in income taxes
+recognized in the financial statements. The pronouncement provides guidance on
+the financial statement recognition and measurement of a tax position taken on
+the Company’s tax return. Pursuant to this pronouncement, the Company has opted
+to classify interest and penalties that would accrue according to the provisions
+of relevant tax law as income tax expense on the Consolidated Statements of
+Income. The Company determines the amount of interest expense to be recognized
+by applying the applicable statutory rate of interest to the difference between
+the tax position recognized and the amount previously taken or expected to be
+taken on a tax return. As required, the Company applied the
+“more-likely-than-not” recognition threshold to all tax positions at the
+adoption date, which resulted in no required adjustment to the opening balance
+of retained earnings. The adoption of this pronouncement did not have a material
+impact on the Company’s results of operations and earnings per share. The
+Company’s tax returns for 2005 through 2007 are currently under examination by
+the Internal Revenue Service. The Company’s tax years 2005 through 2008 remain
+open to examination for most taxing authorities. 
+F -
+22 
+STEVEN
+MADDEN, LTD. AND SUBSIDIARIES 
+Notes
+to Consolidated Financial Statements 
+December
+31, 2009 and 2008 
+($
+in thousands except per share data) 
+Note
+K - Income Taxes (continued) 
+As of
+December 31, 2009, the Company has unrealized investment losses of $2,983
+available to offset future investment gains and thus reduce future taxable
+income. A deferred tax asset has been established from recognized capital losses
+on securities which can only be offset to the extent of capital gains. These
+losses have a five year carryforward. Due to uncertainty in the market place,
+the Company has set up a valuation allowance of $468 to reduce the deferred tax
+asset to the amount that it is more likely than not that the Company will
+generate sufficient capital gains to offset previously recognized capital
+losses. 
+The
+components of deferred tax assets and liabilities are as follows: 
+December
+31, 
+2009 
+2008 
+Current
+deferred tax assets: 
+Receivable
+allowances 
+$ 
+5,449 
+$ 
+4,415 
+Inventory 
+1,097 
+1,523 
+Unrealized
+(gain) loss 
+(139 
+) 
+226 
+Accrued
+expenses 
+1,653 
+1,192 
+Other 
+1,187 
+1,092 
+Gross
+current deferred tax asset 
+9,247 
+8,448 
+Valuation
+allowance 
+(468 
+) 
+(468 
+) 
+8,779 
+7,980 
+Non-current
+deferred tax assets: 
+Depreciation
+and amortization 
+4,660 
+4,276 
+Deferred
+compensation 
+1,612 
+1,082 
+Deferred
+rent 
+2,006 
+1,861 
+Amortization
+of goodwill 
+(1,158 
+) 
+(652 
+) 
+Other 
+423 
+545 
+7,543 
+7,112 
+Deferred
+tax assets 
+$ 
+16,322 
+$ 
+15,092 
+Note
+L - Commitments, Contingencies and Other 
+[1] Legal
+proceedings: 
+(a) 
+On
+June 24, 2009, The Center For Environmental Health filed a lawsuit, Center for Environmental
+Health v. Lulu NYC, LLC, Steve Madden, Ltd., Steve Madden Retail, Inc., et
+al. , Case No. RG09459448, in California Superior Court, Alameda
+County, against the Company and dozens of other California retailers and
+vendors of leather, vinyl, and/or imitation leather handbags, belts, and
+shoes alleging that the retailers and vendors failed to warn that certain
+such products may expose California citizens to lead and lead compounds.
+The parties have been in negotiations to resolve the matters informally
+and have finalized the substance of a consent judgment, the terms of which
+are not material to the Company’s Consolidated Financial
+Statements. 
+F -
+23 
+STEVEN
+MADDEN, LTD. AND SUBSIDIARIES 
+Notes
+to Consolidated Financial Statements 
+December
+31, 2009 and 2008 
+($
+in thousands except per share data) 
+Note
+L - Commitments, Contingencies and Other (continued) 
+(b) 
+On
+June 24, 2009, a class action lawsuit, Shahrzad Tahvilian, et al. v.
+Steve Madden Retail, Inc. and Steve Madden, Ltd. , Case No. BC
+414217, was filed in the Superior Court of California, Los Angeles County,
+against the Company and its wholly-owned subsidiary, Steven Madden Retail,
+Inc. The complaint, which seeks unspecified damages, alleges violations of
+California labor laws, including, among other things, that the Company
+failed to provide mandated meal breaks to its employees and failed to
+provide overtime pay as required. The Company filed an answer in the
+litigation denying all allegations stated in the complaint. The parties
+have agreed to submit the claim to private mediation, which is scheduled
+for March 29, 2010. The Company, with the advice of legal counsel, has
+evaluated the liability in this case and believes that it is not likely to
+exceed $1,000. Accordingly, the Company accrued $1,000 in the fiscal year
+2009. The accrual is subject to change to reflect the status of this
+matter. 
+(c) 
+On
+August 10, 2005, following the conclusion of an audit of the Company
+conducted by auditors U.S. Customs and Border Protection (“Customs”)
+during 2004 and 2005, U.S. Customs issued a report that asserts that
+certain commissions that the Company treated as “buying agents’
+commissions” (which are non-dutiable) should be treated as “selling
+agents’ commissions” and hence are dutiable. In September of 2007, Customs
+notified the Company that it had finalized its assessment of the underpaid
+duties to be $1,400. On October 20, 2005, U.S. Immigration and Customs
+Enforcement notified the Company’s legal counsel that a formal
+investigation of the Company’s importing practices had been commenced as a
+result of the audit. The Company has contested the conclusions of the U.S.
+Customs audit and filed a request for review and issuance of rulings
+thereon by U.S. Customs Headquarters, Office of Regulations and Rulings,
+under internal advice procedures. On November 28, 2007, U.S. Customs
+Headquarters informed the Company that its request for internal advice had
+been accepted and was under review. All efforts by U.S. Customs to collect
+additional duties, fees, interest or penalties have been stayed pending
+final decision of U.S. Customs Headquarters. In the event that the U.S.
+Customs auditors’ position is ultimately upheld, the Company may be
+subject to monetary penalties. A final determination of the matter may not
+occur for several months or even years. The Company, with the advice of
+legal counsel, evaluated the liability in the case, including additional
+duties, interest and penalties, and believes that it is not likely to
+exceed $2,700. Therefore, as of December 31, 2007, the Company had
+recorded a total reserve of $2,700 that was increased by $256 in 2008 and
+$89 in 2009 to reflect anticipated additional interest costs, bringing the
+reserve as of December 31, 2009 and 2008 to $3,045 and $2,956, respectively. Such reserve is subject to change to reflect the status of
+this matter. 
+(d) 
+The
+Company has been named as a defendant in certain other lawsuits in the
+normal course of business. In the opinion of management, after consulting
+with legal counsel, the liabilities, if any, resulting from these matters
+should not have a material effect on the Company’s financial position or
+results of operations. It is the policy of management to disclose the
+amount or range of reasonably possible losses in excess of recorded
+amounts. 
+[2] Employment
+Effective
+December 14, 2009, the Company amended its employment agreement with Steven
+Madden, the Company’s Creative and Design Chief, to extend his existing
+employment agreement, which was due to expire June 30, 2015. The amendment
+extends the term of Mr. Madden’s employment through December 31, 2019. The
+agreement provides for an annual salary of $600, subject to certain specified
+adjustments, through December 31, 2019. The agreement also provides for annual
+cash bonuses based on EBITDA, on revenue for any new business, and royalty
+income over $2,000, and, under certain conditions, an annual option grant at
+exercise prices equal to the market price on the date of grant. In addition, the
+agreement provides that Mr. Madden shall receive a non-accountable annual
+expense allowance of $200. 
+F -
+24 
+STEVEN
+MADDEN, LTD. AND SUBSIDIARIES 
+Notes
+to Consolidated Financial Statements 
+December
+31, 2009 and 2008 
+($
+in thousands except per share data) 
+Note
+L - Commitments, Contingencies and Other (Continued) 
+On
+November 6, 2009, the Company entered into a new employment agreement with
+Edward R. Rosenfeld, the Company’s Chief Executive Officer and the Chairman of
+the Board of Directors, to replace an existing employment agreement that was due
+to expire on December 31, 2009. The agreement, which expires on December 31,
+2012, provides for an annual salary of $400 through December 31, 2009, $500 in
+2010, $525 in 2011 and $551 in 2012. In addition, Mr. Rosenfeld received a grant
+of 50,000 shares of restricted common stock that will vest annually on the
+anniversary date of the agreement over five years. 
+Effective
+October 7, 2009, the Company entered into a new employment agreement with Robert
+Schmertz, the Company’s Brand Director, to replace an existing employment
+agreement that was due to expire at the end of 2009. The new agreement, which
+expires on December 31, 2012, provides for an annual salary of $600 through
+December 31, 2009, and $660 for the duration of the term. Mr. Schmertz will
+receive a performance bonus of $300 for 2009, and any additional bonuses for
+2009 or in the future are at the sole discretion of the Board of Directors. In
+addition, Mr. Schmertz received an option to purchase 50,000 shares of the
+Company’s common stock that will vest in equal annual installments over five
+years commencing on the first anniversary of the date of grant. 
+Effective
+October 7, 2009, the Company amended its employment agreement with Arvind
+Dharia, the Company’s Chief Financial Officer, to, among other things, extend
+the term of his existing employment agreement which was due to expire at the end
+of 2009, to December 31, 2011 and increase Mr. Dharia’s annual base salary to $528.
+The agreement as amended provides for an annual bonus at the discretion of the
+Board of Directors. 
+Effective
+October 1, 2008, the Company amended its employment agreement with Awadhesh
+Sinha, the Company’s Chief Operating Officer. The agreement provides for an
+annual salary of $540 through December 31, 2010, with successive one-year
+automatic renewal terms thereafter. The agreement also provides for an annual
+incentive bonus and requires the Company to accrue deferred cash compensation
+equal to from 7.5% to 25% of annual salary. 
+Effective
+April 29, 2008, the Company entered into an employment agreement with Amelia
+Newton Varela, the Company’s Executive Vice President of Wholesale and Retail.
+The agreement provides for an annual salary of $350 through December 31, 2008
+and $400 for the duration of the term, which ends on December 31, 2010. The
+agreement also provides for annual incentive bonuses. In addition, Ms. Varela
+received an option to purchase 50,000 shares of common stock on the date of the
+agreement, an option to purchase an additional 25,000 in April 2009 and will
+receive an additional option to purchase 25,000 shares of common stock in April
+2010, all of which vest over a five year period commencing on the first
+anniversary of the grant date. 
+The
+Company has employment agreements with other executives (the “executives”) which
+expire between June 30, 2010 and December 31, 2012. Some of these agreements
+provide for cash bonuses at the discretion of the Board of Directors, and some
+provide for cash bonuses based primarily upon a percentage of year-to-year
+increases in earnings before interest, taxes, depreciation and amortization,
+option grants and non-accountable expense allowances as defined. Base salary
+commitments for these executives are as follows: 
+2010 
+$ 
+1,751 
+2011 
+621 
+2012 
+73 
+$ 
+2,445 
+F -
+25 
+STEVEN
+MADDEN, LTD. AND SUBSIDIARIES 
+Notes
+to Consolidated Financial Statements 
+December
+31, 2009 and 2008 
+($
+in thousands except per share data) 
+Note
+L - Commitments, Contingencies and Other (Continued) 
+In
+connection with their employment agreements, five executives received an
+aggregate of 50,000, none and 170,000 shares of restricted common stock from the
+Company in 2009, 2008 and 2007, respectively. The restricted shares vest equally
+each year over a period of between four to five years and, accordingly, the
+Company has recorded a charge to operations in the amount of $1,675, $1,335 and
+$1,726 for the years ended December 31, 2009, 2008 and 2007,
+respectively 
+[3] Letters
+of credit: 
+At
+December 31, 2009, the Company had open letters of credit for the purchase of
+imported merchandise of approximately $3,050. 
+[4] License
+agreements: 
+In
+September 2009, the Company entered into a new long-term license agreement with
+Betsey Johnson LLC to replace an existing agreement that was due to expire on
+December 31, 2010. Under the terms of the agreement, the Company has the right
+to use the Betsey Johnson® and Betseyville ® trademarks in connection with the sale and marketing
+of handbags, small leather goods, belts and umbrellas. The agreement requires
+the Company to make royalty and advertising payments equal to a percentage of
+net sales and a minimum royalty and advertising payment in the event that
+specified net sales targets are not achieved. The agreement expires on December
+In
+September 2009, the Company entered into a license agreement with Dualstar
+Entertainment Group, LLC, under which the Company has the right to use the
+Olsenboye® trademark in connection with the sale and marketing of footwear and
+accessories. The agreement requires the Company to make royalty and advertising
+payments equal to a percentage of net sales and a minimum royalty and
+advertising payment in the event that specified net sales targets are not
+achieved. The agreement expires on December 31, 2011, with one two-year
+renewal period if certain provisions are met. 
+On
+September 10, 2008, the Company entered into a license agreement with Dualstar
+Entertainment Group, LLC, under which the Company has the right to use the
+Elizabeth and James® trademark in connection with the sale and marketing of
+footwear. The agreement requires the Company to make royalty and advertising
+payments equal to a percentage of net sales and a minimum royalty and
+advertising payment in the event that specified net sales targets are not
+achieved. The agreement expires on March 31, 2012, with one three-year
+renewal period if certain provisions are met. 
+On July
+31, 2008, the Company entered into a license agreement to design, manufacture
+and distribute women’s footwear, handbags and belts and related accessories
+under the Fabulosity® brand. The agreement requires the Company to pay the
+licensor a royalty and advertising payments equal to a percentage of net sales
+and a minimum royalty and advertising payment in the event that specified net
+sales targets are not achieved. The agreement expires on December 31, 2011, with
+one three-year renewal period if certain provisions are met. 
+On July
+1, 2008, the Company entered into a license agreement with Jones Investment Co.
+Inc., under which the Company has the right to use the l.e.i.® trademark in
+connection with the sale and marketing of women’s footwear exclusively to
+Wal-Mart. The agreement requires the Company to pay the licensor a royalty and
+advertising payments equal to a percentage of net sales and a minimum royalty
+and advertising payment in the event that specified net sales targets are not
+achieved. The agreement expires on December 31, 2011, with one three-year
+renewal period if certain provisions are met. 
+F -
+26 
+STEVEN
+MADDEN, LTD. AND SUBSIDIARIES 
+Notes
+to Consolidated Financial Statements 
+December
+31, 2009 and 2008 
+($
+in thousands except per share data) 
+Note
+L - Commitments, Contingencies and Other (Continued) 
+On March
+28, 2007, the Company, through its Accessories Division, entered into a license
+agreement to design, manufacture and distribute handbags and belts and related
+accessories under the DF Daisy Fuentes® and the Daisy Fuentes® brands. The
+agreement requires the Company to pay the licensor a royalty and brand
+management fees based on a percentage of net sales and a minimum royalty in the
+event that specified net sales targets are not achieved. The agreement expires
+on December 31, 2010. 
+On May
+12, 2003, the Company entered into a long-term license agreement with Candie’s,
+Inc. to design, manufacture and distribute Candie’s® branded footwear for women
+and children worldwide. The initial term of the agreement expired on December
+31, 2009, with four 3-year renewal terms, the last of which expires on December
+31, 2021. The agreement required the Company to make royalty and advertising
+payments equal to a percentage of net sales of licensed products and a minimum
+royalty and advertising payment in the event that specified net sales targets
+were not achieved. On December 6, 2004, the agreement was amended to reflect
+Candie’s decision to name Kohl’s Corporation the exclusive provider of a new
+line of Candie’s apparel. The amendment extended the initial term of the
+agreement to December 31, 2010, and eliminated the renewal term options.
+Pursuant to the amendment, commencing on January 1, 2007, the Company no longer
+has the exclusive right to market Candie’s branded footwear and will be
+permitted to sell Candie’s branded footwear only to Kohl’s. Under the terms of
+the amendment, Candie’s guarantees that the Company will achieve minimum sales
+levels with Kohl’s during the term of the agreement. In the event such minimum
+sales levels are not achieved, Candie’s is required to compensate the Company in
+an amount based on a percentage of the sales shortfall. Effective January 1,
+2005, all royalty and advertising payments were eliminated. As an inducement to
+execute the amendment, the Company was required to pay Candie’s a total of
+$3,000 payable in eight equal quarterly installments that began in February 2005
+and concluded with a final payment in May 2007. 
+Royalty
+expenses are included in the “cost of goods sold” section of the Company’s
+Consolidated Statements of Income. Aggregate minimum future royalties excluding
+renewal options, under these agreements are as follows: 
+Year
+Ending 
+December
+31, 
+2010 
+$ 
+2,788 
+2011 
+3,311 
+2012 
+1,063 
+2013 
+900 
+$ 
+8,062 
+[5] Related
+Party Transactions: 
+In
+January 2004, the Company entered into an agreement with JLM Consultants, a
+company wholly owned by John Madden, one of the Company’s directors and the
+brother of Steven Madden, the Company’s founder and Creative and Design Chief.
+Under this agreement, Mr. Madden provides consulting services with respect to
+the development of international sales of the Company. Pursuant to this
+agreement, JLM Consultants received a fee and expenses of $760, $760 and $661 in
+2009, 2008 and 2007, respectively, in addition to fees that Mr. Madden received
+for service to the Company as a director. 
+F -
+27 
+STEVEN
+MADDEN, LTD. AND SUBSIDIARIES 
+Notes
+to Consolidated Financial Statements 
+December
+31, 2009 and 2008 
+($
+in thousands except per share data) 
+Note
+L - Commitments, Contingencies and Other (Continued) 
+In July
+2001, the Company entered into a consulting agreement with Peter J. Solomon
+& Company (“Solomon”), a financial advisory firm of which Marc Cooper, a
+former director of the Company from July 2001 through February of 2008, is a
+managing director. Under this agreement, the firm provided financial advisory
+and investment banking services to the Company. This agreement, which was
+amended in March 2004, was terminated on July 11, 2006. The Company paid fees
+and expenses of $46 and $67 to Solomon in 2008 and 2007, respectively, for
+limited consulting engagements. 
+In
+October 2002, the Company entered into an arrangement with Jeff Birnbaum, a
+former director of the Company from June 2003 through October 2007. Under this
+arrangement, which was terminated in October 2007, Mr. Birnbaum provided
+consulting services with respect to the design and manufacturing of shoes and
+general consulting services to the Company. Pursuant to this arrangement, Mr.
+Birnbaum received a fee of $200 in 2007 in addition to fees received for service to the Company as a director.
+[6] Concentrations: 
+The
+Company maintains cash and cash equivalents with various major financial
+institutions which at times are in excess of the amount insured. In addition,
+the Company’s marketable securities are principally held at three brokerage
+companies. 
+During
+the year ended December 31, 2009, the Company purchased approximately 24%, 14%
+and 11% of its merchandise from three suppliers in China. Total product
+purchases from China for the year ended December 31, 2009 was approximately
+84%. 
+During
+the year ended December 31, 2008, the Company purchased approximately 21%, 14%
+and 10% of its merchandise from three suppliers in China. Total purchases from
+China for the year ended December 31, 2008 was approximately 93%. 
+During
+the year ended December 31, 2007, the Company purchased approximately 24% and
+12% of its merchandise from two suppliers in China. Total purchases from China
+for the year ended December 31, 2007 was approximately 81%. 
+Sales to
+one customer accounted for 11% of total net sales for the year ended December
+31, 2009. Three other customers represented 14%, 13% and 10% of accounts
+receivable at December 31, 2009. 
+Sales to
+one customer accounted for 10% of total net sales for the year ended December
+31, 2008. This customer represented 15% while two other customers represented
+15% and 11% of accounts receivable at December 31, 2008. 
+Sales to
+one customer accounted for 12% of total net sales for the year ended December
+31, 2007. This customer represented 17% of accounts receivable at December 31,
+2007. 
+Sales to
+such customers are included in the wholesale segment (see Note
+N). Purchases are made primarily in United States dollars. 
+F -
+28 
+STEVEN
+MADDEN, LTD. AND SUBSIDIARIES 
+Notes
+to Consolidated Financial Statements 
+December
+31, 2009 and 2008 
+($
+in thousands except per share data) 
+Note
+L - Commitments, Contingencies and Other (Continued) 
+[7] Valuation
+and qualifying accounts: 
+The
+following is a summary of the allowance for doubtful accounts related to
+accounts receivable and the allowance for chargebacks related to the amount Due
+from Factors for the years ended December 31: 
+2009 
+2008 
+2007 
+Balance
+at beginning of year 
+$ 
+11,301 
+$ 
+15,446 
+$ 
+12,508 
+Charged
+to reserve 
+— 
+4,145 
+— 
+Increase
+in reserve 
+2,381 
+— 
+2,938 
+Balance
+at end of year 
+$ 
+13,682 
+$ 
+11,301 
+$ 
+15,446 
+The
+following is a summary of the reserve for slow moving inventory for the years
+ended December 31: 
+2009 
+2008 
+2007 
+Balance
+at beginning of year 
+$ 
+2,453 
+$ 
+2,140 
+$ 
+2,065 
+Charged
+to reserve 
+871 
+— 
+— 
+Increase
+to the reserve 
+— 
+313 
+75 
+Balance
+at end of year 
+$ 
+1,582 
+$ 
+2,453 
+$ 
+2,140 
+The
+following is a summary of goodwill and the related accumulated amortization for
+the years ended December 31: 
+2009 
+2008 
+2007 
+Cost
+basis 
+Balance
+at beginning of year 
+$ 
+24,172 
+$ 
+16,520 
+$ 
+7,063 
+Acquisitions
+and purchase price adjustments 
+739 
+7,652 
+9,457 
+Write-off
+of impaired assets 
+— 
+— 
+— 
+Balance
+at end of year 
+24,911 
+24,172 
+16,520 
+Accumulated
+amortization 
+Balance
+at beginning of year 
+598 
+598 
+598 
+Write-off
+of impaired assets 
+— 
+— 
+— 
+Balance
+at end of year 
+598 
+598 
+598 
+Goodwill 
+$ 
+24,313 
+$ 
+23,574 
+$ 
+15,922 
+Note
+M – Subsequent Events 
+On
+February 10, 2010, the Company acquired all of the outstanding shares of stock
+of privately held Big Buddha, Inc. (“Big Buddha”), from its sole stockholder.
+Founded in 2003, Big Buddha designs and markets fashion-forward handbags to
+specialty retailers, better department stores and online retailers. The
+acquisition was completed for $11,000 in cash plus potential earn out payments
+based on annual financial performance through March 2013. 
+F -
+29 
+STEVEN
+MADDEN, LTD. AND SUBSIDIARIES 
+Notes
+to Consolidated Financial Statements 
+December
+31, 2009 and 2008 
+($
+in thousands except per share data) 
+Note
+N - Operating Segment Information 
+The
+Company operates the following business segments: Wholesale Footwear, Wholesale
+Accessories, Retail, First Cost and Licensing. The Wholesale Footwear segment,
+through sales to department and specialty stores worldwide, derives revenue from
+sales of branded women’s, men’s, girls’ and children’s footwear. The Wholesale
+Accessories segment, which includes branded and private label handbags, belts
+and small leather goods, derives revenues from sales to department and specialty
+stores worldwide. The Retail segment, through the operation of Company owned
+retail stores and the Company’s website, derives revenue from sales of branded
+women’s, men’s and children’s footwear and accessories. The First Cost segment
+represents activities of a subsidiary which earns commissions for serving as a
+buying agent of footwear products to mass-market merchandisers, shoe chains and
+other off-price retailers with respect to their purchase of footwear. In the
+Licensing segment, the Company licenses its Steve Madden® and Steven by Steve
+Madden® trademarks for use in connection with the manufacturing, marketing and
+sale of cold weather accessories, sunglasses, eyewear, outerwear, bedding,
+hosiery and women’s fashion apparel and jewelry. 
+The
+Company’s Candie’s business has been transitioned from a “wholesale” model to a
+“first cost” model, and, therefore, commission income for the year ended
+December 31, 2009 is included in the First Cost segment. As a result of this
+change, for the year ended December 31, 2009, net sales for the Wholesale
+Footwear segment does not reflect Candie’s revenue while net sales in 2008
+reflected revenue of $4,223 for the Candie’s business. 
+F -
+30 
+STEVEN
+MADDEN, LTD. AND SUBSIDIARIES 
+Notes
+to Consolidated Financial Statements 
+December
+31, 2009 and 2008 
+($
+in thousands except per share data) 
+Note
+N - Operating Segment Information (continued) 
+The
+accounting policies of the segments are the same as those described in the
+summary of significant accounting policies. The Company evaluates performance
+based on profit or loss from operations before other income (expense) and the
+provision for income taxes. The following is information for the Company’s
+reportable segments: 
+Year
+ended, 
+Wholesale 
+Footwear 
+Wholesale 
+Accessories 
+Total
+Wholesale 
+Retail 
+First
+Cost 
+Licensing 
+Consolidated 
+December
+31, 2009: 
+Net
+sales to external customers 
+$ 
+309,439 
+$ 
+70,406 
+$ 
+379,845 
+$ 
+123,705 
+$ 
+503,550 
+Gross
+profit 
+123,172 
+23,741 
+146,913 
+69,276 
+216,189 
+Commissions
+and licensing
+fees - net 
+— 
+— 
+— 
+— 
+$ 
+16,803 
+$ 
+3,125 
+19,928 
+Income
+(loss) from operations 
+51,360 
+9,199 
+60,559 
+(1,519 
+) 
+16,803 
+3,125 
+78,968 
+Depreciation
+and amortization 
+4,166 
+5,197 
+197 
+— 
+9,560 
+Segment
+assets 
+$ 
+225,533 
+$ 
+42,372 
+267,905 
+51,774 
+7,180 
+— 
+326,859 
+Capital
+expenditures 
+$ 
+1,249 
+$ 
+2,150 
+$ 
+— 
+$ 
+— 
+$ 
+3,399 
+December
+31, 2008: 
+Net
+sales to external customers 
+$ 
+264,479 
+$ 
+66,928 
+$ 
+331,407 
+$ 
+125,639 
+$ 
+457,046 
+Gross
+profit 
+92,903 
+23,478 
+116,381 
+70,443 
+186,824 
+Commissions
+and licensing
+fees - net 
+— 
+— 
+— 
+— 
+$ 
+11,567 
+$ 
+2,727 
+14,294 
+Income
+(loss) from operations 
+25,699 
+9,089 
+34,788 
+(4,176 
+) 
+11,567 
+2,727 
+44,906 
+Depreciation
+and amortization 
+3,751 
+5,295 
+55 
+9,101 
+Segment
+assets 
+$ 
+159,133 
+$ 
+36,453 
+195,586 
+52,536 
+36,571 
+— 
+284,693 
+Capital
+expenditures 
+$ 
+3,551 
+$ 
+4,707 
+$ 
+56 
+$ 
+— 
+$ 
+8,314 
+December
+31, 2007: 
+Net
+sales to external customers 
+$ 
+255,936 
+$ 
+54,469 
+$ 
+310,405 
+$ 
+120,645 
+$ 
+431,050 
+Gross
+profit 
+87,936 
+16,885 
+104,821 
+68,583 
+173,404 
+Commissions
+and licensing
+fees - net 
+— 
+— 
+— 
+— 
+$ 
+14,674 
+$ 
+3,677 
+18,351 
+Income
+(loss) from operations 
+26,978 
+4,481 
+31,459 
+3,104 
+14,674 
+3,677 
+52,914 
+Depreciation
+and amortization 
+3,668 
+4,766 
+1 
+8,435 
+Segment
+assets 
+$ 
+152,373 
+$ 
+29,618 
+181,991 
+56,120 
+28,410 
+— 
+266,521 
+Capital
+expenditures 
+$ 
+3,210 
+$ 
+9,513 
+$ 
+242 
+$ 
+— 
+$ 
+12,965 
+Prior to
+2009, the Company’s international business operated under the “first cost” model
+and thus the revenues were included in Commissions and Licensing Fees in the
+Consolidated Statements of Income. In 2009, the Company’s international business
+began to operate under the “wholesale” model and thus, in 2009, international
+revenues are included in the Net Sales line in the Consolidated Statements of
+Income. For the year ended December 31, 2009, foreign net sales were
+$22,055. 
+F -
+31 
+STEVEN
+MADDEN, LTD. AND SUBSIDIARIES 
+Notes
+to Consolidated Financial Statements 
+December
+31, 2009 and 2008 
+($
+in thousands except per share data) 
+Note
+O - Quarterly Results of Operations (unaudited) 
+The
+following is a summary of the quarterly results of operations for the years
+ended December 31, 2009 and 2008: 
+March
+31, 
+June
+30, 
+September
+30, 
+December
+31, 
+2009: 
+Net
+sales 
+$ 
+107,429 
+$ 
+116,472 
+$ 
+140,138 
+$ 
+139,511 
+Cost
+of sales 
+63,942 
+66,909 
+78,462 
+78,048 
+Gross
+profit 
+43,487 
+49,563 
+61,676 
+61,463 
+Commissions,
+royalty and licensing fee income - net 
+2,905 
+7,362 
+5,726 
+3,935 
+Net
+income 
+$ 
+6,577 
+$ 
+12,144 
+$ 
+17,831 
+$ 
+13,555 
+Net
+income per share: 
+Basic 
+0.37 
+0.67 
+0.99 
+0.75 
+Diluted 
+0.37 
+0.66 
+0.97 
+0.73 
+2008: 
+Net
+sales 
+$ 
+100,539 
+$ 
+109,317 
+$ 
+128,093 
+$ 
+119,097 
+Cost
+of sales 
+60,324 
+63,780 
+75,114 
+71,004 
+Gross
+profit 
+40,215 
+45,537 
+52,979 
+48,093 
+Commissions,
+royalty and licensing fee income - net 
+3,356 
+3,203 
+4,497 
+3,238 
+Net
+income 
+$ 
+2,052 
+$ 
+7,634 
+$ 
+11,088 
+$ 
+7,202 
+Net
+income per share: 
+Basic 
+0.10 
+0.43 
+0.62 
+0.40 
+Diluted 
+0.10 
+0.43 
+0.62 
+0.40 
+F -
+32 
+Exhibits. 
+3.01 
+Certificate
+of Incorporation of Steven Madden, Ltd. (incorporated by reference to
+Exhibit 1 to the Company’s Current Report on Form 8-K filed with the
+Securities and Exchange Commission on November 23,
+1998). 
+3.02 
+Amended
+& Restated By-Laws of Steven Madden, Ltd. (incorporated by reference
+to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed with the
+Securities and Exchange Commission on March 28, 2008). 
+4.01 
+Specimen
+Certificate for shares of Common Stock (incorporated by reference to
+Exhibit 4.1 to the Company’s Registration Statement on Form SB-2/A filed
+with the Securities and Exchange Commission on September 29,
+1993). 
+4.02 
+Rights
+Agreement dated November 14, 2001 between the Company and American Stock
+Transfer and Trust Company (incorporated by reference to Exhibit 4.1 to
+the Company’s Current Report on Form 8-K filed with the Securities and
+Exchange Commission on November 16, 2001). 
+10.01 
+Amended
+and Restated Secured Promissory Note dated December 19, 2007 of Steven
+Madden to the Company (incorporated by reference to Exhibit 10.1 to the
+Company’s Current Report on Form 8-K filed with the Securities and
+Exchange Commission on May 12, 2008). 
+10.02 
+Second
+Amended and Restated Secured Promissory Note dated April 6, 2009 of Steven
+Madden to the Company (incorporated by reference to Exhibit 10.1 to the
+Company’s Current Report on Form 8-K filed with the Securities and
+Exchange Commission on April 10, 2009. 
+10.03 
+Consulting
+Agreement effective August 1, 2004 among the Company, John Madden and
+J.L.M. Consultants Inc., as amended by Amendment No. 1 dated March 10,
+2005 and Amendment No. 2 dated April 14, 2005 (incorporated by reference
+to Exhibits 10.9, 10.10 and 10.11 to the Company’s Annual Report on Form
+10-K for its fiscal year ended December 31, 2005 filed with the Securities
+and Exchange Commission on March 14, 2006). 
+10.04 
+Collection
+Agency Agreement dated July 10, 2009 between Rosenthal & Rosenthal,
+Inc. and the Company (incorporated by reference to Exhibit 10.1 to the
+Company’s Current Report on Form 8-K filed with the Securities and
+Exchange Commission on July 16, 2009). 
+10.05 
+Collection
+Agency Agreement dated July 10, 2009 between Rosenthal & Rosenthal,
+Inc. and Daniel Friedman & Associates, Inc. (incorporated by reference
+to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the
+Securities and Exchange Commission on July 16, 2009). 
+10.06 
+Collection
+Agency Agreement dated July 10, 2009 between Rosenthal & Rosenthal,
+Inc. and Diva Acquisition Corp. (incorporated by reference to Exhibit 10.3
+to the Company’s Current Report on Form 8-K filed with the Securities and
+Exchange Commission on July 16, 2009). 
+10.07 
+Collection
+Agency Agreement dated July 10, 2009 between Rosenthal & Rosenthal,
+Inc. and Steven Madden Retail, Inc. (incorporated by reference to Exhibit
+10.4 to the Company’s Current Report on Form 8-K filed with the Securities
+and Exchange Commission on July 16, 2009). 
+10.08 
+Collection
+Agency Agreement dated July 10, 2009 between Rosenthal & Rosenthal,
+Inc. and Stevies, Inc. (incorporated by reference to Exhibit 10.5 to the
+Company’s Current Report on Form 8-K filed with the Securities and
+Exchange Commission on July 16, 2009). 
+10.09 
+Collection
+Agency Agreement dated July 10, 2009 between Rosenthal & Rosenthal,
+Inc. and SML Acquisition Corp. (incorporated by reference to Exhibit 10.6
+to the Company’s Current Report on Form 8-K filed with the Securities and
+Exchange Commission on July 16, 2009). 
+10.10 
+Amendment
+to Collection Agency Agreement dated February 16, 2010 between Rosenthal
+& Rosenthal, Inc. and the Company. † 
+10.11 
+Letter
+Agreement dated July 10, 2009 among Rosenthal & Rosenthal, Inc., the
+Company, Daniel Friedman & Associates, Inc., Diva Acquisition Corp.,
+Steven Madden Retail, Inc., Stevies, Inc., and SML Acquisition Corp.
+(incorporated by reference to Exhibit 10.7 to the Company’s Current Report
+on Form 8-K filed with the Securities and Exchange Commission on July 16,
+2009). 
+10.12 
+Guarantee
+dated July 10, 2009 of the Company, Daniel Friedman & Associates,
+Inc., Diva Acquisition Corp., Steven Madden Retail, Inc., Stevies, Inc.,
+and SML Acquisition Corp. in favor of Rosenthal & Rosenthal, Inc.
+(incorporated by reference to Exhibit 10.8 to the Company’s Current Report
+on Form 8-K filed with the Securities and Exchange Commission on July 16,
+2009). 
+10.13 
+Stock
+Purchase Agreement dated February 10, 2010 between the Company and Jeremy
+Bassan (incorporated by reference to Exhibit 10.1 to the Company’s Current
+Report on Form 8-K filed with the Securities and Exchange Commission on
+February 11, 2010). 
+10.14 
+Earn-Out
+Agreement dated February 10, 2010 among the Company, Jeremy Bassan and Big
+Buddha, Inc. (incorporated by reference to Exhibit 10.2 to the Company’s
+Current Report on Form 8-K filed with the Securities and Exchange
+Commission on February 11, 2010). 
+10.15 
+Third
+Amended Employment Agreement dated July 15, 2005 between the Company and
+Steven Madden (incorporated by reference to Exhibit 10.1 to the Company’s
+Current Report on Form 8-K filed with the Securities and Exchange
+Commission on July 20, 2005). 
+# 
+10.16 
+Amendment
+dated December 14, 2009 to Third Amended Employment Agreement between the
+Company and Steven Madden (incorporated by reference to Exhibit 10.1 to
+the Company’s Current Report on Form 8-K filed with the Securities and
+Exchange Commission on December 17, 2009). 
+# 
+10.17 
+Employment
+Agreement dated January 1, 1998 between the Company and Arvind Dharia
+(incorporated by reference to Exhibit 10.07 to the Company’s Annual Report
+on Form 10-K for its fiscal year ended December 31, 2000 filed with the
+Securities and Exchange Commission on March 30, 2001. # 
+10.18 
+Amendment
+No. 1 dated June 29, 2001 to Employment Agreement between the Company and
+Arvind Dharia (incorporated by reference to Exhibit 99.4 to the Company’s
+Quarterly Report on Form 10-Q for its fiscal quarter ended June 30, 2001
+filed August 14, 2001. # 
+10.19 
+Amendment
+No. 2 dated October 30, 2002 to Employment Agreement between the Company
+and Arvind Dharia (incorporated by reference to Exhibit 10.16 to the
+Company’s Quarterly Report on Form 10-Q for its fiscal quarter ended
+September 30, 2002 filed with the Securities and Exchange Commission on
+November 14, 2002. # 
+10.20 
+Amendment
+No. 3 dated February 1, 2006 to Employment Agreement between the Company
+and Arvind Dharia (incorporated by reference to Exhibit 10.1 to the
+Company’s Current Report on Form 8-K filed with the Securities and
+Exchange Commission on February 3, 2006). # 
+10.21 
+Amendment
+No. 4 dated October 7, 2009 to Employment Agreement of Arvind Dharia
+between the Company and Arvind Dharia (incorporated by reference to
+Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the
+Securities and Exchange Commission on October 13, 2009). # 
+10.22 
+Employment
+Agreement dated June 15, 2005 between the Company and Awadhesh Sinha
+(incorporated by reference to Exhibit 10.1 to the Company’s Current Report
+on Form 8-K filed with the Securities and Exchange Commission on June 21,
+2005). # 
+10.23 
+Amendment
+No. 1 dated November 6, 2007 to Employment Agreement between the Company
+and Awadhesh Sinha (incorporated by reference to Exhibit 10.1 to the
+Company’s Current Report on Form 8-K filed with the Securities and
+Exchange Commission on November 6, 2007). # 
+10.24 
+Amendment
+No. 2 dated October 14, 2008 and effective October 1, 2008 to Employment
+Agreement between the Company and Awadhesh Sinha (incorporated by
+reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K
+filed with the Securities and Exchange Commission on October 20,
+2008). # 
+10.25 
+Employment
+Agreement dated October 7, 2009 between the Company and Robert Schmertz
+(incorporated by reference to Exhibit 10.1 to the Company’s Current Report
+on Form 8-K filed with the Securities and Exchange Commission on October
+13, 2009). # 
+10.26 
+Employment
+Agreement effective as of April 29, 2008 between the Company and Amelia
+Newton Varela (incorporated by reference to Exhibit 10.1 to the Company’s
+Current Report on Form 8-K filed with the Securities and Exchange
+Commission on May 5, 2008). # 
+10.27 
+Employment
+Agreement dated April 7, 2008 between the Company and Edward Rosenfeld
+(incorporated by reference to Exhibit 10.1 to the Company’s Current Report
+on Form 8-K filed with the Securities and Exchange Commission on April 11,
+2008). # 
+10.28 
+Employment
+Agreement dated November 6, 2009 between the Company and Edward R.
+Rosenfeld (incorporated by reference to Exhibit 10.1 to the Company’s
+Current Report on Form 8-K filed with the Securities and Exchange
+Commission on November 10, 2009). # 
+10.29 
+Amendment
+No. 1 dated March 8, 2010 to Employment Agreement between the Company and
+Edward R. Rosenfeld. † # 
+10.30 
+Letter
+Agreement dated March 27, 2008 between the Company and Walter Yetnikoff
+(incorporated by reference to Exhibit 10.2 to the Company’s Quarterly
+Report on Form 10-Q for its fiscal quarter ended March 31, 2008 filed with
+the Securities and Exchange Commission on May 12, 2008). # 
+10.31 
+Employment
+Agreement dated May 16, 2007 between the Company and Jeffrey Silverman
+(incorporated by reference to Exhibit 10.3 to the Company’s Current Report
+on Form 8-K filed with the Securities and Exchange Commission on May 18,
+2007). # 
+10.32 
+Amendment
+to Employment Agreement dated as of December 21 2007 between the Company
+and Jeffrey Silverman (incorporated by reference to Exhibit 10.3 to the
+Company’s Current Report on Form 8-K filed with the Securities and
+Exchange Commission on December 21, 2007). # 
+10.33 
+Settlement
+and Release Agreement dated December 21, 2007 between the Company and
+Jeffrey Silverman (incorporated by reference to Exhibit 10.1 to the
+Company’s Current Report on Form 8-K filed with the Securities and
+Exchange Commission on December 21, 2007). 
+10.34 
+Termination
+Agreement dated as of April 11, 2008 between the Company and Jeffrey
+Silverman (incorporated by reference to Exhibit 10.1 to the Company’s
+Current Report on Form 8-K filed with the Securities and Exchange
+Commission on April 15, 2008). 
+10.35 
+The
+1999 Stock Plan, approved and adopted on March 15, 1999, amended as of
+March 20, 2000 and March 30, 2001 (incorporated by reference to Exhibit
+10.A to the Company’s Registration Statement on Form S-8 filed with the
+Securities and Exchange Commission on July 26, 2004). # 
+10.36 
+2006
+Stock Incentive Plan (Amended and Restated Effective May 22, 2009),
+approved and adopted on May 22, 2009 (incorporated by reference to Exhibit
+10.1 to the Company’s Current Report on Form 8-K filed with the Securities
+and Exchange Commission on May 28, 2009. # 
+10.37 
+Form
+of Non-Qualified Stock Option Agreement (Chief Executive Officer) under
+the Company’s 2006 Stock Incentive Plan, as amended, as adopted October
+30, 2007 (incorporated by reference to Exhibit 10.2 to the Company’s
+Quarterly Report on Form 10-Q for its fiscal quarter ended September 30,
+2007 filed with the Securities and Exchange Commission on November 9,
+2007). # 
+10.38 
+Form
+of Non-Qualified Stock Option Agreement (Employee without Employment
+Agreement) under the Company’s 2006 Stock Incentive Plan, as adopted
+October 30, 2007 (incorporated by reference to Exhibit 10.3 to the
+Company’s Quarterly Report on Form 10-Q for its fiscal quarter ended
+September 30, 2007 filed with the Securities and Exchange Commission on
+November 9, 2007). # 
+10.39 
+Form
+of Non-Qualified Stock Option Agreement (Employee with Employment
+Agreement) under the Company’s 2006 Stock Incentive Plan, as adopted
+October 30, 2007 (incorporated by reference to Exhibit 10.4 to the
+Company’s Quarterly Report on Form 10-Q for its fiscal quarter ended
+September 30, 2007 filed with the Securities and Exchange Commission on
+November 9, 2007). # 
+10.40 
+Form
+of Restricted Stock Agreement (Chief Executive Officer) under the
+Company’s 2006 Stock Incentive Plan, as adopted October 30, 2007
+(incorporated by reference to Exhibit 10.5 to the Company’s Quarterly
+Report on Form 10-Q for its fiscal quarter ended September 30, 2007 filed
+with the Securities and Exchange Commission on November 9, 2007). # 
+10.41 
+Form
+of Restricted Stock Agreement (Employee without Employment Agreement)
+under the Company’s 2006 Stock Incentive Plan, as adopted October 30, 2007
+(incorporated by reference to Exhibit 10.6 to the Company’s Quarterly
+Report on Form 10-Q for its fiscal quarter ended September 30, 2007 filed
+with the Securities and Exchange Commission on November 9, 2007). # 
+10.42 
+Form
+of Restricted Stock Agreement (Employee with Employment Agreement) under
+the Company’s 2006 Stock Incentive Plan, as adopted October 30, 2007
+(incorporated by reference to Exhibit 10.7 to the Company’s Quarterly
+Report on Form 10-Q for its fiscal quarter ended September 30, 2007 filed
+with the Securities and Exchange Commission on November 9, 2007). # 
+10.43 
+Form
+of Restricted Stock Agreement under the Company’s 2006 Stock Incentive
+Plan used for grants made to non- employee directors from March 2006
+through May 2007, with a schedule setting forth the name of each of the
+recipients, the date of the grant and the number of shares (incorporated
+by reference to Exhibit 10.8 to the Company’s Quarterly Report on Form
+10-Q for its fiscal quarter ended September 30, 2007 filed with the
+Securities and Exchange Commission on November 9, 2007). # 
+10.44 
+Restricted
+Stock Agreement dated March 24, 2006 between Steven Madden and the Company
+(incorporated by reference to Exhibit 10.12 to the Company’s Quarterly
+Report on Form 10-Q for its fiscal quarter ended September 30, 2007 filed
+with the Securities and Exchange Commission on November 9, 2007). # 
+10.45 
+Restricted
+Stock Agreement dated June 9, 2006 between Steven Madden and the Company
+(incorporated by reference to Exhibit 10.13 to the Company’s Quarterly
+Report on Form 10-Q for its fiscal quarter ended September 30, 2007 filed
+with the Securities and Exchange Commission on November 9, 2007). # 
+10.46 
+Restricted
+Stock Agreement dated March 24, 2006 between Arvind Dharia and the Company
+(incorporated by reference to Exhibit 10.14 to the Company’s Quarterly
+Report on Form 10-Q for its fiscal quarter ended September 30, 2007 filed
+with the Securities and Exchange Commission on November 9, 2007). # 
+10.47 
+Restricted
+Stock Agreement dated March 20, 2006 between Amelia Newton Varela and the
+Company (incorporated by reference to Exhibit 10.15 to the Company’s
+Quarterly Report on Form 10-Q for its fiscal quarter ended September 30,
+2007 filed with the Securities and Exchange Commission on November 9,
+2007). # 
+10.48 
+Restricted
+Stock Agreement dated March 20, 2006 between Robert Schmertz and the
+Company (incorporated by reference to Exhibit 10.16 to the Company’s
+Quarterly Report on Form 10-Q for its fiscal quarter ended September 30,
+2007 filed with the Securities and Exchange Commission on November 9,
+2007). # 
+10.49 
+Restricted
+Stock Agreement dated March 6, 2007 between Arvind Dharia and the Company
+(incorporated by reference to Exhibit 10.17 to the Company’s Quarterly
+Report on Form 10-Q for its fiscal quarter ended September 30, 2007 filed
+with the Securities and Exchange Commission on November 9, 2007). # 
+10.50 
+Restricted
+Stock Agreement dated March 9, 2007 between Robert Schmertz and the
+Company (incorporated by reference to Exhibit 10.18 to the Company’s
+Quarterly Report on Form 10-Q for its fiscal quarter ended September 30,
+2007 filed with the Securities and Exchange Commission on November 9,
+2007). # 
+10.51 
+Restricted
+Stock Agreement dated April 25, 2007 between Awadhesh Sinha and the
+Company (incorporated by reference to Exhibit 10.19 to the Company’s
+Quarterly Report on Form 10-Q for its fiscal quarter ended September 30,
+2007 filed with the Securities and Exchange Commission on November 9,
+2007). # 
+10.52 
+Non-Qualified
+Stock Option Agreement dated May 16, 2007 between Jeffrey Silverman and
+the Company (incorporated by reference to Exhibit 10.20 to the Company’s
+Quarterly Report on Form 10-Q for its fiscal quarter ended September 30,
+2007 filed with the Securities and Exchange Commission on November 9,
+2007). # 
+10.53 
+Non-Qualified
+Stock Option Agreement dated May 16, 2007 between Jeffrey Silverman and
+the Company (incorporated by reference to Exhibit 10.21 to the Company’s
+Quarterly Report on Form 10-Q for its fiscal quarter ended September 30,
+2007 filed with the Securities and Exchange Commission on November 9,
+2007). # 
+21.01 
+Subsidiaries
+of the Registrant† 
+23.01 
+Consent
+of Eisner LLP† 
+24.01 
+Power
+of Attorney (included on signature page hereto) 
+31.01 
+Certification
+of Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the
+Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
+Sarbanes-Oxley Act of 2002. † 
+31.02 
+Certification
+of Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the
+Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
+Sarbanes-Oxley Act of 2002. † 
+32.01 
+Certification
+of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 Adopted
+Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. † 
+32.02 
+Certification
+of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 Adopted
+Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. † 
+† 
+Filed
+herewith. 
+# 
+Indicates
+management contract or compensatory plan or arrangement required to be
+identified pursuant to Item 15(b) of this Annual Report on Form
+10-K.
\ No newline at end of file
diff --git a/raw/filings/0000913241/2009/0001019056-10-000302/filing_metadata.csv b/raw/filings/0000913241/2009/0001019056-10-000302/filing_metadata.csv
new file mode 100644
index 0000000000000000000000000000000000000000..1e18c926ee9372fe3348bc25781e990b4d8de5a9
--- /dev/null
+++ b/raw/filings/0000913241/2009/0001019056-10-000302/filing_metadata.csv
@@ -0,0 +1,2 @@
+cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing
+0000913241,SHOO,"STEVEN MADDEN, LTD.",10-K,2010-03-12,2009-12-31,2010-03-12T20:03:31.000Z,0001019056-10-000302,smadden_10k09.htm,FORM 10-K,2407451,0,0,https://www.sec.gov/Archives/edgar/data/913241/000101905610000302/smadden_10k09.htm,https://www.sec.gov/Archives/edgar/data/913241/000101905610000302/,2009,2009,1
diff --git a/raw/filings/0000913241/2009/0001019056-10-000302/item1.txt b/raw/filings/0000913241/2009/0001019056-10-000302/item1.txt
new file mode 100644
index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391
diff --git a/raw/filings/0000913241/2009/0001019056-10-000302/item13.txt b/raw/filings/0000913241/2009/0001019056-10-000302/item13.txt
new file mode 100644
index 0000000000000000000000000000000000000000..e2c6f5b6d059d038464f70333d6fa9c9a3b9b32c
--- /dev/null
+++ b/raw/filings/0000913241/2009/0001019056-10-000302/item13.txt
@@ -0,0 +1,8 @@
+ITEM 13 
+CERTAIN
+RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
+INDEPENDENCE 
+The
+information required to be furnished pursuant to this Item will be set forth in
+our proxy statement for the 2010 Annual Meeting of Stockholders, and is
+incorporated herein by reference.
\ No newline at end of file
diff --git a/raw/filings/0000913241/2009/0001019056-10-000302/item9a.txt b/raw/filings/0000913241/2009/0001019056-10-000302/item9a.txt
new file mode 100644
index 0000000000000000000000000000000000000000..d1a2bd3a79dd5a3f5e06ea6d36a705bd5e95b41d
--- /dev/null
+++ b/raw/filings/0000913241/2009/0001019056-10-000302/item9a.txt
@@ -0,0 +1,139 @@
+ITEM 9A 
+CONTROLS
+AND PROCEDURES 
+Disclosure
+Controls and Procedures 
+As
+required by Rule 13a-15(b) of the Exchange Act, our management, including our
+Chief Executive Officer and Chief Financial Officer, has evaluated the
+effectiveness of our disclosure controls and procedures as of the end of the
+fiscal year covered by this Annual Report on Form 10-K. Based on that
+evaluation, the Chief Executive Officer and Chief Financial Officer have
+concluded that our 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 on Form 10-K. 
+Management’s
+Annual Report on Internal Control Over Financial Reporting 
+Management
+of Steven Madden, Ltd. is responsible for establishing and maintaining adequate
+internal control over financial reporting (as defined in Rule 13a-15(f) of the
+Exchange Act). 
+Our
+internal control over financial reporting is a process designed by, or under the
+supervision of, our principal executive officer and principal financial officer,
+and effected by the board of directors, management, and other personnel, to
+provide reasonable assurance regarding the reliability of financial reporting
+and the preparation of financial statements for external purposes in accordance
+with U.S. generally accepted accounting principles. Our internal control over
+financial reporting includes those policies and procedures that (1) pertain to
+maintenance of records that, in reasonable detail, accurately and fairly reflect
+the transactions and dispositions of our assets; (2) provide reasonable
+assurance that transactions are recorded as necessary to permit preparation of
+financial statements in accordance with U.S. generally accepted accounting
+principles, and that our receipts and expenditures are being made only in
+accordance with authorizations of our management and directors; and (3) provide
+reasonable assurance regarding prevention or timely detection of unauthorized
+acquisition, use, or disposition of our assets that could have a material effect
+on the financial statements. 
+Because
+of its inherent limitations, internal control over financial reporting may not
+prevent or detect misstatements. Also, projections of any evaluation of
+effectiveness to future periods are subject to the risk that controls may become
+inadequate because of changes in conditions, or that the degree of compliance
+with the policies or procedures may deteriorate. 
+With the
+participation of the Chief Executive Officer and the Chief Financial Officer,
+our management conducted an evaluation of the effectiveness as of the end of our
+fiscal year ended December 31, 2009, of our internal control over financial
+reporting based on the framework and criteria established in Internal
+Control–Integrated Framework, issued by the Committee of Sponsoring
+Organizations of the Treadway Commission. Based on this evaluation our
+management has concluded that, as of December 31, 2009, our internal control
+over financial reporting was effective. 
+The
+independent registered public accounting firm that audited the financial
+statements included in this Annual Report on Form 10-K has issued an attestation
+report on our internal control over financial reporting. 
+28 
+Attestation
+Report of our Independent Registered Public Accounting Firm 
+Our
+Independent Registered Public Accounting Firm, Eisner LLP, has audited and
+issued a report on our internal control over financial reporting. The report of
+Eisner LLP appears below. 
+To the
+Board of Directors and Stockholders 
+Steven
+Madden, Ltd. and subsidiaries 
+We have
+audited Steven Madden, Ltd. and subsidiaries’ (the “Company”) internal control
+over financial reporting as of December 31, 2009, based on criteria established
+in Internal Control - Integrated Framework issued by the Committee of Sponsoring
+Organizations of the Treadway Commission (“COSO”). The Company’s management is
+responsible for maintaining effective internal control over financial reporting
+and for its assessment of the effectiveness of internal control over financial
+reporting, included in the accompanying Management’s Annual Report on Internal
+Control over Financial Reporting. Our responsibility is to express an opinion on
+the Company’s internal control over financial reporting based on our
+audit. 
+We
+conducted our audit in accordance with the standards of the Public Company
+Accounting Oversight Board (United States). Those standards require that we plan
+and perform the audit to obtain reasonable assurance about whether effective
+internal control over financial reporting was maintained in all material
+respects. Our audit included obtaining an understanding of internal control over
+financial reporting, assessing the risk that a material weakness exists, and
+testing and evaluating the design and operating effectiveness of internal
+control based on the assessed risk. Our audit also included performing such
+other procedures as we considered necessary in the circumstances. We believe
+that our audit provides a reasonable basis for our opinion. 
+A
+company’s internal control over financial reporting is a process designed to
+provide reasonable assurance regarding the reliability of financial reporting
+and the preparation of financial statements for external purposes in accordance
+with generally accepted accounting principles. A company’s internal control over
+financial reporting includes those policies and procedures that (i) pertain to
+the maintenance of records that, in reasonable detail, accurately and fairly
+reflect the transactions and dispositions of the assets of the company; (ii)
+provide reasonable assurance that transactions are recorded as necessary to
+permit preparation of financial statements in accordance with generally accepted
+accounting principles, and that receipts and expenditures of the company are
+being made only in accordance with authorizations of management and directors of
+the company; and (iii) provide reasonable assurance regarding prevention or
+timely detection of unauthorized acquisition, use, or disposition of the
+company’s assets that could have a material effect on the financial
+statements. 
+Because
+of its inherent limitations, internal control over financial reporting may not
+prevent or detect misstatements. Also, projections of any evaluation of
+effectiveness to future periods are subject to the risk that controls may become
+inadequate because of changes in conditions, or that the degree of compliance
+with the policies or procedures may deteriorate. 
+In our
+opinion, Steven Madden, Ltd. and subsidiaries maintained, in all material
+respects, effective internal control over financial reporting as of December 31,
+2009, based on criteria established in Internal Control - Integrated Framework
+issued by COSO. 
+We also
+have audited, in accordance with the standards of the Public Company Accounting
+Oversight Board (United States), the consolidated balance sheets of Steven
+Madden, Ltd. and subsidiaries as of December 31, 2009 and 2008, 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, 2009,
+and our report dated March 11, 2010 expressed an unqualified opinion on those
+consolidated financial statements and included an explanatory paragraph
+regarding the adoption of the provisions of the accounting guidance relating to
+the uncertainty in income taxes, effective January 1, 2007. 
+/S/ Eisner LLP 
+New York, New York 
+March 11,
+2010 
+29 
+Changes
+in Internal Control Over Financial Reporting 
+There was
+no change in our internal control over financial reporting, identified in
+connection with the evaluation required by paragraph (d) of Rule 13a-15 of the
+Exchange Act, that occurred during the fiscal quarter ended December 31, 2009,
+which has materially affected, or is reasonably likely to materially affect, our
+internal control over financial reporting.
\ No newline at end of file
diff --git a/raw/filings/0000913241/2009/0001019056-10-000302/rp_note.txt b/raw/filings/0000913241/2009/0001019056-10-000302/rp_note.txt
new file mode 100644
index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391
diff --git a/raw/filings/0000913241/2009/0001019056-10-000302/rpt_disclosure.txt b/raw/filings/0000913241/2009/0001019056-10-000302/rpt_disclosure.txt
new file mode 100644
index 0000000000000000000000000000000000000000..6368b1e31e2ad00278a02e766766c936dc265b78
--- /dev/null
+++ b/raw/filings/0000913241/2009/0001019056-10-000302/rpt_disclosure.txt
@@ -0,0 +1,17 @@
+Certain Relationships and Related Party Transactions 
+In January 2004, the Company entered into an agreement with John L. Madden, one of the Company’s directors, and JLM Consultants, a company wholly-owned by John L. Madden. Under this agreement, which was amended in 2005, Mr. Madden agreed to provide consulting services to the Company with respect to the development of international sales of the Company. This agreement expired by its terms on December 31, 2005, but Mr. Madden continues to provide consulting services and the Company continues to make payments to JLM Consultants consistent with those that would have been required under the expired consulting agreement. In accordance with the foregoing, for the 2010 Fiscal Year, JLM Consultants received the following from the Company: (a) a commission equal to 2.5% on international sales, (b) a monthly draw in the amount of $25,000 with recourse against such commissions, (c) a $1,000 per month travel allowance and (d) $2,812 per month toward health insurance premiums for health insurance coverage for John L. Madden. Pursuant to this arrangement, JLM Consultants received a total of $1,005,540 from the Company in the 2010 Fiscal Year. 
+12 
+Effective as of July 1, 2005, the Company amended and restated its employment agreement with Steven Madden, pursuant to which Mr. Madden agreed to serve as the Company’s Creative and Design Chief. The term of Mr. Madden’s employment under his employment agreement commenced on July 1, 2005 and, in accordance with a December 14, 2009 amendment thereto, will end on December 31, 2019. The agreement provides for an annual salary of $600,000, with a 7% increase of base salary on a compound basis in each of the third, fifth, seventh and ninth years of the agreement. Mr. Madden also receives an annual $200,000 non-accountable expense allowance. The agreement provides for an annual cash bonus in an amount determined by the Board of Directors, which will be at least 2% of the Company’s EBITDA (the “Annual Bonus”). Additionally, the Company agreed to pay Mr. Madden an annual cash bonus in relation to “new business” (as defined in the agreement) in an amount to be determined by the Board of Directors, but which is at least (i) 2.5% of new business gross direct revenues plus (ii) 10% of all license or other fee income above $2,000,000 (the “New Business Bonus”). 
+Mr. Madden is also eligible to receive annually, on or about the date of the Company’s annual meeting of stockholders, an option grant (the “Annual Option”) to purchase a number of shares of Common Stock, with such number to be equal to not less than 100% of the largest aggregate number of shares of Common Stock available upon the exercise of an option or options granted to any other continuing full-time employee of the Company during the preceding twelve-month period; provided, however, that a grant to Mr. Madden in excess of 150% of the number of shares of Common Stock available upon the exercise of an option or options granted to such other continuing full-time employee shall require stockholder approval. Any Annual Option received by Mr. Madden will vest quarterly over a one-year period following the grant date and will be exercisable, at a price equal to the closing price of the Company’s Common Stock on the grant date, for a period of five years following the date of the grant. In the event of Mr. Madden’s death, the agreement provides for the payment to Mr. Madden’s estate of his base salary for the 12-month period immediately subsequent to the date of Mr. Madden’s death. 
+In the event that Mr. Madden’s employment agreement is terminated due to Mr. Madden’s total disability (as defined in the agreement), “for cause” (as defined in the agreement) or due to Mr. Madden’s resignation, the Company is obligated to pay Mr. Madden the amount of compensation that is accrued and unpaid through the date of termination. In the event Mr. Madden’s employment agreement is terminated for any reason (other than “for cause” or due to his death, total disability or resignation), the Company is obligated to pay Mr. Madden, in installments, the balance of his base salary that would have been paid by the Company under the agreement for the full term of the agreement. If, during the period commencing 120 days prior to a “change of control” (as defined in the employment agreement) transaction and ending on the first anniversary of a change of control transaction, Mr. Madden’s employment is terminated by the Company other than for cause or by the resignation of Mr. Madden for “good reason” (as defined in the employment agreement), or if Mr. Madden resigns for good reason or without good reason within 30 days following a change of control transaction, all unvested options to purchase shares of Common Stock held by Mr. Madden will vest on the date of termination or resignation and Mr. Madden will be entitled to receive a lump sum cash payment equal to (1) the amount of compensation that is accrued and unpaid through the date of termination, (2) an amount equal to the product of (A) the number of years remaining in the term of the agreement (but not less than 5), and (B) the sum of (w) the base salary for the 12-month period ended on the preceding December 31 (or for the 12-month period ending on December 31, 2002, if greater), (x) the amount of the Annual Bonus earned (paid or accrued or which should have been paid or accrued) for the 12-month period ended on the preceding December 31 (or for the 12-month period ended on December 31, 2002, if greater), (y) the non-accountable expense allowance provided for under the agreement for the 12-month period ended on the preceding December 31, and (z) the amount of the New Business Bonus earned (paid or accrued or which should have been paid or accrued) for the 12-month period ended on the preceding December 31 (or for the 12-month period ending on December 31 during the agreement in which Mr. Madden received the greatest New Business Bonus, if greater). Mr. Madden’s employment agreement contains other customary provisions, including provisions regarding expense reimbursement, confidentiality, solicitation and competition. 
+13 
+For 2010 Fiscal Year, Mr. Madden earned (i) $686,940 in base salary; (ii) $200,000 in non-accountable expense allowance; (iii) a bonus of $2,608,819, representing 2% of the Company’s earnings before interest, tax, depreciation and amortization; (iv) a bonus of $5,627,484, earned based on 2.5% of the Company’s new business; and (v) a bonus of $368,088, based on 10% of Royalty/Licensing income over $2,000,000. As an Annual Option, on May 28, 2010, Mr. Madden received an option to purchase 75,000 shares of Common Stock, pursuant to the Company’s 2006 Stock Incentive Plan, as amended (the “2006 Plan”), at an exercise price of $34.49 per share. The option vests in equal installments of 18,750 shares on each of August 28, 2010, November 28, 2010, February 28, 2011 and May 28, 2011. 
+On January 11, 2010, Mr. Madden received a grant of 54,600 shares of the Company’s Common Stock, subject to certain restrictions (such number of shares is adjusted for an April 30, 2010 three-for-two stock split effected as a stock dividend), under the Company’s 2006 Plan. The restricted Common Stock will vest on the third anniversary of the grant date, January 11, 2013. 
+On June 25, 2007, the Company made a loan to Steven Madden, its Creative and Design Chief and a principal stockholder of the Company, in the amount of $3,000,000, in order for Mr. Madden to exercise a stock option, which was due to expire, and hold the underlying Common Stock. Mr. Madden executed a promissory note in favor of the Company, which is secured by a pledge of 210,000 shares of the Company’s Common Stock beneficially owned by Mr. Madden. There have been successive amendments to the note, the most recent of which occurred on April 6, 2009, at which time the note was amended and restated to (i) extend the maturity date to the earlier of the date that Mr. Madden ceases to be employed by the Company and June 30, 2015 (the “Maturity Date”), and (ii) reflect the rate of interest as 8% per annum for the period from June 25, 2007 until April 6, 2010, and 6% per annum for the period from April 7, 2010 until the Maturity Date. As of December 31, 2010, interest in the amount of $849,186 has accrued on the note. Mr. Madden is the brother of John L. Madden, who has been a director of the Company since the Company’s inception in 1990. 
+Review, Approval or Ratification of Transactions with Related Persons 
+The Company’s written Conduct Code and Employee Handbook prohibit all conflicts of interest. Under the Conduct Code, conflicts of interest occur when private or family interests interfere in any way, or even appear to interfere, with the interests of the Company. The Company’s prohibition on conflicts of interest under the Conduct Code includes any related person transaction. 
+Related person transactions must be approved by the Board, or by a committee of the Board consisting solely of independent directors, who will approve the transaction only if they determine that it is in the best interests of the Company. In considering the transaction, the Board or committee will consider all relevant factors, including, as applicable, (i) the Company’s business rationale for entering into the transaction; (ii) the alternatives to entering into a related person transaction; (iii) whether the transaction is on terms comparable to those available to third parties or, in the case of employment relationships, to employees generally; (iv) the potential for the transaction to lead to an actual or apparent conflict of interest and any safeguards imposed to prevent such actual or apparent conflicts; and (v) the overall fairness of the transaction to the Company. 
+The Company has multiple processes for reporting conflicts of interests, including related person transactions. Under the Conduct Code, all employees are required to report any actual or apparent conflict of interest, or potential conflict of interest, to management. The Chief Financial Officer distributes a questionnaire to the Company’s executive officers and management personnel on a quarterly basis and distributes a questionnaire to the members of the Board of Directors on an annual basis requesting certain information regarding, among other things, their immediate family members, employment and beneficial ownership interests, which information is then reviewed for any conflicts of interest under the Conduct Code. 
+The Board of Directors, the Audit Committee and the Disclosure Committee, which is comprised of management personnel, discuss the related party transactions, specifically, and in connection with the regular review processes attendant to the Company’s periodic filings, including related party transaction disclosures. 
+14 
+If a director is a party to or in some manner involved in a transaction involving the Company, he will be recused from all discussions and decisions about the transaction. The transaction must be approved in advance whenever practicable, and if not practicable, must be ratified as promptly as practicable.
\ No newline at end of file
diff --git a/raw/filings/0000913241/2010/0001019056-11-000275/filing.txt b/raw/filings/0000913241/2010/0001019056-11-000275/filing.txt
new file mode 100644
index 0000000000000000000000000000000000000000..ae21c8594d469772cbc4d1726a973a0b983ef881
--- /dev/null
+++ b/raw/filings/0000913241/2010/0001019056-11-000275/filing.txt
@@ -0,0 +1,3489 @@
+10-K
+1
+smadden_10k10.htm
+FORM 10-K
+Unassociated Document 
+UNITED STATES 
+SECURITIES AND EXCHANGE COMMISSION 
+WASHINGTON, D.C. 20549 
+FORM 10-K 
+(Mark One) 
+x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
+For the fiscal year ended December 31, 2010 
+or 
+o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 
+For the transition period from to 
+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 
+incorporation or organization) 
+(I.R.S. employer identification no.) 
+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: 
+Title of Each Class 
+Name of Each Exchange on Which Registered 
+Common Stock, par value $.0001 per share 
+The NASDAQ Stock Market LLC 
+Preferred Stock Purchase Rights 
+The NASDAQ Stock Market LLC 
+Securities Registered Pursuant to Section 12(g) of the Act: None 
+Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. 
+Yes x No o 
+Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Act. 
+Yes o No x 
+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 o 
+Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). 
+Yes o No o 
+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. o 
+Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. 
+Large accelerated filer x Accelerated filer o Non-accelerated filer o Smaller reporting company o 
+Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). 
+Yes o No x 
+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, 2010, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $786,065,000 (based on the closing sale price of the registrant’s common stock on that date as reported on The NASDAQ Global Select Market). 
+The number of outstanding shares of the registrant’s common stock as of February 24, 2011 was 28,018,046 shares. 
+DOCUMENTS INCORPORATED BY REFERENCE: 
+PART III INCORPORATES CERTAIN INFORMATION BY REFERENCE FROM THE REGISTRANT’S DEFINITIVE PROXY STATEMENT FOR THE REGISTRANT’S 2011 ANNUAL MEETING OF STOCKHOLDERS. 
+TABLE OF CONTENTS 
+SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS 
+1 
+PART I 
+ITEM 1 
+BUSINESS 
+1 
+ITEM 1A 
+RISK FACTORS 
+10 
+ITEM 1B 
+UNRESOLVED STAFF COMMENTS 
+15 
+ITEM 2 
+PROPERTIES 
+15 
+ITEM 3 
+LEGAL PROCEEDINGS 
+16 
+ITEM 4 
+[REMOVED AND RESERVED] 
+17 
+PART II 
+ITEM 5 
+MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES 
+17 
+ITEM 6 
+SELECTED FINANCIAL DATA 
+19 
+ITEM 7 
+MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 
+20 
+ITEM 7A 
+QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK . 
+29 
+ITEM 8 
+FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 
+30 
+ITEM 9 
+CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 
+30 
+ITEM 9A 
+CONTROLS AND PROCEDURES 
+30 
+ITEM 9B 
+OTHER INFORMATION 
+32 
+PART III 
+ITEM 10 
+DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 
+32 
+ITEM 11 
+EXECUTIVE COMPENSATION 
+32 
+ITEM 12 
+SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS 
+32 
+ITEM 13 
+CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE 
+33 
+ITEM 14 
+PRINCIPAL ACCOUNTANT FEES AND SERVICES 
+33 
+PART IV 
+ITEM 15 
+EXHIBITS AND FINANCIAL STATEMENT SCHEDULES 
+33 
+SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS 
+This Annual Report on Form 10-K contains “forward-looking statements” (as that term is defined in the federal securities laws), which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements with regard to future revenue, projected 2011 results, earnings, spending, margins, cash flow, orders, expected timing of shipment of products, inventory levels, future growth or success in specific countries, categories or market sectors, continued or expected distribution to specific retailers, liquidity, capital resources and market risk, strategies and objectives and other future events. More generally, forward-looking statements include, without limitation, any statement that may predict, forecast, indicate or simply state future results, performance or achievements, and can be identified by the use of forward looking language such as “believe,” “anticipate,” “expect,” “estimate,” “intend,” “plan,” “project,” “will be,” “will continue,” “will result,” “could,” “may,” “might,” or any variations of such words with similar meanings. Factors that may affect our results include, but are not limited to, the risks and uncertainties discussed in Item 1A of this Annual Report on Form 10-K. 
+Any such forward-looking statements are subject to risks and uncertainties, many of which are beyond our control, which may influence the accuracy of the statements and the projections upon which the statements are based and could cause our actual results to differ materially from those projected in forward-looking statements. As such, we strongly caution you that these forward-looking statements are not guarantees of future performance or events. Our actual results, performance and achievements could differ materially from those expressed or implied in these forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether from new information, future events or otherwise. 
+PART I 
+ITEM 1 
+BUSINESS 
+Overview 
+Steven Madden, Ltd. and its subsidiaries (collectively, the “Company”) design, source, market and sell fashion-forward footwear for women, men and children. In addition, we design, source, market and sell name brand and private label fashion handbags and accessories. We distribute products through our retail stores, our e-commerce website, department stores, specialty stores, luxury retailers, national chains and mass merchants throughout the United States and through special distribution arrangements in Asia, Canada, Europe, the Middle East, Mexico, Australia, Central and South America and India. Our product line consists of a broad range of updated styles designed to establish or capitalize on market trends, complemented by core products. We have established a reputation for design creativity and offering popular styles and quality products at affordable price points. 
+Fiscal year 2010 was a record year for the Company. Our consolidated net sales for 2010 increased to a record $635.4 million from $503.6 million achieved in 2009. Our gross margin increased in fiscal year 2010 to 43.4%, 50 basis points greater than the 42.9% achieved in 2009. Net income increased 51% in 2010 to a record $75.7 million from $50.1 million in 2009. Diluted earnings per share for the year ended December 31, 2010 increased 47% to a record $2.68 per share on 28,295,000 diluted weighted average shares outstanding compared to $1.82 per share on 27,485,000 diluted weighted average shares outstanding in 2009. Net cash provided by operating activities increased to a record $86.9 million in 2010 compared to $64.3 million in 2009. 
+On January 7, 2010, the Company expanded its licensing activities by entering into an agreement to license the Steve Madden® and Steven by Steve Madden® trademarks for the design, manufacture and worldwide distribution of women’s fashion jewelry. The new women’s fashion jewelry line, which initially shipped in the third quarter 2010, joins our existing licenses for women’s fashion apparel, cold weather accessories, sunglasses, eyewear, outerwear, bedding and hosiery offerings. Our goal is to evolve Steve Madden® into a global lifestyle brand and expand the Company’s presence beyond footwear and accessories. We believe this new jewelry line marks a very logical extension of the Company’s brands. 
+1 
+In fiscal 2010, we also expanded our brand portfolio through two transactions. On February 10, 2010, we acquired all of the outstanding shares of stock of privately held Big Buddha, Inc. (“Big Buddha”) from its sole stockholder (“Seller”). Founded in 2003, Big Buddha designs and markets fashion-forward handbags to specialty retailers and better department stores. We believe that Big Buddha is a strategic fit for our Company. The acquisition was completed for consideration of $11.1 million in cash, net of cash acquired, plus contingent payments pursuant to an earn-out agreement with the Seller, who continues to manage the business as an employee of the Company. See Note B to our Consolidated Financial Statements for additional information relating to the Big Buddha acquisition. 
+On October 5, 2010, pursuant to a Restructuring Agreement between the Company and Betsey Johnson LLC (“Betsey Johnson”), the Company acquired all right, title and interest in substantially all of the intellectual property of Betsey Johnson, including, among other things, the Betsey Johnson® and Betseyville® trademarks, and certain intellectual property licenses and other contracts, including the right to receive royalties and other income with respect thereto (the “Betsey Johnson Assets”). Management believes that Betsey Johnson® is a well recognized brand that offers meaningful growth opportunity for our business. Prior to its entry into the Restructuring Agreement, Betsey Johnson had licensed to the Company the right to use the Betsey Johnson® and Betseyville® trademarks in connection with the sale and marketing of handbags, small leather goods, belts and umbrellas. The acquisition of the Betsey Johnson Assets was the culmination of a series of transactions that began in August 2010. First, in August 2010, the Company purchased from various members of a loan syndicate their respective participations in a term loan to Betsey Johnson in the aggregate outstanding principal amount of $48.750 million (the “Loan”) made by the syndicate lenders to Betsey Johnson. The Company paid the syndicate lenders an aggregate purchase price of $29.217 million, including transaction costs, for their participations in the Loan. The Loan was secured by a first priority security interest in substantially all of the assets of Betsey Johnson and was in default on the date of purchase. On October 5, 2010, the Company entered into the Restructuring Agreement with Betsey Johnson, pursuant to which, in consideration of the elimination of all amounts owed with respect to the Loan, the Company acquired the Betsey Johnson Assets. The Company made a new secured term loan to Betsey Johnson on October 5, 2010 in the principal amount of $3 million, which accrues interest at the rate of 8% per annum and becomes due on December 31, 2015. The new term loan is secured by a first priority security interest in substantially all of the remaining properties and assets of Betsey Johnson. See Notes B and F to our Consolidated Financial Statements for additional information relating to the Loan, the new term loan to Betsey Johnson, and the acquisition of the Betsey Johnson Assets. 
+On March 24, 2010, the Board of Directors declared a 3-for-2 stock split of the Company’s outstanding shares of common stock, effected in the form of a stock dividend on the Company’s outstanding common stock. Stockholders of record at the close of business on April 20, 2010 received one additional share of Steven Madden Ltd. common stock for every two shares of common stock owned on this date. The additional shares were distributed on May 3, 2010. All share and per share data provided herein gives effect to this stock split, applied retroactively. 
+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. We completed our initial public offering in December 1993 and our shares of common stock, $.0001 par value per share, currently trade on the NASDAQ Global Select Market under the symbol “SHOO”. 
+We maintain our principal executive offices at 52-16 Barnett Avenue, Long Island City, NY 11104 and our telephone number is (718) 446-1800. 
+Our website is http://www.stevemadden.com. We file Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other reports and information with the Securities and Exchange Commission (the “SEC”) pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). We make these reports, any amendments to such reports, and our proxy statements for our stockholders’ meetings available free of charge, on our website as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. We will provide paper copies of such filings free of charge upon request. The public may read and copy any materials filed by us with the SEC at the SEC’s Public Reference Room at 100 R Street, NE, Washington, D.C. 20549. The public may also obtain information on the operation of the SEC’s Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding us, which is available at http://www.sec.gov. 
+2 
+Product Distribution Segments 
+Our business is comprised of five distinct segments (Wholesale Footwear, Wholesale Accessories, Retail, First Cost and Licensing). See Note O to our Consolidated Financial Statements for additional information relating to our five operating segments. 
+Our Wholesale Footwear segment is comprised of the following brands: Steve Madden Women’s, Madden Girl, Steve Madden Men’s, Steven, l.e.i. (under license), Elizabeth and James (under license), Stevies, Big Buddha Shoes, Madden and includes our International business. Our Wholesale Accessories segment includes Big Buddha, Betseyville, Betsey Johnson, Steve Madden, Steven by Steve Madden and, through license agreements, Daisy Fuentes® and Olsenboye® accessories brands. Steven Madden Retail, Inc., our wholly owned retail subsidiary, operates Steve Madden and Steven retail stores as well as our e-commerce website. There are also three stores licensed to a third party. The First Cost segment represents activities of a subsidiary that earns commissions for serving as a buying agent for footwear products under private labels and licensed brands (such as Candie’s® and Olsenboye®) for many of the country’s large mass-market merchandisers, shoe chains and other off-price retailers. In the Licensing segment, the Company licenses its Steve Madden® and Steven by Steve Madden® marks for use in connection with the manufacture, marketing and sale of cold weather accessories, sunglasses, eyewear, outerwear, bedding, hosiery, women’s fashion apparel and jewelry. We license our Big Buddha brand for use in connection with the manufacture, marketing and sale of sunglasses and cold weather accessories. In addition, we license our recently acquired Betsey Johnson® and Betseyville® marks for use in connection with the manufacture, marketing and sale of apparel, jewelry, lingerie, swimwear, eyewear, watches and outerwear. 
+Wholesale Footwear Segment 
+Steve Madden Women’s. We design, source and market our Steve Madden brand to major department stores, mid-tier department stores, better specialty stores and independently owned boutiques throughout the United States. The Steve Madden brand has become a leading life-style brand in the fashion conscious marketplace. To serve our customers (primarily women ages 16 to 35), Steve Madden Women’s creates and markets fashion forward footwear designed to appeal to customers seeking exciting, new footwear designs at affordable prices. New products for Steve Madden Women’s are test marketed at Company-owned retail stores. Typically, within a few days, we can determine if the test product appeals to our customers. This enables us to use our flexible sourcing model to rapidly respond to changing trends and customer preferences, which we believe is essential for success in the fashion industry. 
+Madden Girl. We design, source and market a full collection of directional young women’s shoes under the Madden Girl brand. Madden Girl is geared for young women ages 13 to 20, and is an “opening price point” brand currently sold at major department stores, mid-tier retailers and specialty stores. 
+Steve Madden Men’s. We design, source and market a full collection of directional men’s shoes and fashion forward athletic shoes under the Steve Madden Men’s brand to major department stores, mid-tier department stores, better specialty stores and independent shoe stores throughout the United States as well as in our retail stores. Price points for Steve Madden Men’s products range from $70 to $100 at retail, targeted at men ages 20 to 40 years old. Steve Madden Men’s maintains open stock inventory positions in select patterns to serve the replenishment programs of its wholesale customers. 
+Steven. We design, source and market women’s fashion footwear under the Steven® trademark through major department and better footwear specialty stores throughout the United States as well as in our retail stores. Priced a tier above the Steve Madden brand, Steven products are designed to appeal principally to fashion conscious women, ages 25 to 45, who shop at department stores and footwear boutiques. 
+3 
+l.e.i. On July 1, 2008, we entered into a license agreement with Jones Investment Co. Inc., under which we have the right to use the l.e.i. trademark in connection with the sale and marketing of footwear exclusively to Wal-Mart. 
+Elizabeth and James. On September 10, 2008, we entered into a license agreement with Dualstar Entertainment Group, LLC, under which we have the right to use the Elizabeth and James® trademark in connection with the sale and marketing of footwear. The Elizabeth and James brand, which was created by Mary-Kate and Ashley Olsen, is distributed through luxury retailers to women ages 25 to 36 years with average retail price points from $200 to $350 for shoes and from $350 to $500 for boots. 
+Stevies and Steve Madden Kids. Our Stevies and Steve Madden Kids brands are designed, sourced and marketed for young girls, ages six to twelve, via department stores, specialty stores and independent boutiques throughout the United States. 
+Big Buddha Shoes . On February 10, 2010, we acquired all of the outstanding shares of stock of privately held Big Buddha from its sole stockholder. Our new Big Buddha Shoe brand, which began shipping in the third quarter of 2010, is currently sold at department stores and specialty stores. 
+Madden. Our new Madden brand, which began shipping in the first quarter of 2010, includes a full collection of men’s shoes. Madden is an “opening price point” brand that is currently sold at major department stores, mid-tier retailers and specialty stores. 
+International Division. Prior to 2009, our international business (the “International Division”) operated under the “first cost” model and, thus, the revenues derived from our international business were included in Commissions and Licensing Fees in the Consolidated Statements of Income of our Financial Statements. In order to improve operating efficiencies, and to give our international partners better visibility in the process, as of January 2009, we have changed the operating model for our International Division to the “wholesale” model. Our International Division ships products to Asia, Canada, Europe, the Middle East, Mexico, Australia, Central and South America and India. 
+Wholesale Accessories Segment 
+Our Wholesale Accessories segment designs, sources and markets name brand (including Daisy Fuentes® and Olsenboye® each under license and our Steve Madden®, Steven by Steve Madden®, Betsey Johnson®, Bettseyville® and Big Buddha®, brands) and private label fashion handbags and accessories to major department stores, mid-tier department stores, value price retailers and independent stores throughout the United States. 
+Retail Segment 
+As of December 31, 2010, the Company, through our wholly owned subsidiary Steven Madden Retail, Inc., owned and operated 84 retail stores including 79 stores under the Steve Madden name, three under the Steven name, one outlet store and our e-commerce website (at www.stevemadden.com). In 2010, we opened three new stores, closed eight under-performing stores and remodeled five existing stores. Steve Madden stores are located in major shopping malls and in urban street locations across the United States, primarily in New York, California and Florida. In 2010, our retail stores generated annual sales in excess of $742 per square foot compared to $640 per square foot generated in 2009. Comparative store sales (sales of those stores, including the e-commerce website, that were open for all of 2010 and 2009) increased 12.7% in fiscal year 2010 compared to fiscal year 2009. 
+We believe that the Retail segment will continue to enhance overall sales and profitability while increasing recognition for the Steve Madden brand. Additionally, our retail stores enable us to evaluate the appeal of new products and designs to our customers and respond accordingly, which, in turn, strengthens the product development efforts of the Steve Madden Wholesale segments. We expect to open between six and nine new retail stores and close between three and five under-performing stores during 2011. 
+4 
+First Cost Segment 
+The First Cost segment represents activities of a wholly-owned subsidiary of the Company that earns commissions for serving as a buying agent for footwear products under private labels and licensed brands (such as Candie’s® and Olsenboye®) for many of the country’s large mass-market merchandisers, shoe chains and other mid-tier retailers. As a buying agent, we utilize our expertise and our relationships with shoe manufacturers to facilitate the production of private label shoes to our customers’ specifications. We believe that by operating in the private label, mass merchandising market, we are able to maximize additional non-branded sales opportunities. This leverages our overall sourcing and design capabilities. Currently, our First Cost segment serves as a buying agent for the procurement of women’s, men’s and children’s footwear for large retailers, including Kohl’s, J.C. Penney and Sears. The First Cost segment receives buying agent’s commissions from its customers. In addition, we have leveraged the strength of our Steve Madden brands and product designs resulting in a partial recovery of our design, product and development costs from our suppliers. 
+Licensing Segment 
+We license our Steve Madden® and Steven by Steve Madden® trademarks for use in connection with the manufacture, marketing and sale of cold weather accessories, sunglasses, eyewear, outerwear, bedding, hosiery, women’s fashion apparel and jewelry. We license our Big Buddha® brand for use in connection with the manufacture, marketing and sale of sunglasses and cold weather accessories. In addition, we license the Betsey Johnson® and Betseyville® trademarks for use in connection with the manufacture, marketing and sale of apparel, jewelry, lingerie, swimwear, eyewear, watches and outerwear. Most of our license agreements require the licensee to pay us a royalty based on actual net sales, a minimum royalty in the event that specified net sales targets are not achieved and a percentage of sales for advertising the brand. 
+See Note O to our Consolidated Financial Statements for additional information relating to our five operating segments. 
+Product Design and Development 
+We have established a reputation for our creative designs, marketing and trendy products at affordable price points. We believe that our future success will substantially depend on our ability to continue to anticipate and react to changing consumer demands in a timely manner. To meet this objective, we have developed what we believe is an unparalleled design process that allows us to recognize and respond quickly to changing consumer demands. Our design team strives to create designs which it believes fit our 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, usually in our Long Island City facility, which is evaluated and refined prior to the commencement of initial production. Most new products are then tested in selected Steve Madden retail stores. Based on these tests, among other things, management selects the products that are then offered for wholesale and retail distribution nationwide. We believe that our design and testing process and flexible sourcing models provide us with a significant competitive advantage allowing us to mitigate the risk of incurring costs associated with the production and distribution of less desirable designs. 
+Product Sourcing and Distribution 
+We source each of our product lines separately based on the individual design, style and quality specifications of the products in such product lines. We do not own or operate manufacturing facilities; rather, we source our products through agents and our own sourcing office with independently owned manufacturers in China, Mexico, Brazil, India, The Netherlands, Korea and Italy. We have established relationships with a number of manufacturers and agents in each of these countries. Although we have not entered into any long-term manufacturing or supply contracts, we believe that a sufficient number of alternative sources exist for the manufacture of our products. We continually monitor the availability of the principal materials used in our footwear, which are available from a number of sources in various parts of the world. We track inventory flow on a regular basis, monitor sell-through data and incorporate input on product demand from wholesale customers. We use retailers’ feedback to adjust the production or manufacture of new products on a timely basis, which helps reduce the close out of slow-moving products. 
+5 
+We distribute our products from three third-party distribution warehouse centers, two located in California and one located in New Jersey. By utilizing distribution facilities specializing in distribution fulfillment to effect distribution to certain wholesale accounts, Steve Madden retail stores and Internet customers, we believe that our customers are served more promptly and efficiently. 
+Customers 
+Our wholesale customers consist principally of better department stores, mid-tier department stores, specialty stores, including independent boutiques, and catalog retailers. These customers, which include DSW, Macy’s, Nordstrom, Dillard’s, Famous Footwear and Lord & Taylor, generate approximately 73% of our wholesale revenue. For the year ended December 31, 2010, DSW accounted for approximately 12% of our wholesale net sales and 10% of our total net sales. 
+Distribution Channels 
+United States 
+We sell our products principally through department stores, specialty stores, luxury retailers, national chains and mass merchants and through our Company-owned retail stores. For the year ended December 31, 2010, our Retail segment and our two Wholesale segments generated net sales of approximately $134.3 million and $466.3 million, or 22% and 78% of our total domestic net sales, respectively. Each of these distribution channels is described below. 
+Steve Madden and Steven Retail Stores. As of December 31, 2010, we operated 79 company-owned retail stores under the Steve Madden name, three under the Steven name, one outlet store and our e-commerce website (at www.stevemadden.com). We believe that our retail stores will continue to enhance overall sales, profitability, and our ability to react to changing consumer trends. Our stores are also a marketing tool that allows us to strengthen brand recognition and to showcase selected items from our full line of branded and licensed products. Furthermore, our retail stores provide us with venues through which to test and introduce new products, designs and merchandising strategies. Specifically, we often test new designs at our Steve Madden retail stores before scheduling them for mass production and wholesale distribution. In addition to these test marketing benefits, we have been able to leverage sales information gathered at Steve Madden retail stores to assist our wholesale customers in order placement and inventory management. 
+A typical Steve Madden store is approximately 1,400 to 1,600 square feet and is located in a mall or street location that we expect will attract the highest concentration of our core demographic, style-conscious customer base. The Steven stores, which are generally the same size as our Steve Madden stores, have a more sophisticated design and format styled to appeal to a more mature target audience. In addition to carefully analyzing mall demographics and locations, we set profitability guidelines for each potential store site. Specifically, we target well trafficked sites at which the demographics fit our consumer profile and seek new locations where the projected fixed annual rent expense stays within our guidelines. By setting these guidelines, we seek to identify stores that will contribute to our overall profitability both in the near and longer terms. 
+Department Stores. We currently sell to over 2,600 doors of 15 department stores throughout the United States. Our major accounts include Macy’s, Nordstrom, Dillard’s and Lord & Taylor. 
+We provide merchandising support to our department store customers which includes in-store fixtures and signage, supervision of displays and merchandising of our various product lines. Our wholesale merchandising effort includes the creation of in-store concept shops, where a broader collection of our branded products are showcased. These in-store concept shops create an environment that is consistent with our image and are designed to enable the retailer to display and sell a greater volume of our products per square foot of retail space. In addition, these in-store concept shops encourage longer term commitment by the retailer to our products and enhance consumer brand awareness. 
+6 
+In addition to merchandising support, our key account executives maintain weekly communications with their respective accounts to guide them in placing orders and to assist them in managing inventory, assortment and retail sales. We leverage our sell-through data gathered at our 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, which reduces markdown exposure at season’s end. 
+Specialty Stores/Catalog Sales. We currently sell to specialty store locations throughout the United States. Our major specialty store accounts include DSW, Famous Footwear and Journeys. We offer our specialty store accounts the same merchandising, sell-through and inventory tracking support offered to our department store accounts. Sales of our products are also made through various catalogs, such as Victoria’s Secret. 
+Internet Sales. We operate an Internet website, www.stevemadden.com, where customers can purchase numerous styles of our Steve Madden Women’s, Steven and Madden Men’s as well as selected styles of Madden Girl, footwear and accessory products. 
+International 
+Our products are available in many countries and territories worldwide via several retail selling and distribution agreements. Under the terms of the various agreements, the distributors and retailers are generally required to open a minimum number of stores each year and to pay us a fee for each pair of footwear purchased and an additional sales royalty as a percentage of sales or a predetermined amount per unit of sale. Distributors are required to purchase a specified minimum number of products within specified periods. The agreements we have in place expire at various times through December 31, 2031 and include automatic renewals at the distributors’ option if certain conditions are met. These agreements are exclusive in their specific territories, which include Asia, Canada, Europe, the Middle East, Mexico, Australia, Central and South America and India. 
+Competition 
+The fashion industry is highly competitive. We compete with specialty shoe and accessory companies as well as companies with diversified footwear product lines, such as Nine West, Skechers, Kenneth Cole, Nike, Guess and Jessica Simpson. Our competitors may have greater financial and other resources than we do. We believe effective advertising and marketing, fashionable styling, high quality, value and fast manufacturing turnaround are the most important competitive factors and intend to continue to employ these elements as we develop our products. However, we cannot be certain that we will be able to compete successfully against our current and future competitors, or that competitive pressures will not have a material adverse effect on our business, financial condition and results of operations. 
+Marketing and Sales 
+We have focused on creating an integrated brand building program to establish Steve Madden as a leading designer of fashion footwear for style-conscious young women and men. Principal marketing activities include product placements in lifestyle and fashion magazines, personal appearances by our founder and Creative and Design Chief, Steve Madden, and in-store promotions. We continue to promote our e-commerce website (www.stevemadden.com) where customers can purchase products under the brands Steve Madden, Steven, Steve Madden Men’s and selected styles of Madden Girl footwear, as well as view exclusive content, participate in contests and “live chat” with customer service representatives. 
+7 
+Management Information Systems (MIS) Operations 
+Sophisticated information systems are essential to our ability to maintain our competitive position and to support continued growth. We operate on a dual AS/400 system which provides system support for all aspects of our business, including manufacturing purchase orders, customer purchase orders, order allocations, invoicing, accounts receivable management, quick response replenishment, point-of-sale support and financial and management reporting functions. We have a PKMS bar coded warehousing system that is integrated with the wholesale system in order to provide accurate inventory positions and quick response size replenishment for our customers. In addition, we have installed an electronic data interchange (“EDI”) system which provides a computer link between us and certain wholesale customers that enables both the customer and us to monitor purchases, shipments and invoicing. The EDI system also improves our ability to respond to customer inventory requirements on a weekly basis. 
+Intellectual Property 
+Trademarks 
+We own numerous trademarks, including, among others: 
+· 
+Steve Madden® 
+· 
+Madden Girl® 
+· 
+Steven® 
+· 
+Steven by Steve Madden® 
+· 
+Stevies® 
+· 
+Big Buddha® 
+· 
+Betsey Johnson® 
+· 
+Betseyville® 
+· 
+PEACE LOVE SHOES® (logo and various trademarks) 
+We consider each of the above marks to be among our most valuable assets and have registered these marks in numerous countries and in numerous International Classes. From time to time we adopt new trademarks in connection with the marketing of new product lines. We believe that our trademarks have significant value and are important for purposes of identifying the Company, the marketing of our products and the products of our licensees, distinguishing them from the products of others. We act aggressively to register and vigorously to protect our trademarks against infringement. There can be no assurance, however, that we will be able to effectively obtain rights to our marks throughout all of the countries of the world. Moreover, no assurance can be given that others will not assert rights in or ownership of, our marks and other proprietary rights or that we will be able to resolve any such conflicts successfully. Our failure to protect such rights from unlawful and improper appropriation may have a material adverse effect on our business, financial condition, results of operations and liquidity. 
+Trademark Licensing 
+We believe that expanding the Company’s presence beyond footwear and accessories is a logical extension of the Company’s brands. As of December 31, 2010, we license our Steve Madden® and Steven by Steve Madden® trademarks for use in connection with the manufacture, marketing and sale of cold weather accessories, sunglasses, eyewear, outerwear, bedding, hosiery, women’s fashion apparel and jewelry. We license our Big Buddha brand for use in connection with the manufacture, marketing and sale of sunglasses and cold weather accessories. In addition, we license the Betsey Johnson® and Betseyville® trademarks for use in connection with the manufacture, marketing and sale of apparel, jewelry, lingerie, swimwear, eyewear, watches and outerwear. 
+8 
+In connection with our October 5, 2010 acquisition of substantially all of the intellectual property of Betsey Johnson LLC, the Company entered into intellectual property license agreements with Betsey Johnson LLC, pursuant to which the Company granted Betsey Johnson LLC a limited, exclusive license and right to use the Betsey Johnson Ò and Betsey Johnson Collection TM trademarks with respect to specified items of women’s apparel sold in retail stores owned and operated by Betsey Johnson, LLC in the United States, London, England and Canada, in wholesale sales in the United States and in certain other jurisdictions outside the United States, as well as a right and license to sell, via Betsey Johnson LLC’s e-commerce websites and in Betsey Johnson-branded retail stores located in Canada, London, England and the United States, products featuring designs created by the Company or manufactured under license to third parties by the Company. Under these license arrangements, the Company is entitled to royalty payments based on net sales and certain guaranteed minimum royalty payments. The agreement under which we license the Betsey Johnson® and Betsey Johnson Collection™ marks to Betsey Johnson is due to expire on August 30, 2013 and will be automatically extended for successive four-year periods if certain conditions are met. The agreement under which Betsey Johnson was granted a right and license to sell product featuring designs created by the Company or manufactured under license to third parties by the Company is due to expire on October 5, 2011 and will be subject to automatic extensions for successive one year periods if certain condition are met. 
+Most of our out-going license agreements require the licensee to pay us a royalty based on actual net sales, a minimum royalty in the event that specified net sales targets are not achieved and a percentage of sales for advertising the brand. See Notes A12 and N4 to our Consolidated Financial Statements included in this Annual Report on Form 10-K for additional disclosure regarding these licensing arrangements. 
+In addition to out-licenses of our trademarks, we also license from third parties marks used in connection with certain of our product lines. We have licenses from Dualstar Entertainment Group, LLC under which the Company has the right to use the Olsenboye® trademark in connection with the sale and marketing of footwear and accessories and the Elizabeth and James® trademark in connection with the sale and marketing of footwear. The term of these licenses expire on December 31, 2011 and March 31, 2012, respectively. In addition, we hold licenses from Jones Investment Co. Inc. under which the Company has the right to use the GLO Jeans® trademark in connection with the sale and marketing of women’s footwear exclusively to K-Mart and the l.e.i.® trademark in connection with the marketing and sale of women’s footwear exclusively to Wal-Mart. The term of the licenses from Jones Investment Co, Inc. expire on December 31, 2012 and December 31, 2011, respectively. We also hold a license from Dafu Licensing, Inc. to design, manufacture and distribute handbags and belts and related accessories under the DF Daisy Fuentes® and the Daisy Fuentes® brands. The term of our license with Dafu Licensing, Inc. expires on December 31, 2012. Substantially all of these licensing agreements require us to make royalty and advertising payments to the licensor equal to a percentage of our net sales or a minimum royalty and advertising payment in the event that specified net sales targets are not achieved. 
+Employees 
+On February 1, 2011, we employed approximately 1,440 employees, of whom approximately 780 work on a full-time basis and approximately 660 work on a part-time basis, with most of the part-time employees being employed in the Retail segment. All of our employees are located in the United States with the exception of approximately 30 employees located in Hong Kong and China who perform quality control and administrative duties. None of our employees are represented by a union. Our management considers relations with our employees to be good. The Company has never experienced a material interruption of its operations due to a labor dispute. 
+Seasonality 
+Historically, our merchandising businesses have experienced holiday retail seasonality. In addition to seasonal fluctuations, our operating results fluctuate from quarter to quarter as a result of the timing of holidays, weather, the timing of larger shipments of footwear, market acceptance of our products, product mix, pricing and presentation of the products offered and sold, the hiring and training of additional personnel, inventory write downs for obsolescence, the cost of materials, the product mix between wholesale, retail and licensing businesses, the incurrence of other operating costs and factors beyond our control, such as general economic conditions and actions of competitors. 
+9 
+Backlog 
+We had unfilled wholesale customer orders of $161.8 million and $132.6 million, as of February 1, 2011 and 2010, respectively. Our backlog at a particular time is affected by a number of factors, including seasonality, timing of market weeks and wholesale customer purchases of our core basic products through our open stock program. Accordingly, a comparison of backlog from period to period may not be indicative of eventual shipments. 
+ITEM 1A 
+RISK FACTORS 
+You should carefully consider the risks and uncertainties we describe below and the other information in this Annual Report on Form 10-K before deciding to invest in, sell or retain shares of our common stock. These are not the only risks and uncertainties that we face. Other sections of this report may discuss factors that could adversely affect our business. The retail industry is highly competitive and subject to rapid change. There may be additional risks and uncertainties that we do not currently know about or that we currently believe are immaterial, or that we have not predicted, which may also harm our business or adversely affect us. If any of these risks or uncertainties actually occurs, our business, financial condition, results of operations and liquidity could be materially harmed. 
+Risks Related to the Industry in Which the Company Operates 
+Constantly Changing Fashion Trends and Consumer Demands. Our success depends in significant part upon our 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 our products will correspond to the changes in taste and demand or that we will be able to successfully market products that respond to such trends. If we misjudge the market for our products, we may be faced with significant excess inventories for some products and missed opportunities as to others. In addition, misjudgments in merchandise selection could adversely affect our image with our customers resulting in lower sales and increased markdown allowances for customers which could have a material adverse effect on our business, financial condition, results of operations and liquidity. 
+Intense Fashion Industry Competition . The fashion footwear industry is highly competitive and barriers to entry are low. Our competitors include specialty companies as well as companies with diversified product lines. The recent market growth in the sales of fashion footwear has encouraged the entry of many new competitors and increased competition from established companies. Many of these competitors, including Nine West, Skechers, Kenneth Cole, Nike, Guess and Jessica Simpson may have significantly greater financial and other resources than we do and there can be no assurance that we 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 our business, financial condition, results of operations and liquidity. We believe effective advertising and marketing, branding of the Steve Madden® and our other trademarks, fashionable styling, high quality and value are the most important competitive factors and we plan to continue to employ these elements as we develop our products. Our inability to effectively advertise and market our products could have a material adverse effect on our business, financial condition, results of operations and liquidity. 
+Cyclical Nature of Fashion Business . The overall fashion industry is cyclical, and purchasing tends to decline during recessionary periods when disposable income is low. Likewise, purchases of contemporary shoes and accessories tends to decline during recessionary periods and also may decline at other times. There can be no assurance that we will be able to grow or even maintain our current level of revenues and earnings, or remain profitable in the future. Continuing recession in the national or regional economies and uncertainties regarding future economic prospects, among other things, could affect consumer spending habits. The volatility and disruption of global economic and financial market conditions that began in 2008 has caused lingering declines in consumer confidence and spending in the United States and internationally. A further deterioration or a continued weakness of economic and financial market conditions for an extended period of time could have a material adverse effect on our business, financial condition, results of operations and liquidity. 
+10 
+Consolidation Among Retailers . 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 further consolidate, undergo restructurings or reorganizations, or realign their affiliations, any of which could decrease the number of stores that carry our 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 our business or financial condition, results of operations and liquidity, there can be no assurance as to the future effect of any such changes. 
+Economic Uncertainty and Political Risks . Our opportunities for long-term growth and profitability are accompanied by significant challenges and risks, particularly in the near term. Specifically, our business is dependent on consumer demand for our products. We believe that declining consumer confidence accompanied with the tightening of credit standards, higher energy and food prices and unemployment rates and a decrease in consumers’ disposable income has negatively impacted the level of consumer spending for discretionary items during the years ended December 31, 2008, 2009 and 2010. Despite the worsening retail environment, in 2010 we achieved substantial revenue growth in both our Wholesale and Retail segments but we cannot assume that this will be maintained. A continued weak economic environment could have a negative effect on the Company’s sales and results of operations during the year ending December 31, 2011 and thereafter. In addition, unstable political conditions in some parts of the world, including potential or actual international conflicts, or the continuation or escalation of terrorism, could have a material adverse effect on our business, financial condition, results of operations and liquidity. 
+Risks Related to Our Business 
+Dependence on Key Personnel. The growth and success of our Company since its inception more than twenty years ago is attributable, to a significant degree, to the talents, skills and efforts of our founder and Creative and Design Chief, Steven Madden. An extended or permanent loss of the services of Mr. Madden could severely disrupt our business and have a material adverse effect on the Company. Our other senior executives have substantial experience and expertise in our business and industry and have made significant contributions to our growth and success as well. Competition for key executives in the apparel, footwear and accessories industries is intense. While our employment agreements with Mr. Madden and most of our other senior executives include a non-compete provision in the event of the termination of employment, the non-compete periods are for limited duration. While we believe we have depth within our senior management team, if we lose the services of our Creative and Design Chief or any of our senior executives, and especially if any of these individuals joins a competitor or forms a competing company, our business and financial performance could be seriously harmed. A loss of the skills, industry knowledge, contacts and expertise of our Creative and Design Chief or any of our senior executives could cause a setback to our operating plan and strategy. 
+Dependence Upon Significant Customers . Our customers consist principally of major department stores, mid-tier department stores, better specialty stores and independently owned boutiques. Certain of our department store customers, including some under common ownership, account for significant portions of our wholesale business. We generally enter into a number of purchase order commitments with our customers for each of our lines every season and do not enter into long-term agreements with any of our customers. Therefore, a decision by a significant customer, whether motivated by competitive conditions, financial difficulties or otherwise, to decrease the amount of merchandise purchased from us or to change its manner of doing business could have a material adverse effect on our business, financial condition, results of operations and liquidity. 
+Risks Associated with Extending Credit to Customers. We sell our products primarily to retail stores across the United States and extend credit based on an evaluation of each customer’s financial condition, usually without collateral. Various retailers, including some of our customers, have experienced financial difficulties as a result of the financial crisis that began in 2008, which has increased the risk of extending credit to such retailers. However, our losses due to bad debts have been limited. Pursuant to the terms of our factoring agreement, our factor, Rosenthal & Rosenthal, Inc., currently assumes the credit risk related to approximately 76% of our trade accounts receivable. In addition, we have letters of credit for approximately 18% of our trade accounts receivable. Still, if any of our customers experiences a shortage of liquidity, the risk that the customer’s outstanding payables to us would not be paid could cause us to curtail business with the customer or require us to assume more credit risk relating to the customer’s account payable. 
+11 
+Risks Associated with Expansion of Retail Business . Our continued growth depends to a significant degree on whether we are successful in further developing and marketing the Steve Madden, Stevies, Steven, Madden Girl, Steve Madden Men’s, Big Buddha, Elizabeth and James, Olsenboye, l.e.i., Betsey Johnson and Betseyville brands, and creating new brands, product categories and businesses, and operating company-owned Steve Madden and Steven stores is a significant part of our growth strategy. During the year ended December 31, 2010, we opened three and closed eight retail stores and have plans to open six to eight and close five to seven stores in the next fiscal year. We also remodeled five existing stores. Our future expansion plan 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 us in our existing markets. There can be no assurance that we 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. Our retail expansion is dependent on the performance of our wholesale and retail operations, generally as well as on a number of other factors, including our ability to: 
+· 
+locate and obtain favorable store sites ; 
+· 
+negotiate favorable lease terms; 
+· 
+hire, train and retain competent store personnel; 
+· 
+anticipate the preferences of our retail customers in new geographic areas; 
+· 
+successfully integrate new stores into our existing operations. 
+Past comparable store sales results may not be indicative of future results and there can be no assurance that our comparable store sales results will increase or even be maintained in the future. 
+Management of Growth . Our operations have increased and will continue to increase the demand on our managerial, operational and administrative resources. In recent years, we have invested significant resources in, among other things, our management information systems and hiring and training of new personnel. However, in order to manage currently anticipated levels of future demand, we may be required to, among other things, expand our distribution facilities, establish relationships with new manufacturers to produce our product, and continue to expand and improve our financial, management and operating systems. There can be no assurance that we will be able to manage future growth effectively and a failure to do so could have a material adverse effect on our business, financial condition, results of operations and liquidity. 
+Inventory Management . The trend-focused nature of the fashion industry and the rapid changes in customer preferences leave us vulnerable to an increased risk of inventory obsolescence. Thus, our ability to manage our inventories properly is an important factor in our 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 may be necessary to reduce high inventory levels. Our inability to effectively manage our inventory could have a material adverse effect on our business, financial condition, results of operations and liquidity. 
+Foreign Sourcing and Manufacturing . Virtually all of our products are purchased through arrangements with a number of foreign manufacturers, primarily from China, Mexico, Brazil, India, The Netherlands, Korea and Italy. Risks inherent in foreign operations including work stoppages, transportation delays and interruptions, changes in social, political and economic conditions, can result in the disruption of trade from the countries in which our 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 our business, financial condition, results of operations and liquidity. While we believe that we manage our exposure to the risk that any such economic or political condition will materially affect our ability to purchase products because we are aware of a variety of materials and alternative sources that are available, we cannot be certain that we will be able to identify such alternative materials and/or sources without delay or without greater cost to us. Our inability to identify and secure alternative sources of supply in this situation could have a material adverse effect on our business, financial condition, results of operations and liquidity. 
+12 
+Impact of Custom Duties and Other Import Regulations . Our products, virtually all of which are imported, are also subject to United States custom duties. The United States and the countries in which our products are produced or sold, from time to time, impose new quotas, duties, tariffs or other restrictions on imports or exports, may adversely adjust prevailing quotas, duties or tariff levels, or impose sanctions in the form of additional duties to remedy perceived illegal actions, any of which could have a material adverse effect on our business, financial condition, results of operations and liquidity. 
+Manufacturers’ Inability to Manufacture Our Goods in a Timely Manner or Meet Quality Standards . As is common in the footwear industry, we contract for the manufacture of virtually all of our products to our specifications through foreign manufacturers. We do not own or operate any manufacturing facilities and, therefore, we are dependent upon third parties for the manufacture of all of our products. The inability of a manufacturer to ship orders of our products in a timely manner or to meet our quality standards could cause us to miss the delivery date requirements of our customers for those items, which, in turn, could result in cancellation of orders, refusal to accept deliveries, a reduction in purchase prices and, ultimately, termination of a customer relationship, any of which could have a material adverse effect on our business, financial condition, results of operations and liquidity. 
+Difficulty in Locating Replacement Manufacturers. Although we enter 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, we do 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. In addition, we may seek replacement manufacturers due to a significant increase in the prices we are required to pay to our existing manufacturers of our goods. Although we believe that other facilities are available for the manufacture of our products, there can be no assurance that such facilities would be available to us on an immediate basis, if at all, or be able to meet our quality standards and delivery requirements, or that the costs charged to us by such manufacturers would not be significantly greater than those presently paid. 
+Manufacturers’ Failure to Use Acceptable Labor Practices . We do not control our licensing partners or independent manufacturers or their labor practices. The violation of labor or other laws by one of the independent manufacturers with whom we contract or by one of our licensing partners, or the divergence of a manufacturer’s or a licensing partner’s labor practices from those generally accepted as ethical in the United States, would cause us to curtail our relationship with such party which, in turn, would require us to replace that manufacturer which, as noted in the immediately preceding risk factor, could present challenges which could have a material adverse effect on our business, financial condition, results of operations and liquidity. 
+Seasonal and Quarterly Fluctuations . Our results of operations may fluctuate from quarter to quarter and are affected by a variety of factors, including: 
+· 
+the timing of holidays; 
+· 
+weather conditions; 
+· 
+the timing of larger shipments of footwear ; 
+· 
+market acceptance of our products ; 
+· 
+the mix, pricing and presentation of the products offered and sold ; 
+· 
+the hiring and training of additional personnel ; 
+· 
+inventory write downs for obsolescence, the cost of materials ; 
+· 
+the cost of materials; 
+· 
+the product mix between wholesale, retail and licensing businesses ; 
+· 
+the incurrence of other operating costs and 
+· 
+factors beyond our control, such as general economic conditions and actions of competitors. 
+13 
+In addition, we expect that our 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. 
+Inadequate Trademark Protections . We believe that our trademarks and other proprietary rights are of major significance to our success and our competitive position and consider some of our trademarks, such as Steve Madden Ò , to be among our most valuable assets. Accordingly, we devote substantial resources to the establishment and protection of our trademarks on a worldwide basis. Nevertheless, there can be no assurance that the actions taken by us to establish and protect our trademarks and other proprietary rights will be adequate to prevent imitation of our products by others or to prevent others from seeking to block sales of our products on the basis that our products 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 ours or that we 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. Our failure to establish and then protect such proprietary rights from unlawful and improper utilization could have a material adverse effect on our business, financial condition, results of operations and liquidity. 
+Exposure to Foreign Currency Fluctuations . We make approximately 99% of our purchases in U.S. dollars. However, we source substantially all of our products overseas and, as such, the cost of these products may be affected by changes in the value of the relevant currencies. Changes in currency exchange rates may also affect the relative prices at which we and our foreign competitors sell products in the same market. There can be no assurance that foreign currency fluctuations will not have a material adverse effect on our business, financial condition, results of operations and liquidity. 
+Disruption of Information Technology Systems and Websites. We rely heavily on information technology systems to manage and operate all aspects of our business, including product design and testing, production, forecasting, ordering, manufacturing, transportation, sales and distribution, invoicing and accounts receivable management, quick response replenishment, point of sale support and financial management reporting functions. In addition, we maintain an Internet website in the United States where retail customers can order our products. We depend on our in-house information technology employees and outside vendors to maintain and periodically upgrade these systems and our websites to support the growth of our business. It is imperative that we maintain constant operation of our information technology systems and websites and that these systems and our websites operative effectively. Despite our preventative efforts, our information technology systems and websites are vulnerable from time to time to damage or interruption from, among other things, security breaches, computer viruses or power outages, which could adversely impact our business and require significant expenditures by us to remediate any such failure, problem or breach. 
+Breach of Customer Privacy. A routine part of our business includes the gathering, processing and retention of sensitive and confidential information pertaining to our customers. While we believe that adequate security measures have been established and are maintained by us to protect against privacy breaches, the Company’s facilities and information technology systems, and those of our third party service providers, may be vulnerable to security breaches, acts of vandalism, software viruses, misplaced or lost data, programming, human error, or other similar events. Such a breach that results in misappropriation, loss or other unauthorized disclosure of a customer’s confidential information, whether by the Company or a third party service provider, could severely damage our reputation and relationship with our customers and adversely affect our business, as well as expose the Company to risks of litigation and liability. 
+Declines in Our Stock Price Due to Inaccurate Predictions. The trading price of our common stock periodically may rise or fall based on the accuracy of predictions of our future performance. As one of our primary objectives, we strive to maximize the long-term strength, growth and profitability of our Company, rather than to achieve an earnings target in any particular fiscal quarter. We believe that this longer-term goal is in the best interests of the Company and our stockholders, but recognize that it may be helpful to our stockholders and potential investors for us to provide guidance as to our quarterly and annual forecast of net sales and earnings. While we endeavor to provide meaningful and considered guidance at the time it is provided and generally expect to provide updates to our guidance when we report our results each fiscal quarter, actual results may differ as the guidance is based on assumptions and expectations which may or may not come to pass and, as such, we assume no responsibility to update any of our forward-looking statements at such times or otherwise. If and when we announce actual results that differ from those that have been predicted by us, the market price of our common stock could be adversely affected. Investors who rely on these predictions in making investment decisions with respect to our common stock do so at their own risk. We take no responsibility for any losses suffered as a result of such changes in the prices of our common stock. 
+14 
+In addition, at any given time outside securities analysts may follow our financial results and issue reports that discuss our historical financial results and the analysts’ predictions of our future performance, which our stockholders and potential investors may choose to rely on in making investment decisions. These analysts’ predictions are based upon their own opinions and are often different from our own forecasts. Our stock price could decline if our results are below the estimates or expectations of these outside analysts. 
+ITEM 1B 
+UNRESOLVED STAFF COMMENTS 
+None. 
+ITEM 2 
+PROPERTIES 
+We lease space for our headquarters, our retail stores, showrooms and office facilities in various locations in the United States, as well as overseas. We own one improved real property parcel in Long Island City, New York. We believe that our existing facilities are in good operating condition and are adequate for our present level of operations. 
+We lease approximately 48,100 square feet for our corporate headquarters and sample production facilities at 52-16 Barnett Avenue, Long Island City, NY 11104 pursuant to a lease which expires on June 30, 2013. The Steve Madden showroom is located at 1370 Avenue of the Americas, New York, NY. All of our brands are displayed for sale from this 14,000 square foot space. The lease for our showroom expires on June 30, 2020. 
+We lease approximately 20,000 square feet for our Accessories Division’s offices and showroom space at 10 West 33rd Street, New York, NY. The lease expires on December 31, 2014. 
+We lease approximately 6,500 square feet for our Madden Zone business’ office space at 17-19 West 34th Street, New York, NY. The lease expires on October 31, 2011. 
+We maintain approximately 7,200 square feet as a storage facility at 25-15 Borough Place, Woodside, NY. The lease for this space expires on October 31, 2013. 
+We own a building that is approximately 2,200 square feet that is located across the street from our executive offices at 38-35 Woodside Avenue, Long Island City, NY 11104. 
+We lease approximately 3,600 square feet for office space in Kwai Chung, Hong Kong. This lease will expire on March 4, 2011. The Company and the landlord are currently negotiating the terms of a lease extension. 
+In addition, we lease approximately 4,800 square feet for office space in Kuangdong Province, China. This lease will expire on January 31, 2013. 
+15 
+All of our retail stores are leased pursuant to leases that, under their original terms, extend for an average of ten years. Many of the leases contain rent escalation clauses to compensate for increases in operating costs and real estate taxes over the base year. The current terms of our retail store leases, including one licensed store, three unoccupied locations and one location opened in early 2011, expire as follows: 
+Years Initial Lease Terms Expire 
+Number of Stores 
+2011 
+13 
+2012 
+10 
+2013 
+14 
+2014 
+5 
+2015 
+4 
+2016 
+5 
+2017 
+13 
+2018 
+10 
+2019 
+7 
+2020 
+3 
+2021 
+2 
+2022 
+2 
+ITEM 3 
+LEGAL PROCEEDINGS 
+On June 24, 2009, The Center For Environmental Health filed a lawsuit, Center for Environmental Health v. Lulu NYC, LLC, Steve Madden, Ltd., Steve Madden Retail, Inc., et al. , Case No. RG09459448, in California Superior Court, Alameda County, against the Company and dozens of other California retailers and vendors of leather, vinyl and/or imitation leather handbags, belts and shoes alleging that the retailers and vendors failed to warn that certain of such products may expose California citizens to lead and lead compounds. The parties agreed to resolve all claims alleged in the litigation pursuant to a consent judgment, the terms of which are not material to the Company’s Consolidated Financial Statements. The consent judgment was approved and entered by the court on June 1, 2010 and, therefore, the litigation is concluded. 
+On June 24, 2009, a class action lawsuit, Shahrzad Tahvilian, et al. v. Steve Madden Retail, Inc. and Steve Madden, Ltd ., Case No. BC 414217, was filed in the Superior Court of California, Los Angeles County, against the Company and its wholly-owned subsidiary alleging violations of California labor laws. The parties submitted the dispute to private mediation and, on August 31, 2010, reached a settlement on all claims. The court has granted preliminary approval of the settlement. The claims administrator for the class action is currently preparing to send a notice of the settlement to all class members. Once all of the class members’ claims have been received and approved, the settlement will be submitted to the court for final approval. As previously disclosed, based on the proposed settlement, the Company increased its reserve for this claim from $1 million to $2.75 million in the third quarter of 2010. 
+On August 10, 2005, following the conclusion of an audit of the Company conducted by auditors for U.S. Customs and Border Protection (“U.S. Customs”) during 2004 and 2005, U.S. Customs issued a report that asserts that certain commissions that the Company treated as “buying agents’ commissions” (which are non-dutiable) should be treated as “selling agents’ commissions” and hence are dutiable. Subsequently, U.S. Immigration and Customs Enforcement notified the Company’s legal counsel that a formal investigation of the Company’s importing practices had been commenced as a result of the audit. In September of 2007, U.S. Customs notified the Company that it had finalized its assessment of the underpaid duties at $1.4 million. The Company, with the advice of legal counsel, evaluated the liability in the case, including additional duties, interest and penalties, and believed that it was not likely to exceed $3 million, and accordingly, a reserve for this amount was recorded as of December 31, 2009. The Company contested the conclusions of the U.S. Customs audit and filed a request for review and issuance of rulings thereon by U.S. Customs Headquarters, Office of Regulations and Rulings, under internal advice procedures. On September 20, 2010, the Company was advised by legal counsel that U.S. Customs had issued a ruling in the matter, concluding that the commissions paid by the Company pursuant to buying agreements entered into by the Company and one of its two buying agents under review were bona fide buying-agent commissions and, therefore, were non-dutiable. With respect to the second buying agent, U.S. Customs also ruled that beginning in February of 2002, commissions paid by the Company were bona fide buying agent commissions and, therefore, were non-dutiable. However, U.S. Customs found that the Company’s pre-2002 buying agreements with the second agent were legally insufficient to substantiate a buyer-buyer’s agent relationship between the Company and the agent and that commissions paid to the second agent under such buying agreements, in fact, were dutiable. U.S. Customs has not made a formal claim for collection of the duties allegedly owed. At the request of U.S. Customs, the Company has waived the statute of limitations for the collection of the duties allegedly owed until December 5, 2013. The Company is reviewing the ruling, its consequences and the Company’s options with its legal counsel. As previously disclosed, on the basis of the U.S. Customs ruling, the Company reevaluated the liability in the case and believes that it is not likely to exceed $1.248 million and the reserve was reduced from $3 million to such amount as of September 30, 2010 and remains at that level. 
+16 
+We have been named as a defendant in certain other lawsuits in the normal course of business. In the opinion of management, after consulting with legal counsel, the liabilities, if any, resulting from these matters should not have a material effect on our financial position or results of operations. 
+ITEM 4 
+[REMOVED AND RESERVED] 
+PART II 
+ITEM 5 
+MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES 
+Market Information. Our shares of common stock have traded on the NASDAQ Global Select Market since August 1, 2007 and were traded on the NASDAQ National Market prior to that date. The following table sets forth the range of high and low closing sales prices for our common stock during each fiscal quarter during the two-year period ended December 31, 2010 as reported by the NASDAQ Global Select Market. The trading volume of our securities fluctuates and may be limited during certain periods. As a result, the liquidity of an investment in our securities may be adversely affected. 
+Common Stock 
+High 
+Low 
+High 
+Low 
+2010 
+2009 
+Quarter ended 
+March 31, 2010 
+$ 
+32.69 
+$ 
+25.83 
+Quarter ended 
+March 31, 2009 
+$ 
+15.20 
+$ 
+9.05 
+Quarter ended 
+June 30, 2010 
+$ 
+40.08 
+$ 
+31.09 
+Quarter ended 
+June 30, 2009 
+$ 
+20.10 
+$ 
+12.69 
+Quarter ended 
+September 30, 2010 
+$ 
+42.00 
+$ 
+30.52 
+Quarter ended 
+September 30, 2009 
+$ 
+24.83 
+$ 
+15.91 
+Quarter ended 
+December 31, 2010 
+$ 
+47.36 
+$ 
+40.50 
+Quarter ended 
+December 31, 2009 
+$ 
+28.61 
+$ 
+23.79 
+Holders. February 24, 2011, there were 28,018,046 shares of common stock outstanding and 78 holders of record. 
+Dividends . With the exception of a special cash dividend paid in November 2005 and in November 2006, we have not declared or paid any cash dividends in the past to the holders of our common stock and do not currently anticipate declaring or paying any cash dividends in the foreseeable future. We intend to retain earnings, if any, to finance the development and expansion of our business. Future dividend policy will be subject to the discretion of our Board of Directors and will be contingent upon future earnings, if any, our financial condition, capital requirements, general business conditions, and other factors. Therefore, we can give no assurance that any cash dividends of any kind will be paid to holders of our common stock in the future. 
+Equity Compensation Plans . Information regarding our equity compensation plans as of December 31, 2010 is disclosed in Item 12 , “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.” 
+17 
+Issuer Repurchases of Equity Securities. We did not repurchase any shares of our common stock during the fourth quarter of the year ended December 31, 2010. In February and August of 2007, our Board of Directors authorized increases of our previously announced share repurchase program of $30 million and $37 million, respectively. In May of 2010, the Board authorized an additional increase of $50 million to the share repurchase program. At December 31, 2010, an aggregate of $47 million remained authorized to repurchase our common stock. The program has no set expiration date. 
+Performance Graph . The following graph compares the yearly percentage change in the cumulative total stockholder return on our common stock during the period beginning on December 31, 2005, and ending on December 31, 2010, with the cumulative total return on the Russell 2000 Index and the S&P 500 Footwear Index. The comparison assumes that $100 was invested on December 31, 2005 in our common stock and in the foregoing indices and assumes the reinvestment of dividends. 
+12/31/2005 
+12/31/2006 
+12/31/2007 
+12/31/2008 
+12/31/2009 
+12/31/2010 
+Steven Madden, Ltd. 
+$ 
+100.00 
+$ 
+184.95 
+$ 
+105.41 
+$ 
+112.36 
+$ 
+217.34 
+$ 
+329.80 
+Russell 2000 Index 
+$ 
+100.00 
+$ 
+118.35 
+$ 
+116.52 
+$ 
+77.14 
+$ 
+98.11 
+$ 
+124.45 
+S&P 500 Footwear Index 
+$ 
+100.00 
+$ 
+117.36 
+$ 
+154.33 
+$ 
+124.44 
+$ 
+164.16 
+$ 
+215.45 
+18 
+ITEM 6 
+SELECTED FINANCIAL DATA 
+The following selected financial data has been derived from our audited Consolidated Financial Statements. The Income Statement Data relating to 2010, 2009 and 2008, and the Balance Sheet data as of December 31, 2010 and 2009 should be read in conjunction with the information provided in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the notes to our Consolidated Financial Statements appearing elsewhere in this Annual Report on Form 10-K. 
+INCOME STATEMENT DATA 
+Year Ended December 31, 
+(in thousands, except per share data) 
+2010 
+2009 
+2008 
+2007 
+2006 
+Net sales 
+$ 
+635,418 
+$ 
+503,550 
+$ 
+457,046 
+$ 
+431,050 
+$ 
+475,163 
+Cost of sales 
+359,564 
+287,361 
+270,222 
+257,646 
+276,734 
+Gross profit 
+275,854 
+216,189 
+186,824 
+173,404 
+198,429 
+Commissions and licensing fee income - net 
+22,629 
+19,928 
+14,294 
+18,351 
+14,246 
+Operating expenses 
+(176,859 
+) 
+(157,149 
+) 
+(156,212 
+) 
+(138,841 
+) 
+(134,377 
+) 
+Income from operations 
+121,624 
+78,968 
+44,906 
+52,914 
+78,298 
+Interest income 
+4,208 
+2,096 
+2,620 
+3,876 
+3,703 
+Interest expense 
+(4 
+) 
+(93 
+) 
+(207 
+) 
+(65 
+) 
+(100 
+) 
+Gain (loss) on sale of marketable securities 
+29 
+(182 
+) 
+(1,013 
+) 
+(589 
+) 
+(967 
+) 
+Income before provision for income taxes 
+125,857 
+80,789 
+46,306 
+56,136 
+80,934 
+Provision for income taxes 
+50,132 
+30,682 
+18,330 
+20,446 
+34,684 
+Net Income 
+$ 
+75,725 
+$ 
+50,107 
+$ 
+27,976 
+$ 
+35,690 
+$ 
+46,250 
+Basic income per share 
+$ 
+2.74 
+$ 
+1.85 
+$ 
+1.02 
+$ 
+1.15 
+$ 
+1.47 
+Diluted income per share 
+$ 
+2.68 
+$ 
+1.82 
+$ 
+1.01 
+$ 
+1.12 
+$ 
+1.39 
+Basic weighted average shares of common stock 
+27,651 
+27,068 
+27,488 
+30,971 
+31,359 
+Effect of dilutive securities – options and restricted stock 
+644 
+417 
+291 
+967 
+1,793 
+Diluted weighted average shares of common stock outstanding 
+28,295 
+27,485 
+27,779 
+31,938 
+33,152 
+Dividends paid per share of common stock 
+$ 
+0.00 
+$ 
+0.00 
+$ 
+0.00 
+$ 
+0.00 
+$ 
+1.00 
+BALANCE SHEET DATA 
+At December 31 , 
+2010 
+2009 
+2008 
+2007 
+2006 
+Total assets 
+$ 
+447,696 
+$ 
+326,859 
+$ 
+284,693 
+$ 
+266,521 
+$ 
+251,392 
+Working capital 
+138,636 
+139,007 
+122,086 
+121,138 
+151,711 
+Noncurrent liabilities 
+18,967 
+6,710 
+5,801 
+3,470 
+3,136 
+Stockholders’ equity 
+$ 
+357,298 
+$ 
+267,787 
+$ 
+206,242 
+$ 
+215,334 
+$ 
+211,924 
+19 
+ITEM 7 
+MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 
+($ in thousands, except retail sales data per square foot and earnings per share data) 
+The following discussion of our Financial Condition and Results of Operations should be read in conjunction with our audited Consolidated Financial Statements and notes thereto appearing elsewhere in this Annual Report on Form 10-K. 
+Overview 
+Steven Madden, Ltd. and its subsidiaries (collectively the “Company”) design, source, market and sell fashion-forward footwear for women, men and children. In addition, we design, source, market and sell name brand and private label fashion handbags and accessories, through our Accessories Division. We distribute our products through department stores, specialty stores, luxury retailers, national chains, mass merchants and through our retail stores and our e-commerce website throughout the United States and through special distribution arrangements in Asia, Canada, Europe, the Middle East, Mexico, Australia, Central and South America and India. Our product line includes a broad range of updated styles designed to establish or capitalize on market trends, complemented by core products. We have established a reputation for design and creativity and offering popular styles and quality products at accessible price points. 
+Our business is comprised of five distinct segments (Wholesale Footwear, Wholesale Accessories, Retail, First Cost and Licensing). Our Wholesale Footwear segment includes the following brands: Steve Madden Women’s, Madden Girl, Steve Madden Men’s, Steven, l.e.i. (under license), Elizabeth and James (under license), Stevies, Big Buddha Shoes, Madden and includes our International business. Our Wholesale Accessories segment includes Big Buddha, Bettseyville, Betsey Johnson and, through license agreements, Daisy Fuentes® and Olsenboye® accessories brands. Steven Madden Retail, Inc., our wholly owned retail subsidiary, operates Steve Madden and Steven retail stores as well as our e-commerce website (www.stevemadden.com). The First Cost segment represents activities of a subsidiary which earns commissions for serving as a buying agent for footwear products under private labels for many of the country’s large mass-market merchandisers, shoe chains and other off-price retailers. In the Licensing segment, the Company licenses its Steve Madden® and Steven by Steve Madden® trademarks for use in connection with the manufacture, marketing and sale of cold weather accessories, sunglasses, eyewear, outerwear, bedding, hosiery, women’s fashion apparel and jewelry. We license our Big Buddha brand for use in connection with the manufacture, marketing and sale of sunglasses and cold weather accessories. In addition, we license our recently acquired Betsey Johnson® and Betseyville® trademarks for use in connection with the manufacture, marketing and sale of apparel, jewelry, lingerie, swimwear, eyewear, watches and outerwear. 
+On March 24, 2010, the Board of Directors declared a 3-for-2 stock split of the Company’s outstanding shares of common stock, effected in the form of a stock dividend on the Company’s outstanding common stock. Stockholders of record at the close of business on April 20, 2010 received one additional share of Steven Madden Ltd. common stock for every two shares of common stock owned on this date. The additional shares were distributed on May 3, 2010. All share and per share data provided herein gives effect to this stock split, applied retroactively. 
+Fiscal year 2010 was a record year for Steven Madden, Ltd. Consolidated net sales for 2010 increased 26% to a record $635,418 from $503,550 achieved in 2009. Net sales in 2010 includes $16,269 of sales from the l.e.i. brand which was transitioned from a “first cost” model to a “wholesale” model beginning in the first quarter of 2010. Our gross margin increased 50 basis points in the year ended December 31, 2010 to 43.4%, compared to the 42.9% achieved in 2009. Net income increased 51% to a record $75,725 in 2010 from $50,107 in 2009. Diluted earnings per share for the year ended December 31, 2010 increased 47% to a record $2.68 per share on 28,295,000 diluted weighted average shares outstanding compared to $1.82 per share on 27,485,000 diluted weighted average shares outstanding in 2009. Net cash provided by operating activities increased to a record $86,873 in 2010 compared to $64,342 in 2009. 
+20 
+In fiscal year 2010, we expanded our licensing activities by entering into an agreement to license the Steve Madden® and Steven by Steve Madden® trademarks for the design, manufacture and worldwide distribution of women’s fashion jewelry. The new women’s fashion jewelry line, which initially shipped in the third quarter of 2010, joins our existing licenses for cold weather accessories, sunglasses, eyewear, outerwear, bedding, hosiery and women’s fashion apparel. Our goal is to evolve Steve Madden® into a global lifestyle brand and expand the Company’s presence beyond footwear and accessories. We believe this new jewelry line marks a very logical extension of the Company’s brands. 
+In fiscal 2010, we also expanded our brand portfolio through two acquisitions. On February 10, 2010, we acquired all of the outstanding shares of stock of privately held Big Buddha, Inc. (“Big Buddha”) from its sole stockholder (“Seller”). Founded in 2003, Big Buddha designs and markets fashion-forward handbags to specialty retailers and better department stores. We believe that Big Buddha is a strategic fit for our Company. The acquisition was completed for consideration of $11,119 in cash, net of cash acquired plus contingent payments pursuant to an earn-out agreement with the Seller. See Note B to our Consolidated Financial Statements for additional information relating to the Big Buddha acquisition. 
+On October 5, 2010, pursuant to a Restructuring Agreement between the Company and Betsey Johnson LLC (“Betsey Johnson”), the Company acquired all right, title and interest in substantially all of the intellectual property of Betsey Johnson, including, among other things, the Betsey Johnson® and Betseyville® trademarks, and certain intellectual property licenses and other contracts, including the right to receive royalties and other income with respect thereto (the “Betsey Johnson Assets”). Management believes that Betsey Johnson® is a well recognized brand that offers meaningful growth opportunity for our business. Prior to the acquisition, Betsey Johnson had licensed to the Company the right to use the Betsey Johnson® and Betseyville® trademarks in connection with the sale and marketing of handbags, small leather goods, belts and umbrellas. The acquisition of the Betsey Johnson Assets was the culmination of a series of transactions. First, in August 2010, the Company purchased from various members of a loan syndicate their respective participations in a term loan in the aggregate outstanding principal amount of $48,750 (the “Loan”) made by the syndicate lenders to Betsey Johnson. The Company paid the syndicate lenders an aggregate purchase price of $29,217, including transaction costs, for their participations in the Loan. The Loan was secured by a first priority security interest in substantially all of the assets of Betsey Johnson and was in default on the date of purchase. On October 5, 2010, the Company entered into the Restructuring Agreement with Betsey Johnson, pursuant to which, in consideration of the elimination of all amounts owed with respect to the Loan, the Company acquired the Betsey Johnson Assets. The Company made a new secured term loan to Betsey Johnson on October 5, 2010 in the principal amount of $3,000, which accrues interest at the rate of 8% per annum and becomes due on December 31, 2015. The new term loan is secured by a first priority security interest in substantially all of the remaining properties and assets of Betsey Johnson. See Notes B and F to our Consolidated Financial Statements for additional information relating to the Loan, the new term loan to Betsey Johnson, and the acquisition of the Betsey Johnson Assets. 
+In our Retail segment, same store sales (sales of those stores, including the e-commerce website, that were in operation throughout 2010 and 2009) increased 12.7% in 2010. As of December 31, 2010, we had 84 stores in operation, compared to 89 stores as of December 31, 2009. During the year ended December 31, 2010, sales per square foot increased to $742 compared to sales per square foot of $640 achieved in 2009. 
+As of December 31, 2010, our total inventory increased to $39,557 from $30,453 as of December 31, 2009, and our annualized inventory turnover declined to 9.4 times in 2010 compared to 9.8 times in 2009, primarily due to the slower annualized inventory turn of some of our new divisions. Our accounts receivable average collection days were 56 days in 2010 compared to 54 days in 2009, primarily due to the growth in our International business where some of our customers have extended payment terms. As of December 31, 2010, we had $193,757 in cash, cash equivalents and marketable securities, no short- or long-term debt, and total stockholders’ equity of $357,298. 
+21 
+T he following tables set forth information on operations for the periods indicated: 
+Years Ended December 31 
+($ in thousands) 
+2010 
+2009 
+2008 
+CONSOLIDATED: 
+Net sales 
+$ 
+635,418 
+100 
+% 
+$ 
+503,550 
+100 
+% 
+$ 
+457,046 
+100 
+% 
+Cost of sales 
+359,564 
+57 
+287,361 
+57 
+270,222 
+59 
+Gross profit 
+275,854 
+43 
+216,189 
+43 
+186,824 
+41 
+Commission and licensing fee income - net 
+22,629 
+4 
+19,928 
+4 
+14,294 
+3 
+Operating expenses 
+176,859 
+28 
+157,149 
+31 
+156,212 
+34 
+Income from operations 
+121,624 
+19 
+78,968 
+16 
+44,906 
+10 
+Interest and other income – net 
+4,233 
+1 
+1,821 
+— 
+1,400 
+— 
+Income before income taxes 
+125,857 
+20 
+80,789 
+16 
+46,306 
+10 
+Net income 
+75,725 
+12 
+50,107 
+10 
+27,976 
+6 
+By Segment: 
+WHOLESALE FOOTWEAR SEGMENT : 
+Net sales 
+$ 
+402,567 
+100 
+% 
+$ 
+309,439 
+100 
+% 
+$ 
+264,479 
+100 
+% 
+Cost of sales 
+245,964 
+61 
+186,267 
+60 
+171,576 
+65 
+Gross profit 
+156,603 
+39 
+123,172 
+40 
+92,903 
+35 
+Operating expenses 
+81,060 
+20 
+71,812 
+23 
+67,204 
+25 
+Income from operations 
+75,543 
+19 
+51,360 
+17 
+25,699 
+10 
+WHOLESALE ACCESSORIES SEGMENT : 
+Net sales 
+$ 
+98,548 
+100 
+% 
+$ 
+70,406 
+100 
+% 
+$ 
+66,928 
+100 
+% 
+Cost of sales 
+60,622 
+62 
+46,665 
+66 
+43,450 
+65 
+Gross profit 
+37,926 
+38 
+23,741 
+34 
+23,478 
+35 
+Operating expenses 
+23,603 
+24 
+14,542 
+21 
+14,389 
+21 
+Income from operations 
+14,323 
+15 
+9,199 
+13 
+9,089 
+14 
+RETAIL SEGMENT : 
+Net sales 
+$ 
+134,303 
+100 
+% 
+$ 
+123,705 
+100 
+% 
+$ 
+125,639 
+100 
+% 
+Cost of sales 
+52,978 
+39 
+54,429 
+44 
+55,196 
+44 
+Gross profit 
+81,325 
+61 
+69,276 
+56 
+70,443 
+56 
+Operating expenses 
+72,196 
+54 
+70,795 
+57 
+74,619 
+59 
+Income (loss) from operations 
+9,129 
+7 
+(1,519 
+) 
+(1 
+) 
+(4,176 
+) 
+(3 
+) 
+Number of stores 
+84 
+89 
+97 
+FIRST COST SEGMENT : 
+Other commission income - net of expenses 
+$ 
+17,258 
+100 
+% 
+$ 
+16,803 
+100 
+% 
+$ 
+11,567 
+100 
+% 
+LICENSING SEGMENT: 
+Licensing income – net of expenses 
+$ 
+5,371 
+100 
+% 
+$ 
+3,125 
+100 
+% 
+$ 
+2,727 
+100 
+% 
+22 
+RESULTS OF OPERATIONS 
+($ in thousands) 
+Year Ended December 31, 2010 vs. Year Ended December 31, 2009 
+Consolidated : 
+Total net sales for the year ended December 31, 2010 increased by 26% to $635,418 from $503,550 for the comparable period of 2009, as all three of our top line segments had significant net sales increases. Net sales in 2010 includes $16,269 of sales from the l.e.i. brand, which was transitioned from a “first cost” model to a “wholesale” model beginning in the first quarter of 2010. An increase in our gross profit margin to 43.4% for the year ended December 31, 2010 from 42.9% for the prior year was driven by gross profit increases in our Wholesale Accessories and Retail segments. For the years ended December 31, 2010 and 2009, operating expenses were $176,859 and $157,149, respectively. As a percentage of net sales, operating expenses decreased in 2010 to 27.8% compared to 31.2% in 2009. Commission and licensing fee income increased to $22,629 in 2010, compared to $19,928 for the prior year. Net income for 2010 was $75,725, compared to $50,107 in 2009. 
+Wholesale Footwear Segment : 
+Net sales generated by the Wholesale Footwear segment was $402,567, or 63%, and $309,439, or 61%, of our total net sales for the years ended December 31, 2010 and 2009, respectively. This 30% increase in net sales was driven by double-digit net sales increases in our Madden Girl, Steve Madden Men’s, Elizabeth and James, Steven and Kids brands as well as a double-digit increase in our International business. The net sales growth in Madden Girl is due to the success of dress shoes throughout the year combined with strong boot sales in the second and third quarters of 2010, as well as a higher consumer demand for opening price point products. In our Steve Madden Men’s brand, the sales increase is primarily due to the strong performance of men’s dress and casual shoes during the year. In addition, our new men’s line, Madden, has realized a better than expected launch, and has contributed to our net sales growth. Elizabeth and James, our new brand that began shipping in the second quarter of 2009, continued its growth trend primarily with upper tier retailers such as Nordstrom, Saks and Neiman Marcus. Net sales increases for our Steven brand were primarily due to strong sales of wedges during the second quarter and strong boot sales in the first and third quarters of the year. Strong selling of flats and boots during the year resulted in a net sales increase in our Kids brands. The transition of the l.e.i. brand with Wal-mart from a “first cost” model to a “wholesale” model beginning in the first quarter of 2010, contributed net sales of $16,269 in 2010. In addition, our new Big Buddha Shoes brand, which began shipping during the third quarter of 2010, contributed $2,922 of net sales. The net sales increase in our International business was propelled by the division’s significant growth trend in Eastern Asia and expansion into new countries. 
+Gross profit margin in the Wholesale Footwear segment decreased to 38.9% in 2010 from 39.8% in the prior year. The decrease was primarily due to a change in our product mix, including a growth of our International business and the transition of our l.e.i. brand to a “wholesale” model, since both of these businesses realize a significantly lower gross profit margin than our other wholesale divisions. In 2010, operating expenses increased to $81,060 from $71,812 in 2009. As a percentage of sales, operating expenses improved to 20.1% in 2010 from 23.2% in 2009 primarily due to leverage on higher sales. Income from operations for the Wholesale Footwear segment increased 47% to $75,543 for the year ended December 31, 2010 compared to $51,360 for the same period of 2009. 
+Wholesale Accessories Segment : 
+Net sales generated by the Wholesale Accessories segment accounted for $98,548 or 16%, and $70,406 or 14% of total Company net sales for the years ended December 31, 2010 and 2009, respectively. The 40% growth in net sales in the Wholesale Accessories segment is due to the sales contributed by two recent acquisitions, Madden Zone, acquired in July of 2009, and Big Buddha, acquired in February of 2010. In addition, significant increases in sales of Steve Madden handbags and private label belts were partially offset by a net sales decrease in our Betseyville® brand. 
+23 
+Gross profit margin in the Wholesale Accessories segment increased 480 basis points to 38.5% in 2010 from 33.7% in the prior year, primarily due to the significantly higher gross profit margins achieved by our new Big Buddha division combined with a change in the mix of products and lower markdown allowances. During the year ended December 31, 2010, operating expenses increased to $23,603 compared to $14,542 in 2009, primarily due to the incremental operating expenses associated with our new Madden Zone and Big Buddha divisions. Income from operations for the Wholesale Accessories segment increased 56% to $14,323 in 2010 compared to $9,199 in 2009. 
+Retail Segment : 
+Net sales generated by the Retail segment accounted for $134,303, or 21%, and $123,705, or 25%, of total Company net sales for the years ended December 31, 2010 and 2009, respectively. We opened three new stores, remodeled five existing stores and closed eight underperforming stores during the year ended December 31, 2010. As a result, we had 84 retail stores as of December 31, 2010, compared to 89 stores as of December 31, 2009. The 84 stores currently in operation include 79 under the Steve Madden brand, three under the Steven brand, one outlet store and one e-commerce website. Comparable store sales (sales of those stores, including the e-commerce website, that were open for all of 2010 and 2009) for the year ended December 31, 2010 increased 12.7% when compared to the prior year. During the year ended December 31, 2010, gross margin increased 460 basis points to 60.6% from 56.0% in 2009, primarily due to a significant decrease in promotional selling. In 2010, operating expenses increased to $72,196 from $70,795 in the prior year primarily due to a charge of $1,750 for the preliminary settlement of a class action lawsuit against the Company related to our Retail segment. As a percentage of net sales, operating expenses decreased to 53.7% in 2010 compared to 57.2% in 2009. Income from operations increased to $9,129 in 2010 compared to a loss from operations of $1,519 in 2009. 
+First Cost Segment : 
+Income from operations in the First Cost segment increased to $17,258 in 2010 compared to $16,803 in 2009. This increase in income is due to a significant increase in private label business with several of our retail customers including Kohls, Target and Bakers. These increases were partially offset by the transition of one of the Company’s mass merchant customers from a “first cost” model to a “wholesale” model that was initiated pursuant to the customer’s request that the Company sell directly to the customer (“wholesale” model) rather than as a buying agent (“first cost” model) on its behalf beginning in the first quarter of 2010. 
+Licensing Segment: 
+During the year ended December 31, 2010, licensing income increased to $5,371 from $3,125 in the prior year, primarily due to an increase in sales by several of our licensees combined with the incremental licensing revenue generated by our recently acquired Betsey Johnson trademarks. 
+Year Ended December 31, 2009 vs. Year Ended December 31, 2008 
+Consolidated : 
+Total net sales for the year ended December 31, 2009 increased by 10% to $503,550 from $457,046 for the comparable period of 2008. A net sales increase of 17% generated by the Wholesale Footwear segment and an increase of 5% in the Wholesale Accessories segment was partially offset by a 2% decrease in net sales generated by the Retail segment. Overall gross profit margin increased to 42.9% for the year ended December 31, 2009 from 40.9% for the prior year. For the years ended December 31, 2009 and 2008, operating expenses were $157,149 and $156,212, respectively. As a percentage of net sales, operating expenses decreased to 31% compared to 34% in 2008. Commission and licensing fee income increased to $19,928 for the year ended December 31, 2009, compared to $14,294 for the prior year. Net income for 2009 was $50,107, compared to $27,976 in 2008. 
+24 
+Wholesale Footwear Segment : 
+Net sales generated by the Wholesale Footwear segment was $309,439, or 61%, and $264,479, or 57%, of our total net sales for the years ended December 31, 2009 and 2008, respectively. All brands realized an increase in net sales during the year ended December 31, 2009. The Madden Girl brand led the way by posting a 28% increase in net sales in 2009. This increase in net sales was the result of a deeper market penetration and the strong performance of flat shoes and sandals in the second quarter combined with the strong performance of dress boots and booties in the second half of the year. Net sales in our Steven brand increased by 27% in 2009, primarily due to a significant increase in shipments to Steven’s largest customer Nordstrom, combined with the strong performance of casual boots during the second half of 2009. A 12% increase in net sales in 2009 by our Steve Madden Women’s brand was driven by the strong performance of flat sandals and wedges during the spring selling season and by boots in the third and fourth quarters. Finally, the Elizabeth and James Division, our new brand that began shipping in the first quarter of 2009, contributed net sales of $4,298 in 2009. Net sales for 2009 were also impacted by the shift of our Candies® business from a “wholesale” model to a “first cost” model, and the reverse shift of our International business from a “first cost” model to a “wholesale” model, the net effect of which was an increase in net sales of $7,746 during the year ended December 31, 2009. 
+Gross profit margin in the Wholesale Footwear segment increased to 39.8% in 2009 from 35.1% in the prior year, primarily due to a decrease in close out sales combined with improved operating efficiencies. For the year ended December 31, 2009, operating expenses increased to $71,812 from $67,204 in the year ended December 31, 2008, primarily resulting from an increase in variable costs due to an increase in sales. As a percentage of net sales, operating expenses decreased to 23.2% in 2009 from 25.4% in 2008. As a result of the increases in net sales and gross margin as offset by higher operating expenses, income from operations for the Wholesale Footwear segment increased 100% to $51,360 in 2009 compared to $25,699 in 2008. 
+Wholesale Accessories Segment : 
+Net sales generated by the Wholesale Accessories segment was $70,406, or 14%, and $66,928, or 15%, of our total net sales for the years ended December 31, 2009 and 2008, respectively. This 5% increase in net sales in 2009 in our Wholesale Accessories segment was due to the $9,279 of net sales contributed by our new Madden Zone business (established through our Zone 88 acquisition) combined with an increase in sales of Steve Madden® and Steven by Steve Madden® handbags that was partially offset by a decrease of net sales of Betsey Johnson® and Betseyville® handbags. Gross profit margin in the Wholesale Accessories segment decreased to 33.7% in 2009 from 35.1% in the prior year, primarily due to an increase in markdowns and allowances. For the year ended December 31, 2009, operating expenses increased to $14,542 from $14,389 for the prior year. As a percentage of net sales, operating expenses decreased 80 basis points to 20.7% in 2009 from 21.5% in 2008. Income from operations for the Wholesale Accessories segment increased to $9,199 in 2009 from $9,089 in 2008. 
+Retail Segment : 
+Net sales generated by the Retail segment accounted for $123,705, or 25%, and $125,639, or 27%, of total Company net sales for the years ended December 31, 2009 and 2008, respectively. We opened two new stores, remodeled seven existing stores, closed seven underperforming stores and licensed three stores during the year ended December 31, 2009. As a result, we had 89 retail stores as of December 31, 2009, compared to 97 stores as of December 31, 2008. The 89 stores currently in operation include 84 under the Steve Madden brand, four under the Steven brand and one e-commerce website. Comparable store sales (sales of those stores, including the e-commerce website, that were open for all of 2009 and 2008) for the year ended December 31, 2009 increased 1% when compared to the prior year. The gross margin in the Retail segment remained at 56% in 2009 and 2008. During the year ended December 31, 2009, operating expenses decreased to $70,795, or 57% of net sales, from $74,619, or 59% of nets sales, in 2008. This decrease is due to the reduction of rent, payroll and other operating expenses related to the net reduction of eight stores during the year ended December 31, 2009, as well as other operational initiatives put in place. 
+25 
+First Cost Segment : 
+Income from operations in the First Cost segment increased 45% to $16,803 in 2009 compared to $11,567 in 2008. The main drivers of the increase were the growth of our new l.e.i.® brand at Wal-mart, which began shipping in the fourth quarter of 2008, followed by the shift of our Candies® business to the First Cost segment. In addition, growth in our private label business with Sears contributed to this increase in income. These increases were partially offset by the shift in our international business from the “first cost” model to a “wholesale” model in 2009. 
+Licensing Segment: 
+During the year ended December 31, 2009, licensing income increased to $3,125 from $2,727 during the year ended December 31, 2008, primarily due to an increase in sales by several of our licensees combined with the incremental revenue provided by our new bedding and bath licenses. 
+LIQUIDITY AND CAPITAL RESOURCES 
+On July 10, 2009, we entered into a collection agency agreement with Rosenthal & Rosenthal, Inc. (“Rosenthal”) that became effective on September 15, 2009. The agreement provides us with a credit facility in the amount of $30,000, having a sub-limit of $15,000 on the aggregate face amount of letters of credit, at an interest rate based, at our election, upon either the prime rate or LIBOR. The agreement can be terminated by Rosenthal at any time with 60 days’ prior written notice, or by us at any time after the expiration of the first contract year with 60 days’ prior written notice. 
+As of December 31, 2010, we had working capital of $138,636. We had cash and cash equivalents of $66,151, investments in marketable securities of $127,606 and we did not have any long term debt. 
+Management believes that, based upon our current financial position and available cash, cash equivalents and marketable securities, as augmented by cash flow from operations in 2011, we will meet all of our financial commitments and operating needs for at least the next twelve months. 
+OPERATING ACTIVITIES 
+During the year ended December 31, 2010, net cash provided by operating activities was $86,873. The primary sources of cash were net income of $75,725, an increase in accounts payable and accrued expenses of $19,572 and an increase of accrued incentive compensation of $3,603. The primary uses of cash were an increase of accounts receivable of $8,266, an increase in due from factor of $4,985, an increase in inventories of $8,804 and an increase in prepaid expenses, prepaid taxes, deposits and other assets of $4,420. 
+INVESTING ACTIVITIES 
+During the year ended December 31, 2010, we invested $72,663 in marketable securities and received $30,092 from the maturities and sales of securities. We paid an aggregate of $40,602 for the acquisition of the intellectual property of Betsey Johnson and all of the outstanding capital stock of Big Buddha. We also paid $7,004 for the acquisition of notes receivable from Bakers Footwear Group, Inc. and Betsey Johnson, and we made an on-account payment of $1,628 to the seller of Big Buddha against the earn-out payable in 2011 based on the performance of Big Buddha pursuant to the earn-out agreement between the Company and the seller of Big Buddha. Additionally, we made capital expenditures of $3,424, principally for the remodeling of five existing stores, the three new stores opened during the fiscal year 2010, leasehold improvements to our showroom space and enhancements to operating systems. 
+26 
+FINANCING ACTIVITIES 
+During the year ended December 31, 2010, we received $5,082 in cash and realized a tax benefit of $4,718 in connection with the exercise of stock options. Also during 2010, we repurchased approximately 141,000 shares of our common stock at an average per share price of $32.33 for a total cost of $4,559. 
+CONTRACTUAL OBLIGATIONS 
+Our contractual obligations as of December 31, 2010 were as follows: 
+Payment due by period 
+Contractual Obligations 
+Total 
+2011 
+2012-2013 
+2014-2015 
+2016 and after 
+Operating lease obligations 
+$ 
+115,887 
+$ 
+17,679 
+$ 
+32,719 
+$ 
+27,813 
+$ 
+37,676 
+Purchase obligations 
+83,807 
+83,807 
+— 
+— 
+— 
+Contingent payment liability 
+12,372 
+2,372 
+10,000 
+— 
+— 
+Other long-term liabilities (future minimum royalty payments) 
+2,334 
+2,081 
+253 
+— 
+— 
+Total 
+$ 
+214,400 
+$ 
+105,939 
+$ 
+42,972 
+$ 
+27,813 
+$ 
+37,676 
+At December 31, 2010, we had un-negotiated open letters of credit for the purchase of inventory of approximately $1,956. 
+The Company has an employment agreement with Steven Madden, our founder and Creative and Design Chief, which provides for an annual base salary of $600 subject to certain specified adjustments through December 31, 2019. The agreement also provides for annual bonuses based on EBITDA, revenue of any new business, and royalty income over $2 million, plus an equity grant and a non-accountable expense allowance. 
+In addition, we have employment agreements with certain executive officers, which provide for the payment of compensation aggregating approximately $5,542 in 2011, $4,053 in 2012 and $1,450 in 2013. In addition, some of the employment agreements provide for a discretionary bonus and some provide for incentive compensation based on various performance criteria as well as other benefits including stock options. 
+Virtually all of our products are produced at overseas locations, the majority of which are located in China, with a small percentage located in Mexico, Brazil, India, The Netherlands, Korea and Italy. We have not entered into any long-term manufacturing or supply contracts with any of these foreign companies. We believe that a sufficient number of alternative sources exist outside of the United States for the manufacture of our products. We currently make approximately 99% of our purchases in U.S. dollars. 
+INFLATION 
+We do not believe that the price inflation experienced over the last few years in the United States has had a significant effect on the Company’s sales or profitability. Historically, we have minimized the impact of product cost increases by improving operating efficiencies, changing suppliers and increasing prices. However, no assurance can be given that we will be able to offset any such inflationary cost increases in the future. We are currently seeing increases in our cost of goods from southern China averaging approximately 5 - 8%. We are working to mitigate this pressure by shifting some production to northern China, where costs remain lower, and to a lesser extent, to other countries such as Mexico. We are also raising prices on select items with fresh materials or styling and, to date, have not seen resistance to these price increases. Putting this all together, the net impact of all these changes on gross margin was negligible in 2010, and we expect that to be the case in the near term as well. 
+27 
+OFF-BALANCE SHEET ARRANGEMENTS 
+The Company has no off-balance sheet arrangements. 
+CRITICAL ACCOUNTING POLICIES AND THE USE OF ESTIMATES 
+Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our Consolidated Financial Statements included in this Annual Report on Form 10-K, which have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, sales and expenses, and related disclosure of contingent assets and liabilities. Estimates by their nature are based on judgments and available information. Estimates are made based upon historical factors, current circumstances and the experience and judgment of management. Assumptions and estimates are evaluated on an ongoing basis and we may employ outside experts to assist in evaluations. Therefore, actual results could materially differ from those estimates under different assumptions and conditions. Management believes the following critical accounting estimates are more significantly affected by judgments and estimates used in the preparation of our Consolidated Financial Statements: allowance for bad debts, returns and customer chargebacks; inventory valuation; valuation of intangible assets; litigation reserves and cost of sales. 
+Allowances for bad debts, returns and customer chargebacks . We provide reserves against our accounts receivables for future customer chargebacks, co-op advertising allowances, discounts, returns and other miscellaneous deductions that relate to the current period. The reserve against our non-factored trade receivables also includes estimated losses that may result from customers’ inability to pay. The amount of the reserve for bad debts, returns, discounts and compliance chargebacks are determined by analyzing aged receivables, current economic conditions, the prevailing retail environment and historical dilution levels for customers. We evaluate anticipated chargebacks by reviewing several performance indicators for our major customers. These performance indicators (which include inventory levels at the retail floors, sell-through rates and gross margin levels) are analyzed by key account executives and the Vice President of Wholesale Sales to estimate the amount of the anticipated customer allowance. Failure to correctly estimate the amount of the reserve could materially impact our results of operations and financial position. 
+Inventory valuation . Inventories are stated at lower of cost or market, on a first-in, first-out basis. We review inventory on a regular basis for excess and slow moving inventory. The review is based on an analysis of inventory on hand, prior sales and expected net realizable value through future sales. The analysis includes a review of inventory quantities on hand at period-end in relation to year-to-date sales and projections for sales in the foreseeable future as well as subsequent sales. We consider quantities on hand in excess of estimated future sales to be at risk for market impairment. The net realizable value, or market value, is determined based on the estimate of sales prices of such inventory through off-price or discount store channels. The likelihood of any material inventory write-down is dependent primarily on the expectation of future consumer demand for our product. A misinterpretation or misunderstanding of future consumer demand for our product, the economy, or other failure to estimate correctly, in addition to abnormal weather patterns, could result in inventory valuation changes compared to the valuation determined to be appropriate as of the balance sheet date. 
+Valuation of intangible assets . Accounting Standards Codification (“ASC”) Topic 350, “Intangible - Goodwill and Other”, requires that goodwill and intangible assets with indefinite lives no longer be amortized, but rather be tested for impairment at least annually. This pronouncement also requires that intangible assets with finite lives be amortized over their respective lives to their estimated residual values, and reviewed for impairment in accordance with ASC Topic 360 “Property, Plant and Equipment” (“ASC Topic 360”). In accordance with ASC Topic 360, long-lived assets, such as property, equipment, leasehold improvements and goodwill subject to amortization, are reviewed for impairment annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset. 
+28 
+Litigation reserves . Estimated amounts for litigation claims that are probable and can be reasonably estimated are recorded as liabilities in our Consolidated Financial Statements. The likelihood of a material change in these estimated reserves would be dependent on new claims as they may arise and the favorable or unfavorable events of a particular litigation. As additional information becomes available, management will assess the potential liability related to the pending litigation and revise its estimates. Such revisions in management’s estimates of the contingent liability could materially impact our results of operation and financial position. 
+Cost of sales . All costs incurred to bring finished products to our distribution center and, in the Retail segment, the costs to bring products to our stores, are included in the cost of sales line on the Consolidated Statement of Income. These include the cost of finished products, purchase commissions, letter of credit fees, brokerage fees, sample expenses, customs duties, inbound freight, royalty payments on licensed products, labels and product packaging. All warehouse and distribution costs related to the Wholesale segment and freight to customers, if any, are included in the operating expenses line item of our Consolidated Statements of Income. Our gross margins may not be comparable to other companies in the industry because some companies may include warehouse and distribution costs as a component of cost of sales, while other companies report on the same basis as we do and include them in operating expenses. 
+Accounting Standards Adopted In Fiscal 2010: 
+In January 2010, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance which expands disclosure requirements relating to fair value measurements. The guidance adds requirements for disclosing amounts of and reasons for significant transfers into and out of Levels 1, 2 and 3 and requires gross rather than net disclosures about purchases, sales, issuance and settlements relating to Level 3 measurements. The guidance also provides clarification that fair value measurement disclosures are required for each class of assets and liabilities. Disclosures about the valuation techniques and inputs used to measure fair value for measurements that fall in either Level 2 or Level 3 are also required. The Company adopted the provisions of the guidance as of March 31, 2010, except for disclosure about purchases, sales, issuance and settlements in the roll forward of activity in Level 3 fair value measurement, which is effective for fiscal years beginning after December 15, 2010. Disclosures not required for earlier periods are presented for comparative purposes. The new guidance affects disclosures only and, therefore, the adoption had no impact on the Company’s results of operation or financial position. 
+A new accounting pronouncement amending the consolidation guidance relating to variable interest entities (“VIE”) became effective for the Company on January 1, 2010. The new guidance replaces the current quantitative model for determining the primary beneficiary of a VIE with a qualitative approach that considers which entity has the power to direct activities that most significantly impact the VIE’s performance and whether the entity has an obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. The adoption of the accounting pronouncement had no impact on the Company’s Consolidated Financial Statements. 
+ITEM 7A 
+QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 
+($ in thousands) 
+We do not engage in the trading of market risk sensitive instruments in the normal course of business. Our financing arrangements are subject to variable interest rates primarily based on the prime rate and LIBOR. An analysis of our collection agency agreement with Rosenthal can be found in the “Liquidity and Capital Resources” section under Part II, Item 7, and in Note C to the Consolidated Financial Statements included in this Annual Report on Form 10-K under the caption “Due from Factor.” 
+As of December 31, 2010, we held marketable securities valued at $127,606, which consist primarily of corporate and U.S. government and federal agency bonds. These securities are subject to interest rate risk and will decrease in value if interest rates increase. We currently have the ability to hold these securities until maturity. In addition, any decline in interest rates would be expected to reduce our interest income. 
+29 
+ITEM 8 
+FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 
+The information required by this Item is incorporated herein by reference to the Consolidated Financial Statements listed in response to Item 15 of Part IV 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 
+Disclosure Controls and Procedures 
+As required by Rule 13a-15(b) of the Exchange Act, our management, including our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of the end of the fiscal year covered by this Annual Report on Form 10-K. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that our 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 on Form 10-K. 
+Management’s Annual Report on Internal Control Over Financial Reporting 
+Management of Steven Madden, Ltd. is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act). 
+Our internal control over financial reporting is a process designed by, or under the supervision of, our principal executive officer and principal financial officer, and effected by the board of directors, management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that (1) pertain to maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements. 
+Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. 
+With the participation of the Chief Executive Officer and the Chief Financial Officer, our management conducted an evaluation of the effectiveness, as of the end of our fiscal year ended December 31, 2010, of our internal control over financial reporting based on the framework and criteria established in Internal Control–Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation our management has concluded that, as of December 31, 2010, our internal control over financial reporting was effective. 
+30 
+The independent registered public accounting firm that audited the financial statements included in this Annual Report on Form 10-K has issued an attestation report on our internal control over financial reporting. 
+Attestation Report of our Independent Registered Public Accounting Firm 
+Our Independent Registered Public Accounting Firm, EisnerAmper LLP, has audited and issued a report on our internal control over financial reporting. The report of EisnerAmper LLP appears below. 
+To the Board of Directors and Stockholders 
+Steven Madden, Ltd. and subsidiaries 
+We have audited Steven Madden, Ltd. and subsidiaries’ (the “Company”) internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. 
+We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. 
+A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. 
+Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. 
+In our opinion, Steven Madden, Ltd. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control - Integrated Framework issued by COSO. 
+31 
+We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Steven Madden, Ltd. and subsidiaries as of December 31, 2010 and 2009, 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, 2010, and our report dated February 28, 2011 expressed an unqualified opinion thereon. 
+/S/ EisnerAmper LLP 
+New York, New York 
+February 28, 2011 
+Changes in Internal Control Over Financial Reporting 
+There was no change in our internal control over financial reporting, identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 of the Exchange Act, that occurred during the fiscal quarter ended December 31, 2010, which has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 
+ITEM 9B 
+OTHER INFORMATION 
+As disclosed in a Form 8-K filed by the Company on December 3, 2010, on December 1, 2010 the Company entered into an employment agreement (the “Sinha Employment Agreement”) with Awadhesh Sinha, the Company’s Chief Operating Officer, to replace an existing employment agreement that expired at the end of 2010. Pursuant to the Sinha Employment Agreement, which was effective as of January 1, 2011, if Mr. Sinha’s employment is terminated by the Company without Cause or if Mr. Sinha resigns from the Company for Good Reason in connection with a Change of Control (“Cause”, “Good Reason” and “Change of Control” each being defined in the Sinha Employment Agreement), Mr. Sinha will be entitled to receive a severance payment equal to three times his total W-2 compensation for the 12-month period ending on the last December 31 before the termination or resignation of employment, except that, in lieu of his actual base salary received during such period, the annual base salary to which Mr. Sinha was entitled as of the date of termination or resignation of employment will be used to determine his severance payment. On February 25, 2011, the Company and Mr. Sinha entered into an amendment of the Sinha Employment Agreement, a copy of which is filed as Exhibit 10.25 to this Annual Report on Form 10-K, in order to clarify that restricted stock awarded to Mr. Sinha under the Sinha Employment Agreement and future bonuses, if any, paid to Mr. Sinha under the Sinha Employment Agreement will be included in W-2 compensation for purposes of determining the amount of Mr. Sinha’s severance payment in the event of termination or resignation of employment in connection with a Change of Control. 
+PART III 
+ITEM 10 
+DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 
+The information required to be furnished pursuant to this Item will be set forth in our proxy statement for the 2011 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 our proxy statement for the 2011 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 our proxy statement for the 2011 Annual Meeting of Stockholders, and is incorporated herein by reference. 
+32 
+ITEM 13 
+CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE 
+The information required to be furnished pursuant to this Item will be set forth in our proxy statement for the 2011 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 our proxy statement for the 2011 Annual Meeting of Stockholders, and is incorporated herein by reference. 
+PART IV 
+ITEM 15 
+EXHIBITS AND FINANCIAL STATEMENT SCHEDULES 
+(a)(1) Financial Statements 
+The Consolidated Financial Statements of Steven Madden, Ltd. and subsidiaries are included in Item 8: 
+Report of Independent Registered Public Accounting Firm 
+F-1 
+Balance sheets as of December 31, 2010 and 2009 
+F-2 
+Statements of income for the years ended December 31, 2010, 2009 and 2008 
+F-3 
+Statements of changes in stockholders’ equity for the years ended December 31, 2010, 2009 and 2008 
+F-4 
+Statements of cash flows for the years ended December 31, 2010, 2009 and 2008 
+F-6 
+Notes to financial statements 
+F-7 
+(2) Financial Statement Schedules 
+None. 
+(3) Exhibits. 
+2.01 
+Stock Purchase Agreement dated February 10, 2010 between the Company and Jeremy Bassan (incorporated by reference to Exhibit 2.1 to the Company’s Quarterly Report on Form 10-Q for its fiscal quarter ended September 30, 2010 filed with the Securities and Exchange Commission on November 9, 2010) 
+2.02 
+Restructuring Agreement dated October 5, 2010 among the Company, BJ Acquisition LLC, BJ Agent LLC, Betsey Johnson LLC, Betsey Johnson (UK) Limited, Betsey Johnson Canada Ltd., BJ Vines, Inc., Betsey Johnson, Chantal Bacon, Castanea Family Investments, LLC, Castanea Family Holdings, LLC and Castanea Partners Fund III, L.P. (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 8, 2010) 
+3.01 
+Certificate of Incorporation of Steven Madden, Ltd. (incorporated by reference to Exhibit 1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on November 23, 1998) 
+3.02 
+Amended & Restated By-Laws of Steven Madden, Ltd. (incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 28, 2008) 
+33 
+4.01 
+Specimen Certificate for shares of Common Stock (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form SB-2/A filed with the Securities and Exchange Commission on September 29, 1993) 
+4.02 
+Rights Agreement dated November 14, 2001 between the Company and American Stock Transfer and Trust Company (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on November 16, 2001) 
+10.01 
+Second Amended and Restated Secured Promissory Note dated April 6, 2009 of Steven Madden to the Company (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 10, 2009) 
+10.02 
+Consulting Agreement effective August 1, 2004 among the Company, John Madden and J.L.M. Consultants Inc., as amended by Amendment No. 1 dated March 10, 2005 and Amendment No. 2 dated April 14, 2005 (incorporated by reference to Exhibits 10.9, 10.10 and 10.11 to the Company’s Annual Report on Form 10-K for its fiscal year ended December 31, 2005 filed with the Securities and Exchange Commission on March 14, 2006) 
+10.03 
+Collection Agency Agreement dated July 10, 2009 between Rosenthal & Rosenthal, Inc. and the Company (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for its fiscal quarter ended September 30, 2010 filed with the Securities and Exchange Commission on November 9, 2010) 
+10.04 
+Amendment to Collection Agency Agreement dated February 16, 2010 between Rosenthal & Rosenthal, Inc. and the Company (incorporated by reference to Exhibit 10.10 to the Company’s Annual Report on Form 10-K for its fiscal year ended December 31, 2010 filed with the Securities and Exchange Commission on March 12, 2010) 
+10.05 
+Collection Agency Agreement dated July 10, 2009 between Rosenthal & Rosenthal, Inc. and Daniel Friedman & Associates, Inc. (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 16, 2009) 
+10.06 
+Collection Agency Agreement dated July 10, 2009 between Rosenthal & Rosenthal, Inc. and Diva Acquisition Corp. (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 16, 2009) 
+10.07 
+Collection Agency Agreement dated July 10, 2009 between Rosenthal & Rosenthal, Inc. and Steven Madden Retail, Inc. (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 16, 2009) 
+10.08 
+Collection Agency Agreement dated July 10, 2009 between Rosenthal & Rosenthal, Inc. and Stevies, Inc. (incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 16, 2009) 
+10.09 
+Collection Agency Agreement dated July 10, 2009 between Rosenthal & Rosenthal, Inc. and SML Acquisition Corp. (incorporated by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 16, 2009) 
+10.10 
+Letter Agreement dated July 10, 2009 among Rosenthal & Rosenthal, Inc., the Company, Daniel Friedman & Associates, Inc., Diva Acquisition Corp., Steven Madden Retail, Inc., Stevies, Inc., and SML Acquisition Corp. (incorporated by reference to Exhibit 10.7 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 16, 2009) 
+10.11 
+Guarantee dated July 10, 2009 of the Company, Daniel Friedman & Associates, Inc., Diva Acquisition Corp., Steven Madden Retail, Inc., Stevies, Inc., and SML Acquisition Corp. in favor of Rosenthal & Rosenthal, Inc. (incorporated by reference to Exhibit 10.8 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 16, 2009) 
+10.12 
+Earn-Out Agreement dated February 10, 2010 among the Company, Jeremy Bassan and Big Buddha, Inc. (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 11, 2010) 
+34 
+10.13 
+Purchase and Sale Agreement for Distressed Trades dated August 26, 2010 between BJ Acquisition LLC and Paradox Lending LLC (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for its fiscal quarter ended September 30, 2010 filed with the Securities and Exchange Commission on November 9, 2010) 
+10.14 
+Third Amended Employment Agreement dated July 15, 2005 between the Company and Steven Madden (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 20, 2005) 
+10.15 
+Amendment dated December 14, 2009 to Third Amended Employment Agreement between the Company and Steven Madden (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 17, 2009) 
+10.16 
+Employment Agreement dated January 1, 1998 between the Company and Arvind Dharia (incorporated by reference to Exhibit 10.07 to the Company’s Annual Report on Form 10-K for its fiscal year ended December 31, 2000 filed with the Securities and Exchange Commission on March 30, 2001) # 
+10.17 
+Amendment No. 1 dated June 29, 2001 to Employment Agreement between the Company and Arvind Dharia (incorporated by reference to Exhibit 99.4 to the Company’s Quarterly Report on Form 10-Q for its fiscal quarter ended June 30, 2001 filed August 14, 2001) # 
+10.18 
+Amendment No. 2 dated October 30, 2002 to Employment Agreement between the Company and Arvind Dharia (incorporated by reference to Exhibit 10.16 to the Company’s Quarterly Report on Form 10-Q for its fiscal quarter ended September 30, 2002 filed with the Securities and Exchange Commission on November 14, 2002) # 
+10.19 
+Amendment No. 3 dated February 1, 2006 to Employment Agreement between the Company and Arvind Dharia (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 3, 2006) # 
+10.20 
+Amendment No. 4 dated October 7, 2009 to Employment Agreement of Arvind Dharia between the Company and Arvind Dharia (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 13, 2009) # 
+10.21 
+Employment Agreement dated June 15, 2005 between the Company and Awadhesh Sinha (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 21, 2005) # 
+10.22 
+Amendment No. 1 dated November 6, 2007 to Employment Agreement between the Company and Awadhesh Sinha (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on November 6, 2007) # 
+10.23 
+Amendment No. 2 dated October 14, 2008 and effective October 1, 2008 to Employment Agreement between the Company and Awadhesh Sinha (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 20, 2008) # 
+10.24 
+Employment Agreement dated December 1, 2010 between the Company and Awadhesh Sinha (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 3, 2010) # 
+10.25 
+Amendment dated February 25, 2011 to Employment Agreement date December 1, 2010 between the Company and Awadhesh Sinha† # 
+10.26 
+Employment Agreement dated October 7, 2009 between the Company and Robert Schmertz (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 13, 2009) # 
+10.27 
+Employment Agreement effective as of April 29, 2008 between the Company and Amelia Newton Varela (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for its fiscal quarter ended March 31, 2010 filed with the Securities and Exchange Commission on May 7, 2010) # 
+35 
+10.28 
+Employment Agreement dated January 31, 2011 between the Company and Amelia Newton Varela (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 2, 2011) # 
+10.29 
+Employment Agreement dated November 6, 2009 between the Company and Edward R. Rosenfeld (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on November 10, 2009) # 
+10.30 
+Amendment No. 1 dated March 8, 2010 to Employment Agreement between the Company and Edward R. Rosenfeld (incorporated by reference to Exhibit 10.29 to the Company’s Annual Report on Form 10-K for its fiscal year ended December 31, 2010 filed with the Securities and Exchange Commission on March 12, 2010) # 
+10.31 
+The 1999 Stock Plan, approved and adopted on March 15, 1999, amended as of March 20, 2000 and March 30, 2001 (incorporated by reference to Exhibit 10.A to the Company’s Registration Statement on Form S-8 filed with the Securities and Exchange Commission on July 26, 2004) # 
+10.32 
+2006 Stock Incentive Plan (Amended and Restated Effective May 22, 2009), approved and adopted on May 22, 2009 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 28, 2009) # 
+10.33 
+Form of Non-Qualified Stock Option Agreement (Chief Executive Officer) under the Company’s 2006 Stock Incentive Plan, as amended, as adopted October 30, 2007 (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for its fiscal quarter ended September 30, 2007 filed with the Securities and Exchange Commission on November 9, 2007) # 
+10.34 
+Form of Non-Qualified Stock Option Agreement (Employee without Employment Agreement) under the Company’s 2006 Stock Incentive Plan, as adopted October 30, 2007 (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for its fiscal quarter ended September 30, 2007 filed with the Securities and Exchange Commission on November 9, 2007) # 
+10.35 
+Form of Non-Qualified Stock Option Agreement (Employee with Employment Agreement) under the Company’s 2006 Stock Incentive Plan, as adopted October 30, 2007 (incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for its fiscal quarter ended September 30, 2007 filed with the Securities and Exchange Commission on November 9, 2007) # 
+10.36 
+Form of Restricted Stock Agreement (Chief Executive Officer) under the Company’s 2006 Stock Incentive Plan, as adopted October 30, 2007 (incorporated by reference to Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q for its fiscal quarter ended September 30, 2007 filed with the Securities and Exchange Commission on November 9, 2007) # 
+10.37 
+Form of Restricted Stock Agreement (Employee without Employment Agreement) under the Company’s 2006 Stock Incentive Plan, as adopted October 30, 2007 (incorporated by reference to Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q for its fiscal quarter ended September 30, 2007 filed with the Securities and Exchange Commission on November 9, 2007) # 
+10.38 
+Form of Restricted Stock Agreement (Employee with Employment Agreement) under the Company’s 2006 Stock Incentive Plan, as adopted October 30, 2007 (incorporated by reference to Exhibit 10.7 to the Company’s Quarterly Report on Form 10-Q for its fiscal quarter ended September 30, 2007 filed with the Securities and Exchange Commission on November 9, 2007) # 
+10.39 
+Form of Restricted Stock Agreement under the Company’s 2006 Stock Incentive Plan used for grants made to non- employee directors from March 2006 through May 2007, with a schedule setting forth the name of each of the recipients, the date of the grant and the number of shares (incorporated by reference to Exhibit 10.8 to the Company’s Quarterly Report on Form 10-Q for its fiscal quarter ended September 30, 2007 filed with the Securities and Exchange Commission on November 9, 2007) # 
+10.40 
+Restricted Stock Agreement dated June 9, 2006 between Steven Madden and the Company (incorporated by reference to Exhibit 10.13 to the Company’s Quarterly Report on Form 10-Q for its fiscal quarter ended September 30, 2007 filed with the Securities and Exchange Commission on November 9, 2007) # 
+36 
+10.41 
+Restricted Stock Agreement dated March 6, 2007 between Arvind Dharia and the Company (incorporated by reference to Exhibit 10.17 to the Company’s Quarterly Report on Form 10-Q for its fiscal quarter ended September 30, 2007 filed with the Securities and Exchange Commission on November 9, 2007) # 
+10.42 
+Restricted Stock Agreement dated March 9, 2007 between Robert Schmertz and the Company (incorporated by reference to Exhibit 10.18 to the Company’s Quarterly Report on Form 10-Q for its fiscal quarter ended September 30, 2007 filed with the Securities and Exchange Commission on November 9, 2007) # 
+21.01 
+Subsidiaries of the Registrant† 
+23.01 
+Consent of EisnerAmper LLP† 
+24.01 
+Power of Attorney (included on signature page hereto) 
+31.01 
+Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 † 
+31.02 
+Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 † 
+32.01 
+Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 † 
+32.02 
+Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 † 
+† 
+Filed herewith. 
+# 
+Indicates management contract or compensatory plan or arrangement required to be identified pursuant to Item 15(b) of this Annual Report on Form 10-K. 
+37 
+SIGNATURES 
+Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. 
+Dated: New York, New York 
+February 28, 2011 
+STEVEN MADDEN, LTD. 
+By: 
+/s/ EDWARD R. ROSENFELD 
+Edward R. Rosenfeld 
+Chairman and Chief Executive Officer 
+By: 
+/s/ ARVIND DHARIA 
+Arvind Dharia 
+Chief Financial Officer and Chief Accounting Officer 
+POWER OF ATTORNEY 
+KNOW ALL PERSONS BY THESE PRESENTS, that each of the undersigned constitutes and appoints Edward R. Rosenfeld and Arvind Dharia, and each of them, as attorneys-in-fact and agents, with full power of substitution and resubstitution, for and in the name, place and stead of the undersigned, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto and all other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that each of said attorney-in-fact or substitute or substitutes, may lawfully do or cause to be done by virtue hereof. 
+Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated. 
+38 
+Signature 
+Title 
+Date 
+/s/ EDWARD R. ROSENFELD 
+Chairman, Chief Executive Officer and Director 
+February 28, 2011 
+Edward R. Rosenfeld 
+/s/ ARVIND DHARIA 
+Chief Financial Officer and Chief Accounting Officer 
+February 28, 2011 
+Arvind Dharia 
+/s/ JOHN L. MADDEN 
+Director 
+February 28, 2011 
+John L. Madden 
+/s/ PETER MIGLIORINI 
+Director 
+February 28, 2011 
+Peter Migliorini 
+/s/ RICHARD P. RANDALL 
+Director 
+February 28, 2011 
+Richard P. Randall 
+/s/ RAVI SACHDEV 
+Director 
+February 28, 2011 
+Ravi Sachdev 
+/s/ THOMAS H. SCHWARTZ 
+Thomas H. Schwartz 
+Director 
+February 28, 2011 
+39 
+STEVEN MADDEN, LTD. 
+INDEX TO CONSOLIDATED FINANCIAL STATEMENTS 
+Report of Independent Registered Public Accounting Firm 
+F-1 
+Balance sheets as of December 31, 2010 and 2009 
+F-2 
+Statements of income for the years ended December 31, 2010, 2009 and 2008 
+F-3 
+Statements of changes in stockholders’ equity for the years ended December 31, 2010, 2009 and 2008 
+F-4 
+Statements of cash flows for the years ended December 31, 2010, 2009 and 2008 
+F-6 
+Notes to financial statements 
+F-7 
+40 
+REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 
+To the Board of Directors and Stockholders 
+Steven Madden, Ltd. and subsidiaries 
+We have audited the accompanying consolidated balance sheets of Steven Madden, Ltd. and subsidiaries (the “Company”) as of December 31, 2010 and 2009, 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, 2010. 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit 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 referred to above present fairly, in all material respects, the consolidated financial position of Steven Madden, Ltd. and subsidiaries as of December 31, 2010 and 2009, 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, 2010 in conformity with accounting principles generally accepted in the United States of America. 
+We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Steven Madden, Ltd. and subsidiaries’ internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated February 28, 2011 expressed an unqualified opinion thereon. 
+/s/ EisnerAmper LLP 
+New York, New York 
+February 28, 2011 
+F-1 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Consolidated Balance Sheets 
+(in thousands, except per share data) 
+December 31, 
+2010 
+2009 
+ASSETS 
+Current assets: 
+Cash and cash equivalents 
+$ 
+66,151 
+$ 
+69,266 
+Accounts receivable – net of allowances of $2,458 and $1,195 
+18,742 
+11,071 
+Due from factors – net of allowances of $12,800 and $12,487 
+52,206 
+47,534 
+Inventories 
+39,557 
+30,453 
+Marketable securities – available for sale 
+13,289 
+17,971 
+Prepaid expenses and other current assets 
+10,444 
+6,295 
+Prepaid taxes 
+600 
+— 
+Deferred taxes 
+9,078 
+8,779 
+Total current assets 
+210,067 
+191,369 
+Notes receivable 
+7,024 
+— 
+Note receivable – related party 
+3,849 
+3,568 
+Property and equipment, net 
+20,791 
+23,793 
+Deferred taxes 
+7,844 
+7,543 
+Deposits and other 
+2,529 
+1,844 
+Marketable securities - available for sale 
+114,317 
+67,713 
+Goodwill - net 
+38,613 
+24,313 
+Intangibles - net 
+42,662 
+6,716 
+Total assets 
+$ 
+447,696 
+$ 
+326,859 
+LIABILITIES 
+Current liabilities: 
+Accounts payable 
+$ 
+37,089 
+$ 
+24,544 
+Accrued expenses 
+18,425 
+15,338 
+Income taxes payable 
+— 
+166 
+Accrued incentive compensation 
+15,917 
+12,314 
+Total current liabilities 
+71,431 
+52,362 
+Contingent payment liability 
+12,372 
+— 
+Deferred rent 
+5,467 
+5,044 
+Other liabilities 
+1,128 
+1,666 
+Total liabilities 
+90,398 
+59,072 
+Commitments, contingencies and other – (notes L & N) 
+STOCKHOLDERS’ EQUITY 
+Preferred stock - $.0001 par value, 5,000 shares authorized; none issued; Series A Junior Participating preferred stock - $.0001 par value, 60 shares authorized; none issued 
+Common stock - $.0001 par value, 60,000 shares authorized, 36,416 and 35,687 shares issued, 28,013 and 27,425 shares outstanding at December 31, 2010 and 2009, respectively 
+4 
+3 
+Additional paid-in capital 
+165,773 
+147,703 
+Retained earnings 
+323,092 
+247,365 
+Other comprehensive income: 
+Unrealized gain on marketable securities (net of taxes) 
+972 
+700 
+Treasury stock – 8,403 and 8,262 shares at cost at December 31, 2010 and 2009, respectively 
+(132,543 
+) 
+(127,984 
+) 
+Total stockholders’ equity 
+357,298 
+267,787 
+Total liabilities and stockholders’ equity 
+$ 
+447,696 
+$ 
+326,859 
+See notes to consolidated financial statements 
+F-2 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Consolidated Statements of Income 
+(in thousands, except per share data) 
+Years Ended December 31, 
+2010 
+2009 
+2008 
+Net sales 
+$ 
+635,418 
+$ 
+503,550 
+$ 
+457,046 
+Cost of sales 
+359,564 
+287,361 
+270,222 
+Gross profit 
+275,854 
+216,189 
+186,824 
+Commission and licensing fee income – net 
+22,629 
+19,928 
+14,294 
+Operating expenses 
+(176,859 
+) 
+(157,149 
+) 
+(156,212 
+) 
+Income before other income (expenses) and provision for income taxes 
+121,624 
+78,968 
+44,906 
+Other income (expenses): 
+Interest income 
+4,208 
+2,096 
+2,620 
+Interest expense 
+(4 
+) 
+(93 
+) 
+(207 
+) 
+Gain (loss) on sale of marketable securities 
+29 
+(182 
+) 
+(1,013 
+) 
+Income before provision for income taxes 
+125,857 
+80,789 
+46,306 
+Provision for income taxes 
+50,132 
+30,682 
+18,330 
+Net income 
+$ 
+75,725 
+$ 
+50,107 
+$ 
+27,976 
+Basic income per share 
+$ 
+2.74 
+$ 
+1.85 
+$ 
+1.02 
+Diluted income per share 
+$ 
+2.68 
+$ 
+1.82 
+$ 
+1.01 
+Basic weighted average shares of common stock outstanding 
+27,651 
+27,068 
+27,488 
+Effect of dilutive securities – options and restricted stock 
+644 
+417 
+291 
+Diluted weighted average shares of common stock outstanding 
+28,295 
+27,485 
+27,779 
+See notes to consolidated financial statements 
+F-3 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Consolidated Statements of Changes in Stockholders’ Equity 
+(in thousands) 
+Common Stock 
+Additional 
+Retained 
+Shares 
+Amount 
+Paid-in Capital 
+Earnings 
+Balance - December 31, 2007 
+34,539 
+$ 
+3 
+$ 
+129,913 
+$ 
+169,263 
+Exercise of stock options 
+257 
+2,051 
+Tax benefit from exercise of options 
+(258 
+) 
+Issuance of fully vested restricted stock 
+276 
+Stock-based compensation 
+5,656 
+Unrealized holding loss on marketable securities (net of tax benefits of $253) 
+Net income 
+27,976 
+Comprehensive income 
+Forfeiture of accrued dividends 
+18 
+Common stock purchased for treasury 
+Balance - December 31, 2008 
+35,072 
+3 
+137,362 
+197,257 
+Exercise of stock options 
+396 
+3,904 
+Tax expense from stock based compensation 
+497 
+Issuance of fully vested restricted stock 
+219 
+Stock-based compensation 
+5,940 
+Unrealized holding gain on marketable securities (net of taxes of $698) 
+Net income 
+50,107 
+Comprehensive income 
+Forfeiture of accrued dividends 
+1 
+Balance - December 31, 2009 
+35,687 
+3 
+147,703 
+247,365 
+Exercise of stock options 
+431 
+1 
+5,081 
+Tax benefit from exercise of options 
+4,718 
+Issuance of restricted stock 
+298 
+Stock-based compensation 
+8,271 
+Unrealized holding gain on marketable securities (net of taxes of $198) 
+Net income 
+75,725 
+Comprehensive income 
+Forfeiture of accrued dividends 
+2 
+Common stock purchased for treasury 
+Balance - December 31, 2010 
+36,416 
+$ 
+4 
+$ 
+165,773 
+$ 
+323,092 
+See notes to consolidated financial statements 
+F-4 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Consolidated Statements of Changes in Stockholders’ Equity (Continued) 
+(in thousands) 
+Accumulated 
+Other 
+Total 
+Comprehensive 
+Treasury Stock 
+Stockholders’ 
+Comprehensive 
+Gain (Loss) 
+Shares 
+Amount 
+Equity 
+Income 
+Balance - December 31, 2007 
+$ 
+(61 
+) 
+5,662 
+$ 
+(83,784 
+) 
+$ 
+215,334 
+Exercise of stock options 
+2,051 
+Tax benefit from exercise of options 
+(258 
+) 
+Issuance of fully vested restricted stock 
+Stock-based compensation 
+5,656 
+Unrealized holding loss on marketable securities (net of tax benefit of $253) 
+(335 
+) 
+(335 
+) 
+(335 
+) 
+Net income 
+27,976 
+27,976 
+Comprehensive income 
+$ 
+27,641 
+Forfeiture of accrued dividends 
+18 
+Common stock purchased for treasury 
+2,600 
+(44,200 
+) 
+(44,200 
+) 
+Balance - December 31, 2008 
+(396 
+) 
+8,262 
+(127,984 
+) 
+206,242 
+Exercise of stock options 
+3,904 
+Tax expense from exercise of options 
+497 
+Issuance of fully vested restricted stock 
+Stock-based compensation 
+5,940 
+Unrealized holding gain on marketable securities (net of taxes of $698) 
+1,096 
+1,096 
+1,096 
+Net income 
+50,107 
+50,107 
+Comprehensive income 
+$ 
+51,203 
+Forfeiture of accrued dividends 
+1 
+Balance - December 31, 2009 
+700 
+8,262 
+(127,984 
+) 
+267,787 
+Exercise of stock options 
+5,082 
+Tax benefit from exercise of options 
+4,718 
+Issuance of fully vested restricted stock 
+Stock-based compensation 
+8,271 
+Unrealized holding gain on marketable securities (net of taxes of $198) 
+272 
+272 
+272 
+Net income 
+75,725 
+75,725 
+Comprehensive income 
+$ 
+75,997 
+Forfeiture of accrued dividends 
+2 
+Common stock purchased for treasury 
+141 
+(4,559 
+) 
+(4,559 
+) 
+Balance - December 31, 2010 
+$ 
+972 
+8,403 
+$ 
+(132,543 
+) 
+$ 
+357,298 
+See notes to consolidated financial statements 
+F-5 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Consolidated Statements of Cash Flows 
+(in thousands) 
+Years Ended December 31, 
+2010 
+2009 
+2008 
+Cash flows from operating activities: 
+Net income 
+$ 
+75,725 
+$ 
+50,107 
+$ 
+27,976 
+Adjustments to reconcile net income to net cash provided by operating activities: 
+Stock-based compensation 
+8,271 
+5,940 
+5,656 
+Tax expense (benefits) from stock based compensation 
+(4,718 
+) 
+(497 
+) 
+258 
+Depreciation and amortization 
+9,999 
+9,560 
+9,101 
+Loss on disposal of fixed assets 
+543 
+1,153 
+1,619 
+Deferred taxes 
+(798 
+) 
+(1,928 
+) 
+1,495 
+Provision for doubtful accounts and chargebacks 
+1,576 
+2,381 
+(4,145 
+) 
+Accrued interest on notes receivable – related party 
+(281 
+) 
+(198 
+) 
+(244 
+) 
+Deferred rent expense and other non-current liabilities 
+423 
+271 
+2,331 
+Loss (gain) on sale of marketable securities 
+(29 
+) 
+182 
+1,013 
+Changes in: 
+Accounts receivable 
+(8,266 
+) 
+(5,169 
+) 
+3,221 
+Due from factors – excluding advances 
+(4,985 
+) 
+(15,939 
+) 
+2,216 
+Inventories 
+(8,804 
+) 
+1,144 
+(4,400 
+) 
+Prepaid expenses, prepaid taxes, deposits and other assets 
+(4,420 
+) 
+1,691 
+3,887 
+Accounts payable and accrued expenses 
+19,572 
+10,561 
+(10,969 
+) 
+Accrued incentive compensation 
+3,603 
+4,445 
+1,736 
+Other liabilities 
+(538 
+) 
+638 
+1,028 
+Net cash provided by operating activities 
+86,873 
+64,342 
+41,779 
+Cash flows from investing activities: 
+Purchase of property and equipment 
+(3,424 
+) 
+(3,399 
+) 
+(8,314 
+) 
+Purchases of marketable securities 
+(72,663 
+) 
+(67,265 
+) 
+(31,005 
+) 
+Purchases of notes receivable 
+(7,004 
+) 
+— 
+— 
+Advance payment on contingent liability 
+(1,628 
+) 
+— 
+— 
+Maturity/sale of marketable securities 
+30,092 
+17,543 
+74,844 
+Acquisitions, net of cash acquired * 
+(40,602 
+) 
+(5,776 
+) 
+(4,923 
+) 
+Net cash (used in) provided by investing activities 
+(95,229 
+) 
+(58,897 
+) 
+30,602 
+Cash flows from financing activities: 
+Advances from factor - net 
+— 
+(30,168 
+) 
+30,168 
+Proceeds from exercise of stock options 
+5,082 
+3,904 
+2,051 
+Tax benefits from stock based compensation 
+4,718 
+497 
+(258 
+) 
+Common stock purchased for treasury 
+(4,559 
+) 
+— 
+(44,200 
+) 
+Net cash provided by (used in) financing activities 
+5,241 
+(25,767 
+) 
+(12,239 
+) 
+Net (decrease) increase in cash and cash equivalents 
+(3,115 
+) 
+(20,322 
+) 
+60,142 
+Cash and cash equivalents - beginning of year 
+69,266 
+89,588 
+29,446 
+Cash and cash equivalents – end of year 
+$ 
+66,151 
+$ 
+69,266 
+$ 
+89,588 
+Supplemental disclosures of cash flow information: 
+Cash paid during the year for: 
+Interest 
+$ 
+4 
+$ 
+93 
+$ 
+207 
+Income taxes 
+$ 
+42,651 
+$ 
+30,508 
+$ 
+23,306 
+Non-cash transactions 
+Dividend accrual (forfeitures) related to restricted stock 
+$ 
+(2 
+) 
+$ 
+(1 
+) 
+$ 
+(18 
+) 
+* The amount for 2009 includes $4,526 which was accrued at December 31, 2008. The amount for 2008 includes $3,903 which was accrued at December 31, 2007. 
+See notes to consolidated financial statements 
+F-6 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Consolidated Financial Statements 
+December 31, 2010 and 2009 
+($ in thousands except share and per share data) 
+Note A - Summary of Significant Accounting Policies 
+[1] 
+Organization: 
+Steven Madden, Ltd. and its subsidiaries (collectively, the “Company”), a Delaware corporation, design, source, market and sell women’s, men’s and children’s shoes, for sale worldwide through its wholesale and retail channels under the Steve Madden Women’s, Steven and Madden Men’s brand names and through its wholesale channels under the Stevies, Madden Girl, Madden, l.e.i. (under license), Elizabeth and James (under license) and Big Buddha brand names. In addition, the Company designs, sources, markets and sells name brand and private label fashion handbags and accessories to customers worldwide through its Wholesale Accessories segment. The Wholesale Accessories segment includes Big Buddha, Betsey Johnson, Betseyville and, through license agreements, Daisy Fuentes and Olsenboye accessories brands. Revenue is generated predominantly through the sale of the Company’s brand name merchandise and certain licensed products. At December 31, 2010 and 2009, the Company operated 84 and 89 retail stores (including its e-commerce website as a store), respectively. Revenue is subject to seasonal fluctuations. See Note O for operating segment information. 
+[2] 
+Principles of consolidation: 
+The Consolidated Financial Statements include the accounts of Steven Madden, Ltd. and its wholly owned subsidiaries Steven Madden Retail, Inc., Diva Acquisition Corp., Adesso Madden, Inc., Stevies, Inc., Daniel M. Friedman and Associates, Inc. and Big Buddha, Inc. (collectively referred to as the “Company”). All significant intercompany balances and transactions have been eliminated. 
+[3] 
+Stock split: 
+On March 24, 2010, the Board of Directors declared a 3-for-2 stock split of the Company’s outstanding shares of common stock, effected in the form of a stock dividend on the Company’s outstanding common stock. Stockholders of record at the close of business on April 20, 2010 received one additional share of Steven Madden, Ltd. common stock for every two shares of common stock owned on that date. The additional shares were distributed on May 3, 2010. All share and per share data provided herein gives effect to this stock split, applied retroactively. 
+[4] 
+Use of estimates: 
+The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. 
+Significant areas involving management estimates include allowances for bad debts, returns and customer chargebacks and contingent payment liability. The Company provides reserves on trade accounts receivables and due from factors for future customer chargebacks and markdown allowances, discounts, returns and other miscellaneous compliance related deductions that relate to the current period sales. The Company evaluates anticipated chargebacks by reviewing several performance indicators of its major customers. These performance indicators, which include retailers’ inventory levels, sell-through rates and gross margin levels, are analyzed by management to estimate the amount of the anticipated customer allowance. 
+F-7 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Consolidated Financial Statements 
+December 31, 2010 and 2009 
+($ in thousands except share and per share data) 
+Note A - Summary of Significant Accounting Policies (continued) 
+[5] 
+Cash equivalents: 
+Cash equivalents at December 31, 2010 and 2009 amounted to approximately $32,145 and $30,962, respectively, and consisted of money market accounts held primarily at four brokerage companies. The Company considers all highly liquid instruments with an original maturity of three months or less when purchased to be cash equivalents. 
+[6] 
+Marketable securities: 
+Marketable securities consist primarily of corporate and federal agency bonds with maturities greater than three months and up to eight years at the time of purchase. These securities, which are classified as available for sale, are carried at fair value, with unrealized gains and losses net of any tax effect reported in stockholders’ equity as accumulated other comprehensive income (loss) until realized. Amortization of premiums and discounts is included in interest income. For the years ended December 31, 2010 and 2009, the amortization of bond premiums was $1,148 and $801, respectively. The schedule of maturities at December 31, 2010 and 2009 are as follows: 
+Maturities as of 
+December 31, 2010 
+Maturities as of 
+December 31, 2009 
+1 Year or Less 
+1 to 8 Years 
+1 Year or Less 
+1 to 5 Years 
+Municipal bonds, U.S. Government and federal agency bonds 
+$ 
+— 
+$ 
+16,542 
+$ 
+— 
+$ 
+9,479 
+Corporate bonds 
+13,289 
+93,741 
+17,971 
+58,234 
+Certificates of deposit 
+— 
+4,034 
+— 
+— 
+$ 
+13,289 
+$ 
+114,317 
+$ 
+17,971 
+$ 
+67,713 
+[7] 
+Inventories: 
+Inventories, which consist of finished goods on hand and in transit, are stated at the lower of cost (first-in, first-out method) or market. 
+[8] 
+Property and equipment: 
+Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed utilizing the straight-line method based on estimated useful lives ranging from three to ten years. Leasehold improvements are amortized utilizing the straight-line method over the shorter of their estimated useful lives or the remaining lease term. Depreciation and amortization include amounts relating to property and equipment under capital leases. 
+Impairment losses are recognized for long-lived assets, including certain intangibles, used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are not sufficient to recover the assets’ carrying amount. Impairment losses are measured by comparing the fair value of the assets to their carrying amount. 
+F-8 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Consolidated Financial Statements 
+December 31, 2010 and 2009 
+($ in thousands except share and per share data) 
+Note A - Summary of Significant Accounting Policies (continued) 
+[9] 
+Goodwill and intangible assets: 
+The Company’s goodwill and indefinite lived intangible assets are not amortized, rather they are tested for impairment on an annual basis or more often if events or circumstances change that could cause these assets to become impaired. The Company completed its annual impairment tests on the goodwill relating to the Compo Enhancements, Daniel M. Friedman and Diva Acquisition Corp. acquisitions. No impairments were recognized. 
+[10] 
+Net income per share: 
+Basic income per share is based on the weighted average number of shares of common stock outstanding during the year. Diluted income per share reflects: a) the potential dilution assuming shares of common stock were issued upon the exercise of outstanding in-the-money options and the proceeds thereof were used to purchase treasury stock at the average market price during the period, and b) the vesting of granted nonvested restricted stock awards for which the assumed proceeds upon grant are deemed to be the amount of compensation cost attributable to future services and are not yet recognized using the treasury stock method, to the extent dilutive. For the years ended December 31, 2010, 2009 and 2008, options exercisable into approximately 26,000, 15,000 and 75,000 shares of common stock, respectively, have been excluded in the calculation of diluted income per share as the result would have been antidilutive. For the years ended December 31, 2010, 2009 and 2008, all unvested restricted stock awards were dilutive. 
+[11] 
+Advertising costs: 
+The Company expenses costs of print, radio and billboard advertisements as of the first date the advertisements take place. Advertising expense included in operating expenses amounted to approximately $5,597 in 2010, $4,713 in 2009 and $5,019 in 2008. 
+[12] 
+Revenue recognition: 
+The Company recognizes revenue on wholesale sales when products are shipped pursuant to its standard terms, which are freight on board (“FOB”) warehouse, or when products are delivered to the consolidators as per the terms of the customers’ purchase order, persuasive evidence of an arrangement exists, the price is fixed or determinable and collection is reasonably assured. Sales reductions for anticipated discounts, allowances and other deductions are recognized during the period when sales are recorded. Customers retain the right to replacement of the product for poor quality or improper or short shipments, which have historically been immaterial. Retail sales are recognized when the payment is received from customers and are recorded net of returns. The Company also generates commission income acting as a buying agent by arranging to manufacture private label shoes to the specifications of its clients. The Company’s commission revenue includes partial recovery of its design, product and development costs for the services provided to certain suppliers in connection with the Company’s private label business. Commission revenue and product and development cost recoveries are recognized as earned when title to the product transfers from the manufacturer to the customer and collections are reasonably assured and are reported on a net basis after deducting related operating expenses. 
+F-9 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Consolidated Financial Statements 
+December 31, 2010 and 2009 
+($ in thousands except share and per share data) 
+Note A - Summary of Significant Accounting Policies (continued) 
+The Company licenses its Steve Madden and Steven by Steve Madden trademarks for use in connection with the manufacture, marketing and sale of cold weather accessories, sunglasses, eyewear, outerwear, bedding, hosiery, women’s fashion apparel and jewelry. We license our Big Buddha® brand for use in connection with the manufacture, marketing and sale of sunglasses and cold weather accessories. In addition, we license the Betsey Johnson® and Betseyville® trademarks for use in connection with the manufacture, marketing and sale of apparel, jewelry, lingerie, swimwear, eyewear, watches and outerwear. The license agreements require the licensee to pay the Company a royalty and, in substantially all of the agreements, an advertising fee based on the higher of a minimum or a net sales percentage as defined in the various agreements. In addition, under the terms of retail selling agreements, most of the Company’s international distributors are required to pay the Company a royalty based on a percentage of net sales, in addition to a commission on the purchases of the Company’s products. Licensing revenue is recognized on the basis of net sales reported by the licensees and international distributors, or the minimum guaranteed royalties, if higher. In substantially all of the Company’s license agreements, the minimum guaranteed royalty is earned and payable on a quarterly basis. 
+[13] 
+Taxes collected from customers: 
+The Company accounts for certain taxes collected from its customers in accordance with the accounting guidance which permits companies to adopt a policy of presenting taxes in the income statement on either a gross basis (included in revenues and costs) or net basis (excluded from revenues). Taxes within the scope of the accounting guidance would include taxes that are imposed on a revenue transaction between a seller and a customer, for example, sales taxes, use taxes, value-added taxes and some types of excise taxes. The Company has consistently recorded all taxes on a net basis. 
+[14] 
+Sales deductions: 
+The Company supports retailers’ initiatives to maximize sales of the Company’s products on the retail floor by subsidizing the co-op advertising programs of such retailers, providing them with inventory markdown allowances and participating in various other marketing initiatives of its major customers. In addition, the Company accepts returns for damaged product which is charged back to the responsible factory. Such expenses are reflected in the financial statements as deductions to net sales. For the years ended December 31, 2010, 2009 and 2008 the total deductions to net sales for these expenses were $36,957, $31,078 and $37,291, respectively. 
+[15] 
+Cost of sales: 
+All costs incurred to bring finished products to the Company’s distribution center and, in the Retail segment, the costs to bring products to the Company’s stores, are included in the cost of sales line on the Consolidated Statement of Income. These include the cost of finished products, purchase commissions, letter of credit fees, brokerage fees, sample expenses, custom duty, inbound freight, royalty payments on licensed products, labels and product packaging. All warehouse and distribution costs related to the Wholesale segments and freight to customers, if any, are included in the operating expenses line item of the Company’s Consolidated Statement of Income. The Company’s gross margins may not be comparable to those of other companies in the industry because some companies may include warehouse and distribution costs, as well as other costs excluded from cost of sales by the Company, as a component of cost of sales, while other companies report on the same basis as the Company and include them in operating expenses. 
+F-10 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Consolidated Financial Statements 
+December 31, 2010 and 2009 
+($ in thousands except share and per share data) 
+Note A - Summary of Significant Accounting Policies (continued) 
+[16] 
+Warehouse and shipping costs: 
+The Company includes all warehouse and distribution costs for the Wholesale segment in the Operating Expenses line on the Consolidated Statements of Income. For the years ended December 31, 2010, 2009 and 2008, the total warehouse and distribution costs included in Operating Expenses were $10,409, $8,488 and $9,229 respectively. The Company’s standard terms of sales are “FOB Steve Madden warehouse” and thus the Company’s wholesale customers absorb most shipping costs. Shipping costs to wholesale customers incurred by the Company are not considered significant and are included in the Operating Expense line in the Consolidated Statements of Income. 
+[17] 
+Impairment of long-lived assets: 
+The Company reviews long-lived assets, including amortizable intangible assets, for impairment whenever events or changes in business circumstances indicate that the carrying amount of the asset may not be fully recoverable. If facts and circumstances indicate that the Company’s long-lived assets might be impaired, the estimated future undiscounted cash flows associated with the long-lived asset would be compared to its carrying amounts to determine if a write-down to fair value is necessary. If a write-down is required, the amount is determined by estimation of the present value of net discounted cash flows. 
+[18] 
+Exit or disposal activity costs: 
+The Company accounts for its exit and disposal costs by recording an accrual for the liability for lease costs that will continue to be incurred without economic benefit to the Company upon the date that the Company ceases using the leased property. As of December 31, 2010, the Company accrued approximately $1,243 in lease exit costs associated with two stores that were closed prior to the end of their prospective lease terms. 
+[19] 
+Employee Benefit Plan: 
+The Company maintains a tax-qualified 401(k) plan which is available to each of the Company’s eligible employees who elect to participate after meeting certain length-of-service requirements. The Company made discretionary matching contributions of 50% of employees’ contributions up to a maximum of 6% of employees’ compensation which vest to the employees over a period of time. Total matching contributions to the plan for 2010, 2009 and 2008 were approximately $675, $601 and $570, respectively. 
+[20] 
+Fair Value of Financial Instruments: 
+The carrying value of cash and cash equivalents, accounts receivable, due from factors and accounts payable approximate their fair values due to their short-term nature of their underlying terms. The fair values of these financial assets are determined by reference to market data and other valuation techniques, as appropriate. Fair value of the note receivable – related party approximates its carrying value based upon its interest rate, which approximates current market interest rates. As it relates to notes receivable, see Note F for fair value determination. 
+F-11 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Consolidated Financial Statements 
+December 31, 2010 and 2009 
+($ in thousands except share and per share data) 
+Note A - Summary of Significant Accounting Policies (continued) 
+[21] 
+Accounting Standards Adopted In Fiscal 2010: 
+In January 2010, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance which expands disclosure requirements relating to fair value measurements. The guidance adds requirements for disclosing amounts of and reasons for significant transfers into and out of Levels 1, 2 and 3 and requires gross rather than net disclosures about purchases, sales, issuance and settlements relating to Level 3 measurements. The guidance also provides clarification that fair value measurement disclosures are required for each class of assets and liabilities. Disclosures about the valuation techniques and inputs used to measure fair value for measurements that fall in either Level 2 or Level 3 are also required. The Company adopted the provisions of the guidance as of March 31, 2010, except for disclosure about purchases, sales, issuance and settlements in the roll forward of activity in Level 3 fair value measurement, which is effective for fiscal years beginning after December 15, 2010. Disclosures are not required for earlier periods presented for comparative purposes. The new guidance affects disclosures only and, therefore, the adoption had no impact on the Company’s results of operation or financial position. 
+A new accounting pronouncement amending the consolidation guidance relating to variable interest entities (“VIE”) became effective for the Company on January 1, 2010. The new guidance replaces the current quantitative model for determining the primary beneficiary of a VIE with a qualitative approach that considers which entity has the power to direct activities that most significantly impact the VIE’s performance and whether the entity has an obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. The adoption of the accounting pronouncement had no impact on the Company’s Consolidated Financial Statements. 
+[22] 
+Recently Issued Accounting Standards: 
+In December of 2010, the FASB issued Accounting Standards Update 2010-28, “When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts” (“ASU 2010-28”). ASU 2010-28 modifies Step 1 of the goodwill impairment test, which requires an entity to compare the fair value of a reporting unit with its carrying amount, including goodwill. For reporting units with zero or negative carrying amounts, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. Step 2 requires an entity to compare the fair value of a reporting unit goodwill with the carrying amount of that goodwill. The implied fair value of goodwill is determined by assigning a fair value to all the assets and liabilities of the reporting unit as if the reporting unit had been acquired in a business combination. The adoption of ASU 2010-28, which became effective for the Company on January 1, 2011, is not expected to have a material impact on our Consolidated Financial Statements. 
+In December of 2010, the FASB issued ASU 2010-29, “Disclosure of Supplementary Pro Forma Information for Business Combinations.” ASU 2010-29 specifies that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. ASU 2010-29 also expands the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The adoption of ASU 2010-29, which became effective for the Company on January 1, 2011, is not expected to have a material impact on our Consolidated Financial Statements. 
+F-12 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Consolidated Financial Statements 
+December 31, 2010 and 2009 
+($ in thousands except share and per share data) 
+Note B – Acquisitions 
+Betsey Johnson intellectual property 
+On October 5, 2010, pursuant to a Restructuring Agreement between the Company and Betsey Johnson LLC (“Betsey Johnson”), the Company acquired all right, title and interest in substantially all of the intellectual property of Betsey Johnson, including, among other things, the Betsey Johnson® and Betseyville® trademarks, and certain intellectual property licenses and other contracts, including the right to receive royalties and other income with respect thereto (the “Betsey Johnson Assets”). Management believes that Betsey Johnson® offers meaningful growth opportunity for our business. Prior to the acquisition, Betsey Johnson had licensed to the Company the right to use the Betsey Johnson® and Betseyville® trademarks in connection with the sale and marketing of handbags, small leather goods, belts and umbrellas. The acquisition of the Betsey Johnson Assets was the culmination of a series of transactions. First, in August 2010, the Company purchased from various members of a loan syndicate their respective participations in a term loan in the aggregate outstanding principal amount of $48,750 (the “Loan”) made by the syndicate lenders to Betsey Johnson. The Company paid the syndicate lenders an aggregate purchase price of $29,217, including transaction costs, for their participations in the Loan. The Loan was secured by a first priority security interest in substantially all of the assets of Betsey Johnson and was in default on the date of purchase. On October 5, 2010, the Company entered into the Restructuring Agreement with Betsey Johnson, pursuant to which, in consideration of the elimination of all amounts owed with respect to the Loan, the Company acquired the Betsey Johnson Assets. The Company believes that Betsey Johnson ® is a well known, iconic brand and thus the trademark is an indefinite lived asset. As such, the $29,217 purchase price for Betsey Johnson intellectual property will not be amortized, rather it will be tested for impairment on an annual basis or more often if events or circumstances change that could cause the Betsey Johnson intellectual property to become impaired. The Company made a new secured term loan to Betsey Johnson on October 5, 2010 in the principal amount of $3,000, which accrues interest at the rate of 8% per annum and becomes due on December 31, 2015. The new term loan is secured by a first priority security interest in substantially all of the remaining properties and assets of Betsey Johnson. 
+Big Buddha 
+On February 10, 2010, the Company acquired all of the outstanding shares of stock of privately held Big Buddha, Inc. (“Big Buddha”) from its sole stockholder (“Seller”). Founded in 2003, Big Buddha designs and markets fashion-forward handbags to specialty retailers and better department stores. Management believes that Big Buddha is a strategic fit for the Company. The acquisition was completed for consideration of $11,119 in cash, net of cash acquired, plus contingent payments pursuant to an earn-out agreement with the Seller. The earn-out agreement provides for potential payments to the Seller based on the financial performance of Big Buddha handbags for each of the twelve-month periods ending on March 31, 2011, 2012 and 2013. The fair value of the contingent payments was estimated using the present value of management’s projections of the financial results of Big Buddha during the earn-out period. The Company estimates the fair value of the contingent consideration to be $14,000. In December of 2010, the Company made an advance payment of $1,628, reducing the balance of the contingent consideration to $12,372. 
+F-13 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Consolidated Financial Statements 
+December 31, 2010 and 2009 
+($ in thousands except share and per share data) 
+Note B – Acquisitions (continued) 
+The transaction was accounted for using the acquisition method required by generally accepted accounting principles in the United States. Accordingly, the assets and liabilities of Big Buddha were adjusted to their fair values, and the excess of the purchase price over the fair value of the assets acquired, including identified intangible assets, was recorded as goodwill. The fair values assigned to tangible and intangible assets acquired and liabilities assumed are based on management’s estimates and assumptions, which are subject to change. The purchase price has been allocated as follows: 
+Accounts receivable 
+$ 
+668 
+Inventory 
+1,212 
+Prepaid expenses and other current assets 
+102 
+Trade name 
+4,100 
+Customer relationships 
+4,900 
+Non-compete agreement 
+450 
+Accounts payable 
+(171 
+) 
+Accrued expenses 
+(442 
+) 
+Total fair value excluding goodwill 
+10,819 
+Goodwill 
+14,300 
+Net assets acquired 
+$ 
+25,119 
+Contingent consideration classified as a liability will be remeasured at fair value at each reporting date, until the contingency is resolved, with changes recognized in earnings. The goodwill related to this transaction is expected to be deductible for tax purposes over 15 years. 
+The Company incurred approximately $430 in acquisition related costs applicable to the Big Buddha transaction during year ended December 31, 2010. These expenses are included in operating expenses in the Company’s Consolidated Statements of Income. 
+The results of operations of Big Buddha have been included in the Company’s Consolidated Statements of Income from the date of the acquisition. Unaudited pro forma information related to this acquisition is not included, as the impact of this transaction is not material to the Company’s consolidated results. 
+Zone 88 and Shakedown Street 
+On July 8, 2009, the Company acquired certain of the assets constituting the Zone 88 and Shakedown Street (together “Zone 88”) lines of SML Brands, LLC, a subsidiary of Aimee Lynn, Inc. SML Brands designs, sources and markets primarily private label accessories and licensed brands, principally handbags, belts and small leather goods, for mass merchants and mid-tier retailers. The acquisition was completed for $1,348 in cash. The fair values assigned to tangible and intangible assets acquired and liabilities assumed are based on management’s estimates. The Company allocated $220 to current assets, $409 to the value of customer relationships, $841 to goodwill and $122 to liabilities assumed. The value of customer relationships is being amortized over ten years. The results of operations of Zone 88 have been included in the Company’s Consolidated Statements of Income from the date of the acquisition. Unaudited pro forma information related to this acquisition is not included, as the impact of this transaction is not material to the Company’s consolidated results. 
+Note C - Due From Factors 
+On July 10, 2009, the Company entered into a collection agency agreement with Rosenthal & Rosenthal, Inc (“Rosenthal”) that became effective on September 15, 2009. The agreement can be terminated by Rosenthal at any time upon 60 days’ prior written notice, or by us at any time after the expiration of the first contract year upon 60 days’ prior written notice. Under the agreement, the Company can request advances from the factor of up to 85% of aggregate receivables factored by Rosenthal. The agreement provides the Company with a $30 million credit facility with a $15 million sub-limit for letters of credit, at an interest rate based, at our election, upon either the prime rate or LIBOR. The Company also pays a fee of 0.275% of the gross invoice amount factored with Rosenthal. Rosenthal assumes the credit risk on a substantial portion of the receivables the Company refers to it and Rosenthal maintains a lien on all of the Company’s receivables to secure the Company’s obligations. On February 10, 2010, the agreement was amended to include foreign accounts receivable. 
+F-14 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Consolidated Financial Statements 
+December 31, 2010 and 2009 
+($ in thousands except share and per share data) 
+Note C - Due From Factors (continued) 
+Under the terms of our prior factoring agreement, as amended, which the agreement with Rosenthal replaced, the Company could have requested advances from the factor of up to 85% of aggregate factored receivables. The agreement provided the Company with a $50 million credit facility with a $25 million sub-limit for letters of credit. The Company paid a fee that varied depending on the customer of between 0.15% and 0.25% of the gross invoice amount. The prior factor maintained a lien on all of the Company’s receivables to secure the Company’s obligations and assumed the credit risk for all purchased accounts approved by them with certain exceptions. On July 13, 2009, the Company terminated the prior factoring agreement, effective on September 14, 2009. 
+As of December 31, 2010 and 2009, the Company assumed the credit risk on approximately $339 and $178 of factored receivables, respectively. 
+A “factored” sale (whether “with” or “without” recourse) is substantially the same as a non-factored sale and the Company accounts for its factored sales/receivables in the same manner as its non-factored sales/receivables. The factor services the collection of the Company’s accounts receivable. Funds collected by the factor are applied against advances owed to the factor (if any), and the balance is due and payable to the Company, net of any fees. The allowance against “due from factor” is a projected provision based on certain formulas and prior approvals for markdowns, allowances, discounts, advertising and other deductions that customers may deduct against their payments. 
+Note D – Notes Receivable 
+As of December 31, 2010, Notes Receivable were comprised of the following: 
+Due from Bakers Footwear Group, Inc. 
+$ 
+4,024 
+Due from Betsey Johnson LLC (see Note B) 
+3,000 
+Total 
+$ 
+7,024 
+On August 26, 2010, the Company entered into a Debenture and Stock Purchase Agreement with Bakers Footwear Group, Inc. (“Bakers”) pursuant to which the Company paid $5,000 to acquire a subordinated debenture in the principal amount of $5,000 and 1,844,860 unregistered shares of Bakers common stock which trades on the Over-the-Counter Bulletin Board. The Company allocated $996 of the purchase price to the common stock and $4,004 to the subordinated debenture based upon their relative fair values. Interest accrues on the debenture at the rate of 11% per annum and is payable quarterly in cash. The principal amount of the debenture is payable in four equal installments of $1,250 due on August 31, 2017, 2018, 2019 and 2020. The difference between the $4,004 purchase price of the debenture and the $5,000 principal amount of the debenture is considered original issue discount and is being amortized over the life of the debenture. As of December 31, 2010, the total amount of the discount amortized was $20 bringing the value of the note to $4,024. 
+Note E - Note Receivable – related party 
+On June 25, 2007, the Company made a loan to Steven Madden, its Creative and Design Chief and a principal stockholder of the Company, in the amount of $3,000, in order for Mr. Madden to satisfy a personal tax obligation resulting from the exercise of options that were due to expire and retain the underlying Company common stock, which he pledged to the Company as collateral in connection with the loan. Mr. Madden executed a secured promissory note in favor of the Company that had an annual interest rate of 8% and was due on the earlier of the date Mr. Madden ceases to be employed by the Company or December 31, 2007. The note was amended and restated pursuant to an Amended and Restated Secured Promissory Note dated December 19, 2007 which extended the due date to March 31, 2009. A second Amended and Restated Secured Promissory Note dated April 1, 2009 changed the interest rate to 6% and extended the due date of both principal and interest to June 30, 2015. As of December 31, 2010 and 2009, $849 and $568 of interest, respectively, has accrued on the note and has been reflected on the Company’s Consolidated Financial Statements. Due to the 3-for-2 stock split effected on May 3, 2010 (see Note A-3 above) the number of shares securing the loan increased from 510,000 shares to 765,000 shares. Based upon the increase in the market value of the Company’s common stock since the inception of the loan, on July 12, 2010, the Company determined to release from its security interest 555,000 shares of the Company’s common stock, retaining 210,000 shares with a total market value on that date of $6,798, as collateral for the loan. 
+F-15 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Consolidated Financial Statements 
+December 31, 2010 and 2009 
+($ in thousands except share and per share data) 
+Note F - Fair Value Measurement 
+The Company adopted the provisions of FASB ASC 820-10, “Fair Value Measurements and Disclosures” (“ASC 820-10”) for financial assets and liabilities effective January 1, 2008. The guidance permits the Company to elect to measure non-financial assets and non-financial liabilities at fair value effective January 1, 2009. ASC 820-10 clarifies the principle that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. ASC 820-10 utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. A brief description of those three levels is as follows: 
+● 
+Level 1: Observable inputs such as quoted prices in active markets for identical assets or liabilities. 
+● 
+Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. 
+● 
+Level 3: Significant unobservable inputs. 
+The Company’s financial assets subject to fair value measurements as of December 31, 2010 are as follows: 
+Fair Value Measurements 
+Using Fair Value Hierarchy 
+Fair value 
+Level 1 
+Level 2 
+Level 3 
+Assets: 
+Cash equivalents 
+$ 
+32,145 
+$ 
+32,145 
+$ 
+— 
+$ 
+— 
+Current marketable securities – available for sale 
+13,289 
+13,289 
+— 
+— 
+Investment in Bakers 
+996 
+— 
+996 
+— 
+Note receivable – Bakers 
+4,024 
+— 
+— 
+4,024 
+Note receivable – Betsey Johnson 
+3,000 
+— 
+— 
+3,000 
+Long-term marketable securities – available for sale 
+114,317 
+114,317 
+— 
+— 
+Total assets 
+$ 
+167,771 
+$ 
+159,751 
+$ 
+996 
+$ 
+7,024 
+Liabilities: 
+Contingent consideration 
+$ 
+12,372 
+— 
+— 
+$ 
+12,372 
+Total liabilities 
+$ 
+12,372 
+— 
+— 
+$ 
+12,372 
+The Company’s financial assets subject to fair value measurements as of December 31, 2009 are as follows: 
+Fair Value Measurements 
+Using Fair Value Hierarchy 
+Fair value 
+Level 1 
+Level 2 
+Level 3 
+Cash equivalents 
+$ 
+30,962 
+$ 
+30,962 
+— 
+— 
+Current marketable securities – available for sale 
+17,971 
+17,971 
+— 
+— 
+Long-term marketable securities – available for sale 
+67,713 
+67,713 
+— 
+— 
+Total 
+$ 
+116,646 
+$ 
+116,646 
+— 
+— 
+F-16 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Consolidated Financial Statements 
+December 31, 2010 and 2009 
+($ in thousands except share and per share data) 
+Note F - Fair Value Measurement (continued) 
+Pursuant to the Debenture and Stock Purchase Agreement with Bakers (see Note D), the Company received 1,844,860 unregistered shares of Bakers common stock, which trades on the OTC Bulletin Board. These shares, which are thinly traded, were valued using the quoted price of similar registered shares of Bakers common stock adjusted for the effect of the transfer restriction, considering factors such as the nature and duration of the transfer restriction, the volatility of the stock and the risk free interest rate. The shares are included in deposits and other assets on the Company’s Consolidated Balance Sheet. For the note receivable due from Bakers (see note D), which was purchased at a substantial discount, the carrying value was determined to be the fair value. For the note receivable due from Betsey Johnson (see Note B), the carrying value was determined to be the fair value. The Company has recorded a liability for contingent consideration as a result of the February 10, 2010 acquisition of Big Buddha, Inc. (see Note B). The contingent consideration may be paid to the seller of Big Buddha based on the financial performance of Big Buddha for each of the twelve-month periods ending on March 31, 2011, 2012 and 2013. The fair value of the contingent payments was estimated using the present value of management’s projections of the financial results of Big Buddha during the earn-out period. In December of 2010, the Company made an advance payment of $1,628 that will be deducted from the March 2011 earn-out payment. 
+No gains or losses resulting from the fair value measurement of financial assets were included in the Company’s earnings. 
+Accounting guidance permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The accounting guidance also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that chose different measurement attributes for similar assets and liabilities. The Company has elected not to measure any eligible items at fair value. 
+Note G - Property and Equipment 
+The major classes of assets and total accumulated depreciation and amortization are as follows: 
+December 31, 
+2010 
+2009 
+Land and building 
+$ 
+767 
+$ 
+767 
+Leasehold improvements 
+37,066 
+36,181 
+Machinery and equipment 
+3,692 
+3,619 
+Furniture and fixtures 
+4,317 
+4,395 
+Computer equipment 
+16,497 
+15,617 
+62,339 
+60,579 
+Less accumulated depreciation and amortization 
+(41,548 
+) 
+(36,786 
+) 
+Property and equipment - net 
+$ 
+20,791 
+$ 
+23,793 
+Depreciation and amortization expense included in operating expenses amounted to approximately $5,824 in 2010, $6,628 in 2009, and $7,140 in 2008. 
+F-17 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Consolidated Financial Statements 
+December 31, 2010 and 2009 
+($ in thousands except share and per share data) 
+Note H – Goodwill and Intangible Assets 
+The following is a summary of the carrying amount of goodwill by segment for the year ended December 31, 2010: 
+Wholesale 
+Net Carrying 
+Footwear 
+Accessories 
+Retail 
+Amount 
+Balance at January 1, 2010 
+$ 
+1,547 
+$ 
+17,265 
+$ 
+5,501 
+$ 
+24,313 
+Acquisition of Big Buddha 
+0 
+14,300 
+0 
+14,300 
+Balance at December 31, 2010 
+$ 
+1,547 
+$ 
+31,565 
+$ 
+5,501 
+$ 
+38,613 
+The following table details identifiable intangible assets as of December 31, 2010: 
+Estimated Lives 
+Cost Basis 
+Accumulated Amortization 
+Net Carrying Amount 
+Trade names 
+6 – 10 years 
+$ 
+4,550 
+$ 
+709 
+$ 
+3,841 
+Customer relationships 
+10 years 
+11,709 
+3,177 
+8,532 
+License agreements 
+3 – 6 years 
+5,600 
+5,076 
+524 
+Non-compete agreement 
+5 years 
+1,380 
+832 
+548 
+Other 
+3 years 
+14 
+14 
+— 
+23,253 
+9,808 
+13,445 
+Betsey Johnson trademarks 
+indefinite 
+29,217 
+— 
+29,217 
+$ 
+52,470 
+$ 
+9,808 
+$ 
+42,662 
+The amortization of intangible assets amounted to $2,972 and is included in operating expenses on the Company’s Consolidated Statements of Income. The estimated future amortization expense of intangibles as of December 31, 2010 is as follows: 
+2011 
+$ 
+2,434 
+2012 
+1,696 
+2013 
+1,696 
+2014 
+1,688 
+2015 
+1,591 
+Thereafter 
+4,340 
+Total 
+$ 
+13,445 
+F-18 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Consolidated Financial Statements 
+December 31, 2010 and 2009 
+($ in thousands except share and per share data) 
+Note I – Stock-Based Compensation 
+In March 2006, the Board of Directors approved the Steven Madden, Ltd. 2006 Stock Incentive Plan (the “Plan”) under which nonqualified stock options, stock appreciation rights, performance shares, restricted stock, other stock-based awards and performance-based cash awards may be granted to employees, consultants and non-employee directors. The stockholders approved the Plan on May 26, 2006. On May 25, 2007, the stockholders approved an amendment to the Plan to increase the maximum number of shares that may be issued under the Plan from 1,800,000 to 2,325,000. On May 22, 2009, the stockholders approved a second amendment to the Plan that increased the maximum number of shares that may be issued under the Plan to 6,096,000. The following table summarizes the number of shares of common stock authorized for issuance under the Plan, the amount of stock-based awards issued (net of expired or cancelled) under the Plan and the number of shares of common stock available for the grant of stock-based awards under the Plan: 
+Common Stock authorized 
+6,096,000 
+Stock based awards, including restricted stock and stock options granted, net of expired or cancelled 
+3,577,000 
+Common Stock available for grant of stock based awards as of December 31, 2010 
+2,519,000 
+In accordance with accounting guidance relating to stock-based compensation, the Company records compensation for all awards based on the fair value of options and restricted stock on the date of grant. Equity-based compensation is included in operating expenses on the Company’s Consolidated Statements of Income. For the years ended December 31, 2010, 2009 and 2008, total equity-based compensation was as follows: 
+Years Ended December 31, 
+2010 
+2009 
+2008 
+Stock options 
+$ 
+3,724 
+$ 
+1,560 
+$ 
+486 
+Restricted stock 
+4,547 
+4,380 
+5,170 
+Total 
+$ 
+8,271 
+$ 
+5,940 
+$ 
+5,656 
+On March 24, 2008, the Chief Executive Officer and Chairman of the Board of Directors of the Company (the “former CEO”) resigned from his positions. For the purposes of determining any payments to which such former CEO was entitled following his resignation, it was mutually agreed to treat his resignation as a termination without cause, as defined in his employment agreement. Pursuant to an agreement with the Company, 63,750 shares of restricted stock that were due to vest in varying amounts over four years vested on the date of termination. Accordingly, the balance of unamortized stock-based compensation related to the former CEO’s restricted stock of $921 was included as a charge in operating expenses during the quarter ended March 31, 2008. 
+The Company classifies cash flows resulting from the tax benefits from tax deductions in excess of the compensation costs recognized for those options (tax benefits) as financing cash flows. For the years ended December 31, 2010, 2009 and 2008, the Company realized a tax benefit (expense) from the exercise of stock options of $4,718, $497 and $(258), respectively. 
+F-19 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Consolidated Financial Statements 
+December 31, 2010 and 2009 
+($ in thousands except share and per share data) 
+Note I – Stock-Based Compensation (continued) 
+Stock Options 
+The total intrinsic value of options exercised during 2010, 2009 and 2008 amounted to $11,684, $5,300 and $2,361 respectively. During the years ended December 31, 2010, 2009 and 2008, 391,000 options with a weighted average exercise price of $16.80, 142,500 options with a weighted average exercise price of $13.04 and 37,500 options with a weighted average exercise price of $12.05 vested, respectively. As of December 31, 2010, there were 1,507,000 unvested options with a total unrecognized compensation cost of $9,937 that is expected to be recognized over a weighted-average of 2.9 years. 
+The Company estimates the fair value of options granted using the Black-Scholes option-pricing model, which requires several assumptions. The expected term of the options represents the estimated period of time until exercise and is based on historical experience of similar awards. Expected volatility is based on the historical volatility of the Company’s stock. The risk free interest rate is based on the U.S. Treasury yield curve in effect at the time of the grant. With the exception of a special dividend paid in November of 2005 and in November of 2006, the Company historically has not paid dividends and thus the expected dividend rate is assumed to be zero. The weighted average fair value of options granted in 2010, 2009 and 2008 was approximately $12.80, $6.29 and $4.62, respectively, using the Black-Scholes option-pricing model with the following assumptions: 
+2010 
+2009 
+2008 
+Volatility 
+47% to 52% 
+49% to 52% 
+43% to 45% 
+Risk free interest rate 
+0.84% to 2.16% 
+1.39% to 2.09% 
+2.17% to 3.12% 
+Expected life in years 
+3 to 4 
+3 to 4 
+3 to 4 
+Dividend yield 
+0 
+0 
+0 
+Activity relating to stock options granted under the Company’s plans and outside the plans during the three years ended December 31, 2010 is as follows: 
+Number of Shares 
+Weighted Average Exercise Price 
+Weighted Average Remaining Contractual Term 
+Aggregate Intrinsic Value 
+Outstanding at January 1, 2008 
+807,000 
+$ 
+8.30 
+Granted 
+608,000 
+12.89 
+Exercised 
+(257,000 
+) 
+7.97 
+Cancelled/Forfeited 
+— 
+— 
+Outstanding at December 31, 2008 
+1,158,000 
+10.79 
+Granted 
+880,000 
+15.63 
+Exercised 
+(396,000 
+) 
+9.66 
+Cancelled/Forfeited 
+(27,000 
+) 
+11.60 
+Outstanding at December 31, 2009 
+1,615,000 
+13.68 
+Granted 
+647,000 
+33.74 
+Exercised 
+(431,000 
+) 
+12.00 
+Cancelled/Forfeited 
+(29,000 
+) 
+24.05 
+Outstanding at December 31, 2010 
+1,802,000 
+$ 
+21.12 
+5.2 years 
+$ 
+37,126 
+Exercisable at December 31, 2010 
+295,000 
+$ 
+15.48 
+4.3 years 
+$ 
+7,734 
+F-20 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Consolidated Financial Statements 
+December 31, 2010 and 2009 
+($ in thousands except share and per share data) 
+Note I – Stock-Based Compensation (continued) 
+The following table summarizes information about stock options at December 31, 2010: 
+Options Outstanding 
+Options Exercisable 
+Range of Exercise Price 
+Number Outstanding 
+Weighted Average Remaining Contractual Life (in Years) 
+Weighted Average Exercise Price 
+Number Exercisable 
+Weighted Average Exercise Price 
+$ 
+7.50 to $15.00 
+896,000 
+4.6 
+$ 
+12.26 
+232,000 
+$ 
+11.49 
+$ 
+15.01 to $22.00 
+193,000 
+5.3 
+19.34 
+18,000 
+19.93 
+$ 
+22.01 to $29.00 
+187,000 
+5.6 
+25.91 
+3,000 
+26.00 
+$ 
+29.01 to $37.00 
+326,000 
+5.9 
+33.54 
+37,000 
+34.49 
+$ 
+37.01 to $44.00 
+200,000 
+6.3 
+37.81 
+5,000 
+37.06 
+1,802,000 
+5.2 
+$ 
+21.12 
+295,000 
+$ 
+15.48 
+Restricted Stock 
+The following table summarizes restricted stock activity during the three years ended December 31, 2010: 
+Number of Shares 
+Weighted Average Fair Value at Grant Date 
+Outstanding at January 1, 2008 
+761,000 
+$ 
+20.60 
+Granted 
+67,000 
+14.39 
+Vested 
+(276,000 
+) 
+20.73 
+Forfeited 
+(15,000 
+) 
+22.70 
+Outstanding at December 31, 2008 
+537,000 
+19.69 
+Granted 
+134,000 
+23.41 
+Vested 
+(220,000 
+) 
+17.23 
+Forfeited 
+(4,000 
+) 
+24.39 
+Outstanding at December 31, 2009 
+447,000 
+20.97 
+Granted 
+170,000 
+35.08 
+Vested 
+(232,000 
+) 
+19.52 
+Forfeited 
+(10,000 
+) 
+28.49 
+Outstanding at December 31, 2010 
+375,000 
+$ 
+25.80 
+As of December 31, 2010, there was $7,176 of total unrecognized compensation cost related to restricted stock awards granted under the Plan. This cost is expected to be recognized over a weighted-average of 2.4 years. During the years ended December 31, 2010 and 2006, 54,600 and 247,500 restricted stock awards were granted, respectively, to the Company’s Creative and Design Chief of which 95,100 remain restricted as of December 31, 2010. On November 6, 2009, an award of 75,000 shares of restricted stock were granted to Edward R. Rosenfeld, the Company’s Chief Executive Officer and Chairman of the Board, of which 60,000 remain restricted as of December 31, 2010. The Company determines the fair value of its restricted stock awards based on the market price of its common stock on the date of grant. The fair value of the restricted stock that vested during the years ended December 31, 2010, 2009 and 2008 was $4,537, $4,223 and $5,741, respectively. 
+F-21 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Consolidated Financial Statements 
+December 31, 2010 and 2009 
+($ in thousands except share and per share data) 
+Note J - Preferred Stock 
+The Company has authorized 5,000,000 shares of preferred stock. The Board of Directors has designated 60,000 shares of such preferred stock as Series A Junior Participating Preferred Stock (“Series A Preferred”). Holders of the shares of Series A Preferred are entitled to dividends equal to 1,000 times dividends declared or paid on the Company’s common stock. Each share of Series A Preferred entitles the holder to 1,000 votes on all matters submitted to the holders of common stock. The Series A Preferred has a liquidation preference of $1,000 per share, and is not redeemable by the Company. No shares of preferred stock have been issued. 
+Note K – Rights Agreement 
+On October 30, 2001, the Company declared a dividend distribution of one preferred stock purchase right (a “Right”) for each outstanding share of common stock. Prior to the declaration of a stock split on March 24, 2010 (see Note A-3), each Right entitled the holder to purchase from the Company seven ten-thousandths (7/10,000) of a share of Series A Preferred at a price of $50 per seven ten-thousandth (7/10,000) of a share. As a consequence of the aforementioned stock split, an automatic adjustment of each Right occurred pursuant to a Rights Agreement dated November 14, 2001 between the Company and American Stock Transfer and Trust Company (the “Rights Agreement”), following which each holder of a Right is now entitled to purchase from the Company four ten-thousandths (4/10,000) of a share of Series A Preferred at a price of $33.33 per four ten-thousandth (4/10,000) of a share. Initially, the Rights will not be exercisable and will automatically trade with the common stock. The Rights become exercisable, in general, ten days following the announcement of a person or group acquiring beneficial ownership of at least 15% of the outstanding voting stock of the Company. 
+Note L - Operating Leases 
+The Company leases office, showroom and retail facilities under noncancelable operating leases with terms expiring at various times through 2022. Future minimum annual lease payments under noncancelable operating leases consist of the following at December 31: 
+2011 
+$ 
+17,679 
+2012 
+17,275 
+2013 
+15,444 
+2014 
+14,470 
+2015 
+13,343 
+Thereafter 
+37,676 
+Total 
+$ 
+115,887 
+A majority of the retail store leases provide for contingent rental payments if gross sales exceed certain targets. In addition, many of the leases contain rent escalation clauses to compensate for increases in operating costs and real estate taxes. 
+Rent expense for the years ended December 31, 2010, 2009 and 2008 was approximately $21,485, $21,087 and $21,808, respectively. Included in such amounts are contingent rents of $3, $23 and $44 in 2010, 2009 and 2008, respectively. For the year ended December 31, 2010, the Company did not record any lease exit costs, however, for the years ended December 31, 2009 and 2008 the Company recorded approximately $1,541 and $1,325 in lease exit costs associated with leases that were terminated prior to the end of their prospective terms. 
+Rent expense is calculated by amortizing total rental payments (net of any rental abatements, construction allowances and other rental concessions), on a straight-line basis, over the lease term. Accordingly, rent expense charged to operations differs from rent paid resulting in the Company recording deferred rent. 
+F-22 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Consolidated Financial Statements 
+December 31, 2010 and 2009 
+($ in thousands except share and per share data) 
+Note M - Income Taxes 
+The components of income before income taxes are as follows: 
+2010 
+2009 
+2008 
+Domestic 
+$ 
+88,308 
+$ 
+54,666 
+$ 
+31,395 
+Foreign 
+37,549 
+26,123 
+14,911 
+$ 
+125,857 
+$ 
+80,789 
+$ 
+46,306 
+The income tax provision (benefit) consists of the following: 
+2010 
+2009 
+2008 
+Current: 
+Federal 
+$ 
+36,482 
+$ 
+23,896 
+$ 
+11,932 
+State and local 
+8,253 
+4,403 
+2,548 
+Foreign 
+6,195 
+4,310 
+2,609 
+50,930 
+32,609 
+17,089 
+Deferred: 
+Federal 
+(651 
+) 
+(1,748 
+) 
+1,114 
+State and local 
+(147 
+) 
+(179 
+) 
+127 
+(798 
+) 
+(1,927 
+) 
+1,241 
+$ 
+50,132 
+$ 
+30,682 
+$ 
+18,330 
+A reconciliation between taxes computed at the federal statutory rate and the effective tax rate is as follows: 
+December 31, 
+2010 
+2009 
+2008 
+Income taxes at federal statutory rate 
+35.0 
+% 
+35.0 
+% 
+35.0 
+% 
+State and local income taxes - net of federal income tax benefit 
+3.9 
+2.9 
+3.0 
+Nondeductible items 
+0.2 
+0.2 
+0.4 
+Valuation allowance 
+0.5 
+— 
+0.9 
+One-time adjustment for filing prior years’ NY State and NY City amended returns on a combined basis 
+— 
+— 
+0.7 
+Other 
+0.2 
+(0.1 
+) 
+(0.4 
+) 
+Effective rate 
+39.8 
+% 
+38.0 
+% 
+39.6 
+% 
+The Company applies the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. 
+F-23 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Consolidated Financial Statements 
+December 31, 2010 and 2009 
+($ in thousands except share and per share data) 
+Note M - Income Taxes (continued) 
+In accordance with accounting guidance, the Company has opted to classify interest and penalties that would accrue according to the provisions of relevant tax law as income tax expense on the Consolidated Statements of Income. The Company determines the amount of interest expense to be recognized by applying the applicable statutory rate of interest to the difference between the tax position recognized and the amount previously taken or expected to be taken on a tax return. The Company’s tax returns for 2005 through 2007 are currently under examination by the Internal Revenue Service. The Company’s tax years 2005 through 2010 remain open to examination for most taxing authorities. The Company has no unrecognized tax benefits recorded as of the year ended December 31, 2010. Although it is difficult to predict what would occur to change the Company’s unrecognized tax benefits over the next twelve months, the Company believes that there should be no change during the next twelve months. 
+As of December 31, 2010, the Company has realized investment losses of $2,750 available to offset future investment gains and thus reduce future taxable income. A deferred tax asset has been established for recognized capital losses on securities which can only be offset to the extent of capital gains. These losses have a five year carryforward. Due to uncertainty in the marketplace and the Company’s recent history of recording little or no capital gains, the Company has recorded a valuation allowance for the entire balance of the investment losses reflecting management’s belief that it is more likely than not that the Company will not generate a sufficient amount of capital gains to offset previously recognized capital losses prior to the five year expiration period of these losses. 
+The components of deferred tax assets and liabilities are as follows: 
+December 31, 
+2010 
+2009 
+Current deferred tax assets: 
+Receivable allowances 
+$ 
+6,068 
+$ 
+5,449 
+Inventory 
+1,341 
+1,097 
+Unrealized (gain) loss 
+(60 
+) 
+(139 
+) 
+Accrued expenses 
+1,729 
+1,653 
+Other 
+1,094 
+1,187 
+Gross current deferred tax asset 
+10,172 
+9,247 
+Valuation allowance 
+(1,094 
+) 
+(468 
+) 
+9,078 
+8,779 
+Non-current deferred tax assets (liabilities): 
+Depreciation and amortization 
+5,161 
+4,660 
+Deferred compensation 
+2,583 
+1,612 
+Deferred rent 
+2,174 
+2,006 
+Amortization of goodwill 
+(2,142 
+) 
+(1,158 
+) 
+Other 
+68 
+423 
+7,844 
+7,543 
+Deferred tax assets 
+$ 
+16,922 
+$ 
+16,322 
+F-24 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Consolidated Financial Statements 
+December 31, 2010 and 2009 
+($ in thousands except share and per share data) 
+Note N - Commitments, Contingencies and Other 
+[1] 
+Legal proceedings: 
+(a) 
+On June 24, 2009, The Center For Environmental Health filed a lawsuit, Center for Environmental Health v. Lulu NYC, LLC, Steve Madden, Ltd., Steve Madden Retail, Inc., et al. , Case No. RG09459448, in California Superior Court, Alameda County, against the Company and dozens of other California retailers and vendors of leather, vinyl and/or imitation leather handbags, belts and shoes alleging that the retailers and vendors failed to warn that certain of such products may expose California citizens to lead and lead compounds. The parties agreed to resolve all claims alleged in the litigation pursuant to a consent judgment, the terms of which are not material to the Company’s Consolidated Financial Statements. The consent judgment was approved and entered by the court on June 1, 2010 and, therefore, the litigation is concluded. 
+(b) 
+On June 24, 2009, a class action lawsuit, Shahrzad Tahvilian, et al. v. Steve Madden Retail, Inc. and Steve Madden, Ltd. , Case No. BC 414217, was filed in the Superior Court of California, Los Angeles County, against the Company and its wholly-owned subsidiary alleging violations of California labor laws. The parties submitted the dispute to private mediation and, on August 31, 2010, reached a settlement on all claims. The court has granted preliminary approval of the settlement. The claims administrator for the class action is currently preparing to send a notice of the settlement to all class members. Once all of the class members’ claims have been received and approved, the settlement will submitted to the court for final approval. Based on the proposed settlement, the Company increased its reserve for this claim from $1,000 to $2,750 in the third quarter of 2010. 
+(c) 
+On August 10, 2005, following the conclusion of an audit of the Company conducted by auditors for U.S. Customs and Border Protection (“U.S. Customs”) during 2004 and 2005, U.S. Customs issued a report that asserts that certain commissions that the Company treated as “buying agents’ commissions” (which are non-dutiable) should be treated as “selling agents’ commissions” and hence are dutiable. Subsequently, U.S. Immigration and Customs Enforcement notified the Company’s legal counsel that a formal investigation of the Company’s importing practices had been commenced as a result of the audit. In September of 2007, U.S. Customs notified the Company that it had finalized its assessment of the underpaid duties at $1,400. The Company, with the advice of legal counsel, evaluated the liability in the case, including additional duties, interest and penalties, and believed that it was not likely to exceed $3,045, and accordingly, a reserve for this amount was recorded as of December 31, 2009. The Company contested the conclusions of the U.S. Customs audit and filed a request for review and issuance of rulings thereon by U.S. Customs Headquarters, Office of Regulations and Rulings, under internal advice procedures. On September 20, 2010, the Company was advised by legal counsel that U.S. Customs had issued a ruling in the matter, concluding that the commissions paid by the Company pursuant to buying agreements entered into by the Company and one of its two buying agents under review were bona fide buying-agent commissions and, therefore, were non-dutiable. With respect to the second buying agent, U.S. Customs also ruled that beginning in February of 2002, commissions paid by the Company were bona fide buying agent commissions and, therefore, were non-dutiable. However, U.S. Customs found that the Company’s pre-2002 buying agreements with the second agent were legally insufficient to substantiate a buyer-buyer’s agent relationship between the Company and the agent and that commissions paid to the second agent under such buying agreements, in fact, were dutiable. U.S. Customs has not made a formal claim for collection of the duties allegedly owed. At the request of U.S. Customs, the Company has waived the statute of limitations for the collection of the duties allegedly owed until December 5, 2013. The Company is reviewing the ruling, its consequences and the Company’s options with its legal counsel. On the basis of the U.S. Customs ruling, the Company reevaluated the liability in the case and believes that it is not likely to exceed $1,248 and the reserve was reduced from $3,045 to such amount as of September 30, 2010. 
+F-25 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Consolidated Financial Statements 
+December 31, 2010 and 2009 
+($ in thousands except share and per share data) 
+Note N - Commitments, Contingencies and Other (Continued) 
+(d) 
+The Company has been named as a defendant in certain other lawsuits in the normal course of business. In the opinion of management, after consulting with legal counsel, the liabilities, if any, resulting from these matters should not have a material effect on the Company’s financial position or results of operations. It is the policy of management to disclose the amount or range of reasonably possible losses in excess of recorded amounts. 
+[2] 
+Employment agreements: 
+Effective January 1, 2011, the Company entered into an employment agreement with Amelia Newton Varela, the Company’s Executive Vice President of Wholesale, to replace an existing employment agreement that expired at the end of 2010. The agreement provides for an annual salary of $450 through December 31, 2013 and provides the opportunity for annual cash incentive bonuses. In addition, on February 1, 2011, Ms. Varela received an option to purchase 100,000 shares of common stock which will vest in equal annual installments over a four-year period commencing on the first anniversary of the grant date. 
+Effective January 1, 2011, the Company entered into a new employment agreement with Awadhesh Sinha, the Company’s Chief Operating Officer, to replace an existing employment agreement that expired at the end of 2010. The agreement provides for an annual salary of $575 through December 31, 2013. In addition, on December 1, 2010, Mr. Sinha received a grant of 35,000 shares of restricted common stock which will vest in equal annual installments over a three-year period commencing on the first anniversary of the grant date. Additional compensation and bonuses, if any, are at the absolute discretion of the Board of Directors. 
+Effective December 14, 2009, the Company amended its employment agreement with Steven Madden, the Company’s Creative and Design Chief, to extend his existing employment agreement, which was due to expire June 30, 2015. The amendment extends the term of Mr. Madden’s employment through December 31, 2019. The agreement provides for an annual salary of $600, subject to certain specified adjustments, through December 31, 2019. The agreement also provides for annual cash bonuses based on EBITDA, on revenue for any new business, and royalty income over $2,000, and, under certain conditions, an annual option grant at exercise prices equal to the market price on the date of grant. In addition, the agreement provides that Mr. Madden shall receive a non-accountable annual expense allowance of $200. 
+On November 6, 2009, the Company entered into a new employment agreement with Edward R. Rosenfeld, the Company’s Chief Executive Officer and the Chairman of the Board of Directors, to replace an existing employment agreement that was due to expire on December 31, 2009. The agreement, which expires on December 31, 2012, provides for an annual salary of $400 through December 31, 2009, $500 in 2010, $525 in 2011 and $551 in 2012. In addition, Mr. Rosenfeld received a grant of 75,000 shares of restricted common stock which vests in equal annual installments over a five-year period commencing on the first anniversary of the grant date. 
+Effective October 7, 2009, the Company entered into a new employment agreement with Robert Schmertz, the Company’s Brand Director, to replace an existing employment agreement that expired at the end of 2009. The new agreement, which expires on December 31, 2012, provides for an annual salary of $600 through December 31, 2009, and $660 for the duration of the term. Additional compensation and bonuses, if any, are at the sole discretion of the Board of Directors. In addition, Mr. Schmertz received an option to purchase 75,000 shares of the Company’s common stock which will vest in equal annual installments over five years commencing on the first anniversary of the date of grant. 
+F-26 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Consolidated Financial Statements 
+December 31, 2010 and 2009 
+($ in thousands except share and per share data) 
+Note N - Commitments, Contingencies and Other (Continued) 
+Effective October 7, 2009, the Company amended its employment agreement with Arvind Dharia, the Company’s Chief Financial Officer, to, among other things, extend the term of his existing employment agreement, which was due to expire at the end of 2009, to December 31, 2011 and increase Mr. Dharia’s annual base salary to $528. The agreement as amended provides for an annual bonus at the discretion of the Board of Directors. 
+The Company has employment agreements with other executives (the “executives”) which expire between June 30, 2011 and December 31, 2013. Some of these agreements provide for cash bonuses at the discretion of the Board of Directors, and some provide for cash bonuses based primarily upon a percentage of year-to-year increases in earnings before interest, taxes, depreciation and amortization, option grants and non-accountable expense allowances as defined. Base salary commitments for these executives are as follows: 
+2011 
+$ 
+2,804 
+2012 
+1,817 
+2013 
+425 
+$ 
+5,046 
+In connection with their employment agreements, two executives received an aggregate of 47,000 and one executive received 75,000 shares of restricted common stock from the Company in 2010 and 2009, respectively. In addition, five executives received several grants prior to 2008 that vested in 2008 through 2010. The restricted shares vest equally each year over a period of between four to five years and, accordingly, the Company has recorded a charge to operations in the amount of $1,581, $1,675 and $1,614 for the years ended December 31, 2010, 2009 and 2008, respectively. 
+[3] 
+Letters of credit: 
+At December 31, 2010, the Company had open letters of credit for the purchase of imported merchandise of approximately $1,956. 
+[4] 
+License agreements: 
+On January 1, 2010, the Company entered into a license agreement with Jones Investment Co. Inc., under which the Company has the right to use the GLO Jeans® trademark in connection with the sale and marketing of women’s footwear exclusively to K-Mart. The agreement requires the Company to pay the licensor a royalty and advertising payments equal to a percentage of net sales and a minimum royalty and advertising payment in the event that specified net sales targets are not achieved. The agreement expires on December 31, 2012. 
+In September 2009, the Company entered into a license agreement with Dualstar Entertainment Group, LLC, under which the Company has the right to use the Olsenboye® trademark in connection with the sale and marketing of footwear and accessories. The agreement requires the Company to make royalty and advertising payments equal to a percentage of net sales and a minimum royalty and advertising payment in the event that specified net sales targets are not achieved. The agreement expires on December 31, 2011, with one two-year renewal period if certain provisions are met. 
+F-27 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Consolidated Financial Statements 
+December 31, 2010 and 2009 
+($ in thousands except share and per share data) 
+Note N - Commitments, Contingencies and Other (Continued) 
+On September 10, 2008, the Company entered into a license agreement with Dualstar Entertainment Group, LLC, under which the Company has the right to use the Elizabeth and James® trademark in connection with the sale and marketing of footwear. The agreement requires the Company to make royalty and advertising payments equal to a percentage of net sales and a minimum royalty and advertising payment in the event that specified net sales targets are not achieved. The agreement expires on March 31, 2012, with one three-year renewal period if certain provisions are met. 
+On July 1, 2008, the Company entered into a license agreement with Jones Investment Co. Inc., under which the Company has the right to use the l.e.i.® trademark in connection with the sale and marketing of women’s footwear exclusively to Wal-Mart. The agreement requires the Company to pay the licensor a royalty and advertising payments equal to a percentage of net sales and a minimum royalty and advertising payment in the event that specified net sales targets are not achieved. The agreement expires on December 31, 2011, with one three-year renewal period if certain provisions are met. 
+On March 28, 2007, the Company, through its Accessories Division, entered into a license agreement to design, manufacture and distribute handbags and belts and related accessories under the DF Daisy Fuentes® and the Daisy Fuentes® brands. The agreement requires the Company to pay the licensor a royalty and brand management fees based on a percentage of net sales and a minimum royalty in the event that specified net sales targets are not achieved. The agreement expires on December 31, 2012. 
+Royalty expenses are included in the “cost of goods sold” section of the Company’s Consolidated Statements of Income. Aggregate minimum future royalties excluding renewal options, under these agreements are as follows: 
+Year Ending 
+December 31, 
+2011 
+$ 
+2,081 
+2012 
+253 
+$ 
+2,334 
+[5] 
+Related Party Transactions: 
+In January 2004, the Company entered into an agreement with JLM Consultants, a company wholly owned by John Madden, one of the Company’s directors and the brother of Steven Madden, the Company’s founder and Creative and Design Chief. Under this agreement, Mr. Madden provides consulting services with respect to the development of international sales of the Company. Pursuant to this agreement, JLM Consultants received a fee and expenses of $1,006, $760 and $760 in 2010, 2009 and 2008, respectively, in addition to fees that Mr. Madden received for service to the Company as a director. 
+In July 2001, the Company entered into a consulting agreement with Peter J. Solomon & Company (“Solomon”), a financial advisory firm of which Marc Cooper, a former director of the Company from July 2001 through February of 2008, is a managing director. Under this agreement, the firm provided financial advisory and investment banking services to the Company. This agreement, which was amended in March 2004, was terminated on July 11, 2006. The Company paid fees and expenses of $46 to Solomon in 2008 for limited consulting engagements while Mr. Cooper was a director of the Company. 
+F-28 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Consolidated Financial Statements 
+December 31, 2010 and 2009 
+($ in thousands except share and per share data) 
+Note N - Commitments, Contingencies and Other (Continued) 
+[6] 
+Concentrations: 
+The Company maintains cash and cash equivalents with various major financial institutions which at times are in excess of the amount insured. In addition, the Company’s marketable securities are principally held at four brokerage companies. 
+During the year ended December 31, 2010, the Company purchased approximately 13% and 12% of its merchandise from two suppliers in China. Total product purchases from China for the year ended December 31, 2010 was approximately 89%. 
+During the year ended December 31, 2009, the Company purchased approximately 24%, 14% and 11% of its merchandise from three suppliers in China. Total purchases from China for the year ended December 31, 2009 was approximately 84%. 
+During the year ended December 31, 2008, the Company purchased approximately 21%, 14% and 10% of its merchandise from three suppliers in China. Total purchases from China for the year ended December 31, 2008 was approximately 93%. 
+Sales to one customer accounted for 10% of total net sales for the year ended December 31, 2010. Three other customers represented 12%, 12% and 11% of accounts receivable at December 31, 2010. 
+Sales to one customer accounted for 11% of total net sales for the year ended December 31, 2009. Three other customers represented 14%, 13% and 10% of accounts receivable at December 31, 2009. 
+Sales to one customer accounted for 10% of total net sales for the year ended December 31, 2008. This customer represented 15% while two other customers represented 15% and 11% of accounts receivable at December 31, 2008. 
+Sales to such customers are included in the Wholesale segment (see Note O). Purchases are made primarily in United States dollars. 
+[7] 
+Valuation and qualifying accounts: 
+The following is a summary of the allowance for doubtful accounts related to accounts receivable and the allowance for chargebacks related to the amount Due from Factor for the years ended December 31: 
+2010 
+2009 
+2008 
+Balance at beginning of year 
+$ 
+13,682 
+$ 
+11,301 
+$ 
+15,446 
+Charged to reserve 
+— 
+— 
+(4,145 
+) 
+Increase in reserve 
+1,576 
+2,381 
+— 
+Balance at end of year 
+$ 
+15,258 
+$ 
+13,682 
+$ 
+11,301 
+F-29 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Consolidated Financial Statements 
+December 31, 2010 and 2009 
+($ in thousands except share and per share data) 
+Note N - Commitments, Contingencies and Other (Continued) 
+The following is a summary of goodwill and the related accumulated amortization for the years ended December 31: 
+2010 
+2009 
+2008 
+Cost basis 
+Balance at beginning of year 
+$ 
+24,911 
+$ 
+24,172 
+$ 
+16,520 
+Acquisitions and purchase price adjustments 
+14,300 
+739 
+7,652 
+Write-off of impaired assets 
+— 
+— 
+— 
+Balance at end of year 
+39,211 
+24,911 
+24,172 
+Accumulated amortization 
+Balance at beginning of year 
+598 
+598 
+598 
+Write-off of impaired assets 
+— 
+— 
+— 
+Balance at end of year 
+598 
+598 
+598 
+Goodwill 
+$ 
+38,613 
+$ 
+24,313 
+$ 
+23,574 
+Note O - Operating Segment Information 
+The Company operates the following business segments: Wholesale Footwear, Wholesale Accessories, Retail, First Cost and Licensing. The Wholesale Footwear segment, through sales to department stores, mid-tier retailers and specialty stores worldwide, derives revenue from sales of branded and private label women’s, men’s, girls’ and children’s footwear. The Wholesale Accessories segment, which includes branded and private label handbags, belts and small leather goods, derives revenue from sales to department, mid-tier and specialty stores worldwide. The Retail segment, through the operation of Company owned retail stores and the Company’s website, derives revenue from sales of branded women’s, men’s and children’s footwear, accessories and licensed products to consumers. The First Cost segment represents activities of a subsidiary which earns commissions for serving as a buying agent of footwear products to mass-market merchandisers, mid-tier department stores and other retailers with respect to their purchase of footwear. In the License segment, the Company licenses its Steve Madden® and Steven by Steve Madden® trademarks for use in connection with the manufacture, marketing and sale of cold weather accessories, sunglasses, eyewear, outerwear, bedding, hosiery and women’s fashion apparel and jewelry. The Company licenses the Big Buddha brand for use in connection with the manufacture, marketing and sale of sunglasses and cold weather accessories. In addition, the Company licences the Betsey Johnson® and Betseyville® trademarks for use in connection with the manufacture, marketing and sale of apparel, jewelry, lingerie, swimwear, eyewear, watches and outerwear. 
+F-30 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Consolidated Financial Statements 
+December 31, 2010 and 2009 
+($ in thousands except share and per share data) 
+Note O - Operating Segment Information (continued) 
+The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance based on profit or loss from operations before other income (expense) and the provision for income taxes. The following is information for the Company’s reportable segments: 
+Year ended, 
+Wholesale 
+Footwear 
+Wholesale 
+Accessories 
+Total Wholesale 
+Retail 
+First Cost 
+Licensing 
+Consolidated 
+December 31, 2010: 
+Net sales to external customers 
+$ 
+402,567 
+$ 
+98,548 
+$ 
+501,115 
+$ 
+134,303 
+$ 
+635,418 
+Gross profit 
+156,603 
+37,926 
+194,529 
+81,325 
+275,854 
+Commissions and licensing fees - net 
+— 
+— 
+— 
+— 
+$ 
+17,258 
+$ 
+5,371 
+22,629 
+Income from operations 
+75,543 
+14,323 
+89,866 
+9,129 
+17,258 
+5,371 
+121,624 
+Depreciation and amortization 
+5,164 
+4,631 
+204 
+— 
+9,999 
+Segment assets 
+$ 
+268,544 
+$ 
+71,856 
+340,400 
+65,835 
+41,461 
+— 
+447,696 
+Capital expenditures 
+$ 
+1,020 
+$ 
+2,404 
+$ 
+— 
+$ 
+— 
+$ 
+3,424 
+December 31, 2009: 
+Net sales to external customers 
+$ 
+309,439 
+$ 
+70,406 
+$ 
+379,845 
+$ 
+123,705 
+$ 
+503,550 
+Gross profit 
+123,172 
+23,741 
+146,913 
+69,276 
+216,189 
+Commissions and licensing fees - net 
+— 
+— 
+— 
+— 
+$ 
+16,803 
+$ 
+3,125 
+19,928 
+Income (loss) from operations 
+51,360 
+9,199 
+60,559 
+(1,519 
+) 
+16,803 
+3,125 
+78,968 
+Depreciation and amortization 
+4,166 
+5,197 
+197 
+— 
+9,560 
+Segment assets 
+$ 
+225,533 
+$ 
+42,372 
+267,905 
+51,774 
+7,180 
+— 
+326,859 
+Capital expenditures 
+$ 
+1,249 
+$ 
+2,150 
+$ 
+— 
+$ 
+— 
+$ 
+3,399 
+December 31, 2008: 
+Net sales to external customers 
+$ 
+264,479 
+$ 
+66,928 
+$ 
+331,407 
+$ 
+125,639 
+$ 
+457,046 
+Gross profit 
+92,903 
+23,478 
+116,381 
+70,443 
+186,824 
+Commissions and licensing fees - net 
+— 
+— 
+— 
+— 
+$ 
+11,567 
+$ 
+2,727 
+14,294 
+Income (loss) from operations 
+25,699 
+9,089 
+34,788 
+(4,176 
+) 
+11,567 
+2,727 
+44,906 
+Depreciation and amortization 
+3,751 
+5,295 
+55 
+9,101 
+Segment assets 
+$ 
+159,133 
+$ 
+36,453 
+195,586 
+52,536 
+36,571 
+— 
+284,693 
+Capital expenditures 
+$ 
+3,551 
+$ 
+4,707 
+$ 
+56 
+$ 
+— 
+$ 
+8,314 
+Revenues by geographic area for the years ended December 31 are as follows: 
+2010 
+2009 
+2008 
+Domestic 
+$ 
+600,637 
+$ 
+481,495 
+$ 
+457,046 
+International 
+34,781 
+22,055 
+— 
+Total 
+$ 
+635,418 
+$ 
+503,550 
+$ 
+457,046 
+F-31 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Consolidated Financial Statements 
+December 31, 2010 and 2009 
+($ in thousands except share and per share data) 
+Note P - Quarterly Results of Operations (unaudited) 
+The following is a summary of the quarterly results of operations for the years ended December 31, 2010 and 2009: 
+March 31, 
+June 30, 
+September 30, 
+December 31, 
+2010: 
+Net sales 
+$ 
+131,608 
+$ 
+158,664 
+$ 
+184,118 
+$ 
+161,028 
+Cost of sales 
+71,671 
+89,815 
+106,610 
+91,468 
+Gross profit 
+59,937 
+68,849 
+77,508 
+69,560 
+Commissions, royalty and licensing fee income - net 
+6,184 
+5,229 
+6,587 
+4,629 
+Net income 
+$ 
+15,385 
+$ 
+19,799 
+$ 
+22,916 
+$ 
+17,625 
+Net income per share: 
+Basic 
+0.56 
+0.72 
+0.83 
+0.63 
+Diluted 
+0.55 
+0.70 
+0.81 
+0.62 
+2009: 
+Net sales 
+$ 
+107,429 
+$ 
+116,472 
+$ 
+140,138 
+$ 
+139,511 
+Cost of sales 
+63,942 
+66,909 
+78,462 
+78,048 
+Gross profit 
+43,487 
+49,563 
+61,676 
+61,463 
+Commissions, royalty and licensing fee income - net 
+2,905 
+7,362 
+5,726 
+3,935 
+Net income 
+$ 
+6,577 
+$ 
+12,144 
+$ 
+17,831 
+$ 
+13,555 
+Net income per share: 
+Basic 
+0.25 
+0.45 
+0.66 
+0.50 
+Diluted 
+0.24 
+0.44 
+0.64 
+0.49 
+F-32 
+Exhibits. 
+2.01 
+Stock Purchase Agreement dated February 10, 2010 between the Company and Jeremy Bassan (incorporated by reference to Exhibit 2.1 to the Company’s Quarterly Report on Form 10-Q for its fiscal quarter ended September 30, 2010 filed with the Securities and Exchange Commission on November 9, 2010) 
+2.02 
+Restructuring Agreement dated October 5, 2010 among the Company, BJ Acquisition LLC, BJ Agent LLC, Betsey Johnson LLC, Betsey Johnson (UK) Limited, Betsey Johnson Canada Ltd., BJ Vines, Inc., Betsey Johnson, Chantal Bacon, Castanea Family Investments, LLC, Castanea Family Holdings, LLC and Castanea Partners Fund III, L.P. (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 8, 2010) 
+3.01 
+Certificate of Incorporation of Steven Madden, Ltd. (incorporated by reference to Exhibit 1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on November 23, 1998) 
+3.02 
+Amended & Restated By-Laws of Steven Madden, Ltd. (incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 28, 2008) 
+4.01 
+Specimen Certificate for shares of Common Stock (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form SB-2/A filed with the Securities and Exchange Commission on September 29, 1993) 
+4.02 
+Rights Agreement dated November 14, 2001 between the Company and American Stock Transfer and Trust Company (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on November 16, 2001) 
+10.01 
+Second Amended and Restated Secured Promissory Note dated April 6, 2009 of Steven Madden to the Company (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 10, 2009) 
+10.02 
+Consulting Agreement effective August 1, 2004 among the Company, John Madden and J.L.M. Consultants Inc., as amended by Amendment No. 1 dated March 10, 2005 and Amendment No. 2 dated April 14, 2005 (incorporated by reference to Exhibits 10.9, 10.10 and 10.11 to the Company’s Annual Report on Form 10-K for its fiscal year ended December 31, 2005 filed with the Securities and Exchange Commission on March 14, 2006) 
+10.03 
+Collection Agency Agreement dated July 10, 2009 between Rosenthal & Rosenthal, Inc. and the Company (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for its fiscal quarter ended September 30, 2010 filed with the Securities and Exchange Commission on November 9, 2010) 
+10.04 
+Amendment to Collection Agency Agreement dated February 16, 2010 between Rosenthal & Rosenthal, Inc. and the Company (incorporated by reference to Exhibit 10.10 to the Company’s Annual Report on Form 10-K for its fiscal year ended December 31, 2010 filed with the Securities and Exchange Commission on March 12, 2010) 
+10.05 
+Collection Agency Agreement dated July 10, 2009 between Rosenthal & Rosenthal, Inc. and Daniel Friedman & Associates, Inc. (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 16, 2009) 
+10.06 
+Collection Agency Agreement dated July 10, 2009 between Rosenthal & Rosenthal, Inc. and Diva Acquisition Corp. (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 16, 2009) 
+10.07 
+Collection Agency Agreement dated July 10, 2009 between Rosenthal & Rosenthal, Inc. and Steven Madden Retail, Inc. (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 16, 2009) 
+10.08 
+Collection Agency Agreement dated July 10, 2009 between Rosenthal & Rosenthal, Inc. and Stevies, Inc. (incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 16, 2009) 
+10.09 
+Collection Agency Agreement dated July 10, 2009 between Rosenthal & Rosenthal, Inc. and SML Acquisition Corp. (incorporated by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 16, 2009) 
+10.10 
+Letter Agreement dated July 10, 2009 among Rosenthal & Rosenthal, Inc., the Company, Daniel Friedman & Associates, Inc., Diva Acquisition Corp., Steven Madden Retail, Inc., Stevies, Inc., and SML Acquisition Corp. (incorporated by reference to Exhibit 10.7 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 16, 2009) 
+10.11 
+Guarantee dated July 10, 2009 of the Company, Daniel Friedman & Associates, Inc., Diva Acquisition Corp., Steven Madden Retail, Inc., Stevies, Inc., and SML Acquisition Corp. in favor of Rosenthal & Rosenthal, Inc. (incorporated by reference to Exhibit 10.8 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 16, 2009) 
+10.12 
+Earn-Out Agreement dated February 10, 2010 among the Company, Jeremy Bassan and Big Buddha, Inc. (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 11, 2010) 
+10.13 
+Purchase and Sale Agreement for Distressed Trades dated August 26, 2010 between BJ Acquisition LLC and Paradox Lending LLC (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for its fiscal quarter ended September 30, 2010 filed with the Securities and Exchange Commission on November 9, 2010) 
+10.14 
+Third Amended Employment Agreement dated July 15, 2005 between the Company and Steven Madden (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 20, 2005) 
+10.15 
+Amendment dated December 14, 2009 to Third Amended Employment Agreement between the Company and Steven Madden (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 17, 2009) 
+10.16 
+Employment Agreement dated January 1, 1998 between the Company and Arvind Dharia (incorporated by reference to Exhibit 10.07 to the Company’s Annual Report on Form 10-K for its fiscal year ended December 31, 2000 filed with the Securities and Exchange Commission on March 30, 2001) # 
+10.17 
+Amendment No. 1 dated June 29, 2001 to Employment Agreement between the Company and Arvind Dharia (incorporated by reference to Exhibit 99.4 to the Company’s Quarterly Report on Form 10-Q for its fiscal quarter ended June 30, 2001 filed August 14, 2001) # 
+10.18 
+Amendment No. 2 dated October 30, 2002 to Employment Agreement between the Company and Arvind Dharia (incorporated by reference to Exhibit 10.16 to the Company’s Quarterly Report on Form 10-Q for its fiscal quarter ended September 30, 2002 filed with the Securities and Exchange Commission on November 14, 2002) # 
+10.19 
+Amendment No. 3 dated February 1, 2006 to Employment Agreement between the Company and Arvind Dharia (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 3, 2006) # 
+10.20 
+Amendment No. 4 dated October 7, 2009 to Employment Agreement of Arvind Dharia between the Company and Arvind Dharia (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 13, 2009) # 
+10.21 
+Employment Agreement dated June 15, 2005 between the Company and Awadhesh Sinha (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 21, 2005) # 
+10.22 
+Amendment No. 1 dated November 6, 2007 to Employment Agreement between the Company and Awadhesh Sinha (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on November 6, 2007) # 
+10.23 
+Amendment No. 2 dated October 14, 2008 and effective October 1, 2008 to Employment Agreement between the Company and Awadhesh Sinha (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 20, 2008) # 
+10.24 
+Employment Agreement dated December 1, 2010 between the Company and Awadhesh Sinha (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 3, 2010) # 
+10.25 
+Amendment dated February 25, 2011 to Employment Agreement dated December 1, 2010 between the Company and Awadhesh Sinha† # 
+10.26 
+Employment Agreement dated October 7, 2009 between the Company and Robert Schmertz (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 13, 2009) # 
+10.27 
+Employment Agreement effective as of April 29, 2008 between the Company and Amelia Newton Varela (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for its fiscal quarter ended March 31, 2010 filed with the Securities and Exchange Commission on May 7, 2010) # 
+10.28 
+Employment Agreement dated January 31, 2011 between the Company and Amelia Newton Varela (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 2, 2011) # 
+10.29 
+Employment Agreement dated November 6, 2009 between the Company and Edward R. Rosenfeld (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on November 10, 2009) # 
+10.30 
+Amendment No. 1 dated March 8, 2010 to Employment Agreement between the Company and Edward R. Rosenfeld (incorporated by reference to Exhibit 10.29 to the Company’s Annual Report on Form 10-K for its fiscal year ended December 31, 2010 filed with the Securities and Exchange Commission on March 12, 2010) # 
+10.31 
+The 1999 Stock Plan, approved and adopted on March 15, 1999, amended as of March 20, 2000 and March 30, 2001 (incorporated by reference to Exhibit 10.A to the Company’s Registration Statement on Form S-8 filed with the Securities and Exchange Commission on July 26, 2004) # 
+10.32 
+2006 Stock Incentive Plan (Amended and Restated Effective May 22, 2009), approved and adopted on May 22, 2009 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 28, 2009) # 
+10.33 
+Form of Non-Qualified Stock Option Agreement (Chief Executive Officer) under the Company’s 2006 Stock Incentive Plan, as amended, as adopted October 30, 2007 (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for its fiscal quarter ended September 30, 2007 filed with the Securities and Exchange Commission on November 9, 2007) # 
+10.34 
+Form of Non-Qualified Stock Option Agreement (Employee without Employment Agreement) under the Company’s 2006 Stock Incentive Plan, as adopted October 30, 2007 (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for its fiscal quarter ended September 30, 2007 filed with the Securities and Exchange Commission on November 9, 2007) # 
+10.35 
+Form of Non-Qualified Stock Option Agreement (Employee with Employment Agreement) under the Company’s 2006 Stock Incentive Plan, as adopted October 30, 2007 (incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for its fiscal quarter ended September 30, 2007 filed with the Securities and Exchange Commission on November 9, 2007) # 
+10.36 
+Form of Restricted Stock Agreement (Chief Executive Officer) under the Company’s 2006 Stock Incentive Plan, as adopted October 30, 2007 (incorporated by reference to Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q for its fiscal quarter ended September 30, 2007 filed with the Securities and Exchange Commission on November 9, 2007) # 
+10.37 
+Form of Restricted Stock Agreement (Employee without Employment Agreement) under the Company’s 2006 Stock Incentive Plan, as adopted October 30, 2007 (incorporated by reference to Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q for its fiscal quarter ended September 30, 2007 filed with the Securities and Exchange Commission on November 9, 2007) # 
+10.38 
+Form of Restricted Stock Agreement (Employee with Employment Agreement) under the Company’s 2006 Stock Incentive Plan, as adopted October 30, 2007 (incorporated by reference to Exhibit 10.7 to the Company’s Quarterly Report on Form 10-Q for its fiscal quarter ended September 30, 2007 filed with the Securities and Exchange Commission on November 9, 2007) # 
+10.39 
+Form of Restricted Stock Agreement under the Company’s 2006 Stock Incentive Plan used for grants made to non- employee directors from March 2006 through May 2007, with a schedule setting forth the name of each of the recipients, the date of the grant and the number of shares (incorporated by reference to Exhibit 10.8 to the Company’s Quarterly Report on Form 10-Q for its fiscal quarter ended September 30, 2007 filed with the Securities and Exchange Commission on November 9, 2007) # 
+10.40 
+Restricted Stock Agreement dated June 9, 2006 between Steven Madden and the Company (incorporated by reference to Exhibit 10.13 to the Company’s Quarterly Report on Form 10-Q for its fiscal quarter ended September 30, 2007 filed with the Securities and Exchange Commission on November 9, 2007) # 
+10.41 
+Restricted Stock Agreement dated March 6, 2007 between Arvind Dharia and the Company (incorporated by reference to Exhibit 10.17 to the Company’s Quarterly Report on Form 10-Q for its fiscal quarter ended September 30, 2007 filed with the Securities and Exchange Commission on November 9, 2007) # 
+10.42 
+Restricted Stock Agreement dated March 9, 2007 between Robert Schmertz and the Company (incorporated by reference to Exhibit 10.18 to the Company’s Quarterly Report on Form 10-Q for its fiscal quarter ended September 30, 2007 filed with the Securities and Exchange Commission on November 9, 2007) # 
+21.01 
+Subsidiaries of the Registrant† 
+23.01 
+Consent of EisnerAmper LLP† 
+24.01 
+Power of Attorney (included on signature page hereto) 
+31.01 
+Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 † 
+31.02 
+Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 † 
+32.01 
+Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 † 
+32.02 
+Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 † 
+† 
+Filed herewith. 
+# 
+Indicates management contract or compensatory plan or arrangement required to be identified pursuant to Item 15(b) of this Annual Report on Form 10-K.
\ No newline at end of file
diff --git a/raw/filings/0000913241/2010/0001019056-11-000275/filing_metadata.csv b/raw/filings/0000913241/2010/0001019056-11-000275/filing_metadata.csv
new file mode 100644
index 0000000000000000000000000000000000000000..69d36ebb15619b5b9f746d832a937209e90a0ea9
--- /dev/null
+++ b/raw/filings/0000913241/2010/0001019056-11-000275/filing_metadata.csv
@@ -0,0 +1,2 @@
+cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing
+0000913241,SHOO,"STEVEN MADDEN, LTD.",10-K,2011-02-28,2010-12-31,2011-02-28T17:44:30.000Z,0001019056-11-000275,smadden_10k10.htm,FORM 10-K,2333324,0,0,https://www.sec.gov/Archives/edgar/data/913241/000101905611000275/smadden_10k10.htm,https://www.sec.gov/Archives/edgar/data/913241/000101905611000275/,2010,2010,1
diff --git a/raw/filings/0000913241/2010/0001019056-11-000275/item1.txt b/raw/filings/0000913241/2010/0001019056-11-000275/item1.txt
new file mode 100644
index 0000000000000000000000000000000000000000..32346f59c982a12e2c6c9687634213dcaca6e04f
--- /dev/null
+++ b/raw/filings/0000913241/2010/0001019056-11-000275/item1.txt
@@ -0,0 +1,103 @@
+ITEM 1 
+BUSINESS 
+Overview 
+Steven Madden, Ltd. and its subsidiaries (collectively, the “Company”) design, source, market and sell fashion-forward footwear for women, men and children. In addition, we design, source, market and sell name brand and private label fashion handbags and accessories. We distribute products through our retail stores, our e-commerce website, department stores, specialty stores, luxury retailers, national chains and mass merchants throughout the United States and through special distribution arrangements in Asia, Canada, Europe, the Middle East, Mexico, Australia, Central and South America and India. Our product line consists of a broad range of updated styles designed to establish or capitalize on market trends, complemented by core products. We have established a reputation for design creativity and offering popular styles and quality products at affordable price points. 
+Fiscal year 2010 was a record year for the Company. Our consolidated net sales for 2010 increased to a record $635.4 million from $503.6 million achieved in 2009. Our gross margin increased in fiscal year 2010 to 43.4%, 50 basis points greater than the 42.9% achieved in 2009. Net income increased 51% in 2010 to a record $75.7 million from $50.1 million in 2009. Diluted earnings per share for the year ended December 31, 2010 increased 47% to a record $2.68 per share on 28,295,000 diluted weighted average shares outstanding compared to $1.82 per share on 27,485,000 diluted weighted average shares outstanding in 2009. Net cash provided by operating activities increased to a record $86.9 million in 2010 compared to $64.3 million in 2009. 
+On January 7, 2010, the Company expanded its licensing activities by entering into an agreement to license the Steve Madden® and Steven by Steve Madden® trademarks for the design, manufacture and worldwide distribution of women’s fashion jewelry. The new women’s fashion jewelry line, which initially shipped in the third quarter 2010, joins our existing licenses for women’s fashion apparel, cold weather accessories, sunglasses, eyewear, outerwear, bedding and hosiery offerings. Our goal is to evolve Steve Madden® into a global lifestyle brand and expand the Company’s presence beyond footwear and accessories. We believe this new jewelry line marks a very logical extension of the Company’s brands. 
+1 
+In fiscal 2010, we also expanded our brand portfolio through two transactions. On February 10, 2010, we acquired all of the outstanding shares of stock of privately held Big Buddha, Inc. (“Big Buddha”) from its sole stockholder (“Seller”). Founded in 2003, Big Buddha designs and markets fashion-forward handbags to specialty retailers and better department stores. We believe that Big Buddha is a strategic fit for our Company. The acquisition was completed for consideration of $11.1 million in cash, net of cash acquired, plus contingent payments pursuant to an earn-out agreement with the Seller, who continues to manage the business as an employee of the Company. See Note B to our Consolidated Financial Statements for additional information relating to the Big Buddha acquisition. 
+On October 5, 2010, pursuant to a Restructuring Agreement between the Company and Betsey Johnson LLC (“Betsey Johnson”), the Company acquired all right, title and interest in substantially all of the intellectual property of Betsey Johnson, including, among other things, the Betsey Johnson® and Betseyville® trademarks, and certain intellectual property licenses and other contracts, including the right to receive royalties and other income with respect thereto (the “Betsey Johnson Assets”). Management believes that Betsey Johnson® is a well recognized brand that offers meaningful growth opportunity for our business. Prior to its entry into the Restructuring Agreement, Betsey Johnson had licensed to the Company the right to use the Betsey Johnson® and Betseyville® trademarks in connection with the sale and marketing of handbags, small leather goods, belts and umbrellas. The acquisition of the Betsey Johnson Assets was the culmination of a series of transactions that began in August 2010. First, in August 2010, the Company purchased from various members of a loan syndicate their respective participations in a term loan to Betsey Johnson in the aggregate outstanding principal amount of $48.750 million (the “Loan”) made by the syndicate lenders to Betsey Johnson. The Company paid the syndicate lenders an aggregate purchase price of $29.217 million, including transaction costs, for their participations in the Loan. The Loan was secured by a first priority security interest in substantially all of the assets of Betsey Johnson and was in default on the date of purchase. On October 5, 2010, the Company entered into the Restructuring Agreement with Betsey Johnson, pursuant to which, in consideration of the elimination of all amounts owed with respect to the Loan, the Company acquired the Betsey Johnson Assets. The Company made a new secured term loan to Betsey Johnson on October 5, 2010 in the principal amount of $3 million, which accrues interest at the rate of 8% per annum and becomes due on December 31, 2015. The new term loan is secured by a first priority security interest in substantially all of the remaining properties and assets of Betsey Johnson. See Notes B and F to our Consolidated Financial Statements for additional information relating to the Loan, the new term loan to Betsey Johnson, and the acquisition of the Betsey Johnson Assets. 
+On March 24, 2010, the Board of Directors declared a 3-for-2 stock split of the Company’s outstanding shares of common stock, effected in the form of a stock dividend on the Company’s outstanding common stock. Stockholders of record at the close of business on April 20, 2010 received one additional share of Steven Madden Ltd. common stock for every two shares of common stock owned on this date. The additional shares were distributed on May 3, 2010. All share and per share data provided herein gives effect to this stock split, applied retroactively. 
+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. We completed our initial public offering in December 1993 and our shares of common stock, $.0001 par value per share, currently trade on the NASDAQ Global Select Market under the symbol “SHOO”. 
+We maintain our principal executive offices at 52-16 Barnett Avenue, Long Island City, NY 11104 and our telephone number is (718) 446-1800. 
+Our website is http://www.stevemadden.com. We file Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other reports and information with the Securities and Exchange Commission (the “SEC”) pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). We make these reports, any amendments to such reports, and our proxy statements for our stockholders’ meetings available free of charge, on our website as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. We will provide paper copies of such filings free of charge upon request. The public may read and copy any materials filed by us with the SEC at the SEC’s Public Reference Room at 100 R Street, NE, Washington, D.C. 20549. The public may also obtain information on the operation of the SEC’s Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding us, which is available at http://www.sec.gov. 
+2 
+Product Distribution Segments 
+Our business is comprised of five distinct segments (Wholesale Footwear, Wholesale Accessories, Retail, First Cost and Licensing). See Note O to our Consolidated Financial Statements for additional information relating to our five operating segments. 
+Our Wholesale Footwear segment is comprised of the following brands: Steve Madden Women’s, Madden Girl, Steve Madden Men’s, Steven, l.e.i. (under license), Elizabeth and James (under license), Stevies, Big Buddha Shoes, Madden and includes our International business. Our Wholesale Accessories segment includes Big Buddha, Betseyville, Betsey Johnson, Steve Madden, Steven by Steve Madden and, through license agreements, Daisy Fuentes® and Olsenboye® accessories brands. Steven Madden Retail, Inc., our wholly owned retail subsidiary, operates Steve Madden and Steven retail stores as well as our e-commerce website. There are also three stores licensed to a third party. The First Cost segment represents activities of a subsidiary that earns commissions for serving as a buying agent for footwear products under private labels and licensed brands (such as Candie’s® and Olsenboye®) for many of the country’s large mass-market merchandisers, shoe chains and other off-price retailers. In the Licensing segment, the Company licenses its Steve Madden® and Steven by Steve Madden® marks for use in connection with the manufacture, marketing and sale of cold weather accessories, sunglasses, eyewear, outerwear, bedding, hosiery, women’s fashion apparel and jewelry. We license our Big Buddha brand for use in connection with the manufacture, marketing and sale of sunglasses and cold weather accessories. In addition, we license our recently acquired Betsey Johnson® and Betseyville® marks for use in connection with the manufacture, marketing and sale of apparel, jewelry, lingerie, swimwear, eyewear, watches and outerwear. 
+Wholesale Footwear Segment 
+Steve Madden Women’s. We design, source and market our Steve Madden brand to major department stores, mid-tier department stores, better specialty stores and independently owned boutiques throughout the United States. The Steve Madden brand has become a leading life-style brand in the fashion conscious marketplace. To serve our customers (primarily women ages 16 to 35), Steve Madden Women’s creates and markets fashion forward footwear designed to appeal to customers seeking exciting, new footwear designs at affordable prices. New products for Steve Madden Women’s are test marketed at Company-owned retail stores. Typically, within a few days, we can determine if the test product appeals to our customers. This enables us to use our flexible sourcing model to rapidly respond to changing trends and customer preferences, which we believe is essential for success in the fashion industry. 
+Madden Girl. We design, source and market a full collection of directional young women’s shoes under the Madden Girl brand. Madden Girl is geared for young women ages 13 to 20, and is an “opening price point” brand currently sold at major department stores, mid-tier retailers and specialty stores. 
+Steve Madden Men’s. We design, source and market a full collection of directional men’s shoes and fashion forward athletic shoes under the Steve Madden Men’s brand to major department stores, mid-tier department stores, better specialty stores and independent shoe stores throughout the United States as well as in our retail stores. Price points for Steve Madden Men’s products range from $70 to $100 at retail, targeted at men ages 20 to 40 years old. Steve Madden Men’s maintains open stock inventory positions in select patterns to serve the replenishment programs of its wholesale customers. 
+Steven. We design, source and market women’s fashion footwear under the Steven® trademark through major department and better footwear specialty stores throughout the United States as well as in our retail stores. Priced a tier above the Steve Madden brand, Steven products are designed to appeal principally to fashion conscious women, ages 25 to 45, who shop at department stores and footwear boutiques. 
+3 
+l.e.i. On July 1, 2008, we entered into a license agreement with Jones Investment Co. Inc., under which we have the right to use the l.e.i. trademark in connection with the sale and marketing of footwear exclusively to Wal-Mart. 
+Elizabeth and James. On September 10, 2008, we entered into a license agreement with Dualstar Entertainment Group, LLC, under which we have the right to use the Elizabeth and James® trademark in connection with the sale and marketing of footwear. The Elizabeth and James brand, which was created by Mary-Kate and Ashley Olsen, is distributed through luxury retailers to women ages 25 to 36 years with average retail price points from $200 to $350 for shoes and from $350 to $500 for boots. 
+Stevies and Steve Madden Kids. Our Stevies and Steve Madden Kids brands are designed, sourced and marketed for young girls, ages six to twelve, via department stores, specialty stores and independent boutiques throughout the United States. 
+Big Buddha Shoes . On February 10, 2010, we acquired all of the outstanding shares of stock of privately held Big Buddha from its sole stockholder. Our new Big Buddha Shoe brand, which began shipping in the third quarter of 2010, is currently sold at department stores and specialty stores. 
+Madden. Our new Madden brand, which began shipping in the first quarter of 2010, includes a full collection of men’s shoes. Madden is an “opening price point” brand that is currently sold at major department stores, mid-tier retailers and specialty stores. 
+International Division. Prior to 2009, our international business (the “International Division”) operated under the “first cost” model and, thus, the revenues derived from our international business were included in Commissions and Licensing Fees in the Consolidated Statements of Income of our Financial Statements. In order to improve operating efficiencies, and to give our international partners better visibility in the process, as of January 2009, we have changed the operating model for our International Division to the “wholesale” model. Our International Division ships products to Asia, Canada, Europe, the Middle East, Mexico, Australia, Central and South America and India. 
+Wholesale Accessories Segment 
+Our Wholesale Accessories segment designs, sources and markets name brand (including Daisy Fuentes® and Olsenboye® each under license and our Steve Madden®, Steven by Steve Madden®, Betsey Johnson®, Bettseyville® and Big Buddha®, brands) and private label fashion handbags and accessories to major department stores, mid-tier department stores, value price retailers and independent stores throughout the United States. 
+Retail Segment 
+As of December 31, 2010, the Company, through our wholly owned subsidiary Steven Madden Retail, Inc., owned and operated 84 retail stores including 79 stores under the Steve Madden name, three under the Steven name, one outlet store and our e-commerce website (at www.stevemadden.com). In 2010, we opened three new stores, closed eight under-performing stores and remodeled five existing stores. Steve Madden stores are located in major shopping malls and in urban street locations across the United States, primarily in New York, California and Florida. In 2010, our retail stores generated annual sales in excess of $742 per square foot compared to $640 per square foot generated in 2009. Comparative store sales (sales of those stores, including the e-commerce website, that were open for all of 2010 and 2009) increased 12.7% in fiscal year 2010 compared to fiscal year 2009. 
+We believe that the Retail segment will continue to enhance overall sales and profitability while increasing recognition for the Steve Madden brand. Additionally, our retail stores enable us to evaluate the appeal of new products and designs to our customers and respond accordingly, which, in turn, strengthens the product development efforts of the Steve Madden Wholesale segments. We expect to open between six and nine new retail stores and close between three and five under-performing stores during 2011. 
+4 
+First Cost Segment 
+The First Cost segment represents activities of a wholly-owned subsidiary of the Company that earns commissions for serving as a buying agent for footwear products under private labels and licensed brands (such as Candie’s® and Olsenboye®) for many of the country’s large mass-market merchandisers, shoe chains and other mid-tier retailers. As a buying agent, we utilize our expertise and our relationships with shoe manufacturers to facilitate the production of private label shoes to our customers’ specifications. We believe that by operating in the private label, mass merchandising market, we are able to maximize additional non-branded sales opportunities. This leverages our overall sourcing and design capabilities. Currently, our First Cost segment serves as a buying agent for the procurement of women’s, men’s and children’s footwear for large retailers, including Kohl’s, J.C. Penney and Sears. The First Cost segment receives buying agent’s commissions from its customers. In addition, we have leveraged the strength of our Steve Madden brands and product designs resulting in a partial recovery of our design, product and development costs from our suppliers. 
+Licensing Segment 
+We license our Steve Madden® and Steven by Steve Madden® trademarks for use in connection with the manufacture, marketing and sale of cold weather accessories, sunglasses, eyewear, outerwear, bedding, hosiery, women’s fashion apparel and jewelry. We license our Big Buddha® brand for use in connection with the manufacture, marketing and sale of sunglasses and cold weather accessories. In addition, we license the Betsey Johnson® and Betseyville® trademarks for use in connection with the manufacture, marketing and sale of apparel, jewelry, lingerie, swimwear, eyewear, watches and outerwear. Most of our license agreements require the licensee to pay us a royalty based on actual net sales, a minimum royalty in the event that specified net sales targets are not achieved and a percentage of sales for advertising the brand. 
+See Note O to our Consolidated Financial Statements for additional information relating to our five operating segments. 
+Product Design and Development 
+We have established a reputation for our creative designs, marketing and trendy products at affordable price points. We believe that our future success will substantially depend on our ability to continue to anticipate and react to changing consumer demands in a timely manner. To meet this objective, we have developed what we believe is an unparalleled design process that allows us to recognize and respond quickly to changing consumer demands. Our design team strives to create designs which it believes fit our 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, usually in our Long Island City facility, which is evaluated and refined prior to the commencement of initial production. Most new products are then tested in selected Steve Madden retail stores. Based on these tests, among other things, management selects the products that are then offered for wholesale and retail distribution nationwide. We believe that our design and testing process and flexible sourcing models provide us with a significant competitive advantage allowing us to mitigate the risk of incurring costs associated with the production and distribution of less desirable designs. 
+Product Sourcing and Distribution 
+We source each of our product lines separately based on the individual design, style and quality specifications of the products in such product lines. We do not own or operate manufacturing facilities; rather, we source our products through agents and our own sourcing office with independently owned manufacturers in China, Mexico, Brazil, India, The Netherlands, Korea and Italy. We have established relationships with a number of manufacturers and agents in each of these countries. Although we have not entered into any long-term manufacturing or supply contracts, we believe that a sufficient number of alternative sources exist for the manufacture of our products. We continually monitor the availability of the principal materials used in our footwear, which are available from a number of sources in various parts of the world. We track inventory flow on a regular basis, monitor sell-through data and incorporate input on product demand from wholesale customers. We use retailers’ feedback to adjust the production or manufacture of new products on a timely basis, which helps reduce the close out of slow-moving products. 
+5 
+We distribute our products from three third-party distribution warehouse centers, two located in California and one located in New Jersey. By utilizing distribution facilities specializing in distribution fulfillment to effect distribution to certain wholesale accounts, Steve Madden retail stores and Internet customers, we believe that our customers are served more promptly and efficiently. 
+Customers 
+Our wholesale customers consist principally of better department stores, mid-tier department stores, specialty stores, including independent boutiques, and catalog retailers. These customers, which include DSW, Macy’s, Nordstrom, Dillard’s, Famous Footwear and Lord & Taylor, generate approximately 73% of our wholesale revenue. For the year ended December 31, 2010, DSW accounted for approximately 12% of our wholesale net sales and 10% of our total net sales. 
+Distribution Channels 
+United States 
+We sell our products principally through department stores, specialty stores, luxury retailers, national chains and mass merchants and through our Company-owned retail stores. For the year ended December 31, 2010, our Retail segment and our two Wholesale segments generated net sales of approximately $134.3 million and $466.3 million, or 22% and 78% of our total domestic net sales, respectively. Each of these distribution channels is described below. 
+Steve Madden and Steven Retail Stores. As of December 31, 2010, we operated 79 company-owned retail stores under the Steve Madden name, three under the Steven name, one outlet store and our e-commerce website (at www.stevemadden.com). We believe that our retail stores will continue to enhance overall sales, profitability, and our ability to react to changing consumer trends. Our stores are also a marketing tool that allows us to strengthen brand recognition and to showcase selected items from our full line of branded and licensed products. Furthermore, our retail stores provide us with venues through which to test and introduce new products, designs and merchandising strategies. Specifically, we often test new designs at our Steve Madden retail stores before scheduling them for mass production and wholesale distribution. In addition to these test marketing benefits, we have been able to leverage sales information gathered at Steve Madden retail stores to assist our wholesale customers in order placement and inventory management. 
+A typical Steve Madden store is approximately 1,400 to 1,600 square feet and is located in a mall or street location that we expect will attract the highest concentration of our core demographic, style-conscious customer base. The Steven stores, which are generally the same size as our Steve Madden stores, have a more sophisticated design and format styled to appeal to a more mature target audience. In addition to carefully analyzing mall demographics and locations, we set profitability guidelines for each potential store site. Specifically, we target well trafficked sites at which the demographics fit our consumer profile and seek new locations where the projected fixed annual rent expense stays within our guidelines. By setting these guidelines, we seek to identify stores that will contribute to our overall profitability both in the near and longer terms. 
+Department Stores. We currently sell to over 2,600 doors of 15 department stores throughout the United States. Our major accounts include Macy’s, Nordstrom, Dillard’s and Lord & Taylor. 
+We provide merchandising support to our department store customers which includes in-store fixtures and signage, supervision of displays and merchandising of our various product lines. Our wholesale merchandising effort includes the creation of in-store concept shops, where a broader collection of our branded products are showcased. These in-store concept shops create an environment that is consistent with our image and are designed to enable the retailer to display and sell a greater volume of our products per square foot of retail space. In addition, these in-store concept shops encourage longer term commitment by the retailer to our products and enhance consumer brand awareness. 
+6 
+In addition to merchandising support, our key account executives maintain weekly communications with their respective accounts to guide them in placing orders and to assist them in managing inventory, assortment and retail sales. We leverage our sell-through data gathered at our 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, which reduces markdown exposure at season’s end. 
+Specialty Stores/Catalog Sales. We currently sell to specialty store locations throughout the United States. Our major specialty store accounts include DSW, Famous Footwear and Journeys. We offer our specialty store accounts the same merchandising, sell-through and inventory tracking support offered to our department store accounts. Sales of our products are also made through various catalogs, such as Victoria’s Secret. 
+Internet Sales. We operate an Internet website, www.stevemadden.com, where customers can purchase numerous styles of our Steve Madden Women’s, Steven and Madden Men’s as well as selected styles of Madden Girl, footwear and accessory products. 
+International 
+Our products are available in many countries and territories worldwide via several retail selling and distribution agreements. Under the terms of the various agreements, the distributors and retailers are generally required to open a minimum number of stores each year and to pay us a fee for each pair of footwear purchased and an additional sales royalty as a percentage of sales or a predetermined amount per unit of sale. Distributors are required to purchase a specified minimum number of products within specified periods. The agreements we have in place expire at various times through December 31, 2031 and include automatic renewals at the distributors’ option if certain conditions are met. These agreements are exclusive in their specific territories, which include Asia, Canada, Europe, the Middle East, Mexico, Australia, Central and South America and India. 
+Competition 
+The fashion industry is highly competitive. We compete with specialty shoe and accessory companies as well as companies with diversified footwear product lines, such as Nine West, Skechers, Kenneth Cole, Nike, Guess and Jessica Simpson. Our competitors may have greater financial and other resources than we do. We believe effective advertising and marketing, fashionable styling, high quality, value and fast manufacturing turnaround are the most important competitive factors and intend to continue to employ these elements as we develop our products. However, we cannot be certain that we will be able to compete successfully against our current and future competitors, or that competitive pressures will not have a material adverse effect on our business, financial condition and results of operations. 
+Marketing and Sales 
+We have focused on creating an integrated brand building program to establish Steve Madden as a leading designer of fashion footwear for style-conscious young women and men. Principal marketing activities include product placements in lifestyle and fashion magazines, personal appearances by our founder and Creative and Design Chief, Steve Madden, and in-store promotions. We continue to promote our e-commerce website (www.stevemadden.com) where customers can purchase products under the brands Steve Madden, Steven, Steve Madden Men’s and selected styles of Madden Girl footwear, as well as view exclusive content, participate in contests and “live chat” with customer service representatives. 
+7 
+Management Information Systems (MIS) Operations 
+Sophisticated information systems are essential to our ability to maintain our competitive position and to support continued growth. We operate on a dual AS/400 system which provides system support for all aspects of our business, including manufacturing purchase orders, customer purchase orders, order allocations, invoicing, accounts receivable management, quick response replenishment, point-of-sale support and financial and management reporting functions. We have a PKMS bar coded warehousing system that is integrated with the wholesale system in order to provide accurate inventory positions and quick response size replenishment for our customers. In addition, we have installed an electronic data interchange (“EDI”) system which provides a computer link between us and certain wholesale customers that enables both the customer and us to monitor purchases, shipments and invoicing. The EDI system also improves our ability to respond to customer inventory requirements on a weekly basis. 
+Intellectual Property 
+Trademarks 
+We own numerous trademarks, including, among others: 
+· 
+Steve Madden® 
+· 
+Madden Girl® 
+· 
+Steven® 
+· 
+Steven by Steve Madden® 
+· 
+Stevies® 
+· 
+Big Buddha® 
+· 
+Betsey Johnson® 
+· 
+Betseyville® 
+· 
+PEACE LOVE SHOES® (logo and various trademarks) 
+We consider each of the above marks to be among our most valuable assets and have registered these marks in numerous countries and in numerous International Classes. From time to time we adopt new trademarks in connection with the marketing of new product lines. We believe that our trademarks have significant value and are important for purposes of identifying the Company, the marketing of our products and the products of our licensees, distinguishing them from the products of others. We act aggressively to register and vigorously to protect our trademarks against infringement. There can be no assurance, however, that we will be able to effectively obtain rights to our marks throughout all of the countries of the world. Moreover, no assurance can be given that others will not assert rights in or ownership of, our marks and other proprietary rights or that we will be able to resolve any such conflicts successfully. Our failure to protect such rights from unlawful and improper appropriation may have a material adverse effect on our business, financial condition, results of operations and liquidity. 
+Trademark Licensing 
+We believe that expanding the Company’s presence beyond footwear and accessories is a logical extension of the Company’s brands. As of December 31, 2010, we license our Steve Madden® and Steven by Steve Madden® trademarks for use in connection with the manufacture, marketing and sale of cold weather accessories, sunglasses, eyewear, outerwear, bedding, hosiery, women’s fashion apparel and jewelry. We license our Big Buddha brand for use in connection with the manufacture, marketing and sale of sunglasses and cold weather accessories. In addition, we license the Betsey Johnson® and Betseyville® trademarks for use in connection with the manufacture, marketing and sale of apparel, jewelry, lingerie, swimwear, eyewear, watches and outerwear. 
+8 
+In connection with our October 5, 2010 acquisition of substantially all of the intellectual property of Betsey Johnson LLC, the Company entered into intellectual property license agreements with Betsey Johnson LLC, pursuant to which the Company granted Betsey Johnson LLC a limited, exclusive license and right to use the Betsey Johnson Ò and Betsey Johnson Collection TM trademarks with respect to specified items of women’s apparel sold in retail stores owned and operated by Betsey Johnson, LLC in the United States, London, England and Canada, in wholesale sales in the United States and in certain other jurisdictions outside the United States, as well as a right and license to sell, via Betsey Johnson LLC’s e-commerce websites and in Betsey Johnson-branded retail stores located in Canada, London, England and the United States, products featuring designs created by the Company or manufactured under license to third parties by the Company. Under these license arrangements, the Company is entitled to royalty payments based on net sales and certain guaranteed minimum royalty payments. The agreement under which we license the Betsey Johnson® and Betsey Johnson Collection™ marks to Betsey Johnson is due to expire on August 30, 2013 and will be automatically extended for successive four-year periods if certain conditions are met. The agreement under which Betsey Johnson was granted a right and license to sell product featuring designs created by the Company or manufactured under license to third parties by the Company is due to expire on October 5, 2011 and will be subject to automatic extensions for successive one year periods if certain condition are met. 
+Most of our out-going license agreements require the licensee to pay us a royalty based on actual net sales, a minimum royalty in the event that specified net sales targets are not achieved and a percentage of sales for advertising the brand. See Notes A12 and N4 to our Consolidated Financial Statements included in this Annual Report on Form 10-K for additional disclosure regarding these licensing arrangements. 
+In addition to out-licenses of our trademarks, we also license from third parties marks used in connection with certain of our product lines. We have licenses from Dualstar Entertainment Group, LLC under which the Company has the right to use the Olsenboye® trademark in connection with the sale and marketing of footwear and accessories and the Elizabeth and James® trademark in connection with the sale and marketing of footwear. The term of these licenses expire on December 31, 2011 and March 31, 2012, respectively. In addition, we hold licenses from Jones Investment Co. Inc. under which the Company has the right to use the GLO Jeans® trademark in connection with the sale and marketing of women’s footwear exclusively to K-Mart and the l.e.i.® trademark in connection with the marketing and sale of women’s footwear exclusively to Wal-Mart. The term of the licenses from Jones Investment Co, Inc. expire on December 31, 2012 and December 31, 2011, respectively. We also hold a license from Dafu Licensing, Inc. to design, manufacture and distribute handbags and belts and related accessories under the DF Daisy Fuentes® and the Daisy Fuentes® brands. The term of our license with Dafu Licensing, Inc. expires on December 31, 2012. Substantially all of these licensing agreements require us to make royalty and advertising payments to the licensor equal to a percentage of our net sales or a minimum royalty and advertising payment in the event that specified net sales targets are not achieved. 
+Employees 
+On February 1, 2011, we employed approximately 1,440 employees, of whom approximately 780 work on a full-time basis and approximately 660 work on a part-time basis, with most of the part-time employees being employed in the Retail segment. All of our employees are located in the United States with the exception of approximately 30 employees located in Hong Kong and China who perform quality control and administrative duties. None of our employees are represented by a union. Our management considers relations with our employees to be good. The Company has never experienced a material interruption of its operations due to a labor dispute. 
+Seasonality 
+Historically, our merchandising businesses have experienced holiday retail seasonality. In addition to seasonal fluctuations, our operating results fluctuate from quarter to quarter as a result of the timing of holidays, weather, the timing of larger shipments of footwear, market acceptance of our products, product mix, pricing and presentation of the products offered and sold, the hiring and training of additional personnel, inventory write downs for obsolescence, the cost of materials, the product mix between wholesale, retail and licensing businesses, the incurrence of other operating costs and factors beyond our control, such as general economic conditions and actions of competitors. 
+9 
+Backlog 
+We had unfilled wholesale customer orders of $161.8 million and $132.6 million, as of February 1, 2011 and 2010, respectively. Our backlog at a particular time is affected by a number of factors, including seasonality, timing of market weeks and wholesale customer purchases of our core basic products through our open stock program. Accordingly, a comparison of backlog from period to period may not be indicative of eventual shipments.
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+ITEM 13 
+CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE 
+The information required to be furnished pursuant to this Item will be set forth in our proxy statement for the 2011 Annual Meeting of Stockholders, and is incorporated herein by reference.
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+ITEM 9A 
+CONTROLS AND PROCEDURES 
+Disclosure Controls and Procedures 
+As required by Rule 13a-15(b) of the Exchange Act, our management, including our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of the end of the fiscal year covered by this Annual Report on Form 10-K. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that our 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 on Form 10-K. 
+Management’s Annual Report on Internal Control Over Financial Reporting 
+Management of Steven Madden, Ltd. is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act). 
+Our internal control over financial reporting is a process designed by, or under the supervision of, our principal executive officer and principal financial officer, and effected by the board of directors, management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that (1) pertain to maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements. 
+Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. 
+With the participation of the Chief Executive Officer and the Chief Financial Officer, our management conducted an evaluation of the effectiveness, as of the end of our fiscal year ended December 31, 2010, of our internal control over financial reporting based on the framework and criteria established in Internal Control–Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation our management has concluded that, as of December 31, 2010, our internal control over financial reporting was effective. 
+30 
+The independent registered public accounting firm that audited the financial statements included in this Annual Report on Form 10-K has issued an attestation report on our internal control over financial reporting. 
+Attestation Report of our Independent Registered Public Accounting Firm 
+Our Independent Registered Public Accounting Firm, EisnerAmper LLP, has audited and issued a report on our internal control over financial reporting. The report of EisnerAmper LLP appears below. 
+To the Board of Directors and Stockholders 
+Steven Madden, Ltd. and subsidiaries 
+We have audited Steven Madden, Ltd. and subsidiaries’ (the “Company”) internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. 
+We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. 
+A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. 
+Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. 
+In our opinion, Steven Madden, Ltd. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control - Integrated Framework issued by COSO. 
+31 
+We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Steven Madden, Ltd. and subsidiaries as of December 31, 2010 and 2009, 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, 2010, and our report dated February 28, 2011 expressed an unqualified opinion thereon. 
+/S/ EisnerAmper LLP 
+New York, New York 
+February 28, 2011 
+Changes in Internal Control Over Financial Reporting 
+There was no change in our internal control over financial reporting, identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 of the Exchange Act, that occurred during the fiscal quarter ended December 31, 2010, which has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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+Certain Relationships and Related Party Transactions 
+In January 2004, the Company entered into an agreement with John L. Madden,
+one of the Company’s directors, and JLM Consultants, a company wholly-owned by John L. Madden. Under this agreement,
+which was amended in 2005, Mr. Madden agreed to provide consulting services to the Company with respect to the development of international
+sales of the Company. This agreement expired by its terms on December 31, 2005, but Mr. Madden continues to provide
+consulting services and the Company continues to make payments to JLM Consultants consistent with those that would have been required
+under the expired consulting agreement. In accordance with the foregoing, for the 2011 Fiscal Year, JLM Consultants
+received the following from the Company: (a) a commission equal to 2.5% on international sales, (b) a monthly draw in
+the amount of $25,000 with recourse against such commissions, (c) a $1,000 per month travel allowance and (d) $3,859.46 per month
+toward health insurance premiums for health insurance coverage for John L. Madden. Pursuant to this arrangement, JLM
+Consultants received a total of $1,552,227.31 from the Company in the 2011 Fiscal Year. 
+Effective as of July 1, 2005, the Company amended and restated its employment
+agreement with the Company’s founder and Creative and Design Chief, Steven Madden, pursuant to which Mr. Madden agreed to
+continue to serve as the Company’s Creative and Design Chief. The term of Mr. Madden’s employment under
+his employment agreement commenced on July 1, 2005 and, in accordance with the amendment of the agreement effective December 31,
+2011, will end on December 31, 2023. Prior to this recent amendment, the agreement had provided for an annual salary
+of $600,000, with a 7% increase of base salary on a compound basis in each of the third, fifth, seventh and ninth years of the
+agreement. The agreement had also provided for an annual cash bonus in an amount equal to at least 2% of the Company’s
+EBITDA (the “Annual Bonus”) and an annual cash bonus in relation to “new business” (as defined in the agreement)
+in an amount equal to at least (i) 2.5% of new business gross direct revenues plus (ii) 10% of all license or other fee income
+above $2,000,000 (the “New Business Bonus”). The agreement, as amended, increases Mr. Madden’s annual
+base salary but eliminates the Annual Bonus and the New Business Bonus and provides that all cash bonuses subsequent to the 2011
+Fiscal Year will be at the sole discretion of the Company’s Board of Directors. Under the agreement, as amended,
+Mr. Madden’s annual base salary is fixed at $5,416,667 in 2012, $7,416,667 in 2013, $9,666,667 in 2014, $11,916,667 in 2015
+and $10,697,917 in 2016 and in each year thereafter through the end of the term of employment. In addition, the amended agreement
+entitles Mr. Madden to an annual life insurance premium reimbursement of up to $200,000. The amendment also eliminates
+an annual non-accountable expense allowance of $200,000 that had been previously provided to Mr. Madden under the agreement. 
+Pursuant to the amended agreement, as amended, on February 8, 2012,
+Mr. Madden was granted 975,371 restricted shares of Common Stock, valued at approximately $40 million, pursuant to the Company’s
+2006 Stock Incentive Plan, as amended (the “2006 Plan”). The restricted Common Stock will vest in equal
+annual installments over seven years commencing on December 31, 2017 through December 31, 2023, subject to Mr. Madden’s continued
+employment with the Company on each such vesting date. Further, under the agreement, as amended, Mr. Madden has the
+right, exercisable on certain specified dates in fiscal year 2012 only, to elect to further amend the agreement to receive an additional
+restricted stock award for a number of shares of Common Stock valued at $40,000,000 in consideration of a reduction in his annual
+base salary in years subsequent to 2012 as follows: $4,000,000 in 2013, $6,125,000 in 2014, $8,250,000 in 2015 and $7,026,042 in
+2016 and in each year thereafter through the end of the term of employment. In the event that Mr. Madden elects to receive
+an additional restricted stock award, the additional restricted shares of Common Stock issued to Mr. Madden will vest in equal
+annual installments over six years commencing on December 31, 2018 through December 31, 2023, subject to Mr. Madden’s continued
+employment with the Company on each such vesting date. Mr. Madden’s right to receive an additional restricted
+stock award is subject to the availability of shares under the 2006 Plan, or any other plan designated by the Board of Directors
+and approved by the Company’s stockholders. 
+Mr. Madden is also eligible to receive annually, on or about the date
+of the Company’s annual meeting of stockholders, an option grant (the “Annual Option”) to purchase a number of
+shares of Common Stock, with such number to be equal to the greater of (a) not less than 100% of the largest aggregate number of
+shares of Common Stock available upon the exercise of an option or options granted to any other continuing full-time employee of
+the Company during the preceding twelve-month period and (b) 100,000 shares of Common Stock; provided, however, that a grant to
+Mr. Madden in excess of 150% of the number of shares of Common Stock subject to options granted to such other continuing full-time
+employee would require stockholder approval. Any Annual Option granted to Mr. Madden would vest quarterly over a one-year
+period following the grant date and would be exercisable at a price equal to the closing price of the Company’s Common Stock
+on the grant date for a period of five years following the grant date. In addition to the Annual Option, the agreement,
+as amended, provides for a potential additional one-time stock option grant to purchase 500,000 shares of the Company’s
+Common Stock (the number of option shares to be subject to adjustment in the event of a future change in capital structure of the
+Company resulting from a stock split, reverse stock split or other transaction or event having similar effect) in the event that
+the Company achieves earnings per share, on a fully-diluted basis, equal to $3.00 in any fiscal year ending December 31, 2015 or
+after. If granted, the option would vest in equal annual installments of 20% over a five-year period and be exercisable
+for a period of seven years at a price equal to the closing price of the Company’s Common Stock on the date immediately preceding
+the grant date. 
+14 
+Table of Contents 
+In the event of Mr. Madden’s death, his employment agreement provides
+for the payment to Mr. Madden’s estate of his base salary for the 12-month period immediately subsequent to the date of his
+death. Further, in the event that Mr. Madden’s employment agreement is terminated due to Mr. Madden’s total
+disability (as defined in the agreement), “for cause” (as defined in the agreement) or due to Mr. Madden’s resignation,
+the Company is obligated to pay Mr. Madden the amount of compensation that is accrued and unpaid through the date of termination.
+In the event Mr. Madden’s employment agreement is terminated for any reason (other than “for cause” or due to
+his death, total disability or resignation), the Company is obligated to pay Mr. Madden, in installments, the balance of his base
+salary that would have been paid by the Company under the agreement for the full term of the agreement. If, during the
+period commencing 120 days prior to a “change of control” (as defined in the employment agreement) transaction and
+ending on the first anniversary of a change of control transaction, Mr. Madden’s employment is terminated by the Company
+other than for cause or by the resignation of Mr. Madden for “good reason” (as defined in the employment agreement),
+or if Mr. Madden resigns for good reason or without good reason within 30 days following a change of control transaction, all unvested
+options to purchase shares of Common Stock held by Mr. Madden will vest on the date of termination or resignation and Mr. Madden
+will be entitled to receive a lump sum cash payment equal to the amount of compensation that is accrued and unpaid through the
+date of termination plus $35 million. Mr. Madden’s employment agreement contains other customary provisions, including
+provisions regarding expense reimbursement, confidentiality, solicitation and competition. 
+For 2011 Fiscal Year, Mr. Madden earned (i) $709,133 in base salary;
+(ii) $200,000 in non-accountable expense allowance; (iii) a bonus of $2,984,665, representing 2% of the Company’s earnings
+before interest, tax, depreciation and amortization; (iv) a bonus of $7,252,094, earned based on 2.5% of the Company’s new
+business; and (v) a bonus of $748,823, based on 10% of Royalty/Licensing income over $2,000,000. As an Annual Option,
+on June 2, 2011, Mr. Madden was granted an option to purchase 150,000 shares of Common Stock, under the 2006 Plan having
+an exercise price of $35.62 per share. The option vests in equal installments of 37,500 shares on each of August
+27, 2011, November 27, 2011, February 27, 2012 and May 27, 2012. 
+On June 25, 2007, the Company made a loan to Steven Madden, its Creative
+and Design Chief and a principal stockholder of the Company, in the amount of $3,000,000, in order for Mr. Madden to satisfy a
+personal tax obligation resulting from the exercise of a stock option which was due to expire and to hold the underlying shares
+of Common Stock. Mr. Madden executed a promissory note in favor of the Company, which is secured by a pledge of 315,000
+shares of the Company’s Common Stock beneficially owned by Mr. Madden. There have been successive amendments to
+the note, the most recent of which occurred on January 3, 2012, at which time the note was amended and restated to extend the maturity
+date of the obligation to December 31, 2023 and eliminate accrual of interest after December 31, 2011; prior to the most recent
+amendment, the note had been accruing interest at the rate of 6% per annum. In addition, the amended and restated note
+provides that, commencing on December 31, 2014 and annually on each December 31 thereafter through the maturity date, one-tenth
+of the principal amount thereof, together with accrued interest, will be cancelled by the Company provided that Mr. Madden continues
+to be employed by the Company on each such December 31. Contemporaneously, the Company will release a number of pledged
+shares of Common Stock from the pledge generally correlating to the amount of indebtedness cancelled on such date. As
+of December 31, 2011, interest in the amount of $1,090,000 has accrued on the principal amount of the note. 
+Steven Madden is the brother of John L. Madden, who has been a director
+of the Company since the Company’s inception in 1990. 
+15 
+Table of Contents 
+Review, Approval or Ratification of Transactions with Related Persons 
+The Company’s written Conduct Code and Employee Handbook prohibit
+all conflicts of interest. Under the Conduct Code, conflicts of interest occur when private or family interests interfere
+in any way, or even appear to interfere, with the interests of the Company. The Company’s prohibition on conflicts
+of interest under the Conduct Code includes any related person transaction. 
+Related person transactions must be approved by the Board, or by a committee
+of the Board consisting solely of independent directors, who will approve the transaction only if they determine that it is in
+the best interests of the Company. In considering the transaction, the Board or committee will consider all relevant
+factors, including, as applicable, (i) the Company’s business rationale for entering into the transaction; (ii) the alternatives
+to entering into a related person transaction; (iii) whether the transaction is on terms comparable to those available to third
+parties or, in the case of employment relationships, to employees generally; (iv) the potential for the transaction to lead to
+an actual or apparent conflict of interest and any safeguards imposed to prevent such actual or apparent conflicts; and (v) the
+overall fairness of the transaction to the Company. 
+The Company has multiple processes for reporting conflicts of interests,
+including related person transactions. Under the Conduct Code, all employees are required to report any actual or apparent
+conflict of interest, or potential conflict of interest, to management. The Chief Financial Officer distributes a questionnaire
+to the Company’s executive officers and management personnel on a quarterly basis and distributes a questionnaire to the
+members of the Board of Directors on an annual basis requesting certain information regarding, among other things, their immediate
+family members, employment and beneficial ownership interests, which information is then reviewed for any conflicts of interest
+under the Conduct Code. 
+The Board of Directors, the Audit Committee and the Disclosure Committee,
+which is comprised of management personnel, discuss the related party transactions, specifically, and in connection with the regular
+review processes attendant to the Company’s periodic filings, including related party transaction disclosures. 
+If a director is a party to or in some manner involved in a transaction
+involving the Company, he will be recused from all discussions and decisions about the transaction. The transaction must be approved
+in advance whenever practicable, and if not practicable, must be ratified as promptly as practicable.
\ No newline at end of file
diff --git a/raw/filings/0000913241/2011/0001019056-12-000270/filing.txt b/raw/filings/0000913241/2011/0001019056-12-000270/filing.txt
new file mode 100644
index 0000000000000000000000000000000000000000..96104511a5f59be43f6de3d68716d6a9e9c699fe
--- /dev/null
+++ b/raw/filings/0000913241/2011/0001019056-12-000270/filing.txt
@@ -0,0 +1,8121 @@
+10-K
+1
+sm_10k11.htm
+FORM 10-K
+UNITED STATES 
+SECURITIES AND EXCHANGE COMMISSION 
+WASHINGTON, D.C.
+20549 
+FORM 10-K 
+(Mark One)
+[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
+SECURITIES EXCHANGE ACT OF 1934 
+For the fiscal year ended December 31, 2011 
+or 
+o 
+TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
+SECURITIES EXCHANGE ACT OF 1934 
+For the transition period from
+to
+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 incorporation or
+organization)
+(I.R.S. employer identification no.)
+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:
+Title of Each Class
+Name of Each Exchange on Which Registered
+Common Stock, par value $.0001 per share
+The NASDAQ Stock Market LLC
+Preferred Stock Purchase Rights
+The NASDAQ Stock Market LLC
+Securities Registered Pursuant to Section 12(g) of the Act:
+None
+Indicate by
+check mark if the registrant is a well-known seasoned issuer,
+as defined in Rule 405 of the Securities Act. Yes 
+[X] No o 
+Indicate by
+check mark if the registrant is not required to file reports
+pursuant to Section 13 or 15(d) of the Securities Act.
+Yes o No [X] 
+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 o 
+Indicate by check mark whether the registrant has submitted
+electronically and posted on its corporate website, if any,
+every Interactive Data File required to be submitted and
+posted pursuant to Rule 405 of Regulation S-T (§ 232.405
+of this chapter) during the preceding 12 months (or for such
+shorter period that the registrant was required to submit and
+post such files). Yes 
+[X] 
+No o 
+Indicate by check mark if disclosure of delinquent filers
+pursuant to Item 405 of Regulation S-K (§ 229.405) 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. o 
+Indicate by check mark whether the registrant is a large
+accelerated filer, an accelerated filer, a non-accelerated
+filer or a smaller reporting company. See the definitions of
+“large accelerated filer”, “accelerated
+filer” and “smaller reporting company” in
+Rule 12b-2 of the Exchange Act.
+Large accelerated filer [X] 
+Accelerated filer o 
+Non-accelerated filer o 
+Smaller reporting company o 
+Indicate by check mark whether the registrant is a shell
+company (as defined in Rule 12b-2 of the Exchange Act). Yes 
+o No [X] 
+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,
+2011, the last business day of the registrant’s most
+recently completed second fiscal quarter, was approximately
+$1,471,262,000 (based on the closing sale price of the
+registrant’s common stock on that date as reported on
+The NASDAQ Global Select Market).
+The number of outstanding shares of the registrant’s
+common stock as of February 23, 2012 was 44,006,918 shares.
+DOCUMENTS INCORPORATED BY REFERENCE:
+PART III INCORPORATES CERTAIN INFORMATION BY REFERENCE FROM
+THE REGISTRANT’S DEFINITIVE PROXY STATEMENT FOR THE
+REGISTRANT’S 2012 ANNUAL MEETING OF STOCKHOLDERS.
+TABLE OF CONTENTS
+SPECIAL NOTE REGARDING FORWARD-LOOKING
+STATEMENTS 
+1
+PART I 
+ITEM 1 
+BUSINESS 
+1
+ITEM 1A 
+RISK FACTORS 
+12
+ITEM 1B 
+UNRESOLVED STAFF COMMENTS 
+18
+ITEM 2 
+PROPERTIES 
+19
+ITEM 3 
+LEGAL PROCEEDINGS 
+19
+ITEM 4 
+[REMOVED AND RESERVED] 
+20
+PART II 
+ITEM 5 
+MARKET FOR REGISTRANT’S COMMON
+EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
+PURCHASES OF EQUITY SECURITIES 
+20
+ITEM 6 
+SELECTED FINANCIAL DATA 
+22
+ITEM 7 
+MANAGEMENT’S DISCUSSION AND
+ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
+OPERATIONS 
+23
+ITEM 7A 
+QUANTITATIVE AND QUALITATIVE
+DISCLOSURES ABOUT MARKET RISK 
+33
+ITEM 8 
+FINANCIAL STATEMENTS AND SUPPLEMENTARY
+DATA 
+33
+ITEM 9 
+CHANGES IN AND DISAGREEMENTS WITH
+ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 
+33
+ITEM 9A 
+CONTROLS AND PROCEDURES 
+33
+ITEM 9B 
+OTHER INFORMATION 
+35
+PART III 
+ITEM 10 
+DIRECTORS, EXECUTIVE OFFICERS AND
+CORPORATE GOVERNANCE 
+35
+ITEM 11 
+EXECUTIVE COMPENSATION 
+35
+ITEM 12 
+SECURITY OWNERSHIP OF CERTAIN
+BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
+STOCKHOLDER MATTERS 
+35
+ITEM 13 
+CERTAIN RELATIONSHIPS AND RELATED
+TRANSACTIONS, AND DIRECTOR INDEPENDENCE 
+36
+ITEM 14 
+PRINCIPAL ACCOUNTANT FEES AND
+SERVICES 
+36
+PART IV 
+ITEM 15 
+EXHIBITS AND FINANCIAL STATEMENT
+SCHEDULES 
+36
+SPECIAL NOTE REGARDING
+FORWARD-LOOKING STATEMENTS 
+This Annual Report on Form 10-K contains
+“forward-looking statements” (as that term is
+defined in the federal securities laws), which are made
+pursuant to the safe harbor provisions of the Private
+Securities Litigation Reform Act of 1995. These
+forward-looking statements include statements with regard to
+future revenue, projected 2012 results, earnings, spending,
+margins, cash flow, orders, expected timing of shipment of
+products, inventory levels, future growth or success in
+specific countries, categories or market sectors, continued
+or expected distribution to specific retailers, liquidity,
+capital resources and market risk, strategies and objectives
+and other future events. More generally, forward-looking
+statements include, without limitation, any statement that
+may predict, forecast, indicate or simply state future
+results, performance or achievements, and can be identified
+by the use of forward looking language such as
+“believe,” “anticipate,”
+“expect,” “estimate,”
+“intend,” “plan,”
+“project,” “will be,” “will
+continue,” “will result,”
+“could,” “may,” “might,”
+or any variations of such words with similar meanings.
+Factors that may affect our results include, but are not
+limited to, the risks and uncertainties discussed in Item 1A
+of this Annual Report on Form 10-K.
+Any such forward-looking statements are subject to risks and
+uncertainties, many of which are beyond our control, which
+may influence the accuracy of the statements and the
+projections upon which the statements are based and could
+cause our actual results to differ materially from those
+projected in forward-looking statements. As such, we strongly
+caution you that these forward-looking statements are not
+guarantees of future performance or events. Our actual
+results, performance and achievements could differ materially
+from those expressed or implied in these forward-looking
+statements. We undertake no obligation to publicly update or
+revise any forward-looking statements, whether from new
+information, future events or otherwise.
+part I
+ITEM 1
+BUSINESS
+Overview 
+Steven Madden, Ltd. and its subsidiaries (collectively, the
+“Company”) design, source, market and sell
+fashion-forward name brand and private label footwear for
+women, men and children and name brand and private label
+fashion handbags and accessories. Our products are
+distributed through our retail stores and our e-commerce
+website and in department stores, specialty stores, luxury
+retailers, national chains and mass merchants throughout the
+United States. In addition, we have special distribution
+arrangements for the distribution of our products in Asia,
+Canada, Europe, the Middle East, Mexico, Australia, Central
+and South America and India. Our product line consists of a
+broad range of updated styles designed to establish or
+capitalize on market trends, complemented by product
+offerings. We have established a reputation for design
+creativity and our ability to offer quality products in
+popular styles at affordable price points.
+The Company was incorporated as a New York corporation on
+July 9, 1990, reincorporated under the same name in Delaware
+in November 1998 and completed its initial public offering in
+December 1993. Shares of the Company’s common stock,
+$.0001 par value per share, currently trade on the NASDAQ
+Global Select Market under the symbol “SHOO”. Our
+principal executive offices are located at 52-16 Barnett
+Avenue, Long Island City, NY 11104. Our telephone number is
+(718) 446-1800 and our website address is
+http://www.stevemadden.com.
+We file Annual Reports on Form 10-K, Quarterly Reports on
+Form 10-Q, Current Reports on Form 8-K and other reports and
+information with the Securities and Exchange Commission (the
+“SEC”) pursuant to Section 13(a) or 15(d) of the
+Securities Exchange Act of 1934, as amended, (the
+“Exchange Act”). These reports, any amendments to
+such reports, and our proxy statements for our
+stockholders’ meetings are available free of charge, on
+our website as soon as reasonably practicable after such
+material is electronically filed with, or furnished to, the
+SEC. We will provide paper copies of such filings free of
+charge upon request. The public may read and copy any
+materials filed by us with the SEC at the SEC’s Public
+Reference Room at 100 R Street, NE, Washington, D.C. 20549.
+Information regarding the operation of the SEC’s Public
+Reference Room is available by calling the SEC at
+1-800-SEC-0330. In addition, the SEC maintains an Internet
+site that contains reports, proxy and information statements
+and other information regarding us, which is available at
+http://www.sec.gov.
+1
+Fiscal year December 31, 2011 marks the third consecutive
+year that the Company achieved record sales and earnings. Our
+consolidated net sales for 2011 increased 52% to a record
+$968.5 million from the $635.4 million achieved in 2010. Net
+income increased in 2011 to a record $97.2 million from $75.7
+million in 2010. Diluted earnings per share for the year
+ended December 31, 2011 increased 26% to $2.25 per share on
+43,239,000 diluted weighted average shares outstanding
+compared to $1.78 per share on 42,443,000 diluted weighted
+average shares outstanding in 2010.
+During fiscal year 2011, we expanded our product offerings
+through two acquisitions. First, on May 20, 2011, the Company
+acquired all of the outstanding shares of capital stock of
+the closely held company, The Topline Corporation
+(“Topline”), from its sole stockholder (the
+“Topline Seller”). Founded in 1980, Topline and
+its subsidiaries design, manufacture, market and sell private
+label and branded women’s footwear primarily to
+department stores, specialty retailers and mass merchants.
+Topline has sourcing capabilities, sample making facilities
+and product development capabilities in China, including
+personnel and facilities engaged in direct sourcing.
+Management believes that Topline is an excellent strategic
+fit for the Company. The acquisition was completed for
+consideration of approximately $56.128 million cash, plus
+potential contingent payments pursuant to an earn-out
+agreement with the Topline Seller; less an estimated working
+capital adjustment due to the Company. The earn-out agreement
+provides for potential payments to the Topline Seller based
+on the financial performance of Topline for the twelve-month
+period ending on June 30, 2012. (See Note B to our
+Consolidated Financial Statements for additional information
+relating to the potential earn-out payments.) The fair value
+of the contingent payments was estimated using the present
+value of management’s projections of the financial
+results of Topline during the earn-out period. As of December
+31, 2011, the Company estimates the fair value of the
+contingent consideration to be $6.2 million.
+Then, on May 25, 2011, we acquired all of the outstanding
+shares of capital stock of privately held Cejon, Inc. and
+Cejon Accessories, Inc. from the sole stockholder of these
+companies, as well as all of the outstanding membership
+interests in New East Designs, LLC (combined with Cejon Inc.
+and Cejon Accessories, “Cejon”) from its members
+(together with the sole stockholder of Cejon, the
+“Cejon Sellers”). Founded in 1991, Cejon designs,
+markets and sells cold weather accessories, fashion scarves,
+wraps and other trend accessories primarily under the Cejon
+brand name, private labels and under the Steve Madden brand
+name as Cejon has been a licensee of the Company for cold
+weather and selected other fashion accessories since
+September 2006. Management expects the Cejon acquisition will
+further strengthen and expand the Company’s accessories
+platform. The acquisition was completed for consideration of
+approximately $29.1 million cash, plus potential contingent
+payments pursuant to an earn-out agreement with the Cejon
+Sellers. The earn-out agreement provides for potential
+payments to the Cejon Sellers based on the financial
+performance of Cejon for each of the twelve-month periods
+ending on June 30, 2012 through 2016, inclusive. (See Note B
+to our Consolidated Financial Statements for additional
+information relating to the potential earn-out payments.) The
+fair value of the contingent payments was estimated using the
+present value of management’s projections of the
+financial results of Cejon during the earn-out period. As of
+December 31, 2011, we estimate the fair value of the
+contingent consideration to be $23.5 million.
+During the year ended December 31, 2011, the Company made
+significant progress on several previously announced
+strategic initiatives. One such initiative was to continue to
+drive improvements in the performance of our retail segment.
+In 2011, same store sales (sales of those stores, including
+the e-commerce website, that were in operation throughout
+2011 and 2010) increased 13.3% and sales per square foot
+increased to $810 compared to sales per square foot of $742
+achieved in the prior year. Income from store operations as a
+percentage of sales increased to 13.1% in 2011 compared to
+the 6.8% achieved in 2010.
+A second strategic initiative for the Company was the
+expansion of our e-commerce business. In 2011 net sales in
+our e-commerce business increased 25% when compared to the
+prior year. The Company has also achieved progress in its
+initiative to grow its International business, which had net
+sales of $53.3 million in 2011, a 53% increase over the $34.8
+million in net sales achieved by the International business
+in the prior year.
+On May 5, 2011, the Company’s Board of Directors
+announced a three-for-two stock split of the Company’s
+outstanding shares of common stock, effected in the form of a
+stock dividend on the Company’s outstanding common
+stock. Stockholders of record at the close of business on May
+20, 2011 received one additional share of Steven Madden, Ltd.
+common stock for every two shares of common stock owned on
+this date. The additional shares were distributed on May 31,
+2011. Stockholders received cash in lieu of any fractional
+shares of common stock they otherwise would have received in
+connection with the dividend. All share and per share data
+provided herein gives effect to this stock split, applied
+retroactively.
+2
+Recent Developments 
+Effective as of December 31, 2011, the Company and its
+founder and Creative and Design Chief, Steven Madden, entered
+into an amendment to Mr. Madden’s existing employment
+agreement with the Company (the “Amended Madden
+Agreement”). The Amended Madden Agreement, which
+extends the term of Mr. Madden’s employment through
+December 31, 2023, provides for an annual base salary of
+approximately $5.417 million in 2012, approximately $7.417
+million in 2013, approximately $9.667 million in 2014,
+approximately $11.917 million in 2015 and approximately
+$10.698 million in 2016 and in each year thereafter through
+the end of the term of employment. The Amended Madden
+Agreement eliminates the annual cash bonuses payable to Mr.
+Madden based on EBITDA and the annual cash bonus in relation
+to new business contained in Mr. Madden’s previously
+existing employment agreement and provides that all future
+cash bonuses will be at the sole discretion of the
+Company’s Board of Directors. Further, the Amended
+Madden Agreement eliminates the annual non-accountable
+expense allowance of $200,000 provided to Mr. Madden under
+the previously existing employment agreement. Pursuant to the
+Amended Madden Agreement, on February 8, 2012, Mr. Madden was
+granted 975,371 restricted shares of the Company’s
+common stock valued at approximately $40 million, which will
+vest in equal annual installments over seven years commencing
+on December 31, 2017 through December 31, 2023, subject to
+Mr. Madden’s continued employment with the Company on
+each such vesting date. Further, the Amended Madden Agreement
+provides that Mr. Madden has the right, exercisable on
+certain specified dates in fiscal year 2012 only, to elect to
+further amend his employment agreement to receive an
+additional restricted stock award for a number of shares of
+the Company’s common stock valued at $40 million in
+consideration of a reduction in his annual base salary in
+years subsequent to 2012 as follows: approximately $4 million
+in 2013, approximately $6.125 million in 2014, approximately
+$8.25 million in 2015 and approximately $7.026 million in
+2016 and in each year thereafter through the end of the term
+of employment. In addition to the opportunity for
+discretionary cash bonuses, the Amended Madden Agreement
+entitles Mr. Madden to an annual life insurance premium
+reimbursement of up to $200,000 as well as an annual stock
+option grant and the potential for an additional one-time
+stock option grant based upon achievement of certain
+financial performance criteria. The Amended Madden Agreement
+also provides for the elimination of interest accrued after
+December 31, 2011 on an outstanding loan in the original
+principal amount of $3 million made by the Company to Mr.
+Madden, the extension of the maturity date of such loan until
+December 31, 2023, and the forgiveness of 1/10th of the
+principal amount of the loan, together with accrued interest,
+annually over a ten-year period commencing on December 31,
+2014 for so long as Mr. Madden continues to be employed by
+the Company on each such December 31st.
+On February 21, 2012, the Company consummated the previously
+reported proposed purchase of all of the assets of Steve
+Madden Canada Inc., Steve Madden Retail Canada Inc., Pasa
+Agency Inc. and Gelati Imports Inc. (collectively, the
+“Canadian Sellers”), the Company’s sole
+distributor in Canada since 1994, comprising the Canadian
+Sellers’ footwear, handbags and accessories wholesale
+and retail businesses. The transaction was effected pursuant
+to an Asset Purchase Agreement entered into on January 20,
+2012 which provided for a cash payment at closing of
+approximately $29.0 million (Canadian dollars, which converts
+to approximately the same in US dollars) plus potential
+earn-out payments of up to a maximum of $38.0 million
+(Canadian dollars, which converts to approximately the same
+in US dollars), in the aggregate, based on achievement of
+certain earnings targets over a five-year period.
+On February 2, 2012, two individuals purporting to be
+stockholders of the Company commenced separate civil actions
+against the Company, as a nominal defendant, Steven Madden,
+individually, and the Company’s Board of Directors
+alleging shareholder derivative claims in connection with the
+amendment of Mr. Madden’s employment agreement and the
+compensation afforded Mr. Madden thereunder and seeking
+disgorgement of any compensation Mr. Madden received as a
+result of the amendment, an award of unspecified damages and
+a declaration that the amendments are void. See Item 3,
+“Legal Proceedings,” below for a description of
+such action.
+Product Distribution Segments 
+Our business is comprised of five distinct segments:
+Wholesale Footwear, Wholesale Accessories, Retail, First Cost
+and Licensing. See Note Q to our Consolidated Financial
+Statements for additional information relating to our five
+operating segments.
+3
+Our Wholesale Footwear segment is comprised of the following
+brands: Steve Madden Women’s, Madden Girl, Steve Madden
+Men’s, Steven, l.e.i.® (under license), Elizabeth
+and James® (under license), Olsenboye® (under
+license), Stevies, Big Buddha Shoes, Madden, Betsey Johnson
+shoes, Report, Superga® (under license) and includes our
+private label and International businesses. Our Wholesale
+Accessories segment includes Big Buddha, Betseyville, Betsey
+Johnson, Steve Madden, Steven by Steve Madden, Cejon and,
+through license agreements, Daisy Fuentes® and
+Olsenboye® accessories brands and includes our private
+label business. Steven Madden Retail, Inc., our wholly owned
+retail subsidiary, operates Steve Madden and Steven retail
+stores as well as our e-commerce website. There are also
+three stores licensed to a third party. The First Cost
+segment represents activities of a subsidiary that earns
+commissions for serving as a buying agent for footwear
+products under private labels and licensed brands (such as
+Candie’s®) for many of the country’s large
+mass-market merchandisers, shoe chains and other off-price
+retailers. Our Licensing segment is engaged in the licensing
+of the Steve Madden and Steven by Steve Madden marks for use
+in connection with the manufacture, marketing and sale of
+sunglasses, eyewear, outerwear, bedding, hosiery,
+women’s fashion apparel, jewelry and luggage. In
+addition, we license our recently acquired Betsey Johnson and
+Betseyville marks for use in connection with the manufacture,
+marketing and sale of apparel, jewelry, swimwear, eyewear,
+watches, fragrances and outerwear.
+Wholesale Footwear Segment 
+Steve Madden Women’s. We design, source and
+market our Steve Madden brand to major department stores,
+mid-tier department stores, better specialty stores and
+independently owned boutiques throughout the United States.
+The Steve Madden brand has become a leading life-style brand
+in the fashion conscious marketplace. To serve our customers
+(primarily women ages 16 to 35), Steve Madden Women’s
+creates and markets fashion forward footwear designed to
+appeal to customers seeking exciting, new footwear designs at
+affordable prices. New products for Steve Madden
+Women’s are test marketed at Company-owned retail
+stores. Typically, within a few days, we can determine if the
+test product appeals to our customers. This enables us to use
+our flexible sourcing model to rapidly respond to changing
+trends and customer preferences, which we believe is
+essential for success in the fashion industry.
+Madden Girl. We design, source and market a full
+collection of directional young women’s shoes under the
+Madden Girl brand. Madden Girl is geared for young women ages
+13 to 20, and is an “opening price point” brand
+currently sold at major department stores, mid-tier retailers
+and specialty stores.
+Steve Madden Men’s. We design, source and market
+a full collection of directional men’s shoes and
+fashion forward athletic shoes for men under the Steve Madden
+brand to major department stores, mid-tier department stores,
+better specialty stores and independent shoe stores
+throughout the United States as well as in our retail stores.
+Price points for Steve Madden Men’s products range from
+$70 to $100 at retail, targeted at men ages 20 to 40 years
+old. The division maintains open stock inventory positions in
+select patterns to serve the replenishment programs of its
+wholesale customers.
+Steven. We design, source and market women’s
+fashion footwear under the Steven® trademark through
+major department and better footwear specialty stores
+throughout the United States as well as in our retail stores.
+Priced a tier above the Steve Madden brand, Steven products
+are designed to appeal principally to fashion conscious
+women, ages 25 to 45, who shop at department stores and
+footwear boutiques.
+l.e.i. On July 1, 2008, we entered into a license
+agreement with Jones Investment Co. Inc., under which we have
+the right to use the l.e.i.® trademark in connection
+with the sale and marketing of footwear exclusively to
+Wal-Mart.
+Elizabeth and James. On September 10, 2008, we entered
+into a license agreement with Dualstar Entertainment Group,
+LLC, under which we have the right to use the Elizabeth and
+James® trademark in connection with the sale and
+marketing of footwear. The Elizabeth and James® brand,
+which was created by Mary-Kate and Ashley Olsen, is
+distributed through luxury retailers to women ages 25 to 36
+with average retail price points from $200 to $350 for shoes
+and from $350 to $500 for boots.
+4
+Olsenboye. On September 2, 2009, we entered into a
+license agreement with Dualstar Entertainment Group, under
+which we have the right to use the Olsenboye trademark in
+connection with the sale and marketing of footwear
+exclusively to J.C. Penney. Pursuant to the customer’s
+request that we sell directly to the customer, in 2011 we
+transitioned our Olsenboye® footwear business from the
+commission model to the wholesale model.
+Stevies and Steve Madden Kids. Our Stevies and Steve
+Madden Kids brands are designed, sourced and marketed for
+young girls, ages six to twelve, via department stores,
+specialty stores and independent boutiques throughout the
+United States.
+Big Buddha Shoes . On February 10, 2010, we acquired
+all of the outstanding shares of stock of privately held Big
+Buddha from its sole stockholder. Our new Big Buddha Shoe
+brand, which began shipping in the third quarter of 2010, is
+currently sold at department stores and specialty stores.
+Madden. Our Madden brand, which began shipping in the
+first quarter of 2010, includes a full collection of
+men’s shoes. Madden is an “opening price
+point” brand that is currently sold at major department
+stores, mid-tier retailers and specialty stores.
+Betsey Johnson Shoes . On October 5, 2010, the Company
+acquired the Betsey Johnson® trademark and substantially
+all other intellectual property of Betsey Johnson LLC. Betsey
+Johnson shoes are distributed through department stores such
+as Nordstrom and Dillard’s, online retailers such
+Amazon.com and Zappos and to Betsey Johnson retail stores.
+Superga. On February 9, 2011, the Company entered into
+a license agreement with Basic Properties America Inc. and
+BasicNet S.p.A., for use of the Superga® trademark in
+connection with the marketing and sale of footwear. Founded
+in Italy in 1911, Superga is known for its fashion sneakers
+that come in a wide range of colors, fabrics and prints.
+Report. The Report brand was part of our May 2011
+acquisition of Topline. We design, manufacture, market and
+sell our Report brand to major department stores, mid-tier
+department stores, better specialty stores and independently
+owned boutiques throughout the United States.
+International Division. Prior to 2009, our
+international business (the “International
+Division”) operated under the “first cost”
+model and, as a result, the revenues derived from the
+International Division business were included in Commissions
+and Licensing Fees in the Consolidated Statements of Income
+included in our Financial Statements. In order to improve
+operating efficiencies, and to give our international
+partners better visibility in the process, as of January
+2009, we have changed the operating model for our
+International Division to the “wholesale” model.
+The International Division ships products to Asia, Canada,
+Europe, the Middle East, Mexico, Australia and Central and
+South America.
+Private label business. We design, source and market
+private label footwear primarily to specialty retailers,
+mid-tier chains and mass merchants. In addition, we design,
+source and market footwear for third party brands, such as
+Material Girl and Candies.
+Wholesale Accessories Segment 
+Our Wholesale Accessories segment designs, sources and
+markets name brand (including Daisy Fuentes® and
+Olsenboye®, each under license, and our Steve
+Madden®, Steven by Steve Madden®, Betsey
+Johnson®, Betseyville® and Big Buddha® brands)
+and private label fashion handbags and accessories to major
+department stores, mid-tier department stores, value price
+retailers and independent stores throughout the United
+States. In addition, we market and sell cold weather
+accessories, fashion scarves, wraps and other trend
+accessories primarily under our Cejon and the Steve Madden
+brand names and private labels to department stores and
+specialty stores.
+5
+Retail Segment 
+As of December 31, 2011, the Company’s wholly-owned
+subsidiary, Steven Madden Retail, Inc., owned and operated 84
+retail stores including 73 Steve Madden full price stores,
+six Steve Madden outlet stores, three Steven stores, one
+Report store and one e-commerce website. In 2011, we opened
+nine new stores, acquired one store in the Topline
+acquisition and closed ten under-performing stores. Steve
+Madden stores are located in major shopping malls and in
+urban street locations across the United States. In 2011, our
+retail stores generated annual sales in excess of $810 per
+square foot compared to $742 per square foot generated in
+2010. Comparative store sales (sales of those stores,
+including the e-commerce website, that were open for all of
+2011 and 2010) increased 13.3% in fiscal year 2011.
+We anticipate that the Retail segment will continue to
+enhance the Company’s overall sales and profitability
+while increasing recognition for the Steve Madden brand.
+Additionally, our retail stores enable us to evaluate the
+appeal of new products and designs to our customers and
+respond accordingly, which, in turn, strengthens the product
+development efforts of our two Wholesale segments. We expect
+to open between five and seven new retail stores and close
+between three and five under-performing stores during 2012.
+First Cost Segment 
+The First Cost segment represents activities of a wholly
+owned subsidiary of the Company that earns commissions for
+serving as a buying agent for footwear products under private
+labels and licensed brands (such as Candie’s®) for
+many of the country’s large mass-market merchandisers,
+shoe chains and other mid-tier retailers. As a buying agent,
+we utilize our expertise and our relationships with shoe
+manufacturers to facilitate the production of private label
+shoes to our customers’ specifications. We believe that
+by operating in the private label, mass merchandising market,
+we are able to maximize additional non-branded sales
+opportunities. This leverages our overall sourcing and design
+capabilities. Currently, our First Cost segment serves as a
+buying agent for the procurement of women’s,
+men’s and children’s footwear for large
+retailers, including Kohl’s, Bakers, K-Mart and Sears.
+The First Cost segment receives buying agent’s
+commissions from its customers. In addition, by leveraging
+the strength of our Steve Madden brands and product designs,
+we have been able to partially recover our design, product
+and development costs from our suppliers.
+Licensing Segment 
+We license our Steve Madden® and Steven by Steve
+Madden® trademarks for use in connection with the
+manufacture, marketing and sale of sunglasses, eyewear,
+outerwear, bedding, hosiery and women’s fashion
+apparel, jewelry and luggage. In addition, the Company
+licenses the Betsey Johnson® and Betseyville®
+trademarks for use in connection with the manufacture,
+marketing and sale of apparel, jewelry, swimwear, eyewear,
+watches, fragrances and outerwear. Most of our license
+agreements require the licensee to pay us a royalty based on
+actual net sales, a minimum royalty in the event that
+specified net sales targets are not achieved and a percentage
+of sales for advertising the brand.
+See Note Q to our Consolidated Financial Statements for
+additional information relating to our five operating
+segments.
+Product Design and Development 
+We have established a reputation for our creative designs,
+marketing and trendy products at affordable price points. We
+believe that our future success will substantially depend on
+our ability to continue to anticipate and react to changing
+consumer demands in a timely manner. To meet this objective,
+we have developed what we believe is an unparalleled design
+process that allows us to recognize and respond quickly to
+changing consumer demands. Our design team strives to create
+designs which it believes fit our image, reflect current or
+future trends and can be manufactured in a timely and
+cost-effective manner. Most new Steve Madden products are
+tested in select Steve Madden retail stores. Based on these
+tests, among other things, management selects the Steve
+Madden products that are then offered for wholesale and
+retail distribution nationwide. We believe that our design
+and testing process and flexible sourcing models provides the
+Steve Madden brand with a significant competitive advantage
+allowing us to mitigate the risk of incurring costs
+associated with the production and distribution of less
+desirable designs.
+6
+Product Sourcing and Distribution 
+We source each of our product lines separately based on the
+individual design, style and quality specifications of the
+products in such product lines. We do not own or operate
+manufacturing facilities; rather, we use agents and our own
+sourcing office to source our products from independently
+owned manufacturers in China, Mexico, Brazil, India, The
+Netherlands, The Philippines and Italy. We have established
+relationships with a number of manufacturers and agents in
+each of these countries. Although we have not entered into
+any long-term manufacturing or supply contracts, we believe
+that a sufficient number of alternative sources exist for the
+manufacture of our products. We continually monitor the
+availability of the principal materials used in our footwear,
+which are currently available from a number of sources in
+various parts of the world. We track inventory flow on a
+regular basis, monitor sell-through data and incorporate
+input on product demand from wholesale customers. We use
+retailers’ feedback to adjust the production or
+manufacture of new products on a timely basis, which helps
+reduce the close out of slow-moving products.
+We distribute our products from four third-party distribution
+warehouse centers, two located in California, one located in
+Texas and one located in New Jersey, and through one Company
+owned warehouse located in New Jersey. By utilizing
+distribution facilities specializing in distribution
+fulfillment to effect distribution to certain wholesale
+accounts, Steve Madden retail stores and Internet customers,
+we believe that our customers are served more promptly and
+efficiently.
+Customers 
+Our wholesale customers consist principally of better
+department stores, mid-tier department stores, mass
+merchants, specialty stores, including independent boutiques,
+and catalog retailers. Our customers include DSW,
+Macy’s, Nordstrom, Dillard’s, Famous Footwear,
+Lord & Taylor, Target and Wal-mart.
+Distribution Channels 
+United States 
+We sell our products principally through department stores,
+specialty stores, luxury retailers, national chains and mass
+merchants and in our Company-owned retail stores and
+e-commerce website. For the year ended December 31, 2011, our
+Retail segment and our two Wholesale segments generated net
+sales of approximately $154.9 million and $813.6 million, or
+16% and 84% of our total net sales, respectively. Each of
+these distribution channels is described below.
+Steve Madden and Steven Retail Stores. As of December
+31, 2011, we operated 73 Steve Madden full price stores, six
+Steve Madden outlet stores, three Steven stores, one Report
+store and one e-commerce website (at www.stevemadden.com). We
+believe that our retail stores will continue to enhance
+overall sales, profitability, and our ability to react to
+changing consumer trends. Our stores are also a marketing
+tool that allows us to strengthen brand recognition and to
+showcase selected items from our full line of branded and
+licensed products. Furthermore, our retail stores provide us
+with venues through which to test and introduce new products,
+designs and merchandising strategies. Specifically, we often
+test new designs at our Steve Madden retail stores before
+scheduling them for mass production and wholesale
+distribution. In addition to these test marketing benefits,
+we have been able to leverage sales information gathered at
+Steve Madden retail stores to assist our wholesale customers
+in order placement and inventory management.
+A typical Steve Madden store is approximately 1,400 to 1,600
+square feet and is located in a mall or street location that
+we expect will attract the highest concentration of our core
+demographic, style-conscious customer base. The Steven
+stores, which are generally the same size as our Steve Madden
+stores, have a more sophisticated design and format styled to
+appeal to a more mature target audience. In addition to
+carefully analyzing mall demographics and locations, we set
+profitability guidelines for each potential store site.
+Specifically, we target well trafficked sites at which the
+demographics fit our consumer profile and seek new locations
+where the projected fixed annual rent expense stays within
+our guidelines. By setting these guidelines, we seek to
+identify stores that will contribute to our overall
+profitability both in the near and longer terms.
+7
+Department Stores. We currently sell to over 2,300
+doors of 15 department stores throughout the United States.
+Our major accounts include Macy’s, Nordstrom,
+Dillard’s and Lord & Taylor.
+We provide merchandising support to our department store
+customers which includes in-store fixtures and signage,
+supervision of displays and merchandising of our various
+product lines. Our wholesale merchandising effort includes
+the creation of in-store concept shops in which a broader
+collection of our branded products are showcased. These
+in-store concept shops create an environment that is
+consistent with our image and are designed to enable the
+retailer to display and sell a greater volume of our products
+per square foot of retail space. In addition, these in-store
+concept shops encourage longer term commitment by the
+retailer to our products and enhance consumer brand
+awareness.
+In addition to merchandising support, our key account
+executives maintain weekly communications with their
+respective accounts to guide them in placing orders and to
+assist them in managing inventory, assortment and retail
+sales. We leverage our sell-through data gathered at our
+retail stores to assist department stores in allocating their
+open-to-buy dollars to the most popular styles in the product
+line and phasing out styles with weaker sell-throughs, which,
+in turn, reduces markdown exposure at season’s end.
+Specialty Stores/Catalog Sales. We currently sell to
+specialty store locations throughout the United States. Our
+major specialty store accounts include DSW, Famous Footwear
+and Journeys. We offer our specialty store accounts the same
+merchandising, sell-through and inventory tracking support
+offered to our department store accounts. Sales of our
+products are also made through various catalogs, such as
+Victoria’s Secret.
+Internet Sales. We operate an Internet website,
+www.stevemadden.com, where customers can purchase numerous
+styles of our Steve Madden Women’s, Steven, Madden
+Men’s, Big Buddha and Report as well as selected styles
+of Madden Girl, footwear and accessory products.
+International 
+Our products are available in many countries and territories
+worldwide via several retail selling and distribution
+agreements. Under the terms of the various agreements, the
+distributors and retailers are generally required to open a
+minimum number of stores each year and to pay us a fee for
+each pair of footwear purchased and an additional sales
+royalty as a percentage of sales or a predetermined amount
+per unit of sale. Distributors are required to purchase a
+specified minimum number of products within specified
+periods. The agreements we have in place expire at various
+times through February 14, 2031 and include automatic
+renewals at the distributors’ option if certain
+conditions are met. These agreements are exclusive in their
+specific territories, which include Asia, Canada, Europe, the
+Middle East, Mexico, Australia, and Central and South
+America.
+Competition 
+The fashion industry is highly competitive. We compete with
+specialty shoe and accessory companies as well as companies
+with diversified footwear product lines, such as Nine West,
+Jessica Simpson, Guess, Ugg and Aldo. Our competitors may
+have greater financial and other resources than we do. We
+believe effective advertising and marketing, favorable brand
+image, fashionable styling, high quality, value and fast
+manufacturing turnaround are the most important competitive
+factors and intend to continue to employ these elements as we
+develop our products. However, we cannot be certain that we
+will be able to compete successfully against our current and
+future competitors, or that competitive pressures will not
+have a material adverse effect on our business, financial
+condition and results of operations.
+8
+Marketing and Sales 
+We have focused on creating an integrated brand building
+program to establish Steve Madden as a leading designer of
+fashion footwear for style-conscious young women and men.
+Principal marketing activities include product placements in
+lifestyle and fashion magazines, personal appearances by our
+founder and Creative and Design Chief, Steve Madden, and
+in-store promotions. We continue to promote our e-commerce
+website (www.stevemadden.com) where customers can purchase
+products under the brands Steve Madden, Steven, Steve Madden
+Men’s and selected styles of Madden Girl footwear, as
+well as view exclusive content, participate in contests and
+“live chat” with customer service
+representatives.
+Management Information Systems (MIS) Operations 
+Sophisticated information systems are essential to our
+ability to maintain our competitive position and to support
+continued growth. We operate on a dual AS/400 system which
+provides system support for all aspects of our business,
+including manufacturing purchase orders, customer purchase
+orders, order allocations, invoicing, accounts receivable
+management, quick response replenishment, point-of-sale
+support and financial and management reporting functions. We
+have a PKMS bar coded warehousing system that is integrated
+with the wholesale system in order to provide accurate
+inventory positions and quick response size replenishment for
+our customers. In addition, we have installed an electronic
+data interchange (“EDI”) system which provides a
+computer link between us and certain wholesale customers that
+enables both the customer and us to monitor purchases,
+shipments and invoicing. The EDI system also improves our
+ability to respond to customer inventory requirements on a
+weekly basis. We are currently implementing a new Company
+wide ERP system which we expect to go live in the summer of
+this year. We expect the new system to provide operating
+efficiencies and enhance customer service.
+Intellectual Property 
+Trademarks 
+We own numerous trademarks, including, among others:
+·
+Steve Madden®
+·
+Steve Madden plus Design®
+·
+Madden Girl®
+·
+Steven®
+·
+Steven by Steve Madden®
+·
+SM New York®
+·
+Madden Girl by Steve Madden®
+·
+Eyeshadows by Steve Madden®
+·
+Soho Cobbler®
+9
+·
+Steve Madden Luxe®
+·
+Natural Comfort®
+·
+Arc Stripe Design®
+·
+Torch Stripe Design®
+·
+Trissino®
+·
+Stacey and Steve®
+·
+Stacey and Steve Stylized Design®
+·
+Heart Design by Steve Madden®
+·
+Steve Madden and Heart Design®
+·
+Stevies®
+·
+Stevies by Steve Madden®
+·
+Big Buddha®
+·
+Buddha Lux®
+·
+Betsey Johnson®
+·
+Betseyville®
+·
+Steve Madden’s Fix® (logo and various
+trademarks)
+·
+PEACE LOVE SHOES® (logo and various trademarks)
+·
+Cejon®
+·
+Report®
+·
+Report Signature®
+·
+R2®
+We consider each of the above marks to be among our most
+valuable assets and have registered these marks in numerous
+countries and in numerous International Classes. From time to
+time we adopt new trademarks in connection with the marketing
+of new product lines. We believe that our trademarks have
+significant value and are important for purposes of
+identifying the Company, the marketing of our products and
+the products of our licensees, distinguishing them from the
+products of others. We act aggressively to register and
+vigorously protect our trademarks against infringement. There
+can be no assurance, however, that we will be able to
+effectively obtain rights to our marks throughout all of the
+countries of the world. Moreover, no assurance can be given
+that others will not assert rights in or ownership of, our
+marks and other proprietary rights or that we will be able to
+resolve any such conflicts successfully. Our failure to
+protect such rights from unlawful and improper appropriation
+may have a material adverse effect on our business, financial
+condition, results of operations and liquidity.
+10
+Trademark Licensing 
+Our strategy for the continued growth of the Company’s
+business includes expanding the Company’s presence
+beyond footwear and accessories through the selective
+licensing of our brands. As of December 31, 2011, we license
+our Steve Madden® and Steven by Steve Madden®
+trademarks for use in connection with the manufacture,
+marketing and sale of sunglasses, eyewear, outerwear,
+bedding, hosiery and women’s fashion apparel, jewelry
+and luggage. In addition, the Company licenses the Betsey
+Johnson® and Betseyville® trademarks for use in
+connection with the manufacture, marketing and sale of
+apparel, jewelry, swimwear, eyewear, watches, fragrances and
+outerwear. Most of our license agreements require the
+licensee to pay us a royalty based on actual net sales, a
+minimum royalty in the event that specified net sales targets
+are not achieved and a percentage of sales for advertising
+the brand. See Notes A13 and O4 to our Consolidated Financial
+Statements included in this Annual Report on Form 10-K for
+additional disclosure regarding these licensing arrangements.
+In addition to the licensing of our trademarks, we also
+license from third parties trademarks used in connection with
+certain of our product lines. Under licenses from Dualstar
+Entertainment Group, LLC, the Company has the right to use
+the Olsenboye® trademark in connection with the sale and
+marketing of footwear and accessories and the Elizabeth and
+James® trademark in connection with the sale and
+marketing of footwear. The term of these licenses expire on
+December 31, 2013 and March 31, 2012, respectively. In
+addition, we hold licenses from Jones Investment Co. Inc.
+under which the Company has the right to use the GLO
+Jeans® trademark in connection with the sale and
+marketing of women’s footwear exclusively to K-Mart and
+the l.e.i.® trademark in connection with the marketing
+and sale of women’s footwear exclusively to Wal-Mart.
+The term of the licenses from Jones Investment Co, Inc.
+expire on December 31, 2012 and December 31, 2014,
+respectively. We also hold a license from Dafu Licensing,
+Inc. to design, manufacture and distribute handbags and belts
+and related accessories under the DF Daisy Fuentes® and
+the Daisy Fuentes® brands. The term of our license with
+Dafu Licensing, Inc. expires on December 31, 2012. We also
+hold a license from Basic Properties America Inc. and
+BasicNet S.p.A under which we have the right to use the
+Superga® trademark in connection with the sale and
+marketing of footwear. The initial term of our license with
+Basic Properties America Inc. and BasicNet S.p.A expires on
+December 31, 2013, with a four year renewal term at our
+option if certain provisions are met. We also hold a license
+from G-III Apparel Group to design, manufacture and
+distribute eyewear and sunglasses under the Andrew Marc
+brand. The initial term of the license with G-III Apparel
+Group expires on July 31, 2013, with a three year renewal
+term at our option if certain provisions are met.
+Substantially all of these licensing agreements require us to
+make royalty and advertising payments to the licensor equal
+to a percentage of our net sales or a minimum royalty and
+advertising payment in the event that specified net sales
+targets are not achieved.
+Employees 
+On February 1, 2012, we employed approximately 2,370
+employees, of whom approximately 1,620 work on a full-time
+basis and approximately 750 work on a part-time basis, with
+most of the part-time employees being employed in the Retail
+segment. Approximately 1,750 of our employees are located in
+the United States and approximately 620 employees are located
+in Hong Kong and the Peoples Republic of China. None of our
+employees are represented by a union. Our management
+considers relations with our employees to be good. The
+Company has never experienced a material interruption of its
+operations due to a labor dispute.
+11
+Seasonality 
+Historically, some of our businesses, including our Retail
+segment, have experienced holiday retail seasonality. In
+addition to seasonal fluctuations, our operating results
+fluctuate from quarter to quarter as a result of the timing
+of holidays, weather, the timing of larger shipments of
+footwear, market acceptance of our products, product mix,
+pricing and presentation of the products offered and sold,
+the hiring and training of additional personnel, inventory
+write downs for obsolescence, the cost of materials, the
+product mix between wholesale, retail and licensing
+businesses, the incurrence of other operating costs and
+factors beyond our control, such as general economic
+conditions and actions of competitors.
+Backlog 
+We had unfilled wholesale customer orders of $280.8 million
+and $161.8 million, as of February 1, 2012 and 2011,
+respectively. This increase in orders is primarily due to the
+addition of our recently acquired Topline and Cejon
+businesses. Our backlog at a particular time is affected by a
+number of factors, including seasonality, timing of market
+weeks and wholesale customer purchases of our core products
+through our open stock program. Accordingly, a comparison of
+backlog from period to period may not be indicative of
+eventual shipments.
+ITEM 1A
+RISK FACTORS
+You should carefully consider the risks and uncertainties we
+describe below and the other information in this Annual
+Report on Form 10-K before deciding to invest in, sell or
+retain shares of our common stock. These are not the only
+risks and uncertainties that we face. Other sections of this
+report may discuss factors that could adversely affect our
+business. The retail industry is highly competitive and
+subject to rapid change. There may be additional risks and
+uncertainties that we do not currently know about or that we
+currently believe are immaterial, or that we have not
+predicted, which may also harm our business or adversely
+affect us. If any of these risks or uncertainties actually
+occurs, our business, financial condition, results of
+operations and liquidity could be materially harmed.
+Risks Related to the Industry in Which the Company
+Operates 
+Constantly Changing
+Fashion Trends and Consumer Demands. Our
+success depends in significant part upon our 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
+our products will correspond to the changes in taste and
+demand or that we will be able to successfully market
+products that respond to such trends. If we misjudge the
+market for our products, we may be faced with significant
+excess inventories for some products and missed opportunities
+as to others. In addition, misjudgments in merchandise
+selection could adversely affect our image with our customers
+resulting in lower sales and increased markdown allowances
+for customers which could have a material adverse effect on
+our business, financial condition, results of operations and
+liquidity.
+Intense Fashion Industry Competition . The
+fashion footwear industry is highly competitive and barriers
+to entry are low. Our competitors include specialty companies
+as well as companies with diversified product lines. The
+recent market growth in the sales of fashion footwear and
+accessories has encouraged the entry of many new competitors
+and increased competition from established companies. Many of
+these competitors, including Nine West, Guess, Jessica
+Simpson, Ugg and Aldo, may have significantly greater
+financial and other resources than we do and there can be no
+assurance that we will be able to compete successfully with
+other fashion footwear and accessories companies. Increased
+competition could result in pricing pressures, increased
+marketing expenditures and loss of market share, and could
+have a material adverse effect on our business, financial
+condition, results of operations and liquidity. We believe
+effective advertising and marketing, favorable branding of
+the Steve Madden® and our other trademarks, fashionable
+styling, high quality and value are the most important
+competitive factors and we plan to continue to employ these
+elements as we develop new products and businesses. Our
+inability to effectively advertise and market our products
+could have a material adverse effect on our business,
+financial condition, results of operations and liquidity.
+12
+Cyclical Nature of Fashion Business . The overall fashion industry
+is cyclical, and purchasing
+tends to decline during recessionary periods when
+disposable income is low. Likewise, purchases of
+contemporary shoes and accessories tends to decline during
+recessionary periods and also may decline at other times.
+There can be no assurance that we will be able to grow or
+even maintain our current level of revenues and earnings, or
+remain profitable in the future. Continuing recession in the
+international, national or regional economies and uncertainties regarding
+future economic prospects, among other things, could affect
+consumer spending habits. The volatility and disruption of
+global economic and financial market conditions that began in
+2008 has caused lingering declines in consumer confidence and
+spending in the United States and internationally. A further deterioration or a
+continued weakness of economic and financial market
+conditions for an extended period of time could have a
+material adverse effect on our business, financial condition,
+results of operations and liquidity.
+Consolidation Among Retailers . 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 further consolidate,
+undergo restructurings or reorganizations, or realign their
+affiliations, any of which could decrease the number of
+stores that carry our 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 our business or financial condition,
+results of operations and liquidity, there can be no
+assurance as to the future effect of any such changes.
+Economic Uncertainty and Political Risks . Our
+opportunities for long-term growth and profitability are
+accompanied by significant challenges and risks, particularly
+in the near term. Specifically, our business is dependent on
+consumer demand for our products. We believe that declining
+consumer confidence accompanied with the tightening of credit
+standards, higher energy and food prices and unemployment
+rates and a decrease in consumers’ disposable income
+has negatively impacted the level of consumer spending for
+discretionary items during the years ended December 31, 2009,
+2010 and 2011. Despite the worsening retail environment, in
+2011 we achieved substantial revenue growth in both our
+Wholesale and Retail segments but we cannot assume that this
+will be maintained. A continued weak economic environment
+could have a negative effect on the Company’s sales and
+results of operations during the year ending December 31,
+2012 and thereafter. In addition, the European sovereign debt
+crisis and its implications for interconnected global
+financial systems, as well as the unstable political
+conditions in the Middle East and some other parts of the
+world, including potential or actual international conflicts,
+or the continuation or escalation of terrorism, could have a
+material adverse effect on our business, financial condition,
+results of operations and liquidity.
+Risks Related to Our Business 
+Dependence on Key Personnel. The growth and
+success of our Company since its inception more than twenty
+years ago is attributable, to a significant degree, to the
+talents, skills and efforts of our founder and Creative and
+Design Chief, Steven Madden. An extended or permanent loss of
+the services of Mr. Madden could severely disrupt our
+business and have a material adverse effect on the Company.
+Our senior executives have substantial experience and
+expertise in our business and industry and have made
+significant contributions to our growth and success as well.
+Competition for key executives in the apparel, footwear and
+accessories industries is intense. While our employment
+agreements with Mr. Madden and most of our senior executives
+include a non-compete provision in the event of the
+termination of employment, the non-compete periods are of
+limited duration. While we believe we have depth within our
+senior management team, if we lose the services of our
+Creative and Design Chief or any of our senior executives,
+and especially if any of these individuals joins a competitor
+or forms a competing company, our business and financial
+performance could be seriously harmed. A loss of the skills,
+industry knowledge, contacts and expertise of our Creative
+and Design Chief or any of our senior executives could cause
+a setback to our operating plan and strategy.
+Dependence Upon Significant 
+Customers . Our customers consist principally of major
+department stores, mid-tier department stores, better
+specialty stores and independently owned boutiques. Certain
+of our department store customers, including some under
+common ownership, account for significant portions of our
+wholesale business. We generally enter into a number of
+purchase order commitments with our customers for each of our
+lines every season and do not enter into long-term agreements
+with any of our customers. Therefore, a decision by a
+significant customer, whether motivated by competitive
+conditions, financial difficulties or otherwise, to decrease
+the amount of merchandise purchased from us or to change its
+manner of doing business could have a material adverse effect
+on our business, financial condition, results of operations
+and liquidity.
+13
+Risks Associated with
+Extending Credit to Customers. We
+sell our products primarily to retail stores across the
+United States and extend credit based on an evaluation of
+each customer’s financial condition, usually without
+collateral. Various retailers, including some of our
+customers, have experienced financial difficulties as a
+result of the financial crisis that began in 2008, which has
+increased the risk of extending credit to such retailers.
+However, our losses due to bad debts have been limited.
+Pursuant to the terms of our collection agency agreement, our
+factor, Rosenthal & Rosenthal, Inc., currently assumes
+the credit risk related to approximately 43% of our trade
+accounts receivable. In addition, we have letters of credit
+for approximately 20% of our trade accounts receivable.
+Still, if any of our customers experiences a shortage of
+liquidity, the risk that the customer’s outstanding
+payables to us would not be paid could cause us to curtail
+business with the customer or require us to assume more
+credit risk relating to the customer’s account payable.
+Risks Associated
+with Expansion of Retail
+Business . Our continued growth depends to a
+significant degree on whether we are successful in further
+developing and marketing the Steve Madden, Stevies, Steven,
+Madden Girl, Steve Madden Men’s, Big Buddha, Elizabeth
+and James, Olsenboye, l.e.i., Betsey Johnson and Betseyville
+brands, and creating new brands, product categories and
+businesses that are appealing to our customers. The operation
+of company-owned Steve Madden and Steven stores is a
+significant part of our growth strategy. During the year
+ended December 31, 2011, we opened nine new stores, acquired
+one store in connection with the acquisition of Topline and
+closed ten under-performing stores. We have plans to open
+five to seven and close three to five underperforming stores
+in the next fiscal year. Our future expansion plan 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 us in our existing markets. There can be no assurance that
+we 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. Our
+retail expansion is dependent on the performance of our
+wholesale and retail operations, generally as well as on a
+number of other factors, including our ability to:
+·
+locate and obtain favorable store sites;
+·
+negotiate favorable lease terms;
+·
+hire, train and retain competent store personnel;
+·
+anticipate the preferences of our retail customers in
+new geographic areas;
+·
+successfully integrate new stores into our existing
+operations.
+Past comparable store sales results may not be indicative of
+future results and there can be no assurance that our
+comparable store sales results will increase or even be
+maintained in the future.
+Management of Growth . The size of our business
+continues to grow organically and as a result of business
+acquisitions. In order to gain from our acquisitions, we must
+be effective in integrating the businesses acquired into our
+overall operations. Further, the expansion of our operations
+has increased and will continue to increase the demand on our
+managerial, operational and administrative resources. In
+recent years, we have invested significant resources in,
+among other things, our management information systems and
+hiring and training of new personnel. However, in order to
+manage currently anticipated levels of future demand, we may
+be required to, among other things, expand our distribution
+facilities, establish relationships with new manufacturers to
+produce our product, and continue to expand and improve our
+financial, management and operating systems. We may
+experience difficulty integrating acquired businesses into
+our operations and may not achieve anticipated synergies from
+such integration. There can be no assurance that we will be
+able to manage future growth effectively and a failure to do
+so could have a material adverse effect on our business,
+financial condition, results of operations and liquidity.
+Inventory Management . The trend-focused nature
+of the fashion industry and the rapid changes in customer
+preferences leave us vulnerable to an increased risk of
+inventory obsolescence. Thus, our ability to manage our
+inventories properly is an important factor in our
+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 may be necessary to reduce high inventory levels. Our
+inability to effectively manage our inventory could have a
+material adverse effect on our business, financial condition,
+results of operations and liquidity.
+14
+Foreign Sourcing and
+Manufacturing . Virtually all of our products
+are purchased through arrangements with a number of foreign
+manufacturers, primarily from China, Mexico, Brazil, India,
+The Netherlands, The Philippines and Italy. Risks inherent in
+foreign operations including work stoppages, transportation
+delays and interruptions and changes in social, political and
+economic conditions, can result in the disruption of trade
+from the countries in which our 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 our business, financial
+condition, results of operations and liquidity. While we
+believe that we manage our exposure to the risk that any such
+economic or political condition will materially affect our
+ability to purchase products because we are aware of a
+variety of materials and alternative sources that are
+available, we cannot be certain that we will be able to
+identify such alternative materials and/or sources without
+delay or without greater cost to us. Our inability to
+identify and secure alternative sources of supply in this
+situation could have a material adverse effect on our
+business, financial condition, results of operations and
+liquidity.
+Impact of Custom Duties
+and Other Import Regulations . Our
+products, virtually all of which are imported, are also
+subject to United States custom duties. The United States and
+the countries in which our products are produced or sold,
+from time to time, impose new quotas, duties, tariffs or
+other restrictions on imports or exports, may adversely
+adjust prevailing quotas, duties or tariff levels, or impose
+sanctions in the form of additional duties to remedy
+perceived illegal actions, any of which could have a material
+adverse effect on our business, financial condition, results
+of operations and liquidity.
+Manufacturers’ Inability to Manufacture Our Goods in a Timely Manner
+or Meet Quality Standards . As is common in the
+footwear and accessories industries, we contract for the
+manufacture of virtually all of our products to our
+specifications through foreign manufacturers. We do not own
+or operate any manufacturing facilities and, therefore, we
+are dependent upon third parties for the manufacture of all
+of our products. The inability of a manufacturer to ship
+orders of our products in a timely manner or to meet our
+quality standards could cause us to miss the delivery date
+requirements of our customers for those items, which, in
+turn, could result in cancellation of orders, refusal to
+accept deliveries, a reduction in purchase prices and,
+ultimately, termination of a customer relationship, any of
+which could have a material adverse effect on our business,
+financial condition, results of operations and liquidity.
+Difficulty in Locating
+Replacement Manufacturers. Although we enter
+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, we do 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. In addition, we may seek replacement manufacturers for
+various reasons, including a significant increase in the
+prices we are required to pay to our existing manufacturers
+of our goods. Although we believe that other facilities are
+available for the manufacture of our products, there can be
+no assurance that such facilities would be available to us on
+an immediate basis, if at all, or be able to meet our quality
+standards and delivery requirements, or that the costs
+charged to us by such manufacturers would not be
+significantly greater than those presently paid.
+Manufacturers’
+Failure to Use Acceptable Labor
+Practices . and Comply with Local Laws and
+Other Standards . Our products are manufactured
+by numerous independent manufacturers outside of the United
+States. We also have license agreements that permit our
+licensees to manufacture or contract to manufacture products
+using our trademarks. We impose, and require that our
+licensees impose, on these manufacturers environmental,
+health, and safety standards for the benefit of their labor
+force. In addition, we require these manufacturers to comply
+with applicable standards for product safety. However, we do
+not control our independent manufacturers or licensing
+partners or their labor, product safety and other business
+practices and, from time to time, our independent
+manufacturers may not comply with such standards or
+applicable local law or our licensees may not require their
+manufacturers to comply with such standards or applicable
+local law. The violation of such standards and laws by one of
+these independent manufacturers with whom we contract or by
+one of our licensing partners, or the divergence of a
+manufacturer’s or a licensing partner’s labor
+practices from those generally accepted as ethical in the
+United States, could harm our reputation, result in a product
+recall or require us to curtail our relationship with and
+locate a replacement for such manufacturer, which, as noted
+in the immediately preceding risk factor, could be
+challenging, any of which events could have a material
+adverse effect on our business, financial condition, results
+of operations and liquidity.
+15
+Seasonal and Quarterly Fluctuations . Our
+results of operations
+may fluctuate from quarter to quarter and are affected by a
+variety of factors, including:
+·
+the timing of holidays;
+·
+weather conditions;
+·
+the timing of larger shipments of footwear ; 
+·
+market acceptance of our products ; 
+·
+the mix, pricing and presentation of the products
+offered and sold ; 
+·
+the hiring and training of additional personnel ; 
+·
+inventory write downs for obsolescence , the cost of
+materials; 
+·
+the cost of materials;
+·
+the product mix between wholesale, retail and licensing
+businesses ; 
+·
+the incurrence of other operating costs and 
+·
+factors beyond our control, such as general economic
+conditions and actions of competitors.
+In addition, we expect that our 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.
+Inadequate 
+Trademark Protections . We believe that our
+trademarks and other proprietary rights are of major
+significance to our success and our competitive position and
+consider some of our trademarks, such as Steve Madden Ò , to be integral to
+our business and among our most valuable assets. Accordingly,
+we devote substantial resources to the establishment and
+protection of our trademarks on a worldwide basis.
+Nevertheless, there can be no assurance that the actions
+taken by us to establish and protect our trademarks and other
+proprietary rights will be adequate to prevent imitation of
+our products by others or to prevent others from seeking to
+block sales of our products on the basis that our products
+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 ours or that we 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. Our
+failure to establish and then protect such proprietary rights
+from unlawful and improper utilization could have a material
+adverse effect on our business, financial condition, results
+of operations and liquidity.
+Litigation and Other Legal Proceedings. We are
+involved in various claims, litigations and other legal and
+regulatory proceedings and governmental investigations that
+arise from time to time in the ordinary course of our
+business. Due to the inherent uncertainties of litigation and
+such other proceedings and investigations, we cannot predict
+with accuracy the ultimate outcome of any such matters. An
+unfavorable outcome could have an adverse impact on our
+business, financial condition and results of operations and
+the amount of insurance coverage we maintain to address such
+matters may be inadequate to cover these or other claims. In
+addition, any significant litigation, investigation or
+proceeding, regardless of its merits, could divert financial
+and management resources that would otherwise be used to
+benefit our operations. See Item 3 “Legal
+Proceedings,” below for additional information
+regarding certain of the matters in which we are involved.
+Exposure
+to Foreign Currency
+Fluctuations . We make approximately 99% of our
+purchases in U.S. dollars. However, we source substantially
+all of our products overseas and, as such, the cost of these
+products may be affected by changes in the value of the
+relevant currencies. Changes in currency exchange rates may
+also affect the relative prices at which we and our foreign
+competitors sell products in the same market. There can be no
+assurance that foreign currency fluctuations will not have a
+material adverse effect on our business, financial condition,
+results of operations and liquidity.
+16
+Disruption of Information Technology Systems and
+Websites. We rely heavily on information technology
+systems to manage and operate all aspects of our business,
+including product design and testing, production,
+forecasting, ordering, manufacturing, transportation, sales
+and distribution, invoicing and accounts receivable
+management, quick response replenishment, point of sale
+support and financial management reporting functions. In
+addition, we maintain an Internet website in the United
+States where retail customers can order our products. We
+depend on our in-house information technology employees and
+outside vendors to maintain and periodically upgrade these
+systems and our websites to support the growth of our
+business. It is imperative that we maintain constant
+operation of our information technology systems and websites
+and that these systems and our websites operative
+effectively. Despite our preventative efforts, our
+information technology systems and websites are vulnerable
+from time to time to damage or interruption from, among other
+things, security breaches, computer viruses or power outages,
+any of which could adversely impact our business and require
+significant expenditures by us to remediate any such failure,
+problem or breach.
+Information Technology Systems and Website
+Disruption. We are heavily dependent upon our
+information technology systems to record and process
+transactions and manage and operate our business including
+merchandise management, inventory management, sales tracking
+and supply chain monitoring and management. In addition, we
+have e-commerce and other Internet websites. Given the nature
+of our business and the significant number of transactions
+that we engage in on an annual basis, it is essential that we
+maintain constant operation of our computer hardware and
+software systems. Despite vigilance in this regard, our
+systems are vulnerable from time to time to damage or
+interruption from events such as difficulties in replacing or
+integrating new systems, computer viruses, security breaches
+and power outages. Cybersecurity attacks are becoming
+increasingly sophisticated and run the gamut from malicious
+software to electronic security breaches to corruption of
+data and beyond. We are continually evaluating, improving and
+upgrading our systems in an effort to address concerns but
+any such problems or interruptions may result in loss of
+valuable business data, our customers’ or
+employees’ personal information or disruption of our
+operations and other adverse impact to our business. In
+addition, we must comply with increasingly complex regulatory
+standards enacted to protect business and personal data and
+an inability to maintain compliance with these regulatory
+standards could subject us to legal risks and penalties.
+Breach of Customer Privacy. A routine part of
+our business includes the gathering, processing and retention
+of sensitive and confidential information pertaining to our
+customers. While we believe that adequate security measures
+have been established and are maintained by us to protect
+against privacy breaches, the Company’s facilities and
+information technology systems, and those of our third party
+service providers, may be vulnerable to security breaches,
+acts of vandalism, software viruses, misplaced or lost data,
+programming, human error, or other similar events. Such a
+breach that results in misappropriation, loss or other
+unauthorized disclosure of a customer’s confidential
+information, whether by the Company or a third party service
+provider, could severely damage our reputation and
+relationship with our customers and adversely affect our
+business, as well as expose the Company to risks of
+litigation and liability.
+Declines in Our Stock Price Due to Inaccurate
+Predictions. The trading price of our common stock
+periodically may rise or fall based on the accuracy of
+predictions of our future performance. As one of our primary
+objectives, we strive to maximize the long-term strength,
+growth and profitability of our Company, rather than to
+achieve an earnings target in any particular fiscal quarter.
+We believe that this longer-term goal is in the best
+interests of the Company and our stockholders, but recognize
+that it may be helpful to our stockholders and potential
+investors for us to provide guidance as to our quarterly and
+annual forecast of net sales and earnings. While we endeavor
+to provide meaningful and considered guidance at the time it
+is provided and generally expect to provide updates to our
+guidance when we report our results each fiscal quarter,
+actual results may differ from our predictions as the
+guidance is based on assumptions and expectations that may or
+may not come to pass and, as such, we assume no
+responsibility to update any of our forward-looking
+statements at such times or otherwise. If and when we
+announce actual results that differ from those that have been
+predicted by us, the market price of our common stock could
+be adversely affected. Investors who rely on these
+predictions in making investment decisions with respect to
+our common stock do so at their own risk. We take no
+responsibility for any losses suffered as a result of such
+changes in the prices of our common stock.
+17
+In addition, at any given time outside securities analysts
+may follow our financial results and issue reports that
+discuss our historical financial results and the
+analysts’ predictions of our future performance, which
+our stockholders and potential investors may choose to rely
+on in making investment decisions. These analysts’
+predictions are based upon their own opinions and are often
+different from our own forecasts. Our stock price could
+decline if our results are below the estimates or
+expectations of these outside analysts.
+ITEM 1B
+UNRESOLVED STAFF COMMENTS
+None.
+18
+ITEM 2
+PROPERTIES
+We lease space for our headquarters, our retail stores,
+showrooms and office facilities in various locations in the
+United States, as well as overseas. We own one improved real
+property parcel in Long Island City, New York. We believe
+that our existing facilities are in good operating condition
+and are adequate for our present level of operations. The
+following table sets forth information with respect to our
+key properties:
+Location 
+Leased/Owned 
+Primary Use 
+Approximate 
+Area Square 
+Feet 
+Dongguan, Guangdong
+Province, China 
+Leased 
+Offices and sample
+production 
+180,000 
+Long Island City,
+NY 
+Leased 
+Executive offices 
+66,600 
+Bayonne, NJ 
+Leased 
+Warehouse 
+50,000 
+Bellevue, WA 
+Leased 
+Offices, Topline 
+41,500 
+Putian City, Guangdong
+Province, China 
+Leased 
+Offices 
+23,800 
+New York, NY 
+Leased 
+Offices and showroom,
+Accessories 
+20,000 
+New York, NY 
+Leased 
+Showroom 
+14,000 
+New York, NY 
+Leased 
+Offices, Cejon 
+12,400 
+Long Island City,
+NY 
+Leased 
+Storage 
+7,200 
+New York, NY 
+Leased 
+Offices, Accessories
+private label 
+6,500 
+New York, NY 
+Leased 
+Showroom, Topline 
+6,400 
+Guangdong Province,
+China 
+Leased 
+Offices 
+4,800 
+Los Angeles, CA 
+Leased 
+Showroom 
+4,600 
+Kwai Chung, Hong
+Kong 
+Leased 
+Offices 
+3,600 
+Taichung, Taiwan,
+ROC 
+Leased 
+Offices 
+3,200 
+Long Island City,
+NY 
+Owned 
+Offices 
+2,200 
+All of our retail stores are leased pursuant to leases that,
+under their original terms, extend for an average of ten
+years. Many of the leases contain rent escalation clauses to
+compensate for increases in operating costs and real estate
+taxes over the base year. The current terms of our retail
+store leases expire as follows:
+Years Initial Lease Terms Expire
+Number of Stores
+2012
+5
+2013
+14
+2014
+4
+2015
+5
+2016
+4
+2017
+13
+2018
+9
+2019
+8
+2020
+3
+2021
+12
+2022
+6
+2023
+1
+ITEM 3
+LEGAL PROCEEDINGS
+On February 2, 2012, two individuals purporting to be
+stockholders of the Company commenced separate civil actions
+in the Supreme Court of New York, Queens County, Mark
+Ioffe, Derivatively on Behalf of nominal defendant, Steven
+Madden Ltd. v. Steven Madden, et. al, no.
+700188-2012 (the “Ioffe Action”) and Catherine
+L. Phillips, Derivatively on Behalf of Nominal Defendant
+Steven Madden, Ltd v. Steven Madden, et. al. no.
+700189-2012 (together with the Ioffe Action, the
+“Actions”). The Actions assert derivative claims
+challenging the decision of the Company’s Board of
+Directors in January 2012 to amend Steven Madden’s
+Employment Agreement dated July 15, 2005, and amended as of
+December 14, 2009 (the “Madden Employment
+Agreement”) and to amend the promissory note (the
+“Promissory Note”) setting forth Mr. Madden's
+obligations in respect of a loan made by the Company to Mr.
+Madden in 2007 and amended in 2009. The Actions assert that
+the Board violated its duties of loyalty and good faith by
+approving the amendments to the Madden Employment Agreement
+and the Promissory Note and that the changes set forth in the
+amendments constitute a waste of corporate assets. The
+Actions also assert claims of unjust enrichment against Mr.
+Madden. The Actions seek, on behalf of the Company,
+disgorgement of any compensation that Mr. Madden has received
+as a result of the amended Madden Employment Agreement, an
+award of damages to the Company, and a declaration that the
+amendments of the Madden Employment Agreement and the
+Promissory Note are void. The Company intends to seek
+dismissal of the Actions based on, among other things, the
+plaintiffs’ failure to make a demand that the
+Company’s Board of Directors investigate their claims.
+19
+On June 24, 2009, a class action lawsuit, Shahrzad
+Tahvilian, et al. v. Steve Madden Retail, Inc. and Steve
+Madden, Ltd. , Case No. BC 414217, was filed in the
+Superior Court of California, Los Angeles County, against the
+Company and its wholly-owned subsidiary alleging violations
+of California labor laws. The parties submitted the dispute
+to private mediation and, on August 31, 2010, reached a
+settlement on all claims. Based on the proposed settlement,
+the Company increased its reserve for this claim from $1
+million to $2.75 million in the third quarter of 2010. In
+June 2011, the court approved the final settlement for $1.97
+million. The payment of the final settlement did not have a
+material effect on the Company’s financial position.
+On August 10, 2005, following the conclusion of an audit of
+the Company conducted by auditors for U.S. Customs and Border
+Protection (“U.S. Customs”) during 2004 and 2005,
+U.S. Customs issued a report that asserts that certain
+commissions that the Company treated as “buying
+agents’ commissions” (which are non-dutiable)
+should be treated as “selling agents’
+commissions” and hence are dutiable. Subsequently, U.S.
+Immigration and Customs Enforcement notified the
+Company’s legal counsel that a formal investigation of
+the Company’s importing practices had been commenced as
+a result of the audit. In September of 2007, U.S. Customs
+notified the Company that it had finalized its assessment of
+the underpaid duties at $1.4 million. The Company, with the
+advice of legal counsel, evaluated the liability in the case,
+including additional duties, interest and penalties, and
+believed that it was not likely to exceed $3.05 million, and
+accordingly, a reserve for this amount was recorded as of
+December 31, 2009. The Company contested the conclusions of
+the U.S. Customs audit and filed a request for review and
+issuance of rulings thereon by U.S. Customs Headquarters,
+Office of Regulations and Rulings, under internal advice
+procedures. On September 20, 2010, the Company was advised by
+legal counsel that U.S. Customs had issued a ruling in the
+matter, concluding that the commissions paid by the Company
+pursuant to buying agreements entered into by the Company and
+one of its two
+buying agents under review were bona fide buying- agent commissions and,
+therefore, were non-dutiable. With respect to the second
+buying agent, U.S. Customs also ruled that beginning in
+February of 2002, commissions paid by the Company were bona
+fide buying agent commissions and, therefore, were
+non-dutiable. However, U.S. Customs found that the
+Company’s pre-2002 buying agreements with the second
+agent were legally insufficient to substantiate a
+buyer-buyer’s agent relationship between the Company
+and the agent and that commissions paid to the second agent
+under such buying
+agreements, in
+fact, were dutiable. On the basis of the U.S. customs ruling,
+the Company reevaluated the liability in the case and
+believes that it is not likely to exceed $1,248 million and
+the reserve was reduced from $3.05 million to such amount as
+of September 30, 2010.
+On November 21, 2011, U.S. Customs issued a pre-penalty
+notice to the Company in which it alleges that gross
+negligence by the Company resulted in an underpayment of
+duties with respect to certain pre-2002 buying agreements and
+claims that the Company owes $341,677 as an additional duty
+and $1.367 million in monetary penalties. In its
+February 16, 2012 response to the pre-penalty notice, the
+Company submitted that it owes no additional duty and,
+further, did not through negligence or gross negligence fail
+to pay any duty or engage in conduct amounting to either
+gross negligence or negligence. The Company requested
+that U.S. Customs withdraw its proposal to issue a notice of
+penalty and take no further adverse action against the
+Company. In the event that U.S. Customs is not inclined
+to withdraw the pre-penalty notice after review of the
+Company’s response, the Company has requested the
+opportunity to make an oral presentation to U.S. Customs
+prior to the issuance of a notice of penalty. In the event
+that U.S. Customs decides to issue a notice of penalty, the
+Company intends to file a petition for relief requesting a
+reduction of the level of culpability and mitigation of the
+penalty amount assessed. The maximum total amount of damages
+related to this matter is approximately $1.7 million for
+which the Company has accrued $1.248 million.
+We have been named as a defendant in certain other lawsuits
+in the normal course of business. In the opinion of
+management, after consulting with legal counsel, the
+liabilities, if any, resulting from these matters should not
+have a material effect on our financial position or results
+of operations.
+ITEM 4
+[REMOVED AND RESERVED]
+part II
+ITEM 5
+MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED
+STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
+SECURITIES
+Market Information. Our shares of common stock have
+traded on the NASDAQ Global Select Market since August 1,
+2007 and were traded on the NASDAQ National Market prior to
+that date. The following table sets forth the range of high
+and low closing sales prices for our common stock during each
+fiscal quarter during the two-year period ended December 31,
+2011 as reported by the NASDAQ Global Select Market. The
+trading volume of our securities fluctuates and may be
+limited during certain periods. As a result, the liquidity of
+an investment in our securities may be adversely affected.
+Common Stock 
+High
+Low
+High
+Low
+2011
+2010
+Quarter ended 
+March 31, 2011
+$
+31.29
+$
+25.15
+Quarter ended 
+March 31, 2010
+$
+21.80
+$
+17.22
+Quarter ended 
+June 30, 2011
+$
+37.96
+$
+31.73
+Quarter ended 
+June 30, 2010
+$
+26.72
+$
+20.73
+Quarter ended 
+September 30, 2011
+$
+41.02
+$
+30.10
+Quarter ended 
+September 30, 2010
+$
+28.00
+$
+20.35
+Quarter ended 
+December 31, 2011
+$
+37.55
+$
+28.36
+Quarter ended 
+December 31, 2010
+$
+31.57
+$
+27.00
+Holders. As of February 23, 2012, there were 107
+holders of record of our common stock.
+Dividends . With the exception of a special cash
+dividend paid in November 2005 and in November 2006, we have
+not declared or paid any cash dividends in the past to the
+holders of our common stock and do not currently anticipate
+declaring or paying any cash dividends in the foreseeable
+future. We intend to retain earnings, if any, to finance the
+development and expansion of our business. Future dividend
+policy will be subject to the discretion of our Board of
+Directors and will be contingent upon future earnings, if
+any, our financial condition, capital requirements, general
+business conditions, and other factors. Therefore, we can
+give no assurance that any cash dividends of any kind will be
+paid to holders of our common stock in the future.
+Equity Compensation Plans . Information regarding our
+equity compensation plans as of December 31, 2011 is
+disclosed in Item 12, “Security Ownership of Certain
+Beneficial Owners and Management and Related Stockholder
+Matters.”
+Issuer Repurchases of Equity Securities. We did not
+repurchase any shares of our common stock during the fourth
+quarter of the year ended December 31, 2011. In February and
+August 2007, our Board of Directors authorized increases of
+our previously announced share repurchase program of $30
+million and $37 million, respectively. In May 2010, the Board
+authorized an additional increase of $50 million to the share
+repurchase program. At December 31, 2011, an aggregate of $47
+million remained authorized to repurchase our common stock.
+The program has no set expiration date.
+20
+Performance Graph . The following graph compares the
+yearly percentage change in the cumulative total stockholder
+return on our common stock during the period beginning on
+December 31, 2006, and ending on December 31, 2011, with the
+cumulative total return on the Russell 2000 Index and the
+S&P 500 Footwear Index. The comparison assumes that $100
+was invested on December 31, 2006 in our common stock and in
+the foregoing indices and assumes the reinvestment of
+dividends.
+12/31/2006
+12/31/2007
+12/31/2008
+12/31/2009
+12/31/2010
+12/31/2011
+Steven Madden, Ltd.
+$
+100.00
+$
+57.00
+$
+60.75
+$
+117.51
+$
+178.32
+$
+221.22
+Russell 2000 Index
+$
+100.00
+$
+98.45
+$
+65.18
+$
+82.90
+$
+105.16
+$
+100.75
+S&P 500 Footwear Index
+$
+100.00
+$
+131.50
+$
+106.03
+$
+139.88
+$
+183.58
+$
+210.81
+21
+ITEM 6
+SELECTED FINANCIAL DATA
+The following selected financial data has been derived from
+our audited Consolidated Financial Statements. The Income
+Statement Data relating to 2011, 2010 and 2009, and the
+Balance Sheet data as of December 31, 2011 and 2010 should be
+read in conjunction with the information provided in Item 7,
+“Management’s Discussion and Analysis of
+Financial Condition and Results of Operations” and the
+notes to our Consolidated Financial Statements appearing
+elsewhere in this Annual Report on Form 10-K.
+INCOME STATEMENT DATA 
+Year Ended December 31, 
+(in thousands, except per share data)
+2011
+2010
+2009
+2008
+2007
+Net sales
+$
+968,549
+$
+635,418
+$
+503,550
+$
+457,046
+$
+431,050
+Cost of sales
+606,601
+359,564
+287,361
+270,222
+257,646
+Gross profit
+361,948
+275,854
+216,189
+186,824
+173,404
+Commissions and licensing fee income - net
+18,715
+22,629
+19,928
+14,294
+18,351
+Operating expenses
+(226,893
+)
+(176,859
+)
+(157,149
+)
+(156,212
+)
+(138,841
+)
+Income from operations
+153,770
+121,624
+78,968
+44,906
+52,914
+Interest income
+4,885
+4,208
+2,096
+2,620
+3,876
+Interest expense
+(51
+)
+(4
+)
+(93
+)
+(207
+)
+(65
+)
+Other income (expense) - net
+188
+29
+(182
+)
+(1,013
+)
+(589
+)
+Income before provision for income taxes
+158,792
+125,857
+80,789
+46,306
+56,136
+Provision for income taxes
+61,591
+50,132
+30,682
+18,330
+20,446
+Net income
+97,201
+75,725
+50,107
+27,976
+35,690
+Net loss attributable to noncontrolling interests
+118
+—
+—
+—
+—
+Net income attributable to Steven Madden, Ltd.
+$
+97,319
+$
+75,725
+$
+50,107
+$
+27,976
+$
+35,690
+Basic income per share
+$
+2.30
+$
+1.83
+$
+1.23
+$
+0.68
+$
+0.77
+Diluted income per share
+$
+2.25
+$
+1.78
+$
+1.22
+$
+0.67
+$
+0.74
+Basic weighted average shares of common stock
+42,264
+41,477
+40,602
+41,232
+46,457
+Effect of dilutive securities – options and
+restricted stock
+975
+966
+626
+437
+1,450
+Diluted weighted average shares of common stock
+outstanding
+43,239
+42,443
+41,228
+41,669
+47,907
+BALANCE SHEET DATA 
+At December 31,
+2011
+2010
+2009
+2008
+2007
+Total assets
+$
+639,786
+$
+447,696
+$
+326,859
+$
+284,693
+$
+266,521
+Working capital
+211,469
+138,636
+139,007
+122,086
+121,138
+Noncurrent liabilities
+29,940
+18,967
+6,710
+5,801
+3,470
+Stockholders’ equity
+$
+474,758
+$
+357,298
+$
+267,787
+$
+206,242
+$
+215,334
+22
+ITEM 7
+MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
+CONDITION AND RESULTS OF OPERATIONS
+($ in thousands, except retail sales data per square
+foot and earnings per share data)
+The following discussion of our Financial Condition and
+Results of Operations should be read in conjunction with our
+audited Consolidated Financial Statements and notes thereto
+appearing elsewhere in this Annual Report on Form 10-K.
+Overview 
+Steven Madden, Ltd. and its subsidiaries (collectively the
+“Company”) design, source, market and sell
+fashion-forward branded and private label footwear for women,
+men and children. In addition, we design, source, market and
+sell name brand and private label fashion handbags and
+accessories, through our Accessories Division. We distribute
+our products through department stores, specialty stores,
+luxury retailers, national chains, mass merchants and in our
+retail stores and our e-commerce website throughout the
+United States and under special distribution arrangements in
+Asia, Canada, Europe, the Middle East, Mexico, Australia and
+Central and South America. Our product line includes a broad
+range of contemporary styles designed to establish or
+capitalize on market trends, complemented by core product
+offerings. We have established a reputation for design
+creativity and our ability to offer quality products in
+popular styles at accessible price points.
+Our business is comprised of five distinct segments
+(Wholesale Footwear, Wholesale Accessories, Retail, First
+Cost and Licensing). Our Wholesale Footwear segment includes
+the following brands: Steve Madden Women’s, Madden
+Girl, Steve Madden Men’s, Steven, l.e.i. (under
+license), Elizabeth and James (under license), Olsenboye
+(under license), Stevies, Big Buddha Shoes, Madden, Betsey
+Johnson shoes, Report, Superga (under license) and includes
+our private label and International businesses. Our Wholesale
+Accessories segment includes Big Buddha, Betseyville, Betsey
+Johnson, Steve Madden, Steven by Steve Madden, Cejon and,
+through license agreements, Daisy Fuentes® and
+Olsenboye® accessories brands and includes our private
+label business. Steven Madden Retail, Inc., our wholly owned
+retail subsidiary, operates Steve Madden and Steven retail
+stores as well as our e-commerce website
+(www.stevemadden.com). The First Cost segment represents
+activities of a subsidiary which earns commissions for
+serving as a buying agent for footwear products under private
+labels for many of the country’s large mass-market
+merchandisers, shoe chains and other off-price retailers. Our
+Licensing segment is engaged in the licensing of the Steve
+Madden® and Steven by Steve Madden® trademarks for
+use in connection with the manufacture, marketing and sale of
+sunglasses, eyewear, outerwear, bedding, hosiery,
+women’s fashion apparel, jewelry and luggage. In
+addition, the Company licenses the Betsey Johnson® and
+Betseyville® trademarks for use in connection with the
+manufacture, marketing and sale of apparel, jewelry,
+swimwear, eyewear, watches, fragrances and outerwear.
+On May 5, 2011, the Company’s Board of Directors
+declared a three-for-two stock split of the Company’s
+outstanding shares of common stock, effected in the form of a
+stock dividend on the Company’s outstanding common
+stock. Stockholders of record at the close of business on May
+20, 2011 received one additional share of Steven Madden Ltd.
+common stock for every two shares of common stock owned on
+this date. The additional shares were distributed on May 31,
+2011. All share and per share data provided herein gives
+effect to this stock split, applied retroactively.
+Fiscal year 2011 marks the third consecutive year that the
+Company achieved record sales and earnings. Our consolidated
+net sales for 2011 increased 52% to a record $968,549 from
+the $635,418 achieved in 2010. Net income increased in 2011
+to a record $97,201 from $75,725 in 2010. Diluted earnings
+per share for the year ended December 31, 2011 increased 26%
+to $2.25 per share on 43,239,000 diluted weighted average
+shares outstanding compared to $1.78 per share on 42,443,000
+diluted weighted average shares outstanding in 2010.
+23
+During fiscal year 2011, we expanded our product offerings
+through two acquisitions. First, on May 20, 2011, the Company
+acquired all of the outstanding shares of capital stock of
+the closely held company, The Topline Corporation
+(“Topline”), from its sole stockholder (the
+“Topline Seller”). Founded in 1980, Topline and
+its subsidiaries design, manufacture, market and sell private
+label and branded women’s footwear primarily to
+specialty retailers and mass merchants. Topline has sourcing
+capabilities, sample making facilities and product
+development structure resident in China which include
+personnel and facilities engaged in direct sourcing.
+Management believes that Topline is an excellent strategic
+fit for the Company. The acquisition was completed for
+consideration of approximately $56,128 cash, plus potential
+contingent payments pursuant to an earn-out agreement with
+the Topline Seller. The earn-out agreement provides for
+potential payments to the Topline Seller based on the
+financial performance of Topline for the twelve-month period
+ending on June 30, 2012. (See Note B to our Consolidated
+Financial Statements for additional information relating to
+the potential earn-out payments.) The fair value of the
+contingent payments was estimated using the present value of
+management’s projections of the financial results of
+Topline during the earn-out period. As of December 31, 2011,
+the Company estimates the fair value of the contingent
+consideration to be $6,200.
+Then, on May 25, 2011, we acquired all of the outstanding
+shares of capital stock of privately held Cejon, Inc. and
+Cejon Accessories, Inc. from the sole stockholder of these
+companies as well as all of the outstanding membership
+interests in New East Designs, LLC (combined with Cejon Inc.
+and Cejon Accessories, “Cejon”) from its members
+(together with the sole stockholder of Cejon, the
+“Cejon Sellers”). Founded in 1991, Cejon designs,
+markets and sells cold weather accessories, fashion scarves,
+wraps and other trend accessories primarily under the Cejon
+brand name, private labels and under the Steve Madden brand
+name as Cejon has been a licensee of the Company for cold
+weather and selected other fashion accessories since
+September 2006. Management expects the Cejon acquisition will
+further strengthen and expand the Company’s accessories
+platform. The acquisition was completed for consideration of
+approximately $29,108 in cash, plus potential contingent
+payments pursuant to an earn-out agreement with the Cejon
+Sellers. The earn-out agreement provides for potential
+payments to the Cejon Sellers based on the financial
+performance of Cejon for each of the twelve-month periods
+ending on June 30, 2012 through 2016, inclusive. (See Note B
+to our Consolidated Financial Statements for additional
+information relating to the potential earn-out payments.) The
+fair value of the contingent payments was estimated using the
+present value of management’s projections of the
+financial results of Cejon during the earn-out period. As of
+December 31, 2011, we estimate the fair value of the
+contingent consideration to be $23,500.
+During the year ended December 31, 2011, the Company made
+significant progress on several previously announced
+strategic initiatives. One such initiative was to continue to
+drive improvements in the performance of our retail segment.
+In 2011, same store sales (sales of those stores, including
+the e-commerce website, that were in operation throughout
+2011 and 2010) increased 13.3% and sales per square foot
+increased to $810 compared to sales per square foot of $742
+achieved in the prior year. Income from store operations as a
+percentage of sales improved to 13.1% in 2011 compared to the
+6.8% achieved in 2010.
+A second strategic initiative for the Company was the
+expansion of our e-commerce business. In 2011 net sales in
+our e-commerce business increased 25% when compared to the
+prior year. The Company has also achieved progress in its
+initiative to grow its International business, which had net
+sales of $53,263 in fiscal year 2011, a 53% increase over the
+$34,781 in nets sales achieved by our international business
+in fiscal year 2010.
+As of December 31, 2011, our total inventory increased to
+$59,644 from $39,557 as of December 31, 2010, and our
+annualized inventory turnover improved to 10.2 times in 2011
+compared to 9.4 times in 2010. Our accounts receivable
+average collection days were 65 days in 2011 compared to 56
+days in 2010, primarily due to the growth in our private
+label and International businesses where many of our
+customers have extended payment terms. As of December 31,
+2011, we had $180,493 in cash, cash equivalents and
+marketable securities, no short- or long-term debt, and total
+stockholders’ equity of $474,758.
+24
+The following tables set forth information on operations for
+the periods indicated:
+Years Ended 
+December 31 
+($ in thousands)
+2011
+2010
+2009
+CONSOLIDATED :
+Net sales
+$
+968,549
+100
+%
+$
+635,418
+100
+%
+$
+503,550
+100
+%
+Cost of sales
+606,601
+63
+359,564
+57
+287,361
+57
+Gross profit
+361,948
+37
+275,854
+43
+216,189
+43
+Commission and licensing fee income - net
+18,715
+2
+22,629
+4
+19,928
+4
+Operating expenses
+226,893
+23
+176,859
+28
+157,149
+31
+Income from operations
+153,770
+16
+121,624
+19
+78,968
+16
+Interest and other income - net
+5,022
+1
+4,233
+1
+1,821
+—
+Income before income taxes
+158,792
+16
+125,857
+20
+80,789
+16
+Net income
+97,201
+10
+75,725
+12
+50,107
+10
+By Segment:
+WHOLESALE FOOTWEAR SEGMENT :
+Net sales
+$
+636,809
+100
+%
+$
+402,567
+100
+%
+$
+309,439
+100
+%
+Cost of sales
+431,430
+68
+245,964
+61
+186,267
+60
+Gross profit
+205,379
+32
+156,603
+39
+123,172
+40
+Operating expenses
+118,703
+19
+81,060
+20
+71,812
+23
+Income from operations
+86,676
+14
+75,543
+19
+51,360
+17
+WHOLESALE ACCESSORIES SEGMENT :
+Net sales
+$
+176,824
+100
+%
+$
+98,548
+100
+%
+$
+70,406
+100
+%
+Cost of sales
+115,350
+65
+60,622
+62
+46,665
+66
+Gross profit
+61,474
+35
+37,926
+38
+23,741
+34
+Operating expenses
+33,465
+19
+23,603
+24
+14,542
+21
+Income from operations
+28,009
+16
+14,323
+15
+9,199
+13
+RETAIL SEGMENT :
+Net sales
+$
+154,916
+100
+%
+$
+134,303
+100
+%
+$
+123,705
+100
+%
+Cost of sales
+59,821
+39
+52,978
+39
+54,429
+44
+Gross profit
+95,095
+61
+81,325
+61
+69,276
+56
+Operating expenses
+74,725
+48
+72,196
+54
+70,795
+57
+Income (loss) from operations
+20,370
+13
+9,129
+7
+(1,519
+)
+(1
+)
+Number of stores
+84
+84
+89
+FIRST COST SEGMENT :
+Other commission income - net of expenses
+$
+9,795
+100
+%
+$
+17,258
+100
+%
+$
+16,803
+100
+%
+LICENSING SEGMENT :
+Licensing income - net of expenses
+$
+8,920
+100
+%
+$
+5,371
+100
+%
+$
+3,125
+100
+%
+25
+RESULTS OF OPERATIONS 
+($ in thousands) 
+Year Ended December 31, 2011 vs. Year Ended December 31,
+2010 
+Consolidated : 
+Total net sales for the year ended December 31, 2011
+increased by 52% to $968,549 from $635,418 for the comparable
+period of 2010. For the year ended December 31, 2011, gross
+margin as a percentage of net sales decreased to 37.4%
+compared to 43.4% in the same period of last year. Operating
+expenses increased in 2011 to $226,893 from $176,859 in 2010,
+primarily due to incremental costs associated with our
+recently acquired Topline and Cejon businesses and our new
+Betsey Johnson® and Big Buddha® shoe businesses. As
+a percentage of sales, operating expenses decreased 4.4% to
+23.4% in the year ended December 31, 2011 compared to 27.8%
+in the same period of last year, reflecting leverage from
+increased sales. Commission and licensing fee income
+decreased to $18,715 in 2011 compared to $22,629 in 2010,
+primarily due to the transition of our Target private label
+and Olsenboye footwear businesses from the commission model
+to the wholesale model in the fourth quarter of 2010 and the
+first quarter of 2011, respectively. During the year ended
+December 31, 2011, income from operations increased to
+$153,770 and net income increased to $97,201 compared to
+income from operations of $121,624 and a net income of
+$75,725 in 2010.
+Wholesale Footwear Segment : 
+Net sales generated by the Wholesale Footwear segment was
+$636,809, or 66%, and $402,567, or 63%, of our total net
+sales for the years ended December 31, 2011 and 2010,
+respectively. The 58% increase in net sales year over year
+was partially due to the inclusion of net sales from our
+recently acquired Topline business. The transition of our
+Target business to the wholesale model also contributed to
+the increase in net sales. Similarly, the inclusion in net
+sales from our Olsenboye® business, which since the
+fourth quarter of 2010 has been included in the net sales
+line, contributed to the increase in net sales. In addition,
+organic growth in our Steve Madden Women’s and Madden
+Girl brands and a 53% sales increase in our international
+business contributed to the net sales increase in the fiscal
+year 2011. Finally, two new brands, Big Buddha® shoes,
+which began shipping in the third quarter of 2010, and Betsey
+Johnson® shoes, which began shipping in the first
+quarter of 2011, also contributed to the increase in net
+sales.
+Gross profit margin decreased to 32.3% in 2011 from 38.9% in
+2010, due to sales mix shifts as a result of the addition of
+the Topline business and the inclusion of the Company’s
+Target private label and Olsenboye® footwear businesses
+in net sales, which typically achieve lower gross margins. In
+the year ended December 31, 2011, operating expenses
+increased to $118,703 from $81,060 in the same period of
+2010, primarily due to incremental costs associated with our
+recently acquired Topline business and our new Betsey
+Johnson® and Big Buddha® shoe businesses. As a
+percentage of sales, operating expenses improved to 18.6% in
+2011 from 20.1% in 2010, reflecting leverage from increased
+sales. Income from operations for the Wholesale Footwear
+Segment increased to $86,676 for the year ended December 31,
+2011 compared to $75,543 for the year ended December 31,
+2010.
+Wholesale Accessories Segment : 
+Net sales generated by the Wholesale Accessories segment
+accounted for $176,824 or 18%, and $98,548 or 16% of total
+Company net sales for the years ended December 31, 2011 and
+2010, respectively. The 79% increase in net sales period over
+period was primarily due to our new Cejon business, which we
+acquired in the second quarter of 2011. In addition, net
+sales increases in our Big Buddha®, Madden Zone and
+Steve Madden® handbags businesses contributed to our net
+sales increase during the year ended December 31, 2011.
+Gross profit margin in the Wholesale Accessories segment
+decreased to 34.8% in 2011 from 38.5% in the same period last
+year, primarily due to the addition of our Cejon cold weather
+accessories business and the growth in our private label
+business, both of which typically achieves lower gross
+margins than our existing handbag and belt businesses. In the
+year ended December 31, 2011, operating expenses increased to
+$33,465 compared to $23,603 in the year ended December 31,
+2010, primarily due to the incremental costs related to our
+recently acquired Cejon business. As a percentage of sales,
+operating expenses improved to 18.9% in 2011 from 24.0% in
+2010. This improvement is partially due to our Cejon cold
+weather accessory business, acquired in May of 2011, which
+does a significant percentage of its sales in the second half
+of the year, resulting in a lower operating expenses
+percentage during that period. Income from operations for the
+Wholesale Accessories segment increased 96% to $28,009 in
+2011 compared to $14,323 in 2010.
+26
+Retail Segment : 
+Net sales generated by the Retail segment accounted for
+$154,916, or 16%, and $134,303, or 21%, of total Company net
+sales for the years ended December 31, 2011 and 2010,
+respectively. We opened nine new stores, acquired one store
+as part of the acquisition of Topline and closed ten
+under-performing stores during the year ended December 31,
+2011. As a result, we had 84 retail stores as of both
+December 31, 2011 and 2010. The 84 stores currently in
+operation include 73 Steve Madden full price stores, six
+Steve Madden outlet stores, three Steven stores, one Report
+store and one e-commerce website. Comparable store sales
+(sales of those stores, including the e-commerce website,
+that were open for all of 2011 and 2010) for the year ended
+December 31, 2011 increased 13.3% when compared to the prior
+year. During the year ended December 31, 2011, gross margin
+increased to 61.4% from 60.6% in 2010, primarily due to a
+decrease in promotional selling. In 2011, operating expenses
+increased to $74,725 from $72,196 in 2010. As a percentage of
+sales, operating expenses improved to 48.2% in 2011 from
+53.8% in 2010, reflecting leverage from increased sales, in
+addition to a charge of $1,750 in the third quarter of 2010
+for the preliminary settlement of a class action lawsuit. For
+the year ended December 31, 2011, income from operations for
+the Retail segment increased 123% to $20,370 compared to
+$9,129 in the prior year.
+First Cost Segment : 
+The First Cost segment generated income from operations of
+$9,795 for the year ended December 31, 2011, compared to
+$17,258 in the prior year. The primary reason for this
+decrease is the transition of our Target private label and
+Olsenboye® footwear businesses from the commission model
+to the wholesale model in the fourth quarter of 2010 and the
+first quarter of 2011, respectively.
+Licensing Segment: 
+During the year ended December 31, 2011, licensing income
+increased to $8,920 from $5,371 in the prior year, primarily
+due to the incremental licensing revenue generated by our
+Betsey Johnson® intellectual property assets which we
+acquired in the fourth quarter of the prior year.
+Year Ended December 31, 2010 vs. Year Ended December 31,
+2009 
+Consolidated : 
+Total net sales for the year ended December 31, 2010
+increased by 26% to $635,418 from $503,550 for the comparable
+period of 2009, as all three of our top line segments had
+significant net sales increases. Net sales in 2010 includes
+$16,269 of sales from the l.e.i. brand, which was
+transitioned from a “first cost” model to a
+“wholesale” model beginning in the first quarter
+of 2010. An increase in our gross profit margin to 43.4% for
+the year ended December 31, 2010 from 42.9% for the prior
+year was driven by gross profit increases in our Wholesale
+Accessories and Retail segments. For the years ended December
+31, 2010 and 2009, operating expenses were $176,859 and
+$157,149, respectively. As a percentage of net sales,
+operating expenses decreased in 2010 to 27.8% compared to
+31.2% in 2009. Commission and licensing fee income increased
+to $22,629 in 2010, compared to $19,928 for the prior year.
+Net income for 2010 was $75,725, compared to $50,107 in 2009.
+27
+Wholesale Footwear Segment : 
+Net sales generated by the Wholesale Footwear segment was
+$402,567, or 63%, and $309,439, or 61%, of our total net
+sales for the years ended December 31, 2010 and 2009,
+respectively. This 30% increase in net sales was driven by
+double-digit net sales increases in our Madden Girl, Steve
+Madden Men’s, Elizabeth and James, Steven and Kids
+brands as well as a double-digit increase in our
+International business. The net sales growth in Madden Girl
+was due to the success of dress shoes throughout 2010
+combined with strong boot sales in the second and third
+quarters of 2010, as well as a higher consumer demand for
+opening price point products. In our Steve Madden Men’s
+brand, the sales increase was primarily due to the strong
+performance of men’s dress and casual shoes during the
+year. In addition, our new men’s line, Madden, has
+realized a better than expected launch, and has contributed
+to our net sales growth. Elizabeth and James, our new brand
+that began shipping in the second quarter of 2009, continued
+its growth trend in 2010 primarily with upper tier retailers
+such as Nordstrom, Saks and Neiman Marcus. Net sales
+increases for our Steven brand were primarily due to strong
+sales of wedges during the second quarter and strong boot
+sales in the first and third quarters of the year. Strong
+selling of flats and boots during the year resulted in a net
+sales increase in our Kids brands. The transition of the
+l.e.i.® brand with Walmart from the commission model to
+the wholesale model beginning in the first quarter of 2010,
+contributed net sales of $16,269 in 2010. In addition, our
+new Big Buddha Shoes brand, which began shipping during the
+third quarter of 2010, contributed of $2,922 net sales. The
+net sales increase in our International business was
+propelled by the division’s significant growth trend in
+Eastern Asia and expansion into new countries.
+Gross profit margin in the Wholesale Footwear segment
+decreased to 38.9% in 2010 from 39.8% in the prior year. The
+decrease was primarily due to a change in our product mix,
+including a growth of our International business and the
+transition of our l.e.i. brand to a “wholesale”
+model, since both of these businesses realize a significantly
+lower gross profit margin than our other wholesale divisions.
+In 2010, operating expenses increased to $81,060 from $71,812
+in 2009. As a percentage of sales, operating expenses
+improved to 20.1% in 2010 from 23.2% in 2009 primarily due to
+leverage on higher sales. Income from operations for the
+Wholesale Footwear segment increased 47% to $75,543 for the
+year ended December 31, 2010 compared to $51,360 for the same
+period of 2009.
+Wholesale Accessories Segment : 
+Net sales generated by the Wholesale Accessories segment
+accounted for $98,548 or 16%, and $70,406 or 14% of total
+Company net sales for the years ended December 31, 2010 and
+2009, respectively. The 40% growth in net sales in the
+Wholesale Accessories segment was due to the sales
+contributed by two recent acquisitions, Madden Zone, acquired
+in July of 2009, and Big Buddha, acquired in February of
+2010. In addition, significant increases in sales of Steve
+Madden handbags and private label belts were partially offset
+by a net sales decrease in our Betseyville® brand.
+Gross profit margin in the Wholesale Accessories segment
+increased 4.8% to 38.5% in 2010 from 33.7% in the prior year,
+primarily due to the significantly higher gross profit
+margins achieved by our new Big Buddha division combined with
+a change in the mix of products and lower markdown
+allowances. During the year ended December 31, 2010,
+operating expenses increased to $23,603 compared to $14,542
+in 2009, primarily due to the incremental operating expenses
+associated with our new Madden Zone and Big Buddha divisions.
+Income from operations for the Wholesale Accessories segment
+increased 56% to $14,323 in 2010 compared to $9,199 in 2009.
+Retail Segment : 
+Net sales generated by the Retail segment accounted for
+$134,303, or 21%, and $123,705, or 25%, of total Company net
+sales for the years ended December 31, 2010 and 2009,
+respectively. We opened three new stores, remodeled five
+existing stores and closed eight underperforming stores
+during the year ended December 31, 2010. As a result, we had
+84 retail stores as of December 31, 2010, compared to 89
+stores as of December 31, 2009. The 84 stores currently in
+operation at the end of 2010 included 79 under the Steve
+Madden brand, three under the Steven brand, one outlet store
+and one e-commerce website. Comparable store sales (sales of
+those stores, including the e-commerce website, that were
+open for all of 2010 and 2009) for the year ended December
+31, 2010 increased 12.7% when compared to the prior year.
+During the year ended December 31, 2010, gross margin
+increased 4.6% to 60.6% from 56.0% in 2009, primarily due to
+a significant decrease in promotional selling. In 2010,
+operating expenses increased to $72,196 from $70,795 in the
+prior year primarily due to a charge of $1,750 for the
+preliminary settlement of a class action lawsuit against the
+Company related to our Retail segment. As a percentage of net
+sales, operating expenses decreased to 53.7% in 2010 compared
+to 57.2% in 2009. Income from retail operations increased to
+$9,129 in 2010 compared to a loss from retail operations of
+$1,519 in 2009.
+28
+First Cost Segment : 
+Income from operations in the First Cost segment increased to
+$17,258 in 2010 compared to $16,803 in 2009. This increase in
+income was due to a significant increase in private label
+business with several of our retail customers including
+Kohls, Target and Bakers. These increases were partially
+offset by the transition of one of the Company’s mass
+merchant customers from the commission model to the wholesale
+model which transition was made pursuant to the
+customer’s request that the Company sell directly to
+the customer (“wholesale” model) rather than as a
+buying agent (“first cost” model) on its behalf
+beginning in the first quarter of 2010.
+Licensing Segment: 
+During the year ended December 31, 2010, licensing income
+increased to $5,371 from $3,125 in the prior year, primarily
+due to an increase in sales by several of our licensees
+combined with the incremental licensing revenue generated by
+our recently acquired Betsey Johnson trademarks.
+LIQUIDITY AND CAPITAL RESOURCES 
+The Company has a collection agency agreement with Rosenthal
+& Rosenthal, Inc (“Rosenthal”) which
+agreement provides us with a credit facility in the amount of
+$30,000, having a sub-limit of $15,000 on the aggregate face
+amount of letters of credit, at an interest rate based, at
+our election, upon either the prime rate or LIBOR. The
+agreement can be terminated by the Company or Rosenthal at
+any time with 60 days’ prior written notice. As of
+December 31, 2011, we have no borrowings against the credit
+facility.
+As of December 31, 2011, we had working capital of $211,469.
+We had cash and cash equivalents of $102,830, investments in
+marketable securities of $77,663 and we did not have any long
+term debt.
+Management believes that, based upon our current financial
+position and available cash, cash equivalents and marketable
+securities, as augmented by cash flow from operations in
+2012, we will meet all of our financial commitments and
+operating needs for at least the next twelve months.
+OPERATING ACTIVITIES 
+During the year ended December 31, 2011, net cash provided by
+operating activities was $74,968. The primary source of cash
+was net income of $97,201. The primary uses of cash were an
+increase of accounts receivable of $16,543, an increase in
+due from factor of $9,336, an increase in inventories of
+$9,210 an increase in prepaid expenses, prepaid taxes,
+deposits and other assets of $2,068 and a decrease in
+accounts payable and accrued expenses of $7,551.
+INVESTING ACTIVITIES 
+During the year ended December 31, 2011, we invested $17,968
+in marketable securities and received $67,885 from the
+maturities and sales of securities. Also during 2011, we paid
+an aggregate of approximately $89,730 for the acquisitions of
+Topline and Cejon, received $12,004 in refundable cash from
+the seller of Topline and made payments totaling
+approximately $4,151 to the seller of Big Buddha pursuant to
+a performance-based earn-out obligations related to the
+acquisition of Big Buddha. Additionally, during this period,
+the Company made capital expenditures of approximately
+$15,477, principally for systems enhancements, the nine new
+stores that opened during the year and leasehold improvements
+to our showrooms and offices.
+29
+FINANCING ACTIVITIES 
+During the year ended December 31, 2011, we received $4,994
+in cash and realized a tax benefit of $4,154 in connection
+with the exercise of stock options.
+CONTRACTUAL OBLIGATIONS 
+Our contractual obligations as of December 31, 2011 were as
+follows:
+Payment due by period
+Contractual Obligations
+Total
+2012
+2013-2014
+2015-2016
+2017 and after
+Operating lease obligations
+$
+151,192
+$
+22,481
+$
+41,141
+$
+36,803
+$
+50,767
+Purchase obligations
+167,985
+167,985
+—
+—
+—
+Contingent payment liability
+37,921
+14,133
+14,813
+8,975
+—
+Other long-term liabilities (future minimum royalty
+payments)
+1,693
+1,043
+650
+—
+—
+Total
+$
+358,791
+$
+205,642
+$
+56,604
+$
+45,778
+$
+50,767
+At December 31, 2011, we had un-negotiated open letters of
+credit for the purchase of inventory of approximately $3,041.
+Under the employment agreement, as amended, between the
+Company and Steven Madden, the founder and Creative and
+Design Chief of the Company, the Company is obligated to pay
+Mr. Madden an annual base salary which increases over the
+term of the agreement. The employment agreement provides for
+a base salary of approximately $5,416 in 2012, approximately
+$7,417 in 2013, approximately $9,667 in 2014, approximately
+$11,917 in 2015 and approximately $10,698 for the period
+between January 1, 2016 through the expiration of the term on
+December 31, 2023. The employment agreement provides Mr.
+Madden with the right, exercisable on certain specified dates
+in fiscal year 2012 only, to elect to receive a grant of
+restricted stock for a number of shares of the
+Company’s common stock valued at $40,000 in
+consideration for a reduction in his annual base salary in
+years subsequent to 2012 as follows: approximately $4,000 in
+2013, approximately $6,125 in 2014, approximately $8,250 in
+2015 and approximately $7,026 for the period between January
+1, 2016 through the expiration of the employment agreement on
+December 31, 2023. In addition to the opportunity for
+discretionary cash bonuses, Mr. Madden’s employment
+agreement entitles him to an annual life insurance premium,
+as well as an annual stock option grant and the potential for
+an additional one-time stock option grant based on
+achievement of certain financial performance criteria. The
+employment agreement also provides for the elimination of
+interest accrued after December 31, 2011 on an outstanding
+loan in the original principal amount of $3,000 made by the
+Company to Mr. Madden, the extension of the maturity date of
+such loan until December 31, 2023, and the forgiveness of
+1/10 th of the principal amount of the loan,
+together with accrued interest, annually over a ten-year
+period commencing on December 31, 2014 for so long as Mr.
+Madden continues to be employed by the Company on each such
+December 31st.
+The Company has employment agreements with certain executive
+officers, which provide for the payment of compensation
+aggregating approximately $7,301 in 2012, $4,702 in 2013 and
+$1,547 in 2014. In addition, some of these employment
+agreements provide for discretionary bonuses and some provide
+for incentive compensation based on various performance
+criteria as well as other benefits including stock options.
+30
+Virtually all of our products are produced by independent
+manufacturers at overseas locations, the majority of which
+are located in China, with a small percentage located in
+Mexico, Brazil, India, The Netherlands, The Philippines and
+Italy. We have not entered into any long-term manufacturing
+or supply contracts with any manufacturer of our products. We
+believe that a sufficient number of alternative sources exist
+outside of the United States for the manufacture of our
+products. We currently make approximately 99% of our
+purchases in U.S. dollars.
+INFLATION 
+We do not believe that price inflation has had a significant
+effect on the Company’s sales or profitability for our
+year ended December 31, 2011 and the prior two years.
+Historically, we have minimized the impact of product cost
+increases by improving operating efficiencies, changing
+suppliers and increasing prices. However, no assurance can be
+given that we will be able to continue to offset any such
+inflationary cost increases in the future. We are currently
+seeing increases in our cost of goods from southern China
+averaging approximately 5% to 8%. We are working to mitigate
+this pressure by shifting some production to northern China,
+where costs remain comparatively lower, and to a lesser
+extent, to other countries such as Mexico. We are also
+raising prices on select items with fresh materials or
+styling and, to date, have not experienced resistance to
+these price increases. Putting this all together, the net
+impact of all these changes on gross margin was not material
+in 2011, and we expect that to be the case in the near term
+as well.
+OFF-BALANCE SHEET ARRANGEMENTS 
+The Company has no off-balance sheet arrangements.
+CRITICAL ACCOUNTING POLICIES AND THE USE OF ESTIMATES 
+Management’s Discussion and Analysis of Financial
+Condition and Results of Operations is based upon our
+Consolidated Financial Statements included in this Annual
+Report on Form 10-K, which have been prepared in accordance
+with generally accepted accounting principles in the United
+States. The preparation of these financial statements
+requires management to make estimates and judgments that
+affect the reported amounts of assets, liabilities, sales and
+expenses, and related disclosure of contingent assets and
+liabilities. Estimates by their nature are based on judgments
+and available information. Estimates are made based upon
+historical factors, current circumstances and the experience
+and judgment of management. Assumptions and estimates are
+evaluated on an ongoing basis and we may employ outside
+experts to assist in evaluations. Therefore, actual results
+could materially differ from those estimates under different
+assumptions and conditions. Management believes the following
+critical accounting estimates are more significantly affected
+by judgments and estimates used in the preparation of our
+Consolidated Financial Statements: allowance for bad debts,
+returns and customer chargebacks; inventory valuation;
+valuation of intangible assets; litigation reserves and cost
+of sales.
+Allowances for bad debts, returns and customer
+chargebacks . We provide reserves against our accounts
+receivables for future customer chargebacks, co-op
+advertising allowances, discounts, returns and other
+miscellaneous deductions that relate to the current period.
+The reserve against our non-factored trade receivables also
+includes estimated losses that may result from
+customers’ inability to pay. The amount of the reserve
+for bad debts, returns, discounts and compliance chargebacks
+are determined by analyzing aged receivables, current
+economic conditions, the prevailing retail environment and
+historical dilution levels for customers. We evaluate
+anticipated chargebacks by reviewing several performance
+indicators for our major customers. These performance
+indicators (which include inventory levels at the retail
+floors, sell-through rates and gross margin levels) are
+analyzed by key account executives and the Vice President of
+Wholesale Sales to estimate the amount of the anticipated
+customer allowance. Failure to correctly estimate the amount
+of the reserve could materially impact our results of
+operations and financial position.
+31
+Inventory valuation . Inventories are stated at lower
+of cost or market, on a first-in, first-out basis. We review
+inventory on a regular basis for excess and slow moving
+inventory. The review is based on an analysis of inventory on
+hand, prior sales and expected net realizable value through
+future sales. The analysis includes a review of inventory
+quantities on hand at period-end in relation to year-to-date
+sales and projections for sales in the foreseeable future as
+well as subsequent sales. We consider quantities on hand in
+excess of estimated future sales to be at risk for market
+impairment. The net realizable value, or market value, is
+determined based on the estimate of sales prices of such
+inventory through off-price or discount store channels. The
+likelihood of any material inventory write-down is dependent
+primarily on the expectation of future consumer demand for
+our product. A misinterpretation or misunderstanding of
+future consumer demand for our product, the economy, or other
+failure to estimate correctly, in addition to abnormal
+weather patterns, could result in inventory valuation changes
+compared to the valuation determined to be appropriate as of
+the balance sheet date.
+Valuation of intangible assets . Accounting Standards
+Codification (“ASC”) Topic 350, “Intangible
+- Goodwill and Other”, requires that goodwill and
+intangible assets with indefinite lives no longer be
+amortized, but rather be tested for impairment at least
+annually. This pronouncement also requires that intangible
+assets with finite lives be amortized over their respective
+lives to their estimated residual values, and reviewed for
+impairment in accordance with ASC Topic 360 “Property,
+Plant and Equipment” (“ASC Topic 360”). In
+accordance with ASC Topic 360, long-lived assets, such as
+property, equipment, leasehold improvements and goodwill
+subject to amortization, are reviewed for impairment annually
+or whenever events or changes in circumstances indicate that
+the carrying amount of an asset may not be recoverable.
+Recoverability of assets to be held and used is measured by a
+comparison of the carrying amount of an asset to the
+estimated undiscounted future cash flows expected to be
+generated by the asset. If the carrying amount of an asset
+exceeds its estimated future cash flows, an impairment charge
+is recognized in the amount by which the carrying amount of
+the asset exceeds the fair value of the asset.
+Litigation reserves . Estimated amounts for litigation
+claims that are probable and can be reasonably estimated are
+recorded as liabilities in our Consolidated Financial
+Statements. The likelihood of a material change in these
+estimated reserves would be dependent on new claims as they
+may arise and the favorable or unfavorable events of a
+particular litigation. As additional information becomes
+available, management will assess the potential liability
+related to the pending litigation and revise its estimates.
+Such revisions in management’s estimates of the
+contingent liability could materially impact our results of
+operation and financial position.
+Accounting Standards Adopted In Fiscal 2011: 
+In December 2010, the Financial Accounting Standards Board
+(‘FASB”) issued Accounting Standards Update
+(“ASU”) No. 2010-28, “When to Perform Step
+2 of the Goodwill Impairment Test for Reporting Units with
+Zero or Negative Carrying Amounts” (“ASU No.
+2010-28”). ASU No. 2010-28 modifies Step 1 of the
+goodwill impairment test, which requires an entity to compare
+the fair value of a reporting unit with its carrying amount,
+including goodwill. For reporting units with zero or negative
+carrying amounts, an entity is required to perform Step 2 of
+the goodwill impairment test if it is more likely than not
+that a goodwill impairment exists. Step 2 requires an entity
+to compare the fair value of a reporting unit goodwill with
+the carrying amount of that goodwill. The implied fair value
+of goodwill is determined by assigning a fair value to all
+the assets and liabilities of the reporting unit as if the
+reporting unit had been acquired in a business combination.
+The adoption of ASU No. 2010-28, which became effective for
+the Company on January 1, 2011, did not have a material
+impact on the Company’s consolidated financial
+statements.
+In December 2010, FASB issued ASU No. 2010-29 “Business
+Combination (Topic 805): Disclosure of Supplementary Pro
+Forma Information for Business Combinations”
+(“ASU No. 2010-29”). ASU no. 2010-29 specifies
+that if a public entity presents comparative financial
+statements, the entity should disclose revenue and earnings
+of the combined entity as though the business combination(s)
+that occurred during the current year had occurred as of the
+beginning of the comparable prior annual reporting period
+only. ASU No. 2010-29 also expands the supplemental pro forma
+disclosures to include a description of the nature and amount
+of material, nonrecurring pro forma adjustments directly
+attributable to the business combination included in the
+reported pro forma revenue and earnings. ASU No. 2010-29 is
+effective prospectively for business combinations for which
+the acquisition date is on or after the beginning of the
+first annual reporting period beginning on or after December
+15, 2010. The adoption of ASU No. 2010-29 did not have a
+material impact on the Company’s consolidated financial
+statements.
+32
+ITEM 7A 
+QUANTITATIVE AND
+QUALITATIVE DISCLOSURES ABOUT MARKET RISK 
+($ in thousands) 
+We do not engage in the trading of market risk sensitive
+instruments in the normal course of business. Our financing
+arrangements are subject to variable interest rates primarily
+based on the prime rate and LIBOR. An analysis of our
+collection agency agreement with Rosenthal can be found in
+the “Liquidity and Capital Resources” section
+under Part II, Item 7, and in Note C to the Consolidated
+Financial Statements included in this Annual Report on Form
+10-K under the caption “Due from Factor.”
+As of December 31, 2011, we held marketable securities valued
+at approximately $77,663, which consisted primarily of
+corporate bonds and certificates of deposit. These securities
+are subject to interest rate risk and will decrease in value
+if interest rates increase. We currently have the ability to
+hold these securities until maturity.
+ITEM 8
+FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
+The information required by this Item is incorporated herein
+by reference to the Consolidated Financial Statements listed
+in response to Item 15 of Part IV 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
+Disclosure Controls and Procedures 
+As required by Rule 13a-15(b) of the Exchange Act, our
+management, including our Chief Executive Officer and Chief
+Financial Officer, has evaluated the effectiveness of our
+disclosure controls and procedures as of the end of the
+fiscal year covered by this Annual Report on Form 10-K. Based
+on that evaluation, the Chief Executive Officer and Chief
+Financial Officer have concluded that our 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 on Form 10-K.
+Management’s Annual Report on Internal Control Over
+Financial Reporting 
+Management of Steven Madden, Ltd. is responsible for
+establishing and maintaining adequate internal control over
+financial reporting (as defined in Rule 13a-15(f) of the
+Exchange Act).
+Our internal control over financial reporting is a process
+designed by, or under the supervision of, our principal
+executive officer and principal financial officer, and
+effected by the board of directors, management, and other
+personnel, to provide reasonable assurance regarding the
+reliability of financial reporting and the preparation of
+financial statements for external purposes in accordance with
+U.S. generally accepted accounting principles. Our internal
+control over financial reporting includes those policies and
+procedures that (1) pertain to maintenance of records that,
+in reasonable detail, accurately and fairly reflect the
+transactions and dispositions of our assets; (2) provide
+reasonable assurance that transactions are recorded as
+necessary to permit preparation of financial statements in
+accordance with U.S. generally accepted accounting
+principles, and that our receipts and expenditures are being
+made only in accordance with authorizations of our management
+and directors; and (3) provide reasonable assurance regarding
+prevention or timely detection of unauthorized acquisition,
+use, or disposition of our assets that could have a material
+effect on the financial statements.
+33
+Because of its inherent limitations, internal control over
+financial reporting may not prevent or detect misstatements.
+Also, projections of any evaluation of effectiveness to
+future periods are subject to the risk that controls may
+become inadequate because of changes in conditions, or that
+the degree of compliance with the policies or procedures may
+deteriorate. We have excluded Topline and Cejon, which were
+acquired on May 20, 2011 and May 25, 2011, respectively, from
+the scope of our annual report on internal control over
+financial reporting as of December 31, 2011. These operations
+in the aggregate represent approximately 31% of our total
+assets at December 31, 2011 and approximately 18% and 13% of
+our revenues and net income for the year ended December 31,
+2011, respectively.
+With the participation of the Chief Executive Officer and the
+Chief Financial Officer, our management conducted an
+evaluation of the effectiveness, as of the end of our fiscal
+year ended December 31, 2011, of our internal control over
+financial reporting based on the framework and criteria
+established in Internal Control–Integrated Framework,
+issued by the Committee of Sponsoring Organizations of the
+Treadway Commission. Based on this evaluation our management
+has concluded that, as of December 31, 2011, our internal
+control over financial reporting was effective.
+Our independent registered accounting firm, EisnerAmper LLP,
+has audited the Company’s consolidated financial
+statements and the effectiveness of the Company’s
+internal control over financial reporting as of December 31,
+2011. Their report appears in this Annual Report on Form
+10-K.
+34
+Changes in Internal Control Over Financial Reporting 
+There was no change in our internal control over financial
+reporting, identified in connection with the evaluation
+required by paragraph (d) of Rule 13a-15 of the Exchange Act,
+that occurred during the fiscal quarter ended December 31,
+2011, which has materially affected, or is reasonably likely
+to materially affect, our internal control over financial
+reporting.
+ITEM 9B
+OTHER INFORMATION
+None
+part III
+ITEM 10
+DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
+The information required to be furnished pursuant to this
+Item will be set forth in our proxy statement for the 2012
+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 our proxy statement for the 2012
+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 our proxy statement for the 2012
+Annual Meeting of Stockholders, and is incorporated herein by
+reference.
+35
+ITEM 13
+CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
+DIRECTOR INDEPENDENCE
+The information required to be furnished pursuant to this
+Item will be set forth in our proxy statement for the 2012
+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 our proxy statement for the 2012
+Annual Meeting of Stockholders, and is incorporated herein by
+reference.
+part IV
+ITEM 15
+EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
+(a)(1) Financial Statements 
+The Consolidated Financial Statements of Steven Madden, Ltd.
+and subsidiaries are included in Item 8:
+Report of Independent Registered Public Accounting Firm
+F-1
+Balance sheets as of December 31, 2011 and 2010
+F-2
+Statements of income for the years ended December 31,
+2011, 2010 and 2009
+F-3
+Statements of changes in stockholders’ equity for
+the years ended December 31, 2011, 2010 and 2009
+F-4
+Statements of cash flows for the years ended December
+31, 2011, 2010 and 2009
+F-6
+Notes to financial statements
+F-7
+(2) Financial Statement Schedules 
+None.
+(3) Exhibits. 
+2.01
+Stock Purchase Agreement dated February 10, 2010
+between the Company and Jeremy Bassan (incorporated by
+reference to Exhibit 2.1 to the Company’s
+Quarterly Report on Form 10-Q for its fiscal quarter
+ended September 30, 2010 filed with the SEC on November
+9, 2010)
+2.02
+Restructuring Agreement dated October 5, 2010 among the
+Company, BJ Acquisition LLC, BJ Agent LLC, Betsey
+Johnson LLC, Betsey Johnson (UK) Limited, Betsey
+Johnson Canada Ltd., BJ Vines, Inc., Betsey Johnson,
+Chantal Bacon, Castanea Family Investments, LLC,
+Castanea Family Holdings, LLC and Castanea Partners
+Fund III, L.P. (incorporated by reference to Exhibit
+2.1 to the Company’s Current Report on Form 8-K
+filed with the SEC on October 8, 2010)
+2.03
+Stock Purchase Agreement dated May 20, 2011 among the
+Company, The Topline Corporation and William F. Snowden
+(incorporated by reference to Exhibit 2.1 to the
+Company’s Current Report on Form 8-K filed with
+the SEC on May 25, 2011)
+2.04
+Stock Purchase Agreement dated May 25, 2011 among the
+Company, David Seerherman, Cejon, Inc., and Kenneth
+Rogala (incorporated by reference to Exhibit 10.1 to
+the Company’s Current Report on Form 8-K filed
+with the SEC on May 26, 2011)
+36
+2.05
+Asset Purchase Agreement, dated as of January 20, 2012,
+among Steve Madden Canada Inc., Steve Madden Retail
+Canada Inc., Pasa Agency Inc., Gelati Imports Inc., the
+Company, SML Canada Acquisition Corp., 6798039 Canada
+Inc., 6798012 Canada Inc., 3574563 Canada Inc. and
+Thomas Alberga (incorporated by reference to Exhibit
+2.1 to the Company’s Current Report on Form 8-K
+filed with the SEC on January 26, 2012)
+3.01
+Certificate of Incorporation of Steven Madden, Ltd.
+(incorporated by reference to Exhibit 1 to the
+Company’s Current Report on Form 8-K filed with
+the SEC on November 23, 1998)
+3.02
+Amended & Restated By-Laws of Steven Madden, Ltd.
+(incorporated by reference to Exhibit 99.1 to the
+Company’s Current Report on Form 8-K filed with
+the SEC on March 28, 2008)
+4.01
+Specimen Certificate for shares of Common Stock
+(incorporated by reference to Exhibit 4.1 to the
+Company’s Registration Statement on Form SB-2/A
+filed with the SEC on September 29, 1993)
+10.01
+Third Amended and Restated Secured Promissory Note
+dated as of June 25, 2007 of Steven H. Madden to the
+Company (incorporated by reference to Exhibit 10.2 to
+the Company’s Current Report on Form 8-K filed
+with the SEC on January 9, 2012)
+10.02
+Consulting Agreement effective August 1, 2004 among the
+Company, John Madden and J.L.M. Consultants Inc., as
+amended by Amendment No. 1 dated March 10, 2005 and
+Amendment No. 2 dated April 14, 2005 (incorporated by
+reference to Exhibits 10.9, 10.10 and 10.11 to the
+Company’s Annual Report on Form 10-K for its
+fiscal year ended December 31, 2005 filed with the SEC
+on March 14, 2006)
+10.03
+Collection Agency Agreement dated July 10, 2009 between
+Rosenthal & Rosenthal, Inc. and the Company
+(incorporated by reference to Exhibit 10.1 to the
+Company’s Quarterly Report on Form 10-Q for its
+fiscal quarter ended September 30, 2010 filed with the
+SEC on November 9, 2010)
+10.04
+Amendment to Collection Agency Agreement dated February
+16, 2010 between Rosenthal & Rosenthal, Inc. and
+the Company (incorporated by reference to Exhibit 10.10
+to the Company’s Annual Report on Form 10-K for
+its fiscal year ended December 31, 2010 filed with the
+SEC on March 12, 2010)
+10.05
+Collection Agency Agreement dated July 10, 2009 between
+Rosenthal & Rosenthal, Inc. and Daniel Friedman
+& Associates, Inc. (incorporated by reference to
+Exhibit 10.2 to the Company’s Current Report on
+Form 8-K filed with the SEC on July 16, 2009)
+10.06
+Collection Agency Agreement dated July 10, 2009 between
+Rosenthal & Rosenthal, Inc. and Diva Acquisition
+Corp. (incorporated by reference to Exhibit 10.3 to the
+Company’s Current Report on Form 8-K filed with
+the SEC on July 16, 2009)
+10.07
+Collection Agency Agreement dated July 10, 2009 between
+Rosenthal & Rosenthal, Inc. and Steven Madden
+Retail, Inc. (incorporated by reference to Exhibit 10.4
+to the Company’s Current Report on Form 8-K filed
+with the SEC on July 16, 2009)
+10.08
+Collection Agency Agreement dated July 10, 2009 between
+Rosenthal & Rosenthal, Inc. and Stevies, Inc.
+(incorporated by reference to Exhibit 10.5 to the
+Company’s Current Report on Form 8-K filed with
+the SEC on July 16, 2009)
+10.09
+Collection Agency Agreement dated July 10, 2009 between
+Rosenthal & Rosenthal, Inc. and SML Acquisition
+Corp. (incorporated by reference to Exhibit 10.6 to the
+Company’s Current Report on Form 8-K filed with
+the SEC on July 16, 2009)
+10.10
+Letter Agreement dated July 10, 2009 among Rosenthal
+& Rosenthal, Inc., the Company, Daniel Friedman
+& Associates, Inc., Diva Acquisition Corp., Steven
+Madden Retail, Inc., Stevies, Inc., and SML Acquisition
+Corp. (incorporated by reference to Exhibit 10.7 to the
+Company’s Current Report on Form 8-K filed with
+the SEC on July 16, 2009)
+10.11
+Guarantee dated July 10, 2009 of the Company, Daniel
+Friedman & Associates, Inc., Diva Acquisition
+Corp., Steven Madden Retail, Inc., Stevies, Inc., and
+SML Acquisition Corp. in favor of Rosenthal &
+Rosenthal, Inc. (incorporated by reference to Exhibit
+10.8 to the Company’s Current Report on Form 8-K
+filed with the SEC on July 16, 2009)
+37
+10.12
+Earn-Out Agreement dated February 10, 2010 among the
+Company, Jeremy Bassan and Big Buddha, Inc.
+(incorporated by reference to Exhibit 10.2 to the
+Company’s Current Report on Form 8-K filed with
+the SEC on February 11, 2010)
+10.13
+Purchase and Sale Agreement for Distressed Trades dated
+August 26, 2010 between BJ Acquisition LLC and Paradox
+Lending LLC (incorporated by reference to Exhibit 10.2
+to the Company’s Quarterly Report on Form 10-Q
+for its fiscal quarter ended September 30, 2010 filed
+with the SEC on November 9, 2010)
+10.14
+Earn-Out Agreement dated May 25, 2011 among Steven
+Madden, Ltd., David Seerherman, Cejon, Inc., Cejon
+Accessories, Inc., New East Designs, LLC and Kenneth
+Rogala (incorporated by reference to Exhibit 10.2 to
+the Company’s Current Report on Form 8-K filed
+with the SEC on May 26, 2011).
+10.15
+Third Amended Employment Agreement dated July 15, 2005
+between the Company and Steven Madden (incorporated by
+reference to Exhibit 10.1 to the Company’s
+Current Report on Form 8-K filed with the SEC on July
+20, 2005)
+10.16
+Amendment dated December 14, 2009 to Third Amended
+Employment Agreement between the Company and Steven
+Madden (incorporated by reference to Exhibit 10.1 to
+the Company’s Current Report on Form 8-K filed
+with the SEC on December 17, 2009)
+10.17
+Amended and Restated Second Amendment dated as of
+December 31, 2011 to Third Amended Employment Agreement
+between the Company and Steven Madden† ¤ 
+10.18
+Employment Agreement dated January 1, 1998 between the
+Company and Arvind Dharia (incorporated by reference to
+Exhibit 10.07 to the Company’s Annual Report on
+Form 10-K for its fiscal year ended December 31, 2000
+filed with the SEC on March 30, 2001) # 
+10.19
+Amendment No. 1 dated June 29, 2001 to Employment
+Agreement between the Company and Arvind Dharia
+(incorporated by reference to Exhibit 99.4 to the
+Company’s Quarterly Report on Form 10-Q for its
+fiscal quarter ended June 30, 2001 filed August 14,
+2001) # 
+10.20
+Amendment No. 2 dated October 30, 2002 to Employment
+Agreement between the Company and Arvind Dharia
+(incorporated by reference to Exhibit 10.16 to the
+Company’s Quarterly Report on Form 10-Q for its
+fiscal quarter ended September 30, 2002 filed with the
+SEC on November 14, 2002) # 
+10.21
+Amendment No. 3 dated February 1, 2006 to Employment
+Agreement between the Company and Arvind Dharia
+(incorporated by reference to Exhibit 10.1 to the
+Company’s Current Report on Form 8-K filed with
+the SEC on February 3, 2006) # 
+10.22
+Amendment No. 4 dated October 7, 2009 to Employment
+Agreement of Arvind Dharia between the Company and
+Arvind Dharia (incorporated by reference to Exhibit
+10.2 to the Company’s Current Report on Form 8-K
+filed with the SEC on October 13, 2009) # 
+10.23
+Amendment No. 5 dated February 8, 2012 to Employment
+Agreement of Arvind Dharia between the Company and
+Arvind Dharia (incorporated by reference to Exhibit
+10.1 to the Company’s Current Report on Form 8-K
+filed with the SEC on February14, 2012) # 
+10.24
+Employment Agreement dated December 1, 2010 between the
+Company and Awadhesh Sinha (incorporated by reference
+to Exhibit 10.1 to the Company’s Current Report
+on Form 8-K filed with the SEC on December 3,
+2010) # 
+10.25
+Amendment dated February 25, 2011 to Employment
+Agreement dated December 1, 2010 between the Company
+and Awadhesh Sinha (incorporated by reference to
+Exhibit 10.25 to the Company’s Annual Report on
+Form 10-K for its fiscal year ended December 31, 2010,
+filed with the SEC on February 28, 2011) # 
+10.26
+Employment Agreement dated October 7, 2009 between the
+Company and Robert Schmertz (incorporated by reference
+to Exhibit 10.1 to the Company’s Current Report
+on Form 8-K filed with the SEC on October 13,
+2009) # 
+38
+10.27
+Employment Agreement dated January 31, 2011 between the
+Company and Amelia Newton Varela (incorporated by
+reference to Exhibit 10.1 to the Company’s
+Current Report on Form 8-K filed with the SEC on
+February 2, 2011) # 
+10.28
+Employment Agreement dated November 6, 2009 between the
+Company and Edward R. Rosenfeld (incorporated by
+reference to Exhibit 10.1 to the Company’s
+Current Report on Form 8-K filed with the SEC on
+November 10, 2009) # 
+10.29
+Amendment No. 1 dated March 8, 2010 to Employment
+Agreement between the Company and Edward R. Rosenfeld
+(incorporated by reference to Exhibit 10.29 to the
+Company’s Annual Report on Form 10-K for its
+fiscal year ended December 31, 2010 filed with the SEC
+on March 12, 2010) # 
+10.30
+The 1999 Stock Plan, approved and adopted on March 15,
+1999, amended as of March 20, 2000 and March 30, 2001
+(incorporated by reference to Exhibit 10.A to the
+Company’s Registration Statement on Form S-8
+filed with the SEC on July 26, 2004) # 
+10.31
+2006 Stock Incentive Plan (Amended and Restated
+Effective May 22, 2009), approved and adopted on May
+22, 2009 (incorporated by reference to Exhibit 10.1 to
+the Company’s Current Report on Form 8-K filed
+with the SEC on May 28, 2009) # 
+21.01
+Subsidiaries of the Registrant † 
+23.01
+Consent of EisnerAmper LLP † 
+24.01
+Power of Attorney (included on signature page hereto)
+31.01
+Certification of Chief Executive Officer pursuant to
+Rule 13a-14(a) or 15d-14(a) of the Securities Exchange
+Act of 1934, as adopted pursuant to Section 302 of the
+Sarbanes-Oxley Act of 2002 † 
+31.02
+Certification of Chief Financial Officer pursuant to
+Rule 13a-14(a) or 15d-14(a) of the Securities Exchange
+Act of 1934, as adopted pursuant to Section 302 of the
+Sarbanes-Oxley Act of 2002 † 
+32.01
+Certification of Chief Executive Officer pursuant to 18
+U.S.C. Section 1350 Adopted Pursuant to Section 906 of
+the Sarbanes-Oxley Act of 2002 †* 
+32.02
+Certification of Chief Financial Officer pursuant to 18
+U.S.C. Section 1350 Adopted Pursuant to Section 906 of
+the Sarbanes-Oxley Act of 2002 †* 
+101
+The following materials from Steven Madden,
+Ltd.’s Annual Report on Form 10-K for the fiscal
+year ended December 31, 2011, formatted in XBRL
+(Extensible Business Reporting Language): (i) the
+Consolidated Balance Sheets, (ii) the Consolidated
+Statements of Income, (iii) the Consolidated Statements
+of Changes in Stockholders’ Equity, (iv) the
+Consolidated Statements of Cash Flows, and (v) Notes to
+Consolidated Financial Statements, tagged as blocks of
+text.*
+†
+Filed herewith.
+¤ 
+This exhibit amends and restates the document included
+as Exhibit 10.1 to the Company’s Current Report
+on Form 8-K filed with the SEC on January 9, 2012 to
+address an inadvertent omission from the original
+document contained in Section 1(f); all other
+provisions remain unchanged.
+#
+Indicates management contract or compensatory plan or
+arrangement required to be identified pursuant to Item
+15(b) of this Annual Report on Form 10-K.
+*
+This exhibit shall not be deemed “filed”
+for purposes of Section 18 of the Securities Exchange
+Act of 1934, as amended, or otherwise subject to the
+liability of that section, nor shall it be deemed
+incorporated by reference into any filing under the
+Securities Act of 1933, as amended, or the Securities
+Exchange Act of 1934, as amended, whether made before
+or after the date hereof and irrespective of any
+general incorporation language in any filing, except to
+the extent the Company specifically incorporates it by
+reference.
+39
+SIGNATURES 
+Pursuant to the requirements of Section 13 or 15(d) of the
+Securities Exchange Act of 1934, the registrant has duly
+caused this report to be signed on its behalf by the
+undersigned, thereunto duly authorized.
+Dated: 
+New
+York, New York 
+February 28, 2012 
+STEVEN MADDEN, LTD.
+By:
+/s/ EDWARD R. ROSENFELD
+Edward R. Rosenfeld
+Chairman and Chief Executive Officer
+By:
+/s/ ARVIND DHARIA
+Arvind Dharia
+Chief Financial Officer and Chief Accounting Officer
+POWER OF ATTORNEY 
+KNOW ALL PERSONS BY THESE PRESENTS, that each of the
+undersigned constitutes and appoints Edward R. Rosenfeld and
+Arvind Dharia, and each of them, as attorneys-in-fact and
+agents, with full power of substitution and resubstitution,
+for and in the name, place and stead of the undersigned, in
+any and all capacities, to sign any and all amendments to
+this Annual Report on Form 10-K, and to file the same, with
+all exhibits thereto and all other documents in connection
+therewith, with the Securities and Exchange Commission,
+granting unto said attorneys-in-fact and agents full power
+and authority to do and perform each and every act and thing
+requisite and necessary to be done in and about the premises,
+as fully to all intents and purposes as the undersigned might
+or could do in person, hereby ratifying and confirming all
+that each of said attorney-in-fact or substitute or
+substitutes, may lawfully do or cause to be done by virtue
+hereof.
+40
+Pursuant to the requirements of the Securities Exchange Act
+of 1934, this report has been signed below by the following
+persons on behalf of the registrant in the capacities and on
+the dates indicated.
+Signature
+Title
+Date
+/s/ EDWARD R. ROSENFELD
+Chairman, Chief Executive Officer and Director
+February 28, 2012
+Edward R. Rosenfeld
+/s/ ARVIND DHARIA
+Chief Financial Officer and Chief Accounting Officer
+February 28, 2012
+Arvind Dharia
+/s/ JOHN L. MADDEN
+Director
+February 28, 2012
+John L. Madden
+/s/ PETER MIGLIORINI
+Director
+February 28, 2012
+Peter Migliorini
+/s/ RICHARD P. RANDALL
+Director
+February 28, 2012
+Richard P. Randall
+/s/ RAVI SACHDEV
+Director
+February 28, 2012
+Ravi Sachdev
+/s/ THOMAS H. SCHWARTZ
+Director
+February 28, 2012
+Thomas H. Schwartz
+41
+STEVEN MADDEN, LTD. 
+INDEX TO CONSOLIDATED FINANCIAL STATEMENTS 
+Report of Independent Registered
+Public Accounting Firm 
+F-1
+Balance sheets as of December 31, 2011
+and 2010 
+F-2
+Statements of income for the years
+ended December 31, 2011, 2010 and 2009 
+F-3
+Statements of changes in
+stockholders’ equity for the years ended December
+31, 2011, 2010 and 2009 
+F-4
+Statements of cash flows for the years
+ended December 31, 2011, 2010 and 2009 
+F-6
+Notes to financial statements 
+F-7
+42
+REPORT OF INDEPENDENT
+REGISTERED PUBLIC ACCOUNTING FIRM 
+To the Board of Directors and Stockholders
+Steven Madden, Ltd. and subsidiaries
+We have audited the accompanying consolidated balance sheets
+of Steven Madden, Ltd. and subsidiaries (the "Company") as of
+December 31, 2011 and 2010, 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, 2011. We also have audited the
+Company’s internal control over financial reporting as
+of December 31, 2011, based on criteria established in
+Internal Control-Integrated Framework issued by the
+Committee of Sponsoring Organizations of the Treadway
+Commission (COSO). The Company's management is responsible
+for these consolidated financial statements, for maintaining
+effective internal control over financial reporting, and for
+its assessment of the effectiveness of internal control over
+financial reporting included in the accompanying Management's
+Report on Internal Control over Financial Reporting appearing
+under Item 9A of the Company's December 31, 2011 annual
+report on Form 10-K. Our responsibility is to express an
+opinion on these consolidated financial statements based on
+our audits.
+We conducted our audits in accordance with the standards of
+the Public Company Accounting Oversight Board (United
+States). Those standards require that we plan and perform the
+audits to obtain reasonable assurance about whether the
+financial statements are free of material misstatement and
+whether effective internal control over financial reporting
+was maintained in all material respects. Our audits of the
+consolidated financial statements included examining, on a
+test basis, evidence supporting the amounts and disclosures
+in the financial statements, assessing the accounting
+principles used and significant estimates made by management,
+and evaluating the overall financial statement presentation.
+Our audit of internal control over financial reporting
+included obtaining an understanding of internal control over
+financial reporting, assessing the risk that a material
+weakness exists, and testing and evaluating the design and
+operating effectiveness of internal control based on the
+assessed risk. Our audits also included performing such other
+procedures as we considered necessary in the circumstances.
+We believe that our audits provide a reasonable basis for our
+opinions
+A company's internal control over financial reporting is a
+process designed to provide reasonable assurance regarding
+the reliability of financial reporting and the preparation of
+financial statements for external purposes in accordance with
+generally accepted accounting principles. A company's
+internal control over financial reporting includes those
+policies and procedures that (1) pertain to the maintenance
+of records that, in reasonable detail, accurately and fairly
+reflect the transactions and dispositions of the assets of
+the company; (2) provide reasonable assurance that
+transactions are recorded as necessary to permit preparation
+of financial statements in accordance with generally accepted
+accounting principles, and that receipts and expenditures of
+the company are being made only in accordance with
+authorizations of management and directors of the company;
+and (3) provide reasonable assurance regarding prevention or
+timely detection of unauthorized acquisition, use, or
+disposition of the company's assets that could have a
+material effect on the financial statements.
+Because of its inherent limitations, internal control over
+financial reporting may not prevent or detect misstatements.
+Also, projections of any evaluation of effectiveness to
+future periods are subject to the risk that controls may
+become inadequate because of changes in conditions, or that
+the degree of compliance with the policies or procedures may
+deteriorate.
+In our opinion, the consolidated financial statements
+referred to above present fairly, in all material respects,
+the financial position of Steven Madden, Ltd. and
+subsidiaries as of December 31, 2011 and 2010, and the
+results of their operations and their cash flows for each of
+the years in the three-year period ended December 31, 2011,
+in conformity with U.S. generally accepted accounting
+principles. Also in our opinion, the Company has maintained,
+in all material respects, effective internal control over
+financial reporting as of December 31, 2011, based on
+criteria established in Internal Control-Integrated
+Framework issued by COSO.
+As indicated in the accompanying Management's Annual Report
+on Internal Control over Financial Reporting, management's
+assessment of the effectiveness of internal control over
+financial reporting as of December 31, 2011 did not include
+the internal controls of The Topline Corporation
+(“Topline”) and Cejon Inc., Cejon Accessories,
+Inc. and New East Designs, LLC (collectively
+“Cejon”) because they were acquired by the
+Company in purchase business combinations during 2011.
+Topline and Cejon in the aggregate constituted approximately
+31% of total assets and approximately 18% and 13% of revenues
+and net income, respectively, of the related consolidated
+financial statement amounts as of and for the year ended
+December 31, 2011. Our audit of internal control over
+financial reporting of the Company also excluded an
+evaluation of the internal control over financial reporting
+of Topline and Cejon.
+/s/ EisnerAmper LLP 
+New York, New York 
+February 28, 2012
+F-1
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Consolidated Balance
+Sheets 
+(in thousands)
+December 31,
+2011
+2010
+ASSETS
+Current assets:
+Cash and cash equivalents
+$
+102,830
+$
+66,151
+Accounts receivable – net of allowances of $5,894
+and $2,458
+91,407
+18,742
+Due from factor – net of allowances of $12,325
+and $12,800
+62,017
+52,206
+Inventories
+59,644
+39,557
+Marketable securities – available for sale
+5,659
+13,289
+Prepaid expenses and other current assets
+13,832
+10,444
+Prepaid taxes
+1,457
+600
+Deferred taxes
+9,711
+9,078
+Total current assets
+346,557
+210,067
+Notes receivable
+7,401
+7,024
+Note receivable – related party
+4,090
+3,849
+Property and equipment, net
+31,587
+20,791
+Deferred taxes
+2,428
+7,844
+Deposits and other
+1,257
+2,529
+Marketable securities - available for sale
+72,004
+114,317
+Goodwill – net
+75,595
+38,613
+Intangibles – net
+98,867
+42,662
+Total assets
+$
+639,786
+$
+447,696
+LIABILITIES
+Current liabilities:
+Accounts payable
+$
+69,747
+$
+37,089
+Accrued expenses
+34,327
+18,425
+Contingent payment liability – current portion
+14,133
+—
+Accrued incentive compensation
+16,881
+15,917
+Total current liabilities
+135,088
+71,431
+Contingent payment liability
+23,788
+12,372
+Deferred rent
+6,004
+5,467
+Other liabilities
+148
+1,128
+Total liabilities
+165,028
+90,398
+Commitments, contingencies and other – (notes L
+& O)
+STOCKHOLDERS’ EQUITY
+Preferred stock – $.0001 par value, 5,000 shares
+authorized; none issued; Series A Junior Participating
+preferred stock – $.0001 par value, 60 shares
+authorized; none issued
+Common stock – $.0001 par value, 60,000 shares
+authorized, 51,408 and 50,423 shares issued, 43,005 and
+42,020 shares outstanding at December 31, 2011 and
+2010, respectively
+5
+4
+Additional paid-in capital
+186,325
+165,773
+Retained earnings
+420,411
+323,092
+Other comprehensive income
+678
+972
+Treasury stock – 8,403 and 8,403 shares at cost
+at December 31, 2011 and 2010, respectively
+(132,543
+)
+(132,543
+)
+Total Steven Madden, Ltd. stockholders’ equity
+474,876
+357,298
+Noncontrolling interests
+(118
+)
+—
+Total stockholders’ equity
+474,758
+357,298
+Total liabilities and stockholders’ equity
+$
+639,786
+$
+447,696
+See notes to consolidated financial statements
+F-2
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Consolidated Statements of
+Income 
+(in thousands, except per share data)
+Years Ended December 31,
+2011
+2010
+2009
+Net sales
+$
+968,549
+$
+635,418
+$
+503,550
+Cost of sales
+606,601
+359,564
+287,361
+Gross profit
+361,948
+275,854
+216,189
+Commission and licensing fee income – net
+18,715
+22,629
+19,928
+Operating expenses
+(226,893
+)
+(176,859
+)
+(157,149
+)
+Income before other income (expenses) and provision for
+income taxes
+153,770
+121,624
+78,968
+Other income (expenses):
+Interest income
+4,885
+4,208
+2,096
+Interest expense
+(51
+)
+(4
+)
+(93
+)
+Other income (expense) – net
+188
+29
+(182
+)
+Income before provision for income taxes
+158,792
+125,857
+80,789
+Provision for income taxes
+61,591
+50,132
+30,682
+Net income
+97,201
+75,725
+50,107
+Net loss attributable to noncontrolling interests
+118
+—
+—
+Net income attributable to Steven Madden, Ltd.
+$
+97,319
+$
+75,725
+$
+50,107
+Basic income per share
+$
+2.30
+$
+1.83
+$
+1.23
+Diluted income per share
+$
+2.25
+$
+1.78
+$
+1.22
+Basic weighted average shares of common stock
+outstanding
+42,264
+41,477
+40,602
+Effect of dilutive securities – options and
+restricted stock
+975
+966
+626
+Diluted weighted average shares of common stock
+outstanding
+43,239
+42,443
+41,228
+See notes to consolidated financial statements 
+F-3
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Consolidated Statements of
+Changes in Stockholders’ Equity 
+(in thousands)
+Common Stock
+Additional Paid-in
+Retained
+Shares
+Amount
+Capital
+Earnings
+Balance - December 31, 2008
+40,004
+3
+137,362
+197,257
+Exercise of stock options
+594
+— 
+3,904
+— 
+Tax benefit from exercise of options
+— 
+— 
+497
+— 
+Issuance of fully vested restricted stock
+329
+— 
+— 
+— 
+Stock-based compensation
+— 
+— 
+5,940
+— 
+Unrealized holding gain on marketable securities (net
+of taxes of $698)
+— 
+— 
+— 
+— 
+Net income
+— 
+— 
+— 
+50,107
+Comprehensive income
+— 
+— 
+— 
+— 
+Forfeiture of accrued dividends
+— 
+— 
+— 
+1
+Balance - December 31, 2009
+40,927
+3
+147,703
+247,365
+Exercise of stock options
+646
+1
+5,081
+— 
+Tax benefit from stock based compensation
+— 
+— 
+4,718
+— 
+Issuance of fully vested restricted stock
+447
+— 
+— 
+— 
+Stock-based compensation
+— 
+— 
+8,271
+— 
+Unrealized holding gain on marketable securities (net
+of taxes of $198)
+— 
+— 
+— 
+— 
+Net income
+— 
+— 
+— 
+75,725
+Comprehensive income
+— 
+— 
+— 
+— 
+Forfeiture of accrued dividends
+— 
+— 
+— 
+2
+Common stock purchased for treasury
+— 
+— 
+— 
+— 
+Balance - December 31, 2010
+42,020
+4
+165,773
+323,092
+Exercise of stock options
+439
+1
+4,994
+— 
+Tax benefit from exercise of options
+— 
+— 
+4,154
+— 
+Issuance of restricted stock
+546
+— 
+— 
+— 
+Stock-based compensation
+— 
+— 
+11,404
+— 
+Foreign currency translation adjustment
+— 
+— 
+— 
+— 
+Unrealized holding loss on marketable securities (net
+of taxes of $54)
+— 
+— 
+— 
+— 
+Net income
+— 
+— 
+— 
+97,319
+Comprehensive income
+— 
+— 
+— 
+— 
+Balance - December 31, 2011
+43,005
+$
+5
+$
+186,325
+$
+420,411
+See notes to consolidated financial statements 
+F-4
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Consolidated Statements of Changes in Stockholders’
+Equity (Continued) 
+(in thousands)
+Accumulated Other 
+Non- 
+Total 
+Comp- 
+Comprehensive 
+Treasury Stock 
+controlling 
+Stockholders’ 
+rehensive 
+Gain (Loss) 
+Shares 
+Amount 
+interest 
+Equity 
+Income 
+Balance - December 31,
+2008 
+(396 
+) 
+8,262 
+(127,984 
+) 
+— 
+206,242 
+— 
+Exercise of stock
+options 
+— 
+— 
+— 
+— 
+3,904 
+— 
+Tax benefit from exercise
+of options 
+— 
+— 
+— 
+— 
+497 
+— 
+Issuance of fully vested
+restricted stock 
+— 
+— 
+— 
+— 
+— 
+— 
+Stock-based
+compensation 
+— 
+— 
+— 
+— 
+5,940 
+— 
+Unrealized holding gain on
+marketable securities (net of taxes of $698) 
+1,096 
+— 
+— 
+— 
+1,096 
+1,096 
+Net income 
+— 
+— 
+— 
+— 
+50,107 
+50,107 
+Comprehensive income 
+— 
+— 
+— 
+— 
+— 
+$ 
+51,203 
+Forfeiture of accrued
+dividends 
+— 
+— 
+— 
+— 
+1 
+— 
+Balance - December 31,
+2009 
+700 
+8,262 
+(127,984 
+) 
+— 
+267,787 
+— 
+Exercise of stock
+options 
+— 
+— 
+— 
+— 
+5,082 
+— 
+Tax benefit from exercise
+of options 
+— 
+— 
+— 
+— 
+4,718 
+— 
+Issuance of fully vested
+restricted stock 
+— 
+— 
+— 
+— 
+— 
+— 
+Stock-based
+compensation 
+— 
+— 
+— 
+— 
+8,271 
+— 
+Unrealized holding gain on
+marketable securities (net of taxes of $198) 
+272 
+— 
+— 
+— 
+272 
+272 
+Net income 
+— 
+— 
+— 
+— 
+75,725 
+75,725 
+Comprehensive income 
+— 
+— 
+— 
+— 
+— 
+$ 
+75,997 
+Forfeiture of accrued
+dividends 
+— 
+— 
+— 
+— 
+2 
+— 
+Common stock purchased for
+treasury 
+— 
+141 
+(4,559 
+) 
+— 
+(4,559 
+) 
+— 
+Balance - December 31,
+2010 
+972 
+8,403 
+(132,543 
+) 
+— 
+357,298 
+— 
+Exercise of stock
+options 
+— 
+— 
+— 
+— 
+4,995 
+— 
+Tax benefit from exercise
+of options 
+— 
+— 
+— 
+— 
+4,154 
+— 
+Issuance of restricted
+stock 
+— 
+— 
+— 
+— 
+— 
+— 
+Stock-based
+compensation 
+— 
+— 
+— 
+— 
+11,404 
+— 
+Foreign currency
+translation adjustment 
+(209 
+) 
+— 
+— 
+— 
+(209 
+) 
+(209 
+) 
+Unrealized holding loss on
+marketable securities (net of taxes of $54) 
+(85 
+) 
+— 
+— 
+— 
+(85 
+) 
+(85 
+) 
+Net income 
+— 
+— 
+— 
+$ 
+(118 
+) 
+97,201 
+97,201 
+Comprehensive income 
+— 
+— 
+— 
+— 
+— 
+$ 
+96,907 
+Balance - December 31,
+2011 
+$ 
+678 
+8,403 
+$ 
+(132,543 
+) 
+$ 
+(118 
+) 
+$ 
+474,758 
+— 
+See notes to consolidated financial statements 
+F-5
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Consolidated Statements of
+Cash Flows 
+(in thousands)
+Years Ended December 31,
+2011
+2010
+2009
+Cash flows from operating activities:
+Net income
+$
+97,201
+$
+75,725
+$
+50,107
+Adjustments to reconcile net income to net cash
+provided by operating activities:
+Stock-based compensation
+11,404
+8,271
+5,940
+Tax benefits from stock based compensation
+(4,154
+)
+(4,718
+)
+(497
+)
+Depreciation and amortization
+11,060
+9,999
+9,560
+Loss on disposal of fixed assets
+726
+543
+1,153
+Deferred taxes
+1,452
+(798
+)
+(1,928
+)
+Provision for doubtful accounts and chargebacks
+2,961
+1,576
+2,381
+Accrued interest on note receivable – related
+party
+(241
+)
+(281
+)
+(198
+)
+Deferred rent expense and other non-current liabilities
+(357
+)
+423
+271
+Loss (gain) on sale of marketable securities
+(1,254
+)
+(29
+)
+182
+Changes in:
+Accounts receivable
+(16,543
+)
+(8,266
+)
+(5,169
+)
+Due from factor
+(9,336
+)
+(4,985
+)
+(15,939
+)
+Inventories
+(9,210
+)
+(8,804
+)
+1,144
+Prepaid expenses, prepaid taxes, deposits and other
+assets
+(2,068
+)
+(4,420
+)
+1,691
+Accounts payable and accrued expenses
+(7,551
+)
+19,572
+10,561
+Accrued incentive compensation
+964
+3,603
+4,445
+Other liabilities
+(86
+)
+(538
+)
+638
+Net cash provided by operating activities
+74,968
+86,873
+64,342
+Cash flows from investing activities:
+Purchase of property and equipment
+(15,477
+)
+(3,424
+)
+(3,399
+)
+Purchases of marketable securities
+(17,968
+)
+(72,663
+)
+(67,265
+)
+Purchases of notes receivable
+—
+(7,004
+)
+—
+Payment on contingent liability
+(4,151
+)
+(1,628
+)
+—
+Maturity/sale of marketable securities
+67,885
+30,092
+17,543
+Refundable cash acquired from seller
+12,004
+—
+—
+Acquisitions*
+(89,730
+)
+(40,602
+)
+(5,776
+)
+Net cash (used in) provided by investing activities
+(47,437
+)
+(95,229
+)
+(58,897
+)
+Cash flows from financing activities:
+Advances from factor - net
+—
+—
+(30,168
+)
+Proceeds from exercise of stock options
+4,994
+5,082
+3,904
+Tax benefits from stock based compensation
+4,154
+4,718
+497
+Common stock purchased for treasury
+—
+(4,559
+)
+—
+Net cash provided by (used in) financing activities
+9,148
+5,241
+(25,767
+)
+Net (decrease) increase in cash and cash equivalents
+36,679
+(3,115
+)
+(20,322
+)
+Cash and cash equivalents - beginning of year
+66,151
+69,266
+89,588
+Cash and cash equivalents – end of year
+$
+102,830
+$
+66,151
+$
+69,266
+Supplemental disclosures of cash flow information:
+Cash paid during the year for:
+Interest
+$
+51
+$
+4
+$
+93
+Income taxes
+$
+59,633
+$
+42,651
+$
+30,508
+Non-cash transactions
+Dividend accrual (forfeitures) related to restricted
+stock
+$
+—
+$
+(2
+)
+$
+(1
+)
+* The amount for 2009 includes $4,526 which was accrued at
+December 31, 2008.
+See notes to consolidated financial statements 
+F-6
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Consolidated
+Financial Statements 
+December 31, 2011 and 2010 
+($ in thousands except share and per share data) 
+Note A –
+Summary of Significant Accounting Policies 
+[1]
+Organization:
+Steven Madden, Ltd. and its subsidiaries (collectively,
+the “Company”), a Delaware corporation,
+design, source, market and sell name brand and private
+label women’s, men’s and children’s
+shoes, for sale worldwide through its wholesale and
+retail channels under the Steve Madden Women’s,
+Steven and Madden Men’s brand names and through
+its wholesale channels under the Stevies, Madden Girl,
+Madden, l.e.i. (under license), Elizabeth and James
+(under license), Report, Superga (under license),
+Betsey Johnson and Big Buddha brand names. In addition,
+the Company designs, sources, markets and sells name
+brand and private label fashion handbags and
+accessories to customers worldwide through its
+Wholesale Accessories segment. The Wholesale
+Accessories segment includes Big Buddha, Betsey
+Johnson, Betseyville, Cejon, Steve Madden and Steven by
+Steve Madden and, through license agreements, Daisy
+Fuentes and Olsenboye accessories brands. Revenue is
+generated predominantly through the sale of the
+Company’s brand name and private label
+merchandise and certain licensed products. At both
+December 31, 2011 and 2010, the Company operated 84
+retail stores (including its e-commerce website as a
+store). Revenue is subject to seasonal fluctuations.
+See Note Q for operating segment information.
+[2]
+Principles of consolidation:
+The Consolidated Financial Statements include the
+accounts of Steven Madden, Ltd. and its wholly owned
+subsidiaries Steven Madden Retail, Inc., Diva
+Acquisition Corp., Adesso Madden, Inc., Stevies, Inc.,
+Daniel M. Friedman and Associates, Inc., Big Buddha,
+Inc., the Topline Corporation and Cejon, Inc.
+(collectively referred to as the
+“Company”). The accounts of Madlove LLC, a
+joint venture in which the Company is the primary
+beneficiary, is included in the Consolidated Financial
+Statements with the other members’ interests
+reflected in “Net loss attributable to
+noncotnrolling interests” in the Consolidated
+Statement of Income and “Noncontrolling
+interests” in the Consolidated Balance Sheets.
+All significant intercompany balances and transactions
+have been eliminated.
+[3]
+Stock split:
+On May 5, 2011, the Company’s Board of Directors
+announced a three-for-two stock split of the
+Company’s outstanding shares of common stock,
+effected in the form of a stock dividend on the
+Company’s outstanding common stock. Stockholders
+of record at the close of business on May 20, 2011
+received one additional share of the Company’s
+common stock for every two shares of common stock owned
+on this date. The additional shares were distributed on
+May 31, 2011. Stockholders received cash in lieu of any
+fractional shares of common stock they otherwise would
+have received in connection with the dividend. All
+share and per share data provided herein gives effect
+to this stock split, applied retroactively.
+[4]
+Use of estimates:
+The preparation of financial statements in conformity
+with accounting principles generally accepted in the
+United States of America requires management to make
+estimates and assumptions that affect the reported
+amounts of assets and liabilities and disclosure of
+contingent assets and liabilities at the date of the
+financial statements and the reported amounts of
+revenue and expenses during the reporting period.
+Actual results could differ from those estimates.
+Significant areas involving management estimates
+include allowances for bad debts, returns and customer
+chargebacks and contingent payment liabilities. The
+Company provides reserves on trade accounts receivables
+and due from factor for future customer chargebacks and
+markdown allowances, discounts, returns and other
+miscellaneous compliance related deductions that relate
+to the current period sales. The Company evaluates
+anticipated chargebacks and these other credits, by
+reviewing several performance indicators of its major
+customers. These performance indicators, which include
+retailers’ inventory levels, sell-through rates
+and gross margin levels, are analyzed by management to
+estimate the amount of the anticipated customer
+allowance.
+F-7
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Consolidated Financial Statements 
+December 31, 2011 and 2010 
+($ in thousands except share and per share data) 
+Note A –
+Summary of Significant Accounting Policies
+(continued) 
+[5]
+Cash equivalents:
+Cash equivalents at December 31, 2011 and 2010 amounted
+to approximately $57,652 and $32,145, respectively, and
+consisted of money market accounts held primarily at
+four brokerage companies. The Company considers all
+highly liquid instruments with an original maturity of
+three months or less when purchased to be cash
+equivalents.
+[6]
+Marketable securities:
+Marketable securities consist primarily of corporate
+and federal agency bonds with maturities greater than
+three months and up to eight years at the time of
+purchase. These securities, which are classified as
+available for sale, are carried at fair value, with
+unrealized gains and losses net of any tax effect
+reported in stockholders’ equity as accumulated
+other comprehensive income (loss) until realized.
+Amortization of premiums and discounts is included in
+interest income. For the years ended December 31, 2011
+and 2010, the amortization of bond premiums was $1,119
+and $1,148, respectively. The schedule of maturities at
+December 31, 2011 and 2010 are as follows:
+Maturities as of 
+December 31, 2011 
+Maturities as of 
+December 31, 2010
+1 Year or Less
+1 to 8 Years
+1 Year or Less 
+1 to 5 Years
+Municipal bonds, U.S. Government and federal agency
+bonds
+$
+—
+$
+—
+$
+—
+$
+16,542
+Corporate bonds
+5,659
+63,965
+13,289
+93,741
+Certificates of deposit
+—
+8,039
+—
+4,034
+$
+5,659
+$
+72,004
+$
+13,289
+$
+114,317
+[7]
+Inventories:
+Inventories, which consist of finished goods on hand
+and in transit, are stated at the lower of cost
+(first-in, first-out method) or market.
+[8]
+Property and equipment:
+Property and equipment are stated at cost less
+accumulated depreciation and amortization. Depreciation
+is computed utilizing the straight-line method based on
+estimated useful lives ranging from three to ten years.
+Leasehold improvements are amortized utilizing the
+straight-line method over the shorter of their
+estimated useful lives or the remaining lease term.
+Depreciation and amortization include amounts relating
+to property and equipment under capital leases.
+Impairment losses are recognized for long-lived assets,
+including certain intangibles, used in operations when
+indicators of impairment are present and the
+undiscounted cash flows estimated to be generated by
+those assets are not sufficient to recover the
+assets’ carrying amount. Impairment losses are
+measured by comparing the fair value of the assets to
+their carrying amount.
+F-8
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Consolidated Financial Statements 
+December 31, 2011 and 2010 
+($ in thousands except share and per share data) 
+Note A –
+Summary of Significant Accounting Policies
+(continued) 
+[9]
+Goodwill and intangible assets:
+The Company’s goodwill and indefinite lived
+intangible assets are not amortized, rather they are
+tested for impairment on an annual basis or more often
+if events or circumstances change that could cause
+these assets to become impaired. The Company completed
+its annual impairment tests on goodwill, which relates
+to the retail, accessories and Steven reporting units
+as well the Betsey Johnson trademark. No impairments
+were recognized.
+[10]
+Net income per share:
+Basic income per share is based on the weighted average
+number of shares of common stock outstanding during the
+year. Diluted income per share reflects: a) the
+potential dilution assuming shares of common stock were
+issued upon the exercise of outstanding in-the-money
+options and the proceeds thereof were used to purchase
+treasury stock at the average market price during the
+period, and b) the vesting of granted nonvested
+restricted stock awards for which the assumed proceeds
+upon vesting are deemed to be the amount of
+compensation cost not yet recognized attributable to
+future services using the treasury stock method, to the
+extent dilutive. For the years ended December 31, 2011,
+2010 and 2009, options exercisable into approximately
+182,000, 39,000 and 22,500 shares of common stock,
+respectively, have been excluded in the calculation of
+diluted income per share as the result would have been
+antidilutive. For the years ended December 31, 2011,
+2010 and 2009, all unvested restricted stock awards
+were dilutive.
+[11]
+Comprehensive income:
+Comprehensive income is the total of net earnings and
+all other non-owner changes in equity. Except for net
+income, foreign currency translation adjustments, and
+unrealized gains and losses on marketable securities,
+the Company does not have any transactions and other
+economic events that qualify as comprehensive income.
+[12]
+Advertising costs:
+The Company expenses costs of print, radio and
+billboard advertisements as incurred. Advertising
+expense included in operating expenses amounted to
+approximately $7,312 in 2011, $5,597 in 2010 and $4,713
+in 2009.
+[13]
+Revenue recognition:
+The Company recognizes revenue on wholesale sales when
+products are shipped pursuant to its standard terms,
+which are freight on board (“FOB”)
+warehouse, or when products are delivered to the
+consolidators as per the terms of the customers’
+purchase order, persuasive evidence of an arrangement
+exists, the price is fixed or determinable and
+collection is reasonably assured. Sales reductions on
+wholesale sales for anticipated discounts, allowances
+and other deductions are recognized during the period
+when sales are recorded. Customers retain the right to
+replacement of the product for poor quality or improper
+or short shipments, which have historically been
+immaterial. Retail sales are recognized when the
+payment is received from customers and are recorded net
+of estimated returns. The Company also generates
+commission income acting as a buying agent by arranging
+to manufacture private label shoes to the
+specifications of its clients. The Company’s
+commission revenue includes fees charged for its
+design, product and development services provided to
+certain suppliers in connection with the
+Company’s private label business. Commission
+revenue and product and development cost fees are
+recognized as earned when title to the product
+transfers from the manufacturer to the customer and
+collections are reasonably assured and are reported on
+a net basis after deducting related operating expenses.
+F-9
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Consolidated Financial Statements 
+December 31, 2011 and 2010 
+($ in thousands except share and per share data) 
+Note A –
+Summary of Significant Accounting Policies
+(continued) 
+The Company licenses its Steve Madden® and Steven
+by Steve Madden® trademarks for use in connection
+with the manufacture, marketing and sale of sunglasses,
+eyewear, outerwear, bedding, hosiery and women’s
+fashion apparel, jewelry and luggage. In addition, the
+Company licenses the Betsey Johnson® and
+Betseyville® trademarks for use in connection with
+the manufacture, marketing and sale of apparel,
+jewelry, swimwear, eyewear, watches, fragrances and
+outerwear. The license agreements require the licensee
+to pay the Company a royalty and, in substantially all
+of the agreements, an advertising fee based on the
+higher of a minimum or a net sales percentage as
+defined in the various agreements. In addition, under
+the terms of retail selling agreements, most of the
+Company’s international distributors are required
+to pay the Company a royalty based on a percentage of
+net sales, in addition to a commission and a design fee
+on the purchases of the Company’s products.
+Licensing revenue is recognized on the basis of net
+sales reported by the licensees, or the minimum
+guaranteed royalties, if higher. In substantially all
+of the Company’s license agreements, the minimum
+guaranteed royalty is earned and payable on a quarterly
+basis.
+[14]
+Taxes collected from customers:
+The Company accounts for certain taxes collected from
+its customers in accordance with the accounting
+guidance which permits companies to adopt a policy of
+presenting taxes in the income statement on either a
+gross basis (included in revenues and costs) or net
+basis (excluded from revenues). Taxes within the scope
+of this accounting guidance would include taxes that
+are imposed on a revenue transaction between a seller
+and a customer, for example, sales taxes, use taxes,
+value-added taxes and some types of excise taxes. The
+Company has consistently recorded all taxes on a net
+basis.
+[15]
+Sales deductions:
+The Company supports retailers’ initiatives to
+maximize sales of the Company’s products on the
+retail floor by subsidizing the co-op advertising
+programs of such retailers, providing them with
+inventory markdown allowances and participating in
+various other marketing initiatives of its major
+customers. In addition, the Company accepts returns for
+damaged products for which the Company’s costs
+are normally charged back to the responsible
+third-party factory. Such expenses are reflected in the
+financial statements as deductions to net sales.
+[16]
+Cost of sales:
+All costs incurred to bring finished products to the
+Company’s distribution center or to the customers
+freight forwarder and, in the Retail segment, the costs
+to bring products to the Company’s stores, are
+included in the cost of sales line on the Consolidated
+Statements of Income. These include the cost of
+finished products, purchase commissions, letter of
+credit fees, brokerage fees, sample expenses, custom
+duty, inbound freight, royalty payments on licensed
+products, labels and product packaging. All warehouse
+and distribution costs related to the Wholesale
+segments and freight to customers, if any, are included
+in the operating expenses line item of the
+Company’s Consolidated Statements of Income. The
+Company’s gross margins may not be comparable to
+those of other companies in the industry because some
+companies may include warehouse and distribution costs,
+as well as other costs excluded from cost of sales by
+the Company, as a component of cost of sales, while
+other companies report on the same basis as the Company
+and include them in operating expenses.
+F-10
+Note A –
+Summary of Significant Accounting Policies
+(continued) 
+[17]
+Warehouse and shipping costs:
+The Company includes all warehouse and distribution
+costs for the Wholesale segment in the Operating
+Expenses line on the Consolidated Statements of Income.
+For the years ended December 31, 2011, 2010 and 2009,
+the total warehouse and distribution costs included in
+Operating Expenses were $12,190, $10,409 and $8,488
+respectively. Since the Company’s standard terms
+of sales are “FOB Steve Madden warehouse,”
+the Company’s wholesale customers absorb most
+shipping costs. Shipping costs to wholesale customers
+incurred by the Company are not considered significant
+and are included in the Operating Expense line in the
+Consolidated Statements of Income.
+[18]
+Exit or disposal activity costs:
+The Company accounts for its exit and disposal costs by
+recording an accrual for the liability for lease costs
+that will continue to be incurred without economic
+benefit to the Company upon the date that the Company
+ceases using the leased property. As of December 31,
+2011, the Company accrued approximately $232 in lease
+exit costs associated with a store that was closed
+prior to the end of the term of the store lease.
+[19]
+Employee benefit plan:
+The Company maintains a tax-qualified 401(k) plan which
+is available to each of the Company’s eligible
+employees who elect to participate after meeting
+certain length-of-service requirements. The Company
+made discretionary matching contributions of 50% of
+employees’ contributions up to a maximum of 6% of
+employees’ compensation which vest to the
+employees over a period of time. Total matching
+contributions to the plan for 2011, 2010 and 2009 were
+approximately $844, $675 and $601, respectively.
+[20]
+Fair value of financial instruments:
+The carrying value of cash and cash equivalents,
+accounts receivable, due from factors and accounts
+payable approximate their fair values due to their
+short-term nature of their underlying terms. The fair
+values of marketable securities available for sale are
+determined by reference to market data and other
+valuation techniques, as appropriate. Fair value of the
+note receivable – related party approximates its
+carrying value based upon its interest rate, which
+approximates current market interest rates. As it
+relates to notes receivable, see Note F for fair value
+determination.
+[21]
+Recently Issued Accounting Standards:
+In June 2011, the Financial Accounting Standards Board
+(“FASB”) issued ASU No. 2011-05
+“Comprehensive Income (Topic 220): Presentation
+of Comprehensive Income” (“ASU No.
+2011-05”). Under ASU No. 2011-5, an entity has
+the option to present the total of comprehensive
+income, the components of net income, and the
+components of other comprehensive income either in a
+single continuous statement of comprehensive income or
+in two separate but consecutive statements. Regardless
+of which option is selected, an entity is required to
+present each component of net income along with total
+net income, each component of other comprehensive
+income along with a total for other comprehensive
+income, and a total amount for comprehensive income.
+ASU No. 2011-5 eliminates the option to present the
+components of other comprehensive income as part of the
+statement of changes in stockholders’ equity.
+F-11
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Consolidated Financial Statements 
+December 31, 2011 and 2010 
+($ in thousands except share and per share data) 
+Note A –
+Summary of Significant Accounting Policies
+(continued) 
+ASU No. 2011-5 is effective for fiscal years, and
+interim periods within those years, beginning after
+December 15, 2011, and effects the presentation of
+financial statements and thus will have no impact on
+the Company’s Consolidated Financial Statements.
+In October 2011, the FASB announced plans to defer the
+presentation of items that are reclassified from other
+comprehensive income to net income alongside their
+respective components of net income and other
+comprehensive income.
+Note B –
+Acquisitions 
+Cejon 
+On May 25, 2011, the Company acquired all of the outstanding
+shares of capital stock of closely held Cejon, Inc. and Cejon
+Accessories, Inc. from the sole stockholder of these
+companies, as well as all of the outstanding membership
+interests in New East Designs, LLC (together with Cejon Inc.
+and Cejon Accessories, “Cejon”) from its members
+(together with the sole stockholder of Cejon, the
+“Cejon Sellers”). Founded in 1991, Cejon designs,
+markets and sells cold weather accessories, fashion scarves,
+wraps and other trend accessories primarily under the Cejon
+brand name, private labels and under the Steve Madden brand
+name. Cejon had been a licensee of the Company for cold
+weather and selected other fashion accessories since
+September 2006. Management expects the Cejon acquisition will
+further strengthen and expand the Company’s accessories
+platform. The acquisition was completed for consideration of
+approximately $29,108 cash plus potential contingent payments
+pursuant to an earn-out agreement with the Cejon Sellers. The
+earn-out agreement specifies two tiers of potential payments
+to the Cejon Sellers based on the financial performance of
+Cejon for each of the twelve-month periods ending on June 30,
+2012 through 2016, inclusive. The tier one earn-out is based
+on a graduated percentage of EBITDA up to a maximum EBITDA of
+$11,000 in each of the earn-out periods, provided that the
+total aggregate payments under this tier do not exceed
+$25,000. The tier two earn-out is based on a multiple of the
+amount that EBITDA exceeds certain levels in each of the
+earn-out periods, provided that the total aggregate payments
+under this tier do not exceed $33,000. The fair value of the
+contingent payments was estimated using the present value of
+management’s projections of the financial results of
+Cejon during the earn-out period. As of December 31, 2011,
+the Company estimates the fair value of the contingent
+consideration to be $23,500.
+The transaction was accounted for using the acquisition
+method required by generally accepted accounting principles
+(“GAAP”). Accordingly, the assets and liabilities
+of Cejon were adjusted to their fair values, and the excess
+of the purchase price over the fair value of the assets
+acquired, including identified intangible assets, was
+recorded as goodwill. The fair values assigned to tangible
+and intangible assets acquired and liabilities assumed are
+based on management’s estimates and assumptions, which
+are subject to change. The purchase price has been
+preliminarily allocated as follows:
+Accounts receivable
+$
+3,608
+Inventory
+3,803
+Prepaid expenses and other current assets
+56
+Fixed assets
+292
+Trade name
+27,065
+Customer relationships
+3,225
+Non-compete agreement
+305
+Other assets
+23
+Accounts payable
+(1,318
+)
+Accrued expenses
+(2,041
+)
+Total fair value excluding goodwill
+35,018
+Goodwill
+17,590
+Net assets acquired
+$
+52,608
+F-12
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Consolidated Financial Statements 
+December 31, 2011 and 2010 
+($ in thousands except share and per share data) 
+Note B –
+Acquisitions (continued) 
+The purchase price and related allocation are preliminary and
+may be revised as a result of adjustments made to the
+purchase price as may be required as additional information
+regarding assets and liabilities is revealed. Contingent
+consideration classified as a liability will be remeasured at
+fair value at each reporting date, until the contingency is
+resolved, with changes recognized in earnings. The goodwill
+related to this transaction is expected to be deductible for
+tax purposes over 15 years.
+The Company incurred approximately $531 in acquisition
+related costs applicable to the Cejon transaction during the
+year ended December 31, 2011. These expenses are included in
+operating expenses in the Company’s Consolidated
+Statements of Income.
+Topline 
+On May 20, 2011, the Company acquired all of the outstanding
+shares of capital stock of the closely held company, the
+Topline Corporation (“Topline”) from its sole
+stockholder (the “Topline Seller”). Founded in
+1980, Topline and its subsidiaries design, manufacture,
+market and sell private label and branded women’s
+footwear primarily to department stores, specialty retailers
+and mass merchants. Topline has sourcing capabilities, sample
+making facilities and product development capabilities
+resident in China, including personnel and facilities engaged
+in direct sourcing. Management believes that Topline is an
+excellent strategic fit for the Company. The acquisition was
+completed for consideration of approximately $56,128 cash,
+plus potential contingent payments pursuant to an earn-out
+with the Topline Seller. The earn-out agreement provides for
+potential payments to the Topline Seller based on the
+financial performance of Topline for the twelve-month period
+ending on June 30, 2012. The fair value of the contingent
+payments was estimated using the present value of
+management’s projections of the financial results of
+Topline during the earn-out period. As of December 31, 2011,
+the Company estimates the fair value of the contingent
+consideration to be $6,200.
+The transaction was accounted for using the acquisition
+method required by GAAP. Accordingly, the assets and
+liabilities of Topline were adjusted to their fair values,
+and the excess of the purchase price over the fair value of
+the assets acquired, including identified intangible assets,
+was recorded as goodwill. The fair values assigned to
+tangible and intangible assets acquired and liabilities
+assumed are based on management’s estimates and
+assumptions, which are subject to change. The purchase price,
+net of an estimated working capital adjustment due to the
+Company, has been preliminarily allocated as follows:
+Accounts receivable
+$
+55,950
+Inventory
+7,074
+Prepaid expenses and other current assets
+634
+Fixed assets
+4,074
+Trade name
+16,600
+Customer relationships
+7,900
+Non-compete agreement
+300
+Other assets
+108
+Accounts payable
+(40,475
+)
+Accrued expenses
+(7,664
+)
+Income tax payable
+(6,310
+)
+Deferred tax liability
+(3,198
+)
+Total fair value excluding goodwill
+34,993
+Goodwill
+19,392
+Net assets acquired
+$
+54,385
+F-13
+STEVEN MADDEN, LTD.
+AND SUBSIDIARIES 
+Notes to
+Consolidated Financial Statements 
+December 31, 2011
+and 2010 
+($ in thousands
+except share and per share data) 
+Note
+B – Acquisitions ( continued ) 
+The purchase price and related allocation is preliminary and
+may be revised as a result of adjustments made to the
+purchase price as may be required as additional information
+regarding assets and liabilities is revealed. Contingent
+consideration classified as a liability will be remeasured at
+fair value at each reporting date, until the contingency is
+resolved, with changes recognized in earnings. The trade
+name, customer relationships, non-compete agreement and
+goodwill related to this transaction are not deductible for
+tax purposes.
+The Company incurred approximately $529 in acquisition
+related costs applicable to the Topline transaction during
+the year ended December 31, 2011. These expenses are included
+in operating expenses in the Company’s Consolidated
+Statements of Income.
+The results of operations of Topline have been included in
+the Company’s Consolidated Statements of Income from
+the date of the acquisition. Unaudited pro forma information
+related to this acquisition is not included, as the impact of
+this transaction is not material to the Company’s
+consolidated results.
+Betsey Johnson intellectual property 
+On October 5, 2010, pursuant to a Restructuring Agreement
+between the Company and Betsey Johnson LLC (“Betsey
+Johnson”), the Company acquired all right, title and
+interest in substantially all of the intellectual property of
+Betsey Johnson, including, among other things, the Betsey
+Johnson® and Betseyville® trademarks, and certain
+intellectual property licenses and other contracts, including
+the right to receive royalties and other income with respect
+thereto (the “Betsey Johnson Assets”). In
+connection with the transaction, the Company also received a
+10%, non-voting membership interest in Betsey Johnson.
+Management believes that the Betsey Johnson Assets offer
+meaningful growth opportunity for the Company. Prior to the
+acquisition, Betsey Johnson had licensed to the Company the
+right to use the Betsey Johnson® and Betseyville®
+trademarks in connection with the sale and marketing of
+handbags, small leather goods, belts and umbrellas. The
+acquisition of the Betsey Johnson Assets was the culmination
+of a series of transactions. First, in August 2010, the
+Company purchased from various members of a loan syndicate
+their respective participations in a term loan in the
+aggregate outstanding principal amount of $48,750 (the
+“Loan”) made by the syndicate lenders to Betsey
+Johnson. The Company paid the syndicate lenders an aggregate
+purchase price of approximately $29,217, including
+transaction costs, for their participations in the Loan. The
+Loan was secured by a first priority security interest in
+substantially all of the assets of Betsey Johnson and was in
+default on the date of purchase. On October 5, 2010, the
+Company entered into the Restructuring Agreement with Betsey
+Johnson, pursuant to which, in consideration of the
+elimination of all amounts owed with respect to the Loan, the
+Company acquired the Betsey Johnson Assets. The Company
+believes that Betsey Johnson® is a well known, iconic
+brand and, therefore, the trademark is an indefinite lived
+asset. As such, the $29,217 purchase price for the Betsey
+Johnson intellectual property will not be amortized, rather,
+it will be tested for impairment on an annual basis or more
+often if events or circumstances change that could cause the
+Betsey Johnson intellectual property to become impaired. The
+Company made a new secured term loan to Betsey Johnson on
+October 5, 2010 in the principal amount of $3,000, which
+accrues interest at the rate of 8% per annum and becomes due
+on December 31, 2015. As of December 31, 2011, $309 of
+interest has accrued on the note and has been reflected on
+the Company’s Consolidated Financial Statements. The
+new term loan is secured by a first priority security
+interest in substantially all of the remaining properties and
+assets of Betsey Johnson. For the year ended December 31,
+2011, our membership interest in Betsey Johnson, LLC yielded
+a loss, net of taxes, of $653, which is included in the other
+income (expense) line in our Consolidated Statements of
+Income.
+Big Buddha 
+On February 10, 2010, the Company acquired all of the
+outstanding shares of stock of privately held Big Buddha,
+Inc. (“Big Buddha”) from its sole stockholder
+(“Seller”). Founded in 2003, Big Buddha designs
+and markets fashion-forward handbags to specialty retailers
+and better department stores. Management believes that Big
+Buddha is a strategic fit for the Company. The acquisition
+was completed for consideration of $11,119 in cash, net of
+cash acquired, plus contingent payments pursuant to an
+earn-out agreement with the Seller. The earn-out agreement
+provides for potential payments to the Seller based on the
+financial performance of Big Buddha handbags for each of the
+twelve-month periods ending on March 31, 2011, 2012 and 2013.
+The fair value of the contingent payments was estimated using
+the present value of management’s projections of the
+financial results of Big Buddha during the earn-out period.
+The Company estimated the fair value of the contingent
+consideration to be $14,000. The earn-out payment for the
+twelve-month period ended March 31, 2011 was $3,603. As of
+December 31, 2011, the fair value of the contingent liability
+is estimated to be $8,221.
+F-14
+STEVEN MADDEN, LTD.
+AND SUBSIDIARIES 
+Notes to
+Consolidated Financial Statements 
+December 31, 2011
+and 2010 
+($ in thousands
+except share and per share data) 
+Note B –
+Acquisitions (continued) 
+The transaction was accounted for using the acquisition
+method required by GAAP. Accordingly, the assets and
+liabilities of Big Buddha were adjusted to their fair values,
+and the excess of the purchase price over the fair value of
+the assets acquired, including identified intangible assets,
+was recorded as goodwill. The fair values assigned to
+tangible and intangible assets acquired and liabilities
+assumed are based on management’s estimates and
+assumptions, which are subject to change. The purchase price
+has been allocated as follows:
+Accounts receivable
+$
+668
+Inventory
+1,212
+Prepaid expenses and other current assets
+102
+Trade name
+4,100
+Customer relationships
+4,900
+Non-compete agreement
+450
+Accounts payable
+(171
+)
+Accrued expenses
+(442
+)
+Total fair value excluding goodwill
+10,819
+Goodwill
+14,300
+Net assets acquired
+$
+25,119
+Contingent consideration classified as a liability will be
+remeasured at fair value at each reporting date, until the
+contingency is resolved, with changes recognized in earnings.
+The goodwill related to this transaction is expected to be
+deductible for tax purposes over 15 years.
+The Company incurred approximately $430 in acquisition
+related costs applicable to the Big Buddha transaction during
+2010. These expenses are included in operating expenses in
+the Company’s Consolidated Statements of Income.
+The results of operations of Big Buddha have been included in
+the Company’s Consolidated Statements of Income from
+the date of the acquisition. Unaudited pro forma information
+related to this acquisition is not included, as the impact of
+this transaction is not material to the Company’s
+consolidated results.
+Note C – Due
+From Factor 
+The Company has a collection agency agreement with Rosenthal
+& Rosenthal, Inc. (“Rosenthal”) that became
+effective on September 15, 2009. The agreement can be
+terminated by the Company or Rosenthal at any time upon 60
+days’ prior written notice. Under the agreement, the
+Company can request advances from Rosenthal of up to 85% of
+aggregate receivables submitted to Rosenthal. The agreement
+provides the Company with a $30 million credit facility with
+a $15 million sub-limit for letters of credit, at an interest
+rate based, at the Company’s election, upon either the
+prime rate or LIBOR. The Company also pays a fee of 0.275% of
+the gross invoice amount submitted to Rosenthal. Rosenthal
+assumes the credit risk on a substantial portion of the
+receivables the Company submits to it and, to the extent of
+any loans made to the Company, Rosenthal maintains a lien on
+all of the Company’s receivables to secure the
+Company’s obligations. On February 10, 2010, the
+agreement was amended to include foreign accounts receivable.
+As of December 31, 2011 and 2010, the Company assumed the
+credit risk on approximately $357 and $339 of factored
+receivables, respectively.
+F-15
+STEVEN MADDEN, LTD.
+AND SUBSIDIARIES 
+Notes to
+Consolidated Financial Statements 
+December 31, 2011
+and 2010 
+($ in thousands
+except share and per share data) 
+Note C –
+Due From Factors (continued) 
+The factor services the collection of the Company’s
+accounts receivable. Funds collected by the factor are
+applied against advances owed to the factor (if any), and the
+balance is due and payable to the Company, net of any fees.
+The allowance against “due from factor” is a
+projected provision based on certain formulas and prior
+approvals for markdowns, allowances, discounts, advertising
+and other deductions that customers may deduct against their
+payments.
+Note D – Notes
+Receivable 
+As of December 31, 2011 and 2010, Notes Receivable was
+comprised of the following:
+December 31,
+2011
+2010
+Due from Bakers Footwear Group, Inc.
+$
+4,092
+$
+4,024
+Due from Betsey Johnson LLC (see Note B)
+3,309
+3,000
+Total
+$
+7,401
+$
+7,024
+On August 26, 2010, the Company entered into a Debenture and
+Stock Purchase Agreement with Bakers Footwear Group, Inc.
+(“Bakers”) pursuant to which the Company paid
+$5,000 to acquire a subordinated debenture in the principal
+amount of $5,000 and 1,844,860 unregistered shares of Bakers
+common stock which trades on the Over-the-Counter Bulletin
+Board. The Company allocated $996 of the purchase price to
+the common stock and $4,004 to the subordinated debenture
+based upon their relative fair values. Interest accrues on
+the debenture at the rate of 11% per annum and is payable
+quarterly in cash. The principal amount of the debenture is
+payable by Bakers in four equal installments of $1,250 due on
+August 31, 2017, 2018, 2019 and 2020. The difference between
+the $4,004 purchase price of the debenture and the $5,000
+principal amount of the debenture is considered original
+issue discount and is being amortized over the life of the
+debenture. As of December 31, 2011 and 2010, the cumulative
+amount of the discount amortized was $88 and $20, bringing
+the carrying amount of the note to $4,092 and $4,024,
+respectively.
+Note E –
+Note Receivable – related party 
+On June 25, 2007, the Company
+made a loan to Steve Madden, its Creative and Design Chief
+and a principal stockholder of the Company, in the amount of
+$3,000 in order for Mr. Madden to satisfy a personal tax
+obligation resulting from the exercise of options that were
+due to expire and retain the underlying Company common stock,
+which he pledged to the Company as collateral to secure the
+loan. Mr. Madden executed a secured promissory note in favor
+of the Company bearing interest at an annual rate of 8%,
+which was due on the earlier of the date Mr. Madden ceases to
+be employed by the Company or December 31, 2007. The note was
+amended and restated as of December 19, 2007 to extend the
+maturity date to March 31, 2009, and amended and restated
+again as of April 1, 2009 to change the interest rate to 6%
+and extend the maturity date to June 30, 2015 at which time
+all principal and accrued interest would become due. On
+January 3, 2012, in connection with an amendment to Mr.
+Madden’s employment contract (see Note O2), the note
+was again amended and restated (the “Third Amended and
+Restated Note”) to extend the maturity date to December
+31, 2023 and eliminate accrual of interest after December 31,
+2011. In addition, the third Amended and Restated Note
+provides that, commencing on December 31, 2014 and annually
+on each December 31 thereafter through the maturity date,
+one-tenth of the principal amount thereof, together with
+accrued interest, will be cancelled by the Company provided
+that Mr. Madden continues to be employed by the Company on
+each such December 31. As of December 31, 2011, $1,090 of
+interest has accrued on the principal amount of the loan and
+has been reflected on the Company’s Consolidated
+Financial Statements. Due to the three-for-two stock split effected
+on May 3, 2010 the number of shares securing the loan
+increased from 510,000 shares to 765,000 shares. Based upon
+the increase in the market value of the Company’s
+common stock since the inception of the loan, on July 12,
+2010, the Company released from its security interest 555,000
+shares of the Company’s common stock, retaining 210,000
+shares with a total market value on that date of $6,798, as
+collateral for the loan. Subsequently, pursuant to the
+three-for-two stock split effected on May 31, 2011 (see Note A3
+above), the number of shares securing the repayment of the
+loan has increased from 210,000 shares to 315,000 shares. On
+December 31, 2011, the total market value of these shares was
+$10,868. 
+F-16
+STEVEN MADDEN, LTD.
+AND SUBSIDIARIES 
+Notes to
+Consolidated Financial Statements 
+December 31, 2011
+and 2010 
+($ in thousands
+except share and per share data) 
+Note F –
+Fair Value Measurement 
+The accounting guidance under Accounting Standards
+Codification (“ASC”) “Fair Value
+Measurements and Disclosures” (“ASC
+820-10”) requires the Company to make disclosures about
+the fair value of certain of its assets and liabilities. ASC
+820-10 clarifies the principle that fair value should be
+based on the assumptions market participants would use when
+pricing an asset or liability and establishes a fair value
+hierarchy that prioritizes the information used to develop
+those assumptions. ASC 820-10 utilizes a fair value hierarchy
+that prioritizes the inputs to valuation techniques used to
+measure fair value into three broad levels. A brief
+description of those three levels is as follows:
+●
+Level 1: Observable inputs such as quoted prices in
+active markets for identical assets or liabilities.
+●
+Level 2: Inputs other than quoted prices that are
+observable for the asset or liability, either directly
+or indirectly.
+●
+Level 3: Significant unobservable inputs.
+The Company’s financial assets subject to fair value
+measurements as of December 31, 2011 are as follows:
+Fair Value Measurements 
+Using Fair Value Hierarchy 
+Fair value 
+Level 1 
+Level 2 
+Level 3 
+Assets:
+Cash equivalents
+$
+57,652
+$
+57,652
+$
+–
+$
+—
+Current marketable securities – available for
+sale
+5,659
+5,659
+—
+—
+Investment in Bakers
+996
+—
+996
+—
+Note receivable – Bakers
+4,092
+—
+—
+4,092
+Note receivable – Betsey Johnson
+3,309
+—
+—
+3,309
+Long-term marketable securities – available for
+sale
+72,004
+72,004
+—
+—
+Total assets
+$
+143,712
+$
+135,315
+$
+996
+$
+7,401
+Liabilities:
+Contingent consideration – Big Buddha
+$
+8,221
+—
+—
+$
+8,221
+Contingent consideration – Cejon
+23,500
+—
+—
+23,500
+Contingent consideration – Topline
+6,200
+—
+—
+6,200
+Total liabilities
+$
+37,921
+—
+—
+$
+37,921
+F-17
+STEVEN MADDEN, LTD.
+AND SUBSIDIARIES 
+Notes to
+Consolidated Financial Statements 
+December 31, 2011
+and 2010 
+($ in thousands
+except share and per share data) 
+Note F –
+Fair Value Measurement (continued) 
+The Company’s financial assets subject to fair value
+measurements as of December 31, 2010 are as follows:
+Fair Value Measurements 
+Using Fair Value Hierarchy 
+Assets:
+Fair value 
+Level 1 
+Level 2 
+Level 3 
+Cash equivalents
+$
+32,145
+$
+32,145
+$
+—
+$
+—
+Current marketable securities – available for
+sale
+13,289
+13,289
+—
+—
+Investment in Bakers
+996
+—
+996
+—
+Note receivable – Bakers
+4,024
+—
+—
+4,024
+Note receivable – Betsey Johnson
+3,000
+—
+—
+3,000
+Long-term marketable securities – available for
+sale
+114,317
+114,317
+—
+—
+Total assets
+$
+167,771
+$
+159,751
+$
+996
+$
+7,024
+Liabilities:
+Contingent consideration
+$
+12,372
+—
+—
+$
+12,372
+Total liabilities
+$
+12,372
+—
+—
+$
+12,372
+Pursuant to the Debenture and Stock Purchase Agreement with
+Bakers (see Note D), the Company acquired 1,844,860
+unregistered shares of Bakers common stock, which trades on
+the OTC Bulletin Board. These shares, which are thinly
+traded, were valued using the quoted price of similar
+registered shares of Bakers common stock adjusted for the
+effect of the transfer restriction, considering factors such
+as the nature and duration of the transfer restriction, the
+volatility of the stock and the risk free interest rate. The
+shares are included in deposits and other assets on the
+Company’s Consolidated Balance Sheets. For the note
+receivable due from Bakers (see Note D), which was purchased
+at a substantial discount, the carrying value was determined
+to be the fair value. For the note receivable due from Betsey
+Johnson (see Note D), the carrying value was determined to be
+the fair value.
+The Company has recorded a liability for potential contingent
+consideration in connection with the May 25, 2011 acquisition
+of Cejon (see Note B). Pursuant to the terms of an earn-out
+agreement between the Company and the sellers of Cejon,
+earn-out payments may be due annually to the sellers of Cejon
+based on the financial performance of Cejon for each of the
+twelve-month periods ending on June 30, 2012 through 2016,
+inclusive. The fair value of the contingent payments was
+estimated using the present value of management’s
+projections of the financial results of Cejon during the
+earn-out period. There have been no significant changes in
+estimates since the date of the acquisition.
+The Company has recorded a liability for potential contingent
+consideration in connection with the May 20, 2011 acquisition
+of Topline (see Note B). Pursuant to the terms of the
+acquisition agreement, an earn-out payment may be due to the
+seller of Topline based on the financial performance of
+Topline for the twelve-month period ending on June 30, 2012.
+The fair value of the contingent payment was estimated using
+the present value of management’s projections of the
+financial results of Topline during the earn-out period.
+There have been no significant changes in estimates since the
+date of the acquisition.
+The Company has recorded a liability for potential contingent
+consideration in connection with the February 10, 2010
+acquisition of Big Buddha (see Note B). Pursuant to the terms
+of an earn-out agreement between the Company and the seller
+of Big Buddha,, earn-out payments may be due annually to the
+seller of Big Buddha based on the financial performance of
+Big Buddha for each of the twelve-month periods ending on
+March 31, 2012 and 2013. The fair value of the contingent
+payments was estimated using the present value of
+management’s projections of the financial results of
+Big Buddha during the earn-out period. The contingent payment
+for the twelve-month period ended March 31, 2011 was $3,603.
+F-18
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Consolidated Financial Statements 
+December 31, 2011 and 2010 
+($ in thousands except share and per share data) 
+Note G –
+Property and Equipment 
+The major classes of assets and total accumulated
+depreciation and amortization are as follows:
+December 31, 
+2011 
+2010 
+Land and building
+$
+767
+$
+767
+Leasehold improvements
+40,147
+37,066
+Machinery and equipment
+5,833
+3,692
+Furniture and fixtures
+5,893
+4,317
+Computer equipment
+26,191
+16,497
+78,831
+62,339
+Less accumulated depreciation and amortization
+(47,244
+)
+(41,548
+)
+Property and equipment - net
+$
+31,587
+$
+20,791
+Depreciation and amortization expense included in operating
+expenses amounted to approximately $6,732 in 2011, $5,824 in
+2010 and $6,628 in 2009.
+Note H –
+Goodwill and Intangible Assets 
+The following is a summary of the carrying amount of goodwill
+by segment for the year ended December 31, 2011:
+Net
+Wholesale
+Carrying
+Footwear 
+Accessories 
+Retail 
+Amount 
+Balance at January 1, 2011
+$
+1,547
+$
+31,565
+$
+5,501
+$
+38,613
+Acquisition of Cejon
+—
+17,590
+—
+17,590
+Acquisition of Topline
+19,392
+—
+—
+19,392
+Balance at December 31, 2011
+$
+20,939
+$
+49,155
+$
+5,501
+$
+75,595
+The following table details identifiable intangible assets as
+of December 31, 2011: 
+Estimated Lives 
+Cost Basis 
+Accumulated Amortization 
+Net Carrying Amount 
+Trade names
+6 – 10
+years
+$
+8,590
+$
+1,180
+$
+7,410
+Customer relationships
+10 years
+22,834
+4,999
+17,835
+License agreements
+3 – 6
+years
+5,600
+5,600
+—
+Non-compete agreement
+5 years
+1,985
+1,205
+780
+Other
+3 years
+14
+14
+—
+39,023
+12,998
+26,025
+Trademarks
+indefinite
+72,842
+—
+72,842
+$
+111,865
+$
+12,998
+$
+98,867
+F-19
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Consolidated Financial Statements 
+December 31, 2011 and 2010 
+($ in thousands except share and per share data) 
+Note H –
+Goodwill and Intangible Assets (continued) 
+The amortization of intangible assets amounted to $3,191 and
+is included in operating expenses on the Company’s
+Consolidated Statements of Income. The estimated future
+amortization expense of intangibles as of December 31, 2011
+is as follows:
+2012
+$
+3,393
+2013
+3,393
+2014
+3,326
+2015
+3,142
+2016
+2,837
+Thereafter
+9,933
+Total
+$
+26,024
+Note I –
+Stock-Based Compensation 
+In March 2006, the Board of Directors approved the Steven
+Madden, Ltd. 2006 Stock Incentive Plan (the
+“Plan”) under which nonqualified stock options,
+stock appreciation rights, performance shares, restricted
+stock, other stock-based awards and performance-based cash
+awards may be granted to employees, consultants and
+non-employee directors. The stockholders approved the Plan on
+May 26, 2006. On May 25, 2007, the stockholders approved an
+amendment to the Plan to increase the maximum number of
+shares that may be issued under the Plan from 2,700,000 to
+3,487,500. On May 22, 2009, the stockholders approved a
+second amendment to the Plan that increased the maximum
+number of shares that may be issued under the Plan to
+9,144,000. The following table summarizes the number of
+shares of common stock authorized for use under the Plan, the
+number of stock-based awards granted (net of expired or
+cancelled awards) under the Plan and the number of shares of
+common stock available for the grant of stock-based awards
+under the Plan:
+Common Stock authorized
+9,144,000
+Stock based awards, including restricted stock and
+stock options granted, net of expired or cancelled
+6,449,000
+Common Stock available for grant of stock based awards
+as of December 31, 2011
+2,695,000
+In accordance with accounting guidance relating to
+stock-based compensation, the Company records compensation
+for all awards based on the fair value of options and
+restricted stock on the date of grant. Equity-based
+compensation is included in operating expenses on the
+Company’s Consolidated Statements of Income. For the
+years ended December 31, 2011, 2010 and 2009, total
+equity-based compensation was as follows:
+Years Ended December 31, 
+2011 
+2010 
+2009 
+Stock options
+$
+5,787
+$
+3,724
+$
+1,560
+Restricted stock
+5,617
+4,547
+4,380
+Total
+$
+11,404
+$
+8,271
+$
+5,940
+F-20
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Consolidated Financial Statements 
+December 31, 2011 and 2010 
+($ in thousands except share and per share data) 
+Note I –
+Stock-Based Compensation (continued) 
+The Company classifies cash flows resulting from the tax
+benefits from tax deductions in excess of the compensation
+costs recognized for those options (tax benefits) as
+financing cash flows. For the years ended December 31, 2011,
+2010 and 2009, the Company realized a tax benefit from the
+exercise of stock options of $4,154, $4,718 and $497,
+respectively.
+Stock Options 
+The total intrinsic value of options exercised during 2011,
+2010 and 2009 amounted to $10,768, $11,684 and $5,300
+respectively. During the years ended December 31, 2011, 2010
+and 2009, 860,000 options with a weighted average exercise
+price of $15.92, 587,000 options with a weighted average
+exercise price of $11.20 and 214,000 options with a weighted
+average exercise price of $8.69 vested, respectively. As of
+December 31, 2011, there were 1,839,000 unvested options with
+a total unrecognized compensation cost of $9,309 that is
+expected to be recognized over a weighted-average of 2.4
+years.
+The Company estimates the fair value of options granted using
+the Black-Scholes option-pricing model, which requires
+several assumptions. The expected term of the options
+represents the estimated period of time until exercise and is
+based on historical experience of similar awards. Expected
+volatility is based on the historical volatility of the
+Company’s stock. The risk free interest rate is based
+on the U.S. Treasury yield curve in effect at the time of the
+grant. With the exception of a special dividend paid in
+November of 2005 and in November of 2006, the Company
+historically has not paid dividends and thus the expected
+dividend rate is assumed to be zero. The weighted average
+fair value of options granted in 2011, 2010 and 2009 was
+approximately $10.97, $8.53 and $4.19, respectively, using
+the Black-Scholes option-pricing model with the following
+assumptions: 
+2011 
+2010 
+2009 
+Volatility
+43% to 49%
+47% to 52%
+49% to 52%
+Risk free interest rate
+0.61% to 1.78%
+0.84% to 2.16%
+1.39% to 2.09%
+Expected life in years
+2 to 4
+3 to 4
+3 to 4
+Dividend yield
+0
+0
+0
+F-21
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Consolidated Financial Statements 
+December 31, 2011 and 2010 
+($ in thousands except share and per share data) 
+Note I –
+Stock-Based Compensation (continued) 
+Activity relating to stock options granted under the
+Company’s plans and outside the plans during the three
+years ended December 31, 2011 is as follows:
+Number of Shares 
+Weighted Average Exercise Price 
+Weighted Average Remaining Contractual Term 
+Aggregate Intrinsic Value 
+Outstanding at January 1, 2009
+1,737,000
+$
+7.19
+Granted
+1,320,000
+10.42
+Exercised
+(594,000
+)
+6.44
+Cancelled/Forfeited
+(40,000
+)
+7.73
+Outstanding at December 31, 2009
+2,423,000
+9.12
+Granted
+971,000
+22.49
+Exercised
+(647,000
+)
+8.00
+Cancelled/Forfeited
+(44,000
+)
+16.03
+Outstanding at December 31, 2010
+2,703,000
+14.08
+Granted
+618,000
+29.93
+Exercised
+(439,000
+)
+11.39
+Cancelled/Forfeited
+(179,000
+)
+19.42
+Outstanding at December 31, 2011
+2,703,000
+$
+17.79
+4.6 years 
+$ 45,397 
+Exercisable at December 31, 2011
+863,000
+$
+15.36
+4.0 years 
+$ 16,613 
+The following table summarizes information about stock
+options at December 31, 2011:
+Options Outstanding 
+Options Exercisable 
+Range of Exercise Price 
+Number Outstanding 
+Weighted Average Remaining Contractual Life (in
+Years) 
+Weighted Average Exercise Price 
+Number Exercisable 
+Weighted Average Exercise Price 
+$ 5.25 to $11.85
+1,050,000
+3.8
+$
+8.27
+436,000
+$
+8.11
+$11.86 to $18.45
+442,000
+4.6
+15.54
+152,000
+15.32
+$18.46 to $25.05
+529,000
+4.9
+23.27
+184,000
+23.24
+$25.06 to $31.65
+500,000
+6.0
+27.43
+17,000
+26.95
+$31.66 to $38.25
+182,000
+4.6
+35.81
+75,000
+35.62
+2,703,000
+4.6
+$
+17.79
+863,000
+$
+15.36
+F-22
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Consolidated Financial Statements 
+December 31, 2011 and 2010 
+($ in thousands except share and per share data) 
+Note I –
+Stock-Based Compensation (continued) 
+Restricted Stock 
+The following table summarizes restricted stock activity
+during the three years ended December 31, 2011:
+Number of Shares 
+Weighted Average Fair Value at Grant Date 
+Outstanding at January 1, 2009
+806,000
+$
+13.13
+Granted
+201,000
+15.61
+Vested
+(329,000
+)
+11.49
+Forfeited
+(7,000
+)
+16.26
+Outstanding at December 31, 2009
+671,000
+13.98
+Granted
+254,000
+23.39
+Vested
+(348,000
+)
+13.01
+Forfeited
+(15,000
+)
+18.99
+Outstanding at December 31, 2010
+562,000
+17.20
+Granted
+383,000
+31.65
+Vested
+(239,000
+)
+15.56
+Forfeited
+(35,000
+)
+28.44
+Outstanding at December 31, 2011
+671,000
+$
+25.44
+As of December 31, 2011, there was $13,335 of total
+unrecognized compensation cost related to restricted stock
+awards granted under the Plan. This cost is expected to be
+recognized over a weighted-average of 2.9 years.
+On January 3, 2012, the Company
+and its Creative and Design Chief, Steven Madden, entered
+into an amendment of Mr. Madden’s existing employment
+agreement, pursuant to which, on February 8, 2012, Mr. Madden
+was granted 975,371 restricted shares of the Company’s
+common stock, which will vest in equal annual installments
+over a seven-year period commencing on December 31, 2017 and,
+thereafter, on each December 31 st through December 31, 2023, subject to
+Mr. Madden’s continued employment on each such vesting
+date. 
+The Company determines the fair value of its restricted stock
+awards based on the market price of its common stock on the
+date of grant. The fair value of the restricted stock that
+vested during the years ended December 31, 2011, 2010 and
+2009 was $3,718, $4,537 and $4,223, respectively.
+Note J –
+Preferred Stock 
+The Company has authorized 5,000,000 shares of preferred
+stock. The Board of Directors has designated 60,000 shares of
+such preferred stock as Series A Junior Participating
+Preferred Stock (“Series A Preferred”). Holders
+of the shares of Series A Preferred are entitled to dividends
+equal to 1,000 times dividends declared or paid on the
+Company’s common stock. Each share of Series A
+Preferred entitles the holder to 1,000 votes on all matters
+submitted to the holders of common stock. The Series A
+Preferred has a liquidation preference of $1,000 per share,
+and is not redeemable by the Company. No shares of preferred
+stock have been issued.
+F-23
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Consolidated Financial Statements 
+December 31, 2011 and 2010 
+($ in thousands except share and per share data) 
+Note K –
+Rights Agreement 
+On October 30, 2001, the Company declared a dividend
+distribution of one preferred stock purchase right (a
+“Right”) for each outstanding share of common
+stock. Prior to a three-for-two stock split of the Company’s
+outstanding shares of common stock on May 31, 2011, (see Note
+A-3), each Right entitled the holder to purchase from the
+Company four ten-thousandths (4/10,000) of a share of Series
+A Preferred at a price of $33.33 per four ten-thousandth
+(4/10,000) of a share. As a consequence of the aforementioned
+stock split, an automatic adjustment of each Right occurred
+pursuant to a Rights Agreement dated November 14, 2001
+between the Company and American Stock Transfer and Trust
+Company (the “Rights Agreement”), following which
+each holder of a Right was then entitled to purchase from the
+Company three ten-thousandths (3/10,000) of a share of Series
+A Preferred at a price of $22.22 per three ten-thousandth
+(3/10,000) of a share. Initially, the Rights would not be
+exercisable and would automatically trade with the common
+stock. The Rights would become exercisable, in general, ten
+days following the announcement of a person or group
+acquiring beneficial ownership of at least 15% of the
+outstanding voting stock of the Company. Pursuant to the
+Rights Agreement, the Rights expired on November 14, 2011.
+Note L –
+Operating Leases 
+The Company leases office, showroom and retail facilities
+under noncancelable operating leases with terms expiring at
+various times through 2023. Future minimum annual lease
+payments under noncancelable operating leases consist of the
+following at December 31:
+2012
+$
+22,481
+2013
+21,107
+2014
+20,034
+2015
+18,846
+2016
+17,958
+Thereafter
+50,767
+Total
+$
+151,193
+A majority of the retail store leases provide for contingent
+rental payments if gross sales exceed certain targets. In
+addition, many of the leases contain rent escalation clauses
+to compensate for increases in operating costs and real
+estate taxes.
+Rent expense for the years ended December 31, 2011, 2010 and
+2009 was approximately $25,328, $21,485 and $21,087,
+respectively. Included in such amounts are contingent rents
+of $142, $3 and $23 in 2011, 2010 and 2009, respectively. For
+the years ended December 31, 2011 and 2010, the Company did
+not record any lease exit costs, however, for the year ended
+December 31, 2009 the Company recorded approximately $1,541
+in lease exit costs associated with a lease that was
+terminated prior to the end of its stated term.
+Rent expense is calculated by amortizing total rental
+payments (net of any rental abatements, construction
+allowances and other rental concessions), on a straight-line
+basis, over the lease term. Accordingly, rent expense charged
+to operations differs from rent paid resulting in the Company
+recording deferred rent.
+F-24
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Consolidated Financial Statements 
+December 31, 2011 and 2010 
+($ in thousands except share and per share data) 
+Note M –
+Income Taxes 
+The components of income before income taxes are as
+follows: 
+2011 
+2010 
+2009 
+Domestic
+$
+117,497
+$
+88,308
+$
+54,666
+Foreign
+41,295
+37,549
+26,123
+$
+158,792
+$
+125,857
+$
+80,789
+The income tax provision (benefit) consists of the following:
+2011 
+2010 
+2009 
+Current:
+Federal
+$
+43,953
+$
+36,482
+$
+23,896
+State and local
+8,560
+8,253
+4,403
+Foreign
+6,814
+6,195
+4,310
+59,327
+50,930
+32,609
+Deferred:
+Federal
+1,588
+(651
+)
+(1,748
+)
+State and local
+676
+(147
+)
+(179
+)
+2,264
+(798
+)
+(1,927
+)
+$
+61,591
+$
+50,132
+$
+30,682
+A reconciliation between taxes computed at the federal
+statutory rate and the effective tax rate is as follows:
+December 31, 
+2011 
+2010 
+2009 
+Income taxes at federal statutory rate
+35.0
+%
+35.0
+%
+35.0
+%
+State and local income taxes - net of federal income
+tax benefit
+3.9
+3.9
+2.9
+Nondeductible items
+0.3
+0.2
+0.2
+Valuation allowance (reversal)
+(0.4
+)
+0.5
+—
+Other
+—
+0.2
+(0.1
+)
+Effective rate
+38.8
+%
+39.8
+%
+38.0
+%
+The Company applies the asset and liability method of
+accounting for income taxes. Under this method, deferred tax
+assets and liabilities are determined based on differences
+between financial reporting and tax bases of assets and
+liabilities and are measured using the enacted tax rates and
+laws that are expected to be in effect when the differences
+are expected to reverse.
+F-25
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Consolidated Financial Statements 
+December 31, 2011 and 2010 
+($ in thousands except share and per share data) 
+Note M –
+Income Taxes (continued) 
+In accordance with accounting guidance, the Company has opted
+to classify interest and penalties that would accrue
+according to the provisions of relevant tax law as income tax
+expense on the Consolidated Statements of Income. The Company
+determines the amount of interest expense to be recognized by
+applying the applicable statutory rate of interest to the
+difference between the tax position recognized and the amount
+previously taken or expected to be taken on a tax return.
+The Company’s tax years 2008 through 2011 remain open
+to examination for most taxing authorities. The Company has
+no unrecognized tax benefits recorded as of the year ended
+December 31, 2011. Although it is difficult to predict what
+would occur to change the Company’s unrecognized tax
+benefits over the next twelve months, the Company believes
+that there should be no change during the next twelve months.
+As of December 31, 2011, the Company has realized investment
+losses of $1,254 available to offset future investment gains
+and thus reduce future taxable income. A deferred tax asset
+has been established for recognized capital losses on
+securities which can only be offset to the extent of capital
+gains. These losses have a five year carryforward. Due to
+uncertainty in the marketplace and, with the exception of
+2011, due to the Company’s recent history of recording
+little or no capital gains, the Company has recorded a
+valuation allowance for the entire balance of the investment
+losses reflecting management’s belief that it is more
+likely than not that the Company will not generate a
+sufficient amount of capital gains to offset previously
+recognized capital losses prior to the five year expiration
+period of these losses.
+The components of deferred tax assets and liabilities are as
+follows:
+December 31, 
+2011 
+2010 
+Current deferred tax assets:
+Receivable allowances
+$
+7,246
+$
+6,068
+Inventory
+1,975
+1,341
+Unrealized (gain) loss
+(6
+)
+(60
+)
+Accrued expenses
+496
+1,729
+Other
+595
+1,094
+Gross current deferred tax asset
+10,306
+10,172
+Valuation allowance
+(595
+)
+(1,094
+)
+9,711
+9,078
+Non-current deferred tax assets (liabilities):
+Depreciation and amortization
+(1,889
+)
+5,161
+Deferred compensation
+4,902
+2,583
+Deferred rent
+2,388
+2,174
+Amortization of goodwill
+(2,504
+)
+(2,142
+)
+Other
+(469
+)
+68
+2,428
+7,844
+Deferred tax assets
+$
+12,139
+$
+16,922
+F-26
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Consolidated Financial Statements 
+December 31, 2011 and 2010 
+($ in thousands except share and per share data) 
+Note N –
+Consolidated Variable Interest entity 
+On April 15, 2011, the Company formed a joint venture with
+two individuals through a limited liability company, Madlove,
+LLC (“Madlove”), as to which the Company is the
+primary beneficiary. Madlove designs and markets
+women’s footwear under the Madlove label. As the
+primary beneficiary of Madlove, the assets, liabilities and
+results of operations of Madlove are included in the
+Company’s Consolidated Financial Statements. The other
+members’ interests are reflected in “Net loss
+attributable to noncontrolling interests” in the
+Consolidated Statements of Income and “Noncontrolling
+interests” in the Consolidated Balance Sheets. The
+following table summarizes the carrying amount of
+Madlove’s assets and liabilities included in the
+Company’s Consolidated Balance Sheets at December 31,
+2011:
+Accounts receivable – net
+$
+293
+Inventory
+140
+Fixed assets – net
+40
+Current assets
+473
+Due to Steven Madden, Ltd.
+28
+Other current liabilities
+69
+Current liabilities
+$
+97
+Note O –
+Commitments, Contingencies and Other 
+[1]
+Legal proceedings:
+(a)
+On February 2, 2012, two individuals purporting to be
+stockholders of the Company commenced a civil action in
+the Supreme Court of New York, Queens County, Mark
+Ioffe, Derivatively on Behalf of nominal defendant,
+Steven Madden Ltd . v. Steven Madden, et.
+al, No. 700188-2012 (the “Ioffe
+Action”) and Catherine L. Phillips,
+Derivatively on Behalf of Nominal Defendant and Steven
+Madden, Ltd. v. Steven Madden, et. al, No.
+700189-2012 (together with the Ioffe Action, the
+“Actions”). The Actions assert derivative
+claims challenging the decision of the Company’s
+Board of Directors in January 2012 to amend Steven
+Madden’s employment agreement dated July 15,
+2005, and amended as of December 14, 2009 (the
+“Madden Employment Agreement”) and to amend
+the promissory note (the “Promissory Note”)
+setting forth Mr. Madden's obligations in respect of a
+loan made by the Company to Mr. Madden in 2007 and
+amended in 2009. The Actions assert that the Board
+violated its duties of loyalty and good faith by
+approving the amendments to the Madden Employment
+Agreement and the Promissory Note and that the changes
+set forth in the amendments constitute a waste of
+corporate assets. The Actions also assert claims of
+unjust enrichment against Mr. Madden. The Actions seek,
+on behalf of the Company, disgorgement of any
+compensation that Mr. Madden has received as a result
+of the amended Madden Employment Agreement, an award of
+damages to the Company, and a declaration that the
+amendments of the Madden Employment Agreement and the
+Promissory Note are void. The Company intends to seek
+dismissal of the Actions based on, among other things,
+the plaintiffs’ failure to make a demand that the
+Company’s Board of Directors investigate their
+claims.
+(b)
+On June 24, 2009, a class action lawsuit, Shahrzad
+Tahvilian, et al. v. Steve Madden Retail, Inc. and
+Steve Madden, Ltd. , Case No. BC 414217, was filed
+in the Superior Court of California, Los Angeles
+County, against the Company and its wholly-owned
+subsidiary alleging violations of California labor
+laws. The parties submitted the dispute to private
+mediation and, on August 31, 2010, reached a settlement
+on all claims. Based on the proposed settlement, the
+Company increased its reserve for this claim from
+$1,000 to $2,750 in the third quarter of 2010. In June
+2011, the court approved the final settlement for
+$1,968. The payment of the final settlement did not
+have a material effect on the Company’s financial
+position.
+F-27
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Consolidated Financial Statements 
+December 31, 2011 and 2010 
+($ in thousands except share and per share data) 
+Note O –
+Commitments, Contingencies and Other (continued) 
+(c)
+On August 10, 2005, following the conclusion of an
+audit of the Company conducted by auditors for U.S.
+Customs and Border Protection (“U.S.
+Customs”) during 2004 and 2005, U.S. Customs
+issued a report that asserts that certain commissions
+that the Company treated as “buying agents’
+commissions” (which are non-dutiable) should be
+treated as “selling agents’
+commissions” and hence are dutiable.
+Subsequently, U.S. Immigration and Customs Enforcement
+notified the Company’s legal counsel that a
+formal investigation of the Company’s importing
+practices had been commenced as a result of the audit.
+In September of 2007, U.S. Customs notified the Company
+that it had finalized its assessment of the underpaid
+duties at $1,400. The Company, with the advice of legal
+counsel, evaluated the liability in the case, including
+additional duties, interest and penalties, and believed
+that it was not likely to exceed $3,045, and
+accordingly, a reserve for this amount was recorded as
+of December 31, 2009. The Company contested the
+conclusions of the U.S. Customs audit and filed a
+request for review and issuance of rulings thereon by
+U.S. Customs Headquarters, of Regulations and Rulings,
+under internal advice procedures. On September 20,
+2010, the Company was advised by legal counsel that
+U.S. Customs had issued a ruling in the matter,
+concluding that the commissions paid by the Company
+pursuant to buying agreements entered into by the
+Company and one of its two buying agents under review
+were bona fide buying-agent commissions and,
+therefore, were non-dutiable. With respect to the
+second buying agent, U.S. Customs also ruled that
+beginning in February of 2002, commissions paid by the
+Company were bona fide buying agent commissions and,
+therefore, were non-dutiable. However, U.S. Customs
+found that the Company’s pre-2002 buying
+agreements with the second agent were legally
+insufficient to substantiate a buyer-buyer’s
+agent relationship between the Company and the agent
+and that commissions paid to the second agent under
+such buying agreements, in fact, were dutiable. On the
+basis of the U.S. Customs ruling the Company
+reevaluated the liability in the case and believes that
+it is not likely to exceed $1,248 and the reserve was
+reduced from $3,045 to such amount as of September 30,
+2010. 
+On November 21, 2011, U.S. Customs issued a pre-penalty
+notice to the Company in which it alleges that gross
+negligence by the Company resulted in an underpayment
+of duties with respect to certain pre-2002 buying
+agreements and claims that the Company owes $342 as an
+additional duty and $1,367 in monetary penalties. 
+In its February 16, 2012 response to the pre-penalty
+notice, the Company submitted that it owes no
+additional duty and, further, did not through
+negligence or gross negligence fail to pay any duty or
+engage in conduct amounting to either gross negligence
+or negligence. The Company requested that U.S.
+Customs withdraw its proposal to issue a notice of
+penalty and take no further adverse action against the
+Company. In the event that U.S. Customs is not
+inclined to withdraw the pre-penalty notice after
+review of the Company’s response, the Company has
+requested the opportunity to make an oral presentation
+to U.S. Customs prior to the issuance of a notice of
+penalty. In the event that U.S. Customs decides to
+issue a notice of penalty, the Company intends to file
+a petition for relief requesting a reduction of the
+level of culpability and mitigation of the penalty
+amount assessed. The maximum total amount of damages
+related to this matter is approximately $1,700 for
+which the Company has accrued $1,248.
+(d)
+The Company has been named as a defendant in certain
+other lawsuits in the normal course of business. In the
+opinion of management, after consulting with legal
+counsel, the liabilities, if any, resulting from these
+matters should not have a material effect on the
+Company’s financial position or results of
+operations. It is the policy of management to disclose
+the amount or range of reasonably possible losses in
+excess of recorded amounts.
+[2]
+Employment agreements:
+On January 3, 2012, the Company and its Creative and
+Design Chief, Steven Madden, entered into an amendment,
+dated as of December 31, 2011, to Mr. Madden’s
+existing employment agreement with the Company (the
+“Amended Madden Agreement”). The Amended
+Madden Agreement, which extends the term of Mr.
+Madden’s employment through December 31, 2023,
+provides for an annual base salary of approximately
+$5,417 in 2012, approximately $7,417 in 2013,
+approximately $9,667 in 2014, approximately $11,917 in
+2015 and approximately $10,698 in 2016 and in each year
+thereafter through the end of the term of employment.
+Effective in 2012, the Amended Madden Agreement
+eliminates the annual cash bonuses payable to Mr.
+Madden based on EBITDA and the annual cash bonus in
+relation to new business contained in Mr.
+Madden’s previously existing employment agreement
+and provides that all future cash bonuses will be at
+the sole discretion of the Company’s Board of
+Directors. Further, the Amended Madden Agreement
+eliminates the annual non-accountable expense allowance
+of up to $200 provided to Mr. Madden under the
+previously existing employment agreement. Pursuant to
+Amended Madden Agreement, on February 8, 2012, Mr.
+Madden was granted 975,371 restricted shares of the
+Company’s common stock valued at approximately
+$40,000, which will vest in equal annual installments
+over seven years commencing on December 31, 2017
+through December 31, 2023, subject to Mr.
+Madden’s continued employment with the Company on
+each such vesting date. Further, the Amended Madden
+Agreement provides that Mr. Madden has the right,
+exercisable on certain specified dates in fiscal year
+2012 only, to elect to further amend his employment
+agreement to receive an additional restricted stock
+award for a number of shares of the Company’s
+common stock valued at $40,000 in consideration of a
+reduction in his annual base salary in years subsequent
+to 2012 as follows: approximately $4,000 in 2013,
+approximately $6,125 in 2014, approximately $8,250 in
+2015 and approximately $7,026 in 2016 and in each year
+thereafter through the end of the term of employment.
+In addition to the opportunity for discretionary cash
+bonuses, the Amended Madden Agreement entitles Mr.
+Madden to an annual life insurance premium
+reimbursement of up to $200, as well as an annual stock
+option grant and the potential for an additional
+one-time stock option grant based upon achievement of
+certain financial performance criteria. The Amended
+Madden Agreement also provides for the elimination of
+interest accrued after December 31, 2011 on an
+outstanding loan in the original principal amount of
+$3,000 made by the Company to Mr. Madden, the extension
+of the maturity date of such loan until December 31,
+2023, and the forgiveness of 1/10th of the principal
+amount of the loan, together with accrued interest,
+annually over a ten-year period commencing on December
+31, 2014 for so long as Mr. Madden continues to be
+employed by the Company on each such December 31st.
+F-28
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Consolidated Financial Statements 
+December 31, 2011 and 2010 
+($ in thousands except share and per share data) 
+Note O –
+Commitments, Contingencies and Other (continued) 
+On February 8, 2012, the Company and its Chief
+Financial Officer, Arvind Dharia, entered into an
+amendment of Mr. Dharia’s existing employment
+agreement. The amendment, among other things, extends
+the term of Mr. Dharia’s employment agreement,
+which was set to expire at the end of 2011, until
+December 31, 2014 and increases his annual base salary
+to $555 effective January 1, 2012 through the remainder
+of the term. Pursuant to the amendment, on February 8,
+2012, Mr. Dharia received a restricted stock award for
+10,000 restricted shares of the Company’s common
+stock, which will vest in substantially equal annual
+installments over a three-year period commencing on
+February 8, 2013 through February 8, 2015. The
+agreement, as amended, provides for an annual bonus to
+Mr. Dharia at the discretion of the Board of Directors.
+Effective January 1, 2011, the Company entered into an
+employment agreement with Amelia Newton Varela, the
+Company’s Executive Vice President of Wholesale,
+to replace an existing employment agreement that
+expired at the end of 2010. The agreement provides for
+an annual salary of $450 through December 31, 2013 and
+provides the opportunity for annual cash incentive
+bonuses. In addition, on February 1, 2011, Ms. Varela
+received an option to purchase 100,000 shares of common
+stock at the market value on the date of grant, which
+will vest in equal annual installments over a four-year
+period commencing on the first anniversary of the grant
+date.
+Effective January 1, 2011, the Company entered into a
+new employment agreement with Awadhesh Sinha, the
+Company’s Chief Operating Officer, to replace an
+existing employment agreement that expired at the end
+of 2010. The agreement provides for an annual salary of
+$575 through December 31, 2013. In addition, on
+December 1, 2010, Mr. Sinha received a grant of 35,000
+shares of restricted common stock which will vest in
+equal annual installments over a three-year period
+commencing on the first anniversary of the grant date.
+Additional compensation and bonuses, if any, are at the
+discretion of the Board of Directors.
+On November 6, 2009, the Company entered into a new
+employment agreement with Edward R. Rosenfeld, the
+Company’s Chief Executive Officer and the
+Chairman of the Board of Directors, to replace an
+existing employment agreement that was due to expire on
+December 31, 2009. The agreement, which expires on
+December 31, 2012, provides for an annual salary of
+$400 through December 31, 2009, $500 in 2010, $525 in
+2011 and $551 in 2012. In addition, Mr. Rosenfeld
+received a grant of 75,000 shares of restricted common
+stock which vests in equal annual installments over a
+five-year period commencing on the first anniversary of
+the grant date.
+Effective October 7, 2009, the Company entered into a
+new employment agreement with Robert Schmertz, the
+Company’s Brand Director, to replace an existing
+employment agreement that expired at the end of 2009.
+The new agreement, which expires on December 31, 2012,
+provides for an annual salary of $600 through December
+31, 2009, and $660 for the duration of the term.
+Additional compensation and bonuses, if any, are at the
+sole discretion of the Board of Directors. In addition,
+Mr. Schmertz received an option to purchase 75,000
+shares of the Company’s common stock which will
+vest in equal annual installments over five years
+commencing on the first anniversary of the date of
+grant.
+F-29
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Consolidated Financial Statements 
+December 31, 2011 and 2010 
+($ in thousands except share and per share data) 
+Note O –
+Commitments, Contingencies and Other (continued) 
+The Company has employment agreements with certain
+other employees which expire between June 30, 2012 and
+December 31, 2016. Some of these agreements provide for
+cash bonuses at the discretion of the Board of
+Directors, and some provide for cash bonuses based
+primarily upon a percentage of year-to-year increases
+in earnings before interest, taxes, depreciation and
+amortization and option grants. Base salary commitments
+for these executives are as follows:
+2012
+$
+5,065
+2013
+3,123
+2014
+993
+2015
+500
+2016
+250
+$
+9,931
+In connection with their employment agreements, four
+executives received an aggregate of 56,250 shares,
+70,500 shares and 112,500 shares of restricted common
+stock from the Company in 2011, 2010 and 2009,
+respectively. In addition, three executives received
+several grants of restricted stock prior to 2009 that
+vested in 2009 through 2011. The restricted shares vest
+equally each year over a period of between four to five
+years and, accordingly, the Company has recorded a
+charge to operations in the amount of $2,281, $1,581
+and $1,675 for the years ended December 31, 2011, 2010
+and 2009, respectively.
+[3]
+Letters of credit:
+At December 31, 2011, the Company had open letters of
+credit for the purchase of imported merchandise of
+approximately $3,041.
+[4]
+License agreements:
+On February 9, 2011, the Company entered into a license
+agreement with Basic Properties America Inc. and
+BasicNet S.p.A, under which the Company has the right
+to use the Superga® trademark in connection with
+the sale and marketing of women’s footwear. The
+agreement requires the Company to pay the licensor a
+royalty equal to a percentage of net sales and a
+minimum royalty in the event that specified net sales
+targets are not achieved. The agreement expires on
+December 31, 2013, with one four-year renewal period,
+at the Company’s option, if certain provisions
+are met.
+On January 1, 2010, the Company entered into a license
+agreement with Jones Investment Co. Inc., under which
+the Company has the right to use the GLO Jeans®
+trademark in connection with the sale and marketing of
+women’s footwear exclusively to K-Mart. The
+agreement requires the Company to pay the licensor a
+royalty and advertising payments equal to a percentage
+of net sales and a minimum royalty and advertising
+payment in the event that specified net sales targets
+are not achieved. The agreement expires on December 31,
+2012.
+In September 2009, the Company entered into a license
+agreement with Dualstar Entertainment Group, LLC, under
+which the Company has the right to use the
+Olsenboye® trademark in connection with the
+marketing and sale of footwear and accessories. The
+agreement requires the Company to make royalty and
+advertising payments equal to a percentage of net sales
+and a minimum royalty and advertising payment in the
+event that specified net sales targets are not
+achieved. The initial term of this agreement, which was
+to expire on December 31, 2011, was renewed for an
+additional two-year term and will now expire on
+December 31, 2013.
+On September 10, 2008, the Company entered into a
+license agreement with Dualstar Entertainment Group,
+LLC, under which the Company has the right to use the
+Elizabeth and James® trademark in connection with
+the sale and marketing of footwear. The agreement
+requires the Company to make royalty and advertising
+payments equal to a percentage of net sales and a
+minimum royalty and advertising payment in the event
+that specified net sales targets are not achieved. The
+agreement expires on March 31, 2012, with one
+three-year renewal period if certain provisions are
+met.
+F-30
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Consolidated Financial Statements 
+December 31, 2011 and 2010 
+($ in thousands except share and per share data) 
+Note O –
+Commitments, Contingencies and Other (continued) 
+On July 1, 2008, the Company entered into a license
+agreement with Jones Investment Co. Inc., under which
+the Company has the right to use the l.e.i.®
+trademark in connection with the sale and marketing of
+women’s footwear exclusively to Wal-Mart. The
+agreement requires the Company to pay the licensor a
+royalty and advertising payments equal to a percentage
+of net sales and a minimum royalty and advertising
+payment in the event that specified net sales targets
+are not achieved. The initial term of this agreement,
+which was to expire on December 31, 2011, was renewed
+for an additional three-year term, which will expire on
+December 31, 2014.
+On March 28, 2007, the Company, through its Accessories
+Division, entered into a license agreement to design,
+manufacture and distribute handbags and belts and
+related accessories under the DF Daisy Fuentes®
+and the Daisy Fuentes® brands. The agreement
+requires the Company to pay the licensor a royalty and
+brand management fees based on a percentage of net
+sales and a minimum royalty in the event that specified
+net sales targets are not achieved. The agreement
+expires on December 31, 2012.
+Royalty expenses are included in the “cost of
+goods sold” section of the Company’s
+Consolidated Statements of Income. Aggregate minimum
+future royalties excluding renewal options, under these
+agreements are as follows:
+Year Ending 
+December 31, 
+2012
+$
+1,043
+2013
+650
+$
+1,693
+[5]
+Related Party Transactions:
+In January 2004, the Company entered into an agreement
+with JLM Consultants, a company wholly owned by John
+Madden, one of the Company’s directors and the
+brother of Steven Madden, the Company’s founder
+and Creative and Design Chief. Under this agreement,
+Mr. Madden provides consulting services with respect to
+the development of international sales of the Company.
+Pursuant to this agreement, JLM Consultants received a
+fee and expenses of $1,552, $1,006 and $760 in 2011,
+2010 and 2009, respectively, in addition to fees that
+Mr. Madden received for service to the Company as a
+director.
+[6]
+Concentrations:
+The Company maintains cash and cash equivalents with
+various major financial institutions which at times are
+in excess of the amount insured. In addition, the
+Company’s marketable securities are principally
+held at four brokerage companies.
+During the year ended December 31, 2011, the Company
+did not purchase more that 10% of its merchandise from
+any single supplier. Total product purchases from China
+for the year ended December 31, 2011 was approximately
+90%.
+During the year ended December 31, 2010, the Company
+purchased approximately 13% and 12% of its merchandise
+from two suppliers in China. Total product purchases
+from China for the year ended December 31, 2010 was
+approximately 89%.
+During the year ended December 31, 2009, the Company
+purchased approximately 24%, 14% and 11% of its
+merchandise from three suppliers in China. Total
+purchases from China for the year ended December 31,
+2009 was approximately 84%.
+F-31
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Consolidated Financial Statements 
+December 31, 2011 and 2010 
+($ in thousands except share and per share data) 
+Note O –
+Commitments, Contingencies and Other (continued) 
+For the year ended December 31, 2011, the Company did
+not have any customers who account for more than 10% of
+total net sales or 10% of total accounts receivable.
+Sales to one customer accounted for 10% of total net
+sales for the year ended December 31, 2010. Three other
+customers represented 12%, 12% and 11% of accounts
+receivable at December 31, 2010.
+Sales to one customer accounted for 11% of total net
+sales for the year ended December 31, 2009. Three other
+customers represented 14%, 13% and 10% of accounts
+receivable at December 31, 2009.
+Sales to such customers are included in the Wholesale
+segment (see Note Q). Purchases are made primarily in
+United States dollars.
+[7]
+Valuation and qualifying accounts:
+The following is a summary of the allowance for
+chargebacks and doubtful accounts related to accounts
+receivable and the allowance for chargebacks related to
+the amount Due from Factor for the years ended December
+31:
+2011 
+2010 
+2009 
+Balance at beginning of year
+$
+15,258
+$
+13,682
+$
+11,301
+Charged to reserve
+—
+—
+—
+Increase in reserve
+2,961
+1,576
+2,381
+Balance at end of year
+$
+18,219
+$
+15,258
+$
+13,682
+The following is a summary of goodwill and the related
+accumulated amortization for the years ended December
+31:
+2011 
+2010 
+2009 
+Cost basis
+Balance at beginning of year
+$
+39,211
+$
+24,911
+$
+24,172
+Acquisitions and purchase price adjustments
+36,982
+14,300
+739
+Write-off of impaired assets
+—
+—
+—
+Balance at end of year
+76,193
+39,211
+24,911
+Accumulated amortization
+Balance at beginning of year
+598
+598
+598
+Write-off of impaired assets
+—
+—
+—
+Balance at end of year
+598
+598
+598
+Goodwill
+$
+75,595
+$
+38,613
+$
+24,313
+F-32
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Consolidated Financial Statements 
+December 31, 2011 and 2010 
+($ in thousands except share and per share data) 
+Note P –
+Subsequent Events 
+On February 21, 2012, the Company consummated the previously
+reported proposed purchase of all of the assets of Steve
+Madden Canada Inc., Steve Madden Retail Canada Inc., Pasa
+Agency Inc. and Gelati Imports Inc. (collectively, the
+“Canadian Sellers”), the Company’s sole
+distributor in Canada since 1994, comprising the Canadian
+Sellers’ footwear, handbags and accessories wholesale
+and retail businesses. The transaction was effected pursuant
+to an Asset Purchase Agreement entered into on January 20,
+2012 which provided for a cash payment at closing of
+approximately $29,000 (Canadian dollars, which converts to
+approximately the same in US dollars) plus potential earn-out
+payments of up to a maximum of $38,000 (Canadian dollars,
+which converts to approximately the same in US dollars), in
+the aggregate, based on achievement of certain earnings
+targets over a five-year period.
+Note Q –
+Operating Segment Information 
+The Company operates the following business segments:
+Wholesale Footwear, Wholesale Accessories, Retail, First Cost
+and Licensing. The Wholesale Footwear segment, through sales
+to department stores, mid-tier retailers and specialty stores
+worldwide, derives revenue from sales of branded and private
+label women’s, men’s, girls’ and
+children’s footwear. The Wholesale Accessories segment,
+which includes branded and private label handbags, belts and
+small leather goods as well as cold weather and selected
+other fashion accessories, derives revenue from sales to
+department, mid-tier and specialty stores worldwide. The
+Retail segment, through the operation of Company owned retail
+stores and the Company’s website, derives revenue from
+sales of branded women’s, men’s and
+children’s footwear, accessories and licensed products
+to consumers. The First Cost segment represents activities of
+a subsidiary which earns commissions for serving as a buying
+agent of footwear products to mass-market merchandisers,
+mid-tier department stores and other retailers with respect
+to their purchase of footwear. In the Licensing segment, the
+Company licenses its Steve Madden® and Steven by Steve
+Madden® trademarks for use in connection with the
+manufacture, marketing and sale of sunglasses, eyewear,
+outerwear, bedding, hosiery and women’s fashion
+apparel, jewelry and luggage. In addition, this segment
+licenses the Betsey Johnson® and Betseyville®
+trademarks for use in connection with the manufacture,
+marketing and sale of apparel, jewelry, swimwear, eyewear,
+watches, fragrances and outerwear.
+F-33
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Consolidated Financial Statements 
+December 31, 2011 and 2010 
+($ in thousands except share and per share data) 
+Note Q –
+Operating Segment Information (continued) 
+The accounting policies of the segments are the same as those
+described in the summary of significant accounting policies.
+The Company evaluates performance based on profit or loss
+from operations before other income (expense) and the
+provision for income taxes. The following is information for
+the Company’s reportable segments:
+Year ended,
+Wholesale
+Footwear
+Wholesale
+Accessories
+Total Wholesale 
+Retail 
+First Cost 
+Licensing 
+Consolidated 
+December 31, 2011:
+Net sales to external customers
+$
+636,809
+$
+176,824
+$
+813,633
+$
+154,916
+$
+968,549
+Gross profit
+205,379
+61,474
+266,853
+95,095
+361,948
+Commissions and licensing fees - net
+—
+—
+—
+—
+$
+9,795
+$
+8,920
+18,715
+Income from operations
+86,676
+28,009
+114,685
+20,370
+9,795
+8,920
+153,770
+Depreciation and amortization
+6,604
+4,378
+78
+—
+11,060
+Segment assets
+$
+383,170
+$
+132,648
+515,818
+76,630
+47,338
+—
+639,786
+Capital expenditures
+$
+10,314
+$
+5,163
+$
+—
+$
+—
+$
+15,477
+December 31, 2010:
+Net sales to external customers
+$
+402,567
+$
+98,548
+$
+501,115
+$
+134,303
+$
+635,418
+Gross profit
+156,603
+37,926
+194,529
+81,325
+275,854
+Commissions and licensing fees - net
+—
+—
+—
+—
+$
+17,258
+$
+5,371
+22,629
+Income from operations
+75,543
+14,323
+89,866
+9,129
+17,258
+5,371
+121,624
+Depreciation and amortization
+5,164
+4,631
+204
+—
+9,999
+Segment assets
+$
+268,544
+$
+71,856
+340,400
+65,835
+41,461
+—
+447,696
+Capital expenditures
+$
+1,020
+$
+2,404
+$
+—
+$
+—
+$
+3,424
+December 31, 2009:
+Net sales to external customers
+$
+309,439
+$
+70,406
+$
+379,845
+$
+123,705
+$
+503,550
+Gross profit
+123,172
+23,741
+146,913
+69,276
+216,189
+Commissions and licensing fees - net
+—
+—
+—
+—
+$
+16,803
+$
+3,125
+19,928
+Income (loss) from operations
+51,360
+9,199
+60,559
+(1,519)
+16,803
+3,125
+78,968
+Depreciation and amortization
+4,166
+5,197
+197
+—
+9,560
+Segment assets
+$
+225,533
+$
+42,372
+267,905
+51,774
+7,180
+—
+326,859
+Capital expenditures
+$
+1,249
+$
+2,150
+$
+—
+$
+—
+$
+3,399
+F-34
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Consolidated Financial Statements 
+December 31, 2011 and 2010 
+($ in thousands except share and per share data) 
+Note Q –
+Operating Segment Information (continued) 
+Revenues by geographic area for the years ended December 31
+are as follows:
+2011 
+2010 
+2009 
+Domestic
+$
+915,286
+$
+600,637
+$
+481,495
+International
+53,263
+34,781
+22,055
+Total
+$
+968,549
+$
+635,418
+$
+503,550
+Note R –
+Quarterly Results of Operations (unaudited) 
+The following is a summary of the quarterly results of
+operations for the years ended December 31, 2011 and 2010:
+March 31, 
+June 30, 
+September 30, 
+December 31, 
+2011:
+Net sales
+$
+165,755
+$
+209,152
+$
+313,887
+$
+279,755
+Cost of sales
+96,623
+125,057
+204,434
+180,487
+Gross profit
+69,132
+84,095
+109,453
+99,268
+Commissions, royalty and licensing fee income - net
+4,567
+4,432
+5,649
+4,067
+Net income attributable to Steven Madden, Ltd.
+$
+17,852
+$
+23,784
+$
+31,911
+$
+23,772
+Net income per share:
+Basic
+0.43
+0.56
+0.75
+0.56
+Diluted
+0.42
+0.55
+0.74
+0.55
+2010:
+Net sales
+$
+131,608
+$
+158,664
+$
+184,118
+$
+161,028
+Cost of sales
+71,671
+89,815
+106,610
+91,468
+Gross profit
+59,937
+68,849
+77,508
+69,560
+Commissions, royalty and licensing fee income - net
+6,184
+5,229
+6,587
+4,629
+Net income attributable to Steven Madden, Ltd.
+$
+15,385
+$
+19,799
+$
+22,916
+$
+17,625
+Net income per share:
+Basic
+0.37
+0.48
+0.55
+0.42
+Diluted
+0.36
+0.47
+0.54
+0.41
+F-35
+Exhibits. 
+2.01
+Stock Purchase Agreement dated February 10, 2010
+between the Company and Jeremy Bassan (incorporated by
+reference to Exhibit 2.1 to the Company’s
+Quarterly Report on Form 10-Q for its fiscal quarter
+ended September 30, 2010 filed with the SEC on November
+9, 2010)
+2.02
+Restructuring Agreement dated October 5, 2010 among the
+Company, BJ Acquisition LLC, BJ Agent LLC, Betsey
+Johnson LLC, Betsey Johnson (UK) Limited, Betsey
+Johnson Canada Ltd., BJ Vines, Inc., Betsey Johnson,
+Chantal Bacon, Castanea Family Investments, LLC,
+Castanea Family Holdings, LLC and Castanea Partners
+Fund III, L.P. (incorporated by reference to Exhibit
+2.1 to the Company’s Current Report on Form 8-K
+filed with the SEC on October 8, 2010)
+2.03
+Stock Purchase Agreement dated May 20, 2011 among the
+Company, The Topline Corporation and William F. Snowden
+(incorporated by reference to Exhibit 2.1 to the
+Company’s Current Report on Form 8-K filed with
+the SEC on May 25, 2011)
+2.04
+Stock Purchase Agreement dated May 25, 2011 among the
+Company, David Seerherman, Cejon, Inc., and Kenneth
+Rogala (incorporated by reference to Exhibit 10.1 to
+the Company’s Current Report on Form 8-K filed
+with the SEC on May 26, 2011)
+2.05
+Asset Purchase Agreement, dated as of January 20, 2012,
+among Steve Madden Canada Inc., Steve Madden Retail
+Canada Inc., Pasa Agency Inc., Gelati Imports Inc., the
+Company, SML Canada Acquisition Corp., 6798039 Canada
+Inc., 6798012 Canada Inc., 3574563 Canada Inc. and
+Thomas Alberga (incorporated by reference to Exhibit
+2.1 to the Company’s Current Report on Form 8-K
+filed with the SEC on January 26, 2012)
+3.01
+Certificate of Incorporation of Steven Madden, Ltd.
+(incorporated by reference to Exhibit 1 to the
+Company’s Current Report on Form 8-K filed with
+the SEC on November 23, 1998)
+3.02
+Amended & Restated By-Laws of Steven Madden, Ltd.
+(incorporated by reference to Exhibit 99.1 to the
+Company’s Current Report on Form 8-K filed with
+the SEC on March 28, 2008)
+4.01
+Specimen Certificate for shares of Common Stock
+(incorporated by reference to Exhibit 4.1 to the
+Company’s Registration Statement on Form SB-2/A
+filed with the SEC on September 29, 1993)
+10.01
+Third Amended and Restated Secured Promissory Note
+dated as of June 25, 2007 of Steven H. Madden to the
+Company (incorporated by reference to Exhibit 10.2 to
+the Company’s Current Report on Form 8-K filed
+with the SEC on January 9, 2012)
+10.02
+Consulting Agreement effective August 1, 2004 among the
+Company, John Madden and J.L.M. Consultants Inc., as
+amended by Amendment No. 1 dated March 10, 2005 and
+Amendment No. 2 dated April 14, 2005 (incorporated by
+reference to Exhibits 10.9, 10.10 and 10.11 to the
+Company’s Annual Report on Form 10-K for its
+fiscal year ended December 31, 2005 filed with the SEC
+on March 14, 2006)
+10.03
+Collection Agency Agreement dated July 10, 2009 between
+Rosenthal & Rosenthal, Inc. and the Company
+(incorporated by reference to Exhibit 10.1 to the
+Company’s Quarterly Report on Form 10-Q for its
+fiscal quarter ended September 30, 2010 filed with the
+SEC on November 9, 2010)
+10.04
+Amendment to Collection Agency Agreement dated February
+16, 2010 between Rosenthal & Rosenthal, Inc. and
+the Company (incorporated by reference to Exhibit 10.10
+to the Company’s Annual Report on Form 10-K for
+its fiscal year ended December 31, 2010 filed with the
+SEC on March 12, 2010)
+10.05
+Collection Agency Agreement dated July 10, 2009 between
+Rosenthal & Rosenthal, Inc. and Daniel Friedman
+& Associates, Inc. (incorporated by reference to
+Exhibit 10.2 to the Company’s Current Report on
+Form 8-K filed with the SEC on July 16, 2009)
+10.06
+Collection Agency Agreement dated July 10, 2009 between
+Rosenthal & Rosenthal, Inc. and Diva Acquisition
+Corp. (incorporated by reference to Exhibit 10.3 to the
+Company’s Current Report on Form 8-K filed with
+the SEC on July 16, 2009)
+10.07
+Collection Agency Agreement dated July 10, 2009 between
+Rosenthal & Rosenthal, Inc. and Steven Madden
+Retail, Inc. (incorporated by reference to Exhibit 10.4
+to the Company’s Current Report on Form 8-K filed
+with the SEC on July 16, 2009)
+10.08
+Collection Agency Agreement dated July 10, 2009 between
+Rosenthal & Rosenthal, Inc. and Stevies, Inc.
+(incorporated by reference to Exhibit 10.5 to the
+Company’s Current Report on Form 8-K filed with
+the SEC on July 16, 2009)
+10.09
+Collection Agency Agreement dated July 10, 2009 between
+Rosenthal & Rosenthal, Inc. and SML Acquisition
+Corp. (incorporated by reference to Exhibit 10.6 to the
+Company’s Current Report on Form 8-K filed with
+the SEC on July 16, 2009)
+10.10
+Letter Agreement dated July 10, 2009 among Rosenthal
+& Rosenthal, Inc., the Company, Daniel Friedman
+& Associates, Inc., Diva Acquisition Corp., Steven
+Madden Retail, Inc., Stevies, Inc., and SML Acquisition
+Corp. (incorporated by reference to Exhibit 10.7 to the
+Company’s Current Report on Form 8-K filed with
+the SEC on July 16, 2009)
+10.11
+Guarantee dated July 10, 2009 of the Company, Daniel
+Friedman & Associates, Inc., Diva Acquisition
+Corp., Steven Madden Retail, Inc., Stevies, Inc., and
+SML Acquisition Corp. in favor of Rosenthal &
+Rosenthal, Inc. (incorporated by reference to Exhibit
+10.8 to the Company’s Current Report on Form 8-K
+filed with the SEC on July 16, 2009)
+10.12
+Earn-Out Agreement dated February 10, 2010 among the
+Company, Jeremy Bassan and Big Buddha, Inc.
+(incorporated by reference to Exhibit 10.2 to the
+Company’s Current Report on Form 8-K filed with
+the SEC on February 11, 2010)
+10.13
+Purchase and Sale Agreement for Distressed Trades dated
+August 26, 2010 between BJ Acquisition LLC and Paradox
+Lending LLC (incorporated by reference to Exhibit 10.2
+to the Company’s Quarterly Report on Form 10-Q
+for its fiscal quarter ended September 30, 2010 filed
+with the SEC on November 9, 2010)
+10.14
+Earn-Out Agreement dated May 25, 2011 among Steven
+Madden, Ltd., David Seerherman, Cejon, Inc., Cejon
+Accessories, Inc., New East Designs, LLC and Kenneth
+Rogala (incorporated by reference to Exhibit 10.2 to
+the Company’s Current Report on Form 8-K filed
+with the SEC on May 26, 2011).
+10.15
+Third Amended Employment Agreement dated July 15, 2005
+between the Company and Steven Madden (incorporated by
+reference to Exhibit 10.1 to the Company’s
+Current Report on Form 8-K filed with the SEC on July
+20, 2005)
+10.16
+Amendment dated December 14, 2009 to Third Amended
+Employment Agreement between the Company and Steven
+Madden (incorporated by reference to Exhibit 10.1 to
+the Company’s Current Report on Form 8-K filed
+with the SEC on December 17, 2009)
+10.17
+Amended and Restated Second Amendment dated as of
+December 31, 2011 to Third Amended Employment Agreement
+between the Company and Steven Madden† ¤ 
+10.18
+Employment Agreement dated
+January 1, 1998 between the Company and Arvind Dharia
+(incorporated by reference to Exhibit 10.07 to the
+Company’s Annual Report on Form 10-K for its
+fiscal year ended December 31, 2000 filed with the SEC
+on March 30, 2001) # 
+10.19
+Amendment No. 1 dated June
+29, 2001 to Employment Agreement between the Company
+and Arvind Dharia (incorporated by reference to Exhibit
+99.4 to the Company’s Quarterly Report on Form
+10-Q for its fiscal quarter ended June 30, 2001 filed
+August 14, 2001) # 
+10.20
+Amendment No. 2 dated
+October 30, 2002 to Employment Agreement between the
+Company and Arvind Dharia (incorporated by reference to
+Exhibit 10.16 to the Company’s Quarterly Report
+on Form 10-Q for its fiscal quarter ended September 30,
+2002 filed with the SEC on November 14,
+2002) # 
+10.21
+Amendment No. 3 dated
+February 1, 2006 to Employment Agreement between the
+Company and Arvind Dharia (incorporated by reference to
+Exhibit 10.1 to the Company’s Current Report on
+Form 8-K filed with the SEC on February 3,
+2006) # 
+10.22
+Amendment No. 4 dated
+October 7, 2009 to Employment Agreement of Arvind
+Dharia between the Company and Arvind Dharia
+(incorporated by reference to Exhibit 10.2 to the
+Company’s Current Report on Form 8-K filed with
+the SEC on October 13, 2009) # 
+10.23
+Amendment No. 5 dated
+February 8, 2012 to Employment Agreement of Arvind
+Dharia between the Company and Arvind Dharia
+(incorporated by reference to Exhibit 10.1 to the
+Company’s Current Report on Form 8-K filed with
+the SEC on February 14, 2012) # 
+10.24
+Employment Agreement dated
+December 1, 2010 between the Company and Awadhesh Sinha
+(incorporated by reference to Exhibit 10.1 to the
+Company’s Current Report on Form 8-K filed with
+the SEC on December 3, 2010) # 
+10.25
+Amendment dated February
+25, 2011 to Employment Agreement dated December 1, 2010
+between the Company and Awadhesh Sinha (incorporated by
+reference to Exhibit 10.25 to the Company’s
+Annual Report on Form 10-K for its fiscal year ended
+December 31, 2010, filed with the SEC on February 28,
+2011) # 
+10.26
+Employment Agreement dated
+October 7, 2009 between the Company and Robert Schmertz
+(incorporated by reference to Exhibit 10.1 to the
+Company’s Current Report on Form 8-K filed with
+the SEC on October 13, 2009) # 
+10.27
+Employment Agreement dated
+January 31, 2011 between the Company and Amelia Newton
+Varela (incorporated by reference to Exhibit 10.1 to
+the Company’s Current Report on Form 8-K filed
+with the SEC on February 2, 2011) # 
+10.28
+Employment Agreement dated
+November 6, 2009 between the Company and Edward R.
+Rosenfeld (incorporated by reference to Exhibit 10.1 to
+the Company’s Current Report on Form 8-K filed
+with the SEC on November 10, 2009) # 
+10.29
+Amendment No. 1 dated
+March 8, 2010 to Employment Agreement between the
+Company and Edward R. Rosenfeld (incorporated by
+reference to Exhibit 10.29 to the Company’s
+Annual Report on Form 10-K for its fiscal year ended
+December 31, 2010 filed with the SEC on March 12,
+2010) # 
+10.30
+The 1999 Stock Plan,
+approved and adopted on March 15, 1999, amended as of
+March 20, 2000 and March 30, 2001 (incorporated by
+reference to Exhibit 10.A to the Company’s
+Registration Statement on Form S-8 filed with the SEC
+on July 26, 2004) # 
+10.31
+2006 Stock Incentive Plan
+(Amended and Restated Effective May 22, 2009), approved
+and adopted on May 22, 2009 (incorporated by reference
+to Exhibit 10.1 to the Company’s Current Report
+on Form 8-K filed with the SEC on May 28,
+2009) # 
+21.01
+Subsidiaries of the
+Registrant † 
+23.01
+Consent of EisnerAmper
+LLP † 
+24.01
+Power of Attorney (included on signature page hereto)
+31.01
+Certification of Chief
+Executive Officer pursuant to Rule 13a-14(a) or
+15d-14(a) of the Securities Exchange Act of 1934, as
+adopted pursuant to Section 302 of the Sarbanes-Oxley
+Act of 2002 † 
+31.02
+Certification of Chief
+Financial Officer pursuant to Rule 13a-14(a) or
+15d-14(a) of the Securities Exchange Act of 1934, as
+adopted pursuant to Section 302 of the Sarbanes-Oxley
+Act of 2002 † 
+32.01
+Certification of Chief
+Executive Officer pursuant to 18 U.S.C. Section 1350
+Adopted Pursuant to Section 906 of the Sarbanes-Oxley
+Act of 2002 †* 
+32.02
+Certification of Chief
+Financial Officer pursuant to 18 U.S.C. Section 1350
+Adopted Pursuant to Section 906 of the Sarbanes-Oxley
+Act of 2002 †* 
+101
+The following materials from Steven Madden,
+Ltd.’s Annual Report on Form 10-K for the fiscal
+year ended December 31, 2011, formatted in XBRL
+(Extensible Business Reporting Language): (i) the
+Consolidated Balance Sheets, (ii) the Consolidated
+Statements of Income, (iii) the Consolidated Statements
+of Changes in Stockholders’ Equity, (iv) the
+Consolidated Statements of Cash Flows, and (v) Notes to
+Consolidated Financial Statements, tagged as blocks of
+text.*
+†
+Filed herewith.
+¤ 
+This exhibit amends and restates the document included
+as Exhibit 10.1 to the Company’s Current Report
+on Form 8-K filed with the SEC on January 9, 2012 to
+address an inadvertent omission from the original
+document contained in Section 1(f); all other
+provisions remain unchanged.
+#
+Indicates management contract or compensatory plan or
+arrangement required to be identified pursuant to Item
+15(b) of this Annual Report on Form 10-K.
+*
+This exhibit shall not be deemed “filed”
+for purposes of Section 18 of the Securities Exchange
+Act of 1934, as amended, or otherwise subject to the
+liability of that section, nor shall it be deemed
+incorporated by reference into any filing under the
+Securities Act of 1933, as amended, or the Securities
+Exchange Act of 1934, as amended, whether made before
+or after the date hereof and irrespective of any
+general incorporation language in any filing, except to
+the extent the Company specifically incorporates it by
+reference.
\ No newline at end of file
diff --git a/raw/filings/0000913241/2011/0001019056-12-000270/filing_metadata.csv b/raw/filings/0000913241/2011/0001019056-12-000270/filing_metadata.csv
new file mode 100644
index 0000000000000000000000000000000000000000..0454bfe571da1720e3d578f6858dfa257c27a9a0
--- /dev/null
+++ b/raw/filings/0000913241/2011/0001019056-12-000270/filing_metadata.csv
@@ -0,0 +1,2 @@
+cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing
+0000913241,SHOO,"STEVEN MADDEN, LTD.",10-K,2012-02-29,2011-12-31,2012-02-28T23:49:12.000Z,0001019056-12-000270,sm_10k11.htm,FORM 10-K,10222325,1,0,https://www.sec.gov/Archives/edgar/data/913241/000101905612000270/sm_10k11.htm,https://www.sec.gov/Archives/edgar/data/913241/000101905612000270/,2011,2011,1
diff --git a/raw/filings/0000913241/2011/0001019056-12-000270/item1.txt b/raw/filings/0000913241/2011/0001019056-12-000270/item1.txt
new file mode 100644
index 0000000000000000000000000000000000000000..9e09fe8c253f8b3cd0cba2ac8932603a57bc9565
--- /dev/null
+++ b/raw/filings/0000913241/2011/0001019056-12-000270/item1.txt
@@ -0,0 +1,857 @@
+ITEM 1
+BUSINESS
+Overview 
+Steven Madden, Ltd. and its subsidiaries (collectively, the
+“Company”) design, source, market and sell
+fashion-forward name brand and private label footwear for
+women, men and children and name brand and private label
+fashion handbags and accessories. Our products are
+distributed through our retail stores and our e-commerce
+website and in department stores, specialty stores, luxury
+retailers, national chains and mass merchants throughout the
+United States. In addition, we have special distribution
+arrangements for the distribution of our products in Asia,
+Canada, Europe, the Middle East, Mexico, Australia, Central
+and South America and India. Our product line consists of a
+broad range of updated styles designed to establish or
+capitalize on market trends, complemented by product
+offerings. We have established a reputation for design
+creativity and our ability to offer quality products in
+popular styles at affordable price points.
+The Company was incorporated as a New York corporation on
+July 9, 1990, reincorporated under the same name in Delaware
+in November 1998 and completed its initial public offering in
+December 1993. Shares of the Company’s common stock,
+$.0001 par value per share, currently trade on the NASDAQ
+Global Select Market under the symbol “SHOO”. Our
+principal executive offices are located at 52-16 Barnett
+Avenue, Long Island City, NY 11104. Our telephone number is
+(718) 446-1800 and our website address is
+http://www.stevemadden.com.
+We file Annual Reports on Form 10-K, Quarterly Reports on
+Form 10-Q, Current Reports on Form 8-K and other reports and
+information with the Securities and Exchange Commission (the
+“SEC”) pursuant to Section 13(a) or 15(d) of the
+Securities Exchange Act of 1934, as amended, (the
+“Exchange Act”). These reports, any amendments to
+such reports, and our proxy statements for our
+stockholders’ meetings are available free of charge, on
+our website as soon as reasonably practicable after such
+material is electronically filed with, or furnished to, the
+SEC. We will provide paper copies of such filings free of
+charge upon request. The public may read and copy any
+materials filed by us with the SEC at the SEC’s Public
+Reference Room at 100 R Street, NE, Washington, D.C. 20549.
+Information regarding the operation of the SEC’s Public
+Reference Room is available by calling the SEC at
+1-800-SEC-0330. In addition, the SEC maintains an Internet
+site that contains reports, proxy and information statements
+and other information regarding us, which is available at
+http://www.sec.gov.
+1
+Fiscal year December 31, 2011 marks the third consecutive
+year that the Company achieved record sales and earnings. Our
+consolidated net sales for 2011 increased 52% to a record
+$968.5 million from the $635.4 million achieved in 2010. Net
+income increased in 2011 to a record $97.2 million from $75.7
+million in 2010. Diluted earnings per share for the year
+ended December 31, 2011 increased 26% to $2.25 per share on
+43,239,000 diluted weighted average shares outstanding
+compared to $1.78 per share on 42,443,000 diluted weighted
+average shares outstanding in 2010.
+During fiscal year 2011, we expanded our product offerings
+through two acquisitions. First, on May 20, 2011, the Company
+acquired all of the outstanding shares of capital stock of
+the closely held company, The Topline Corporation
+(“Topline”), from its sole stockholder (the
+“Topline Seller”). Founded in 1980, Topline and
+its subsidiaries design, manufacture, market and sell private
+label and branded women’s footwear primarily to
+department stores, specialty retailers and mass merchants.
+Topline has sourcing capabilities, sample making facilities
+and product development capabilities in China, including
+personnel and facilities engaged in direct sourcing.
+Management believes that Topline is an excellent strategic
+fit for the Company. The acquisition was completed for
+consideration of approximately $56.128 million cash, plus
+potential contingent payments pursuant to an earn-out
+agreement with the Topline Seller; less an estimated working
+capital adjustment due to the Company. The earn-out agreement
+provides for potential payments to the Topline Seller based
+on the financial performance of Topline for the twelve-month
+period ending on June 30, 2012. (See Note B to our
+Consolidated Financial Statements for additional information
+relating to the potential earn-out payments.) The fair value
+of the contingent payments was estimated using the present
+value of management’s projections of the financial
+results of Topline during the earn-out period. As of December
+31, 2011, the Company estimates the fair value of the
+contingent consideration to be $6.2 million.
+Then, on May 25, 2011, we acquired all of the outstanding
+shares of capital stock of privately held Cejon, Inc. and
+Cejon Accessories, Inc. from the sole stockholder of these
+companies, as well as all of the outstanding membership
+interests in New East Designs, LLC (combined with Cejon Inc.
+and Cejon Accessories, “Cejon”) from its members
+(together with the sole stockholder of Cejon, the
+“Cejon Sellers”). Founded in 1991, Cejon designs,
+markets and sells cold weather accessories, fashion scarves,
+wraps and other trend accessories primarily under the Cejon
+brand name, private labels and under the Steve Madden brand
+name as Cejon has been a licensee of the Company for cold
+weather and selected other fashion accessories since
+September 2006. Management expects the Cejon acquisition will
+further strengthen and expand the Company’s accessories
+platform. The acquisition was completed for consideration of
+approximately $29.1 million cash, plus potential contingent
+payments pursuant to an earn-out agreement with the Cejon
+Sellers. The earn-out agreement provides for potential
+payments to the Cejon Sellers based on the financial
+performance of Cejon for each of the twelve-month periods
+ending on June 30, 2012 through 2016, inclusive. (See Note B
+to our Consolidated Financial Statements for additional
+information relating to the potential earn-out payments.) The
+fair value of the contingent payments was estimated using the
+present value of management’s projections of the
+financial results of Cejon during the earn-out period. As of
+December 31, 2011, we estimate the fair value of the
+contingent consideration to be $23.5 million.
+During the year ended December 31, 2011, the Company made
+significant progress on several previously announced
+strategic initiatives. One such initiative was to continue to
+drive improvements in the performance of our retail segment.
+In 2011, same store sales (sales of those stores, including
+the e-commerce website, that were in operation throughout
+2011 and 2010) increased 13.3% and sales per square foot
+increased to $810 compared to sales per square foot of $742
+achieved in the prior year. Income from store operations as a
+percentage of sales increased to 13.1% in 2011 compared to
+the 6.8% achieved in 2010.
+A second strategic initiative for the Company was the
+expansion of our e-commerce business. In 2011 net sales in
+our e-commerce business increased 25% when compared to the
+prior year. The Company has also achieved progress in its
+initiative to grow its International business, which had net
+sales of $53.3 million in 2011, a 53% increase over the $34.8
+million in net sales achieved by the International business
+in the prior year.
+On May 5, 2011, the Company’s Board of Directors
+announced a three-for-two stock split of the Company’s
+outstanding shares of common stock, effected in the form of a
+stock dividend on the Company’s outstanding common
+stock. Stockholders of record at the close of business on May
+20, 2011 received one additional share of Steven Madden, Ltd.
+common stock for every two shares of common stock owned on
+this date. The additional shares were distributed on May 31,
+2011. Stockholders received cash in lieu of any fractional
+shares of common stock they otherwise would have received in
+connection with the dividend. All share and per share data
+provided herein gives effect to this stock split, applied
+retroactively.
+2
+Recent Developments 
+Effective as of December 31, 2011, the Company and its
+founder and Creative and Design Chief, Steven Madden, entered
+into an amendment to Mr. Madden’s existing employment
+agreement with the Company (the “Amended Madden
+Agreement”). The Amended Madden Agreement, which
+extends the term of Mr. Madden’s employment through
+December 31, 2023, provides for an annual base salary of
+approximately $5.417 million in 2012, approximately $7.417
+million in 2013, approximately $9.667 million in 2014,
+approximately $11.917 million in 2015 and approximately
+$10.698 million in 2016 and in each year thereafter through
+the end of the term of employment. The Amended Madden
+Agreement eliminates the annual cash bonuses payable to Mr.
+Madden based on EBITDA and the annual cash bonus in relation
+to new business contained in Mr. Madden’s previously
+existing employment agreement and provides that all future
+cash bonuses will be at the sole discretion of the
+Company’s Board of Directors. Further, the Amended
+Madden Agreement eliminates the annual non-accountable
+expense allowance of $200,000 provided to Mr. Madden under
+the previously existing employment agreement. Pursuant to the
+Amended Madden Agreement, on February 8, 2012, Mr. Madden was
+granted 975,371 restricted shares of the Company’s
+common stock valued at approximately $40 million, which will
+vest in equal annual installments over seven years commencing
+on December 31, 2017 through December 31, 2023, subject to
+Mr. Madden’s continued employment with the Company on
+each such vesting date. Further, the Amended Madden Agreement
+provides that Mr. Madden has the right, exercisable on
+certain specified dates in fiscal year 2012 only, to elect to
+further amend his employment agreement to receive an
+additional restricted stock award for a number of shares of
+the Company’s common stock valued at $40 million in
+consideration of a reduction in his annual base salary in
+years subsequent to 2012 as follows: approximately $4 million
+in 2013, approximately $6.125 million in 2014, approximately
+$8.25 million in 2015 and approximately $7.026 million in
+2016 and in each year thereafter through the end of the term
+of employment. In addition to the opportunity for
+discretionary cash bonuses, the Amended Madden Agreement
+entitles Mr. Madden to an annual life insurance premium
+reimbursement of up to $200,000 as well as an annual stock
+option grant and the potential for an additional one-time
+stock option grant based upon achievement of certain
+financial performance criteria. The Amended Madden Agreement
+also provides for the elimination of interest accrued after
+December 31, 2011 on an outstanding loan in the original
+principal amount of $3 million made by the Company to Mr.
+Madden, the extension of the maturity date of such loan until
+December 31, 2023, and the forgiveness of 1/10th of the
+principal amount of the loan, together with accrued interest,
+annually over a ten-year period commencing on December 31,
+2014 for so long as Mr. Madden continues to be employed by
+the Company on each such December 31st.
+On February 21, 2012, the Company consummated the previously
+reported proposed purchase of all of the assets of Steve
+Madden Canada Inc., Steve Madden Retail Canada Inc., Pasa
+Agency Inc. and Gelati Imports Inc. (collectively, the
+“Canadian Sellers”), the Company’s sole
+distributor in Canada since 1994, comprising the Canadian
+Sellers’ footwear, handbags and accessories wholesale
+and retail businesses. The transaction was effected pursuant
+to an Asset Purchase Agreement entered into on January 20,
+2012 which provided for a cash payment at closing of
+approximately $29.0 million (Canadian dollars, which converts
+to approximately the same in US dollars) plus potential
+earn-out payments of up to a maximum of $38.0 million
+(Canadian dollars, which converts to approximately the same
+in US dollars), in the aggregate, based on achievement of
+certain earnings targets over a five-year period.
+On February 2, 2012, two individuals purporting to be
+stockholders of the Company commenced separate civil actions
+against the Company, as a nominal defendant, Steven Madden,
+individually, and the Company’s Board of Directors
+alleging shareholder derivative claims in connection with the
+amendment of Mr. Madden’s employment agreement and the
+compensation afforded Mr. Madden thereunder and seeking
+disgorgement of any compensation Mr. Madden received as a
+result of the amendment, an award of unspecified damages and
+a declaration that the amendments are void. See Item 3,
+“Legal Proceedings,” below for a description of
+such action.
+Product Distribution Segments 
+Our business is comprised of five distinct segments:
+Wholesale Footwear, Wholesale Accessories, Retail, First Cost
+and Licensing. See Note Q to our Consolidated Financial
+Statements for additional information relating to our five
+operating segments.
+3
+Our Wholesale Footwear segment is comprised of the following
+brands: Steve Madden Women’s, Madden Girl, Steve Madden
+Men’s, Steven, l.e.i.® (under license), Elizabeth
+and James® (under license), Olsenboye® (under
+license), Stevies, Big Buddha Shoes, Madden, Betsey Johnson
+shoes, Report, Superga® (under license) and includes our
+private label and International businesses. Our Wholesale
+Accessories segment includes Big Buddha, Betseyville, Betsey
+Johnson, Steve Madden, Steven by Steve Madden, Cejon and,
+through license agreements, Daisy Fuentes® and
+Olsenboye® accessories brands and includes our private
+label business. Steven Madden Retail, Inc., our wholly owned
+retail subsidiary, operates Steve Madden and Steven retail
+stores as well as our e-commerce website. There are also
+three stores licensed to a third party. The First Cost
+segment represents activities of a subsidiary that earns
+commissions for serving as a buying agent for footwear
+products under private labels and licensed brands (such as
+Candie’s®) for many of the country’s large
+mass-market merchandisers, shoe chains and other off-price
+retailers. Our Licensing segment is engaged in the licensing
+of the Steve Madden and Steven by Steve Madden marks for use
+in connection with the manufacture, marketing and sale of
+sunglasses, eyewear, outerwear, bedding, hosiery,
+women’s fashion apparel, jewelry and luggage. In
+addition, we license our recently acquired Betsey Johnson and
+Betseyville marks for use in connection with the manufacture,
+marketing and sale of apparel, jewelry, swimwear, eyewear,
+watches, fragrances and outerwear.
+Wholesale Footwear Segment 
+Steve Madden Women’s. We design, source and
+market our Steve Madden brand to major department stores,
+mid-tier department stores, better specialty stores and
+independently owned boutiques throughout the United States.
+The Steve Madden brand has become a leading life-style brand
+in the fashion conscious marketplace. To serve our customers
+(primarily women ages 16 to 35), Steve Madden Women’s
+creates and markets fashion forward footwear designed to
+appeal to customers seeking exciting, new footwear designs at
+affordable prices. New products for Steve Madden
+Women’s are test marketed at Company-owned retail
+stores. Typically, within a few days, we can determine if the
+test product appeals to our customers. This enables us to use
+our flexible sourcing model to rapidly respond to changing
+trends and customer preferences, which we believe is
+essential for success in the fashion industry.
+Madden Girl. We design, source and market a full
+collection of directional young women’s shoes under the
+Madden Girl brand. Madden Girl is geared for young women ages
+13 to 20, and is an “opening price point” brand
+currently sold at major department stores, mid-tier retailers
+and specialty stores.
+Steve Madden Men’s. We design, source and market
+a full collection of directional men’s shoes and
+fashion forward athletic shoes for men under the Steve Madden
+brand to major department stores, mid-tier department stores,
+better specialty stores and independent shoe stores
+throughout the United States as well as in our retail stores.
+Price points for Steve Madden Men’s products range from
+$70 to $100 at retail, targeted at men ages 20 to 40 years
+old. The division maintains open stock inventory positions in
+select patterns to serve the replenishment programs of its
+wholesale customers.
+Steven. We design, source and market women’s
+fashion footwear under the Steven® trademark through
+major department and better footwear specialty stores
+throughout the United States as well as in our retail stores.
+Priced a tier above the Steve Madden brand, Steven products
+are designed to appeal principally to fashion conscious
+women, ages 25 to 45, who shop at department stores and
+footwear boutiques.
+l.e.i. On July 1, 2008, we entered into a license
+agreement with Jones Investment Co. Inc., under which we have
+the right to use the l.e.i.® trademark in connection
+with the sale and marketing of footwear exclusively to
+Wal-Mart.
+Elizabeth and James. On September 10, 2008, we entered
+into a license agreement with Dualstar Entertainment Group,
+LLC, under which we have the right to use the Elizabeth and
+James® trademark in connection with the sale and
+marketing of footwear. The Elizabeth and James® brand,
+which was created by Mary-Kate and Ashley Olsen, is
+distributed through luxury retailers to women ages 25 to 36
+with average retail price points from $200 to $350 for shoes
+and from $350 to $500 for boots.
+4
+Olsenboye. On September 2, 2009, we entered into a
+license agreement with Dualstar Entertainment Group, under
+which we have the right to use the Olsenboye trademark in
+connection with the sale and marketing of footwear
+exclusively to J.C. Penney. Pursuant to the customer’s
+request that we sell directly to the customer, in 2011 we
+transitioned our Olsenboye® footwear business from the
+commission model to the wholesale model.
+Stevies and Steve Madden Kids. Our Stevies and Steve
+Madden Kids brands are designed, sourced and marketed for
+young girls, ages six to twelve, via department stores,
+specialty stores and independent boutiques throughout the
+United States.
+Big Buddha Shoes . On February 10, 2010, we acquired
+all of the outstanding shares of stock of privately held Big
+Buddha from its sole stockholder. Our new Big Buddha Shoe
+brand, which began shipping in the third quarter of 2010, is
+currently sold at department stores and specialty stores.
+Madden. Our Madden brand, which began shipping in the
+first quarter of 2010, includes a full collection of
+men’s shoes. Madden is an “opening price
+point” brand that is currently sold at major department
+stores, mid-tier retailers and specialty stores.
+Betsey Johnson Shoes . On October 5, 2010, the Company
+acquired the Betsey Johnson® trademark and substantially
+all other intellectual property of Betsey Johnson LLC. Betsey
+Johnson shoes are distributed through department stores such
+as Nordstrom and Dillard’s, online retailers such
+Amazon.com and Zappos and to Betsey Johnson retail stores.
+Superga. On February 9, 2011, the Company entered into
+a license agreement with Basic Properties America Inc. and
+BasicNet S.p.A., for use of the Superga® trademark in
+connection with the marketing and sale of footwear. Founded
+in Italy in 1911, Superga is known for its fashion sneakers
+that come in a wide range of colors, fabrics and prints.
+Report. The Report brand was part of our May 2011
+acquisition of Topline. We design, manufacture, market and
+sell our Report brand to major department stores, mid-tier
+department stores, better specialty stores and independently
+owned boutiques throughout the United States.
+International Division. Prior to 2009, our
+international business (the “International
+Division”) operated under the “first cost”
+model and, as a result, the revenues derived from the
+International Division business were included in Commissions
+and Licensing Fees in the Consolidated Statements of Income
+included in our Financial Statements. In order to improve
+operating efficiencies, and to give our international
+partners better visibility in the process, as of January
+2009, we have changed the operating model for our
+International Division to the “wholesale” model.
+The International Division ships products to Asia, Canada,
+Europe, the Middle East, Mexico, Australia and Central and
+South America.
+Private label business. We design, source and market
+private label footwear primarily to specialty retailers,
+mid-tier chains and mass merchants. In addition, we design,
+source and market footwear for third party brands, such as
+Material Girl and Candies.
+Wholesale Accessories Segment 
+Our Wholesale Accessories segment designs, sources and
+markets name brand (including Daisy Fuentes® and
+Olsenboye®, each under license, and our Steve
+Madden®, Steven by Steve Madden®, Betsey
+Johnson®, Betseyville® and Big Buddha® brands)
+and private label fashion handbags and accessories to major
+department stores, mid-tier department stores, value price
+retailers and independent stores throughout the United
+States. In addition, we market and sell cold weather
+accessories, fashion scarves, wraps and other trend
+accessories primarily under our Cejon and the Steve Madden
+brand names and private labels to department stores and
+specialty stores.
+5
+Retail Segment 
+As of December 31, 2011, the Company’s wholly-owned
+subsidiary, Steven Madden Retail, Inc., owned and operated 84
+retail stores including 73 Steve Madden full price stores,
+six Steve Madden outlet stores, three Steven stores, one
+Report store and one e-commerce website. In 2011, we opened
+nine new stores, acquired one store in the Topline
+acquisition and closed ten under-performing stores. Steve
+Madden stores are located in major shopping malls and in
+urban street locations across the United States. In 2011, our
+retail stores generated annual sales in excess of $810 per
+square foot compared to $742 per square foot generated in
+2010. Comparative store sales (sales of those stores,
+including the e-commerce website, that were open for all of
+2011 and 2010) increased 13.3% in fiscal year 2011.
+We anticipate that the Retail segment will continue to
+enhance the Company’s overall sales and profitability
+while increasing recognition for the Steve Madden brand.
+Additionally, our retail stores enable us to evaluate the
+appeal of new products and designs to our customers and
+respond accordingly, which, in turn, strengthens the product
+development efforts of our two Wholesale segments. We expect
+to open between five and seven new retail stores and close
+between three and five under-performing stores during 2012.
+First Cost Segment 
+The First Cost segment represents activities of a wholly
+owned subsidiary of the Company that earns commissions for
+serving as a buying agent for footwear products under private
+labels and licensed brands (such as Candie’s®) for
+many of the country’s large mass-market merchandisers,
+shoe chains and other mid-tier retailers. As a buying agent,
+we utilize our expertise and our relationships with shoe
+manufacturers to facilitate the production of private label
+shoes to our customers’ specifications. We believe that
+by operating in the private label, mass merchandising market,
+we are able to maximize additional non-branded sales
+opportunities. This leverages our overall sourcing and design
+capabilities. Currently, our First Cost segment serves as a
+buying agent for the procurement of women’s,
+men’s and children’s footwear for large
+retailers, including Kohl’s, Bakers, K-Mart and Sears.
+The First Cost segment receives buying agent’s
+commissions from its customers. In addition, by leveraging
+the strength of our Steve Madden brands and product designs,
+we have been able to partially recover our design, product
+and development costs from our suppliers.
+Licensing Segment 
+We license our Steve Madden® and Steven by Steve
+Madden® trademarks for use in connection with the
+manufacture, marketing and sale of sunglasses, eyewear,
+outerwear, bedding, hosiery and women’s fashion
+apparel, jewelry and luggage. In addition, the Company
+licenses the Betsey Johnson® and Betseyville®
+trademarks for use in connection with the manufacture,
+marketing and sale of apparel, jewelry, swimwear, eyewear,
+watches, fragrances and outerwear. Most of our license
+agreements require the licensee to pay us a royalty based on
+actual net sales, a minimum royalty in the event that
+specified net sales targets are not achieved and a percentage
+of sales for advertising the brand.
+See Note Q to our Consolidated Financial Statements for
+additional information relating to our five operating
+segments.
+Product Design and Development 
+We have established a reputation for our creative designs,
+marketing and trendy products at affordable price points. We
+believe that our future success will substantially depend on
+our ability to continue to anticipate and react to changing
+consumer demands in a timely manner. To meet this objective,
+we have developed what we believe is an unparalleled design
+process that allows us to recognize and respond quickly to
+changing consumer demands. Our design team strives to create
+designs which it believes fit our image, reflect current or
+future trends and can be manufactured in a timely and
+cost-effective manner. Most new Steve Madden products are
+tested in select Steve Madden retail stores. Based on these
+tests, among other things, management selects the Steve
+Madden products that are then offered for wholesale and
+retail distribution nationwide. We believe that our design
+and testing process and flexible sourcing models provides the
+Steve Madden brand with a significant competitive advantage
+allowing us to mitigate the risk of incurring costs
+associated with the production and distribution of less
+desirable designs.
+6
+Product Sourcing and Distribution 
+We source each of our product lines separately based on the
+individual design, style and quality specifications of the
+products in such product lines. We do not own or operate
+manufacturing facilities; rather, we use agents and our own
+sourcing office to source our products from independently
+owned manufacturers in China, Mexico, Brazil, India, The
+Netherlands, The Philippines and Italy. We have established
+relationships with a number of manufacturers and agents in
+each of these countries. Although we have not entered into
+any long-term manufacturing or supply contracts, we believe
+that a sufficient number of alternative sources exist for the
+manufacture of our products. We continually monitor the
+availability of the principal materials used in our footwear,
+which are currently available from a number of sources in
+various parts of the world. We track inventory flow on a
+regular basis, monitor sell-through data and incorporate
+input on product demand from wholesale customers. We use
+retailers’ feedback to adjust the production or
+manufacture of new products on a timely basis, which helps
+reduce the close out of slow-moving products.
+We distribute our products from four third-party distribution
+warehouse centers, two located in California, one located in
+Texas and one located in New Jersey, and through one Company
+owned warehouse located in New Jersey. By utilizing
+distribution facilities specializing in distribution
+fulfillment to effect distribution to certain wholesale
+accounts, Steve Madden retail stores and Internet customers,
+we believe that our customers are served more promptly and
+efficiently.
+Customers 
+Our wholesale customers consist principally of better
+department stores, mid-tier department stores, mass
+merchants, specialty stores, including independent boutiques,
+and catalog retailers. Our customers include DSW,
+Macy’s, Nordstrom, Dillard’s, Famous Footwear,
+Lord & Taylor, Target and Wal-mart.
+Distribution Channels 
+United States 
+We sell our products principally through department stores,
+specialty stores, luxury retailers, national chains and mass
+merchants and in our Company-owned retail stores and
+e-commerce website. For the year ended December 31, 2011, our
+Retail segment and our two Wholesale segments generated net
+sales of approximately $154.9 million and $813.6 million, or
+16% and 84% of our total net sales, respectively. Each of
+these distribution channels is described below.
+Steve Madden and Steven Retail Stores. As of December
+31, 2011, we operated 73 Steve Madden full price stores, six
+Steve Madden outlet stores, three Steven stores, one Report
+store and one e-commerce website (at www.stevemadden.com). We
+believe that our retail stores will continue to enhance
+overall sales, profitability, and our ability to react to
+changing consumer trends. Our stores are also a marketing
+tool that allows us to strengthen brand recognition and to
+showcase selected items from our full line of branded and
+licensed products. Furthermore, our retail stores provide us
+with venues through which to test and introduce new products,
+designs and merchandising strategies. Specifically, we often
+test new designs at our Steve Madden retail stores before
+scheduling them for mass production and wholesale
+distribution. In addition to these test marketing benefits,
+we have been able to leverage sales information gathered at
+Steve Madden retail stores to assist our wholesale customers
+in order placement and inventory management.
+A typical Steve Madden store is approximately 1,400 to 1,600
+square feet and is located in a mall or street location that
+we expect will attract the highest concentration of our core
+demographic, style-conscious customer base. The Steven
+stores, which are generally the same size as our Steve Madden
+stores, have a more sophisticated design and format styled to
+appeal to a more mature target audience. In addition to
+carefully analyzing mall demographics and locations, we set
+profitability guidelines for each potential store site.
+Specifically, we target well trafficked sites at which the
+demographics fit our consumer profile and seek new locations
+where the projected fixed annual rent expense stays within
+our guidelines. By setting these guidelines, we seek to
+identify stores that will contribute to our overall
+profitability both in the near and longer terms.
+7
+Department Stores. We currently sell to over 2,300
+doors of 15 department stores throughout the United States.
+Our major accounts include Macy’s, Nordstrom,
+Dillard’s and Lord & Taylor.
+We provide merchandising support to our department store
+customers which includes in-store fixtures and signage,
+supervision of displays and merchandising of our various
+product lines. Our wholesale merchandising effort includes
+the creation of in-store concept shops in which a broader
+collection of our branded products are showcased. These
+in-store concept shops create an environment that is
+consistent with our image and are designed to enable the
+retailer to display and sell a greater volume of our products
+per square foot of retail space. In addition, these in-store
+concept shops encourage longer term commitment by the
+retailer to our products and enhance consumer brand
+awareness.
+In addition to merchandising support, our key account
+executives maintain weekly communications with their
+respective accounts to guide them in placing orders and to
+assist them in managing inventory, assortment and retail
+sales. We leverage our sell-through data gathered at our
+retail stores to assist department stores in allocating their
+open-to-buy dollars to the most popular styles in the product
+line and phasing out styles with weaker sell-throughs, which,
+in turn, reduces markdown exposure at season’s end.
+Specialty Stores/Catalog Sales. We currently sell to
+specialty store locations throughout the United States. Our
+major specialty store accounts include DSW, Famous Footwear
+and Journeys. We offer our specialty store accounts the same
+merchandising, sell-through and inventory tracking support
+offered to our department store accounts. Sales of our
+products are also made through various catalogs, such as
+Victoria’s Secret.
+Internet Sales. We operate an Internet website,
+www.stevemadden.com, where customers can purchase numerous
+styles of our Steve Madden Women’s, Steven, Madden
+Men’s, Big Buddha and Report as well as selected styles
+of Madden Girl, footwear and accessory products.
+International 
+Our products are available in many countries and territories
+worldwide via several retail selling and distribution
+agreements. Under the terms of the various agreements, the
+distributors and retailers are generally required to open a
+minimum number of stores each year and to pay us a fee for
+each pair of footwear purchased and an additional sales
+royalty as a percentage of sales or a predetermined amount
+per unit of sale. Distributors are required to purchase a
+specified minimum number of products within specified
+periods. The agreements we have in place expire at various
+times through February 14, 2031 and include automatic
+renewals at the distributors’ option if certain
+conditions are met. These agreements are exclusive in their
+specific territories, which include Asia, Canada, Europe, the
+Middle East, Mexico, Australia, and Central and South
+America.
+Competition 
+The fashion industry is highly competitive. We compete with
+specialty shoe and accessory companies as well as companies
+with diversified footwear product lines, such as Nine West,
+Jessica Simpson, Guess, Ugg and Aldo. Our competitors may
+have greater financial and other resources than we do. We
+believe effective advertising and marketing, favorable brand
+image, fashionable styling, high quality, value and fast
+manufacturing turnaround are the most important competitive
+factors and intend to continue to employ these elements as we
+develop our products. However, we cannot be certain that we
+will be able to compete successfully against our current and
+future competitors, or that competitive pressures will not
+have a material adverse effect on our business, financial
+condition and results of operations.
+8
+Marketing and Sales 
+We have focused on creating an integrated brand building
+program to establish Steve Madden as a leading designer of
+fashion footwear for style-conscious young women and men.
+Principal marketing activities include product placements in
+lifestyle and fashion magazines, personal appearances by our
+founder and Creative and Design Chief, Steve Madden, and
+in-store promotions. We continue to promote our e-commerce
+website (www.stevemadden.com) where customers can purchase
+products under the brands Steve Madden, Steven, Steve Madden
+Men’s and selected styles of Madden Girl footwear, as
+well as view exclusive content, participate in contests and
+“live chat” with customer service
+representatives.
+Management Information Systems (MIS) Operations 
+Sophisticated information systems are essential to our
+ability to maintain our competitive position and to support
+continued growth. We operate on a dual AS/400 system which
+provides system support for all aspects of our business,
+including manufacturing purchase orders, customer purchase
+orders, order allocations, invoicing, accounts receivable
+management, quick response replenishment, point-of-sale
+support and financial and management reporting functions. We
+have a PKMS bar coded warehousing system that is integrated
+with the wholesale system in order to provide accurate
+inventory positions and quick response size replenishment for
+our customers. In addition, we have installed an electronic
+data interchange (“EDI”) system which provides a
+computer link between us and certain wholesale customers that
+enables both the customer and us to monitor purchases,
+shipments and invoicing. The EDI system also improves our
+ability to respond to customer inventory requirements on a
+weekly basis. We are currently implementing a new Company
+wide ERP system which we expect to go live in the summer of
+this year. We expect the new system to provide operating
+efficiencies and enhance customer service.
+Intellectual Property 
+Trademarks 
+We own numerous trademarks, including, among others:
+·
+Steve Madden®
+·
+Steve Madden plus Design®
+·
+Madden Girl®
+·
+Steven®
+·
+Steven by Steve Madden®
+·
+SM New York®
+·
+Madden Girl by Steve Madden®
+·
+Eyeshadows by Steve Madden®
+·
+Soho Cobbler®
+9
+·
+Steve Madden Luxe®
+·
+Natural Comfort®
+·
+Arc Stripe Design®
+·
+Torch Stripe Design®
+·
+Trissino®
+·
+Stacey and Steve®
+·
+Stacey and Steve Stylized Design®
+·
+Heart Design by Steve Madden®
+·
+Steve Madden and Heart Design®
+·
+Stevies®
+·
+Stevies by Steve Madden®
+·
+Big Buddha®
+·
+Buddha Lux®
+·
+Betsey Johnson®
+·
+Betseyville®
+·
+Steve Madden’s Fix® (logo and various
+trademarks)
+·
+PEACE LOVE SHOES® (logo and various trademarks)
+·
+Cejon®
+·
+Report®
+·
+Report Signature®
+·
+R2®
+We consider each of the above marks to be among our most
+valuable assets and have registered these marks in numerous
+countries and in numerous International Classes. From time to
+time we adopt new trademarks in connection with the marketing
+of new product lines. We believe that our trademarks have
+significant value and are important for purposes of
+identifying the Company, the marketing of our products and
+the products of our licensees, distinguishing them from the
+products of others. We act aggressively to register and
+vigorously protect our trademarks against infringement. There
+can be no assurance, however, that we will be able to
+effectively obtain rights to our marks throughout all of the
+countries of the world. Moreover, no assurance can be given
+that others will not assert rights in or ownership of, our
+marks and other proprietary rights or that we will be able to
+resolve any such conflicts successfully. Our failure to
+protect such rights from unlawful and improper appropriation
+may have a material adverse effect on our business, financial
+condition, results of operations and liquidity.
+10
+Trademark Licensing 
+Our strategy for the continued growth of the Company’s
+business includes expanding the Company’s presence
+beyond footwear and accessories through the selective
+licensing of our brands. As of December 31, 2011, we license
+our Steve Madden® and Steven by Steve Madden®
+trademarks for use in connection with the manufacture,
+marketing and sale of sunglasses, eyewear, outerwear,
+bedding, hosiery and women’s fashion apparel, jewelry
+and luggage. In addition, the Company licenses the Betsey
+Johnson® and Betseyville® trademarks for use in
+connection with the manufacture, marketing and sale of
+apparel, jewelry, swimwear, eyewear, watches, fragrances and
+outerwear. Most of our license agreements require the
+licensee to pay us a royalty based on actual net sales, a
+minimum royalty in the event that specified net sales targets
+are not achieved and a percentage of sales for advertising
+the brand. See Notes A13 and O4 to our Consolidated Financial
+Statements included in this Annual Report on Form 10-K for
+additional disclosure regarding these licensing arrangements.
+In addition to the licensing of our trademarks, we also
+license from third parties trademarks used in connection with
+certain of our product lines. Under licenses from Dualstar
+Entertainment Group, LLC, the Company has the right to use
+the Olsenboye® trademark in connection with the sale and
+marketing of footwear and accessories and the Elizabeth and
+James® trademark in connection with the sale and
+marketing of footwear. The term of these licenses expire on
+December 31, 2013 and March 31, 2012, respectively. In
+addition, we hold licenses from Jones Investment Co. Inc.
+under which the Company has the right to use the GLO
+Jeans® trademark in connection with the sale and
+marketing of women’s footwear exclusively to K-Mart and
+the l.e.i.® trademark in connection with the marketing
+and sale of women’s footwear exclusively to Wal-Mart.
+The term of the licenses from Jones Investment Co, Inc.
+expire on December 31, 2012 and December 31, 2014,
+respectively. We also hold a license from Dafu Licensing,
+Inc. to design, manufacture and distribute handbags and belts
+and related accessories under the DF Daisy Fuentes® and
+the Daisy Fuentes® brands. The term of our license with
+Dafu Licensing, Inc. expires on December 31, 2012. We also
+hold a license from Basic Properties America Inc. and
+BasicNet S.p.A under which we have the right to use the
+Superga® trademark in connection with the sale and
+marketing of footwear. The initial term of our license with
+Basic Properties America Inc. and BasicNet S.p.A expires on
+December 31, 2013, with a four year renewal term at our
+option if certain provisions are met. We also hold a license
+from G-III Apparel Group to design, manufacture and
+distribute eyewear and sunglasses under the Andrew Marc
+brand. The initial term of the license with G-III Apparel
+Group expires on July 31, 2013, with a three year renewal
+term at our option if certain provisions are met.
+Substantially all of these licensing agreements require us to
+make royalty and advertising payments to the licensor equal
+to a percentage of our net sales or a minimum royalty and
+advertising payment in the event that specified net sales
+targets are not achieved.
+Employees 
+On February 1, 2012, we employed approximately 2,370
+employees, of whom approximately 1,620 work on a full-time
+basis and approximately 750 work on a part-time basis, with
+most of the part-time employees being employed in the Retail
+segment. Approximately 1,750 of our employees are located in
+the United States and approximately 620 employees are located
+in Hong Kong and the Peoples Republic of China. None of our
+employees are represented by a union. Our management
+considers relations with our employees to be good. The
+Company has never experienced a material interruption of its
+operations due to a labor dispute.
+11
+Seasonality 
+Historically, some of our businesses, including our Retail
+segment, have experienced holiday retail seasonality. In
+addition to seasonal fluctuations, our operating results
+fluctuate from quarter to quarter as a result of the timing
+of holidays, weather, the timing of larger shipments of
+footwear, market acceptance of our products, product mix,
+pricing and presentation of the products offered and sold,
+the hiring and training of additional personnel, inventory
+write downs for obsolescence, the cost of materials, the
+product mix between wholesale, retail and licensing
+businesses, the incurrence of other operating costs and
+factors beyond our control, such as general economic
+conditions and actions of competitors.
+Backlog 
+We had unfilled wholesale customer orders of $280.8 million
+and $161.8 million, as of February 1, 2012 and 2011,
+respectively. This increase in orders is primarily due to the
+addition of our recently acquired Topline and Cejon
+businesses. Our backlog at a particular time is affected by a
+number of factors, including seasonality, timing of market
+weeks and wholesale customer purchases of our core products
+through our open stock program. Accordingly, a comparison of
+backlog from period to period may not be indicative of
+eventual shipments.
\ No newline at end of file
diff --git a/raw/filings/0000913241/2011/0001019056-12-000270/item13.txt b/raw/filings/0000913241/2011/0001019056-12-000270/item13.txt
new file mode 100644
index 0000000000000000000000000000000000000000..c943bcd984eadd125394073ecd413cfe9d4ccd82
--- /dev/null
+++ b/raw/filings/0000913241/2011/0001019056-12-000270/item13.txt
@@ -0,0 +1,7 @@
+ITEM 13
+CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
+DIRECTOR INDEPENDENCE
+The information required to be furnished pursuant to this
+Item will be set forth in our proxy statement for the 2012
+Annual Meeting of Stockholders, and is incorporated herein by
+reference.
\ No newline at end of file
diff --git a/raw/filings/0000913241/2011/0001019056-12-000270/item9a.txt b/raw/filings/0000913241/2011/0001019056-12-000270/item9a.txt
new file mode 100644
index 0000000000000000000000000000000000000000..93d14d4dd2725e3aab68e9ae4ca918d07841d17a
--- /dev/null
+++ b/raw/filings/0000913241/2011/0001019056-12-000270/item9a.txt
@@ -0,0 +1,80 @@
+ITEM 9A
+CONTROLS AND PROCEDURES
+Disclosure Controls and Procedures 
+As required by Rule 13a-15(b) of the Exchange Act, our
+management, including our Chief Executive Officer and Chief
+Financial Officer, has evaluated the effectiveness of our
+disclosure controls and procedures as of the end of the
+fiscal year covered by this Annual Report on Form 10-K. Based
+on that evaluation, the Chief Executive Officer and Chief
+Financial Officer have concluded that our 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 on Form 10-K.
+Management’s Annual Report on Internal Control Over
+Financial Reporting 
+Management of Steven Madden, Ltd. is responsible for
+establishing and maintaining adequate internal control over
+financial reporting (as defined in Rule 13a-15(f) of the
+Exchange Act).
+Our internal control over financial reporting is a process
+designed by, or under the supervision of, our principal
+executive officer and principal financial officer, and
+effected by the board of directors, management, and other
+personnel, to provide reasonable assurance regarding the
+reliability of financial reporting and the preparation of
+financial statements for external purposes in accordance with
+U.S. generally accepted accounting principles. Our internal
+control over financial reporting includes those policies and
+procedures that (1) pertain to maintenance of records that,
+in reasonable detail, accurately and fairly reflect the
+transactions and dispositions of our assets; (2) provide
+reasonable assurance that transactions are recorded as
+necessary to permit preparation of financial statements in
+accordance with U.S. generally accepted accounting
+principles, and that our receipts and expenditures are being
+made only in accordance with authorizations of our management
+and directors; and (3) provide reasonable assurance regarding
+prevention or timely detection of unauthorized acquisition,
+use, or disposition of our assets that could have a material
+effect on the financial statements.
+33
+Because of its inherent limitations, internal control over
+financial reporting may not prevent or detect misstatements.
+Also, projections of any evaluation of effectiveness to
+future periods are subject to the risk that controls may
+become inadequate because of changes in conditions, or that
+the degree of compliance with the policies or procedures may
+deteriorate. We have excluded Topline and Cejon, which were
+acquired on May 20, 2011 and May 25, 2011, respectively, from
+the scope of our annual report on internal control over
+financial reporting as of December 31, 2011. These operations
+in the aggregate represent approximately 31% of our total
+assets at December 31, 2011 and approximately 18% and 13% of
+our revenues and net income for the year ended December 31,
+2011, respectively.
+With the participation of the Chief Executive Officer and the
+Chief Financial Officer, our management conducted an
+evaluation of the effectiveness, as of the end of our fiscal
+year ended December 31, 2011, of our internal control over
+financial reporting based on the framework and criteria
+established in Internal Control–Integrated Framework,
+issued by the Committee of Sponsoring Organizations of the
+Treadway Commission. Based on this evaluation our management
+has concluded that, as of December 31, 2011, our internal
+control over financial reporting was effective.
+Our independent registered accounting firm, EisnerAmper LLP,
+has audited the Company’s consolidated financial
+statements and the effectiveness of the Company’s
+internal control over financial reporting as of December 31,
+2011. Their report appears in this Annual Report on Form
+10-K.
+34
+Changes in Internal Control Over Financial Reporting 
+There was no change in our internal control over financial
+reporting, identified in connection with the evaluation
+required by paragraph (d) of Rule 13a-15 of the Exchange Act,
+that occurred during the fiscal quarter ended December 31,
+2011, which has materially affected, or is reasonably likely
+to materially affect, our internal control over financial
+reporting.
\ No newline at end of file
diff --git a/raw/filings/0000913241/2011/0001019056-12-000270/rp_note.txt b/raw/filings/0000913241/2011/0001019056-12-000270/rp_note.txt
new file mode 100644
index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391
diff --git a/raw/filings/0000913241/2011/0001019056-12-000270/rpt_disclosure.txt b/raw/filings/0000913241/2011/0001019056-12-000270/rpt_disclosure.txt
new file mode 100644
index 0000000000000000000000000000000000000000..434c05dded49e6687511779a9aa34607da6fcce6
--- /dev/null
+++ b/raw/filings/0000913241/2011/0001019056-12-000270/rpt_disclosure.txt
@@ -0,0 +1,135 @@
+Certain Relationships and Related Party Transactions 
+JLM
+Consultants, Inc., a company wholly-owned by John L. Madden. Since 2004, the Company has engaged JLM Consultants, Inc.,
+a company wholly-owned by John L. Madden, a member of the Board and the brother of Steven Madden, the Company’s founder
+and Creative and Design Chief, to provide consulting services to the Company with respect to the development of international
+sales of the Company. On February 23, 2012, the Company entered into a consulting agreement (the “JLM Consulting Agreement”)
+with JLM Consultants, Inc., which replaced a prior consulting agreement, and continues in effect until December 31, 2014. In accordance
+with the terms of the JLM Consulting Agreement, for the 2012 Fiscal Year, JLM Consultants, Inc. received the following compensation
+from the Company for services rendered: (a) a commission equal to 1.5% of international sales and 10% of retail royalty income,
+(b) a monthly draw in the amount of $25,000, which amount was offset against commissions earned, (c) a $1,000 per month travel
+allowance and (d) $4,599.80 per month reimbursement for health insurance premiums for John L. Madden. Pursuant to this arrangement,
+JLM Consultants, Inc. received a total of $1,447,270 from the Company in the 2012 Fiscal Year. 
+Pursuant
+to the JLM Consulting Agreement, on January 2, 2013, the Company issued 48,008 restricted shares of the Company’s Common
+Stock to JLM Consultants, Inc. under the Steven Madden, Ltd. 2006
+Stock Incentive Plan, as amended (the “2006 Plan”), which shares will vest in twelve substantially equal quarterly
+installments over a three-year period commencing on April 1, 2013 and continuing to vest quarterly thereafter until the final
+installment vests on January 1, 2016. 
+Steven
+Madden Employment Agreement. Effective as of July 1, 2005, the Company amended and restated its employment agreement
+with the Company’s founder and Creative and Design Chief, Steven Madden, pursuant to which Mr. Madden agreed to continue
+to serve as the Company’s Creative and Design Chief. The term of Mr. Madden’s employment under his employment agreement
+commenced on July 1, 2005 and, in accordance with the amendment of the agreement effective December 31, 2011, will end on December
+31, 2023. Prior to this recent amendment, the agreement had provided for an annual salary of $600,000, with a 7% increase of base
+salary on a compound basis in each of the third, fifth, seventh and ninth years of the agreement. The agreement had also provided
+for an annual cash bonus in an amount equal to at least 2% of the Company’s EBITDA (the “Annual Bonus”) and
+an annual cash bonus in relation to “new business” (as defined in the agreement) in an amount equal to at least (i)
+2.5% of new business gross direct revenues plus (ii) 10% of all license or other fee income above $2,000,000 (the “New Business
+Bonus”). The agreement, as amended, increases Mr. Madden’s annual base salary but eliminates the Annual
+Bonus and the New Business Bonus and provides that all cash bonuses subsequent to the fiscal year ended December 31, 2011 will
+be at the sole discretion of the Company’s Board of Directors. Under the agreement, as amended, Mr. Madden’s annual
+base salary was fixed at $5,416,667 in 2012, $7,416,667 in 2013, $9,666,667 in 2014, $11,916,667 in 2015 and $10,697,917 in 2016
+and in each year thereafter through the end of the term of employment. In addition, the amended agreement entitles Mr. Madden
+to an annual life insurance premium reimbursement of up to $200,000. The amendment also eliminates an annual non-accountable expense
+allowance of $200,000 that had been previously provided to Mr. Madden under the agreement. Pursuant to the amended agreement,
+on February 8, 2012, Mr. Madden was granted 975,371 restricted shares of Common Stock, valued at approximately $40 million, under
+the 2006 Plan. The restricted Common Stock will vest in equal annual installments over seven
+years commencing on December 31, 2017 through December 31, 2023, subject to Mr. Madden’s continued employment with the Company
+on each such vesting date. 
+14 
+On
+June 30, 2012, pursuant to an election right granted to him under the agreement, as amended, Mr. Madden notified the Company of
+his election to receive an additional restricted stock award valued at $40 million in consideration of a reduction in his annual
+base salary in years subsequent to the 2012 Fiscal Year. Accordingly, on July 3, 2012, Mr. Madden was issued 1,262,228 restricted
+shares of Common Stock under the 2006 Plan. The restricted Common Stock will vest in equal annual installments over six years
+commencing on December 31, 2018 through December 31, 2023, subject to Mr. Madden’s continued employment with the Company
+on each such vesting date. As a result of his election to receive an additional restricted stock award, Mr. Madden’s annual
+base salary for years subsequent to the 2012 Fiscal Year has been reduced as follows: $4,000,000 in 2013, $6,125,000 in 2014,
+$8,250,000 in 2015 and $7,026,042 in 2016 and in each year thereafter through the end of the term of employment. 
+Mr.
+Madden is also eligible to receive annually, on or about the date of the Company’s annual meeting of stockholders (but not
+later than June 30 th ), an option grant (the “Annual Option”) to purchase a number of shares of Common Stock,
+with such number to be equal to the greater of (a) 100% of the largest aggregate number of shares of Common Stock available upon
+the exercise of an option or options granted to any other continuing full-time employee of the Company during the preceding twelve-month
+period and (b) 100,000 shares of Common Stock; provided, however, that a grant to Mr. Madden in excess of 150% of the number of
+shares of Common Stock subject to options granted to such other continuing full-time employee would require stockholder approval.
+Any Annual Option granted to Mr. Madden would vest quarterly over a one-year period following the grant date and would be exercisable
+at a price equal to the closing price of the Company’s Common Stock on the grant date for a period of five years following
+the grant date. In addition to the Annual Option, the agreement,
+as amended, provides for a potential additional one-time stock option grant to purchase 500,000 shares of the Company’s
+Common Stock (the number of option shares to be subject to adjustment in the event of a future change
+in capital structure of the Company resulting from a stock split, reverse stock split or other transaction or event having similar
+effect) in the event that the Company achieves earnings per share, on a fully-diluted basis, equal to $3.00 in any fiscal
+year ending December 31, 2015 or after. If granted, the option would vest in equal annual installments of 20% over a five-year
+period and be exercisable for a period of seven years at a price equal to the closing price of the Company’s Common Stock
+on the date immediately preceding the grant date. 
+In
+the event of Mr. Madden’s death, his employment agreement provides for the payment to Mr. Madden’s estate of his base
+salary for the 12-month period immediately subsequent to the date of his death. Further, in the event that Mr. Madden’s
+employment agreement is terminated due to Mr. Madden’s total disability (as defined in the agreement), “for cause”
+(as defined in the agreement) or due to Mr. Madden’s resignation, the Company is obligated to pay Mr. Madden the amount
+of compensation that is accrued and unpaid through the date of termination. In the event Mr. Madden’s employment agreement
+is terminated for any reason (other than “for cause” or due to his death, total disability or resignation), the Company
+is obligated to pay Mr. Madden, in installments, the balance of his base salary that would have been paid by the Company under
+the agreement for the full term of the agreement. If, during the period commencing 120 days prior to a “change of control”
+(as defined in the employment agreement) transaction and ending on the first anniversary of a change of control transaction, Mr.
+Madden’s employment is terminated by the Company other than for cause or by the resignation of Mr. Madden for “good
+reason” (as defined in the employment agreement), or if Mr. Madden resigns for good reason or without good reason within
+30 days following a change of control transaction, all unvested options to purchase shares of Common Stock held by Mr. Madden
+will vest on the date of termination or resignation and Mr. Madden will be entitled to receive a lump sum cash payment equal to
+the amount of compensation that is accrued and unpaid through the date of termination plus $35 million. Mr. Madden’s employment
+agreement contains other customary provisions, including provisions regarding expense reimbursement, confidentiality, solicitation
+and competition. 
+15 
+For
+the 2012 Fiscal Year, Mr. Madden earned $5,416,667 in base salary and received $200,000 for the payment of an annual life insurance
+premium. As an Annual Option, on June 4, 2012, Mr. Madden was granted an option to purchase 100,000 restricted shares of Common
+Stock, under the 2006 Plan having an exercise price of $38.99 per share. The option vests in equal installments of 25,000 shares
+on each of August 25, 2012, November 25, 2012, February 25, 2013 and May 25, 2013. 
+Loan
+to Steven Madden. On June 25, 2007, the Company made a loan to Steven Madden, its Creative and Design Chief and a principal
+stockholder of the Company, in the amount of $3,000,000, in order for Mr. Madden to satisfy a personal tax obligation resulting
+from the exercise of a stock option which was due to expire and to hold the underlying shares of Common Stock. Mr. Madden executed
+a promissory note in favor of the Company, which is secured by a pledge of 315,000 shares of the Company’s Common Stock
+beneficially owned by Mr. Madden. There have been successive amendments to the note, the most recent of which occurred on January
+3, 2012, at which time the note was amended and restated to extend the maturity date of the obligation to December 31, 2023 and
+eliminate the accrual of interest after December 31, 2011. Prior to the most recent amendment, the note had been accruing interest
+at the rate of 6% per annum. In addition, the amended and restated
+note provides that, commencing on December 31, 2014 and annually on each December 31 thereafter through the maturity date, one-tenth
+of the principal amount thereof, together with accrued interest, will be cancelled by the Company provided that Mr. Madden continues
+to be employed by the Company on each such December 31. Contemporaneously, the Company will release
+a number of pledged shares of Common Stock from the pledge generally correlating to the amount of indebtedness cancelled on such
+date. As of December 31, 2011, interest in the amount of $1,090,000 had accrued on the principal amount of the note and, as noted
+above, interest was eliminated after December 31, 2011. 
+Steven
+Madden is the brother of John L. Madden, who has been a director of the Company since 1993. 
+Review, Approval or Ratification of Transactions with Related Persons 
+The
+Company’s written Conduct Code and Employee Handbook prohibit all conflicts of interest. Under the Conduct Code, conflicts
+of interest occur when private or family interests interfere in any way, or even appear to interfere, with the interests of the
+Company. The Company’s prohibition on conflicts of interest under the Conduct Code includes any related person transaction. 
+Related
+person transactions must be approved by the Board, or by a committee of the Board consisting solely of independent directors,
+who will approve the transaction only if they determine that it is in the best interests of the Company. In considering the transaction,
+the Board or committee will consider all relevant factors, including, as applicable, (i) the Company’s business rationale
+for entering into the transaction; (ii) the alternatives to entering into a related person transaction; (iii) whether the transaction
+is on terms comparable to those available to third parties or, in the case of employment relationships, to employees generally;
+(iv) the potential for the transaction to lead to an actual or apparent conflict of interest and any safeguards imposed to prevent
+such actual or apparent conflicts; and (v) the overall fairness of the transaction to the Company. 
+The
+Company has multiple processes for reporting conflicts of interests, including related person transactions. Under the Conduct
+Code, all employees are required to report any actual or apparent conflict of interest, or potential conflict of interest, to
+management. The Chief Financial Officer distributes a questionnaire to the Company’s executive officers and management personnel
+on a quarterly basis and distributes a questionnaire to the members of the Board of Directors on an annual basis requesting certain
+information regarding, among other things, their immediate family members, employment and beneficial ownership interests, which
+information is then reviewed for any conflicts of interest under the Conduct Code. 
+16 
+The
+Board of Directors, the Audit Committee and the Disclosure Committee, which is comprised of management personnel, discuss the
+related party transactions, specifically, and in connection with the regular review processes attendant to the Company’s
+periodic filings, including related party transaction disclosures. 
+If
+a director is a party to or in some manner involved in a transaction involving the Company, he will be recused from all discussions
+and decisions about the transaction. The transaction must be approved in advance whenever practicable, and if not practicable,
+must be ratified as promptly as practicable.
\ No newline at end of file
diff --git a/raw/filings/0000913241/2013/0001445305-14-000668/filing.txt b/raw/filings/0000913241/2013/0001445305-14-000668/filing.txt
new file mode 100644
index 0000000000000000000000000000000000000000..d661e5ad88ad1148c93ad47252a40911d7d98a88
--- /dev/null
+++ b/raw/filings/0000913241/2013/0001445305-14-000668/filing.txt
@@ -0,0 +1,4064 @@
+10-K
+1
+shoo-20131231x10k.htm
+10-K
+SHOO-2013.12.31-10K 
+UNITED STATES 
+SECURITIES AND EXCHANGE COMMISSION 
+WASHINGTON, D.C. 20549 
+FORM 10-K 
+(Mark One) 
+x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
+For the fiscal year ended December 31, 2013 
+or 
+o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
+For the transition period from ________ to ________ 
+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: 
+Title of Each Class 
+Name of Each Exchange on Which Registered 
+Common Stock, par value $.0001 per share 
+The NASDAQ Stock Market LLC 
+Preferred Stock Purchase Rights 
+The NASDAQ Stock Market LLC 
+Securities Registered Pursuant to Section 12(g) of the Act: None 
+Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. 
+Yes x No o 
+Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Act. 
+Yes o No x 
+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 o 
+Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). 
+Yes x No o 
+Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) 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. o 
+Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. 
+Large accelerated filer x 
+Accelerated filer o 
+Non-accelerated filer o (do not check if smaller reporting company) 
+Smaller reporting company o 
+Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). 
+Yes o No x 
+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, 2013, the last business day of the registrant's most recently completed second fiscal quarter, was approximately $2,147,439,000 (based on the closing sale price of the registrant's common stock on that date as reported on The NASDAQ Global Select Market). 
+The number of outstanding shares of the registrant's common stock as of February 26, 2014 was 66,841,151 shares. 
+DOCUMENTS INCORPORATED BY REFERENCE: 
+PART III INCORPORATES CERTAIN INFORMATION BY REFERENCE FROM THE REGISTRANT'S DEFINITIVE PROXY STATEMENT FOR THE REGISTRANT'S 2014 ANNUAL MEETING OF STOCKHOLDERS. 
+TABLE OF CONTENTS 
+SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS 
+1 
+PART I 
+ITEM 1 BUSINESS 
+1 
+ITEM 1A RISK FACTORS 
+9 
+ITEM 1B UNRESOLVED STAFF COMMENTS 
+15 
+ITEM 2 PROPERTIES 
+15 
+ITEM 3 LEGAL PROCEEDINGS 
+17 
+ITEM 4 MINE SAFETY DISCLOSURES 
+18 
+PART II 
+ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER 
+MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES 
+18 
+ITEM 6 SELECTED FINANCIAL DATA 
+20 
+ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 
+AND RESULTS OF OPERATIONS 
+22 
+ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 
+30 
+ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 
+30 
+ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON 
+ACCOUNTING AND FINANCIAL DISCLOSURE 
+30 
+ITEM 9A CONTROLS AND PROCEDURES 
+30 
+ITEM 9B OTHER INFORMATION 
+31 
+PART III 
+ITEM 10 DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 
+31 
+ITEM 11 EXECUTIVE COMPENSATION 
+31 
+ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND 
+MANAGEMENT AND RELATED STOCKHOLDER MATTERS 
+31 
+ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND 
+DIRECTOR INDEPENDENCE 
+31 
+ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES 
+31 
+PART IV 
+ITEM 15 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES 
+32 
+2 
+SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS 
+This Annual Report on Form 10-K contains “forward-looking statements” (as that term is defined in the federal securities laws), which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements with regard to future revenue, projected 2014 results, earnings, spending, margins, cash flow, orders, expected timing of shipment of products, inventory levels, future growth or success in specific countries, categories or market sectors, continued or expected distribution to specific retailers, liquidity, capital resources and market risk, strategies and objectives and other future events. More generally, forward-looking statements include, without limitation, any statement that may predict, forecast, indicate or simply state future results, performance or achievements, and can be identified by the use of forward looking language such as “believe,” “anticipate,” “expect,” “estimate,” “intend,” “plan,” “project,” “will be,” “will continue,” “will result,” “could,” “may,” “might,” or any variations of such words with similar meanings. Factors that may affect our results include, but are not limited to, the risks and uncertainties discussed in Item 1A of this Annual Report on Form 10-K. 
+Any such forward-looking statements are subject to risks and uncertainties, many of which are beyond our control, which may influence the accuracy of the statements and the projections upon which the statements are based and could cause our actual results to differ materially from those projected in forward-looking statements. As such, we strongly caution you that these forward-looking statements are not guarantees of future performance or events. Our actual results, performance and achievements could differ materially from those expressed or implied in these forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether from new information, future events or otherwise. 
+PART I 
+ITEM 1 BUSINESS 
+($ in thousands, except share and per share data) 
+Overview 
+Steven Madden, Ltd. and its subsidiaries (collectively, the “Company”) design, source, market and sell fashion-forward name brand and private label footwear for women, men and children and name brand and private label fashion handbags and accessories and license our trademarks for use in connection with the manufacture, marketing and sale of various products of our licensees. Our products are marketed through our retail stores and our e-commerce websites, as well as better department stores, major department stores, mid-tier department stores, specialty stores, luxury retailers, value priced retailers, national chains, mass merchants and catalog retailers throughout the United States and Canada. In addition, we have special distribution arrangements for the marketing of our products in Asia, Europe, the Middle East, Mexico, India, South Africa and South and Central America. We offer a broad range of updated styles designed to establish or complement and capitalize on market trends. We have established a reputation for design creativity and our ability to offer quality products in popular styles at affordable prices, delivered in an efficient manner and time frame. 
+Steven Madden, Ltd. was incorporated as a New York corporation on July 9, 1990, reincorporated under the same name in Delaware in November 1998 and completed its initial public offering in December 1993. Shares of Steven Madden, Ltd. common stock, $.0001 par value per share, currently trade on the NASDAQ Global Select Market under the symbol “SHOO”. Our principal executive offices are located at 52-16 Barnett Avenue, Long Island City, NY 11104. Our telephone number is (718) 446-1800 and our website address is http://www.stevemadden.com. 
+We file Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other reports and information with the Securities and Exchange Commission (the “SEC”) pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). These reports, any amendments to such reports, and our proxy statements for our stockholders' meetings are available free of charge, on the "Investor Relations" section of our website as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. We will provide paper copies of such filings free of charge upon request. The public may read and copy any materials filed by us with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information regarding the operation of the SEC's Public Reference Room is available by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding us, which is available at http://www.sec.gov. 
+Fiscal year 2013 represents the fifth consecutive year that the Company achieved record sales and earnings. Net sales for 2013 increased 7% to $1,314,223 from $1,227,072 in the same period of last year. Net income attributable to Steven Madden, 
+1 
+Ltd. increased 10% to $132,007 in 2013 compared to $119,626 in the same period of last year. Diluted earnings per share in 2013 increased to $1.98 per share on 66,836,000 diluted weighted average shares outstanding compared to $1.81 per share on 66,255,000 diluted weighted average shares outstanding in the prior year. 
+On August 19, 2013 our Board of Directors declared a three-for-two stock split of the Company's outstanding shares of common stock, effected in the form of a stock dividend on the Company's outstanding common stock. Stockholders of record at the close of business on September 20, 2013 received one additional share of Steven Madden. Ltd., common stock for every two shares of common stock owned on that date. The additional shares were distributed to the Company's stockholders on October 1, 2013. Stockholders received cash in lieu of any fractional shares of common stock they otherwise would have received in connection with the dividend. All share and per share data provided herein gives effect to this stock split, applied retroactively. 
+Product Distribution Segments 
+Our business is comprised of five distinct segments: Wholesale Footwear, Wholesale Accessories, Retail, First Cost and Licensing. 
+Our Wholesale Footwear segment is comprised of the following brands: Steve Madden Women's®, Madden Girl®, Steve Madden Men's®, Steven, l.e.i.® (under license), Olsenboye® (under license), Stevies®, Steve Madden Kids®, Madden®, Betsey Johnson® shoes, Report®, Superga® (under license), and includes our International business and certain private label footwear business. Our Wholesale Accessories segment includes Big Buddha, Betseyville, Betsey Johnson, Steve Madden, Steven, Cejon and, through a license agreement Olsenboye® accessories brands and includes our International business and certain private label accessories business. Steven Madden Retail, Inc., our wholly-owned retail subsidiary, operates Steve Madden, Steven and Superga retail stores and Steve Madden, Superga, Betsey Johnson and FREEBIRD by Steven e-commerce websites. The First Cost segment represents activities of a subsidiary that earns commissions for serving as a buying agent for footwear products under private labels for many of the country's large mass-market merchandisers, shoe chains and other value priced retailers. Our Licensing segment is engaged in the licensing of the Steve Madden and Steven by Steve Madden marks for use in connection with the manufacture, marketing and sale of sunglasses, eyewear, outerwear, bedding, hosiery, women's fashion apparel, jewelry, watches and luggage. In addition, we license our Betsey Johnson® and Betseyville® marks for use in connection with the manufacture, marketing and sale of apparel, jewelry, swimwear, eyewear, watches, fragrances and outerwear. 
+Wholesale Footwear Segment 
+Steve Madden Women's. We design, source and market our Steve Madden brand to department stores, specialty stores, luxury retailers, value priced retailers, national chains, mass merchants, online retailers and catalog retailers throughout the United States and Canada. The Steve Madden brand has become a leading life-style brand in the fashion conscious marketplace. To serve our customers (primarily women ages 16 to 35), Steve Madden Women's offers fashion forward footwear designed to appeal to customers seeking exciting, new footwear designs at affordable prices. New products for Steve Madden Women's are test marketed at Company-owned retail stores. Typically, within a few days, we can determine if the test product appeals to our customers. This enables us to use our flexible sourcing model to rapidly respond to changing trends and customer preferences, which we believe is essential for success in the fashion industry. 
+Madden Girl. We design, source and market a full collection of directional young women's shoes under the Madden Girl brand. Madden Girl is geared for young women ages 13 to 20, and is an “opening price point” brand currently sold at major department stores, mid-tier retailers and specialty stores. 
+Steve Madden Men's. We design, source, and market a lifestyle collection of men's footwear for the fashion forward man, ages 18 to 45 years old, under the Steve Madden® brand. Retail channels include major department stores, mid-tier department stores, better specialty stores, online retailers and independent shoe stores throughout the United States. Price points for Steve Madden Men's products range from $70 to $150 at retail. 
+Madden. T he Madden brand is a streetwear focused collection of footwear geared to meet the trend directions of the 13 to 21 year old fashion consumer. Madden products range from $45 to $85 and are sold to national specialty stores, better department stores, mid tier department stores, online retailers and independent specialty stores. 
+Steven. We design, source and market women's fashion footwear under the Steven® trademark through major department and better footwear specialty stores throughout the United States as well as in our retail stores. Priced a tier above the Steve 
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+Madden brand, Steven products are designed to appeal principally to fashion conscious women, ages 25 to 45, who shop at department stores and footwear boutiques. 
+l.e.i. On July 1, 2008, we entered into a license agreement with Jones Investment Co. Inc., under which we have the right to use the l.e.i.® trademark in connection with the sale and marketing of footwear exclusively to Wal-Mart. 
+Olsenboye. On September 2, 2009, we entered into a license agreement with Dualstar Entertainment Group, under which we have the right to use the Olsenboye® trademark in connection with the sale and marketing of footwear exclusively to J.C. Penney. Pursuant to the customer's request that we sell directly to the customer, in 2011 we transitioned our Olsenboye® footwear business from the commission model to the wholesale model. 
+Stevies and Steve Madden Kids. Our Stevies® and Steve Madden Kids brands are designed, sourced and marketed to appeal to young girls, ages six to 12, and are sold at department stores, specialty stores, online retailers and independent boutiques throughout the United States. 
+Betsey Johnson Shoes . On October 5, 2010, the Company acquired the Betsey Johnson® trademark and substantially all other intellectual property of Betsey Johnson LLC. The Betsey Johnson® and Betseyville shoe brands are distributed through department stores such as Nordstrom, Dillard's and J.C. Penney and online retailers such as Amazon.com and Zappos. 
+Superga. On February 9, 2011, the Company entered into a license agreement with Basic Properties America Inc. and BasicNet S.p.A., for the use of the Superga® trademark in connection with the marketing and sale of footwear. Founded in Italy in 1911, Superga is known for fashion sneakers that come in a wide range of colors, fabrics and prints. 
+FREEBIRD by Steven . We design, source, and market a full collection of handcrafted, Goodyear welted boots. The designs are inspired by vintage Americana and created using time-honored craftsmanship. The FREEBIRD by Steven® collection conveys a unique fashion life style that transcends many generations. Price points for FREEBIRD by Steven range from $195 to $450 and are currently sold at major department stores, mid-tier retailers, and specialty boutiques. 
+Report. The Report and Report Signature brand was part of our May 2011 acquisition of Topline Corporation ("Topline"). We design, manufacture, market and sell our Report brand to major department stores, mid-tier department stores and independently owned boutiques throughout the United States. 
+Mad Love. Formed in April 2011 as a joint venture, the Mad Love® brand is an exclusive beach-to-the-street life style brand for Target, created to appeal to women with a young attitude and active life style. 
+International Division. Prior to 2009, our international business (the “International Division”) operated under the “first cost” model and, as a result, the revenues derived from the International Division business were included in Commissions and Licensing Fees in the Consolidated Statements of Income included in our Financial Statements. In order to improve operating efficiencies, and to give our international partners better visibility in the process, as of January 2009, we have changed the operating model for our International Division to the “wholesale” model. The International Division ships products to Asia, Canada, Europe, the Middle East, Mexico, South Africa, India and Central and South America. 
+Private label business. We design, source and market private label footwear primarily to specialty retailers, mid-tier chains and mass market merchants. In addition, we design, source and market footwear for third party brands, such as Material Girl® and Candies®. 
+Wholesale Accessories Segment 
+Our Wholesale Accessories segment designs, sources and markets name brands (including our Steve Madden®, Steven by Steve Madden®, Madden Girl®, Betsey Johnson®, Betseyville® and Big Buddha® brands and Olsenboye®, under license,) and private label fashion handbags and accessories to department stores, mass merchants, value priced retailers, online retailers and specialty stores throughout the United States and Canada. In addition, we market and sell cold weather accessories, fashion scarves, wraps and other trend accessories primarily under our Cejon® and the Steve Madden® brand names and private labels to department stores and specialty stores. 
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+Retail Segment 
+As of December 31, 2013 , the Company's wholly-owned subsidiary, Steven Madden Retail, Inc., owned and operated 121 retail stores including 97 Steve Madden full price stores, 17 Steve Madden outlet stores, two Steven stores, one Superga store and four e-commerce websites. In 2013 , we opened six new full price stores, six new outlet stores, established a FREEBIRD by Steven® online store and closed our one Report store. Steve Madden stores are located in major shopping malls and in urban street locations across the United States and Canada. Comparative store sales (sales of those stores, including the e-commerce websites, that were open for all of 2013 and 2012 ) decreased 2.1% in fiscal year 2013 . The Company excludes new locations from the comparable store base for the first year of operations. Stores that are closed for renovations are removed from the comparable store base. 
+We anticipate that the Retail segment will continue to enhance the Company's overall sales and profitability while increasing recognition for our brands. Additionally, our retail stores enable us to evaluate the appeal of new products and designs to our customers and respond accordingly, which, in turn, strengthens the product development efforts of our two Wholesale segments. We expect to open between 13 and 16 new retail stores and anticipate closing three stores in 2014 . 
+First Cost Segment 
+The First Cost segment earns commissions for serving as a buying agent for footwear products under private labels for many of the large mass-market merchandisers, shoe chains and other mid-tier retailers. As a buying agent, we utilize our expertise and our relationships with shoe manufacturers to facilitate the production of private label shoes to our customers' specifications. We believe that by operating in the private label, mass merchandising market, we are able to create additional non-branded sales opportunities. This leverages our overall sourcing and design capabilities. Currently, our First Cost segment earns commissions serving as a buying agent for the procurement of women's, men's and children's footwear for large retailers, including, Kohl's, K-Mart and Sears. In addition, by leveraging the strength of our Steve Madden brands and product designs, we have been able to partially recover our design, product and development costs from our suppliers. 
+Licensing Segment 
+We license our Steve Madden® and Steven by Steve Madden® trademarks for use in connection with the manufacture, marketing and sale of sunglasses, eyewear, outerwear, bedding, hosiery and women's fashion apparel, jewelry, watches and luggage. In addition, the Company licenses the Betsey Johnson® and Betseyville® trademarks for use in connection with the manufacture, marketing and sale of apparel, jewelry, swimwear, eyewear, watches, fragrances and outerwear. Most of our license agreements require the licensee to pay us a royalty based on actual net sales, a minimum royalty in the event that specified net sales targets are not achieved and a percentage of sales for advertising the brand. 
+See Note P to our Consolidated Financial Statements included in this Annual Report on Form 10-K for additional information relating to our five operating segments. 
+Product Design and Development 
+We have established a reputation for our creative designs, marketing and trendy products at affordable price points. We believe that our future success will substantially depend on our ability to continue to anticipate and react to changing consumer demands in a timely manner. To meet this objective, we have developed what we believe is an unparalleled design process that allows us to recognize and respond quickly to changing consumer demands. Our design team strives to create designs which it believes fit our image, reflect current or future trends and can be manufactured in a timely and cost-effective manner. Most new Steve Madden products are tested in select Steve Madden retail stores. Based on these tests, among other things, management selects the Steve Madden products that are then offered for wholesale and retail distribution nationwide. We believe that our design and testing process and flexible sourcing models provide the Steve Madden brands with a significant competitive advantage allowing us to mitigate the risk of incurring costs associated with the production and distribution of less desirable designs. 
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+Product Sourcing and Distribution 
+We source each of our product lines separately based on the individual design, style and quality specifications of the products in such product lines. We do not own or operate manufacturing facilities; rather, we use agents and our own sourcing office to source our products from independently owned manufacturers in China, Mexico, Brazil, Italy and India. We have established relationships with a number of manufacturers and agents in each of these countries. Although we have not entered into any long-term manufacturing or supply contracts, we believe that a sufficient number of alternative sources exist for the manufacture of our products. We continually monitor the availability of the principal materials used in our footwear, which are currently available from a number of sources in various parts of the world. We track inventory flow on a regular basis, monitor sell-through data and incorporate input on product demand from wholesale customers. We use retailers' feedback to adjust the production or manufacture of new products on a timely basis, which helps reduce the close out of slow-moving products. 
+We distribute our products from four third-party distribution centers, two located in California, one located in Texas, and one located in New Jersey, and through two Company-operated distribution centers located in New Jersey and Canada. By utilizing distribution facilities specializing in distribution fulfillment to effect distribution to certain wholesale accounts, Steve Madden retail stores and Internet customers, we believe that our customers are served more promptly and efficiently. 
+Customers 
+Our wholesale customers consist principally of better department stores, major department stores, mid-tier department stores, national chains, mass merchants, value priced retailers, specialty stores, online retailers and catalog retailers. Our customers include, Macy's, DSW, Kohl's, Ross, Nordstrom, Dillard's, Target, Walmart, Payless, Marshall's and TJ Maxx. 
+Distribution Channels 
+United States and Canada 
+We sell our products principally through department stores, specialty stores, online retailers, luxury retailers, national chains and mass merchants and in our Company-owned retail stores in the United States and Canada and our e-commerce websites. For the year ended December 31, 2013 , our Retail segment and our two Wholesale segments generated net sales of approximately $209,612 and $1,104,611 , or 16% and 84% of our total net sales, respectively. Each of these distribution channels is described below. 
+Steve Madden and Steven Retail Stores. As of December 31, 2013 , we operated 97 Steve Madden full price stores, 17 Steve Madden outlet stores, two Steven stores, one Superga store and four e-commerce websites. We believe that our retail stores will continue to enhance overall sales, profitability, and our ability to react to changing consumer trends. Our stores are also a marketing tool that allows us to strengthen brand recognition and to showcase selected items from our full line of branded and licensed products. Furthermore, our retail stores provide us with venues through which to test and introduce new products, designs and merchandising strategies. Specifically, we often test new designs at our Steve Madden retail stores before scheduling them for mass production and wholesale distribution. In addition to these test marketing benefits, we have been able to leverage sales information gathered at Steve Madden retail stores to assist our wholesale customers in order placement and inventory management. 
+A typical Steve Madden store is approximately 1,400 to 1,600 square feet and is located in a mall or street location that we expect will attract the highest concentration of our core demographic, style-conscious customer base. The Steven stores, which are generally the same size as our Steve Madden stores, have a more sophisticated design and format styled to appeal to a more mature target audience. In addition to carefully analyzing mall demographics and locations, we set profitability guidelines for each potential store site. Specifically, we target well trafficked sites at which the demographics fit our consumer profile and seek new locations where the projected fixed annual rent expense stays within our guidelines. By setting these guidelines, we seek to identify stores that will contribute to our overall profitability both in the near and longer terms. 
+Department Stores. We currently sell to over 2,500 doors of 17 department stores throughout the United States and Canada. Our major accounts include Macy's, Nordstrom, Dillard's, Lord & Taylor and Bloomingdale's. 
+We provide merchandising support to our department store customers including, in-store fixtures and signage, supervision of displays and merchandising of our various product lines. Our wholesale merchandising effort includes the creation of in-store concept shops in which a broader collection of our branded products are showcased. These in-store concept shops create an environment that is consistent with our image and are designed to enable the retailer to display and sell a greater volume of our 
+5 
+products per square foot of retail space. In addition, these in-store concept shops encourage longer term commitment by the retailer to our products and enhance consumer brand awareness. 
+In addition to merchandising support, our key account executives maintain weekly communications with their respective accounts to guide them in placing orders and to assist them in managing inventory, assortment and retail sales. We leverage our sell-through data gathered at our retail stores to assist department stores in allocating their open-to-buy dollars to the most popular styles in the product line and phasing out styles with weaker sell-throughs, which, in turn, reduces markdown exposure at season's end. 
+National chains and mass merchants. We currently sell to national chains and mass merchants throughout the United States and Canada. Our major accounts include Target, Walmart, Kmart, JC Penney, Kohl's and Sears. 
+Specialty Stores/Catalog Sales. We currently sell to specialty store locations throughout the United States and Canada. Our major specialty store accounts include DSW, Famous Footwear and Journeys. We offer our specialty store accounts the same merchandising, sell-through and inventory tracking support offered to our department store accounts. Sales of our products are also made through various catalogs, such as Victoria's Secret. 
+Internet Sales. We operate four Internet e-commerce website stores where customers can purchase numerous styles of our Steve Madden Women's, Steven, Madden Men's, FREEBIRD by Steven, Superga, and Betsey Johnson, as well as selected styles of Madden Girl, footwear and accessory products. We also sell to online retailers throughout the United States and Canada. Our major accounts include Zappos and Amazon. 
+International 
+Our products are available in many countries and territories worldwide via several retail selling and distribution agreements. Under the terms of the various agreements, the distributors and retailers purchase product from the Company and are generally required to open a minimum number of stores each year and to pay us a fee for each pair of footwear purchased and an additional sales royalty as a percentage of sales or a predetermined amount per unit of sale. Most of the distributors are required to purchase a specified minimum number of products within specified periods. The agreements we have in place expire at various times through February 14, 2031 and include automatic renewals at the distributors' option if certain conditions are met. These agreements are exclusive in their specific territories, which include Asia, the Middle East, Europe, Mexico, India, South Africa and South and Central America. 
+Competition 
+The fashion industry is highly competitive. We compete with specialty shoe and accessory companies as well as companies with diversified footwear product lines, such as Nine West, Jessica Simpson, Guess, Ugg and Aldo. Our competitors may have greater financial and other resources than we do. We believe effective advertising and marketing, favorable brand image, fashionable styling, high quality, value and fast manufacturing turnaround are the most important competitive factors and intend to continue to employ these elements as we develop our products. However, we cannot be certain that we will be able to compete successfully against our current and future competitors, or that competitive pressures will not have a material adverse effect on our business, financial condition and results of operations. 
+Marketing and Sales 
+We have focused on creating an integrated brand building program to establish Steve Madden as a leading designer of fashion footwear for style-conscious young women and men. Principal marketing activities include product placements in life style and fashion magazines, personal appearances by our founder and Creative and Design Chief, Steve Madden, and in-store promotions. We continue to promote our e-commerce websites where customers can purchase products under the brands Steve Madden Women's, Steven, Madden Men's, FREEBIRD by Steven, Superga, and Betsey Johnson, as well as selected styles of Madden Girl, footwear and accessory products, as well as view exclusive content, participate in contests and “live chat” with customer service representatives. We also connect with our customers through social media forums including Twitter, Facebook and Instagram. 
+Management Information Systems (MIS) Operations 
+Sophisticated information systems are essential to our ability to maintain our competitive position and to support continued growth. We operate on a dual AS/400 system which provides system support for all aspects of our business, including 
+6 
+manufacturing, purchase orders, customer purchase orders, order allocations, invoicing, accounts receivable management, quick response replenishment, point-of-sale support and financial and management reporting functions. We operate a PKMS bar coded Warehouse Management System that is integrated with a Wholesale Enterprise Resource Planning system in order to provide accurate inventory positions and quick response size replenishment for our wholesale customers. In addition, we have installed an Electronic Data Interchange (“EDI”) system which provides a computer link between certain wholesale customers and us that enables both the customer and us to monitor purchases, shipments and invoicing. The EDI system also improves our ability to respond to customer inventory requirements on a weekly basis. We are currently implementing a new Company-wide enterprise resource planning ("ERP") system. Various phases of the Company-wide ERP system were rolled out in 2013 and roll-outs will continue in 2014. We expect the new Company-wide ERP system to provide greater operating efficiencies, enhance customer service and support future business growth. 
+Intellectual Property 
+Trademarks 
+We own numerous trademarks, including, among others: 
+• 
+Steve Madden® 
+• 
+Steve Madden plus Design® 
+• 
+STEVE MADDEN in Chinese Characters® 
+• 
+Madden Girl® 
+• 
+Madden Girl By Steve Madden® 
+• 
+Steven® 
+• 
+Steven by Steve Madden (word mark)® 
+• 
+Steven by Steve Madden (design)® 
+• 
+SM New York® 
+• 
+Madden Girl by Steve Madden® 
+• 
+Eyeshadows by Steve Madden® 
+• 
+Soho Cobbler® 
+• 
+Steve Madden Luxe® 
+• 
+Natural Comfort® 
+• 
+Arc Stripe Design® 
+• 
+Asterisk with Shaded Circle Design® 
+• 
+Trissino® 
+• 
+Torch Stripe (design)® 
+• 
+7B® 
+• 
+7B (design)® 
+• 
+Stacey and Steve® 
+• 
+Stacey and Steve Stylized Design® 
+• 
+Heart Design by Steve Madden® 
+• 
+Steve Madden and Heart Design® 
+• 
+Steve Madden's Fix® (logo and various trademarks) 
+• 
+PEACE LOVE SHOES® (logo and various trademarks) 
+• 
+Stevies® 
+• 
+Stevies by Steve Madden® 
+• 
+Stevies plus Design® 
+7 
+• 
+Big Buddha® 
+• 
+BIG BUDDHA plus Design® 
+• 
+Buddha Lux® 
+• 
+Betsey Johnson (word mark)® 
+• 
+Betsey Johnson (stylized mark)® 
+• 
+Betseyville (word mark)® 
+• 
+Betseyville (stylized mark)® 
+• 
+BETSEYVILLE BY BETSEY JOHNSON® 
+• 
+THE WILD PAIR (word mark)® 
+• 
+WILD PAIR (word mark)® 
+• 
+WILD PAIR (stylized mark)® (logo and various trademarks) 
+• 
+THE WILD PAIR plus Circle (design)® 
+• 
+Report® 
+• 
+Report Seattle® 
+• 
+Report Signature® 
+• 
+Report Girl® 
+• 
+Trend Report® 
+• 
+Topline® 
+• 
+R Report (design)® 
+• 
+R (design)® 
+• 
+R2® 
+• 
+Wild Rice® 
+• 
+Jellisy® 
+• 
+Flirt® 
+• 
+Offset Chevron (design)® 
+• 
+Mad Love® 
+• 
+Freebird by Steven® 
+• 
+Cejon® 
+We consider these marks to be among our most valuable assets and have registered these marks in numerous countries and in numerous International Classes. From time to time we adopt new trademarks in connection with the marketing of new product lines. We believe that our trademarks have significant value and are important for purposes of identifying the Company, the marketing of our products and the products of our licensees, distinguishing them from the products of others. We act aggressively to register and vigorously protect our trademarks against infringement. There can be no assurance, however, that we will be able to effectively obtain rights to our marks throughout all of the countries of the world. Moreover, no assurance can be given that others will not assert rights in or ownership of, our marks and other proprietary rights or that we will be able to resolve any such conflicts successfully. Our failure to protect such rights from unlawful and improper appropriation may have a material adverse effect on our business, financial condition, results of operations and liquidity. 
+Trademark Licensing 
+Our strategy for the continued growth of the Company's business includes expanding the Company's presence beyond footwear and accessories through the selective licensing of our brands. As of December 31, 2013 , we license our Steve Madden® and Steven by Steve Madden® trademarks for use in connection with the manufacture, marketing and sale of sunglasses, eyewear, outerwear, bedding, hosiery and women's fashion apparel, jewelry, watches and luggage. In addition, the Company licenses the Betsey Johnson® and Betseyville® trademarks for use in connection with the manufacture, marketing and sale of apparel, jewelry, 
+8 
+watches, swimwear, eyewear, fragrances and outerwear. Most of our license agreements require the licensee to pay us a royalty based on actual net sales, a minimum royalty in the event that specified net sales targets are not achieved and a percentage of sales for advertising the brand. See Notes A and O to our Consolidated Financial Statements included in this Annual Report on Form 10-K for additional disclosure regarding these licensing arrangements. 
+In addition to the licensing of our trademarks, we also license from third parties trademarks used in connection with certain of our product lines. Under license from Dualstar Entertainment Group, LLC, the Company has the right to use the Olsenboye® trademark in connection with the sale and marketing of footwear and accessories. The term of the Olsenboye® license will expire on December 31, 2015. Also, we hold a license from Jones Investment Co. Inc. under which the Company has the right to use the l.e.i.® trademark in connection with the marketing and sale of women's footwear exclusively to Wal-Mart through December 31, 2014. Through a license agreement with Basic Properties America Inc. and BasicNet S.p.A we have the right to use the Superga® trademark in connection with the marketing and sale of footwear through December 31, 2022. Additionally, we license from G-III Apparel Group the Andrew Marc brand in connection with the design, manufacture and distribution of eyewear and sunglasses. The initial term of the license from G-III Apparel Group expired on July 31, 2013; however, the Company is currently in negotiations with G-III Apparel Group to extend the term of the license. Substantially all of these licensing agreements require us to make royalty and advertising payments to the licensor equal to a percentage of our net sales or a minimum royalty and advertising payment in the event that specified net sales targets are not achieved. 
+Employees 
+On February 1, 2014 , we employed approximately 2,864 employees, of whom approximately 1,886 work on a full-time basis and approximately 978 work on a part-time basis. Most of our part-time employees work in the Retail segment. Approximately 1,991 of our employees are located in the United States, approximately 613 employees are located in Hong Kong and China, and approximately 260 are located in Canada. None of our employees are represented by a union. Our management considers relations with our employees to be good. The Company has never experienced a material interruption of its operations due to a labor dispute. 
+Seasonality 
+Historically, some of our businesses, including our Retail segment, have experienced holiday retail seasonality. In addition to seasonal fluctuations, our operating results fluctuate from quarter to quarter as a result of the timing of holidays, weather, the timing of larger shipments of footwear, market acceptance of our products, product mix, pricing and presentation of the products offered and sold, the hiring and training of additional personnel, inventory write downs for obsolescence, the cost of materials, the product mix among our wholesale, retail and licensing businesses, the incurrence of other operating costs and factors beyond our control, such as general economic conditions and actions of competitors. 
+Backlog 
+We had unfilled wholesale customer orders of approximately $295,000 and $302,000, as of February 1, 2014 and 2013 , respectively. Our backlog at a particular time is affected by a number of factors, including seasonality, timing of market weeks and wholesale customer purchases of our core products through our open stock program. Accordingly, a comparison of backlog from period to period may not be indicative of eventual shipments. 
+ITEM 1A RISK FACTORS 
+You should carefully consider the risks and uncertainties we describe below and the other information in this Annual Report on Form 10-K before deciding to invest in, sell or retain shares of our common stock. These are not the only risks and uncertainties that we face. Other sections of this report may discuss factors that could adversely affect our business. The retail industry is highly competitive and subject to rapid change. There may be additional risks and uncertainties that we do not currently know about or that we currently believe are immaterial, or that we have not predicted, which may also harm our business or adversely affect us. If any of these risks or uncertainties actually occurs, our business, financial condition, results of operations and liquidity could be materially harmed. 
+9 
+Risks Related to the Industry in Which the Company Operates 
+Constantly Changing Fashion Trends and Consumer Demands. Our success depends in significant part upon our 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 our products will correspond to the changes in taste and demand or that we will be able to successfully market products that respond to such trends. If we misjudge the market for our products, we may be faced with significant excess inventories for some products and missed opportunities as to others. In addition, misjudgments in merchandise selection could adversely affect our image with our customers resulting in lower sales and increased markdown allowances for customers which could have a material adverse effect on our business, financial condition, results of operations and liquidity. 
+Intense Fashion Industry Competition . The fashion footwear and accessories industry is highly competitive and barriers to entry are low. Our competitors include specialty companies as well as companies with diversified product lines. The recent market growth in the sales of fashion footwear and accessories has encouraged the entry of many new competitors and increased competition from established companies. Many of these competitors, including Nine West, Guess, Jessica Simpson, Ugg and Aldo, may have significantly greater financial and other resources than we do and there can be no assurance that we will be able to compete successfully with other fashion footwear and accessories companies. Increased competition could result in pricing pressures, increased marketing expenditures and loss of market share, and could have a material adverse effect on our business, financial condition, results of operations and liquidity. We believe effective advertising and marketing, favorable branding of the Steve Madden® and our other trademarks, fashionable styling, high quality and value are the most important competitive factors and we plan to continue to employ these elements as we develop new products and businesses. Our inability to effectively advertise and market our products could have a material adverse effect on our business, financial condition, results of operations and liquidity. 
+Cyclical Nature of Fashion Business . The overall fashion industry is cyclical, and purchasing tends to decline during recessionary periods when disposable income is low. Likewise, purchases of contemporary shoes and accessories tends to decline during recessionary periods and also may decline at other times. There can be no assurance that we will be able to grow or even maintain our current level of revenues and earnings, or remain profitable in the future. Continuing slow growth in the international, national or regional economies and uncertainties regarding future economic prospects, among other things, could affect consumer spending habits. The volatility and disruption of global economic and financial market conditions that began in 2008 has caused lingering declines in consumer confidence and spending in the United States and internationally. A further deterioration or a continued weakness of economic and financial market conditions for an extended period of time could have a material adverse effect on our business, financial condition, results of operations and liquidity. 
+Consolidation Among Retailers . 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 further consolidate, undergo restructurings or reorganizations, or realign their affiliations, any of which could decrease the number of stores that carry our 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 our business or financial condition, results of operations and liquidity, there can be no assurance as to the future effect of any such changes. 
+Economic Uncertainty and Political Risks . Our opportunities for long-term growth and profitability are accompanied by significant challenges and risks, particularly in the near term. Specifically, our business is dependent on consumer demand for our products. We believe that declining consumer confidence accompanied with the tightening of credit standards, higher energy and food prices and unemployment rates and a decrease in consumers' disposable income has negatively impacted the level of consumer spending for discretionary items during the years ended December 31, 2013, 2012 and 2011. During the three year period ended December 31, 2013, we achieved revenue growth in both our Wholesale and Retail segments but we cannot assume that this will be maintained. A continued weak economic environment could have a negative effect on the Company's sales and results of operations during the year ending December 31, 2014 and thereafter. In addition the unstable political conditions in the Middle East and some other parts of the world, including potential or actual international conflicts, or the continuation or escalation of terrorism, could have a material adverse effect on our business, financial condition, results of operations and liquidity. 
+Risks Related to Our Business 
+Dependence on Key Personnel. The growth and success of our Company since its inception almost a quarter century ago is attributable, to a significant degree, to the talents, skills and efforts of our founder and Creative and Design Chief, Steven Madden. An extended or permanent loss of the services of Mr. Madden could severely disrupt our business and have a material adverse effect on the Company. Our senior executives have substantial experience and expertise in our business and industry and 
+10 
+have made significant contributions to our growth and success as well. Competition for key executives in the apparel, footwear and accessories industries is intense. While our employment agreements with Mr. Madden and most of our senior executives include a non-compete provision in the event of the termination of employment, the non-compete periods are of limited duration. While we believe we have depth within our senior management team, if we lose the services of our Creative and Design Chief or any of our senior executives, and especially if any of these individuals joins a competitor or forms a competing company, our business and financial performance could be seriously harmed. A loss of the skills, industry knowledge, contacts and expertise of our Creative and Design Chief or any of our senior executives could cause a setback to our operating plan and strategy. 
+Dependence Upon Significant Customers . Our customers consist principally of better department stores, major department stores, mid-tier department stores, specialty stores, luxury retailers, value priced retailers, national chains, mass merchants and catalog retailers. Certain of our department store customers, including some under common ownership, account for significant portions of our wholesale business. We generally enter into a number of purchase order commitments with our customers for each of our lines every season and do not enter into long-term agreements with any of our customers. Therefore, a decision by a significant customer, whether motivated by competitive conditions, financial difficulties or otherwise, to decrease the amount of merchandise purchased from us or to change its manner of doing business could have a material adverse effect on our business, financial condition, results of operations and liquidity. 
+Risks Associated with Extending Credit to Customers. We sell our products primarily to retail stores across the United States and extend credit based on an evaluation of each customer's financial condition, usually without collateral. Various retailers, including some of our customers, have experienced financial difficulties as a result of the financial crisis that began in 2008, which has increased the risk of extending credit to such retailers. However, our losses due to bad debts have been limited. Pursuant to the terms of our collection agency agreement, our factor, Rosenthal & Rosenthal, Inc., currently assumes the credit risk related to approximately 57% of our trade accounts receivable. In addition, we have letters of credit for approximately 19% of our trade accounts receivable. Still, if any of our customers experiences a shortage of liquidity, the risk that the customer's outstanding payables to us would not be paid could cause us to curtail business with the customer or require us to assume more credit risk relating to the customer's account payable. 
+Risks Associated with Expansion of Retail Business . Our continued growth depends to a significant degree on whether we are successful in further developing and marketing our brands, and creating new brands, product categories and businesses that are appealing to our customers. The operation of company-owned Steve Madden and Steven stores is a significant part of our growth strategy. During the year ended December 31, 2013, we opened six new full-price stores, six new outlet stores, established FREEBIRD by Steven online store and closed our one Report store. We have plans to open between 13 and 16 new retail stores and anticipate closing three stores in 2014. Our future expansion plan 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 us in our existing markets. There can be no assurance that we 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. Our retail expansion is dependent on the performance of our wholesale and retail operations, generally, as well as on a number of other factors, including our ability to: 
+• 
+locate and obtain favorable store sites; 
+• 
+negotiate favorable lease terms; 
+• 
+hire, train and retain competent store personnel; 
+• 
+anticipate the preferences of our retail customers in new geographic areas; 
+• 
+successfully integrate new stores into our existing operations. 
+Past comparable store sales results may not be indicative of future results and there can be no assurance that our comparable store sales results will increase or even be maintained in the future. 
+Management of Growth . The size of our business continues to grow organically and as a result of business acquisitions. In order to gain from our acquisitions, we must be effective in integrating the businesses acquired into our overall operations. Further, the expansion of our operations has increased and will continue to increase the demand on our managerial, operational and administrative resources. In recent years, we have invested significant resources in, among other things, our management information systems and hiring and training of new personnel. However, in order to manage currently anticipated levels of future demand, we may be required to, among other things, expand our distribution facilities, establish relationships with new manufacturers to produce our product, and continue to expand and improve our financial, management and operating systems. We may experience difficulty integrating acquired businesses into our operations and may not achieve anticipated synergies from such integration. There can be no assurance that we will be able to manage future growth effectively and a failure to do so could have a material adverse effect on our business, financial condition, results of operations and liquidity. 
+11 
+Inventory Management . The trend-focused nature of the fashion industry and the rapid changes in customer preferences leave us vulnerable to an increased risk of inventory obsolescence. Thus, our ability to manage our inventories properly is an important factor in our 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 may be necessary to reduce high inventory levels. Our inability to effectively manage our inventory could have a material adverse effect on our business, financial condition, results of operations and liquidity. 
+Foreign Sourcing and Manufacturing. Virtually all of our products are purchased through arrangements with a number of foreign manufacturers, primarily from China, Mexico, Brazil, Italy and India. During 2013, approximately 85% of our total purchases were from China. Risks inherent in foreign operations including work stoppages, transportation delays and interruptions and changes in social, political and economic conditions, can result in the disruption of trade from the countries in which our 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 our business, financial condition, results of operations and liquidity. While we believe that we manage our exposure to the risk that any such economic or political condition will materially affect our ability to purchase products because we are aware of a variety of materials and alternative sources that are available, we cannot be certain that we will be able to identify such alternative materials and/or sources without delay or without greater cost to us. Our inability to identify and secure alternative sources of supply in this situation could have a material adverse effect on our business, financial condition, results of operations and liquidity. 
+Impact of Custom Duties and Other Import Regulations . Virtually all of our products imported and subject to United States custom duties. The United States and the countries in which our products are produced or sold, from time to time, impose new quotas, duties, tariffs or other restrictions on imports or exports, may adversely adjust prevailing quotas, duties or tariff levels, or impose sanctions in the form of additional duties to remedy perceived illegal actions, any of which could have a material adverse effect on our business, financial condition, results of operations and liquidity. 
+Manufacturers' Inability to Manufacture Our Goods in a Timely Manner or Meet Quality Standards . As is common in the footwear and accessories industries, we contract with foreign manufactures virtually all of our products to our specifications. We do not own or operate any manufacturing facilities and, therefore, we are dependent upon third parties for the manufacture of all of our products. The inability of a manufacturer to ship orders of our products in a timely manner or to meet our quality standards could cause us to miss the delivery date requirements of our customers for those items, which, in turn, could result in cancellation of orders, refusal to accept deliveries, a reduction in purchase prices and, ultimately, termination of a customer relationship, any of which could have a material adverse effect on our business, financial condition, results of operations and liquidity. 
+New rules relating to “conflict minerals” will require the Company to incur additional expenses and could adversely affect our business. The SEC has promulgated final rules mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act requiring the disclosure of the use of tantalum, tin, tungsten and gold, known as “conflict minerals,” included in products either manufactured by public companies or as to which public companies have contracted for the manufacture. These new rules, adopted in an effort to prevent inadvertent support of armed conflict in the Democratic Republic of Congo and certain adjoining countries (collectively, the “DRC”), require companies to investigate their supply chains to determine whether these minerals are present in their products and, if so, from where the minerals originated. The rules also require disclosure and annual reporting as to whether or not conflict minerals, if used in the manufacture of the products offered, originated from the DRC. Compliance with these rules could adversely affect the sourcing, supply and pricing of materials used in our products. We currently require our manufacturers to comply with policies addressing legal and ethical concerns relating to labor, employment, political and social matters including restrictions on the use of conflict minerals. Violation of these policies by our manufacturers could harm our reputation, disrupt our supply chain and/or increase our cost of goods sold. Additionally, violation by our manufacturers could cause us to face disqualification as a supplier for our customers and suffer reputational challenges. Due to the complexity of our supply chain, compliance with the rules requires significant efforts from a cross-operational team and diverts our management and personnel and results in potential costs of additional staff. Any of the foregoing could adversely affect our sales, net earnings, business and financial condition and results of operations. 
+Difficulty in Locating Replacement Manufacturers. Although we enter 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, we do 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. In addition, we may seek replacement manufacturers for various reasons, including a significant increase in the prices we are required to pay to existing manufacturers of our goods. Although we believe that other facilities are available for the manufacture of our products, there can be no assurance that such facilities would be available to us 
+12 
+on an immediate basis, if at all, or be able to meet our quality standards and delivery requirements, or that the costs charged to us by such manufacturers would not be significantly greater than those presently paid. 
+Manufacturers' Failure to Use Acceptable Labor Practices . and Comply with Local Laws and Other Standards . Our products are manufactured by numerous independent manufacturers outside of the United States. We also have license agreements that permit our licensees to manufacture or contract to manufacture products using our trademarks. We impose, and require that our licensees impose, on these manufacturers environmental, health, and safety standards for the benefit of their labor force. In addition, we require these manufacturers to comply with applicable standards for product safety. However, we do not control our independent manufacturers or licensing partners or their labor, product safety and other business practices and, from time to time, our independent manufacturers may not comply with such standards or applicable local law or our licensees may not require their manufacturers to comply with such standards or applicable local law. The violation of such standards and laws by one of the independent manufacturers with whom we contract or by one of our licensing partners, or the divergence of a manufacturer's or a licensing partner's labor practices from those generally accepted as ethical in the United States, could harm our reputation, result in a product recall or require us to curtail our relationship with and locate a replacement for such manufacturer, which, as noted in the immediately preceding risk factor, could be challenging. Any of these events could have a material adverse effect on our business, financial condition, results of operations and liquidity. 
+Seasonal and Quarterly Fluctuations . Our results of operations may fluctuate from quarter to quarter and are affected by a variety of factors, including: 
+• 
+the timing of holidays; 
+• 
+weather conditions; 
+• 
+the timing of larger shipments of footwear; 
+• 
+market acceptance of our products; 
+• 
+the mix, pricing and presentation of the products offered and sold; 
+• 
+the hiring and training of additional personnel; 
+• 
+inventory write downs for obsolescence; 
+• 
+the cost of materials; 
+• 
+the product mix between wholesale, retail and licensing businesses; 
+• 
+the incurrence of other operating costs; and 
+• 
+factors beyond our control, such as general economic conditions and actions of competitors. 
+In addition, we expect that our 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. 
+Extreme or unseasonable weather conditions in locations in which we or our customers and suppliers are located could adversely affect our business. Our corporate headquarters and principal operational locations, including retail, distribution and warehousing facilities, may be subject to natural disasters and other severe weather and geological events that could disrupt our operations. The occurrence of such natural events may result in sudden disruptions in business conditions of the local economies affected, as well as of the regional and global economies, and may result in decreased demand for our products and disruptions in our management functions, sales channels and manufacturing and distribution networks, which could have a material adverse effect on our business, financial condition and results of operations. Extreme weather events and changes in weather patterns can also influence customer trends and shopping habits. Extended periods of unseasonably warm temperatures during the winter season or cool weather during the summer season may diminish demand for our seasonal merchandise. Heavy snowfall, hurricanes or other severe weather events in the areas in which our retail stores and the retail stores of our wholesale customers are located may decrease customer traffic in those stores and reduce our sales and profitability. If severe weather events force closure of or disrupt operations at the distribution centers we use for our merchandise, we could incur higher costs and experience longer lead times to distribute our products to our retail stores, wholesale customers or e-commerce customers. If prolonged, such extreme or unseasonable weather conditions could adversely affect our business, financial condition and results of operations. 
+Inadequate Trademark Protections . We believe that our trademarks and other proprietary rights are of major significance to our success and our competitive position and consider some of our trademarks, such as Steve Madden, to be integral to our business and among our most valuable assets. Accordingly, we devote substantial resources to the establishment and protection of our trademarks on a worldwide basis. Nevertheless, there can be no assurance that the actions taken by us to establish and protect our trademarks and other proprietary rights will be adequate to prevent imitation of our products by others or to prevent others from seeking to block sales of our products on the basis that our products 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 
+13 
+rights of ours or that we 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. Our failure to establish and then protect such proprietary rights from unlawful and improper utilization could have a material adverse effect on our business, financial condition, results of operations and liquidity. 
+Litigation and Other Legal Proceedings. We are involved in various claims, litigations and other legal and regulatory proceedings and governmental investigations that arise from time to time in the ordinary course of our business. Due to the inherent uncertainties of litigation and such other proceedings and investigations, we cannot predict with accuracy the ultimate outcome of any such matters. An unfavorable outcome could have an adverse impact on our business, financial condition and results of operations and the amount of insurance coverage we maintain to address such matters may be inadequate to cover these or other claims. In addition, any significant litigation, investigation or proceeding, regardless of its merits, could divert financial and management resources that would otherwise be used to benefit our operations. See Item 3 “Legal Proceedings,” below for additional information regarding certain of the matters in which we are involved. 
+Disruption of Information Technology Systems and Websites. We are heavily dependent upon our information technology systems to record and process transactions and manage and operate all aspects of our business ranging from product design and testing, production, forecasting, ordering, manufacturing, transportation, sales and distribution, invoicing and accounts receivable management, quick response replenishment, point of sale support and financial management reporting functions In addition, we have e-commerce and other Internet websites. Given the nature of our business and the significant number of transactions that we engage in on an annual basis, it is essential that we maintain constant operation of our information technology systems and websites and that these systems and our websites operate effectively. We depend on our in-house information technology employees and outside vendors to maintain and periodically upgrade these systems and our websites to support the growth of our business. Despite our preventative efforts, our information technology systems and websites are vulnerable from time to time to damage or interruption from events such as difficulties in replacing or integrating new systems, computer viruses, security breaches and power outages. Cyber security attacks are becoming increasingly sophisticated and run the gamut from malicious software to electronic security breaches to corruption of data and beyond. We are continually evaluating, improving and upgrading our information technology systems and websites in an effort to address these concerns. Any such problems or interruptions may result in loss of valuable business data, our customers' or employees' personal information, disruption of our operations and other adverse impact to our business and require significant expenditures by us to remediate any such failure, problem or breach. In addition, we must comply with increasingly complex regulatory standards enacted to protect business and personal data and an inability to maintain compliance with these regulatory standards could subject us to legal risks and penalties. 
+Breach of Customer Privacy. A routine part of our business includes the gathering, processing and retention of sensitive and confidential information pertaining to our customers. While we believe that adequate security measures have been established and are maintained by us to protect against privacy breaches, the Company's facilities and information technology systems, and those of our third party service providers, may be vulnerable to security breaches, acts of vandalism, software viruses, misplaced or lost data, programming or human error, or other similar events. Such a breach that results in misappropriation, loss or other unauthorized disclosure of a customer's confidential information, whether by the Company or a third party service provider, could severely damage our reputation and relationship with our customers and adversely affect our business, as well as expose the Company to risks of litigation and liability. 
+Declines in Our Stock Price Due to Inaccurate Predictions. The trading price of our common stock periodically may rise or fall based on the accuracy of predictions of our future performance. As one of our primary objectives, we strive to maximize the long-term strength, growth and profitability of our Company, rather than to achieve an earnings target in any particular fiscal quarter. We believe that this longer-term goal is in the best interests of the Company and our stockholders, but recognize that it may be helpful to our stockholders and potential investors for us to provide guidance as to our quarterly and annual forecast of net sales and earnings. While we endeavor to provide meaningful and considered guidance at the time it is provided and generally expect to provide updates to our guidance when we report our results each fiscal quarter, actual results may differ from our predictions as the guidance is based on assumptions and expectations that may or may not come to pass and, as such, we assume no responsibility to update any of our forward-looking statements at such times or otherwise. If and when we announce actual results that differ from those that have been predicted by us, the market price of our common stock could be adversely affected. Investors who rely on these predictions in making investment decisions with respect to our common stock do so at their own risk. We take no responsibility for any losses suffered as a result of such changes in the prices of our common stock. 
+Exposure to Foreign Currency Fluctuations . We make approximately 90% of our purchases in U.S. dollars. However, we source substantially all of our products overseas and, as such, the cost of these products may be affected by changes in the value of the relevant currencies. Changes in currency exchange rates may also affect the relative prices at which we and our foreign competitors sell products in the same market. There can be no assurance that foreign currency fluctuations will not have a material adverse effect on our business, financial condition, results of operations and liquidity. 
+14 
+In addition, at any given time outside securities analysts may follow our financial results and issue reports that discuss our historical financial results and the analysts' predictions of our future performance, which our stockholders and potential investors may choose to rely on in making investment decisions. These analysts' predictions are based upon their own opinions and are often different from our own forecasts. Our stock price could decline if our results are below the estimates or expectations of these outside analysts. 
+ITEM 1B UNRESOLVED STAFF COMMENTS 
+None. 
+ITEM 2 PROPERTIES 
+We lease space for our headquarters, our retail stores, showrooms and office facilities in various locations in the United States, as well as overseas. We own one improved real property parcel in Long Island City, New York. We believe that our existing facilities are in good operating condition and are adequate for our present level of operations. The following table sets forth information with respect to our key properties: 
+Location 
+Leased/Owned 
+Primary Use 
+Approximate Area Square Feet 
+Dongguan, Guangdong Province, China 
+Leased 
+Offices and sample production 
+180,000 
+Long Island City, NY 
+Leased 
+Executive offices 
+66,600 
+Bayonne, NJ 
+Leased 
+Warehouse 
+50,000 
+Bellevue, WA 
+Leased 
+Offices, Topline 
+41,500 
+Montreal, Canada 
+Leased 
+Offices, warehouse 
+27,000 
+Putian City, Guangdong Province, China 
+Leased 
+Offices 
+23,800 
+New York, NY 
+Leased 
+Offices and showroom, Accessories 
+20,000 
+New York, NY 
+Leased 
+Showroom 
+14,000 
+New York, NY 
+Leased 
+Offices, Cejon 
+12,400 
+Long Island City, NY 
+Leased 
+Storage 
+7,200 
+New York, NY 
+Leased 
+Offices, Accessories private label 
+6,500 
+New York, NY 
+Leased 
+Showroom, Topline 
+6,400 
+Guangdong Province, China 
+Leased 
+Offices 
+4,800 
+Los Angeles, CA 
+Leased 
+Showroom 
+4,600 
+Kwai Chung, Hong Kong 
+Leased 
+Offices 
+3,800 
+Long Island City, NY 
+Owned 
+Other 
+2,200 
+15 
+All of our retail stores are leased pursuant to leases that, under their original terms, extend for an average of ten years. Many of the leases contain rent escalation clauses to compensate for increases in operating costs and real estate taxes over the base year. The current terms of our retail store leases expire as follows: 
+Years Initial Lease Terms Expire 
+Number of Stores 
+2014 
+5 
+2015 
+8 
+2016 
+4 
+2017 
+12 
+2018 
+10 
+2019 
+11 
+2020 
+4 
+2021 
+13 
+2022 
+20 
+2023 
+23 
+2024 
+6 
+2025 
+1 
+16 
+ITEM 3 LEGAL PROCEEDINGS 
+As previously disclosed, on February 2, 2012, two individuals purporting to be stockholders of the Company commenced separate civil actions in the Supreme Court of New York, Queens County, Mark Ioffe, Derivatively on Behalf of Nominal Defendant Steven Madden, Ltd. v. Steven Madden, et. al, No. 700188-2012 (the “Ioffe Action”) and Catherine L. Phillips, Derivatively on Behalf of Nominal Defendant Steven Madden, Ltd. v. Steven Madden, et. al, No. 700189-2012 (together with the Ioffe Action, the “Actions”). The Actions asserted derivative claims challenging the decision of the Company's Board of Directors in January 2012 to amend Steven Madden's employment agreement dated July 15, 2005, and amended as of December 14, 2009 and to amend the promissory note setting forth Mr. Madden's obligations in respect of a loan made by the Company to Mr. Madden in 2007 and amended in 2009 and claimed, among other things, that the Board violated its duties of loyalty and good faith by approving the amendments. The Actions also asserted claims of unjust enrichment against Mr. Madden. The Company and the other defendants filed a motion for dismissal of the Actions, which was granted by the court on September 13, 2012. The plaintiffs did not file a notice of appeal with respect to the dismissal of the Actions and the time period for filing an appeal expired. 
+On or about May 17, 2013, a law firm purporting to represent Mark Ioffe served a demand letter on the Company's Board of Directors (the “Demand Letter”). The allegations in the Demand Letter are substantively the same as the claims made in the Actions in which the Court entered a judgment of dismissal. The Demand Letter provides that should the Board of Directors fail to take the actions demanded within a reasonable period of time or refuse to take such actions, Mr. Ioffe would commence a shareholder derivative action on behalf of the Company. In response to the Demand Letter, the Board of Directors has formed a special committee consisting of Board members Richard P. Randall, Peter Migliorini and Ravi Sachdev to, among other things, investigate and evaluate the various demands, allegations and requests for action contained in the Demand Letter. The special committee commenced an investigation into the matters raised in the Demand Letter and retained independent counsel to assist and advise it in connection with such investigation. After completing a thorough investigation and evaluation of its findings, the special committee reported to the Board of Directors its recommendation that the Company take no action in response to the Demand Letter. The Board accepted the recommendation of the special committee and determined that the best interests of the Company would not be served by taking any action in response to the Demand Letter. 
+On July 19, 2011, an individual purporting to act on behalf of a class of similarly situated individuals commenced a civil action in the United States District Court for the Central District of California, Samantha Ellison, individually and on behalf of a class of similarly situated individuals v. Steven Madden, Ltd., No. CV11-05935 (the “Ellison Action”) asserting that the Company made unsolicited commercial text calls to wireless telephone numbers of the class members in violation of the Telephone Consumers Protection Act (the "TCPA") and seeking, on behalf of the class, an injunction requiring the Company to cease all wireless text messages without prior written consent as required by the TCPA, as well as the recovery of statutory damages to the class members together with costs and reasonable attorneys' fees. The Company responded by challenging the suit on several grounds. Settlement discussions resulted in a settlement being reached on July 30, 2012 for an aggregate gross settlement fund of $10 million, from which all of the Company's settlement obligations were to be paid, including, but not limited to, valid claims, claims administration fees, and the fees and costs of class counsel. Following a fairness hearing, on May 7, 2013, the court entered an order granting final approval of the settlement and dismissing the Ellison Action on the merits and with prejudice. The Company submitted an initial settlement payment of $5,000 into the settlement fund. The Company's insurer covered 45% of the initial settlement payment of $5,000 , subject to the Company's agreement to return, to the Company's insurer, its pro rata share of any remaining amounts in the settlement fund. The claims administrator has paid all of the Company's settlement obligations from the settlement fund. Because of the number of valid claims submitted to the claims administrator and other factors, the settlement fund did not need to be replenished by the Company with any additional amounts over and above the initial settlement payment. The residual funds from the settlement fund, totaling approximately $1,717 , have been returned to the Company, of which 45% has been returned by the Company to the Company's insurer. Accordingly, the actual expense to the Company for the Ellison Action was approximately $1,800 . 
+On August 10, 2005, following the conclusion of an audit of the Company conducted by auditors for U.S. Customs and Border Protection (“U.S. Customs”) during 2004 and 2005, U.S. Customs issued a report that asserts that certain commissions that the Company treated as “buying agents’ commissions” (which are non-dutiable) should be treated as “selling agents’ commissions” and hence are dutiable. Subsequently, U.S. Immigration and Customs Enforcement notified the Company’s legal counsel that a formal investigation of the Company’s importing practices had been commenced as a result of the audit. In September 2007, U.S. Customs notified the Company that it had finalized its assessment of the underpaid duties at $1,400 . The Company, with the advice of legal counsel, evaluated the liability in the case, including additional duties, interest and penalties, and believed that it was not likely to exceed $3,045 , and accordingly, a liability for this amount was recorded as of December 31, 2009. The Company contested the conclusions of the U.S. Customs audit and filed a request for review and issuance of rulings thereon by U.S. Customs Headquarters, Office of Regulations and Rulings, under internal advice procedures. On September 20, 2010, U.S. Customs issued a ruling in the matter, concluding that the commissions paid by the Company pursuant to buying agreements 
+17 
+entered into by the Company and one of its two buying agents under review were bona fide buying-agent commissions and, therefore, were non-dutiable. With respect to the second buying agent, U.S. Customs also ruled that beginning in February 2002, commissions paid by the Company were bona fide buying agent commissions and, therefore, were non-dutiable. However, U.S. Customs found that the Company’s pre-2002 buying agreements with the second agent were legally insufficient to substantiate a buyer-buyer’s agent relationship between the Company and the agent and that commissions paid to the second agent under such buying agreements, in fact, were dutiable. On the basis of the U.S. Customs ruling, the Company reevaluated the liability in the case and believes that it is not likely to exceed $1,248 and the liability was reduced from $3,045 to such amount as of September 30, 2010. 
+On November 21, 2011, U.S. Customs issued a pre-penalty notice to the Company in which it alleges that gross negligence by the Company resulted in an underpayment of duties with respect to certain pre-2002 buying agreements and claims that the Company owes $342 as an additional duty and $1,367 in monetary penalties. In its February 16, 2012 response to the pre-penalty notice, the Company submitted that it owes no additional duty and, further, did not through negligence or gross negligence fail to pay any duty or engage in conduct amounting to either gross negligence or negligence. The Company requested that U.S. Customs withdraw its proposal to issue a notice of penalty and take no further adverse action against the Company. In the event that U.S. Customs is not inclined to withdraw the pre-penalty notice after review of the Company’s response, the Company has requested the opportunity to make an oral presentation to U.S. Customs prior to the issuance of a notice of penalty. In the event that U.S. Customs determines to issue a notice of penalty, the Company intends to file a petition for relief requesting a reduction of the level of culpability and mitigation of the penalty amount assessed. The maximum total amount of damages related to this matter is estimated at approximately $1,700 for which the Company has accrued $1,248 . 
+We have been named as a defendant in certain other lawsuits in the normal course of business. In the opinion of management, after consulting with legal counsel, the liabilities, if any, resulting from these matters should not have a material effect on our financial position or results of operations. 
+ITEM 4 MINE SAFETY DISCLOSURES 
+Not applicable. 
+PART II 
+ITEM 5 
+MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES 
+Market Information. Our shares of common stock have traded on the NASDAQ Global Select Market since August 1, 2007 and were traded on the NASDAQ National Market prior to that date. The following table sets forth the range of high and low closing sales prices for our common stock during each fiscal quarter during the two-year period ended December 31, 2013 as reported by the NASDAQ Global Select Market. The trading volume of our securities fluctuates and may be limited during certain periods. As a result, the liquidity of an investment in our securities may be adversely affected. 
+Common Stock 
+High 
+Low 
+High 
+Low 
+2013 
+2012 
+Quarter ended 
+March 31, 2013 
+$31.85 
+$27.33 
+Quarter ended 
+March 31, 2012 
+$30.05 
+$22.89 
+Quarter ended 
+June 30, 2013 
+$33.17 
+$27.95 
+Quarter ended 
+June 30, 2012 
+$29.51 
+$21.17 
+Quarter ended 
+September 30, 2013 
+$37.73 
+$32.24 
+Quarter ended 
+September 30, 2012 
+$30.03 
+$21.13 
+Quarter ended 
+December 31, 2013 
+$39.48 
+$33.90 
+Quarter ended 
+December 31, 2012 
+$29.99 
+$27.38 
+18 
+Holders. As of February 26, 2014, there were 115 holders of record of our common stock. 
+Dividends . With the exception of a special cash dividend paid in November 2005 and in November 2006, we have not declared or paid any cash dividends in the past to the holders of our common stock. We intend to retain earnings, if any, for potential future dividends and to finance the development and expansion of our business. Future dividend policy will be subject to the discretion of our Board of Directors and will be contingent upon future earnings, if any, our financial condition, capital requirements, general business conditions, and other factors. Therefore, we can give no assurance that any cash dividends of any kind will be paid to holders of our common stock in the future. 
+Equity Compensation Plans . Information regarding our equity compensation plans as of December 31, 2013 is disclosed in Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.” 
+Issuer Repurchases of Equity Securities. The Company's Board of Directors authorized a share repurchase program (the "Share Repurchase Program"). effective as of January 1, 2004, originally providing for share repurchases in the aggregate amount of $20 million. The Share Repurchase Program permits the Company to effect repurchases from time to time through a combination of open market repurchases or in privately negotiated transactions at such prices and times as are determined to be in the best interest of the Company. The Share Repurchase Program does not have a fixed expiration or termination date and may be modified or terminated by the Board of Directors at any time. On several occasions the Board of Directors has increased the amount authorized for repurchase. On June 18, 2013, the Board of Directors approved a continuation of the Share Repurchase Program for an additional $125 million in repurchases of the Company's common stock. During fiscal year 2013, an aggregate of 3,000,167 shares of the Company's common stock was repurchased, in the open market, under the Share Repurchase Program, at an average per share price of $34.06 , for an aggregate purchase price of approximately $102 million. At December 31, 2013 , an aggregate of approximately $70 million remained available for future repurchases of our common stock under the Share Repurchase Program. The program has no set expiration date. The following table presents the total number of shares of the Company's common stock, $.0001 par value, purchased by the Company in the three months ended December 31, 2013 , the average price paid per share and the approximate dollar value of the shares that still could have been purchased at the end of the fiscal period, pursuant to the Company's Share Repurchase Program. 
+Period 
+Total Number of Shares Purchased 
+Average Price Paid per Share 
+Total Number of Shares Purchased as part of Publicly Announced Plans or Programs 
+Maximum Dollar Amount of Shares that May Yet Be Purchased Under the Plans or Programs 
+10/1/2013- 10/31/2013 
+374,350 
+$ 
+35.20 
+374,350 
+$ 
+89,448 
+11/1/2013- 11/30/2013 
+301,158 
+$ 
+38.14 
+301,158 
+$ 
+77,962 
+12/1/2013- 12/31/2013 
+220,270 
+$ 
+36.52 
+220,270 
+$ 
+69,918 
+Total 
+895,778 
+$ 
+36.51 
+895,778 
+$ 
+69,918 
+Performance Graph . The following graph compares the yearly percentage change in the cumulative total stockholder return on our common stock during the period beginning on December 31, 2008, and ending on December 31, 2013, with the cumulative total return on the Russell 2000 Index and the S&P 500 Footwear Index. The comparison assumes that $100 was invested on December 31, 2008 in our common stock and in the foregoing indices and assumes the reinvestment of dividends. 
+19 
+12/31/2008 
+12/31/2009 
+12/31/2010 
+12/31/2011 
+12/31/2012 
+12/31/2013 
+Steven Madden, Ltd. 
+$100.00 
+$193.35 
+$293.35 
+$363.92 
+$445.89 
+$578.96 
+Russell 2000 Index 
+$100.00 
+$127.09 
+$161.17 
+$154.44 
+$179.75 
+$249.53 
+S&P 500 Footwear Index 
+$100.00 
+$132.08 
+$173.33 
+$198.42 
+$215.60 
+$333.10 
+ITEM 6 SELECTED FINANCIAL DATA 
+The following selected financial data has been derived from our audited Consolidated Financial Statements. The Income Statement Data relating to 2013 , 2012 and 2011 , and the Balance Sheet data as of December 31, 2013 and 2012 should be read in conjunction with the information provided in Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations” and the notes to our Consolidated Financial Statements appearing elsewhere in this Annual Report on Form 10-K. 
+20 
+INCOME STATEMENT DATA 
+Year Ended December 31, 
+(in thousands, except per share data) 
+2013 
+2012 
+2011 
+2010 
+2009 
+Net sales 
+$ 
+1,314,223 
+$ 
+1,227,072 
+$ 
+968,549 
+$ 
+635,418 
+$ 
+503,550 
+Cost of sales 
+831,847 
+771,370 
+606,601 
+359,564 
+287,361 
+Gross profit 
+482,376 
+455,702 
+361,948 
+275,854 
+216,189 
+Commissions and licensing fee income - net 
+15,632 
+15,395 
+18,715 
+22,629 
+19,928 
+Operating expenses 
+(295,223 
+) 
+(283,689 
+) 
+(226,893 
+) 
+(176,859 
+) 
+(157,149 
+) 
+Impairment charges and provision for litigation 
+983 
+(8,432 
+) 
+— 
+— 
+— 
+Income from operations 
+203,768 
+178,976 
+153,770 
+121,624 
+78,968 
+Interest income 
+4,228 
+3,067 
+4,885 
+4,208 
+2,096 
+Interest expense 
+(128 
+) 
+(49 
+) 
+(51 
+) 
+(4 
+) 
+(93 
+) 
+Other income (expense) - net 
+1,083 
+2,193 
+188 
+29 
+(182 
+) 
+Income before provision for income taxes 
+208,951 
+184,187 
+158,792 
+125,857 
+80,789 
+Provision for income taxes 
+75,666 
+64,623 
+61,591 
+50,132 
+30,682 
+Net income 
+133,285 
+119,564 
+97,201 
+75,525 
+50,107 
+Net (income) loss attributable to non-controlling interests 
+(1,278 
+) 
+62 
+118 
+— 
+— 
+Net income attributable to Steven Madden, Ltd. 
+$ 
+132,007 
+$ 
+119,626 
+$ 
+97,319 
+$ 
+75,725 
+$ 
+50,107 
+Basic income per share 
+$2.04 
+$1.85 
+$1.53 
+$1.22 
+$0.82 
+Diluted income per share 
+$1.98 
+$1.81 
+$1.50 
+$1.19 
+$0.81 
+Basic weighted average shares of common stock 
+64,583 
+64,529 
+63,396 
+62,216 
+60,903 
+Effect of dilutive securities - options and restricted stock 
+2,253 
+1,726 
+1,463 
+1,450 
+939 
+Diluted weighted average shares of common stock outstanding 
+66,836 
+66,255 
+64,859 
+63,665 
+61,842 
+BALANCE SHEET DATA 
+At December 31 , 
+2013 
+2012 
+2011 
+2010 
+2009 
+Total assets 
+$ 
+880,241 
+$ 
+804,039 
+$ 
+639,786 
+$ 
+447,696 
+$ 
+326,859 
+Working capital 
+342,142 
+306,776 
+211,649 
+138,636 
+139,007 
+Noncurrent liabilities 
+46,898 
+43,161 
+29,940 
+18,697 
+6,710 
+Stockholders' equity 
+$ 
+678,840 
+$ 
+626,400 
+$ 
+474,758 
+$ 
+357,298 
+$ 
+267,787 
+21 
+ITEM 7 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 
+The following discussion of our Financial Condition and Results of Operations should be read in conjunction with our audited Consolidated Financial Statements and notes thereto appearing elsewhere in this Annual Report on Form 10-K. 
+Overview: 
+($ in thousands, except retail sales data per square foot, earnings per share and per share data) 
+Steven Madden, Ltd. and its subsidiaries (collectively the “Company”) design, source, market and sell fashion-forward branded and private label footwear for women, men and children. In addition, we design, source, market and sell name brand and private label fashion handbags and accessories, through our Accessories Division. We market and sell our products through better department stores, major department stores, mid-tier department stores, specialty stores, luxury retailers, value priced retailers, national chains, mass merchants, online retailers, catalog retailers and in our retail stores and our e-commerce websites throughout the United States and Canada and under special distribution arrangements in Asia, Europe, the Middle East, Mexico, India, South Africa and Central and South America. Our product line includes a broad range of contemporary styles designed to establish or capitalize on market trends, complemented by core product offerings. We have established a reputation for design creativity and our ability to offer quality products in popular styles at accessible price points, delivered in an efficient manner and time frame. 
+Our business is comprised of five distinct segments (Wholesale Footwear, Wholesale Accessories, Retail, First Cost and Licensing). Our Wholesale Footwear segment includes the following brands: Steve Madden Women's®, Madden Girl®, Steve Madden Men's®, Steven, Betsey Johnson®, Olsenboye® (under license), Stevies®, Steve Madden Kids®, Superga® (under license), Madden®, Report®, l.e.i.® (under license), and includes our private label footwear and International businesses. Our Wholesale Accessories segment includes Steve Madden, Steven by Steve Madden, Big Buddha, Betseyville, Betsey Johnson, Cejon and, through a license agreement, Olsenboye® accessories brands and includes our private label accessories business. Steven Madden Retail, Inc., our wholly-owned retail subsidiary, operates Steve Madden, Steven and Superga retail stores as well as our four e-commerce websites (www.stevemadden.com, www.superga-usa.com, www.betseyjohnson.com and www. freebirdbysteven.com). The First Cost segment earns commissions for serving as a buying agent for footwear products under private labels for many of the country's large mass-market merchandisers, shoe chains and other value priced retailers. Our Licensing segment is engaged in the licensing of the Steve Madden® and Steven by Steve Madden® trademarks for use in connection with the manufacture, marketing and sale of sunglasses, eyewear, outerwear, bedding, hosiery, and women's fashion apparel, jewelry, watches and luggage. In addition, the Company licenses the Betsey Johnson® and Betseyville® trademarks for use in connection with the manufacture, marketing and sale of apparel, jewelry, swimwear, eyewear, watches, fragrances and outerwear. 
+On August 19, 2013, the Company's Board of Directors declared a three-for-two stock split of the Company's outstanding shares of common stock, effected in the form of a stock dividend on the Company's outstanding common stock. Stockholders of record at the close of business on September 20, 2013 received one additional share of Steven Madden. Ltd. common stock for every two shares of common stock owned on that date. Stockholders received cash in lieu of any fractional shares of common stock they otherwise would have received in connection with the dividend. The additional shares were distributed to the Company's stockholders on October 1, 2013. All share and per share data provided herein gives effect to this stock split, applied retroactively. 
+Fiscal year 201 represents the fifth consecutive year that the Company achieved record sales and earnings. Net sales for 2013 increased 7% to $1,314,223 from $1,227,072 in the same period of last year. Net income increased 10% to $132,007 in 2013 compared to $119,626 in the same period of last year. The Company's effective tax rate for 2013 increased to 36.2% compared to 35.1% recorded in 2012 due primarily to a reduction in the tax benefit in 2013 related to the portion of earnings from the Company's foreign operations that have been invested indefinitely. Diluted earnings per share in 2013 increased to $1.98 per share on 66,836,000 diluted weighted average shares outstanding compared to $1.81 per share on 66,255,000 diluted weighted average shares outstanding in the prior year. 
+In our Retail segment, same store sales (sales of those stores, including the e-commerce websites, that were in operation throughout 2013 and 2012 ) decreased 2.1%, and sales per square foot decreased to $823 in 2013 compared to sales per square foot of $890 in 2012 . As of December 31, 2013 , we had 121 stores in operation, compared to 109 stores as of December 31, 2012 . In 2013 , we made significant progress on our strategic initiative to expand our outlet business. During 2013, we introduced six new outlet locations bringing our total to 17. 
+Our total inventory turnover was 10.3 times compared to 10.6 times in the comparable period of last year. Our accounts receivable average collection days were 64 days in 2013 compared to 66 days in 2012 , primarily due to standardization of payment 
+22 
+terms with certain customers. As of December 31, 2013 , we had $292,133 in cash, cash equivalents and marketable securities, no short or long-term debt and total stockholders’ equity of $678,840 . Working capital increased to $342,142 as of December 31, 2013 , compared to $306,776 on December 31, 2012 . 
+The following tables set forth information on operations for the periods indicated: 
+Years Ended December 31 
+($ in thousands) 
+2013 
+2012 
+2011 
+CONSOLIDATED: 
+Net sales 
+$ 
+1,314,223 
+100.0 
+% 
+$ 
+1,227,072 
+100.0 
+% 
+$ 
+968,549 
+100.0 
+% 
+Cost of sales 
+831,847 
+63.3 
+% 
+771,370 
+62.9 
+% 
+606,601 
+62.6 
+% 
+Gross profit 
+482,376 
+36.7 
+% 
+455,702 
+37.1 
+% 
+361,948 
+37.4 
+% 
+Other operating income – net of expenses 
+15,632 
+1.2 
+% 
+15,395 
+1.3 
+% 
+18,715 
+1.9 
+% 
+Operating expenses 
+295,223 
+22.5 
+% 
+283,689 
+23.1 
+% 
+226,893 
+23.4 
+% 
+Impairment charges and provision for litigation 
+983 
+0.1 
+% 
+8,432 
+0.7 
+% 
+— 
+— 
+% 
+Income from operations 
+203,768 
+15.5 
+% 
+178,976 
+14.6 
+% 
+153,770 
+15.9 
+% 
+Interest and other income – net 
+5,183 
+0.4 
+% 
+5,211 
+0.4 
+% 
+5,022 
+0.5 
+% 
+Income before income taxes 
+208,951 
+15.9 
+% 
+184,187 
+15.0 
+% 
+158,792 
+16.4 
+% 
+Net income attributable to Steven Madden, Ltd. 
+132,007 
+10.0 
+% 
+119,626 
+9.7 
+% 
+97,319 
+10.0 
+% 
+By Segment: 
+WHOLESALE FOOTWEAR SEGMENT: 
+Net sales 
+$ 
+860,448 
+100.0 
+% 
+$ 
+794,486 
+100.0 
+% 
+$ 
+636,809 
+100.0 
+% 
+Cost of sales 
+596,584 
+69.3 
+% 
+544,939 
+68.6 
+% 
+431,430 
+67.7 
+% 
+Gross profit 
+263,864 
+30.7 
+% 
+249,547 
+31.4 
+% 
+205,379 
+32.3 
+% 
+Operating expenses 
+146,175 
+17.0 
+% 
+145,221 
+18.3 
+% 
+118,703 
+18.6 
+% 
+Income from operations - before impairment charges and provision for litigation 
+117,689 
+13.7 
+% 
+104,326 
+13.1 
+% 
+86,676 
+13.6 
+% 
+WHOLESALE ACCESSORIES SEGMENT: 
+Net sales 
+$ 
+244,163 
+100.0 
+% 
+$ 
+241,339 
+100.0 
+% 
+$ 
+176,824 
+100.0 
+% 
+Cost of sales 
+154,856 
+63.4 
+% 
+154,284 
+63.9 
+% 
+115,350 
+65.2 
+% 
+Gross profit 
+89,307 
+36.6 
+% 
+87,055 
+36.1 
+% 
+61,474 
+34.8 
+% 
+Operating expenses 
+44,569 
+18.3 
+% 
+45,679 
+18.9 
+% 
+33,465 
+18.9 
+% 
+Income from operations - before impairment charges and provision for litigation 
+44,738 
+18.3 
+% 
+41,376 
+17.1 
+% 
+28,009 
+15.8 
+% 
+RETAIL SEGMENT: 
+Net sales 
+$ 
+209,612 
+100.0 
+% 
+$ 
+191,247 
+100.0 
+% 
+$ 
+154,916 
+100.0 
+% 
+Cost of sales 
+80,407 
+38.4 
+% 
+72,147 
+37.7 
+% 
+59,821 
+38.6 
+% 
+Gross profit 
+129,205 
+61.6 
+% 
+119,100 
+62.3 
+% 
+95,095 
+61.4 
+% 
+Operating expenses 
+104,479 
+49.8 
+% 
+92,789 
+48.5 
+% 
+74,725 
+48.2 
+% 
+Income from operations - before impairment charges and provision for litigation 
+24,726 
+11.8 
+% 
+26,311 
+13.8 
+% 
+20,370 
+13.1 
+% 
+23 
+Number of stores 
+121 
+109 
+84 
+FIRST COST SEGMENT: 
+Other commission income – net of expenses 
+$ 
+7,988 
+100.0 
+% 
+$ 
+7,778 
+100.0 
+% 
+$ 
+9,795 
+100.0 
+% 
+LICENSING SEGMENT: 
+Licensing income – net of expenses 
+$ 
+7,644 
+100.0 
+% 
+$ 
+7,617 
+100.0 
+% 
+$ 
+8,920 
+100.0 
+% 
+RESULTS OF OPERATIONS 
+($ in thousands, except retail sales data per square foot, earnings per share and per share data) 
+Year Ended December 31, 2013 vs. Year Ended December 31, 2012 
+Consolidated : 
+Total net sales for the year ended December 31, 2013 increased by 7% to $1,314,223 from $1,227,072 for fiscal year 2012 . For the year ended December 31, 2013 , gross margin as a percentage of net sales was 36.7% compared to 37.1% in the prior year. Operating expenses increased in 2013 to $295,223 from $283,689 in 2012 . As a percentage of sales, operating expenses decreased to 22.5% in the year ended December 31, 2013 compared to 23.1% in the previous year. Commission and licensing fee income slightly increased to $15,632 in 2013 compared to $15,395 in 2012 . During the year ended December 31, 2013 , income from operations increased to $203,768 and net income attributable to Steven Madden, Ltd. increased to $132,007 compared to income from operations of $178,976 and net income of $119,626 in 2012 . 
+Wholesale Footwear Segment : 
+Net sales generated by the Wholesale Footwear segment was $860,448 , or 65% , and $794,486 , or 65% , of our total net sales for the years ended December 31, 2013 and 2012 , respectively. This represents a $65,962 , or 8.3% increase year over year. Excluding sales attributable to SM Canada business in each year, organic net sales growth was 7.8% . Organic net sales growth was driven by a $50,087 or 17.9% increase in net sales in our wholesale private label business, as well as a $8,595 or 15.3% net sales increase in our International business. In addition, our Steve Madden Women's, Madden Girl, Steve Madden Kids, Steve Madden Men's brands realized increased sales revenue in 2013 . Finally, our new FREEBIRD by Steven brand, which began shipping in the fourth quarter of 2012 contributed to the net sales increase. These increases were partially offset by a decline in our Topline business reflecting the loss of two private label customers that are competitors of Steve Madden and elected not to go forward with the Company following the Topline acquisition. 
+Gross profit margin decreased to 30.7% in 2013 from 31.4% in the prior year, primarily due to sales increase in the lower-margin private label and international businesses. In the year ended December 31, 2013 , operating expenses was $146,175 compared to $145,221 in the same period of 2012 . As a percentage of sales, operating expenses improved to 17.0% in 2013 from 18.3% in 2012 , reflecting cost control and operating expense leverage from increased sales. Income from operations for the Wholesale Footwear Segment increased to $117,689 for the year ended December 31, 2013 compared to $104,326 for the year ended December 31, 2012 . 
+Wholesale Accessories Segment : 
+Net sales generated by the Wholesale Accessories segment accounted for $244,163 or 19% , and $241,339 or 20% of total Company net sales for the years ended December 31, 2013 and 2012 , respectively. This represents a $2,824 , or 1% increase year over year primarily driven by double digit sales growth in Steve Madden® and Betsey Johnson® handbags, partially offset by declines in belts and cold weather accessories. 
+Gross profit margin in the Wholesale Accessories segment increased to 36.6% in 2013 from 36.1% in the prior year primarily due to improvements in sales of cold weather accessories as well as significant sales growth of our Steve Madden® and Betsey Johnson® handbag businesses, which achieve higher gross margins. In the year ended December 31, 2013 , operating expenses decreased to $44,569 compared to $45,679 in the year ended December 31, 2012 , primarily reflecting lower payroll related costs in addition to cost control. As a percentage of sales, operating expenses improved to 18.3% in 2013 from 18.9% in 2012 . Income from operations for the Wholesale Accessories segment increased 8% to $44,738 in 2013 compared to $41,376 in 2012 . 
+24 
+Retail Segment : 
+Net sales generated by the Retail segment accounted for $209,612 , or 16% , and $191,247 , or 16% , of total Company net sales for the years ended December 31, 2013 and 2012 , respectively, which represents a $18,365 or 10% increase, year over year. This increase is primarily due to the addition of retail stores since the fourth quarter of 2012 , partially offset by a decline of 2.1% in comparable store sales. We opened 12 new stores, closed our one Report store, and established a FREEBIRD by Steven e-commerce store during the year ended December 31, 2013 . As a result, we had 121 retail stores as of December 31, 2013 , compared to 109 stores as of December 31, 2012 . The 121 stores currently in operation include 97 Steve Madden full price stores, 17 Steve Madden outlet stores, two Steven stores, one Superga store and four e-commerce websites. Comparable store sales (sales of those stores, including the e-commerce websites, that were open for all of 2013 and 2012 ) for the year ended December 31, 2013 decreased 2.1% when compared to the prior year. The Company excludes new locations from the comparable store base for the first year of operations. Stores that are closed for renovations are removed from the comparable store base. During the year ended December 31, 2013 , gross margin decreased to 61.6% from 62.3% in 2012 . Excluding the impact of the acquisition of SM Canada, gross profit margin decreased to 60.4% from 61.6% . In 2013 , operating expenses increased to $104,479 from $92,789 in 2012 primarily due to the incremental cost associated with the net year-over-year increase of our 11 net new retail stores and one e-commerce site. As a percentage of sales, operating expenses increased to 49.8% in 2013 from 48.5% in the prior year. For the year ended December 31, 2013 , income from operations for the Retail segment decreased to $24,726 compared to $26,311 in the prior year. 
+First Cost Segment : 
+The First Cost segment generated income from operations of $7,988 for the year ended December 31, 2013 , compared to $7,778 in 2012 . 
+Licensing Segment: 
+During the year ended December 31, 2013 , licensing income of $7,644 was flat compared to the prior year income of $7,617 . 
+Year Ended December 31, 2012 vs. Year Ended December 31, 2011 
+Consolidated: 
+Total net sales for the year ended December 31, 2012 increased by 27% to $1,227,072 from $968,549 for fiscal year 2011. For the year ended December 31, 2012, gross margin as a percentage of net sales decreased to 37.1% compared to 37.4% in the prior year. Operating expenses increased in 2012 to $283,689 from $226,893 in 2011, primarily due to incremental costs associated with our new Topline and Cejon businesses (both acquired in May 2011) and our new SM Canada business (acquired in February 2012). As a percentage of sales, operating expenses decreased to 23.1% in the year ended December 31, 2012 compared to 23.4% in the previous year. In 2012, we recorded impairment charges of $5,932 related to the bankruptcies of Betsey Johnson LLC and Bakers, and recorded an expense of $2,500 for the settlement of a class action lawsuit. Commission and licensing fee income decreased to $15,395 in 2012 compared to $18,715 in 2011, partially due to a $852 bad debt expense related to the Bakers bankruptcy. During the year ended December 31, 2012, income from operations increased to $178,976 and net income attributable to Steven Madden, Ltd. increased to $119,626 compared to income from operations of $153,770 and a net income attributable to Steven Madden, Ltd. of $97,319 in 2011. 
+Wholesale Footwear Segment: 
+Net sales generated by the Wholesale Footwear segment was $794,486, or 65%, and $636,809, or 66%, of our total net sales for the years ended December 31, 2012 and 2011, respectively. This represents a $157,678, or 24.8% increase year over year. The increase reflects $103,285 due to our SM Canada business acquired during 2012 and our Topline business acquired in May 2011. Excluding sales attributable to Topline and SM Canada business in each year, organic net sales growth was 10.4%. Organic net sales growth was driven by a 40% increase in net sales in our wholesale private label business, as well as double digit sales increases in our Steve Madden® Women's brand. In addition, our Steve Madden Kids brand, Steve Madden Men's brand and our International business all realized increased sales revenue in 2012. Finally, our new Superga® brand, which began shipping in the first quarter of 2012 and our new Betseyville® shoe brand, which began shipping in the second quarter of 2012, contributed to the increase in net sales in 2012. 
+25 
+Gross profit margin decreased to 31.4% in 2012 from 32.3% in the prior year, primarily due to sales mix shifts as a result of the addition of the Topline business, and significant sales increases in our Target private label business and our International business, which typically achieve lower gross margins. Excluding the full year impact of Topline and our acquired SM Canada business, gross profit margin was 34.6% in 2012 and 35.3% in 2011. In the year ended December 31, 2012, operating expenses increased to $145,221 from $118,703 in the same period of 2011, primarily due to incremental costs associated with the SM Canada and Topline businesses. As a percentage of sales, operating expenses improved to 18.3% in 2012 from 18.6% in 2011, reflecting leverage from increased sales. Income from operations for the Wholesale Footwear segment increased to $104,326 for the year ended December 31, 2012 compared to $86,676 for the year ended December 31, 2011. 
+Wholesale Accessories Segment: 
+Net sales generated by the Wholesale Accessories segment accounted for $241,339 or 20%, and $176,824 or 18% of total Company net sales for the years ended December 31, 2012 and 2011, respectively. This represents a $64,515, or 36.5% increase year over year. The increase in net sales reflects sales growth of $15,615 contributed by our Cejon business, which we acquired in the second quarter of 2011. Exclusive of Cejon in each year, organic net sales growth in the Wholesale Accessories segment was 43.1%. This increase in organic sales was driven by strong sales results across all the accessories product lines including a 118% net sales increase in Steve Madden® handbags followed by a 59% increase in Betsey Johnson® handbags, a 17% increase in our private label business, a 15% increase in Big Buddha® handbags and a 13% increase in our belt business. 
+Gross profit margin in the Wholesale Accessories segment increased to 36.1% in 2012 from 34.8% in the prior year. Excluding Cejon, gross profit margin increased to 38.3% in 2012 from 38.0%, primarily due to the significant growth of our Steve Madden® and Betsey Johnson® handbag businesses, which typically achieve higher gross margins. In the year ended December 31, 2012, operating expenses increased to $45,679 compared to $33,465 in the year ended December 31, 2011, primarily due to incremental costs associated with our new Cejon business acquired in May 2011. As a percentage of sales, operating expenses remained at 18.9% for both 2012 and 2011. Income from operations for the Wholesale Accessories segment increased 48% to $41,376 in 2012 compared to $28,009 in 2011. 
+Retail Segment: 
+Net sales generated by the Retail segment accounted for $191,247, or 16%, and $154,916, or 16%, of total Company net sales for the years ended December 31, 2012 and 2011, respectively. This reflects a $36,330 or 23.5% increase, year over year. The increase reflects a $13,495 increase due to the inclusion of net sales from our 2012 acquisition of SM Canada. Excluding sales attributable to the acquisition, organic net sales growth was 14.7%. We opened 20 new stores, acquired seven stores as part of the acquisition of SM Canada, established Superga® and Betsey Johnson online stores and closed four under-performing stores during the year ended December 31, 2012. As a result, we had 109 retail stores as of December 31, 2012, compared to 84 stores as of December 31, 2011. The 109 stores in operation at the end of fiscal year 2012 include 91 Steve Madden full price stores, 11 Steve Madden outlet stores, two Steven stores, one Report store, one Superga store and three e-commerce websites. Comparable store sales (sales of those stores, including the e-commerce websites, that were open for all of 2012 and 2011) for the year ended December 31, 2012 increased 7.9% when compared to the prior year. The Company excludes new locations from the comparable store base for the first year of operations. Stores that are closed for renovations are removed from the comparable store base. During the year ended December 31, 2012, gross margin increased to 62.3% from 61.4% in 2011, primarily due to the impact of the 12 new stores open in Canada at the end of fiscal year 2012, which achieve significantly higher gross profit margins than stores located in the U.S. as well as improved operating efficiencies. Excluding the impact of the acquisition of SM Canada, gross profit margin slightly decreased to 61.3% from 61.4%. In 2012, operating expenses increased to $92,789 from $74,725 in 2011 primarily due to the incremental cost associated with the net year-over-year increase of 25 stores. As a percentage of sales, operating expenses increased to 48.5% in 2012 from 48.2% in the prior year. For the year ended December 31, 2012, income from operations for the Retail segment increased to $26,311 compared to $20,370 in the prior year. 
+First Cost Segment: 
+The First Cost segment generated income from operations of $7,778 for the year ended December 31, 2012, compared to $9,795 in the prior year. This decrease is primarily due to a $852 bad debt expense resulting from the Bakers bankruptcy as well as a decline in business with Bakers during the year ended December 31, 2012. 
+Licensing Segment: 
+During the year ended December 31, 2012, licensing income decreased to $7,617 from $8,920 in the prior year. The decrease in net licensing revenue is primarily due to a loss of revenue that occurred when we transitioned outerwear business from an under-performing licensee to a new licensee with whom we expect to increase revenues in future years. 
+26 
+LIQUIDITY AND CAPITAL RESOURCES 
+($ in thousands) 
+The Company has a collection agency agreement with Rosenthal & Rosenthal, Inc. (“Rosenthal”). The agreement provides us with a credit facility in the amount of $30,000 , having a sub-limit of $15,000 on the aggregate face amount of letters of credit, at an interest rate based, at our election, upon either the prime rate or LIBOR. The agreement can be terminated by the Company or Rosenthal at any time with 60 days’ prior written notice. As of December 31, 2013 we had no borrowings against this credit facility. 
+As of December 31, 2013 , we had working capital of $342,142 . We had cash and cash equivalents of $180,275 , investments in marketable securities of $111,858 and we did not have any long-term debt. 
+We believe that based upon our current financial position and available cash, cash equivalents and marketable securities, we will meet all of our financial commitments and operating needs for at least the next 12 months. 
+OPERATING ACTIVITIES 
+($ in thousands) 
+Cash provided by operations was $155,453 in 2013 compared to cash provided by operations of $ 143,341 in the prior year. The primary sources of cash were net income of $133,285 and an increase in accounts payable and other accrued expenses of $20,702 . The primary uses of cash were a decrease of accounts receivable of $13,655 and an increase of inventories of $10,013 . 
+INVESTING ACTIVITIES 
+($ in thousands) 
+During the year ended December 31, 2013 , we invested $63,310 in marketable securities and received $43,675 from the maturities and sales of securities. We also made capital expenditures of $20,746 , principally for systems enhancements and leasehold improvements to office space, 12 new stores and one e-commerce website opened in 2013 and improvements to existing stores. 
+FINANCING ACTIVITIES 
+($ in thousands) 
+During the year ended December 31, 2013 , net cash used by financing activities was $103,574 , which consisted of share repurchases of $102,172 and payment of contingent liabilities related to acquisitions completed in prior years of $11,481 , partially offset by proceeds from the exercise of stock options of $5,802 and the tax benefit from the exercise of options of $4,277 . 
+27 
+CONTRACTUAL OBLIGATIONS 
+($ in thousands) 
+Our contractual obligations as of December 31, 2013 were as follows: 
+Payment due by period 
+Contractual Obligations 
+Total 
+2014 
+2015-2016 
+2017-2018 
+2019 and after 
+Operating lease obligations 
+$ 
+236,886 
+$ 
+32,035 
+$ 
+64,486 
+$ 
+54,216 
+$ 
+86,149 
+Purchase obligations 
+126,341 
+126,341 
+— 
+— 
+— 
+Contingent payment liability 
+34,795 
+9,681 
+18,046 
+7,068 
+— 
+Other long-term liabilities (future minimum royalty payments) 
+1,830 
+1,165 
+665 
+— 
+— 
+Total 
+$ 
+399,852 
+$ 
+169,222 
+$ 
+83,197 
+$ 
+61,284 
+$ 
+86,149 
+At December 31, 2013 , we had un-negotiated open letters of credit for the purchase of inventory of approximately $1,842. 
+On January 3, 2012, the Company and its Creative and Design Chief, Steven Madden, entered into an amendment, dated as of December 31, 2011, to Mr. Madden’s then existing employment agreement with the Company. The amended agreement, which extends the term of Mr. Madden's employment through December 31, 2023, provides for a base salary of approximately $7,417 in 2013, approximately $9,667 in 2014, approximately $11,917 in 2015 and approximately $10,698 per annum for the period between January 1, 2016 through the expiration of the term of employment. The employment agreement provided Mr. Madden with the right, exercisable on certain specified dates in fiscal year 2012 only, to elect to receive a grant of restricted stock for a number of shares of the Company’s common stock valued at $40,000 in consideration for a reduction in his annual base salary in years subsequent to 2012 as follows: $4,000 in 2013, approximately $6,125 in 2014, approximately $8,250 in 2015 and approximately $7,026 per annum for the period between January 1, 2016 through the expiration of the employment agreement on December 31, 2023. On June 30, 2012, Mr. Madden exercised this right and on July 3, 2012 he was granted 1,893,342 restricted shares of the Company's common stock at the then market price of $21.13, which will vest in the same manner as the February 8, 2012 restricted stock grant received by Mr. Madden pursuant to the amended agreement. (See Note O to the Consolidated Financial Statements.) Accordingly, Mr. Madden's annual base salary was reduced as described above. In addition to the opportunity for cash bonuses at the sole discretion of the Board of Directors, Mr. Madden’s employment agreement entitles him to an annual life insurance premium payment as well as an annual stock option grant and the potential for an additional one-time stock option grant based on achievement of certain financial performance criteria. The employment agreement also provides for the elimination of interest accrued after December 31, 2011 on an outstanding loan in the original principal amount of $3,000 made by the Company to Mr. Madden, the extension of the maturity date of such loan until December 31, 2023, and the forgiveness of 1/10 th of the principal amount of the loan, together with accrued interest, annually over a ten-year period commencing on December 31, 2014 for so long as Mr. Madden continues to be employed by the Company on each such December 31. As a result of the elimination of further interest accumulation, the outstanding principal and the accrued interest as of December 31, 2011 has been discounted to reflect imputed interest, which will be amortized over the remaining life of the loan. 
+The Company has employment agreements with certain executive officers, which provide for the payment of compensation aggregating approximately $2,987 in 2014, $1,769 in 2015, and $1,162 in 2016. In addition, some of these employment agreements provide for discretionary bonuses and some provide for incentive compensation based on various performance criteria as well as other benefits including stock related compensation. 
+Virtually all of our products are produced by independent manufacturers at overseas locations, the majority of which are located in China, with a small and growing percentage located in Mexico in addition to smaller amounts in Brazil, Italy and India. We have not entered into any long-term manufacturing or supply contracts with any of these foreign manufacturers. We believe that a sufficient number of alternative sources exist outside of the United States for the manufacture of our products. We currently make approximately 90% of our purchases in U.S. dollars. 
+28 
+INFLATION 
+We do not believe that inflation and price changes have had a significant effect on the Company's sales or profitability for the fiscal year ended December 31, 2013 and the prior two fiscal years. Historically, we have minimized the impact of product cost increases by increasing prices, changing suppliers and by improving operating efficiencies. However, no assurance can be given that we will be able to offset such inflationary cost increases in the future. 
+OFF BALANCE SHEET ARRANGEMENTS 
+The Company has no off balance sheet arrangements. 
+CRITICAL ACCOUNTING POLICIES AND THE USE OF ESTIMATES 
+Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our Consolidated Financial Statements included in this Annual Report on Form 10-K, which have been prepared in accordance with generally accepted accounting principles in the United States ("GAAP"). The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, sales and expenses, and related disclosure of contingent assets and liabilities. Estimates by their nature are based on judgments and available information. Our estimates are made based upon historical factors, current circumstances and the experience and judgment of management. Assumptions and estimates are evaluated on an ongoing basis and we may employ outside experts to assist in evaluations. Therefore, actual results could materially differ from those estimates under different assumptions and conditions. Management believes the following critical accounting estimates are more significantly affected by judgments and estimates used in the preparation of our Consolidated Financial Statements: allowance for bad debts, returns, and customer chargebacks; inventory valuation; valuation of intangible assets, litigation reserves, and contingent payment liabilities. 
+Allowances for bad debts, returns and customer chargebacks . We provide reserves against our trade accounts receivables for future customer chargebacks, co-op advertising allowances, discounts, returns and other miscellaneous deductions that relate to the current period. The reserve against our non-factored trade receivables also includes estimated losses that may result from customers’ inability to pay. The amount of the reserve for bad debts, returns, discounts and compliance chargebacks are determined by analyzing aged receivables, current economic conditions, the prevailing retail environment and historical dilution levels for customers. We evaluate anticipated customer markdowns and advertising chargebacks by reviewing several performance indicators for our major customers. These performance indicators (which include inventory levels at the retail floors, sell through rates and gross margin levels) are analyzed by management to estimate the amount of the anticipated customer allowance. Failure to correctly estimate the amount of the reserve could materially impact our results of operations and financial position. 
+Inventory valuation . Inventories are stated at lower-of-cost or market, on a first-in, first-out basis. We review inventory on a regular basis for excess and slow moving inventory. The review is based on an analysis of inventory on hand, prior sales, and expected net realizable value through future sales. The analysis includes a review of inventory quantities on hand at period-end in relation to year-to-date sales and projections for sales in the foreseeable future as well as subsequent sales. We consider quantities on hand in excess of estimated future sales to be at risk for market impairment. The net realizable value, or market value, is determined based on the estimate of sales prices of such inventory through off-price or discount store channels. The likelihood of any material inventory write-down is dependent primarily on the expectation of future consumer demand for our product. A misinterpretation or misunderstanding of future consumer demand for our product, the economy, or other failure to estimate correctly, in addition to abnormal weather patterns, could result in inventory valuation changes, compared to the valuation determined to be appropriate as of the balance sheet date. 
+Valuation of intangible assets . Accounting Standards Codification (“ASC”) Topic 350, “Intangible – Goodwill and Other”, requires that goodwill and intangible assets with indefinite lives no longer be amortized, but rather be tested for impairment at least annually. This pronouncement also requires that intangible assets with finite lives be amortized over their respective lives to their estimated residual values, and reviewed for impairment in accordance with ASC Topic 360, “Property, Plant and Equipment” (“ASC Topic 360”). In accordance with ASC Topic 360, long-lived assets, such as property, equipment, leasehold improvements and intangible assets subject to amortization, are reviewed for impairment annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset. 
+29 
+Litigation reserves . Estimated amounts for litigation claims that are probable and can be reasonably estimated are recorded as liabilities in our Consolidated Financial Statements. The likelihood of a material change in these estimated reserves would be dependent on new claims as they may arise and the favorable or unfavorable events of a particular litigation. As additional information becomes available, management will assess the potential liability related to the pending litigation and revise its estimates. Such revisions in management’s estimates of a contingent liability could materially impact our results of operation and financial position. 
+Contingent payment liabilities. Since February 2010, the Company has completed four acquisitions, all of which require the Company to make contingent payments to the sellers based on the future financial performance of the acquired businesses over a period of from one to five years. The fair value of the contingent payments was estimated using the present value of management's projections of the financial results of the acquired business. Failure to correctly project the financial results of the acquired businesses could materially impact our results of operations and financial position. 
+ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 
+($ in thousands) 
+We do not engage in the trading of market risk sensitive instruments in the normal course of business. Our financing arrangements are subject to variable interest rates primarily based on the prime rate and LIBOR. An analysis of our collection agency agreement with Rosenthal can be found in the “Liquidity and Capital Resources” section under Part II, Item 7, and in Note C to the Consolidated Financial Statements included in this Annual Report on Form 10-K under the caption “Factor Receivable.” 
+As of December 31, 2013 , we held marketable securities valued at approximately $111,858 , which consisted primarily of corporate bonds and certificates of deposit. These securities are subject to interest rate risk and will decrease in value if interest rates increase. We currently have the ability to hold these securities until maturity. 
+ITEM 8 
+FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 
+The information required by this Item is incorporated herein by reference to the Consolidated Financial Statements listed in response to Item 15 of Part IV 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 
+Disclosure Controls and Procedures 
+As required by Rule 13a-15(b) of the Exchange Act, our management, including our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of the end of the fiscal year covered by this Annual Report on Form 10-K. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that our 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 on Form 10-K. 
+Management's Annual Report on Internal Control Over Financial Reporting 
+Management of Steven Madden, Ltd. is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act). 
+Our internal control over financial reporting is a process designed by, or under the supervision of, our principal executive officer and principal financial officer, and effected by the board of directors, management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that (1) pertain to maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (3) provide reasonable assurance 
+30 
+regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements. 
+Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. 
+With the participation of the Chief Executive Officer and the Chief Financial Officer, our management conducted an evaluation of the effectiveness, as of the end of our fiscal year ended December 31, 2013 , of our internal control over financial reporting based on the framework and criteria established in the 1992 Internal Control-Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation our management has concluded that, as of December 31, 2013 , our internal control over financial reporting was effective. 
+Our independent registered public accounting firm, EisnerAmper LLP, has audited the Company's consolidated financial statements and the effectiveness of the Company's internal control over financial reporting as of December 31, 2013 . Their report appears in this Annual Report on Form 10-K. 
+Changes in Internal Control Over Financial Reporting 
+There was no change in our internal control over financial reporting, identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 of the Exchange Act, that occurred during the fiscal quarter ended December 31, 2013 , which has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 
+ITEM 9B OTHER INFORMATION 
+None 
+PART III 
+ITEM 10 
+DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 
+The information required to be furnished pursuant to this Item will be set forth in our proxy statement for the 2014 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 our proxy statement for the 2014 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 our proxy statement for the 2014 Annual Meeting of Stockholders, and is incorporated herein by reference. 
+ITEM 13 
+CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE 
+The information required to be furnished pursuant to this Item will be set forth in our proxy statement for the 2014 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 our proxy statement for the 2014 Annual Meeting of Stockholders, and is incorporated herein by reference. 
+31 
+PART IV 
+ITEM 15 
+EXHIBITS AND FINANCIAL STATEMENT SCHEDULES 
+(a) Financial Statements and Financial Statements Schedules 
+See "Index to Consolidated Financial Statements included herein. 
+(b) Exhibits. See the exhibit index included herein. 
+32 
+SIGNATURES 
+Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. 
+DATE: February 27, 2014 
+STEVEN MADDEN, LTD. 
+/s/ EDWARD R. ROSENFELD 
+Edward R. Rosenfeld 
+Chairman and Chief Executive Officer 
+/s/ ARVIND DHARIA 
+Arvind Dharia 
+Chief Financial Officer and Chief Accounting Officer 
+33 
+POWER OF ATTORNEY 
+KNOW ALL PERSONS BY THESE PRESENTS, that each of the undersigned constitutes and appoints Edward R. Rosenfeld and Arvind Dharia, and each of them, as attorneys-in-fact and agents, with full power of substitution and re-substitution, for and in the name, place and stead of the undersigned, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto and all other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that each of said attorney-in-fact or substitute or substitutes, may lawfully do or cause to be done by virtue hereof. 
+Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated. 
+Signature 
+Title 
+Date 
+/S/ EDWARD R. ROSENFELD 
+Chairman, Chief Executive Officer and Director 
+February 27, 2014 
+Edward R. Rosenfeld 
+/S/ ARVIND DHARIA Arvind Dharia 
+Chief Financial Officer and Chief Accounting Officer 
+February 27, 2014 
+/S/ JOHN L. MADDEN 
+Director 
+February 27, 2014 
+John L. Madden 
+/S/ PETER MIGLIORINI 
+Director 
+February 27, 2014 
+Peter Migliorini 
+/S/ RICHARD P. RANDALL 
+Director 
+February 27, 2014 
+Richard P. Randall 
+/S/ RAVI SACHDEV 
+Director 
+February 27, 2014 
+Ravi Sachdev 
+/S/ THOMAS H. SCHWARTZ 
+Director 
+February 27, 2014 
+Thomas H. Schwartz 
+34 
+INDEX TO CONSOLIDATED FINANCIAL STATEMENTS 
+Report of Independent Registered Public Accounting Firm 
+F-1 
+Consolidated Balance Sheets as of December 31, 2013 and 2012 
+F-2 
+Consolidated Statements of Income for the years ended December 31, 2013, 2012 and 2011 
+F-3 
+Consolidated Statements of Comprehensive Income for the years ended December 31, 2013, 2012 and 2011 
+F-4 
+Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2013, 2012 and 2011 
+F-5 
+Consolidated Statements of Cash Flows for the years ended December 31, 2013, 2012 and 2011 
+F-7 
+Notes to Consolidated Financial Statements 
+F-8 
+35 
+REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 
+To the Board of Directors and Stockholders 
+Steven Madden, Ltd. and subsidiaries 
+We have audited the accompanying consolidated balance sheets of Steven Madden, Ltd. and subsidiaries (the "Company") as of December 31, 2013 and 2012, and the related consolidated statements of income, comprehensive income, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 2013. We also have audited the Company's internal control over financial reporting as of December 31, 2013, based on criteria established in the 1992 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Report on Internal Control over Financial Reporting appearing under Item 9A of the Company's December 31, 2013 annual report on Form 10-K. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. 
+We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. 
+A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. 
+Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. 
+In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Steven Madden, Ltd. and subsidiaries as of December 31, 2013 and 2012, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2013, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company has maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on criteria established in the 1992 Internal Control-Integrated Framework issued by COSO. 
+/s/ EisnerAmper LLP 
+New York, New York 
+February 27, 2014 
+F-1 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Consolidated Balance Sheets 
+(in thousands) 
+December 31, 
+2013 
+2012 
+ASSETS 
+Current assets: 
+Cash and cash equivalents 
+$ 
+180,275 
+$ 
+168,777 
+Accounts receivable, net of allowances of $2,594 and $4,581 
+89,200 
+75,545 
+Factor accounts receivable, net of allowances of $17,818 and $17,856 
+96,223 
+92,156 
+Inventories 
+73,696 
+63,683 
+Marketable securities – available for sale 
+20,591 
+16,285 
+Prepaid expenses and other current assets 
+17,194 
+13,404 
+Prepaid taxes 
+7,199 
+331 
+Deferred taxes 
+12,267 
+11,073 
+Total current assets 
+496,645 
+441,254 
+Notes receivable 
+3,171 
+3,085 
+Note receivable – related party 
+3,581 
+3,581 
+Property and equipment, net 
+56,606 
+45,285 
+Deposits and other 
+3,276 
+2,305 
+Marketable securities – available for sale 
+91,267 
+81,202 
+Goodwill – net 
+96,132 
+91,559 
+Intangibles – net 
+129,563 
+135,768 
+Total Assets 
+$ 
+880,241 
+$ 
+804,039 
+LIABILITIES 
+Current liabilities: 
+Accounts payable 
+$ 
+99,126 
+$ 
+83,427 
+Accrued expenses 
+37,099 
+31,782 
+Contingent payment liability – current portion 
+10,695 
+11,551 
+Accrued incentive compensation 
+7,583 
+7,718 
+Total current liabilities 
+154,503 
+134,478 
+Contingent payment liability 
+24,100 
+30,409 
+Deferred rent 
+9,435 
+7,521 
+Deferred taxes 
+13,224 
+5,117 
+Other liabilities 
+139 
+114 
+Total Liabilities 
+201,401 
+177,639 
+Commitments, contingencies and other 
+STOCKHOLDERS’ EQUITY 
+Preferred stock – $.0001 par value, 5,000 shares authorized; none issued; Series A Junior Participating preferred stock – $.0001 par value, 60 shares authorized; none issued 
+— 
+— 
+Common stock – $.0001 par value, 135,000 shares authorized, 82,941 and 81,795 shares issued, 67,336 and 69,191 shares outstanding 
+7 
+5 
+Additional paid-in capital 
+247,858 
+217,638 
+Retained earnings 
+672,044 
+540,037 
+Accumulated other comprehensive income 
+(6,677 
+) 
+1,443 
+Treasury stock – 15,605 and 12,605 shares at cost 
+(234,715 
+) 
+(132,543 
+) 
+Total Steven Madden, Ltd. stockholders’ equity 
+678,517 
+626,580 
+Non-controlling interests 
+323 
+(180 
+) 
+Total stockholders’ equity 
+678,840 
+626,400 
+Total Liabilities and Stockholders’ Equity 
+$ 
+880,241 
+$ 
+804,039 
+See accompanying notes to consolidated financial statements 
+F-2 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Consolidated Statements of Income 
+(in thousands, except per share data) 
+Years Ended December 31, 
+2013 
+2012 
+2011 
+Net sales 
+$ 
+1,314,223 
+$ 
+1,227,072 
+$ 
+968,549 
+Cost of sales 
+831,847 
+771,370 
+606,601 
+Gross profit 
+482,376 
+455,702 
+361,948 
+Commission and licensing fee income – net 
+15,632 
+15,395 
+18,715 
+Operating expenses 
+(295,223 
+) 
+(283,689 
+) 
+(226,893 
+) 
+Impairment charges and provision for litigation 
+983 
+(8,432 
+) 
+— 
+Income from operations 
+203,768 
+178,976 
+153,770 
+Interest income 
+4,228 
+3,067 
+4,885 
+Interest expense 
+(128 
+) 
+(49 
+) 
+(51 
+) 
+Other income - net 
+1,083 
+2,193 
+188 
+Income before provision for income taxes 
+208,951 
+184,187 
+158,792 
+Provision for income taxes 
+75,666 
+64,623 
+61,591 
+Net income 
+133,285 
+119,564 
+97,201 
+Net (income) loss attributable to non-controlling interests 
+(1,278 
+) 
+62 
+118 
+Net income attributable to Steven Madden, Ltd. 
+$ 
+132,007 
+$ 
+119,626 
+$ 
+97,319 
+Basic net income per share 
+$ 
+2.04 
+$ 
+1.85 
+$ 
+1.53 
+Diluted net income per share 
+$ 
+1.98 
+$ 
+1.81 
+$ 
+1.50 
+Basic weighted average common shares outstanding 
+64,583 
+64,529 
+63,396 
+Effect of dilutive securities – options/restricted stock 
+2,253 
+1,726 
+1,463 
+Diluted weighted average common shares outstanding 
+66,836 
+66,255 
+64,859 
+See accompanying notes to consolidated financial statements 
+F-3 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Consolidated Statements of Comprehensive Income 
+(in thousands) 
+2013 
+Pre-tax amounts 
+Tax benefit/(expense) 
+After-tax amounts 
+Net income 
+$ 
+133,285 
+Other comprehensive income (loss): 
+Foreign currency translation adjustment 
+$ 
+(4,282 
+) 
+$ 
+— 
+(4,282 
+) 
+Losses on cash flow hedging derivatives 
+(622 
+) 
+252 
+(370 
+) 
+Unrealized gain (loss) on marketable securities 
+(5,685 
+) 
+2,217 
+(3,468 
+) 
+Total other comprehensive income (loss) 
+$ 
+(10,589 
+) 
+$ 
+2,469 
+(8,120 
+) 
+Comprehensive income 
+125,165 
+Comprehensive income attributable to non-controlling interests 
+(1,278 
+) 
+Comprehensive income attributable to Steven Madden, Ltd. 
+$ 
+123,887 
+2012 
+Pre-tax amounts 
+Tax benefit/(expense) 
+After-tax amounts 
+Net income 
+$ 
+119,564 
+Other comprehensive income (loss): 
+Foreign currency translation adjustment 
+$ 
+(21 
+) 
+$ 
+— 
+(21 
+) 
+Gains on cash flow hedging derivatives 
+162 
+(75 
+) 
+87 
+Unrealized gain (loss) on marketable securities 
+1,146 
+(447 
+) 
+699 
+Total other comprehensive income (loss) 
+$ 
+1,287 
+$ 
+(522 
+) 
+765 
+Comprehensive income 
+120,329 
+Comprehensive income attributable to non-controlling interests 
+62 
+Comprehensive income attributable to Steven Madden, Ltd. 
+$ 
+120,391 
+2011 
+Pre-tax amounts 
+Tax benefit/(expense) 
+After-tax amounts 
+Net income 
+$ 
+97,201 
+Other comprehensive income (loss): 
+Foreign currency translation adjustment 
+$ 
+(209 
+) 
+$ 
+— 
+(209 
+) 
+Unrealized gain (loss) on marketable securities 
+(139 
+) 
+54 
+(85 
+) 
+Total other comprehensive income (loss) 
+$ 
+(348 
+) 
+$ 
+54 
+(294 
+) 
+Comprehensive income 
+96,907 
+Comprehensive income attributable to non-controlling interests 
+118 
+Comprehensive income attributable to Steven Madden, Ltd. 
+$ 
+97,025 
+See accompanying notes to consolidated financial statements 
+F-4 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Consolidated Statements of Changes in Stockholders' Equity 
+(in thousands) 
+Common Stock 
+Additional Paid‑in Capital 
+Retained Earnings 
+Shares 
+Amount 
+Balance - December 31, 2010 
+63,030 
+$ 
+4 
+$ 
+165,773 
+$ 
+323,092 
+Exercise of stock options 
+659 
+1 
+4,994 
+— 
+Tax benefit from stock based compensation 
+— 
+— 
+4,154 
+— 
+Issuance of restricted stock 
+819 
+— 
+— 
+— 
+Stock-based compensation 
+— 
+— 
+11,404 
+— 
+Foreign currency translation adjustment 
+— 
+— 
+— 
+— 
+Unrealized holding loss on securities (net of tax of $54) 
+— 
+— 
+— 
+— 
+Net income 
+— 
+— 
+— 
+97,319 
+Balance - December 31, 2011 
+64,508 
+5 
+186,325 
+420,411 
+Exercise of stock options 
+874 
+— 
+9,271 
+— 
+Tax benefit from stock based compensation 
+— 
+— 
+4,608 
+— 
+Issuance of restricted stock 
+3,809 
+— 
+— 
+— 
+Stock-based compensation 
+— 
+— 
+17,434 
+— 
+Foreign currency translation adjustment 
+— 
+— 
+— 
+— 
+Unrealized holding gain on securities (net of tax of $447) 
+— 
+— 
+— 
+— 
+Cash flow hedge (net of tax of $75) 
+Net income 
+— 
+— 
+— 
+119,626 
+Balance - December 31, 2012 
+69,191 
+5 
+217,638 
+540,037 
+Share repurchases 
+(3,000 
+) 
+— 
+— 
+— 
+Exercise of stock options 
+563 
+2 
+5,802 
+— 
+Tax benefit from stock based compensation 
+— 
+— 
+4,277 
+— 
+Issuance of restricted stock 
+582 
+— 
+— 
+— 
+Stock-based compensation 
+— 
+— 
+20,141 
+— 
+Foreign currency translation adjustment 
+— 
+— 
+— 
+— 
+Unrealized holding loss on securities (net of tax benefit of $2,217) 
+— 
+— 
+— 
+— 
+Cash flow hedge (net of tax benefit of $252) 
+— 
+— 
+— 
+— 
+Distributions to non-controlling interests, net 
+— 
+— 
+— 
+— 
+Net income 
+— 
+— 
+— 
+132,007 
+Balance - December 31, 2013 
+67,336 
+$ 
+7 
+$ 
+247,858 
+$ 
+672,044 
+See accompanying notes to consolidated financial statements 
+F-5 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Consolidated Statements of Changes in Stockholders' Equity (Continued) 
+(in thousands) 
+Accumulated Other Comprehensive Gain (Loss) 
+Treasury Stock 
+Non-controlling interest 
+Total Stockholders' Equity 
+Shares 
+Amount 
+Balance - December 31, 2010 
+$ 
+972 
+12,605 
+$ 
+(132,543 
+) 
+$ 
+— 
+$ 
+357,298 
+Exercise of stock options 
+— 
+— 
+— 
+— 
+4,995 
+Tax benefit from stock based compensation 
+— 
+— 
+— 
+— 
+4,154 
+Issuance of restricted stock 
+— 
+— 
+— 
+— 
+— 
+Stock-based compensation 
+— 
+— 
+— 
+— 
+11,404 
+Foreign currency translation adjustment 
+(209 
+) 
+— 
+— 
+— 
+(209 
+) 
+Unrealized holding loss on securities (net of tax of $54) 
+(85 
+) 
+— 
+— 
+— 
+(85 
+) 
+Net income 
+— 
+— 
+— 
+(118 
+) 
+97,201 
+Balance - December 31, 2011 
+678 
+12,605 
+(132,543 
+) 
+(118 
+) 
+474,758 
+Exercise of stock options 
+— 
+— 
+— 
+— 
+9,271 
+Tax benefit from stock based compensation 
+— 
+— 
+— 
+— 
+4,608 
+Issuance of restricted stock 
+— 
+— 
+— 
+— 
+— 
+Stock-based compensation 
+— 
+— 
+— 
+— 
+17,434 
+Foreign currency translation adjustment 
+(21 
+) 
+— 
+— 
+— 
+(21 
+) 
+Unrealized holding gain on securities (net of tax of $447) 
+699 
+— 
+— 
+— 
+699 
+Cash flow hedge (net of tax of $75) 
+87 
+87 
+Net income 
+— 
+— 
+— 
+(62 
+) 
+119,564 
+Balance - December 31, 2012 
+1,443 
+12,605 
+(132,543 
+) 
+(180 
+) 
+626,400 
+Share repurchases 
+— 
+3,000 
+(102,172 
+) 
+— 
+(102,172 
+) 
+Exercise of stock options 
+— 
+— 
+— 
+— 
+5,804 
+Tax benefit from stock based compensation 
+— 
+— 
+— 
+— 
+4,277 
+Issuance of restricted stock 
+— 
+— 
+— 
+— 
+— 
+Stock-based compensation 
+— 
+— 
+— 
+— 
+20,141 
+Foreign currency translation adjustment 
+(4,282 
+) 
+— 
+— 
+— 
+(4,282 
+) 
+Unrealized holding loss on securities (net of tax benefit of $2,217) 
+(3,468 
+) 
+— 
+— 
+— 
+(3,468 
+) 
+Cash flow hedge (net of tax benefit of $252) 
+(370 
+) 
+— 
+— 
+— 
+(370 
+) 
+Distributions to non-controlling interests, net 
+— 
+— 
+— 
+(775 
+) 
+(775 
+) 
+Net income 
+— 
+— 
+— 
+1,278 
+133,285 
+Balance - December 31, 2013 
+$ 
+(6,677 
+) 
+15,605 
+$ 
+(234,715 
+) 
+$ 
+323 
+$ 
+678,840 
+See accompanying notes to consolidated financial statements 
+F-6 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Consolidated Statements of Cash Flows 
+(in thousands) 
+Year Ended December 31, 
+2013 
+2012 
+2011 
+Cash flows from operating activities: 
+Net income 
+$ 
+133,285 
+$ 
+119,564 
+$ 
+97,201 
+Adjustments to reconcile net income to net cash provided by operating activities: 
+Stock-based compensation 
+20,141 
+17,434 
+11,404 
+Tax benefit from stock-based compensation 
+(4,277 
+) 
+(4,608 
+) 
+(4,154 
+) 
+Depreciation and amortization 
+12,979 
+12,642 
+11,060 
+Loss on disposal of fixed assets 
+905 
+250 
+726 
+Impairment charges 
+— 
+5,932 
+— 
+Deferred taxes 
+7,106 
+1,528 
+1,452 
+Provision for doubtful accounts and chargebacks 
+— 
+4,218 
+2,961 
+Accrued interest on note receivable – related party 
+— 
+509 
+(241 
+) 
+Deferred rent expense and other liabilities 
+1,914 
+1,538 
+(357 
+) 
+Realized gain on sale of marketable securities 
+(1,083 
+) 
+(2,110 
+) 
+(1,254 
+) 
+Changes in: 
+Accounts receivable 
+(13,655 
+) 
+19,669 
+(16,543 
+) 
+Due from factor 
+(4,067 
+) 
+(35,670 
+) 
+(9,336 
+) 
+Inventories 
+(10,013 
+) 
+(1,819 
+) 
+(9,210 
+) 
+Prepaid expenses, prepaid taxes, deposits and other 
+(8,484 
+) 
+1,557 
+(2,068 
+) 
+Accounts payable and accrued expenses 
+20,702 
+11,956 
+(7,551 
+) 
+Accrued incentive compensation 
+— 
+(9,163 
+) 
+964 
+Other liabilities 
+— 
+(86 
+) 
+(86 
+) 
+Net cash provided by operating activities 
+155,453 
+143,341 
+74,968 
+Cash flows from investing activities: 
+Capital expenditures 
+(20,746 
+) 
+(20,102 
+) 
+(15,477 
+) 
+Purchases of marketable securities 
+(63,310 
+) 
+(63,822 
+) 
+(17,968 
+) 
+Purchase of notes receivable, net of collections 
+— 
+(1,562 
+) 
+— 
+Maturity/sale of marketable securities 
+43,675 
+46,447 
+67,885 
+Refundable cash acquired from seller 
+— 
+— 
+12,004 
+Acquisitions, net of cash required 
+— 
+(29,367 
+) 
+(89,730 
+) 
+Net cash used in investing activities 
+(40,381 
+) 
+(68,406 
+) 
+(43,286 
+) 
+Cash flows from financing activities: 
+Proceeds from exercise of stock options 
+5,802 
+9,271 
+4,994 
+Tax benefit from the exercise of options 
+4,277 
+4,608 
+4,154 
+Payment of contingent liability 
+(11,481 
+) 
+(22,867 
+) 
+(4,151 
+) 
+Common stock purchased for treasury 
+(102,172 
+) 
+— 
+— 
+Net cash (used) provided by financing activities 
+(103,574 
+) 
+(8,988 
+) 
+4,997 
+Net increase in cash and cash equivalents 
+11,498 
+65,947 
+36,679 
+Cash and cash equivalents – beginning of year 
+168,777 
+102,830 
+66,151 
+Cash and cash equivalents – end of year 
+$ 
+180,275 
+$ 
+168,777 
+$ 
+102,830 
+Supplemental disclosures of cash flow information: 
+Cash paid during the year for: 
+Interest 
+$ 
+128 
+$ 
+49 
+$ 
+51 
+Income taxes 
+$ 
+57,147 
+$ 
+52,711 
+$ 
+59,633 
+See accompanying notes to consolidated financial statements. 
+F-7 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Consolidated Financial Statements 
+December 31, 2013 and 2012 
+($ in thousands, except share and per share data) 
+NOTE A – Summary of Significant Accounting Policies 
+[1] Organization: 
+Steven Madden, Ltd. a Delaware corporation, and its subsidiaries, design, source, market and sell name brand and private label women's, men's and children's shoes, worldwide through its wholesale and retail channels under the Steve Madden Women's, Steven and Madden Men's brand names and through its wholesale channels under the Stevies, Madden Girl, Madden, l.e.i. (under license), Report, Superga (under license), Betsey Johnson and Big Buddha brand names. In addition, the Company designs, sources, markets and sells name brand and private label fashion handbags and accessories to customers worldwide through its Wholesale Accessories segment. The Wholesale Accessories segment includes Big Buddha, Betsey Johnson, Betseyville, Cejon, Steve Madden and Steven by Steve Madden and, through a license agreement Olsenboye, accessories brands. Revenue is generated predominantly through the sale of the Company's brand name and private label merchandise and certain licensed products. At December 31, 2013 and 2012 , the Company operated 121 (including four e-commerce websites) and 109 (including three e-commerce websites) retail stores, respectively. Revenue is subject to seasonal fluctuations. See Note P for operating segment information. 
+[2] Principles of consolidation: 
+The Consolidated Financial Statements include the accounts of Steven Madden, Ltd. and its wholly-owned subsidiaries Steven Madden Retail, Inc., Diva Acquisition Corp., Adesso Madden, Inc., Stevies, Inc., Daniel M. Friedman and Associates, Inc., Big Buddha, Inc., the Topline Corporation, Cejon, Inc., SML Holdings S.a.r.l., SML Canada Acquisition Corp. (collectively the "Company"). The accounts of MadLove LLC, a joint venture in which the Company is the primary beneficiary, is included in the Consolidated Financial Statements with the other members' interests reflected in “Net (income) loss attributable to non-controlling interests” in the Consolidated Statements of Income and “Non-controlling interests” in the Consolidated Balance Sheets. All significant intercompany balances and transactions have been eliminated. Additionally, certain adjustments were made to prior years' amounts to conform to the 2013 presentation and to reflect the three-for-two stock split. 
+[3] 2013 Stock Split 
+On August 20, 2013, the Company announced that on August 19, 2013, its Board of Directors declared a three-for-two stock split of the Company's outstanding shares of common stock, effected in the form of a stock dividend on the Company's outstanding common stock. Stockholders of record at the close of business on September 20, 2013 received one additional share of Steven Madden, Ltd. common stock for every two shares of common stock owned on that date. The additional shares were distributed on October 1, 2013. Stockholders received cash in lieu of any fractional shares of common stock they otherwise would have received in connection with the dividend. All share and per share data provided herein gives effect to this stock split, applied retroactively. 
+[4] Use of Estimates: 
+The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. 
+Significant areas involving management estimates include allowances for bad debts, returns and customer chargebacks, inventory valuation, valuation of intangible assets, litigation reserves, and contingent payment liabilities. The Company provides reserves on trade accounts receivables and factor receivables for future customer chargebacks and markdown allowances, discounts, returns and other miscellaneous compliance-related deductions that relate to the current period sales. The Company evaluates anticipated chargebacks by reviewing several performance indicators of its major 
+F-8 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Consolidated Financial Statements 
+December 31, 2013 and 2012 
+($ in thousands, except share and per share data) 
+NOTE A – Summary of Significant Accounting Policies (continued) 
+customers. These performance indicators, which include retailers’ inventory levels, sell-through rates and gross margin levels, are analyzed by management to estimate the amount of the anticipated customer allowance. 
+[5] Cash equivalents: 
+Cash equivalents at December 31, 2013 and 2012 amounted to approximately $102,247 and $27,219 , respectively, and consisted of money market accounts held primarily at four brokerage companies. The Company considers all highly liquid instruments with an original maturity of three months or less when purchased to be cash equivalents. 
+[6] Marketable securities: 
+Marketable securities consist primarily of corporate bonds and certificates of deposit with maturities greater than three months and up to ten years at the time of purchase. These securities, which are classified as available for sale, are carried at fair value, with unrealized gains and losses net of any tax effect reported in stockholders' equity as accumulated other comprehensive income (loss) until realized. Amortization of premiums and discounts is included in interest income. For the years ended December 31, 2013 and 2012 , the amortization of bond premiums was $661 and $894 , respectively. The schedule of maturities at December 31, 2013 and 2012 are as follows: 
+Maturities as of 
+December 31, 2013 
+Maturities as of 
+December 31, 2012 
+1 Year or Less 
+1 to 10 Years 
+1 Year or Less 
+1 to 10 Years 
+Corporate bonds 
+$ 
+4,078 
+$ 
+82,888 
+$ 
+8,285 
+$ 
+73,027 
+Certificates of deposit 
+16,513 
+8,379 
+8,000 
+8,175 
+Total 
+$ 
+20,591 
+$ 
+91,267 
+$ 
+16,285 
+$ 
+81,202 
+[7] Inventories: 
+Inventories, which consist of finished goods on hand and in transit, are stated at the lower of cost (first-in, first-out method) or market. 
+[8] Property and equipment: 
+Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed utilizing the straight-line method based on estimated useful lives ranging from three to ten years. Leasehold improvements are amortized utilizing the straight-line method over the shorter of their estimated useful lives or the remaining lease term. Impairment losses are recognized for long-lived assets, including certain intangibles, used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are not sufficient to recover the assets' carrying amount. Impairment losses are measured by comparing the fair value of the assets to their carrying amount. 
+[9] Goodwill and intangible assets: 
+The Company's goodwill and indefinite lived intangible assets are not amortized, rather they are tested for impairment on an annual basis or more often if events or circumstances change that could cause these assets to become impaired. The Company completed its annual impairment tests on goodwill and intangible assets during the third quarter of 2013 and no impairments were recognized. 
+The Company amortizes its intangible assets with definite useful lives over their estimated useful lives and reviews these assets for impairment. The Company is currently amortizing its acquired intangible assets with definite useful lives over periods typically from three to ten years. 
+F-9 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Consolidated Financial Statements 
+December 31, 2013 and 2012 
+($ in thousands, except share and per share data) 
+NOTE A – Summary of Significant Accounting Policies (continued) 
+[10] Net Income Per Share of Common Stock: 
+Basic net income per share is based on the weighted average number of shares of common stock outstanding during the period, which does not include unvested restricted stock subject to forfeiture. Diluted net income per share reflects: a) the potential dilution assuming shares of common stock were issued upon the exercise of outstanding in-the-money options and the proceeds thereof were used to purchase shares of the Company’s common stock at the average market price during the period, and b) the vesting of granted nonvested restricted stock awards for which the assumed proceeds upon vesting are deemed to be the amount of compensation cost not yet recognized attributable to future services using the treasury stock method, to the extent dilutive. For the years ended December 31, 2013 , 2012 and 2011 , options to purchase approximately 15,000 , 99,000 and 182,000 shares of common stock, respectively, have been excluded in the calculation of diluted income per share as the result would have been anti-dilutive. For the years ended December 31, 2013 , 2012 and 2011 , all unvested restricted stock awards were dilutive. 
+[11] Comprehensive Income: 
+Comprehensive income is the total of net earnings and all other non-owner changes in equity. Comprehensive income for the Company includes net income, foreign currency translation adjustments, cash flow hedging and unrealized gains and losses on marketable securities. 
+[12] Advertising costs: 
+The Company expenses costs of print, radio and billboard advertisements as incurred. Advertising expense included in operating expenses amounted to approximately $11,529 in 2013 , $9,783 in 2012 and $7,312 in 2011 . 
+[13] Revenue Recognition: 
+The Company recognizes revenue on wholesale sales when (i) products are shipped pursuant to its standard terms, which are freight on board (“FOB”) Company warehouse, or when products are delivered to the consolidators, or any other destination, as per the terms of the customers’ purchase order, (ii) persuasive evidence of an arrangement exists, (iii) the price is fixed and determinable and (iv) collection is reasonably assured. Sales reductions on wholesale sales for anticipated discounts, allowances and other deductions are recognized during the period when sales are recorded. Customers retain the right to replacement of the product for poor quality or improper or short shipments, which have historically been immaterial. Retail sales are recognized when the payment is received from customers and are recorded net of estimated returns. The Company generates commission income acting as a buying agent by arranging to manufacture private label shoes to the specifications of its clients. The Company’s commission revenue also includes fees charged for its design, product and development services provided to certain suppliers in connection with the Company’s private label business. Commission revenue and product and development fees are recognized as earned when title to the product transfers from the manufacturer to the customer and collections are reasonably assured and are reported on a net basis after deducting related operating expenses. 
+The Company licenses its Steve Madden® and Steven by Steve Madden® trademarks for use in connection with the manufacture, marketing and sale of sunglasses, eyewear, outerwear, bedding, hosiery, women's fashion apparel, jewelry, watches and luggage. In addition, the Company licenses the Betsey Johnson® and Betseyville® trademarks for use in connection with the manufacture, marketing and sale of apparel, jewelry, swimwear, eyewear, watches, fragrances and outerwear. The license agreements require the licensee to pay the Company a royalty and, in substantially all of the agreements, an advertising fee based on the higher of a minimum or a net sales percentage as defined in the various agreements. In addition, under the terms of retail selling agreements, most of the Company’s international distributors are required to pay the Company a royalty based on a percentage of net sales, in addition to a commission and a design fee on the purchases of the Company’s products. Licensing revenue is recognized on the basis of net sales reported by the licensees, or the minimum guaranteed royalties, if higher. 
+F-10 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Consolidated Financial Statements 
+December 31, 2013 and 2012 
+($ in thousands, except share and per share data) 
+NOTE A – Summary of Significant Accounting Policies (continued) 
+In substantially all of the Company’s license agreements, the minimum guaranteed royalty is earned and receivable on a quarterly basis. 
+[14] Taxes Collected From Customers: 
+The Company accounts for certain taxes collected from its customers in accordance with the accounting guidance which permits companies to adopt a policy of presenting taxes in the income statement on either a gross basis (included in revenues and costs) or a net basis (excluded from revenues). Taxes within the scope of this accounting guidance would include taxes that are imposed on a revenue transaction between a seller and a customer, for example, sales taxes, use taxes, value-added taxes and some types of excise taxes. The Company has consistently recorded all taxes on a net basis. 
+[15] Sales Deductions: 
+The Company supports retailers’ initiatives to maximize sales of the Company’s products on the retail floor by subsidizing the co-op advertising programs of such retailers, providing them with inventory markdown allowances and participating in various other marketing initiatives of its major customers. In addition, the majority of the product the Company accepts as returns relates to damaged products for which the Company’s costs are normally charged back to the responsible third-party factory. Such expenses are reflected in the financial statements as deductions to net sales. 
+[16] Cost of Sales: 
+All costs incurred to bring finished products to the Company’s distribution center or to the customers’ freight forwarder and, in the Retail segment, the costs to bring products to the Company’s stores, are included in the cost of sales line on the Consolidated Statements of Income. These include the cost of finished products, purchase commissions, letter of credit fees, brokerage fees, sample expenses, custom duty, inbound freight, royalty payments on licensed products, labels and product packaging. All warehouse and distribution costs related to the Wholesale segments and freight to customers, if any, are included in the operating expenses line item of the Company’s Consolidated Statements of Income. The Company’s gross margins may not be comparable to those of other companies in the industry because some companies may include warehouse and distribution costs, as well as other costs excluded from cost of sales by the Company, as a component of cost of sales, while other companies report on the same basis as the Company and include them in operating expenses. 
+[17] Warehouse and shipping costs: 
+The Company includes all warehouse and distribution costs for the Wholesale segment in the Operating Expenses line on the Consolidated Statements of Income. For the years ended December 31, 2013 , 2012 and 2011 , the total warehouse and distribution costs included in Operating Expenses were $14,887 , $14,140 and $12,190 respectively. Since the Company's standard terms of sales are “FOB Steve Madden warehouse,” the Company's wholesale customers absorb most shipping costs. Shipping costs to wholesale customers incurred by the Company are not considered significant and are included in the Operating Expense line in the Consolidated Statements of Income. 
+[18] Employee benefit plan: 
+The Company maintains a tax-qualified 401(k) plan which is available to each of the Company's eligible employees who elect to participate after meeting certain length-of-service requirements. The Company made discretionary matching contributions of 50% of employees' contributions up to a maximum of 6% of employees' compensation which vest to the employees over a period of time. Total matching contributions to the plan for 2013 , 2012 and 2011 were approximately $1,259 , $1,206 and $844 , respectively. 
+F-11 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Consolidated Financial Statements 
+December 31, 2013 and 2012 
+($ in thousands, except share and per share data) 
+NOTE A – Summary of Significant Accounting Policies (continued) 
+[19] Derivative Instruments: 
+The Company uses derivative instruments to manage its exposure to cash-flow variability from foreign currency risk. Derivatives are carried on the balance sheet at fair value and included in prepaid expenses and other current assets. The Company applies cash flow hedge accounting for its derivative instruments. Net derivative gains and losses attributable to derivatives subject to cash flow hedge accounting reside in accumulated other comprehensive income and will be reclassified to earnings in future periods as the economic transactions to which the derivatives relate affect earnings. See Note L-Derivative Instruments. 
+[20] Income Taxes: 
+The provision for income taxes is computed using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those tax assets are expected to be realized or settled. The Company records a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized. 
+The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement. See Note N - Income Taxes. 
+[21] Share-based Compensation: 
+The Company recognizes expense related to share-based payment transactions in which it receives employee services in exchange for (a) equity instruments of the Company or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. Share-based compensation cost for restricted stock units (“RSUs”) is measured based on the closing fair market value of the Company’s common stock on the date of grant. Share-based compensation cost for stock options is measured at the grant date, based on the fair-value as calculated by the Black-Scholes-Merton (“BSM”) option-pricing model. The BSM option-pricing model incorporates various assumptions including expected volatility, estimated expected life and interest rates. The Company recognizes share-based compensation cost over the award’s requisite service period on a straight-line basis. The Company recognizes a benefit from share-based compensation in the Consolidated Statements of Stockholders' Equity if an incremental tax benefit is realized. See Note I - Stock Based Compensation. 
+Note B – Acquisitions 
+Steve Madden Canada 
+On February 21, 2012, the Company purchased all of the assets of Steve Madden Canada Inc., Steve Madden Retail Canada Inc., Pasa Agency Inc. and Gelati Imports Inc. (collectively, “SM Canada”), the Company’s sole distributor in Canada since 1994, comprising SM Canada’s footwear, handbags and accessories wholesale and retail businesses. The transaction was completed for cash consideration of approximately $26,686 , net of a working capital adjustment of $2,681 , plus potential earn-out payments of up to a maximum of $38,000 Canadian dollars (which converted to approximately $ 37,327 U.S. dollars at the time of acquisition), in the aggregate, based on achievement of certain earnings targets for each of the 12-month periods ending on March 31, 2013 through 2017, inclusive. The Company made the first earn-out payment, $4,529 for the period ended March 31, 2013, in October 2013. The fair value of the contingent payments was estimated using the present value of management’s projections of the financial results of SM Canada during the earn-out period. As of December 31, 2013 , the Company estimates the fair value of the contingent consideration to be $19,360 . 
+F-12 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Consolidated Financial Statements 
+December 31, 2013 and 2012 
+($ in thousands, except share and per share data) 
+Note B – Acquisitions (continued) 
+The transaction was accounted for using the acquisition method required by GAAP. Accordingly, the assets and liabilities of SM Canada were adjusted to their fair values, and the excess of the purchase price over the fair value of the assets acquired, including identified intangible assets, was recorded as goodwill. The fair values assigned to tangible and intangible assets acquired and liabilities assumed are based on management’s estimates and assumptions. The purchase price has been allocated as follows: 
+Accounts receivable 
+$ 
+2,496 
+Inventory 
+2,220 
+Prepaid expenses and other assets 
+147 
+Fixed assets 
+1,005 
+Re-acquired right 
+35,200 
+Customer relationships 
+4,400 
+Non-compete agreement 
+455 
+Accounts payable 
+(2,645 
+) 
+Accrued expenses 
+(802 
+) 
+Total fair value excluding goodwill 
+42,476 
+Goodwill 
+9,368 
+Net assets acquired 
+$ 
+51,844 
+Prior to the acquisition, the Company and SM Canada had a preexisting relationship under which SM Canada had the exclusive right to use the Steve Madden brand throughout Canada in connection with the sale and distribution of merchandise. The settlement of the preexisting relationship is considered a re-acquired right and was valued based on the present value of estimated future cash flows. 
+Contingent consideration, classified as a liability, is remeasured at fair value at each reporting date, until the contingency is resolved, with changes recognized in earnings. The goodwill and other identifiable intangible assets related to this transaction are expected to be deductible for tax purposes over 15 years. 
+The Company incurred approximately $ 951 in acquisition-related costs applicable to the SM Canada transaction during the years ended December 31, 2012 and 2011. These expenses are included in operating expenses in the Company’s Consolidated Statements of Income. In connection with the acquisition, the Company provided an interest free loan to the seller of SM Canada in the principal amount of $ 3,107 Canadian dollars ($ 3,171 in U.S. dollars) pursuant to a promissory note. The note will be paid in five annual installments which are due on the dates the five annual earn-out payments are paid. The first payment of principal was made subsequent to the year ended December 31, 2013 in January 2014. To the extent the contingent consideration recorded above related to the earn-out is not achieved, the repayment terms of the note may result in less than the entire principal amount of the loan being paid. In such event, the unpaid principal amount of the note will be forgiven. The note was recorded net of the imputed interest, which will be amortized to income over the term of the note. 
+Cejon 
+On May 25, 2011, the Company acquired all of the outstanding shares of the capital stock of closely held Cejon, Inc. and Cejon Accessories, Inc. from the sole stockholder of these companies, as well as all of the outstanding membership interests in New East Designs, LLC (together with Cejon Inc. and Cejon Accessories, “Cejon”) from its members (together with the sole stockholder of Cejon, the “Cejon Sellers”). Founded in 1991, Cejon designs, markets and sells cold weather accessories, fashion scarves, wraps and other trend accessories primarily under the Cejon brand name, private labels and under the Steve Madden brand name. Cejon had been a licensee of the Company for cold weather and selected other fashion accessories since September 2006. Management expects the Cejon acquisition will further strengthen and expand the Company’s accessories platform. The acquisition was completed for consideration of approximately $29,502 cash plus potential contingent payments pursuant to an earn-out agreement 
+F-13 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Consolidated Financial Statements 
+December 31, 2013 and 2012 
+($ in thousands, except share and per share data) 
+Note B – Acquisitions (continued) 
+with the Cejon Sellers. The earn-out agreement specifies two tiers of potential payments to the Cejon Sellers based on the financial performance of Cejon for each of the 12-month periods ending on June 30, 2012 through 2016, inclusive. The tier one earn-out is based on a graduated percentage of EBITDA up to a maximum EBITDA of $11,000 in each of the earn-out periods, provided that the total aggregate payments under this tier do not exceed $25,000 . The tier two earn-out is based on a multiple of the amount that EBITDA exceeds certain levels in each of the earn-out periods, provided that the total aggregate payments under this tier do not exceed $33,000 . The earn-out payments of $5,139 and $5,000 for the periods ended June 30, 2013 and 2012 were paid in the third quarter of each year, respectively. 
+The transaction was accounted for using the acquisition method required by GAAP. Accordingly, the assets and liabilities of Cejon were adjusted to their fair values, and the excess of the purchase price over the fair value of the assets acquired, including identified intangible assets, was recorded as goodwill. The fair values assigned to tangible and intangible assets acquired and liabilities assumed are based on management’s estimates and assumptions. The purchase price, net of a working capital adjustment of $836 , has been allocated as follows: 
+Accounts receivable 
+$ 
+3,631 
+Inventory 
+3,998 
+Prepaid expenses and other current assets 
+196 
+Fixed assets 
+190 
+Trade name 
+27,065 
+Customer relationships 
+3,225 
+Non-compete agreement 
+305 
+Other assets 
+24 
+Accounts payable 
+(1,318 
+) 
+Accrued expenses 
+(2,242 
+) 
+Total fair value excluding goodwill 
+35,074 
+Goodwill 
+17,759 
+Net assets acquired 
+$ 
+52,833 
+Contingent consideration, classified as a liability, will be remeasured at fair value at each reporting date, until the contingency is resolved, with changes recognized in earnings. The goodwill and other identifiable intangibles related to this transaction are expected to be deductible for tax purposes over 15 years. 
+The Company incurred approximately $ 531 in acquisition-related costs applicable to the Cejon transaction during the year ended December 31, 2011. These expenses were included in operating expenses in the Company’s Consolidated Statements of Income for the year ended December 31, 2011. 
+Topline 
+On May 20, 2011, the Company acquired all of the outstanding shares of capital stock of the closely held company, The Topline Corporation ("Topline") from its sole stockholder (the “Topline Seller”). Founded in 1980, Topline and its subsidiaries design, manufacture, market and sell private label and branded women’s footwear primarily to value priced retailers, department stores, specialty retailers and mass merchants. Topline has sourcing capabilities, sample making facilities and product development capabilities in China, including personnel and facilities engaged in direct sourcing. Management believes that Topline is an excellent strategic fit for the Company. The acquisition was completed for consideration of approximately $56,128 in cash, plus potential contingent payments pursuant to an earn-out agreement with the Topline Seller. The earn-out agreement provides for potential payments to the Topline Seller based on the financial performance of Topline for the 12-month period ended on June 30, 2012. 
+F-14 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Consolidated Financial Statements 
+December 31, 2013 and 2012 
+($ in thousands, except share and per share data) 
+Note B – Acquisitions (continued) 
+The fair value of the contingent payments was estimated using the present value of management’s projections of the financial results of Topline during the earn-out period. The final earn-out payment of $13,600 was made in 2012. 
+The transaction was accounted for using the acquisition method required by GAAP. Accordingly, the assets and liabilities of Topline were adjusted to their fair values, and the excess of the purchase price over the fair value of the assets acquired, including identified intangible assets, was recorded as goodwill. The fair values assigned to tangible and intangible assets acquired and liabilities assumed are based on management’s estimates and assumptions. The purchase price, net of working capital adjustment of $ 4,154 paid to the Topline Seller, has been allocated as follows: 
+Accounts receivable 
+$ 
+55,950 
+Inventory 
+8,460 
+Prepaid expenses and other current assets 
+990 
+Fixed assets 
+3,895 
+Trade name 
+16,600 
+Customer relationships 
+7,900 
+Non-compete agreement 
+300 
+Other assets 
+108 
+Accounts payable 
+(40,475 
+) 
+Accrued expenses 
+(7,784 
+) 
+Income tax payable 
+(3,082 
+) 
+Deferred tax liability 
+(8,491 
+) 
+Total fair value excluding goodwill 
+34,371 
+Goodwill 
+31,003 
+Net assets acquired 
+$ 
+65,374 
+The trade name, customer relationships, non-compete agreement and goodwill related to this transaction are not deductible for tax purposes. 
+The Company incurred approximately $ 529 in acquisition related costs applicable to the Topline transaction during the year ended December 31, 2011. These expenses were included in operating expenses in the Company’s Consolidated Statements of Income for the year ended December 31, 2011. 
+The results of operations of SM Canada, Cejon and Topline have been included in the Company’s Consolidated Statements of Income from the date of the acquisitions. Unaudited pro forma information related to these acquisitions is not included, as the impact of these transactions is not material to the Company’s consolidated results. 
+Note C – Factor Receivable 
+The Company has a collection agency agreement with Rosenthal & Rosenthal, Inc. (“Rosenthal”) that became effective on September 15, 2009. The agreement can be terminated by the Company or Rosenthal at any time upon 60 days prior written notice. Under the agreement the Company can request advances from Rosenthal of up to 85% of aggregate receivables submitted to Rosenthal. The agreement provides the Company with a $30,000 credit facility with a $15,000 sub-limit for letters of credit at an interest rate based, at the Company’s election, upon either the prime rate or LIBOR. As of December 31, 2013 , no letters of credit were outstanding. The Company also pays a fee based on a percentage of the gross invoice amount submitted to Rosenthal. Originally the fee was 0.275% of the gross invoice amount but, on July 10, 2012 the agreement was amended to reduce the fee to 0.25% . Rosenthal assumes the credit risk on a substantial portion of the receivables that the Company submits to it and, to the extent of any loans made to the Company, Rosenthal maintains a lien on all of the Company’s receivables to secure the Company’s obligations. 
+F-15 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Consolidated Financial Statements 
+December 31, 2013 and 2012 
+($ in thousands, except share and per share data) 
+Note C – Factor Receivable (continued) 
+Rosenthal services the collection of the Company's accounts receivable. Funds collected by Rosenthal are applied against advances owed to Rosenthal (if any), and the balance is due and payable to the Company, net of any fees. The allowance against “factor receivables” is a projected provision based on certain formulas and prior approvals for markdowns, allowances, discounts, advertising and other deductions that customers may deduct against their payments. 
+Note D – Notes Receivable 
+As of December 31, 2013 and 2012 , Notes Receivable were comprised of the following: 
+December 31, 
+2013 
+December 31, 
+2012 
+Due from seller of SM Canada (see Note B) 
+3,171 
+3,085 
+On August 26, 2010, the Company entered into a Debenture and Stock Purchase Agreement with Bakers Footwear Group, Inc. (“Bakers”) pursuant to which the Company paid $5,000 to acquire a subordinated debenture in the principal amount of $5,000 and 1,844,860 unregistered shares of Bakers common stock which traded on the Over-the-Counter Bulletin Board. The Company allocated $996 of the purchase price to the common stock and $4,004 to the subordinated debenture based upon their relative fair values. The debenture provided for the accrual of interest at the rate of 11% per annum and quarterly cash payments of interest. The principal amount of the debenture was payable by Bakers in four equal installments of $1,250 due on August 31, 2017, 2018, 2019 and 2020. The difference between the $4,004 purchase price of the debenture and the $5,000 principal amount of the debenture is considered original issue discount and is being amortized over the life of the debenture. During 2012 and 2011, the total amount of the discount amortized was $ 145 and $ 88 , bringing the value of the note to $ 4,148 and $ 4,092 , respectively. On October 3, 2012, Bakers filed for Chapter 11 protection in the United States Bankruptcy Court. As a consequence of the bankruptcy, the debenture due from Bakers (as well as the Bakers common stock) is considered impaired and, therefore, was deemed to have no value. Accordingly, a charge of $ 4,148 (as well as a charge of $996 for the write-off of Bakers common stock) was included in the impairment charges and provision for litigation in the Company's Consolidated Financial Statements for the year ended December 31, 2012. In January 2013, Bakers announced its intention to liquidate or sell all of its remaining assets. 
+In April 2012, Betsey Johnson LLC filed for Chapter 11 protection in the United States Bankruptcy Court. Shortly thereafter, Betsey Johnson LLC announced that it would commence an orderly liquidation of all of its assets. As a consequence of the bankruptcy, the note receivable due from Betsey Johnson LLC is considered impaired, and accordingly, an impairment charge was recorded and the value of the note was reduced to its anticipated recovery of $ 500 in the second quarter of 2012. In the fourth quarter of 2012, the Company collected $ 1,522 and recorded a $ 1,022 benefit related to a greater-than-anticipated recovery of the Betsey Johnson LLC note receivable. 
+Note E – Note Receivable – Related Party 
+On June 25, 2007, the Company made a loan to Steve Madden, its Creative and Design Chief and a principal stockholder of the Company, in the amount of $3,000 in order for Mr. Madden to satisfy a personal tax obligation resulting from the exercise of stock options that were due to expire and to retain the underlying Company common stock, which common stock he pledged to the Company as collateral to secure the loan. Mr. Madden executed a secured promissory note in favor of the Company bearing interest at an annual rate of 8% , which was due on the earlier of the date Mr. Madden ceases to be employed by the Company or December 31, 2007. The note was amended and restated as of December 19, 2007 to extend the maturity date to March 31, 2009, and amended and restated again as of April 1, 2009 to change the interest rate to 6% and the maturity date to June 30, 2015 at which time all principal and accrued interest would become due. On January 3, 2012, in connection with an amendment of Mr. Madden’s employment contract, the note was again amended and restated (the “Third Amended and Restated Note”) to extend the maturity date to December 31, 2023 and eliminate the accrual of interest after December 31, 2011. In addition, the Third Amended and Restated Note provides that, commencing on December 31, 2014, and annually on each December 31 thereafter through the maturity date, one-tenth of the principal amount thereof, together with accrued interest, will be cancelled by the Company, provided that Mr. Madden continues to be employed by the Company on each such December 31. As of December 31, 2011, $1,090 of interest has accrued on the principal amount of the loan related to the period prior to the elimination of the accrual of interest and has been reflected on the Company’s Consolidated Financial Statements. Due to the three-for-two stock split of the Company's 
+F-16 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Consolidated Financial Statements 
+December 31, 2013 and 2012 
+($ in thousands, except share and per share data) 
+Note E – Note Receivable – Related Party (continued) 
+common stock effected on May 3, 2010, the number of shares of the Company's common stock securing the loan increased from 510,000 shares to 765,000 shares. Based upon the increase in the market value of the Company’s common stock since the inception of the loan, on July 12, 2010, the Company released from its security interest 555,000 shares of the Company’s common stock, retaining 210,000 shares with a total market value on that date of $6,798 , as collateral for the loan. Additionally, pursuant to the three-for-two stock split of the Company's common stock effected on May 31, 2011, the number of shares of the Company's common stock securing the repayment of the loan increased from 210,000 shares to 315,000 shares and pursuant to the three-for-two stock split of the Company's common stock effected on October 1, 2013, the number of shares of the Company's common stock securing the repayment of the loan has increased from 315,000 shares to 472,500 shares. On December 31, 2013 , the total market value of these shares was $ 17,289 . Pursuant to the elimination of further interest accumulation under the Third Amended and Restated Note, the outstanding principal and the accrued interest as of December 31, 2013 and 2012 has been discounted to reflect imputed interest, which will be amortized over the remaining life of the loan. 
+Note F – Fair Value Measurement 
+The accounting guidance under Accounting Standards Codification “Fair Value Measurements and Disclosures” (“ASC 820-10”) requires the Company to make disclosures about the fair value of certain of its assets and liabilities. ASC 820-10 clarifies the principle that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. ASC 820-10 utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. A brief description of those three levels is as follows: 
+• 
+Level 1: Observable inputs such as quoted prices in active markets for identical assets or liabilities. 
+• 
+Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. 
+• 
+Level 3: Significant unobservable inputs. 
+The Company’s financial assets and liabilities, subject to fair value measurements, as of December 31, 2013 and 2012 are as follows: 
+F-17 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Consolidated Financial Statements 
+December 31, 2013 and 2012 
+($ in thousands, except share and per share data) 
+Note F – Fair Value Measurement (continued) 
+December 31, 2013 
+Fair Value Measurements 
+Using Fair Value Hierarchy 
+Fair value 
+Level 1 
+Level 2 
+Level 3 
+Assets: 
+Cash equivalents 
+$ 
+102,247 
+$ 
+102,247 
+$ 
+— 
+$ 
+— 
+Current marketable securities – available for sale (a) 
+20,591 
+20,591 
+— 
+— 
+Forward contracts 
+(460 
+) 
+— 
+(460 
+) 
+— 
+Note receivable – related party 
+3,581 
+— 
+— 
+3,581 
+Note receivable – Seller of SM Canada 
+3,171 
+— 
+— 
+3,171 
+Long-term marketable securities – available for sale (b) 
+91,267 
+91,267 
+— 
+— 
+Total assets 
+$ 
+220,397 
+$ 
+214,105 
+$ 
+(460 
+) 
+$ 
+6,752 
+Liabilities: 
+Contingent consideration 
+$ 
+34,795 
+— 
+— 
+$ 
+34,795 
+Total liabilities 
+$ 
+34,795 
+$ 
+— 
+$ 
+— 
+$ 
+34,795 
+(a) Current marketable securities includes unrealized gains of $59. 
+(b) Long-term marketable securities includes unrealized gains of $1,387 and unrealized losses of $4,530. 
+December 31, 2012 
+Fair Value Measurements 
+Using Fair Value Hierarchy 
+Fair value 
+Level 1 
+Level 2 
+Level 3 
+Assets: 
+Cash equivalents 
+$ 
+27,219 
+$ 
+27,219 
+$ 
+— 
+$ 
+— 
+Current marketable securities – available for sale (a) 
+16,285 
+16,285 
+— 
+— 
+Forward contracts 
+161 
+— 
+161 
+— 
+Note receivable – related party 
+3,581 
+— 
+— 
+3,581 
+Note receivable – SM Canada 
+3,085 
+— 
+— 
+3,085 
+Long-term marketable securities – available for sale (b) 
+81,202 
+81,202 
+— 
+— 
+Total assets 
+$ 
+131,533 
+$ 
+124,706 
+$ 
+161 
+$ 
+6,666 
+Liabilities: 
+Contingent consideration 
+$ 
+41,960 
+— 
+— 
+$ 
+41,960 
+Total liabilities 
+$ 
+41,960 
+$ 
+— 
+$ 
+— 
+$ 
+41,960 
+(a) Current marketable securities includes unrealized gains of $91 and unrealized losses of $241. 
+(b) Long-term marketable securities includes unrealized gains of $3,076 and unrealized losses of $325. 
+Forward contracts are entered into to manage the risk associated with the volatility of future cash flows denominated in Mexican pesos. Fair value of these instruments are based on observable market transactions of spot and forward rates. 
+For the note receivable due from related party (see Note E) and due from the sellers of SM Canada (see Note B), the carrying value was determined to be the fair value, based upon their actual interest rates, which approximate current market interest rates. 
+The Company has recorded a liability for potential contingent consideration in connection with the February 21, 2012 acquisition of SM Canada (see Note B). Pursuant to the terms of an earn-out agreement between the Company and the seller of SM Canada, 
+F-18 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Consolidated Financial Statements 
+December 31, 2013 and 2012 
+($ in thousands, except share and per share data) 
+Note F – Fair Value Measurement (continued) 
+earn-out payments will be due annually to the seller of SM Canada based on the financial performance of SM Canada for each of the 12-month periods ending on March 31, 2013 through 2017, inclusive. The fair value of the contingent payments was estimated using the present value of management’s projections of the financial results of SM Canada during the earn-out period. The earn-out payment of $4,529 for the period ended March 31, 2013 was paid in the fourth quarter of this year. 
+The Company has recorded a liability for potential contingent consideration in connection with the May 25, 2011 acquisition of Cejon (see Note B). Pursuant to the terms of an earn-out agreement between the Company and the sellers of Cejon, earn-out payments will be made annually to the sellers of Cejon, based on the financial performance of Cejon for each of the twelve-month periods ending on June 30, 2012 through 2016, inclusive. The fair value of the contingent payments was estimated using the present value of management’s projections of the financial results of Cejon during the earn-out period. The earn-out payment of $5,139 for the period ended June 30, 2013 was paid in the third quarter of this year. 
+The Company has recorded a liability for contingent consideration as a result of the February 10, 2010 acquisition of Big Buddha, Inc. The final contingent consideration was paid during the third quarter of 2013 in the amount of $1,813 based on the financial performance of Big Buddha for the 12-month period ended March 31, 2013. 
+Accounting guidance permits entities to choose to measure financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The accounting guidance also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that chose different measurement attributes for similar assets and liabilities. The Company has elected not to measure any eligible items at fair value. 
+The carrying value of certain financial instruments such as accounts receivable, due from factor and accounts payable approximates their fair values due to the short-term nature of their underlying terms. The fair values of investment in marketable securities available for sale are determined by reference to market data and other valuation techniques, as appropriate. Fair value of the notes receivable held by the Company approximates their carrying value based upon their imputed or actual interest rate, which approximates applicable current market interest rates. 
+Note G - Property and Equipment 
+The major classes of assets and total accumulated depreciation and amortization are as follows: 
+December 31, 
+2013 
+2012 
+Land and building 
+$ 
+767 
+$ 
+767 
+Leasehold improvements 
+62,087 
+55,005 
+Machinery and equipment 
+5,727 
+5,808 
+Furniture and fixtures 
+6,498 
+6,432 
+Computer equipment 
+38,664 
+30,676 
+113,743 
+98,688 
+Less accumulated depreciation and amortization 
+(57,137 
+) 
+(53,403 
+) 
+Property and equipment - net 
+$ 
+56,606 
+$ 
+45,285 
+Depreciation and amortization expense related to property and equipment included in operating expenses amounted to approximately $ 8,858 in 2013 , $ 8,501 in 2012 and $ 6,732 in 2011 . 
+F-19 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Consolidated Financial Statements 
+December 31, 2013 and 2012 
+($ in thousands, except share and per share data) 
+Note H – Goodwill and Intangible Assets 
+The following is a summary of the carrying amount of goodwill by segment as of December 31, 2013 and 2012 : 
+Wholesale 
+Net Carrying 
+Footwear 
+Accessories 
+Retail 
+Amount 
+Balance at January 1, 2012 
+$ 
+20,939 
+$ 
+49,155 
+$ 
+5,501 
+$ 
+75,595 
+Purchase accounting adjustment - Topline 
+11,610 
+169 
+— 
+11,779 
+Acquisition of SM Canada 
+3,841 
+— 
+344 
+4,185 
+Balance at December 31, 2012 
+36,390 
+49,324 
+5,845 
+91,559 
+Purchase accounting adjustment - SM Canada 
+1,686 
+— 
+3,496 
+5,182 
+Translation and other 
+(485 
+) 
+— 
+(124 
+) 
+(609 
+) 
+Balance at December 31, 2013 
+$ 
+37,591 
+$ 
+49,324 
+$ 
+9,217 
+$ 
+96,132 
+The following table details identifiable intangible assets as of December 31, 2013 and 2012 : 
+2013 
+Estimated Lives 
+Cost Basis 
+Accumulated Amortization (1) 
+Net Carrying Amount 
+Trade names 
+6–10 years 
+$ 
+4,590 
+$ 
+2,059 
+$ 
+2,531 
+Customer relationships 
+10 years 
+27,339 
+10,424 
+16,915 
+License agreements 
+3–6 years 
+5,600 
+5,600 
+— 
+Non-compete agreement 
+5 years 
+2,440 
+1,853 
+587 
+Other 
+3 years 
+14 
+14 
+— 
+39,983 
+19,950 
+20,033 
+Re-acquired right 
+indefinite 
+35,200 
+2,558 
+32,642 
+Trade names 
+indefinite 
+76,888 
+— 
+76,888 
+$ 
+152,071 
+$ 
+22,508 
+$ 
+129,563 
+(1) Includes the effect of foreign currency translation related primarily to the changes in the Canadian dollar in relation to the U.S. dollar. 
+2012 
+Estimated Lives 
+Cost Basis 
+Accumulated Amortization 
+Net Carrying Amount 
+Trade names 
+6–10 years 
+$ 
+4,590 
+$ 
+1,618 
+$ 
+2,972 
+Customer relationships 
+10 years 
+27,339 
+7,541 
+19,798 
+License agreements 
+3–6 years 
+5,600 
+5,600 
+— 
+Non-compete agreement 
+5 years 
+2,440 
+1,530 
+910 
+Other 
+3 years 
+14 
+14 
+— 
+39,983 
+16,303 
+23,680 
+Re-acquired right 
+indefinite 
+35,200 
+— 
+35,200 
+Trade names 
+indefinite 
+76,888 
+— 
+76,888 
+$ 
+152,071 
+$ 
+16,303 
+$ 
+135,768 
+The amortization of intangible assets amounted to $ 3,459 for 2013 and $ 3,305 for 2012 and is included in operating expenses on 
+F-20 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Consolidated Financial Statements 
+December 31, 2013 and 2012 
+($ in thousands, except share and per share data) 
+Note H – Goodwill and Intangible Assets (continued) 
+the Company's Consolidated Statements of Income. The estimated future amortization expense of purchased intangibles for the next five years is as follows: 
+2014 
+$ 
+3,254 
+2015 
+3,072 
+2016 
+2,769 
+2017 
+2,530 
+2018 
+2,389 
+Thereafter 
+6,019 
+Total 
+$ 
+20,033 
+Note I – Stock-Based Compensation 
+In March 2006, the Board of Directors of the Company approved the Steven Madden, Ltd. 2006 Stock Incentive Plan (the “Plan”) under which nonqualified stock options, stock appreciation rights, performance shares, restricted stock, other stock-based awards and performance-based cash awards may be granted to employees, consultants and non-employee directors. The stockholders approved the Plan on May 26, 2006. On May 25, 2007, the stockholders approved an amendment to the Plan to increase the maximum number of shares that may be issued under the Plan from 4,050,000 to 5,231,250 . On May 22, 2009, the stockholders approved a second amendment to the Plan that increased the maximum number of shares that may be issued under the Plan to 13,716,000 . On May 25, 2012, the stockholders approved a third amendment to the Plan that increased the maximum number of shares that may be issued under the Plan to 23,466,000 . The following table summarizes the number of shares of common stock authorized for use under the Plan, the number of stock-based awards granted (net of expired or cancelled awards) under the Plan and the number of shares of common stock available for the grant of stock-based awards under the Plan: 
+Common stock authorized 
+23,466,000 
+Stock-based awards, including restricted stock and stock options granted, net of expired or cancelled 
+(17,986,000 
+) 
+Common stock available for grant of stock-based awards as of December 31, 2013 
+5,480,000 
+In accordance with accounting guidance relating to stock-based compensation, the Company records compensation for all awards based on the fair value of options and restricted stock on the date of grant. Equity-based compensation is included in operating expenses on the Company's Consolidated Statements of Income. For the years ended December 31, 2013 , 2012 and 2011 , total equity-based compensation was as follows: 
+Years Ended December 31, 
+2013 
+2012 
+2011 
+Restricted stock 
+$ 
+15,097 
+$ 
+11,622 
+$ 
+5,787 
+Stock options 
+5,044 
+5,812 
+5,617 
+Total 
+$ 
+20,141 
+$ 
+17,434 
+$ 
+11,404 
+The Company classifies cash flows resulting from the tax benefits from tax deductions in excess of the compensation costs recognized for those options (tax benefits) as financing cash flows. For the years ended December 31, 2013 , 2012 and 2011 , the Company realized a tax benefit from stock-based compensation of $ 4,277 , $ 4,608 and $ 4,154 , respectively. 
+F-21 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Consolidated Financial Statements 
+December 31, 2013 and 2012 
+($ in thousands, except share and per share data) 
+Note I – Stock-Based Compensation (continued) 
+Stock Options 
+The total intrinsic value of options exercised during 2013 , 2012 and 2011 amounted to $ 8,016 , $ 15,386 and $ 10,768 respectively. During the years ended December 31, 2013 , 2012 and 2011 , 1,061,513 options with a weighted average exercise price of $12.91 , 1,243,500 options with a weighted average exercise price of $12.77 and 1,290,000 options with a weighted average exercise price of $ 10.61 vested, respectively. As of December 31, 2013 , there were unvested options relating to 1,218,199 shares of common stock with a total of $7,620 of unrecognized compensation cost and an average vesting period of 2.5 years. 
+The Company uses the Black-Scholes-Merton option-pricing model to estimate the fair value of options granted, which requires several assumptions. The expected term of the options represents the estimated period of time until exercise and is based on the historical experience of similar awards. Expected volatility is based on the historical volatility of the Company’s common stock. The risk free interest rate is based on the U.S. Treasury yield curve in effect at the time of the grant. With the exception of special dividends paid in November 2005 and 2006, the Company historically has not paid regular cash dividends and thus the expected dividend rate is assumed to be zero. The following weighted average assumptions were used for stock options granted: 
+2013 
+2012 
+2011 
+Volatility 
+31% to 45% 
+40% to 47% 
+43% to 49% 
+Risk-free interest rate 
+0.37% to 1.38% 
+0.47% to 0.87% 
+0.61% to 1.78% 
+Expected life in years 
+4 to 5 
+3 to 5 
+2 to 4 
+Dividend yield 
+0.00% 
+0.00% 
+0.00% 
+Weighted average fair value 
+$10.21 
+$9.43 
+$7.31 
+Activity relating to stock options granted under the Company’s plans and outside the plans during the three years ended December 31, 2013 is as follows: 
+Number of Shares 
+Weighted Average Exercise Price 
+Weighted Average Remaining Contractual Term 
+Aggregate Intrinsic Value 
+Outstanding at January 1, 2011 
+4,054,500 
+$ 
+9.39 
+Granted 
+927,000 
+19.95 
+Exercised 
+(658,500 
+) 
+7.59 
+Cancelled/Forfeited 
+(268,500 
+) 
+12.95 
+Outstanding at December 31, 2011 
+4,054,500 
+11.86 
+Granted 
+354,000 
+27.09 
+Exercised 
+(874,500 
+) 
+10.61 
+Cancelled/Forfeited 
+(130,500 
+) 
+13.40 
+Outstanding at December 31, 2012 
+3,403,500 
+13.71 
+Granted 
+584,000 
+30.03 
+Exercised 
+(563,000 
+) 
+10.28 
+Cancelled/Forfeited 
+(51,500 
+) 
+22.32 
+Outstanding at December 31, 2013 
+3,373,000 
+17.01 
+3.6 years 
+$ 
+94,064 
+Exercisable at December 31, 2013 
+2,163,000 
+12.88 
+2.8 years 
+$ 
+51,269 
+F-22 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Consolidated Financial Statements 
+December 31, 2013 and 2012 
+($ in thousands, except share and per share data) 
+Note I – Stock-Based Compensation (continued) 
+The following table summarizes information about stock options at December 31, 2013 : 
+Options Outstanding 
+Options Exercisable 
+Range of Exercise Price 
+Number Outstanding 
+Weighted Average Remaining Contractual Life (in Years) 
+Weighted Average Exercise Price 
+Number Exercisable 
+Weighted Average Exercise Price 
+$3.65 to $8.72 
+1,073,000 
+1.8 
+$5.67 
+1,073,000 
+$5.67 
+$9.50 to $14.99 
+203,000 
+3.2 
+13.43 
+80,500 
+13.26 
+$15.29 to $20.86 
+924,000 
+3.4 
+17.19 
+552,000 
+16.75 
+$21.17 to $26.95 
+448,000 
+4.8 
+24.55 
+407,500 
+24.62 
+$27.03 to $38.96 
+732,000 
+5.7 
+29.77 
+50,000 
+28.75 
+3,380,000 
+3.6 
+17.01 
+2,163,000 
+12.88 
+Restricted Stock 
+The following table summarizes restricted stock activity during the three years ended December 31, 2013 : 
+Number of Shares 
+Weighted Average Fair Value at Grant Date 
+Outstanding at January 1, 2011 
+843,000 
+$ 
+11.47 
+Granted 
+574,500 
+21.10 
+Vested 
+(358,500 
+) 
+10.37 
+Forfeited 
+(52,500 
+) 
+18.96 
+Outstanding at December 31, 2011 
+1,006,500 
+16.96 
+Granted 
+3,670,500 
+24.23 
+Vested 
+(340,500 
+) 
+16.33 
+Forfeited 
+(3,000 
+) 
+25.40 
+Outstanding at December 31, 2012 
+4,333,500 
+23.16 
+Granted 
+434,000 
+29.21 
+Vested 
+(473,500 
+) 
+19.65 
+Forfeited 
+(37,000 
+) 
+18.82 
+Outstanding at December 31, 2013 
+4,257,000 
+24.24 
+As of December 31, 2013 , there was $87,393 of total unrecognized compensation cost related to restricted stock awards granted under the Plan. This cost is expected to be recognized over a weighted average of 8.7 years. 
+The Company determines the fair value of its restricted stock awards based on the market price of its common stock on the date of grant. The fair value of the restricted stock that vested during the years ended December 31, 2013 , 2012 and 2011 was $ 9,306 , $ 5,553 and $ 3,718 , respectively. 
+F-23 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Consolidated Financial Statements 
+December 31, 2013 and 2012 
+($ in thousands, except share and per share data) 
+Note I – Stock-Based Compensation (continued) 
+On January 3, 2012, the Company and its Creative and Design Chief, Steven Madden, entered into an amendment of Mr. Madden’s existing employment agreement, pursuant to which, on February 8, 2012, Mr. Madden was granted 1,463,057 restricted shares of the Company’s common stock at the then market price of $27.34 , which will vest in equal annual installments over a seven-year period commencing on December 31, 2017 and, thereafter, on each December 31 through December 31, 2023, subject to Mr. Madden’s continued employment on each such vesting date. Pursuant to the amended employment agreement, on June 30, 2012, Mr. Madden exercised his right to receive an additional restricted stock award, and on July 3, 2012 he was granted 1,893,342 restricted shares of the Company's common stock at the then market price of $21.13 , which will vest in the same manner as the prior grant. 
+Note J - Preferred Stock 
+The Company has authorized 5,000,000 shares of preferred stock. The Board of Directors has designated 60,000 shares of such preferred stock as Series A Junior Participating Preferred Stock (“Series A Preferred”). Holders of the shares of Series A Preferred are entitled to dividends equal to 1,000 times dividends declared or paid on the Company's common stock. Each share of Series A Preferred entitles the holder to 1,000 votes on all matters submitted to the holders of common stock. The Series A Preferred has a liquidation preference of $ 1,000 per share, and is not redeemable by the Company. No shares of preferred stock have been issued. 
+Note K - Share Repurchase Program 
+The Company's Board of Directors authorized a share repurchase program (the “Share Repurchase Program”), effective as of January 1, 2004, originally providing for share repurchases in the aggregate amount of $20,000 . The Share Repurchase Program does not have a fixed expiration or termination date and may be modified or terminated by the Board of Directors at any time. On several occasions the Board of Directors has increased the amount authorized for repurchase. On June 18, 2013, the Board of Directors approved a continuation of the Share Repurchase Program for an additional $125,000 in repurchases of the Company's common stock. The Share Repurchase Program permits the Company to effect repurchases from time to time through a combination of open market repurchases or in privately negotiated transactions at such prices and times as are determined to be in the best interest of the Company. During the twelve months ended December 31, 2013 , an aggregate of 3,000,167 shares of the Company's common stock was repurchased, in the open market, under the program, at an average price per share of $34.06 , for an aggregate purchase price of approximately $102,172 . As of December 31, 2013 , approximately $69,918 remained available for future repurchases under the Share Repurchase Program. 
+Note L - Derivative Instruments 
+The Company uses derivative instruments, specifically, forward foreign exchange contracts, to manage the risk associated with the volatility of future cash flows denominated in Mexican pesos. The foreign exchange contracts will be used to mitigate the impact of exchange rate fluctuations on forecasted purchases of inventory from Mexico and are designated as cash flow hedging instruments. The Company enters into forward contracts with terms of no more than two years. As of December 31, 2013 , the fair value of the Company's foreign currency derivatives, which is included on the Consolidated Balance Sheet in accrued expenses, is $460 . As of December 31, 2013 , $283 of losses related to cash flow hedges are recorded in accumulated other comprehensive income, net of taxes and are expected to be recognized in earnings at the same time the hedged items affect earnings. As of December 31, 2012 , the fair value of the Company's foreign currency derivatives, which is included on the Consolidated Balance Sheet in prepaid expenses and other current assets, was $161 . As of December 31, 2012 , $87 of gains related to cash flow hedges are recorded in accumulated other comprehensive income, net of taxes and are expected to be recognized in earnings at the same time the hedged items affect earnings. As of December 31, 2013 and 2012 , none of the Company's hedging activities were considered ineffective and thus no gains and losses relating to ineffectiveness on its hedging activities were recognized in the Consolidated Statements of Income. For the years ended December 31, 2013 and 2012 , gains of $656 and $0 were reclassified from accumulated other comprehensive income and recognized in the Consolidated Statements of Income in cost of sales. 
+F-24 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Consolidated Financial Statements 
+December 31, 2013 and 2012 
+($ in thousands, except share and per share data) 
+Note M - Operating Leases 
+The Company leases office, showroom and retail facilities under noncancelable operating leases with terms expiring at various times through 2023. Future minimum annual lease payments under noncancelable operating leases consist of the following at December 31: 
+2014 
+$ 
+32,035 
+2015 
+32,613 
+2016 
+31,873 
+2017 
+29,087 
+2018 
+25,129 
+Thereafter 
+86,149 
+Total 
+$ 
+236,886 
+A majority of the retail store leases provide for contingent rental payments if gross sales exceed certain targets. In addition, many of the leases contain rent escalation clauses to compensate for increases in operating costs and real estate taxes. Rent expense for the years ended December 31, 2013 , 2012 and 2011 was approximately $ 38,527 , $ 33,073 and $ 25,328 , respectively. Included in such amounts are contingent rents of $ 140 , $ 169 and $ 142 in 2013 , 2012 and 2011 , respectively. 
+Rent expense is calculated by amortizing total base rental payments (net of any rental abatements, construction allowances and other rental concessions), on a straight-line basis, over the lease term. Accordingly, rent expense charged to operations differs from rent paid resulting in the Company recording deferred rent. 
+Note N - Income Taxes 
+The components of income before income taxes are as follows: 
+2013 
+2012 
+2011 
+Domestic 
+$ 
+125,772 
+$ 
+123,691 
+$ 
+117,497 
+Foreign 
+83,179 
+60,496 
+41,295 
+$ 
+208,951 
+$ 
+184,187 
+$ 
+158,792 
+The income tax provision (benefit) consists of the following: 
+2013 
+2012 
+2011 
+Current: 
+Federal 
+$ 
+41,334 
+$ 
+41,280 
+$ 
+43,953 
+State and local 
+11,265 
+10,319 
+8,560 
+Foreign 
+14,385 
+11,035 
+6,814 
+66,984 
+62,634 
+59,327 
+Deferred: 
+Federal 
+8,815 
+2,272 
+1,588 
+State and local 
+(667 
+) 
+(396 
+) 
+676 
+Foreign 
+534 
+113 
+— 
+8,682 
+1,989 
+2,264 
+$ 
+75,666 
+$ 
+64,623 
+$ 
+61,591 
+F-25 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Consolidated Financial Statements 
+December 31, 2013 and 2012 
+($ in thousands, except share and per share data) 
+Note N - Income Taxes (continued) 
+A reconciliation between taxes computed at the federal statutory rate and the effective tax rate is as follows: 
+December 31, 
+2013 
+2012 
+2011 
+Income taxes at federal statutory rate 
+35.0 
+% 
+35.0 
+% 
+35.0 
+% 
+Effects of foreign operations 
+(1.7 
+) 
+(3.3 
+) 
+— 
+State and local income taxes - net of federal income tax benefit 
+3 
+3.4 
+3.9 
+Nondeductible items 
+0.1 
+0.1 
+0.3 
+Valuation allowance (reversal) 
+(0.3 
+) 
+(0.4 
+) 
+Other 
+(0.2 
+) 
+0.2 
+— 
+Effective rate 
+36.2 
+% 
+35.1 
+% 
+38.8 
+% 
+The Company applies the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. 
+In accordance with accounting guidance, the Company has opted to classify interest and penalties that would accrue according to the provisions of relevant tax law as income tax expense on the Consolidated Statements of Income. The Company determines the amount of interest expense to be recognized by applying the applicable statutory rate of interest to the difference between the tax position recognized and the amount previously taken or expected to be taken on a tax return. The Company's tax years 2010 through 2013 remain open to examination by most taxing authorities. The Company has no unrecognized tax benefits recorded as of the year ended December 31, 2013. 
+F-26 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Consolidated Financial Statements 
+December 31, 2013 and 2012 
+($ in thousands, except share and per share data) 
+Note N - Income Taxes (continued) 
+The components of deferred tax assets and liabilities are as follows: 
+December 31, 
+2013 
+2012 
+Current deferred tax assets (liabilities): 
+Receivable allowances 
+$ 
+8,024 
+$ 
+9,005 
+Inventory 
+1,932 
+1,588 
+Unrealized (gain) loss 
+(23 
+) 
+58 
+Accrued expenses 
+499 
+496 
+Other 
+1,835 
+(74 
+) 
+Gross current deferred tax asset 
+12,267 
+11,073 
+Non-current deferred tax assets (liabilities): 
+Depreciation and amortization 
+(5,033 
+) 
+(1,982 
+) 
+Deferred compensation 
+10,827 
+8,200 
+Unremitted earnings of foreign subsidiaries 
+(20,748 
+) 
+(10,224 
+) 
+Deferred rent 
+3,741 
+2,991 
+Amortization of goodwill 
+(3,293 
+) 
+(3,097 
+) 
+Unrealized loss (gain) 
+1,226 
+(1,073 
+) 
+Other 
+56 
+68 
+(13,224 
+) 
+(5,117 
+) 
+Deferred tax (liabilities) assets 
+$ 
+(957 
+) 
+$ 
+5,956 
+The Company's consolidated financial statements provide for any related tax liability on amounts that may be repatriated from foreign operations, aside from undistributed earnings of certain of the Company's foreign subsidiaries that are intended to be indefinitely reinvested in operations outside the U.S. The deferred tax liability of $ 20,748 and $10,224 for the years ended December 31, 2013 and 2012, respectively, reflects the amounts that may be repatriated from foreign operations. A portion of the amount established in the year ended December 31, 2012 was based on the finalization of the purchase accounting in 2012 of Topline. The total amount of indefinitely reinvested earnings of foreign subsidiaries as of December 31, 2013 and 2012 was $42,750 and $ 27,100 , respectively. Accordingly, no provision has been made for United States income taxes which may become payable if those undistributed earnings of foreign subsidiaries are paid as dividends. Determination of the amount of unrecognized deferred income tax liabilities on these earnings is not practicable because such liability, if any, is subject to many variables and is dependent on circumstances existing if and when remittance occurs. 
+Note O – Commitments, Contingencies and Other 
+[1] Legal Proceedings: 
+(a) 
+As previously disclosed, on February 2, 2012, two individuals purporting to be stockholders of the Company commenced separate civil actions in the Supreme Court of New York, Queens County, Mark Ioffe, Derivatively on Behalf of Nominal Defendant Steven Madden, Ltd. v. Steven Madden, et. al, No. 700188-2012 (the “Ioffe Action”) and Catherine L. Phillips, Derivatively on Behalf of Nominal Defendant Steven Madden, Ltd. v. Steven Madden, et. al, No. 700189-2012 (together with the Ioffe Action, the “Actions”). The Actions asserted derivative claims challenging the decision of the Company's Board of Directors in January 2012 to amend Steven Madden's employment agreement dated July 15, 2005, and amended as of December 14, 2009 and to amend the promissory note setting 
+F-27 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Consolidated Financial Statements 
+December 31, 2013 and 2012 
+($ in thousands, except share and per share data) 
+forth Mr. Madden's obligations in respect of a loan made by the Company to Mr. Madden in 2007 and amended in 2009 and claimed, among other things, that the Board violated its duties of loyalty and good faith by approving the amendments. The Actions also asserted claims of unjust enrichment against Mr. Madden. The Company and the other defendants filed a motion for dismissal of the Actions, which was granted by the court on September 13, 2012. The plaintiffs did not file a notice of appeal with respect to the dismissal of the Actions and the time period for filing an appeal expired. 
+On or about May 17, 2013, a law firm purporting to represent Mark Ioffe served a demand letter on the Company's Board of Directors (the “Demand Letter”). The allegations in the Demand Letter are substantively the same as the claims made in the Actions in which the Court entered a judgment of dismissal. The Demand Letter provides that should the Board of Directors fail to take the actions demanded within a reasonable period of time or refuse to take such actions, Mr. Ioffe would commence a shareholder derivative action on behalf of the Company. In response to the Demand Letter, the Board of Directors has formed a special committee consisting of Board members Richard P. Randall, Peter Migliorini and Ravi Sachdev to, among other things, investigate and evaluate the various demands, allegations and requests for action contained in the Demand Letter. The special committee commenced an investigation into the matters raised in the Demand Letter and retained independent counsel to assist and advise it in connection with such investigation. After completing a thorough investigation and evaluation of its findings, the special committee reported to the Board of Directors its recommendation that the Company take no action in response to the Demand Letter. The Board accepted the recommendation of the special committee and determined that the best interests of the Company would not be served by taking any action in response to the Demand Letter. 
+(b) 
+As previously disclosed, on July 19, 2011, an individual purporting to act on behalf of a class of similarly situated individuals commenced a civil action in the United States District Court for the Central District of California, Samantha Ellison, individually and on behalf of a class of similarly situated individuals v. Steven Madden, Ltd., No. CV11-05935 (the “Ellison Action”) asserting that the Company made unsolicited commercial text calls to wireless telephone numbers of the class members in violation of the Telephone Consumers Protection Act (the "TCPA") and seeking, on behalf of the class, an injunction requiring the Company to cease all wireless text messages without prior written consent as required by the TCPA, as well as the recovery of statutory damages to the class members together with costs and reasonable attorneys' fees. The Company responded by challenging the suit on several grounds. Settlement discussions resulted in a settlement being reached on July 30, 2012 for an aggregate gross settlement fund of $10,000 , from which all of the Company's settlement obligations were to be paid, including, but not limited to, valid claims, claims administration fees, and the fees and costs of class counsel. Following a fairness hearing, on May 7, 2013, the court entered an order granting final approval of the settlement and dismissing the Ellison Action on the merits and with prejudice. The Company submitted a initial settlement payment of $5,000 into the settlement fund. The Company's insurer covered 45% of the initial settlement payment of $5,000 , subject to the Company's agreement to return, to the Company's insurer, its pro rata share of any remaining amounts in the settlement fund. The claims administrator has paid all of the Company's settlement obligations from the settlement fund. Because of the number of valid claims submitted to the claims administrator and other factors, the settlement fund did not need to be replenished by the Company with any additional amounts over and above the initial settlement payment. The residual funds from the settlement fund, totaling approximately $1,717 , have been returned to the Company, of which 45% has been returned by the Company to the Company's insurer. Accordingly, the actual expense to the Company for the Ellison Action was $1,800 . 
+(c) 
+On August 10, 2005, following the conclusion of an audit of the Company conducted by auditors for U.S. Customs and Border Protection (“U.S. Customs”) during 2004 and 2005, U.S. Customs issued a report that asserts that certain commissions that the Company treated as “buying agents’ commissions” (which are non-dutiable) should be treated as “selling agents’ commissions” and hence are dutiable. Subsequently, U.S. Immigration and Customs Enforcement notified the Company’s legal counsel that a formal investigation of the Company’s importing practices had been commenced as a result of the audit. In September 2007, U.S. Customs notified the Company that it had finalized its assessment of the underpaid duties at $1,400 . The Company, with the advice of legal counsel, evaluated the liability in the case, including additional duties, interest and penalties, and believed that it was not likely to exceed $3,045 , and accordingly, a liability for this amount was recorded as of December 31, 2009. The Company contested the conclusions of the U.S. Customs audit and filed a request for review and issuance of rulings thereon by U.S. Customs Headquarters, of Regulations and Rulings, under internal advice procedures. On September 20, 2010, U.S. Customs issued a ruling in the matter, concluding that the commissions paid by the Company pursuant to buying agreements entered into by the Company and one of its two buying agents under review were bona fide buying-agent commissions and, therefore, were non-dutiable. With respect to the second buying agent, U.S. Customs also ruled that beginning in February 2002, commissions paid by the Company were bona fide buying agent commissions and, therefore, were 
+F-28 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Consolidated Financial Statements 
+December 31, 2013 and 2012 
+($ in thousands, except share and per share data) 
+Note O – Commitments, Contingencies and Other (continued) 
+non-dutiable. However, U.S. Customs found that the Company’s pre-2002 buying agreements with the second agent were legally insufficient to substantiate a buyer-buyer’s agent relationship between the Company and the agent and that commissions paid to the second agent under such buying agreements, in fact, were dutiable. On the basis of the U.S. Customs ruling, the Company reevaluated the liability in the case and believes that it is not likely to exceed $1,248 and the liability was reduced from $3,045 to such amount as of September 30, 2010. 
+On November 21, 2011, U.S. Customs issued a pre-penalty notice to the Company in which it alleges that gross negligence by the Company resulted in an underpayment of duties with respect to certain pre-2002 buying agreements and claims that the Company owes $342 as an additional duty and $1,367 in monetary penalties. In its February 16, 2012 response to the pre-penalty notice, the Company submitted that it owes no additional duty and, further, did not through negligence or gross negligence fail to pay any duty or engage in conduct amounting to either gross negligence or negligence. The Company requested that U.S. Customs withdraw its proposal to issue a notice of penalty and take no further adverse action against the Company. In the event that U.S. Customs is not inclined to withdraw the pre-penalty notice after review of the Company’s response, the Company has requested the opportunity to make an oral presentation to U.S. Customs prior to the issuance of a notice of penalty. In the event that U.S. Customs determines to issue a notice of penalty, the Company intends to file a petition for relief requesting a reduction of the level of culpability and mitigation of the penalty amount assessed. The maximum total amount of damages related to this matter is approximately $1,700 for which the Company has accrued $1,248 . 
+(d) 
+The Company has been named as a defendant in certain other lawsuits in the normal course of business. In the opinion of management, after consulting with legal counsel, the liabilities, if any, resulting from these matters should not have a material effect on the Company’s financial position or results of operations. It is the policy of management to disclose the amount or range of reasonably possible losses in excess of recorded amounts. 
+[2] Employment agreements: 
+Robert Schmertz. Effective January 1, 2013, the Company entered into a new employment agreement with Robert Schmertz, the Company's Brand Director, to replace an existing employment agreement that expired at the end of 2012. The new agreement, which expires on December 31, 2014, provides for an annual salary of $ 725 . In addition, pursuant to his new employment agreement, on January 4, 2013, Mr. Schmertz received a grant of 25,000 shares of the Company's common stock subject to certain restrictions. The restricted shares were issued under the Company's 2006 Stock Incentive Plan, as amended, and will vest in five substantially equal annual installments over five years commencing on the first anniversary of the date of the grant. Additional compensation and bonuses, if any, are at the sole discretion of the Board of Directors. 
+Edward R. Rosenfeld. On December 31, 2012, the Company entered into a new employment agreement with Edward R. Rosenfeld, the Company's Chief Executive Officer and the Chairman of the Board of Directors, to replace an existing employment agreement that expired on December 31, 2012. The agreement, which expires on December 31, 2015, provides for an approximate annual salary of $ 579 through December 31, 2013, $ 608 in 2014 and $ 638 in 2015. In addition, pursuant to his new employment agreement, Mr. Rosenfeld received a grant of 150,000 shares of the Company's common stock subject to certain restrictions. The restricted shares were issued under the Company's 2006 Stock Incentive Plan, as amended, and will vest in equal annual installments over a five -year period commencing on December 1, 2013. Additional compensation and bonuses, if any, are at the sole discretion of the Board of Directors. 
+Steven Madden. On January 3, 2012, the Company and its Creative and Design Chief, Steven Madden, entered into an amendment, dated as of December 31, 2011, to Mr. Madden's existing employment agreement with the Company (the “Amended Madden Agreement”). The Amended Madden Agreement, which extends the term of Mr. Madden's employment through December 31, 2023, provides for an annual base salary of approximately $ 7,417 in 2013, approximately $ 9,667 in 2014, approximately $ 11,917 in 2015 and approximately $ 10,698 in 2016 and in each year thereafter through the end of the term of employment. Effective in 2012, the Amended Madden Agreement eliminates the annual cash bonuses payable to Mr. Madden based on EBITDA and the annual cash bonus in relation to new business contained in Mr. Madden's previously existing employment agreement and provides that all future cash bonuses will be at the sole discretion of the Company's Board of Directors. Further, the Amended Madden Agreement eliminates the annual non-accountable expense allowance of up to $ 200 provided to Mr. Madden under the previously existing employment agreement. Pursuant to the Amended Madden Agreement, on February 8, 2012, Mr. Madden was granted 1,463,056 restricted shares of the Company's common stock valued at approximately $ 40,000 , which will vest in equal annual installments over seven years commencing on December 31, 2017 through December 31, 2023, subject to Mr. 
+F-29 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Consolidated Financial Statements 
+December 31, 2013 and 2012 
+($ in thousands, except share and per share data) 
+Note O – Commitments, Contingencies and Other (continued) 
+Madden's continued employment with the Company on each such vesting date. Pursuant to the Amended Madden Agreement, on June 30, 2012, Mr. Madden exercised his right to receive an additional restricted stock award, and on July 3, 2012 he was granted 1,893,342 restricted shares of the Company's common stock, which will vest in the same manner as the February 8, 2012 grant. As consideration for the additional restricted stock grant, Mr. Madden will receive a reduction in his annual base salary in years subsequent to 2012 as follows: approximately $ 4,000 in 2013, approximately $ 6,125 in 2014, approximately $ 8,250 in 2015 and approximately $ 7,026 in 2016 and in each year thereafter through the end of the term of employment. In addition to the opportunity for discretionary cash bonuses, the Amended Madden Agreement entitles Mr. Madden to an annual life insurance premium reimbursement of up to $ 200 , as well as an annual stock option grant and the potential for an additional one-time stock option grant based upon achievement of 
+certain financial performance criteria. The Amended Madden Agreement also provides for the elimination of interest accrued after December 31, 2011 on an outstanding loan in the original principal amount of $ 3,000 made by the Company to Mr. Madden, the extension of the maturity date of such loan until December 31, 2023, and the forgiveness of 1/10th of the principal amount of the loan, together with accrued interest, annually over a ten-year period commencing on December 31, 2014 for so long as Mr. Madden continues to be employed by the Company on each such December 31st. 
+Arvind Dharia. On February 8, 2012, the Company and its Chief Financial Officer, Arvind Dharia, entered into an amendment of Mr. Dharia's existing employment agreement. The amendment, among other things, extends the term of Mr. Dharia's employment agreement, which was set to expire at the end of 2011, until December 31, 2014 and increases his annual base salary to $ 555 effective January 1, 2012 through the remainder of the term. Pursuant to the amendment, on February 8, 2012, Mr. Dharia received a restricted stock award for 15,000 restricted shares of the Company's common stock, which will vest in substantially equal annual installments over a three -year period commencing on February 8, 2013 through February 8, 2015. The agreement, as amended, provides for an annual bonus to Mr. Dharia at the discretion of the Board of Directors. 
+Amelia Newton Varela. Effective January 1, 2014, the Company entered into a new employment agreement with Amelia Newton Varela, the Company's Executive Vice President of Wholesale, to replace an existing employment agreement that expired at the end of 2013. The new agreement, which expires on December 31, 2016 provides for an annual salary of $ 500 through December 31, 2016 and provides the opportunity for annual cash incentive bonuses. In addition, on February 3, 2014, Ms. Varela received an option to purchase 100,000 shares of common stock at an exercise price equal to the market price of the Company's common stock on the last trading day prior to the grant. The option will vest in equal annual installments over a four -year period commencing on the first anniversary of the grant date. 
+Awadhesh Sinha. Effective January 1, 2014, the Company entered into a new employment agreement with Awadhesh Sinha, the Company's Chief Operating Officer, to replace an existing employment agreement that expired at the end of 2013. The new agreement, which expires on December 31, 2016 provides for an annual salary of $ 600 , $ 630 , and $ 661 for the three years ended December 31, 2014, 2015, and 2016 and provides the opportunity for annual cash and share based incentive bonuses. In addition, on January 15, 2014, Mr. Sinha received a grant of 29,886 shares of restricted common stock, which will vest in equal annual installments over a three -year period on each of December 15, 2014, December 15, 2015, and December 15, 2016. 
+[3] Letters of credit: 
+At December 31, 2013 , the Company had open letters of credit for the purchase of imported merchandise of approximately $ 1,842 . 
+[4] License agreements: 
+On February 9, 2011, the Company entered into a license agreement with Basic Properties America Inc. and BasicNet S.p.A, under which the Company has the right to use the Superga® trademark in connection with the sale and marketing of women's footwear. The agreement requires the Company to pay the licensor a royalty equal to a percentage of net sales and a minimum royalty in the event that specified net sales targets are not achieved. The agreement was amended on April 11, 2013 extending the original agreement through December 31, 2022. 
+On January 1, 2010, the Company entered into a license agreement with Jones Investment Co. Inc., under which the Company has the right to use the GLO Jeans® trademark in connection with the sale and marketing of women's footwear exclusively to K-Mart. The agreement requires the Company to pay the licensor a royalty and advertising payments equal to a percentage of net sales and a minimum royalty and advertising payment in the event that specified net sales targets 
+F-30 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Consolidated Financial Statements 
+December 31, 2013 and 2012 
+($ in thousands, except share and per share data) 
+Note O – Commitments, Contingencies and Other (continued) 
+are not achieved. The agreement which expired on December 31, 2012, was renewed for an additional three-year term and will now expire on December 31, 2015. Subsequently, effective December 31, 2013, the Company terminated the license agreement with Jones Investment Co. Inc. requiring Jones Investment Co. Inc. to fulfill all of its financial obligations through the year ending December 31, 2013. 
+In September 2009, the Company entered into a license agreement with Dualstar Entertainment Group, LLC, under which the Company has the right to use the Olsenboye® trademark in connection with the marketing and sale of footwear and accessories. The agreement requires the Company to make royalty and advertising payments equal to a percentage of net sales and a minimum royalty and advertising payment in the event that specified net sales targets are not achieved. The initial term of this agreement, which expired on December 31, 2011 has been extended until December 31, 2015. 
+On September 10, 2008, the Company entered into a license agreement with Dualstar Entertainment Group, LLC, under which the Company has the right to use the Elizabeth and James® trademark in connection with the sale and marketing of footwear. The agreement required the Company to make royalty and advertising payments equal to a percentage of net sales and a minimum royalty and advertising payment in the event that specified net sales targets were not achieved. The agreement was terminated by the Company in December of 2013 and a charge was recorded for the remainder of the guaranteed minimum payments. The cash outflows for the guaranteed minimum royalty will continue through the original contract expiration of March 31, 2015. 
+On July 1, 2008, the Company entered into a license agreement with Jones Investment Co. Inc., under which the Company has the right to use the l.e.i.® trademark in connection with the sale and marketing of women's footwear exclusively to Wal-Mart. The agreement required the Company to pay the licensor a royalty and advertising payments equal to a percentage of net sales and a minimum royalty and advertising payment in the event that specified net sales targets are not achieved. The initial term of this agreement, which expired on December 31, 2011, was renewed for an additional three-year term, which will expire on December 31, 2014. 
+On March 28, 2007, the Company, through its Accessories Division, entered into a license agreement to design, manufacture and distribute handbags and belts and related accessories under the DF Daisy Fuentes® and the Daisy Fuentes® brands. The agreement required the Company to pay the licensor a royalty and brand management fees based on a percentage of net sales and a minimum royalty in the event that specified net sales targets are not achieved. The agreement expired on December 31, 2012 and was not renewed. 
+Future minimum royalty payments are $1,830 for 2014 , $1,165 for 2015 through 2016, and $665 for 2017 through 2018. Royalty expenses are included in the “cost of goods sold” section of the Company's Consolidated Statements of Income. 
+[5] Related Party Transactions: 
+On February 23, 2012, the Company entered into an agreement (the "2012 Consulting Agreement") with JLM Consultants, Inc., a company wholly-owned by John Madden, one of the Company's directors and the brother of Steven Madden, the Company's founder and Creative and Design Chief, which replaced an earlier consulting agreement (the "2004 Consulting Agreement") between the Company and JLM Consultants, Inc. that had expired by its terms on December 31, 2005 but under which JLM Consultants, Inc. had continued to provide consulting services for the consideration provided in the 2004 Consulting Agreement. Under the 2012 Consulting Agreement, Mr. Madden and JLM Consultants, Inc. will continue to provide consulting services with respect to the development of international sales of the Company. JLM Consultants, Inc. received fees and expenses of $ 1,310 in 2013 pursuant to the 2012 Consulting Agreement and $ 1,447 and $ 1,552 in 2012 and 2011 , respectively, pursuant to the 2004 Consulting Agreement. The fees and expenses paid to JLM Consultants, Inc. in respect to 2011 were in addition to fees that Mr. Madden received for serving as a director of the Company in 2011. Subsequent to 2011, Mr. Madden no longer receives fees for his service as a director of the Company. 
+[6] Concentrations: 
+The Company maintains cash and cash equivalents with various major financial institutions which at times are in excess of the amount insured. In addition, the Company's marketable securities are principally held at four brokerage companies . 
+During the year ended December 31, 2013 , the Company did not purchase more than 10% of its merchandise from any single supplier. Total product purchases from China for the year ended December 31, 2013 were approximately 85% . 
+F-31 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Consolidated Financial Statements 
+December 31, 2013 and 2012 
+($ in thousands, except share and per share data) 
+Note O – Commitments, Contingencies and Other (continued) 
+During the year ended December 31, 2012 , the Company did not purchase more than 10% of its merchandise from any single supplier. Total product purchases from China for the year ended December 31, 2012 were approximately 88% . 
+During the year ended December 31, 2011 , the Company did not purchase more than 10% of its merchandise from any single supplier. Total product purchases from China for the year ended December 31, 2011 were approximately 90% . 
+For the year ended December 31, 2013 , the Company did not have any customers who account for more than 10% of total net sales or 10% of total accounts receivable. 
+For the year ended December 31, 2012 , the Company did not have any customers who account for more than 10% of total net sales or 10% of total accounts receivable. 
+For the year ended December 31, 2011 , the Company did not have any customers who account for more than 10% of total net sales or 10% of total accounts receivable. 
+Purchases are made primarily in United States dollars. 
+[7] Valuation and qualifying accounts: 
+The following is a summary of the allowance for chargebacks and doubtful accounts related to accounts receivable and the allowance for chargebacks related to the amount due from factor for the years ended: 
+December 31, 
+2013 
+2012 
+2011 
+Balance at beginning of year 
+$ 
+22,437 
+$ 
+18,219 
+$ 
+15,258 
+Reductions in reserve, net 
+(2,025 
+) 
+— 
+— 
+Increases in reserve, net 
+— 
+4,218 
+2,961 
+Balance at end of year 
+$ 
+20,412 
+$ 
+22,437 
+$ 
+18,219 
+The following is a summary of goodwill and the related accumulated amortization for the: 
+Year Ended December 31, 
+2013 
+2012 
+2011 
+Cost basis 
+Balance at beginning of year 
+$ 
+92,157 
+$ 
+76,193 
+$ 
+39,211 
+Acquisitions and purchase price adjustments 
+4,573 
+15,964 
+36,982 
+Balance at end of year 
+96,730 
+92,157 
+76,193 
+Accumulated amortization 
+Balance at beginning of year 
+598 
+598 
+598 
+Balance at end of year 
+598 
+598 
+598 
+Goodwill - net 
+$ 
+96,132 
+$ 
+91,559 
+$ 
+75,595 
+Note P – Operating Segment Information 
+The Company operates the following business segments: Wholesale Footwear, Wholesale Accessories, Retail, First Cost and Licensing. The Wholesale Footwear segment, through sales to department stores, mid-tier retailers, mass market merchants , online retailers and specialty stores, derives revenue, both domestically and worldwide through our International business, from sales of branded and private label women’s, men’s, girls’ and children’s footwear. The Wholesale Accessories segment, which includes branded and private label handbags, belts and small leather goods as well as cold weather and selected other fashion accessories, derives revenue, both domestically and worldwide through our International business, from sales to department stores, mid-tier retailers, mass market merchants, online retailers and specialty stores. Our Wholesale Footwear and Wholesale Accessories segments, through our International business, derive revenue from Canada and, under special distribution arrangements, from 
+F-32 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Consolidated Financial Statements 
+December 31, 2013 and 2012 
+($ in thousands, except share and per share data) 
+Asia, Europe, the Middle East, Mexico, India, South Africa and Central and South America. The Retail segment, through the operation of Company-owned retail stores in the United States and Canada and the Company’s websites, derives revenue from sales of branded women’s, men’s and children’s footwear, accessories and licensed products to consumers. The First Cost segment represents activities of a subsidiary which earns commissions for serving as a buying agent of footwear products to mass-market merchandisers, mid-tier department stores and other retailers with respect to their purchase of footwear. In the Licensing segment, the Company licenses its Steve Madden® and Steven by Steve Madden® trademarks and other trademark rights for use in connection with the manufacture, marketing and sale of sunglasses, eyewear, outerwear, bedding, hosiery and women's fashion apparel, jewelry, watches and luggage. In addition, this segment licenses the Betsey Johnson® and Betseyville® trademarks for use in connection with the manufacture, marketing and sale of apparel, jewelry, swimwear, eyewear, watches, fragrances and outerwear. 
+F-33 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Consolidated Financial Statements 
+December 31, 2013 and 2012 
+($ in thousands, except share and per share data) 
+Note P – Operating Segment Information (continued) 
+Year ended 
+Wholesale Footwear 
+Wholesale Accessories 
+Total Wholesale 
+Retail 
+First Cost 
+Licensing 
+Corporate 
+Consolidated 
+December 31, 2013: 
+Net sales 
+$ 
+860,448 
+$ 
+244,163 
+$ 
+1,104,611 
+$ 
+209,612 
+$ 
+— 
+$ 
+— 
+$ 
+— 
+$ 
+1,314,223 
+Gross profit 
+263,864 
+89,307 
+353,171 
+129,205 
+— 
+— 
+— 
+482,376 
+Commissions and licensing fees – net 
+— 
+— 
+— 
+— 
+7,988 
+7,644 
+— 
+15,632 
+Income from operations 
+117,689 
+44,738 
+162,427 
+24,726 
+7,988 
+7,644 
+983 
+203,768 
+Depreciation and amortization 
+6,659 
+5,542 
+116 
+— 
+662 
+12,979 
+Segment assets 
+$ 
+537,609 
+$ 
+152,553 
+690,162 
+129,549 
+60,530 
+— 
+— 
+880,241 
+Capital expenditures 
+$ 
+9,276 
+$ 
+11,470 
+$ 
+— 
+$ 
+— 
+$ 
+— 
+$ 
+20,746 
+December 31, 2012: 
+Net sales 
+$ 
+794,486 
+$ 
+241,339 
+$ 
+1,035,825 
+$ 
+191,247 
+$ 
+— 
+$ 
+— 
+$ 
+— 
+$ 
+1,227,072 
+Gross profit 
+249,547 
+87,055 
+336,602 
+119,100 
+— 
+— 
+— 
+455,702 
+Commissions and licensing fees – net 
+— 
+— 
+— 
+— 
+7,778 
+7,617 
+$ 
+— 
+15,395 
+Income from operations 
+104,326 
+41,376 
+145,702 
+26,311 
+7,778 
+7,617 
+(8,432 
+) 
+178,976 
+Depreciation and amortization 
+7,717 
+4,818 
+107 
+— 
+— 
+12,642 
+Segment assets 
+$ 
+511,011 
+$ 
+138,602 
+649,613 
+101,674 
+52,752 
+— 
+— 
+804,039 
+Capital expenditures 
+$ 
+7,506 
+$ 
+12,596 
+$ 
+— 
+$ 
+— 
+$ 
+— 
+$ 
+20,102 
+December 31, 2011 
+Net sales 
+$ 
+636,809 
+$ 
+176,824 
+$ 
+813,633 
+$ 
+154,916 
+$ 
+— 
+$ 
+— 
+$ 
+— 
+$ 
+968,549 
+Gross profit 
+205,379 
+61,474 
+266,853 
+95,095 
+— 
+— 
+— 
+361,948 
+Commissions and licensing fees – net 
+— 
+— 
+— 
+— 
+9,795 
+8,920 
+— 
+18,715 
+Income from operations 
+86,676 
+28,009 
+114,685 
+20,370 
+9,795 
+8,920 
+— 
+153,770 
+Depreciation and amortization 
+6,604 
+4,378 
+78 
+— 
+— 
+11,060 
+Segment assets 
+$ 
+383,170 
+$ 
+132,648 
+515,818 
+76,630 
+47,338 
+— 
+— 
+639,786 
+Capital expenditures 
+$ 
+10,314 
+$ 
+5,163 
+$ 
+— 
+$ 
+— 
+$ 
+— 
+$ 
+15,477 
+F-34 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Consolidated Financial Statements 
+December 31, 2013 and 2012 
+($ in thousands, except share and per share data) 
+Note P – Operating Segment Information (continued) 
+Revenues by geographic area are as follows: 
+Year Ended December 31, 
+2013 
+2012 
+2011 
+Domestic (a) 
+$ 
+1,200,797 
+$ 
+1,133,077 
+$ 
+915,286 
+International 
+113,426 
+93,995 
+53,263 
+Total 
+$ 
+1,314,223 
+$ 
+1,227,072 
+$ 
+968,549 
+(a) Includes revenues of $315,154, $261,759 and $162,377 for the years ended 2013, 2012 and 2011 related to sales to U.S. customers where the title is transferred outside the U.S. and the sale is recorded by our International subsidiary. 
+F-35 
+STEVEN MADDEN, LTD. AND SUBSIDIARIES 
+Notes to Consolidated Financial Statements 
+December 31, 2013 and 2012 
+($ in thousands, except share and per share data) 
+Note Q - Quarterly Results of Operations (unaudited) 
+The following is a summary of the quarterly results of operations for the years ended December 31, 2013 and 2012 : 
+March 31, 
+June 30, 
+September 30, 
+December 31, 
+2013: 
+Net sales 
+$ 
+278,916 
+$ 
+297,634 
+$ 
+394,791 
+$ 
+342,882 
+Cost of sales 
+176,318 
+187,056 
+255,088 
+213,385 
+Gross profit 
+102,598 
+110,578 
+139,703 
+129,497 
+Commissions, royalty and licensing fee income - net 
+4,366 
+3,699 
+4,937 
+2,630 
+Net income attributable to Steven Madden, Ltd. 
+$ 
+23,400 
+$ 
+28,956 
+$ 
+43,992 
+$ 
+35,659 
+Net income per share: 
+Basic 
+0.36 
+0.45 
+0.68 
+0.55 
+Diluted 
+0.35 
+0.43 
+0.66 
+0.54 
+2012: 
+Net sales 
+$ 
+265,970 
+$ 
+288,692 
+$ 
+356,883 
+$ 
+315,527 
+Cost of sales 
+169,877 
+184,438 
+225,668 
+191,387 
+Gross profit 
+96,093 
+104,254 
+131,215 
+124,140 
+Commissions, royalty and licensing fee income - net 
+4,473 
+4,252 
+3,875 
+2,795 
+Net income attributable to Steven Madden, Ltd. 
+$ 
+21,868 
+$ 
+26,899 
+$ 
+37,896 
+$ 
+32,963 
+Net income per share: 
+Basic 
+0.34 
+0.42 
+0.59 
+0.51 
+Diluted 
+0.33 
+0.41 
+0.57 
+0.49 
+F-36 
+Exhibit Index 
+2.01 
+Stock Purchase Agreement dated February 10, 2010 between the Company and Jeremy Bassan (incorporated by reference to Exhibit 2.1 to the Company's Quarterly Report on Form 10-Q for its fiscal quarter ended September 30, 2010 filed with the SEC on November 9, 2010) 
+2.02 
+Restructuring Agreement dated October 5, 2010 among the Company, BJ Acquisition LLC, BJ Agent LLC, Betsey Johnson LLC, Betsey Johnson (UK) Limited, Betsey Johnson Canada Ltd., BJ Vines, Inc., Betsey Johnson, Chantal Bacon, Castanea Family Investments, LLC, Castanea Family Holdings, LLC and Castanea Partners Fund III, L.P. (incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K filed with the SEC on October 8, 2010) 
+2.03 
+Stock Purchase Agreement dated May 20, 2011 among the Company, The Topline Corporation and William F. Snowden (incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K filed with the SEC on May 25, 2011) 
+2.04 
+Stock Purchase Agreement dated May 25, 2011 among the Company, David Seerherman, Cejon, Inc., and Kenneth Rogala (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the SEC on May 26, 2011) 
+2.05 
+Asset Purchase Agreement, dated as of January 20, 2012, among Steve Madden Canada Inc., Steve Madden Retail Canada Inc., Pasa Agency Inc., Gelati Imports Inc., the Company, SML Canada Acquisition Corp., 6798039 Canada Inc., 6798012 Canada Inc., 3574563 Canada Inc. and Thomas Alberga (incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K filed with the SEC on January 26, 2012) 
+3.01 
+Certificate of Incorporation of Steven Madden, Ltd. (incorporated by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2013 filed with the SEC on August 8, 2013) 
+3.02 
+Amended & Restated By-Laws of Steven Madden, Ltd. (incorporated by reference to Exhibit 99.1 to the Company's Current Report on Form 8-K filed with the SEC on March 28, 2008) 
+4.01 
+Specimen Certificate for shares of Common Stock (incorporated by reference to Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2013 filed with the SEC on August 8, 2013) 
+10.01 
+Third Amended and Restated Secured Promissory Note dated as of June 25, 2007 of Steven H. Madden to the Company (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed with the SEC on January 9, 2012) 
+10.02 
+Consulting Agreement dated February 23, 2012 between the Company and J.L.M. Consultants Inc.(incorporated by reference to Exhibit 10.2 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2012 filed with the SEC on March 1, 2013. 
+10.03 
+Collection Agency Agreement dated July 10, 2009 between Rosenthal & Rosenthal, Inc. and the Company (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for its fiscal quarter ended September 30, 2010 filed with the SEC on November 9, 2010) 
+10.04 
+Amendment to Collection Agency Agreement dated February 16, 2010 between Rosenthal & Rosenthal, Inc. and the Company (incorporated by reference to Exhibit 10.10 to the Company's Annual Report on Form 10-K for its fiscal year ended December 31, 2010 filed with the SEC on March 12, 2010) 
+10.05 
+Collection Agency Agreement dated July 10, 2009 between Rosenthal & Rosenthal, Inc. and Daniel Friedman & Associates, Inc. (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed with the SEC on July 16, 2009) 
+10.06 
+Collection Agency Agreement dated July 10, 2009 between Rosenthal & Rosenthal, Inc. and Diva Acquisition Corp. (incorporated by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K filed with the SEC on July 16, 2009) 
+10.07 
+Collection Agency Agreement dated July 10, 2009 between Rosenthal & Rosenthal, Inc. and Steven Madden Retail, Inc. (incorporated by reference to Exhibit 10.4 to the Company's Current Report on Form 8-K filed with the SEC on July 16, 2009) 
+10.08 
+Collection Agency Agreement dated July 10, 2009 between Rosenthal & Rosenthal, Inc. and Stevies, Inc. (incorporated by reference to Exhibit 10.5 to the Company's Current Report on Form 8-K filed with the SEC on July 16, 2009) 
+10.09 
+Collection Agency Agreement dated July 10, 2009 between Rosenthal & Rosenthal, Inc. and SML Acquisition Corp. (incorporated by reference to Exhibit 10.6 to the Company's Current Report on Form 8-K filed with the SEC on July 16, 2009) 
+10.10 
+Letter Agreement dated July 10, 2009 among Rosenthal & Rosenthal, Inc., the Company, Daniel Friedman & Associates, Inc., Diva Acquisition Corp., Steven Madden Retail, Inc., Stevies, Inc., and SML Acquisition Corp. (incorporated by reference to Exhibit 10.7 to the Company's Current Report on Form 8-K filed with the SEC on July 16, 2009) 
+F-37 
+10.11 
+Guarantee dated July 10, 2009 of the Company, Daniel Friedman & Associates, Inc., Diva Acquisition Corp., Steven Madden Retail, Inc., Stevies, Inc., and SML Acquisition Corp. in favor of Rosenthal & Rosenthal, Inc. (incorporated by reference to Exhibit 10.8 to the Company's Current Report on Form 8-K filed with the SEC on July 16, 2009) 
+10.12 
+Earn-Out Agreement dated May 25, 2011 among Steven Madden, Ltd., David Seerherman, Cejon, Inc., Cejon Accessories, Inc., New East Designs, LLC and Kenneth Rogala (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed with the SEC on May 26, 2011). 
+10.13 
+Third Amended Employment Agreement dated July 15, 2005 between the Company and Steven Madden (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the SEC on July 20, 2005) 
+10.14 
+Amendment dated December 14, 2009 to Third Amended Employment Agreement between the Company and Steven Madden (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the SEC on December 17, 2009) 
+10.15 
+Amended and Restated Second Amendment dated as of December 31, 2011 to Third Amended Employment Agreement between the Company and Steven Madden (incorporated by reference to Exhibit 10.17 to the Company's Annual Report on Form 10-K for its fiscal year ended December 31, 2011 filed with the SEC on February 29, 2012) 
+10.16 
+Employment Agreement dated January 1, 1998 between the Company and Arvind Dharia (incorporated by reference to Exhibit 10.07 to the Company's Annual Report on Form 10-K for its fiscal year ended December 31, 2000 filed with the SEC on March 30, 2001) # 
+10.17 
+Amendment No. 1 dated June 29, 2001 to Employment Agreement between the Company and Arvind Dharia (incorporated by reference to Exhibit 99.4 to the Company's Quarterly Report on Form 10-Q for its fiscal quarter ended June 30, 2001 filed August 14, 2001) # 
+10.18 
+Amendment No. 2 dated October 30, 2002 to Employment Agreement between the Company and Arvind Dharia (incorporated by reference to Exhibit 10.16 to the Company's Quarterly Report on Form 10-Q for its fiscal quarter ended September 30, 2002 filed with the SEC on November 14, 2002) # 
+10.19 
+Amendment No. 3 dated February 1, 2006 to Employment Agreement between the Company and Arvind Dharia (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the SEC on February 3, 2006) # 
+10.20 
+Amendment No. 4 dated October 7, 2009 to Employment Agreement of Arvind Dharia between the Company and Arvind Dharia (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed with the SEC on October 13, 2009) # 
+10.21 
+Amendment No. 5 dated February 8, 2012 to Employment Agreement of Arvind Dharia between the Company and Arvind Dharia (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the SEC on February 14, 2012) # 
+10.22 
+Employment Agreement dated January 10, 2014 between the Company and Awadhesh Sinha (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed with the SEC on January 16, 2014) # 
+10.23 
+Employment Agreement dated January 2, 2013 between the Company and Robert Schmertz (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the SEC on January 8, 2013) # 
+10.24 
+Employment Agreement dated January 10, 2014 between the Company and Amelia Newton Varela (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the SEC on January 16, 2014) # 
+10.25 
+Employment Agreement dated December 31, 2012 between the Company and Edward R. Rosenfeld (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the SEC on January 3, 2013) # 
+10.26 
+The 1999 Stock Plan, approved and adopted on March 15, 1999, amended as of March 20, 2000 and March 30, 2001 (incorporated by reference to Exhibit 10.A to the Company's Registration Statement on Form S-8 filed with the SEC on July 26, 2004) # 
+10.27 
+2006 Stock Incentive Plan (Amended and Restated Effective May 22, 2009), amended by the Board on April 5, 2012 and approved and adopted by the Company's stockholders on May 25, 2012 (incorporated by reference to Exhibit 10.30 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2012 filed with the SEC on March 1, 2013) # 
+21.01 
+Subsidiaries of the Registrant † 
+23.01 
+Consent of EisnerAmper LLP † 
+24.01 
+Power of Attorney (included on signature page hereto) 
+31.01 
+Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 † 
+31.02 
+Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 † 
+F-38 
+32.01 
+Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 †* 
+32.02 
+Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 †* 
+101 
+The following materials from Steven Madden, Ltd.'s Annual Report on Form 10-K for the fiscal year ended December 31, 2013, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Stockholders' Equity, (v) the Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements, tagged as blocks of text.* 
+† 
+Filed herewith. 
+# 
+Indicates management contract or compensatory plan or arrangement required to be identified pursuant to Item 15(b) of this Annual Report on Form 10-K. 
+* 
+This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date hereof and irrespective of any general incorporation language in any filing, except to the extent the Company specifically incorporates it by reference. 
+F-39
\ No newline at end of file
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new file mode 100644
index 0000000000000000000000000000000000000000..7346846d3dc5169be44c3b45e370702aa7c71aec
--- /dev/null
+++ b/raw/filings/0000913241/2013/0001445305-14-000668/filing_metadata.csv
@@ -0,0 +1,2 @@
+cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing
+0000913241,SHOO,"STEVEN MADDEN, LTD.",10-K,2014-02-27,2013-12-31,2014-02-27T21:16:39.000Z,0001445305-14-000668,shoo-20131231x10k.htm,10-K,14237928,1,0,https://www.sec.gov/Archives/edgar/data/913241/000144530514000668/shoo-20131231x10k.htm,https://www.sec.gov/Archives/edgar/data/913241/000144530514000668/,2013,2013,1
diff --git a/raw/filings/0000913241/2013/0001445305-14-000668/item1.txt b/raw/filings/0000913241/2013/0001445305-14-000668/item1.txt
new file mode 100644
index 0000000000000000000000000000000000000000..a1978a9ddb9507e8a1a8c1e48ea4255880a1d530
--- /dev/null
+++ b/raw/filings/0000913241/2013/0001445305-14-000668/item1.txt
@@ -0,0 +1,203 @@
+ITEM 1 BUSINESS 
+($ in thousands, except share and per share data) 
+Overview 
+Steven Madden, Ltd. and its subsidiaries (collectively, the “Company”) design, source, market and sell fashion-forward name brand and private label footwear for women, men and children and name brand and private label fashion handbags and accessories and license our trademarks for use in connection with the manufacture, marketing and sale of various products of our licensees. Our products are marketed through our retail stores and our e-commerce websites, as well as better department stores, major department stores, mid-tier department stores, specialty stores, luxury retailers, value priced retailers, national chains, mass merchants and catalog retailers throughout the United States and Canada. In addition, we have special distribution arrangements for the marketing of our products in Asia, Europe, the Middle East, Mexico, India, South Africa and South and Central America. We offer a broad range of updated styles designed to establish or complement and capitalize on market trends. We have established a reputation for design creativity and our ability to offer quality products in popular styles at affordable prices, delivered in an efficient manner and time frame. 
+Steven Madden, Ltd. was incorporated as a New York corporation on July 9, 1990, reincorporated under the same name in Delaware in November 1998 and completed its initial public offering in December 1993. Shares of Steven Madden, Ltd. common stock, $.0001 par value per share, currently trade on the NASDAQ Global Select Market under the symbol “SHOO”. Our principal executive offices are located at 52-16 Barnett Avenue, Long Island City, NY 11104. Our telephone number is (718) 446-1800 and our website address is http://www.stevemadden.com. 
+We file Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other reports and information with the Securities and Exchange Commission (the “SEC”) pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). These reports, any amendments to such reports, and our proxy statements for our stockholders' meetings are available free of charge, on the "Investor Relations" section of our website as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. We will provide paper copies of such filings free of charge upon request. The public may read and copy any materials filed by us with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information regarding the operation of the SEC's Public Reference Room is available by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding us, which is available at http://www.sec.gov. 
+Fiscal year 2013 represents the fifth consecutive year that the Company achieved record sales and earnings. Net sales for 2013 increased 7% to $1,314,223 from $1,227,072 in the same period of last year. Net income attributable to Steven Madden, 
+1 
+Ltd. increased 10% to $132,007 in 2013 compared to $119,626 in the same period of last year. Diluted earnings per share in 2013 increased to $1.98 per share on 66,836,000 diluted weighted average shares outstanding compared to $1.81 per share on 66,255,000 diluted weighted average shares outstanding in the prior year. 
+On August 19, 2013 our Board of Directors declared a three-for-two stock split of the Company's outstanding shares of common stock, effected in the form of a stock dividend on the Company's outstanding common stock. Stockholders of record at the close of business on September 20, 2013 received one additional share of Steven Madden. Ltd., common stock for every two shares of common stock owned on that date. The additional shares were distributed to the Company's stockholders on October 1, 2013. Stockholders received cash in lieu of any fractional shares of common stock they otherwise would have received in connection with the dividend. All share and per share data provided herein gives effect to this stock split, applied retroactively. 
+Product Distribution Segments 
+Our business is comprised of five distinct segments: Wholesale Footwear, Wholesale Accessories, Retail, First Cost and Licensing. 
+Our Wholesale Footwear segment is comprised of the following brands: Steve Madden Women's®, Madden Girl®, Steve Madden Men's®, Steven, l.e.i.® (under license), Olsenboye® (under license), Stevies®, Steve Madden Kids®, Madden®, Betsey Johnson® shoes, Report®, Superga® (under license), and includes our International business and certain private label footwear business. Our Wholesale Accessories segment includes Big Buddha, Betseyville, Betsey Johnson, Steve Madden, Steven, Cejon and, through a license agreement Olsenboye® accessories brands and includes our International business and certain private label accessories business. Steven Madden Retail, Inc., our wholly-owned retail subsidiary, operates Steve Madden, Steven and Superga retail stores and Steve Madden, Superga, Betsey Johnson and FREEBIRD by Steven e-commerce websites. The First Cost segment represents activities of a subsidiary that earns commissions for serving as a buying agent for footwear products under private labels for many of the country's large mass-market merchandisers, shoe chains and other value priced retailers. Our Licensing segment is engaged in the licensing of the Steve Madden and Steven by Steve Madden marks for use in connection with the manufacture, marketing and sale of sunglasses, eyewear, outerwear, bedding, hosiery, women's fashion apparel, jewelry, watches and luggage. In addition, we license our Betsey Johnson® and Betseyville® marks for use in connection with the manufacture, marketing and sale of apparel, jewelry, swimwear, eyewear, watches, fragrances and outerwear. 
+Wholesale Footwear Segment 
+Steve Madden Women's. We design, source and market our Steve Madden brand to department stores, specialty stores, luxury retailers, value priced retailers, national chains, mass merchants, online retailers and catalog retailers throughout the United States and Canada. The Steve Madden brand has become a leading life-style brand in the fashion conscious marketplace. To serve our customers (primarily women ages 16 to 35), Steve Madden Women's offers fashion forward footwear designed to appeal to customers seeking exciting, new footwear designs at affordable prices. New products for Steve Madden Women's are test marketed at Company-owned retail stores. Typically, within a few days, we can determine if the test product appeals to our customers. This enables us to use our flexible sourcing model to rapidly respond to changing trends and customer preferences, which we believe is essential for success in the fashion industry. 
+Madden Girl. We design, source and market a full collection of directional young women's shoes under the Madden Girl brand. Madden Girl is geared for young women ages 13 to 20, and is an “opening price point” brand currently sold at major department stores, mid-tier retailers and specialty stores. 
+Steve Madden Men's. We design, source, and market a lifestyle collection of men's footwear for the fashion forward man, ages 18 to 45 years old, under the Steve Madden® brand. Retail channels include major department stores, mid-tier department stores, better specialty stores, online retailers and independent shoe stores throughout the United States. Price points for Steve Madden Men's products range from $70 to $150 at retail. 
+Madden. T he Madden brand is a streetwear focused collection of footwear geared to meet the trend directions of the 13 to 21 year old fashion consumer. Madden products range from $45 to $85 and are sold to national specialty stores, better department stores, mid tier department stores, online retailers and independent specialty stores. 
+Steven. We design, source and market women's fashion footwear under the Steven® trademark through major department and better footwear specialty stores throughout the United States as well as in our retail stores. Priced a tier above the Steve 
+2 
+Madden brand, Steven products are designed to appeal principally to fashion conscious women, ages 25 to 45, who shop at department stores and footwear boutiques. 
+l.e.i. On July 1, 2008, we entered into a license agreement with Jones Investment Co. Inc., under which we have the right to use the l.e.i.® trademark in connection with the sale and marketing of footwear exclusively to Wal-Mart. 
+Olsenboye. On September 2, 2009, we entered into a license agreement with Dualstar Entertainment Group, under which we have the right to use the Olsenboye® trademark in connection with the sale and marketing of footwear exclusively to J.C. Penney. Pursuant to the customer's request that we sell directly to the customer, in 2011 we transitioned our Olsenboye® footwear business from the commission model to the wholesale model. 
+Stevies and Steve Madden Kids. Our Stevies® and Steve Madden Kids brands are designed, sourced and marketed to appeal to young girls, ages six to 12, and are sold at department stores, specialty stores, online retailers and independent boutiques throughout the United States. 
+Betsey Johnson Shoes . On October 5, 2010, the Company acquired the Betsey Johnson® trademark and substantially all other intellectual property of Betsey Johnson LLC. The Betsey Johnson® and Betseyville shoe brands are distributed through department stores such as Nordstrom, Dillard's and J.C. Penney and online retailers such as Amazon.com and Zappos. 
+Superga. On February 9, 2011, the Company entered into a license agreement with Basic Properties America Inc. and BasicNet S.p.A., for the use of the Superga® trademark in connection with the marketing and sale of footwear. Founded in Italy in 1911, Superga is known for fashion sneakers that come in a wide range of colors, fabrics and prints. 
+FREEBIRD by Steven . We design, source, and market a full collection of handcrafted, Goodyear welted boots. The designs are inspired by vintage Americana and created using time-honored craftsmanship. The FREEBIRD by Steven® collection conveys a unique fashion life style that transcends many generations. Price points for FREEBIRD by Steven range from $195 to $450 and are currently sold at major department stores, mid-tier retailers, and specialty boutiques. 
+Report. The Report and Report Signature brand was part of our May 2011 acquisition of Topline Corporation ("Topline"). We design, manufacture, market and sell our Report brand to major department stores, mid-tier department stores and independently owned boutiques throughout the United States. 
+Mad Love. Formed in April 2011 as a joint venture, the Mad Love® brand is an exclusive beach-to-the-street life style brand for Target, created to appeal to women with a young attitude and active life style. 
+International Division. Prior to 2009, our international business (the “International Division”) operated under the “first cost” model and, as a result, the revenues derived from the International Division business were included in Commissions and Licensing Fees in the Consolidated Statements of Income included in our Financial Statements. In order to improve operating efficiencies, and to give our international partners better visibility in the process, as of January 2009, we have changed the operating model for our International Division to the “wholesale” model. The International Division ships products to Asia, Canada, Europe, the Middle East, Mexico, South Africa, India and Central and South America. 
+Private label business. We design, source and market private label footwear primarily to specialty retailers, mid-tier chains and mass market merchants. In addition, we design, source and market footwear for third party brands, such as Material Girl® and Candies®. 
+Wholesale Accessories Segment 
+Our Wholesale Accessories segment designs, sources and markets name brands (including our Steve Madden®, Steven by Steve Madden®, Madden Girl®, Betsey Johnson®, Betseyville® and Big Buddha® brands and Olsenboye®, under license,) and private label fashion handbags and accessories to department stores, mass merchants, value priced retailers, online retailers and specialty stores throughout the United States and Canada. In addition, we market and sell cold weather accessories, fashion scarves, wraps and other trend accessories primarily under our Cejon® and the Steve Madden® brand names and private labels to department stores and specialty stores. 
+3 
+Retail Segment 
+As of December 31, 2013 , the Company's wholly-owned subsidiary, Steven Madden Retail, Inc., owned and operated 121 retail stores including 97 Steve Madden full price stores, 17 Steve Madden outlet stores, two Steven stores, one Superga store and four e-commerce websites. In 2013 , we opened six new full price stores, six new outlet stores, established a FREEBIRD by Steven® online store and closed our one Report store. Steve Madden stores are located in major shopping malls and in urban street locations across the United States and Canada. Comparative store sales (sales of those stores, including the e-commerce websites, that were open for all of 2013 and 2012 ) decreased 2.1% in fiscal year 2013 . The Company excludes new locations from the comparable store base for the first year of operations. Stores that are closed for renovations are removed from the comparable store base. 
+We anticipate that the Retail segment will continue to enhance the Company's overall sales and profitability while increasing recognition for our brands. Additionally, our retail stores enable us to evaluate the appeal of new products and designs to our customers and respond accordingly, which, in turn, strengthens the product development efforts of our two Wholesale segments. We expect to open between 13 and 16 new retail stores and anticipate closing three stores in 2014 . 
+First Cost Segment 
+The First Cost segment earns commissions for serving as a buying agent for footwear products under private labels for many of the large mass-market merchandisers, shoe chains and other mid-tier retailers. As a buying agent, we utilize our expertise and our relationships with shoe manufacturers to facilitate the production of private label shoes to our customers' specifications. We believe that by operating in the private label, mass merchandising market, we are able to create additional non-branded sales opportunities. This leverages our overall sourcing and design capabilities. Currently, our First Cost segment earns commissions serving as a buying agent for the procurement of women's, men's and children's footwear for large retailers, including, Kohl's, K-Mart and Sears. In addition, by leveraging the strength of our Steve Madden brands and product designs, we have been able to partially recover our design, product and development costs from our suppliers. 
+Licensing Segment 
+We license our Steve Madden® and Steven by Steve Madden® trademarks for use in connection with the manufacture, marketing and sale of sunglasses, eyewear, outerwear, bedding, hosiery and women's fashion apparel, jewelry, watches and luggage. In addition, the Company licenses the Betsey Johnson® and Betseyville® trademarks for use in connection with the manufacture, marketing and sale of apparel, jewelry, swimwear, eyewear, watches, fragrances and outerwear. Most of our license agreements require the licensee to pay us a royalty based on actual net sales, a minimum royalty in the event that specified net sales targets are not achieved and a percentage of sales for advertising the brand. 
+See Note P to our Consolidated Financial Statements included in this Annual Report on Form 10-K for additional information relating to our five operating segments. 
+Product Design and Development 
+We have established a reputation for our creative designs, marketing and trendy products at affordable price points. We believe that our future success will substantially depend on our ability to continue to anticipate and react to changing consumer demands in a timely manner. To meet this objective, we have developed what we believe is an unparalleled design process that allows us to recognize and respond quickly to changing consumer demands. Our design team strives to create designs which it believes fit our image, reflect current or future trends and can be manufactured in a timely and cost-effective manner. Most new Steve Madden products are tested in select Steve Madden retail stores. Based on these tests, among other things, management selects the Steve Madden products that are then offered for wholesale and retail distribution nationwide. We believe that our design and testing process and flexible sourcing models provide the Steve Madden brands with a significant competitive advantage allowing us to mitigate the risk of incurring costs associated with the production and distribution of less desirable designs. 
+4 
+Product Sourcing and Distribution 
+We source each of our product lines separately based on the individual design, style and quality specifications of the products in such product lines. We do not own or operate manufacturing facilities; rather, we use agents and our own sourcing office to source our products from independently owned manufacturers in China, Mexico, Brazil, Italy and India. We have established relationships with a number of manufacturers and agents in each of these countries. Although we have not entered into any long-term manufacturing or supply contracts, we believe that a sufficient number of alternative sources exist for the manufacture of our products. We continually monitor the availability of the principal materials used in our footwear, which are currently available from a number of sources in various parts of the world. We track inventory flow on a regular basis, monitor sell-through data and incorporate input on product demand from wholesale customers. We use retailers' feedback to adjust the production or manufacture of new products on a timely basis, which helps reduce the close out of slow-moving products. 
+We distribute our products from four third-party distribution centers, two located in California, one located in Texas, and one located in New Jersey, and through two Company-operated distribution centers located in New Jersey and Canada. By utilizing distribution facilities specializing in distribution fulfillment to effect distribution to certain wholesale accounts, Steve Madden retail stores and Internet customers, we believe that our customers are served more promptly and efficiently. 
+Customers 
+Our wholesale customers consist principally of better department stores, major department stores, mid-tier department stores, national chains, mass merchants, value priced retailers, specialty stores, online retailers and catalog retailers. Our customers include, Macy's, DSW, Kohl's, Ross, Nordstrom, Dillard's, Target, Walmart, Payless, Marshall's and TJ Maxx. 
+Distribution Channels 
+United States and Canada 
+We sell our products principally through department stores, specialty stores, online retailers, luxury retailers, national chains and mass merchants and in our Company-owned retail stores in the United States and Canada and our e-commerce websites. For the year ended December 31, 2013 , our Retail segment and our two Wholesale segments generated net sales of approximately $209,612 and $1,104,611 , or 16% and 84% of our total net sales, respectively. Each of these distribution channels is described below. 
+Steve Madden and Steven Retail Stores. As of December 31, 2013 , we operated 97 Steve Madden full price stores, 17 Steve Madden outlet stores, two Steven stores, one Superga store and four e-commerce websites. We believe that our retail stores will continue to enhance overall sales, profitability, and our ability to react to changing consumer trends. Our stores are also a marketing tool that allows us to strengthen brand recognition and to showcase selected items from our full line of branded and licensed products. Furthermore, our retail stores provide us with venues through which to test and introduce new products, designs and merchandising strategies. Specifically, we often test new designs at our Steve Madden retail stores before scheduling them for mass production and wholesale distribution. In addition to these test marketing benefits, we have been able to leverage sales information gathered at Steve Madden retail stores to assist our wholesale customers in order placement and inventory management. 
+A typical Steve Madden store is approximately 1,400 to 1,600 square feet and is located in a mall or street location that we expect will attract the highest concentration of our core demographic, style-conscious customer base. The Steven stores, which are generally the same size as our Steve Madden stores, have a more sophisticated design and format styled to appeal to a more mature target audience. In addition to carefully analyzing mall demographics and locations, we set profitability guidelines for each potential store site. Specifically, we target well trafficked sites at which the demographics fit our consumer profile and seek new locations where the projected fixed annual rent expense stays within our guidelines. By setting these guidelines, we seek to identify stores that will contribute to our overall profitability both in the near and longer terms. 
+Department Stores. We currently sell to over 2,500 doors of 17 department stores throughout the United States and Canada. Our major accounts include Macy's, Nordstrom, Dillard's, Lord & Taylor and Bloomingdale's. 
+We provide merchandising support to our department store customers including, in-store fixtures and signage, supervision of displays and merchandising of our various product lines. Our wholesale merchandising effort includes the creation of in-store concept shops in which a broader collection of our branded products are showcased. These in-store concept shops create an environment that is consistent with our image and are designed to enable the retailer to display and sell a greater volume of our 
+5 
+products per square foot of retail space. In addition, these in-store concept shops encourage longer term commitment by the retailer to our products and enhance consumer brand awareness. 
+In addition to merchandising support, our key account executives maintain weekly communications with their respective accounts to guide them in placing orders and to assist them in managing inventory, assortment and retail sales. We leverage our sell-through data gathered at our retail stores to assist department stores in allocating their open-to-buy dollars to the most popular styles in the product line and phasing out styles with weaker sell-throughs, which, in turn, reduces markdown exposure at season's end. 
+National chains and mass merchants. We currently sell to national chains and mass merchants throughout the United States and Canada. Our major accounts include Target, Walmart, Kmart, JC Penney, Kohl's and Sears. 
+Specialty Stores/Catalog Sales. We currently sell to specialty store locations throughout the United States and Canada. Our major specialty store accounts include DSW, Famous Footwear and Journeys. We offer our specialty store accounts the same merchandising, sell-through and inventory tracking support offered to our department store accounts. Sales of our products are also made through various catalogs, such as Victoria's Secret. 
+Internet Sales. We operate four Internet e-commerce website stores where customers can purchase numerous styles of our Steve Madden Women's, Steven, Madden Men's, FREEBIRD by Steven, Superga, and Betsey Johnson, as well as selected styles of Madden Girl, footwear and accessory products. We also sell to online retailers throughout the United States and Canada. Our major accounts include Zappos and Amazon. 
+International 
+Our products are available in many countries and territories worldwide via several retail selling and distribution agreements. Under the terms of the various agreements, the distributors and retailers purchase product from the Company and are generally required to open a minimum number of stores each year and to pay us a fee for each pair of footwear purchased and an additional sales royalty as a percentage of sales or a predetermined amount per unit of sale. Most of the distributors are required to purchase a specified minimum number of products within specified periods. The agreements we have in place expire at various times through February 14, 2031 and include automatic renewals at the distributors' option if certain conditions are met. These agreements are exclusive in their specific territories, which include Asia, the Middle East, Europe, Mexico, India, South Africa and South and Central America. 
+Competition 
+The fashion industry is highly competitive. We compete with specialty shoe and accessory companies as well as companies with diversified footwear product lines, such as Nine West, Jessica Simpson, Guess, Ugg and Aldo. Our competitors may have greater financial and other resources than we do. We believe effective advertising and marketing, favorable brand image, fashionable styling, high quality, value and fast manufacturing turnaround are the most important competitive factors and intend to continue to employ these elements as we develop our products. However, we cannot be certain that we will be able to compete successfully against our current and future competitors, or that competitive pressures will not have a material adverse effect on our business, financial condition and results of operations. 
+Marketing and Sales 
+We have focused on creating an integrated brand building program to establish Steve Madden as a leading designer of fashion footwear for style-conscious young women and men. Principal marketing activities include product placements in life style and fashion magazines, personal appearances by our founder and Creative and Design Chief, Steve Madden, and in-store promotions. We continue to promote our e-commerce websites where customers can purchase products under the brands Steve Madden Women's, Steven, Madden Men's, FREEBIRD by Steven, Superga, and Betsey Johnson, as well as selected styles of Madden Girl, footwear and accessory products, as well as view exclusive content, participate in contests and “live chat” with customer service representatives. We also connect with our customers through social media forums including Twitter, Facebook and Instagram. 
+Management Information Systems (MIS) Operations 
+Sophisticated information systems are essential to our ability to maintain our competitive position and to support continued growth. We operate on a dual AS/400 system which provides system support for all aspects of our business, including 
+6 
+manufacturing, purchase orders, customer purchase orders, order allocations, invoicing, accounts receivable management, quick response replenishment, point-of-sale support and financial and management reporting functions. We operate a PKMS bar coded Warehouse Management System that is integrated with a Wholesale Enterprise Resource Planning system in order to provide accurate inventory positions and quick response size replenishment for our wholesale customers. In addition, we have installed an Electronic Data Interchange (“EDI”) system which provides a computer link between certain wholesale customers and us that enables both the customer and us to monitor purchases, shipments and invoicing. The EDI system also improves our ability to respond to customer inventory requirements on a weekly basis. We are currently implementing a new Company-wide enterprise resource planning ("ERP") system. Various phases of the Company-wide ERP system were rolled out in 2013 and roll-outs will continue in 2014. We expect the new Company-wide ERP system to provide greater operating efficiencies, enhance customer service and support future business growth. 
+Intellectual Property 
+Trademarks 
+We own numerous trademarks, including, among others: 
+• 
+Steve Madden® 
+• 
+Steve Madden plus Design® 
+• 
+STEVE MADDEN in Chinese Characters® 
+• 
+Madden Girl® 
+• 
+Madden Girl By Steve Madden® 
+• 
+Steven® 
+• 
+Steven by Steve Madden (word mark)® 
+• 
+Steven by Steve Madden (design)® 
+• 
+SM New York® 
+• 
+Madden Girl by Steve Madden® 
+• 
+Eyeshadows by Steve Madden® 
+• 
+Soho Cobbler® 
+• 
+Steve Madden Luxe® 
+• 
+Natural Comfort® 
+• 
+Arc Stripe Design® 
+• 
+Asterisk with Shaded Circle Design® 
+• 
+Trissino® 
+• 
+Torch Stripe (design)® 
+• 
+7B® 
+• 
+7B (design)® 
+• 
+Stacey and Steve® 
+• 
+Stacey and Steve Stylized Design® 
+• 
+Heart Design by Steve Madden® 
+• 
+Steve Madden and Heart Design® 
+• 
+Steve Madden's Fix® (logo and various trademarks) 
+• 
+PEACE LOVE SHOES® (logo and various trademarks) 
+• 
+Stevies® 
+• 
+Stevies by Steve Madden® 
+• 
+Stevies plus Design® 
+7 
+• 
+Big Buddha® 
+• 
+BIG BUDDHA plus Design® 
+• 
+Buddha Lux® 
+• 
+Betsey Johnson (word mark)® 
+• 
+Betsey Johnson (stylized mark)® 
+• 
+Betseyville (word mark)® 
+• 
+Betseyville (stylized mark)® 
+• 
+BETSEYVILLE BY BETSEY JOHNSON® 
+• 
+THE WILD PAIR (word mark)® 
+• 
+WILD PAIR (word mark)® 
+• 
+WILD PAIR (stylized mark)® (logo and various trademarks) 
+• 
+THE WILD PAIR plus Circle (design)® 
+• 
+Report® 
+• 
+Report Seattle® 
+• 
+Report Signature® 
+• 
+Report Girl® 
+• 
+Trend Report® 
+• 
+Topline® 
+• 
+R Report (design)® 
+• 
+R (design)® 
+• 
+R2® 
+• 
+Wild Rice® 
+• 
+Jellisy® 
+• 
+Flirt® 
+• 
+Offset Chevron (design)® 
+• 
+Mad Love® 
+• 
+Freebird by Steven® 
+• 
+Cejon® 
+We consider these marks to be among our most valuable assets and have registered these marks in numerous countries and in numerous International Classes. From time to time we adopt new trademarks in connection with the marketing of new product lines. We believe that our trademarks have significant value and are important for purposes of identifying the Company, the marketing of our products and the products of our licensees, distinguishing them from the products of others. We act aggressively to register and vigorously protect our trademarks against infringement. There can be no assurance, however, that we will be able to effectively obtain rights to our marks throughout all of the countries of the world. Moreover, no assurance can be given that others will not assert rights in or ownership of, our marks and other proprietary rights or that we will be able to resolve any such conflicts successfully. Our failure to protect such rights from unlawful and improper appropriation may have a material adverse effect on our business, financial condition, results of operations and liquidity. 
+Trademark Licensing 
+Our strategy for the continued growth of the Company's business includes expanding the Company's presence beyond footwear and accessories through the selective licensing of our brands. As of December 31, 2013 , we license our Steve Madden® and Steven by Steve Madden® trademarks for use in connection with the manufacture, marketing and sale of sunglasses, eyewear, outerwear, bedding, hosiery and women's fashion apparel, jewelry, watches and luggage. In addition, the Company licenses the Betsey Johnson® and Betseyville® trademarks for use in connection with the manufacture, marketing and sale of apparel, jewelry, 
+8 
+watches, swimwear, eyewear, fragrances and outerwear. Most of our license agreements require the licensee to pay us a royalty based on actual net sales, a minimum royalty in the event that specified net sales targets are not achieved and a percentage of sales for advertising the brand. See Notes A and O to our Consolidated Financial Statements included in this Annual Report on Form 10-K for additional disclosure regarding these licensing arrangements. 
+In addition to the licensing of our trademarks, we also license from third parties trademarks used in connection with certain of our product lines. Under license from Dualstar Entertainment Group, LLC, the Company has the right to use the Olsenboye® trademark in connection with the sale and marketing of footwear and accessories. The term of the Olsenboye® license will expire on December 31, 2015. Also, we hold a license from Jones Investment Co. Inc. under which the Company has the right to use the l.e.i.® trademark in connection with the marketing and sale of women's footwear exclusively to Wal-Mart through December 31, 2014. Through a license agreement with Basic Properties America Inc. and BasicNet S.p.A we have the right to use the Superga® trademark in connection with the marketing and sale of footwear through December 31, 2022. Additionally, we license from G-III Apparel Group the Andrew Marc brand in connection with the design, manufacture and distribution of eyewear and sunglasses. The initial term of the license from G-III Apparel Group expired on July 31, 2013; however, the Company is currently in negotiations with G-III Apparel Group to extend the term of the license. Substantially all of these licensing agreements require us to make royalty and advertising payments to the licensor equal to a percentage of our net sales or a minimum royalty and advertising payment in the event that specified net sales targets are not achieved. 
+Employees 
+On February 1, 2014 , we employed approximately 2,864 employees, of whom approximately 1,886 work on a full-time basis and approximately 978 work on a part-time basis. Most of our part-time employees work in the Retail segment. Approximately 1,991 of our employees are located in the United States, approximately 613 employees are located in Hong Kong and China, and approximately 260 are located in Canada. None of our employees are represented by a union. Our management considers relations with our employees to be good. The Company has never experienced a material interruption of its operations due to a labor dispute. 
+Seasonality 
+Historically, some of our businesses, including our Retail segment, have experienced holiday retail seasonality. In addition to seasonal fluctuations, our operating results fluctuate from quarter to quarter as a result of the timing of holidays, weather, the timing of larger shipments of footwear, market acceptance of our products, product mix, pricing and presentation of the products offered and sold, the hiring and training of additional personnel, inventory write downs for obsolescence, the cost of materials, the product mix among our wholesale, retail and licensing businesses, the incurrence of other operating costs and factors beyond our control, such as general economic conditions and actions of competitors. 
+Backlog 
+We had unfilled wholesale customer orders of approximately $295,000 and $302,000, as of February 1, 2014 and 2013 , respectively. Our backlog at a particular time is affected by a number of factors, including seasonality, timing of market weeks and wholesale customer purchases of our core products through our open stock program. Accordingly, a comparison of backlog from period to period may not be indicative of eventual shipments.
\ No newline at end of file
diff --git a/raw/filings/0000913241/2013/0001445305-14-000668/item13.txt b/raw/filings/0000913241/2013/0001445305-14-000668/item13.txt
new file mode 100644
index 0000000000000000000000000000000000000000..d106777ffea0372dbd7e2b7e757d01c955f11463
--- /dev/null
+++ b/raw/filings/0000913241/2013/0001445305-14-000668/item13.txt
@@ -0,0 +1,3 @@
+ITEM 13 
+CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE 
+The information required to be furnished pursuant to this Item will be set forth in our proxy statement for the 2014 Annual Meeting of Stockholders, and is incorporated herein by reference.
\ No newline at end of file
diff --git a/raw/filings/0000913241/2013/0001445305-14-000668/item9a.txt b/raw/filings/0000913241/2013/0001445305-14-000668/item9a.txt
new file mode 100644
index 0000000000000000000000000000000000000000..42554a6a12133f9232237cceafc963c3e6cfeae8
--- /dev/null
+++ b/raw/filings/0000913241/2013/0001445305-14-000668/item9a.txt
@@ -0,0 +1,13 @@
+ITEM 9A CONTROLS AND PROCEDURES 
+Disclosure Controls and Procedures 
+As required by Rule 13a-15(b) of the Exchange Act, our management, including our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of the end of the fiscal year covered by this Annual Report on Form 10-K. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that our 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 on Form 10-K. 
+Management's Annual Report on Internal Control Over Financial Reporting 
+Management of Steven Madden, Ltd. is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act). 
+Our internal control over financial reporting is a process designed by, or under the supervision of, our principal executive officer and principal financial officer, and effected by the board of directors, management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that (1) pertain to maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (3) provide reasonable assurance 
+30 
+regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements. 
+Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. 
+With the participation of the Chief Executive Officer and the Chief Financial Officer, our management conducted an evaluation of the effectiveness, as of the end of our fiscal year ended December 31, 2013 , of our internal control over financial reporting based on the framework and criteria established in the 1992 Internal Control-Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation our management has concluded that, as of December 31, 2013 , our internal control over financial reporting was effective. 
+Our independent registered public accounting firm, EisnerAmper LLP, has audited the Company's consolidated financial statements and the effectiveness of the Company's internal control over financial reporting as of December 31, 2013 . Their report appears in this Annual Report on Form 10-K. 
+Changes in Internal Control Over Financial Reporting 
+There was no change in our internal control over financial reporting, identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 of the Exchange Act, that occurred during the fiscal quarter ended December 31, 2013 , which has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
\ No newline at end of file
diff --git a/raw/filings/0000913241/2013/0001445305-14-000668/rp_note.txt b/raw/filings/0000913241/2013/0001445305-14-000668/rp_note.txt
new file mode 100644
index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391
diff --git a/raw/filings/0000913241/2013/0001445305-14-000668/rpt_disclosure.txt b/raw/filings/0000913241/2013/0001445305-14-000668/rpt_disclosure.txt
new file mode 100644
index 0000000000000000000000000000000000000000..d6c38c8b0b8ad931c5115a4c66ffe7a8af763748
--- /dev/null
+++ b/raw/filings/0000913241/2013/0001445305-14-000668/rpt_disclosure.txt
@@ -0,0 +1,139 @@
+and Related Party Transactions 
+JLM
+Consultants, Inc., a company wholly-owned by John L. Madden. Since 2004, the Company has engaged JLM Consultants, Inc.,
+a company wholly-owned by John L. Madden, a member of the Board and the brother of Steven Madden, the Company’s founder
+and Creative and Design Chief, to provide consulting services to the Company with respect to the development of international
+sales of the Company. On February 23, 2012, the Company entered into a consulting agreement (the “JLM Consulting Agreement”)
+with JLM Consultants, Inc. to replace a prior consulting agreement. The JLM Consulting Agreement expired by its terms on December
+31, 2014, but Mr. Madden continues to provide consulting services to the Company and the Company continues to make payments to
+JLM Consultants, Inc. consistent with those that would have been required under the expired consulting agreement. In accordance
+with the terms of the JLM Consulting Agreement, for the 2014 Fiscal Year, JLM Consultants, Inc. received the following compensation
+from the Company for services rendered: (a) a commission equal to 1% of net sales, excluding retail royalty income; (b) a commission
+equal to 10% of retail royalty income; (c) 1% of any commission income to the International division that is not recognized in
+net sales; (d) a monthly draw in the amount of $25,000, which amount is offset against commissions earned; (e) a $1,000 per month
+travel allowance; and (f) monthly reimbursements, in the aggregate amount of $59,888 in the 2014 Fiscal Year, for health insurance
+premiums for John L. Madden. Pursuant to this arrangement, JLM Consultants, Inc. received a total of $1,240,375 from the Company
+in the 2014 Fiscal Year. 
+17 
+Pursuant
+to the JLM Consulting Agreement, on January 2, 2013, the Company issued 72,012 restricted shares of the Company’s Common
+Stock to JLM Consultants, Inc. under the Steven Madden, Ltd. 2006 Stock Incentive Plan, as amended (the “2006 Plan”),
+which shares will vest in twelve substantially equal quarterly installments over a three-year period commencing on April 1, 2013
+and continuing to vest quarterly thereafter until the final installment vests on January 1, 2016. 
+Steven
+Madden Employment Agreement. Effective as of July 1, 2005, the Company amended and restated its employment agreement with
+the Company’s founder and Creative and Design Chief, Steven Madden, pursuant to which Mr. Madden agreed to continue to serve
+as the Company’s Creative and Design Chief. The term of Mr. Madden’s employment under his employment agreement commenced
+on July 1, 2005 and, in accordance with the amendment of the agreement effective December 31, 2011, will end on December 31, 2023.
+Prior to this recent amendment, the agreement had provided for an annual salary of $600,000, with a 7% increase of base salary
+on a compound basis in each of the third, fifth, seventh and ninth years of the agreement. The agreement had also provided for
+an annual cash bonus in an amount equal to at least 2% of the Company’s EBITDA (the “Annual Bonus”) and an annual
+cash bonus in relation to “new business” (as defined in the agreement) in an amount equal to at least (i) 2.5% of
+new business gross direct revenues plus (ii) 10% of all license or other fee income above $2,000,000 (the “New Business
+Bonus”). The agreement, as amended, increases Mr. Madden’s annual base salary but eliminates the Annual Bonus and
+the New Business Bonus and provides that all cash bonuses subsequent to the fiscal year ended December 31, 2011 will be at the
+sole discretion of the Company’s Board of Directors. Under the agreement, as amended, Mr. Madden’s annual base salary
+was fixed at $5,416,667 in 2012, $7,416,667 in 2013, $9,666,667 in 2014, $11,916,667 in 2015 and $10,697,917 in 2016 and in each
+year thereafter through the end of the term of employment. In addition, the amended agreement entitles Mr. Madden to an annual
+life insurance premium reimbursement of up to $200,000. The amendment also eliminates an annual non-accountable expense allowance
+of $200,000 that had been previously provided to Mr. Madden under the agreement. Pursuant to the amended agreement, on February
+8, 2012, Mr. Madden was granted 1,463,056 restricted shares of Common Stock (the number of shares indicated having been adjusted
+for an October 1, 2013 three-for-two stock split effected as a stock dividend), valued at approximately $40 million, under the
+2006 Plan. The restricted Common Stock will vest in equal annual installments over seven years commencing on December 31, 2017
+through December 31, 2023, subject to Mr. Madden’s continued employment with the Company on each such vesting date. 
+On
+June 30, 2012, pursuant to an election right granted to him under the agreement, as amended, Mr. Madden notified the Company of
+his election to receive an additional restricted stock award valued at $40 million in consideration of a reduction in his annual
+base salary in years subsequent to 2012. Accordingly, on July 3, 2012, Mr. Madden was issued 1,893,342 restricted shares of Common
+Stock (the number of shares indicated having been adjusted for an October 1, 2013 three-for-two stock split effected as a stock
+dividend) under the 2006 Plan. The restricted Common Stock will vest in equal annual installments over six years commencing on
+December 31, 2018 through December 31, 2023, subject to Mr. Madden’s continued employment with the Company on each such
+vesting date. As a result of his election to receive an additional restricted stock award, Mr. Madden’s annual base salary
+for years subsequent to 2012 has been reduced as follows: $4,000,000 in 2013, $6,125,000 in 2014, $8,250,000 in 2015 and $7,026,042
+in 2016 and in each year thereafter through the end of the term of employment. 
+Mr.
+Madden is also eligible to receive annually, on or about the date of the Company’s annual meeting of stockholders (but not
+later than June 30 th ), an option grant (the “Annual Option”) to purchase a number of shares of Common Stock,
+with such number to be equal to the greater of (a) 100% of the largest aggregate number of shares of Common Stock available upon
+the exercise of an option or options granted to any other continuing full-time employee of the Company during the preceding twelve-month
+period and (b) 100,000 shares of Common Stock; provided, however, that a grant to Mr. Madden in excess of 150% of the number of
+shares of Common Stock subject to options granted to such other continuing full-time employee would require stockholder approval.
+Any Annual Option granted to Mr. Madden would vest quarterly over a one-year period following the grant date and would be exercisable
+at a price equal to the closing price of the Company’s Common Stock on the grant date for a period of five years following
+the grant date. In addition to the Annual Option, the agreement, as amended, provides for a potential additional one-time stock
+option grant to purchase 750,000 shares of the Company’s Common Stock (the number of shares subject to this potential stock
+option award having been adjusted for an October 1, 2013 three-for-two stock split effected as a stock dividend) in the event
+that the Company achieves earnings per share, on a fully-diluted basis, equal to $3.00 in any fiscal year ending December 31,
+2015 or after. If granted, the option would vest in equal annual installments of 20% over a five-year period and be exercisable
+for a period of seven years at a price equal to the closing price of the Company’s Common Stock on the date immediately
+preceding the grant date. 
+18 
+In
+the event of Mr. Madden’s death, his employment agreement provides for the payment to Mr. Madden’s estate of his base
+salary for the 12-month period immediately subsequent to the date of his death. Further, in the event that Mr. Madden’s
+employment agreement is terminated due to Mr. Madden’s total disability (as defined in the agreement), “for cause”
+(as defined in the agreement) or due to Mr. Madden’s resignation, the Company is obligated to pay Mr. Madden the amount
+of compensation that is accrued and unpaid through the date of termination. In the event Mr. Madden’s employment agreement
+is terminated for any reason (other than “for cause” or due to his death, total disability or resignation), the Company
+is obligated to pay Mr. Madden, in installments, the balance of his base salary that would have been paid by the Company under
+the agreement for the full term of the agreement. If, during the period commencing 120 days prior to a “change of control”
+(as defined in the employment agreement) transaction and ending on the first anniversary of a change of control transaction, Mr.
+Madden’s employment is terminated by the Company other than for cause or by the resignation of Mr. Madden for “good
+reason” (as defined in the employment agreement), or if Mr. Madden resigns for good reason or without good reason within
+30 days following a change of control transaction, all unvested options to purchase shares of Common Stock held by Mr. Madden
+will vest on the date of termination or resignation and Mr. Madden will be entitled to receive a lump sum cash payment equal to
+the amount of compensation that is accrued and unpaid through the date of termination plus $35 million. Mr. Madden’s employment
+agreement contains other customary provisions, including provisions regarding expense reimbursement, confidentiality, solicitation
+and competition. 
+For
+the 2014 Fiscal Year, Mr. Madden earned $6,125,000 in base salary and received $200,000 for the payment of an annual life insurance
+premium. Mr. Madden opted to waive his right to the Annual Option for the 2014 Fiscal Year. 
+Loan
+to Steven Madden. On June 25, 2007, the Company made a loan to Steven Madden, its Creative and Design Chief and a principal
+stockholder of the Company, in the amount of $3,000,000, in order for Mr. Madden to satisfy a personal tax obligation resulting
+from the exercise of a stock option which was due to expire and to hold the underlying shares of Common Stock. Mr. Madden executed
+a promissory note in favor of the Company, which is secured by a pledge of 472,500 shares of the Company’s Common Stock
+beneficially owned by Mr. Madden (the number of shares indicated having been adjusted for an October 1, 2013 three-for-two stock
+split effected as a stock dividend). There have been successive amendments to the note, the most recent of which occurred on January
+3, 2012, at which time the note was amended and restated to extend the maturity date of the obligation to December 31, 2023 and
+eliminate the accrual of interest after December 31, 2011. Prior to the most recent amendment, the note had been accruing interest
+at the rate of 6% per annum. In addition, the amended and restated note provides that, commencing on December 31, 2014 and annually
+on each December 31 thereafter through the maturity date, one-tenth of the principal amount thereof, together with accrued interest,
+will be cancelled by the Company provided that Mr. Madden continues to be employed by the Company on each such December 31. Contemporaneously,
+the Company will release a number of pledged shares of Common Stock from the pledge generally correlating to the amount of indebtedness
+cancelled on such date. As of December 31, 2011, interest in the amount of $1,090,000 had accrued on the principal amount of the
+note and, as noted above, interest was eliminated after December 31, 2011. On December 31, 2014, the required one-tenth of the
+principal amount of the note, together with accrued interest, was written-off by the Company. 
+Steven
+Madden is the brother of John L. Madden, who has been a director of the Company since 1993. 
+Review, Approval or Ratification
+of Transactions with Related Persons 
+The
+Company’s written Conduct Code and Employee Handbook prohibit all conflicts of interest. Under the Conduct Code, conflicts
+of interest occur when private or family interests interfere in any way, or even appear to interfere, with the interests of the
+Company. The Company’s prohibition on conflicts of interest under the Conduct Code includes any related person transaction. 
+19 
+Related
+person transactions must be approved by the Board, or by a committee of the Board consisting solely of independent directors,
+who will approve the transaction only if they determine that it is in the best interests of the Company. In considering the transaction,
+the Board or committee will consider all relevant factors, including, as applicable, (i) the Company’s business rationale
+for entering into the transaction; (ii) the alternatives to entering into a related person transaction; (iii) whether the transaction
+is on terms comparable to those available to third parties or, in the case of employment relationships, to employees generally;
+(iv) the potential for the transaction to lead to an actual or apparent conflict of interest and any safeguards imposed to prevent
+such actual or apparent conflicts; and (v) the overall fairness of the transaction to the Company. 
+The
+Company has multiple processes for reporting conflicts of interests, including related person transactions. Under the Conduct
+Code, all employees are required to report any actual or apparent conflict of interest, or potential conflict of interest, to
+management. The Chief Financial Officer distributes a questionnaire to the Company’s executive officers and management personnel
+on a quarterly basis and distributes a questionnaire to the members of the Board of Directors on an annual basis requesting certain
+information regarding, among other things, their immediate family members, employment and beneficial ownership interests, which
+information is then reviewed for any conflicts of interest under the Conduct Code. 
+The
+Board of Directors, the Audit Committee and the Disclosure Committee, which is comprised of management personnel, discuss the
+related party transactions, specifically, and in connection with the regular review processes attendant to the Company’s
+periodic filings, including related party transaction disclosures. 
+If
+a director is a party to or in some manner involved in a transaction involving the Company, he or she will be recused from all
+discussions and decisions about the transaction. The transaction must be approved in advance whenever practicable, and if not
+practicable, must be ratified as promptly as practicable. 
+COMPENSATION
\ No newline at end of file
diff --git a/raw/filings/0001017303/2003/0000950123-04-003987/filing.txt b/raw/filings/0001017303/2003/0000950123-04-003987/filing.txt
new file mode 100644
index 0000000000000000000000000000000000000000..d3102b5bbb263f10e33415da680242e4efb809a6
--- /dev/null
+++ b/raw/filings/0001017303/2003/0000950123-04-003987/filing.txt
@@ -0,0 +1,3156 @@
+10-K
+1
+y95646e10vk.txt
+FORM 10-K
+UNITED STATES
+SECURITIES AND EXCHANGE COMMISSION
+Washington, DC. 20549
+---------------------
+FORM 10-K
+(Mark One)
+(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
+EXCHANGE ACT OF 1934
+For the fiscal year ended December 31, 2003
+or
+( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
+SECURITIES EXCHANGE ACT OF 1934
+For the transition period from to
+------------------ ---------------------.
+Commission file number: 0-21121
+TRANSACT TECHNOLOGIES INCORPORATED
+--------------------------------------------------------------------------------
+(Exact name of registrant as specified in its charter)
+DELAWARE 06-1456680
+------------------------------------------------ -------------------
+(State or other jurisdiction of incorporation or (I.R.S. Employer
+organization) Identification No.)
+7 LASER LANE, WALLINGFORD, CT 06492
+------------------------------------------------ -------------------
+(Address of principal executive offices) (Zip Code)
+Registrant's telephone number, including area code 203-269-1198
+Securities registered pursuant to Section 12 (b) of the Act:
+NONE
+Securities registered pursuant to Section 12 (g) of the Act:
+COMMON STOCK, $0.01 PAR VALUE
+--------------------------------------------------------------------------------
+(Title of class)
+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 other 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 ( ) No (X)
+As of June 30, 2003 the aggregate market value of the registrant's issued and
+outstanding voting stock held by non-affiliates of the registrant was
+$63,900,000.
+As of March 5, 2004, the registrant had outstanding 6,020,648 shares of common
+stock, $0.01 par value.
+DOCUMENTS INCORPORATED BY REFERENCE
+Proxy Statement for the Annual Meeting of Shareholders to be held on May 26,
+2004 - Part III (Items 10-14).
+PART I
+ITEM 1. BUSINESS.
+THE COMPANY
+TransAct was incorporated in June 1996 and began operating as a
+stand-alone business in August 1996 as a spin-off of the printer business that
+was formerly conducted by certain subsidiaries of Tridex Corporation. We
+completed an initial public offering on August 22, 1996.
+TransAct Technologies Incorporated ("TransAct" or the "Company")
+designs, develops, manufactures and markets transaction-based printers under the
+Ithaca(R) and Magnetec(R) brand names. In addition, we market related
+consumables, spare parts and service. Our printers are used worldwide to provide
+transaction records such as receipts, tickets, coupons, register journals and
+other documents. We focus on two core markets: (1) point-of-sale and banking
+("POS") and (2) gaming and lottery. We sell our products directly to original
+equipment manufacturers ("OEMs"), value-added resellers ("VARs"), selected
+distributors and directly to end-users. Our product distribution spans across
+the Americas, Europe, the Middle East, Africa, the Caribbean Islands and the
+South Pacific. We have one primary operating facility located in Ithaca, New
+York, five sales offices located in the United States, and one sales office and
+service depot in the United Kingdom. Our executive offices are located at 7
+Laser Lane, Wallingford, CT 06492 with a telephone number of (203) 269-1198.
+GENERAL DEVELOPMENT OF BUSINESS
+The year 2003 was a pivotal, and successful, year for TransAct,
+highlighted by the following achievements:
+- Increased revenues by $12,637,000, or 32% over 2002
+- Increased operating income by $3,672,000
+- Reported our first profitable year since 1999 with
+net income of $1,528,000
+- Repaid all our revolving bank borrowings
+We continue to focus on sales growth in our two core markets, point of
+sale and banking ("POS") and gaming and lottery, to drive increased
+profitability.
+The POS market remained soft in 2003 due to continued lower capital
+spending by users of POS products and overall economic weakness, primarily in
+the U.S. We expect to see some improvement in the POS market during 2004,
+although not until the second half of 2004. Despite weakness of the market in
+2003, our POS printer sales increased by 8.7% due primarily to growing sales of
+our POSjet(R) and Bankjet(R) line of inkjet printers. During 2003, we announced
+wins from two major financial services companies for shipments of over 19,000
+Bankjet(R) printers to upgrade bank teller applications, which we began to ship
+in 2003 and expect to complete shipping during 2004. Given our success in 2003
+and in light of the renewed focus we see banks placing on branch banking, we
+plan to more proactively seek opportunities with other banks for upgrading bank
+teller systems, if and when they arise. Our long-term strategy in the POS market
+is to capture at least 20% market share, or approximately $200 million in sales,
+primarily through increasing and enhancing our product portfolio, increasing
+geographic coverage, and growing our customer base.
+Our focus in the gaming and lottery market is two-fold. On the lottery
+side, we continue to hold a leading position based on our long-term purchase
+agreements with GTECH Corporation ("GTECH"), our largest customer and the
+world's largest provider of lottery terminals, with an approximately 70% market
+share. GTECH has been our customer since 1995, and we continue to maintain a
+good relationship with them. Currently, we fulfill substantially all of GTECH's
+printer requirements for lottery terminal installations and upgrades. Our sales
+to GTECH each year are directly dependent on the timing and number of
+new and upgraded lottery terminal installations GTECH performs.
+On the gaming side, our focus lies primarily in supplying printers for
+use in slot machines in casinos. During 2003, we benefited from the increasing
+number of casinos that began to convert traditional coin-issuing slot machines
+into ticket-issuing slot machines. As a result, sales of our gaming and lottery
+printers increased by over 50%. We expect this trend to continue into 2004, as
+more casinos convert their slot machines. The adoption and rollout of the
+ticket-in/ticket-out initiative is happening and we expect all 700,000 slot
+machines in North America to be fitted with a printer within the next two to
+four years. We also expect growth from gaming sales internationally, beginning
+in late 2004, as markets such as Australia and Europe evaluate the use of this
+technology for their slot machines.
+1
+Our services and consumables products, which include the repair of
+printers and the sale of spare parts and consumables (paper, ribbons and inkjet
+cartridges), offer a substantial growth opportunity and recurring revenue stream
+for TransAct. Our services and consumables products revenue has grown to
+$8,543,000 and 16.4% of net sales in 2003, an increase of over 22% from 2002.
+During 2004, we plan to more actively promote and dedicate increased resources
+to our services and consumables products in an effort to substantially increase
+the volume of sales. We have implemented a specialized software system, improved
+our sales lead tracking and prospecting processes, and instituted incentive
+schemes for our sales people to enable us to better cross-sell our services and
+consumables products to our customers. We also believe that the increasing sales
+of our inkjet printers will drive substantially higher inkjet cartridge sales in
+2004 and beyond.
+Operationally, gross margin and operating margin were significantly
+improved. We expect to see further gross margin and operating margin improvement
+in 2004 as the volume of sales increases and we continue to focus on controlling
+expenses. We reported net income for 2003 - the first time since 1999. We also
+generated sufficient cash during 2003 to repay all outstanding revolving
+borrowings under our credit facility, and had almost $500,000 of cash on our
+balance sheet as of December 31, 2003.
+FINANCIAL INFORMATION ABOUT SEGMENTS
+We have assessed our operating and reportable segments and have
+determined that we operate in one reportable segment, the design, development,
+manufacture and marketing of transaction-based printers and printer-related
+products.
+PRODUCTS AND SERVICES
+TransAct designs, develops, manufactures and markets a broad array of
+transaction-based printers utilizing inkjet, thermal and impact printing
+technology for applications requiring up to 60 character columns, primarily in
+the POS and gaming and lottery markets. Our printers are configurable and offer
+customers the ability to choose from a variety of features and functions.
+Options typically include PC board configuration, paper cutting devices, paper
+handling capacities and cabinetry color. In addition to our configurable
+printers, we manufacture custom printers for certain OEM customers. In
+collaboration with these customers, we provide engineering and manufacturing
+expertise for the design and development of specialized printers. In addition,
+we offer inkjet cartridges, printer ribbons, paper and replacement parts for all
+of our products.
+We provide customers with telephone sales and technical support, a
+personal account representative to handle orders, shipping and general
+information, and expedited shipping for orders of our configurable and custom
+products. Technical and sales support personnel receive training on all of our
+products and services manufactured. Our printers generally carry up to a
+two-year limited warranty; extended warranties are available for purchase to
+supplement the original warranty. Service contracts for the repair and
+maintenance of printers beyond the original warranty period are also available
+for purchase.
+SOURCES AND AVAILABILITY OF RAW MATERIALS
+The principal materials used in manufacturing are inkjet, thermal and
+impact printheads, injection molded plastic parts, formed/stamped metal parts,
+circuit boards and electronic components. Although we could experience temporary
+disruption if certain suppliers ceased doing business with us, our requirements
+generally are available from a number of sources, except as described below.
+Okidata Americas, Inc. ("Okidata"), is the sole supplier for a printer
+component kit consisting of a printhead, control board and carriage (the "Oki
+Kit"), that is used in all of our Ithaca(R) brand impact printers. The loss of
+the supply of Oki Kits would have a material adverse effect on TransAct. We have
+a supply agreement with Okidata to provide Oki Kits until June 8, 2005. Prices
+under this agreement are fixed, but may be changed by Okidata after providing
+180 days written notice.
+Hewlett-Packard Company ("HP") is the sole supplier of inkjet
+cartridges that are used in all of our inkjet printers. The loss of the supply
+of HP inkjet cartridges would have a material adverse effect on the sale of our
+inkjet printers. We have a supply agreement with HP to purchase inkjet
+cartridges until February 1, 2005 at fixed prices.
+2
+We believe our relations with Okidata and HP are good and have
+received no indication that these supply agreements will not be renewed beyond
+the respective expiration dates of the current contracts. We cannot be certain,
+however, that these supply agreements will be renewed, or if renewed, that the
+terms will be as favorable as those under the current contracts.
+PATENTS AND PROPRIETARY INFORMATION
+We have significantly expanded our patent portfolio over the past four
+years, and expect to continue to do so in the future. We also believe our patent
+portfolio will provide additional opportunities to license our intellectual
+property in the future. We currently own eight patents, four of which we
+consider material. The earliest expiration date of these eight patents is in
+2008 with the latest expiration date in 2020. Of the material patents, one
+patent covers methods and apparatus for allowing a two-color printer to print
+images using single pass technology by printing during both forward and reverse
+movement of the print mechanism; another patent relates to our proprietary void
+and reprint receipt printing method which is used in certain of our slot machine
+printers; and two other patents cover a method for converting a full color image
+into a two-color image, plus a background color. We also have sought patent
+protection for certain design features of 1) printers using inkjet technology,
+2) POS printers using thermal technology, and 3) thermal printers for use in
+casino slot machines. We regard certain manufacturing processes and designs to
+be proprietary and attempt to protect them through employee and third-party
+nondisclosure agreements and similar means. It may be possible for unauthorized
+third parties to copy certain portions of our products or to reverse engineer or
+otherwise obtain and use, to our detriment, information that we regard as
+proprietary. Moreover, the laws of some foreign countries do not afford the same
+protection to our proprietary rights as do United States laws. There can be no
+assurance that legal protections relied upon by the Company to protect our
+proprietary position will be adequate or that our competitors will not
+independently develop technologies that are substantially equivalent or superior
+to our technologies.
+In November 2002, the Company was advised that certain POS printers
+sold by us since late 1999 may use technology covered by recently issued patents
+of a third party competitor. In an effort to resolve this matter, we originally
+offered to pay approximately $160,000, while the other party sought payment of
+up to $950,000. We recorded a charge of $160,000 in cost of sales in the fourth
+quarter of 2002 related to this matter. Based on the likely outcome of current
+negotiations, we recorded an additional charge of $740,000 in the fourth quarter
+of 2003 related to usage prior to January 1, 2003. Although settlement
+negotiations are continuing, we believe that the total accrual of $900,000 (the
+"Patent Resolution Payment") reflects the best estimate of the expense related
+to the pre-2003 usage of this third party patented technology. We also accrued
+estimated royalty payments for usage of this technology after January 1, 2003.
+SEASONALITY
+Retailers typically reduce purchases of new POS equipment in the fourth
+quarter, due to the increased volume of consumer transactions in the holiday
+period, and our sales of printers in the POS market historically have increased
+in the third quarter and decreased in the fourth quarter. Similarly,
+installations of lottery terminals are typically reduced in the fourth quarter
+resulting in decreased sales of lottery printers. However, we did not experience
+material seasonality in our total net sales, due to significant growth in sales
+from our gaming market (for which we have not experienced seasonality). As a
+result, we experienced little impact from the mild seasonality of our POS and
+lottery market.
+CERTAIN CUSTOMERS
+We currently have two ongoing OEM purchase agreements with GTECH
+Corporation ("GTECH"). The first OEM purchase agreement ("GTECH Impact Printer
+Agreement") provides for the sale of impact on-line lottery printers and spare
+parts through December 31, 2004. The second OEM purchase agreement ("GTECH
+Thermal Printer Agreement") provides for the sale of thermal on-line lottery
+printers and spares parts, at fixed prices, through June 28, 2007. Firm purchase
+orders for printers under either agreement may be placed annually by GTECH.
+Pursuant to orders placed under the GTECH Impact Printer Agreement, we have
+orders for approximately $2,000,000 of impact on-line lottery printers for
+delivery during the second and third quarters of 2004. Because our new thermal
+on-line lottery printer is a replacement for our impact on-line printer, we do
+not expect any further shipments of impact on-line lottery printers in 2004
+beyond the third quarter. Additionally, pursuant to the GTECH Thermal Printer
+Agreement, we have received orders for approximately $1,800,000 worth of thermal
+printers for delivery in 2004. We expect to receive additional orders from GTECH
+for thermal printers during 2004. We also sell printers to GTECH for use in
+lottery terminals at grocery store check-out lanes ("in-lane lottery printers").
+Sales of in-lane lottery printers are project-oriented, and, as such, we cannot
+predict if and when future sales may occur. Sales to GTECH accounted for
+approximately 19%, 27% and 33% of net sales in 2003, 2002 and 2001,
+respectively.
+We also provide printers to Harrah's for use in casino slot machines
+throughout the United States. During 2003, sales to Harrah's accounted for
+approximately 12% of net sales. We have received orders for approximately
+$2,200,000 from Harrah's of printers for delivery in 2004. We expect to receive
+additional orders from them for printers during 2004.
+3
+BACKLOG
+Our backlog of firm orders was approximately $5,344,000 as of March 5,
+2004, including approximately $3,200,000 and $500,000 to GTECH and Harrah's,
+respectively, compared to $7,628,000 as of March 14, 2003, including
+approximately $4,300,000 to GTECH and none to Harrah's. Based on customers'
+current delivery requirements, we expect to fill our entire current backlog
+during 2004.
+COMPETITION
+The market for transaction-based printers is extremely competitive, and
+we expect such competition to continue in the future. We compete with a number
+of companies, many of which have greater financial, technical and marketing
+resources than us. We believe our ability to compete successfully depends on a
+number of factors both within and outside our control, including durability,
+reliability, quality, design capability, product customization, price, customer
+support, success in developing new products, manufacturing expertise and
+capacity, supply of component parts and materials, strategic relationships with
+suppliers, the timing of new product introductions by us and our competitors,
+general market, economic and political conditions and, in some cases, the
+uniqueness of our products.
+In the POS market, our major competitor is Epson America, Inc., which
+controls a dominant portion of the POS markets into which we sell. We also
+compete, to a much lesser extent, with Axiohm Transaction Solutions, Star
+Micronics America, Inc., Citizen -- CBM America Corporation, and Korean Printer
+Solutions. Certain competitors of ours have greater financial resources, lower
+costs attributable to higher volume production, and sometimes offer lower prices
+than us.
+In the lottery market (consisting principally of on-line lottery
+transaction printing), we hold a leading position, based largely on our
+long-term purchase agreements with GTECH, which controls approximately 70% of
+the worldwide on-line lottery market. We compete in this market based solely on
+our ability to provide specialized, custom-engineered products to GTECH.
+In the gaming market (consisting principally of slot machine and video
+lottery terminal transaction printing), we and our major competitor,
+FutureLogic, Inc., comprise a substantial portion of the market. We also
+compete, to a lesser extent, with JCM American Corporation and Money Controls, a
+division of Coin Acceptors, Inc. (Coinco). Certain of our products sold for
+gaming applications compete based upon our ability to provide highly specialized
+products, custom engineering and ongoing technical support.
+Our strategy for competing in our markets is to continue to develop new
+products and product line extensions, to increase our geographic market
+penetration, take advantage of strategic relationships, and to lower product
+costs by sourcing certain products overseas. We expect to particularly focus on
+(1) promoting our line of slot machine printers into the gaming market, (2)
+increasing sales of our new iTherm(TM)280 thermal POS printer and family of
+printers utilizing Hewlett Packard's inkjet printing technology, and (3)
+expanding our consumables, spare parts and service business. Although we believe
+that our products, operations and relationships provide a competitive
+foundation, there can be no assurance that we will compete successfully in the
+future.
+RESEARCH AND DEVELOPMENT ACTIVITIES
+We spent approximately $2,276,000, $2,025,000 and $3,070,000 in 2003,
+2002 and 2001, respectively, on engineering, design and product development
+efforts in connection with specialized engineering and design to introduce new
+products and to customize existing products. During 2004, we expect to focus the
+majority of our research and development activities on the continuing
+development and enhancement of (1) our family of printers for the POS market
+utilizing inkjet and thermal printing technology and (2) our ticket-issuing
+printers for use in the casino market.
+ENVIRONMENT
+We are not aware of any material noncompliance with federal, state and
+local provisions that have been enacted or adopted regulating the discharge of
+materials into the environment, or otherwise relating to the protection of the
+environment.
+EMPLOYEES
+As of March 12, 2004, TransAct Technologies and our subsidiaries
+employed 201 persons, of whom 148 were full-time and 53 were temporary
+employees. None of our employees is unionized, and we consider our relationships
+with our employees to be good.
+4
+FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS
+We have foreign operations primarily from TransAct Technologies Ltd., a
+wholly-owned subsidiary located in the United Kingdom, which had sales to its
+customers of $1,068,000, $738,000, and $1,791,000 (primarily to Fujitsu for
+sales and service of printers used in the British Post Office) in 2003, 2002 and
+2001, respectively. We had export sales to our customers from our domestic
+operations of approximately $3,663,000, $3,968,000 and $6,131,000 in 2003, 2002
+and 2001, respectively. Total international sales, which include sales from our
+foreign subsidiary and export sales from our domestic operations, were
+approximately $4,731,000, $4,706,000 and $7,922,000 in 2003, 2002 and 2001,
+respectively.
+ADDITIONAL INFORMATION
+We make available free of charge through our internet website,
+WWW.TRANSACT-TECH.COM, our annual report on Form 10-K, quarterly reports on Form
+10-Q, current reports on Form 8-K, and all amendments to those reports as soon
+as reasonably practicable after such material is electronically filed with or
+furnished to the SEC.
+We maintain a Code of Business Conduct that is applicable to all
+employees, including our Chief Executive Officer, Chief Financial Officer and
+Controller. This Code, which requires continued observance of high ethical
+standards such as honesty, integrity and compliance with the law in the conduct
+of our business, is available for public access on our internet website.
+EXECUTIVE OFFICERS OF THE REGISTRANT
+Pursuant to General Instructions G(3) of form 10-K, the following list
+is included as an unnumbered item in Part I of this Report in lieu of being
+included in the Proxy Statement for the Annual Meeting of Stockholders to be
+held on May 26, 2004.
+The following is a list of the names and ages of all executive officers
+of the registrant, indicating all positions and offices with the registrant held
+by each such person and each person's principal occupations and employment
+during at least the past five years.
+Name Age Position
+---- --- --------
+Bart C. Shuldman 46 Chairman of the Board, President and Chief Executive Officer
+Richard L. Cote 62 Executive Vice President, Chief Financial Officer, Treasurer, Secretary
+and Director
+James B. Stetson 46 Executive Vice President - Sales and Marketing
+Michael S. Kumpf 54 Executive Vice President - Engineering
+Steven A. DeMartino 34 Senior Vice President - Finance and Information Technology
+BART C. SHULDMAN has been Chief Executive Officer, President and a
+Director of the Company since its formation in June 1996. Previously, Mr.
+Shuldman served as President of Magnetec and later the combined operations of
+Magnetec and Ithaca from August 1993 until June 1996. In February 2001, Mr.
+Shuldman was elected Chairman of the Board.
+RICHARD L. COTE has been Executive Vice President, Chief Financial
+Officer, Treasurer, Secretary and a Director of the Company since its formation
+in June 1996. Prior thereto, he served as Senior Vice President and Chief
+Financial Officer of Tridex from September 1993 to June 1996. On June 1, 2004,
+Mr. Cote will step down as Executive Vice President, Chief Financial Officer,
+Treasurer, Secretary and Director of the Company. Mr. Cote will continue in a
+consulting capacity through the end of 2004.
+JAMES B. STETSON was appointed Executive Vice President, Sales and
+Marketing in November 2001, and served as Senior Vice President of Worldwide
+Sales from February 2000 to November 2001, and Vice President of Sales, Latin
+America from October 1997 to February 2000. Prior to joining TransAct, Mr.
+Stetson served as Vice President and Sales Manager at Gekay Sales and Service
+Company from 1995 until October 1997.
+MICHAEL S. KUMPF was appointed Executive Vice President of Engineering
+in March 2002. He served as Senior Vice President, Engineering from June 1996 to
+March 2002 and Vice President, Engineering of Ithaca from 1991 until June 1996.
+5
+STEVEN A. DEMARTINO, a certified public accountant, joined TransAct as
+Corporate Controller in August 1996 and was appointed an officer of the Company
+in January 1998, Vice President in December 1999, and Senior Vice President,
+Finance and Information Technology in October 2001. Prior to joining TransAct,
+Mr. DeMartino was a self-employed financial consultant from May 1996 to August
+1996. Prior thereto, Mr. DeMartino served as Controller of Copart, Inc. from
+September 1994 to May 1996. On June 1, 2004, Mr. DeMartino will succeed Mr. Cote
+as TransAct's Executive Vice President, Chief Financial Officer, Treasurer and
+Secretary.
+ITEM 2. PROPERTIES.
+Our operations are currently conducted at the facilities described
+below. In February 2001, we announced plans to establish a global engineering
+and manufacturing center at our Ithaca, NY facility. As part of this strategic
+decision, we consolidated all manufacturing and engineering from our
+Wallingford, CT facility into our existing Ithaca, NY facility. Our corporate
+headquarters are still located in the Wallingford, CT facility. Although we are
+actively seeking to sublease our Wallingford, CT facility, in 2003 we determined
+that because of the continuing regional decline in the commercial real estate
+market, it was unlikely that we would be able to sublease our facility. As such,
+we increased our restructuring accrual at December 31, 2003 to provide for the
+remaining non-cancelable lease payments and other related costs for this
+facility through the expiration of the lease (March 31, 2008). The increase in
+the restructuring accrual includes the reversal of estimated sublease income for
+the remainder of the lease term.
+In connection with the consolidation of facilities into Ithaca, we
+added approximately 10,000 square feet of manufacturing space and 3,000 square
+feet of office space to our Ithaca facility during 2002.
+Size Owned or Lease Expiration
+Location Operations Conducted (Approx. Sq. Ft.) Leased Date
+-------- -------------------- ----------------- ------ ----
+Wallingford, Connecticut Executive offices 49,000 Leased March 31, 2008
+Ithaca, New York Manufacturing facility 74,000 Leased June 30, 2007
+Doncaster, United Kingdom Sales office and service 2,800 Leased August 1, 2009
+depot
+Georgia (2), Nevada, New York and Five (5) regional sales 750 Leased Various
+Texas offices
+We believe that our facilities generally are in good condition,
+adequately maintained and suitable for their present and currently contemplated
+uses.
+ITEM 3. LEGAL PROCEEDINGS.
+None.
+ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
+No matters were submitted to a vote of security holders during the last
+quarter of the year covered by this report.
+6
+PART II
+ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
+ISSUERS PURCHASES OF EQUITY SECURITIES.
+Our common stock is traded on the Nasdaq SmallCap Market under the
+symbol TACT. As of March 12, 2004, there were 675 holders of record of the
+common stock. The high and low sales bid quotations of the common stock reported
+during each quarter of the years ended December 31, 2003 and 2002 were as
+follows:
+Year Ended Year Ended
+December 31, 2003 December 31, 2002
+----------------- -----------------
+High Low High Low
+---- --- ---- ---
+First Quarter $ 5.67 $ 3.90 $ 6.70 $ 3.90
+Second Quarter 13.89 5.05 7.00 4.51
+Third Quarter 17.90 11.75 5.99 3.60
+Fourth Quarter 27.40 15.82 5.12 3.91
+No dividends on common stock have been declared, and we do not
+anticipate declaring dividends in the foreseeable future. Our credit agreement
+with Banknorth N.A. restricts the payment of cash dividends on our common stock
+for the term of the agreement.
+ITEM 6. SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
+Year Ended December 31,
+--------------------------------------------------------------------------
+2003 2002 2001 2000 1999
+---- ---- ---- ---- ----
+Statement of Operations Data:
+Net sales $ 52,098 $ 39,461 $ 43,974 $ 53,720 $ 44,889
+Gross profit 15,543 10,216 9,774 14,142 11,754
+Operating expenses 12,855 11,200 17,060 14,296 11,719
+Operating income (loss) 2,688 (984) (7,286) (154) 35
+Net income (loss) 1,528 (692) (4,922) (344) 324
+Net income (loss) available
+to common shareholders 1,170 (1,050) (5,280) (664) 324
+Net income (loss) per share:
+Basic 0.20 (0.19) (0.95) (0.12) 0.06
+Diluted 0.19 (0.19) (0.95) (0.12) 0.06
+December 31,
+-----------------------------------------------------------------
+2003 2002 2001 2000 1999
+----- ---- ---- ---- ----
+Balance Sheet Data:
+Total assets $26,361 $22,030 $25,791 $27,619 $25,684
+Working capital 11,787 8,798 8,366 13,631 11,094
+Long-term debt, excluding
+current portion 330 2,791 5,344 5,944 7,100
+Redeemable convertible
+preferred stock 3,902 3,824 3,746 3,668 -
+Shareholders' equity 10,347 6,545 7,315 12,191 12,207
+7
+ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
+OF OPERATIONS.
+This discussion should be read in conjunction with the Consolidated
+Financial Statements and notes thereto.
+FORWARD LOOKING STATEMENTS
+Certain statements included in this report, including without
+limitation statements in this Management's Discussion and Analysis of Financial
+Condition and Results of Operations, which are not historical facts are
+"forward-looking statements" within the meaning of Section 27A of the Securities
+Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
+as amended. All forward-looking statements involve risks and uncertainties,
+including, but not limited to, customer acceptance and market share gains, both
+domestically and internationally, in the face of substantial competition from
+competitors that have broader lines of products and greater financial resources;
+introduction of new products into the marketplace by competitors; successful
+product development; dependence on significant customers; dependence on third
+parties for sales outside the United States including Australia, New Zealand,
+Europe and Latin America; economic and political conditions in the United
+States, Australia, New Zealand, Europe and Latin America; marketplace acceptance
+of new products; risks associated with the Patent Resolution Payment;
+availability of third-party components at reasonable prices; and the absence of
+price wars or other significant pricing pressures affecting our products in the
+United States and abroad. Actual results may differ materially from those
+discussed in, or implied by, the forward-looking statements. The forward-looking
+statements speak only as of the date of this report and we assume no duty to
+update them to reflect new, changing or unanticipated events or circumstances.
+OVERVIEW
+The year 2003 was a pivotal, and successful, year for TransAct,
+highlighted by the following achievements:
+- Increased revenues by $12,637,000, or 32% over 2002
+- Increased operating income by $3,672,000
+- Reported our first profitable year since 1999 with
+net income of $1,528,000
+- Repaid all our revolving bank borrowings
+We continue to focus on sales growth in our two core markets, point of
+sale and banking ("POS") and gaming and lottery, to drive increased
+profitability. During 2003, our total net sales grew by over 32% to
+approximately $52,098,000. See the table below for a breakdown of our sales.
+Year ended Year ended Change
+(In thousands) December 31, 2003 December 31, 2002 $ %
+-------------- ----------------- ----------------- ----------------
+Printers - POS $14,027 26.9% $12,900 32.7% $ 1,127 8.7%
+Printers - Gaming and lottery 29,528 56.7% 19,578 49.6% 9,950 50.8%
+------- ----- ------- ----- -------
+Subtotal - printers 43,555 83.6% 32,478 82.3% 11,077 34.1%
+Services and consumables 8,543 16.4% 6,983 17.7% 1,560 22.3%
+------- ----- ------- ----- -------
+Total net sales $52,098 100.0% $39,461 100.0% $12,637 32.0%
+======= ===== ======= ===== =======
+The POS market remained soft in 2003 due to continued lower capital
+spending by users of POS products and overall economic weakness, primarily in
+the U.S. We expect to see some improvement in the POS market during 2004,
+although not until the second half of 2004. Despite weakness of the market in
+2003, our POS printer sales increased by 8.7% due primarily to growing sales of
+our POSjet(R) and Bankjet(R) line of inkjet printers. During 2003, we announced
+wins from two major financial services companies for shipments of over 19,000
+Bankjet(R) printers to upgrade bank teller applications, which we began to ship
+in 2003 and expect to complete shipping during 2004. Given our success in 2003
+and in light of the renewed focus we see banks placing on branch banking, we
+plan to more proactively seek opportunities with other banks for upgrading bank
+teller systems, if and when they arise. Our long-term strategy in the POS market
+is to capture at least 20% market share, or approximately $200 million in sales,
+primarily through increasing and enhancing our product portfolio, increasing
+geographic coverage, and growing our customer base.
+Our focus in the gaming and lottery market is two-fold. On the lottery
+side, we continue to hold a leading position based on our long-term purchase
+agreements with GTECH Corporation ("GTECH"), our largest customer and the
+world's largest provider of lottery terminals, with an approximately 70% market
+share. GTECH has been our customer since 1995, and we continue to maintain a
+good relationship with them. Currently, we fulfill substantially all of GTECH's
+printer requirements for lottery terminal installations and upgrades. During
+2003, total sales to GTECH were approximately $9,750,000, representing a
+decrease of approximately 9% from 2002. Based on existing orders and expected
+future demand based on input from GTECH, we expect overall sales to GTECH in
+2004 to be slightly below the 2003 level. Our sales to GTECH each year are
+directly dependent on the timing and number of new and upgraded lottery terminal
+installations GTECH performs.
+8
+On the gaming side, our focus lies primarily in supplying printers for
+use in slot machines in casinos. During 2003, we benefited from the increasing
+number of casinos that began to convert traditional coin-issuing slot machines
+into ticket-issuing slot machines. As a result, sales of our gaming and lottery
+printers increased by over 50%. We expect this trend to continue into 2004, as
+more casinos convert their slot machines. The adoption and rollout of the
+ticket-in/ticket-out initiative is happening and we expect all 700,000 slot
+machines in North America to be fitted with a printer within the next two to
+four years. We also expect growth from gaming sales internationally, beginning
+in late 2004, as markets such as Australia and Europe evaluate the use of this
+technology for their slot machines.
+Our services and consumables products, which include the repair of
+printers and the sale of spare parts and consumables (paper, ribbons and inkjet
+cartridges), offer a substantial growth opportunity and recurring revenue stream
+for TransAct. Our services and consumables products revenue has grown to
+$8,543,000 and 16.4% of net sales in 2003, an increase of over 22% from 2002.
+During 2004, we plan to more actively promote and dedicate increased resources
+to our services products in an effort to substantially increase the volume of
+sales. We have implemented a specialized software system, improved our sales
+lead tracking and prospecting processes, and instituted incentive schemes for
+our sales people to enable us to better cross-sell our services products to our
+customers. We also believe that the increasing sales of our inkjet printers will
+drive substantially higher inkjet cartridge sales in 2004 and beyond.
+Operationally, gross margin and operating margin were significantly
+improved. We expect to see further gross margin and operating margin improvement
+in 2004 as the volume of sales increases and we continue to focus on controlling
+expenses. We reported net income for 2003 - the first time since 1999. We also
+generated sufficient cash during 2003 to repay all outstanding revolving
+borrowings under our credit facility, and had almost $500,000 of cash on our
+balance sheet as of December 31, 2003.
+CRITICAL ACCOUNTING POLICIES AND ESTIMATES
+Our discussion and analysis of our financial condition and results of
+operations are based upon our consolidated financial statements, which have been
+prepared by us in accordance with accounting principles generally accepted in
+the United States of America. These principles require the use of estimates,
+judgments and assumptions. Such estimates and judgments are based upon
+historical experience and certain assumptions that are believed to be reasonable
+in the particular circumstances. Those judgments affect both balance sheet items
+and income statement categories. Our estimates include those related to revenue
+recognition, inventory obsolescence, the valuation of deferred tax assets and
+liabilities, depreciable lives of equipment, warranty obligations, and
+restructuring accruals. We evaluate our assumptions on an ongoing basis by
+comparing actual results with our estimates. Actual results may differ from the
+original estimates. The following accounting policies are those that we believe
+to be most critical in the preparation of our financial statements.
+REVENUE RECOGNITION - Our typical contracts include the sale of
+printers, which are sometimes accompanied by separately-priced extended warranty
+contracts. We also sell spare parts, consumables, and other repair services
+(sometimes pursuant to multi-year product maintenance contracts) which are not
+included in the original printer sale and are ordered by the customer as needed.
+We recognize revenue pursuant to the guidance within SAB 104, "Revenue
+Recognition". Specifically, revenue is recognized when evidence of an
+arrangement exists, delivery (based on shipping terms which are generally FOB
+shipping point) has occurred, the selling price is fixed and determinable, and
+collectibility is reasonably assured. We provide for an estimate of product
+returns and price protection based on historical experience at the time of
+revenue recognition.
+Revenue related to extended warranty and product maintenance contracts
+is recognized pursuant to FASB Technical Bulletin 90-1 ("FTB 90-1"), "Accounting
+for Separately Priced Extended Warranty and Product Maintenance Contracts."
+Pursuant to FTB 90-1, revenue related to separately priced product maintenance
+contract is deferred and recognized over the term of the maintenance period. We
+record deferred revenue for amounts received from customers for maintenance
+contracts prior to the maintenance period.
+Our customers have the right to return products that do not function
+properly within a limited time after delivery. We monitor and track product
+returns and record a provision for the estimated future returns based on
+historical experience. Returns have historically been within expectations and
+the provisions established, but we cannot guarantee that we will continue to
+experience return rates consistent with historical patterns.
+We offer some of our customers price protection as an incentive to
+carry inventory of our product. These price protection plans provide that if we
+lower prices, we will credit them for the price decrease on inventory they hold.
+Our customers typically carry limited amounts of inventory, and we infrequently
+lower prices on current products. As a result, the amounts paid under these
+plans have been minimal. However, we cannot guarantee that this minimal level
+will continue.
+9
+ACCOUNTS RECEIVABLE - We have standardized credit granting and review
+policies and procedures for all customer accounts, including: credit reviews of
+all new customer accounts; ongoing credit evaluations of current customers;
+credit limits and payment terms based on available credit information; and
+adjustments to credit limits based upon payment history and the customer's
+current credit worthiness. We also provide an estimate of doubtful accounts
+based on historical experience and specific customer collection issues. Our
+allowance for doubtful accounts as of December 31, 2003 was $100,000, or 1.1% of
+outstanding accounts receivable, which we feel is appropriate considering the
+overall quality of the accounts receivable. While credit losses have
+historically been within expectations and the reserves established, we cannot
+guarantee that our credit loss experience will continue to be consistent with
+historical experience. As of December 31, 2003, we had an accounts receivable
+balance due from Harrah's (casinos) of 31% of the total balance due. No other
+customer accounts receivable balance exceeded 10%.
+INVENTORY - Our inventories are valued at the lower of cost or market.
+We assess market value based on historical usage and estimates of future demand.
+Assumptions are reviewed at least quarterly and adjustments are made, as
+necessary, to reflect changed market conditions. Should circumstances change and
+we determine that additional inventory is subject to obsolescence, additional
+write-downs of inventory could result in a charge to income. As of December 31,
+2003, our net inventory included a reserve to write inventory down to lower of
+cost or market of $1,950,000, or 19.5% of gross inventory. Reserves increased
+significantly in 2002 and remained at that level during 2003 due to several
+products that were discontinued during that time period.
+INCOME TAXES - In preparing our consolidated financial statements, we
+are required to estimate income taxes in each of the jurisdictions in which we
+operate. This involves estimating the actual current tax exposure together with
+assessing temporary differences between the tax basis of certain assets and
+liabilities and their reported amounts in the financial statements, as well as
+net operating losses, tax credits and other carryforwards. These differences
+result in deferred tax assets and liabilities, which are included within our
+consolidated balance sheets. We then assess the likelihood that the deferred tax
+assets will be realized from future taxable income, and to the extent that we
+believe that realization is not likely, we establish a valuation allowance.
+Significant judgment is required in determining the provision for
+income taxes and, in particular, any valuation allowance recorded against our
+deferred tax assets. On a quarterly basis, we evaluate the recoverability of our
+deferred tax assets based upon historical results and forecasted taxable income
+over future years, and match this forecast against the basis differences,
+deductions available in future years and the limitations allowed for net
+operating loss and tax credit carryforwards to ensure that there is adequate
+support for the realization of the deferred tax assets. While we have considered
+future taxable income and ongoing prudent and feasible tax planning strategies
+in assessing the need for the valuation allowance, in the event we were to
+determine that we would not be able to realize all or part of our deferred tax
+assets in the future, an adjustment to the deferred tax assets would be charged
+as a reduction to income in the period such determination was made. Likewise,
+should we determine that we would be able to realize future deferred tax assets
+in excess of its net recorded amount, an adjustment to the deferred tax assets
+would increase net income in the period such determination was made.
+As of December 31, 2003, we recorded a net deferred tax asset of
+approximately $3,024,000 and a valuation allowance of $331,000, primarily on a
+portion of our foreign tax credits, research and development credits and certain
+state net operating loss carryforwards. We will need to recognize approximately
+$8.0 million in future taxable income in order to realize all of our deferred
+tax assets at December 31, 2003. Based on our projection of future taxable
+income, no additional valuation allowance is considered necessary. Should
+circumstances change and we determine that some or all of the deferred taxes
+would not be realized, a valuation allowance would be recorded resulting in a
+charge to income in the period the determination is made.
+GOODWILL - We test the impairment of goodwill each year, or whenever
+events or changes in circumstances indicate that the carrying value may not be
+recoverable. We completed our last assessment as of December 31, 2003. Factors
+considered that may trigger an impairment review are: significant
+underperformance relative to expected historical or projected future operating
+results; significant changes in the manner of use of acquired assets or the
+strategy for the overall business; significant negative industry or economic
+trends; and significant decline in market capitalization relative to net book
+value. Goodwill amounted to $1,469,000 at December 31, 2003.
+RESTRUCTURING - In February 2001, we announced plans to establish a
+global engineering and manufacturing center at our Ithaca, NY facility. As part
+of this strategic decision, we undertook a plan to consolidate all manufacturing
+and engineering into our existing Ithaca, NY facility and close our Wallingford,
+CT manufacturing facility (the "Consolidation"). However, our Company
+headquarters remains in Wallingford, CT. Our technology shift to inkjet and
+thermal printing from dot matrix impact printing has dramatically reduced the
+labor content in our printers, and therefore, lowered the required production
+capacity. As of December 31, 2001, we successfully transferred substantially all
+our Wallingford product lines to Ithaca, NY, with the exception of a small
+service depot that remains in Connecticut. The closing of the Wallingford
+manufacturing facility resulted in the termination of employment of
+approximately 70 production, administrative and management employees.
+10
+Through December 31, 2003, we have incurred approximately $6.2 million
+of expenses associated with the Consolidation, including severance pay, stay
+bonuses, employee benefits, moving expenses, non-cancelable lease payments, and
+other costs, of which approximately $1.1 million, $1.0 million and $4.1 million
+were recognized in 2003, 2002 and 2001, respectively. We do not expect to incur
+any additional restructuring expenses related to the Consolidation beyond 2003.
+See the "Liquidity and Capital Resources" section for a discussion of the
+expected impact of the Consolidation on our future results of operations and
+cash flows.
+In connection with the Consolidation of manufacturing facilities in
+2001, we recorded significant accruals. These accruals comprised severance pay,
+stay bonuses, employee benefits, non-cancelable lease payments and certain other
+expenses. Management has made reasonable estimates of such costs and expenses.
+However, if actual costs differ from the estimates, charges or credits to income
+could result in the period the adjustments are determined. In 2002 and 2003, we
+changed our estimate of sublease income on the Wallingford, CT facility,
+resulting in additional restructuring expense.
+WARRANTY - We generally warranty our products for up to 24 months and
+record the estimated cost of such product warranties at the time the sale is
+recorded. Estimated warranty costs are based upon actual past experience of
+product returns and the related estimated cost of labor and material to make the
+necessary repairs. If actual future product return rates or the actual costs of
+material and labor differ from the estimates, adjustments to the accrued
+warranty liability would be made.
+CONTINGENCIES - We record an estimated liability related to
+contingencies based on our estimates of the probable outcomes. On a quarterly
+basis, we assess the potential liability related to pending litigation, audits
+and other contingencies and confirm or revise estimates and reserves as
+appropriate.
+In November 2002, we were advised that certain POS printers sold by us
+since late 1999 may use technology covered by recently issued patents of a third
+party competitor. In an effort to resolve this matter, we originally offered to
+pay approximately $160,000, while the other party sought payment of up to
+$950,000. We recorded a charge of $160,000 in cost of sales in the fourth
+quarter of 2002 related to this matter. Based on the likely outcome of current
+negotiations, we recorded an additional charge of $740,000 in the fourth quarter
+of 2003 related to usage prior to January 1, 2003. Although settlement
+negotiations are continuing, we believe that the total accrual of $900,000 (the
+"Patent Resolution Payment") reflects the best estimate of the expense related
+to the pre-2003 usage of this third party patented technology. We also accrued
+estimated royalty payments for usage of this technology after January 1, 2003.
+ACCUMULATED OTHER COMPREHENSIVE INCOME - Stockholders' equity contains
+certain items classified as other comprehensive income, including foreign
+currency translation adjustments related to our non-U.S. subsidiary company that
+has a designated functional currency other than the U.S. dollar. We are required
+to translate the subsidiary functional currency financial statements to U.S.
+dollars using a combination of historical, month-end and weighted average
+foreign exchange rates. This combination of rates creates the foreign currency
+translation adjustments component of other comprehensive income.
+(A) RESULTS OF OPERATIONS
+(i) YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31,
+2002
+NET SALES. Net sales by market for the years ended December 31, 2003
+and 2002 were as follows:
+Year ended Year ended Change
+(In thousands) December 31, 2003 December 31, 2002 $ %
+----------------------- ----------------------- -----------------------
+Point of sale and banking $20,745 39.8% $18,475 46.8% $ 2,270 12%
+Gaming and lottery 31,353 60.2% 20,986 53.2% 10,367 49%
+------- ------- ------- ------- -------
+$52,098 100.0% $39,461 100.0% $12,637 32%
+======= ======= ======= ======= =======
+International $ 4,731 9.1% $ 4,706 11.9% $ 25 1%
+======= ======= ======= ======= =======
+Net sales for 2003 increased $12,637,000, or 32%, from 2002 largely due
+to significantly higher shipments into our gaming and lottery market, as well as
+increased shipments into our POS market. Overall, international sales remained
+relatively flat in 2003 compared to 2002.
+11
+Point of sale and banking: Sales of our POS products worldwide increased
+approximately $2,270,000, or 12%, from 2002.
+Year ended Year ended Change
+(In thousands) December 31, 2003 December 31, 2002 $ %
+----------------------- ----------------------- ----------------
+Domestic $16,510 79.6% $14,119 76.4% $ 2,391 17%
+International 4,235 20.4% 4,356 23.6% (121) (3%)
+------- ----- ------- ----- -------
+$20,745 100.0% $18,475 100.0% $ 2,270 12%
+======= ===== ======= ===== =======
+Domestic POS revenue increased 17% due largely to significantly higher
+sales of our POSjet(R) and Bankjet(R) lines of inkjet printers. Sales of such
+inkjet printers increased by approximately 187% in 2003 compared to 2002. The
+overall increase in domestic POS revenue is largely attributable to (1)
+shipments of our Bankjet(R) line of inkjet printers to two major financial
+services companies to upgrade bank teller stations, (2) increased shipments of
+our POSjet(R) line of inkjet printers, including shipments to one of the world's
+largest casual dining restaurant chains for use in their food and beverage
+service operations, and (3) significantly higher service, spare parts and
+consumables (mostly replacement inkjet cartridges) revenue.
+International POS revenue decreased 3% due primarily to lower sales of
+our thermal fiscal printers in Europe (approximately $800,000). Lower thermal
+fiscal printer sales were largely offset by (1) higher sales (approximately
+$300,000) through our expanding network of international distributors and (2)
+higher service, spare parts and consumables revenue (approximately $400,000),
+largely resulting from a service contract related to printers shipped for the
+British Post Office in prior years. Such service contract expires in the second
+quarter of 2005, and provides quarterly revenue of approximately $250,000. We
+are currently negotiating for the renewal of this contract upon its expiration,
+however, there can be no assurance that we will be successful. We also continue
+to actively seek additional distribution partners in both Latin America and
+Europe in order to increase our breadth of coverage and future sales in these
+regions.
+We expect sales into the POS market for the first quarter of 2004 to be
+consistent with those reported for the fourth quarter of 2003. However, we
+expect full year sales for 2004 to be modestly higher than those reported during
+2003.
+Gaming and lottery: Sales of our gaming and lottery products increased
+by $10,367,000, or 49%, from 2002, primarily due to significantly stronger sales
+of our slot machine and video lottery terminal ("VLT") printers, somewhat offset
+by lower sales of lottery printers to GTECH.
+Year ended Year ended Change
+(In thousands) December 31, 2003 December 31, 2002 $ %
+----------------------- ----------------------- -----------------
+Domestic $30,857 98.4% $20,636 98.3% $10,221 50%
+International 496 1.6% 350 1.7% 146 42%
+----------------------- ----------------------- -------
+$31,353 100.0% $20,986 100.0% $10,367 49%
+======================= ======================= =======
+Year ended Year ended Change
+(In thousands) December 31, 2003 December 31, 2002 $ %
+------------------- -------------------- ----------------
+Gaming $ 21,587 68.9% $ 10,277 49.0% $ 11,310 110%
+Lottery 9,766 31.4% 10,709 51.0% (943) (9%)
+-------- ----- -------- ----- --------
+$ 31,353 100.0% $ 20,986 100.0% $ 10,367 49%
+======== ===== ======== ===== ========
+Sales of our gaming products, which include video lottery terminal
+("VLT") and slot machine printers used in casinos and racetracks ("racinos"),
+and related spare parts and repairs, more than doubled from 2002. This increase
+resulted primarily from significantly increased installations of our casino
+printers, primarily for use in slot machines at casinos throughout North America
+that print receipts instead of issuing coins ("ticket-in, ticket-out" or
+"TITO"). Based on existing orders and sales opportunities for TITO printers, we
+expect sales of our casino printers to continue to increase in 2004, as more
+regulatory approvals for racinos are expected to be obtained and more casinos
+are expected to convert to ticket-in, ticket-out slot machines. Also, due to
+government budget shortfalls, many states have approved (such as New York and
+Oklahoma) or are considering VLT initiatives as a means of raising revenue. As
+such, we also expect sales of our VLT printers to increase in 2004 compared to
+2003 due to these initiatives.
+12
+Total sales to GTECH, which included impact and thermal on-line lottery
+printers, impact in-lane lottery printers (primarily found at checkout counters
+of certain grocery stores), and spare parts revenue, decreased by $943,000 to
+approximately $9,750,000, or 19% of net sales, in 2003, compared to $10,700,000,
+or 27% of net sales, in 2002.
+See the table below for an analysis of revenues from GTECH.
+Year ended
+(In thousands, except %) December 31,
+2003 2002
+------- -------
+Impact on-line lottery printers and spare parts $ 1,596 $10,032
+Thermal on-line lottery printers 8,000 -
+In-lane lottery printers 170 677
+------- -------
+$ 9,766 $10,709
+======= =======
+% of consolidated net sales 19% 27%
+Sales to GTECH of impact on-line lottery printers and spare parts
+totaled approximately $1,596,000 in 2003, compared to $10,032,000 in 2002. We
+have approximately $2,000,000 of orders from GTECH for impact on-line lottery
+printers for delivery in the second and third quarters of 2004. Because our
+thermal on-line lottery printer is a replacement for our impact on-line lottery
+printer, we do not expect any further shipments of impact on-line lottery
+printers in 2004 beyond the third quarter. Shipments of in-lane lottery printers
+totaled approximately $170,000 in 2003 compared to $677,000 in 2002. Since sales
+of in-lane lottery printers are project-oriented, we cannot predict if and when
+future sales may occur. In July 2002, we entered into a 5-year agreement with
+GTECH to provide a newly designed thermal on-line lottery printer. During 2003,
+we shipped approximately $8,000,000 of these printers. We made no shipments of
+thermal on-line lottery printers during 2002. Based on existing orders and
+expected future demand based on input from GTECH, we expect sales of our thermal
+on-line lottery printers in 2004 to be slightly less than those reported in
+2003.
+International gaming and lottery product sales increased slightly from
+2002. Such sales represented less than 2% of total sales into this market during
+2003 and 2002. However, we expect growth in international gaming revenue,
+beginning in late 2004, as markets such as Australia and Europe evaluate the use
+of this technology for their slot machines.
+GROSS PROFIT. Gross profit increased by $5,327,000, or 52%, to
+$15,543,000, and gross margin increased to 29.8% from 25.9%. Both gross profit
+and gross margin for 2003 benefited from a substantial increase in the volume of
+sales (32%) and a more favorable sales mix, including increased sales of higher
+margin gaming and lottery printers in 2003 compared to 2002. Gross profit
+included a charge of $740,000, or 1.4% of net sales, and $160,000, or 0.4% of
+net sales, related to the Patent Resolution Payment (see "Contingent
+Liabilities" in Liquidity and Capital Resources) in 2003 and 2002, respectively.
+We expect gross margin for 2004 to be approximately 32-33%, as we gain operating
+leverage on higher expected sales volume in 2004 compared to 2003.
+ENGINEERING AND PRODUCT DEVELOPMENT. Engineering, design and product
+development expenses primarily include salary and payroll related expenses for
+our engineering staff, depreciation and design expenses (including prototype
+printer expense, outside design and testing services and supplies). Such
+expenses increased $251,000, or 12%, to $2,276,000, primarily due to higher (1)
+compensation related expenses (approximately $80,000) and (2) expenses
+(including travel) related largely to the development of our new thermal on-line
+lottery printer for GTECH and our iTherm(TM)280 thermal POS printer ($170,000).
+Engineering and product development expenses decreased as a percentage of net
+sales to 4.4% from 5.1%, primarily due to significantly higher sales volume in
+2003 compared to 2002. We expect engineering and product development expenses to
+increase in 2004 as we plan to add staff to continue increasing product
+development to expand our families of inkjet printers for the POS market and
+ticket-issuing printers for the casino market.
+13
+SELLING AND MARKETING. Selling and marketing expenses primarily include
+salaries and payroll related expenses for our sales and marketing staff, sales
+commissions, travel expenses, expenses associated with the lease of sales
+offices, advertising, trade show expenses and other promotional marketing
+expenses. Selling and marketing expenses increased by $941,000, or 23%, to
+$4,968,000, due primarily to higher (1) sales commissions resulting from
+increased sales in 2003 compared to 2002 (approximately $440,000), (2)
+compensation related expenses, including additional sales staff and expenses
+associated with the opening of a new sales office in Las Vegas, to support our
+growing gaming printer sales (approximately $250,000), (3) selling expenses at
+our UK facility due largely to the unfavorable impact of exchange rates in the
+period (approximately $140,000) and (4) marketing expenses (approximately
+$100,000). Selling and marketing expenses decreased as a percentage of net sales
+to 9.5% from 10.2%, due primarily to higher volume of sales in 2003 compared to
+2002. We expect selling and marketing expenses to increase modestly in 2004, as
+we plan to add sales staff to help grow our sales and increase our breadth of
+coverage in our markets.
+GENERAL AND ADMINISTRATIVE. General and administrative expenses
+primarily include: salaries and payroll related expenses for our executive,
+accounting, human resource and information technology staff; expenses for our
+corporate headquarters; professional and legal expenses; and telecommunication
+expenses. General and administrative expenses increased by $293,000, or 7%, to
+$4,483,000. During 2003 we incurred higher legal expenses (approximately
+$250,000) related to our growing patent portfolio and the Patent Resolution
+Payment. In addition, incentive compensation increased by approximately
+$130,000. These increases were somewhat offset by staff reductions resulting
+from the Consolidation (approximately $80,000). General and administrative
+expenses decreased as a percentage of net sales to 8.6% from 10.6%, due
+primarily to higher volume of sales in 2003 compared to 2002. We expect general
+and administrative expenses to increase somewhat in 2004, due largely to planned
+expenses related to required compliance with the Sarbanes-Oxley Act of 2002 and
+additional finance staff related to our CFO transition plan and growth in our
+overall business.
+BUSINESS CONSOLIDATION AND RESTRUCTURING. We incurred $1,128,000 and
+$958,000 of expenses related to the Consolidation in 2003 and 2002,
+respectively. These expenses were substantially the result of revisions to our
+original estimate for non-cancelable lease payments included in the
+restructuring accrual. During the third quarter of 2002, based on regional
+softness in demand in the commercial real estate market, we increased our
+restructuring accrual by $900,000 to reflect the longer period of time then
+projected to sublease our Wallingford, CT facility. The accrual at December 31,
+2002 reflected estimated sublease income after September 30, 2004. After
+expanded efforts during 2003, we determined that because of the continuing
+regional decline in the commercial real estate market in 2003, it was unlikely
+that we would be able to sublease our Wallingford, CT facility. As such, we
+increased our restructuring accrual, which represents the reversal of estimated
+sublease income, in the fourth quarter of 2003 by $1,128,000 to provide for the
+remaining non-cancelable lease payments and other related costs for this
+facility through the expiration of the lease (March 31, 2008).
+We do not expect to incur any further restructuring expenses related to
+the Consolidation beyond 2003. See "Consolidation Expenses" in Liquidity and
+Capital Resources).
+OPERATING INCOME (LOSS). During 2003, we reported operating income of
+$2,688,000, or 5.2% of net sales, compared to an operating loss of $984,000, or
+2.5% of net sales, in 2002. The significant increase in our operating income was
+due largely to higher gross profit on higher sales, partially offset by higher
+operating expenses (primarily selling and marketing expenses) in 2003 compared
+to 2002. Operating income (loss) for 2003 and 2002 included charges related to
+the Consolidation ($1,128,000 and $958,000, respectively) and the Patent
+Resolution Payment ($740,000 and $160,000, respectively).
+INTEREST. We reported interest expense of $219,000 in 2003 compared to
+$217,000 in 2002. Interest income decreased by $16,000 to $9,000 in 2003. The
+decrease in interest income was largely attributable to a higher level of
+invested cash in 2002 resulting from the receipt of an advance payment of
+approximately $5.8 million, from a major customer in advance of printer
+shipments, the proceeds of which were used to repay outstanding revolving
+borrowings in 2002. At December 31, 2003, we had no outstanding revolving
+borrowings and $420,000 outstanding under a term loan, that we repaid during
+January 2004. We expect to generate cash during 2004, and, as a result, expect
+to report interest income on our available cash in 2004. See "Liquidity and
+Capital Resources" below for more information.
+WRITE-OFF OF DEFERRED FINANCING COSTS. In August 2003, we entered into
+a new credit facility with Banknorth N.A., which replaced an existing facility
+with LaSalle Business Credit, Inc. ("LaSalle"). We recorded a charge of
+approximately $103,000 in the third quarter of 2003 related to the write-off of
+unamortized deferred financing costs from our prior credit facility with
+LaSalle. Our new credit facility with Banknorth contains more favorable terms
+that those contained in our prior facility with LaSalle, which we believe will
+result in significant costs savings during the term of the new credit facility.
+14
+OTHER INCOME (EXPENSE). Other expense for 2003 primarily included
+transaction exchange loss recorded by our UK subsidiary. Other income for 2002
+included a one-time gain of $145,000 resulting from the receipt of 2,146 shares
+of common stock from our health insurance company, Anthem, Inc., upon its
+demutualization. We sold these shares during the third quarter of 2002. This
+gain was partially offset by approximately $50,000 of transaction exchange loss
+recorded by our UK subsidiary during 2002, due to the strengthening of the
+British pound against the dollar.
+INCOME TAXES. We recorded an income tax provision of $725,000 at an
+effective rate of 32.2% in 2003, and an income tax benefit of $390,000 at an
+effective rate of 36.0% in 2002. The lower effective rate in 2003 reflects a
+favorable outcome of a state tax audit, benefits from certain tax credits, and
+utilization of state net operating loss carryforwards not previously
+anticipated. We expect to record income taxes at an effective rate of
+approximately 36% during 2004.
+NET INCOME (LOSS). We reported net income in 2003 of $1,528,000, or
+$0.19 per share (diluted) after giving effect to $358,000 of dividends and
+accretion charges on preferred stock. This compares to a net loss in 2002 of
+$692,000, or $0.19 per share (diluted) after giving effect to $358,000 of
+dividends and accretion charges on preferred stock. Both per-share amounts are
+after giving effect to $358,000 of dividends and accretion charges on preferred
+stock. In future quarters, dividends and accretion charges on preferred stock
+will be approximately $90,000, before the effect of any conversion or redemption
+of the preferred stock.
+(ii) YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31,
+2001
+NET SALES. Net sales by market for the years ended December 31, 2002
+and 2001 were as follows:
+Year ended Year ended Change
+(In thousands) December 31, 2002 December 31, 2001 $ %
+--------------------- ----------------- -----------------
+Point of sale and banking $18,475 46.8% $24,105 54.8% $(5,630) (23%)
+Gaming and lottery 20,986 53.2% 19,869 45.2% 1,117 6%
+----- ------- ----- -------
+$39,461 100.0% $43,974 100.0% $(4,513) (10%)
+===== ======= ===== =======
+International $ 4,706 11.9% $ 7,922 18.0% $(3,216) (41%)
+===== ======= ===== =======
+Net sales for 2002 decreased $4,513,000, or 10%, from 2001 largely due
+to lower shipments into our POS market, partially offset by higher sales into
+our gaming and lottery market. Overall, international sales decreased by
+$3,216,000 or 41%, primarily due a reduction in (1) revenue related to the
+British Post Office project (approximately $400,000), (2) kiosk printer
+shipments for use in a Canadian government application (approximately
+$1,500,000), (3) shipments of our thermal fiscal printer in Europe
+(approximately $1,000,000) and (4) POS revenue through distribution in Europe
+and Latin America (approximately $500,000), partially offset by an increase in
+international sales of our gaming and lottery printers (approximately $300,000).
+Point of sale and banking: Sales of our POS products worldwide
+decreased approximately $5,630,000, or 23%.
+Year ended Year ended Change
+(In thousands) December 31, 2002 December 31, 2001 $ %
+-------------------- -------------------- -----------------
+Domestic $ 14,119 76.4% $ 16,235 67.4% $ (2,116) (13%)
+International 4,356 23.6% 7,870 32.6% (3,514) (45%)
+--------- ------- ----------- ------- ---------
+$ 18,475 100.0% $ 24,105 100.0% $ (5,630) (23%)
+========= ======= =========== ======= =========
+Domestic POS product revenue decreased $2,116,000, or 13%, as we
+experienced softness in demand from our domestic distributors, particularly in
+the first and third quarters of 2002. Sales of our kiosk and ATM printers and
+related spare parts also declined by approximately $900,000. Due to steadily
+declining sales and low anticipated future sales, we decided to no longer sell
+such printers after 2002. Sales in 2002 included increasing sales of our POSjet
+line of inkjet printers.
+15
+International POS printer shipments decreased approximately 45% for
+several reasons. First, sales to ICL Pathway for the British Post Office
+project, which included printer shipments, spare parts and service revenue,
+declined by approximately $400,000 to $1,800,000 in 2002. We completed shipping
+printers for the British Post Office project during the first quarter of 2001,
+and expect no future sales for this project, other than spare parts and service.
+Secondly, shipments of our thermal fiscal printer in Europe declined by
+approximately $1,000,000 to $950,000 in 2002. Thirdly, during 2001, we shipped
+approximately $1,500,000 of our thermal kiosk printers for use in a Canadian
+government application. We made no shipments of these printers in 2002. We do
+not expect to make any future shipments for this application. Lastly, we
+experienced a decrease of approximately $500,000 in sales through distribution,
+primarily in Latin America, and to a lesser extent, in Europe.
+Gaming and lottery: Sales into the gaming and lottery market increased
+by $1,117,000, or 6%, from 2001, primarily due to stronger sales of our video
+lottery terminal ("VLT") and slot machine printers, largely offset by lower
+sales of lottery printers to GTECH.
+Year ended Year ended Change
+(In thousands) December 31, 2002 December 31, 2001 $ %
+--------------------- ---------------------- ------------------
+Domestic $ 20,636 98.3% $ 19,817 98.3% $ 819 4%
+International 350 1.7% 52 1.7% 298 573%
+---------- ----- ---------- ----- ---------
+$ 20,986 100.0% $ 19,869 100.0% $ 1,117 6%
+========== ===== ========== ===== =========
+Year ended Year ended Change
+(In thousands) December 31, 2002 December 31, 2001 $ %
+----------------------- ------------------------ ------------------
+Gaming $ 10,277 49.0% $ 5,413 27.2% $ 4,864 90%
+Lottery 10,709 51.0% 14,456 72.8% (3,747) (26%)
+---------- ----- ---------- ----- ---------
+$ 20,986 100.0% $ 19,869 100.0% $ 1,117 6%
+========== ===== ========== ===== =========
+Sales of our gaming printers, which included VLT and slot machine
+printers, and related spare parts and repairs, increased by approximately
+$4,864,000, or 90%. The increase in gaming printer sales resulted from two
+factors; (1) increased installations of our VLT printers in West Virginia and
+other states, including approximately $1,600,000 of sales of a custom printer to
+one customer and (2) increased sales of our casino printers, primarily for use
+in slot machines at casinos throughout North America that print receipts instead
+of issuing coins ("ticket-in, ticket-out").
+Shipments to GTECH, which included on-line and in-lane lottery printers
+and spare parts revenue, decreased $3,747,000, or 26%. See the table below for
+an analysis of revenues from GTECH. Since sales of in-lane lottery printers are
+project-oriented, we cannot predict if and when future sales may occur.
+Year ended
+(In thousands, except %) December 31,
+2002 2001
+------- -------
+Impact on-line lottery printers and spare parts $10,032 $14,253
+In-lane lottery printers 677 203
+------- -------
+$10,709 $14,456
+======= =======
+% of consolidated net sales 27% 27%
+GROSS PROFIT. Gross profit increased by $442,000, or 5%, to
+$10,216,000, and the gross margin also increased to 25.9% from 22.2%. Both gross
+profit and gross margin for 2002 benefited from improved sales mix and cost
+reductions resulting from the Consolidation.
+ENGINEERING AND PRODUCT DEVELOPMENT. Engineering, design and product
+development expenses decreased $1,045,000, or 34%, to $2,025,000, and also
+decreased as a percentage of net sales to 5.1% from 7.0%. This decrease is
+primarily due to a reduction in engineering staff at our Wallingford, CT
+facility due to the Consolidation.
+16
+SELLING AND MARKETING. Selling and marketing expenses decreased
+$543,000, or 12%, to $4,027,000, and decreased as a percentage of net sales to
+10.2% from 10.4%. Such expenses decreased mostly due to lower planned
+promotional and advertising expenses and staff reductions resulting from the
+Consolidation.
+GENERAL AND ADMINISTRATIVE. General and administrative expenses
+decreased by $1,909,000, or 31%, to $4,190,000, and decreased as a percentage of
+net sales to 10.6% from 13.9%. The decrease primarily resulted from (1) staff
+reductions resulting from the Consolidation and (2) the inclusion in 2001 of
+$680,000 of accelerated depreciation on certain assets located at the Company's
+Wallingford, CT facility (primarily leasehold improvements and computer
+equipment) whose useful lives were shortened as a result of the Consolidation.
+BUSINESS CONSOLIDATION AND RESTRUCTURING. We incurred $958,000 of
+expenses related to the Consolidation in 2002. These expenses were substantially
+the result of a revision to our estimate for non-cancelable lease payments
+included in the restructuring accrual at September 30, 2002. Based on regional
+softness in demand in the commercial real estate market, we increased our
+restructuring accrual by $900,000 to reflect the longer period of time then
+projected to sublease our Wallingford, CT facility. The accrual at December 31,
+2002 reflected estimated sublease income after September 30, 2004.
+During 2001, we incurred approximately $3,321,000 of Consolidation
+expenses, which primarily included a portion of employee severance and
+termination related expenses and facility closure and consolidation expenses
+(including moving expenses, estimated non-cancelable lease payments and other
+costs). See "Consolidation Expenses" in Liquidity and Capital Resources).
+OPERATING LOSS. During 2002, we reported an operating loss of $984,000,
+or 2.5% of net sales, compared to an operating loss of $7,286,000, or 16.6% of
+net sales, in 2001. The reduction in our operating loss was due to (1)
+significantly reduced operating expenses as a direct result of the
+Consolidation, (2) lower Consolidation expenses and (3) higher gross margin.
+INTEREST. Net interest expense decreased by $205,000 to $192,000 in
+2002, due largely to a significant reduction in our average outstanding
+borrowings under our revolving bank facility resulting from significantly lower
+inventories (approximately $2,200,000), receipt of an advance payment from a
+customer, and to a lesser extent, lower interest rates.
+OTHER INCOME. Other income for 2002 includes a one-time gain of
+$145,000 resulting from the receipt of 2,146 shares of common stock from our
+health insurance company, Anthem, Inc., upon its demutualization. We sold these
+shares during the third quarter of 2002. This gain was partially offset by
+approximately $50,000 of transaction exchange loss recorded by our UK subsidiary
+during 2002, due to the strengthening of the British pound against the dollar,
+mostly in the second quarter of 2002.
+INCOME TAXES. We recorded an income tax benefit of $390,000 and
+$2,748,000 in 2002 and 2001, respectively, at an effective rate of approximately
+36.0% in each period.
+NET LOSS. We reported a net loss in 2002 of $692,000, or $0.19 per
+share (basic and diluted) after giving effect to $358,000 of dividends and
+accretion charges on preferred stock. This compares to a net loss of $4,922,000,
+or $0.95 per share (basic and diluted) after giving effect to $358,000 of
+dividends and accretion charges on preferred stock in 2001. In future quarters,
+dividends and accretion charges on preferred stock will be approximately
+$90,000, before the effect of any conversion or redemption of the preferred
+stock.
+17
+(B) LIQUIDITY AND CAPITAL RESOURCES
+CASH FLOW
+Overview: During 2003, we significantly improved our operating results.
+We reported our first profitable year since 1999 and as of December 31, 2003
+reported no revolving bank debt. Looking forward, we expect to generate
+approximately $5 to $6 million in cash from operations during 2004 and have
+between $4 and $5 million of cash on our balance sheet at the end of 2004. We
+also expect to earn interest income on our available cash balance throughout
+2004.
+Operating activities: The following significant factors affected our
+cash provided by operations of $1,814,000 in 2003:
+- We reported net income of $1,528,000.
+- We recorded depreciation, amortization and non-cash
+compensation expense of $1,723,000.
+- Accounts receivable increased by $5,035,000 because of
+significantly higher sales in the fourth quarter of 2003
+compared to the fourth quarter of 2002.
+- Inventories decreased by $374,000, despite a significant
+increase in sales, due to improved inventory management.
+- Accounts payable increased by $305,000 due to the timing of
+payments and increased inventory purchases resulting from a
+higher volume of sales.
+- Accrued liabilities increased by $1,172,000, primarily due to
+higher compensation related accruals and an increase in
+deferred revenue on extended warranty contracts and other
+customer prepayments.
+- Accrued license fees increased by $1,038,000 related to the
+Patent Resolution Payment (see "Contingent Liabilities"
+below).
+- Accrued restructuring expenses increased by $407,000. (See
+"Consolidation Expenses" below).
+Investing activities: We used approximately $930,000 of cash for
+investing activities in 2003 compared to using $577,000 in 2002. Our capital
+expenditures were approximately $1,261,000 and $577,000 in 2003 and 2002,
+respectively. Expenditures in 2003 primarily included new product tooling
+(largely for our new thermal on-line lottery printer for GTECH and our
+newly-introduced iTherm(TM)280 thermal POS printer), and to a lesser extent,
+computer equipment. We expect capital expenditures for 2004 to be approximately
+$1,600,000, primarily for tooling for new products and enhanced versions of our
+existing products. During the second quarter of 2003, we received cash proceeds
+of $330,000, plus accrued interest, from an officer of the Company in repayment
+of an outstanding loan.
+Financing activities: We used approximately $1,387,000 in financing
+activities during 2003, largely due to net repayments under our revolving credit
+facility (approximately $2,541,000) and payments of cash dividends on our
+preferred stock (approximately $280,000), largely offset by proceeds from stock
+option exercises (approximately $1,364,000) and net term loan borrowings
+(approximately $70,000).
+WORKING CAPITAL
+Our working capital increased to $11,787,000 at December 31, 2003 from
+$8,798,000 at December 31, 2002. The current ratio also increased to 2.36 to 1
+at December 31, 2003 from 2.20 to 1 at December 31, 2002. The increase in both
+working capital and the current ratio was largely due to significantly higher
+receivables (approximately $5,035,000) due to higher sales in the fourth quarter
+of 2003 compared to the fourth quarter of 2002, partially offset by higher
+accrued expenses (approximately $1,046,000), mostly due to an increase in
+compensation related accruals and deferred revenue, at the end of 2003 compared
+to 2002.
+DEFERRED TAXES
+As of December 31, 2003, we had a net deferred tax asset of
+approximately $3,024,000. In order to utilize this deferred tax asset, we will
+need to generate approximately $8.0 million of taxable income in future years.
+Based on future projections of taxable income, we have determined that it is
+more likely than not that the existing net deferred tax asset will be realized.
+18
+CONTINGENT LIABILITIES
+In November 2002, the Company was advised that certain POS printers
+sold by us since late 1999 may use technology covered by recently issued patents
+of a third party competitor. In an effort to resolve this matter, we originally
+offered to pay approximately $160,000, while the other party sought payment of
+up to $950,000. We recorded a charge of $160,000 in cost of sales in the fourth
+quarter of 2002 related to this matter. Based on the likely outcome of current
+negotiations, we recorded an additional charge of $740,000 in the fourth quarter
+of 2003 related to usage prior to January 1, 2003. Although settlement
+negotiations are continuing, we believe that the total accrual of $900,000 (the
+"Patent Resolution Payment") reflects the best estimate of the expense related
+to the pre-2003 usage of this third party patented technology. We also accrued
+estimated royalty payments for usage of this technology after January 1, 2003.
+CREDIT FACILITY AND BORROWINGS
+On August 6, 2003, we entered into a new $12.5 million credit facility
+(the "Banknorth Credit Facility") with Banknorth N.A. The Banknorth Credit
+Facility replaced our prior credit facility (the "LaSalle Credit Facility) with
+LaSalle Business Credit, Inc. ("LaSalle"). The Banknorth Credit Facility
+provides for an $11.5 million revolving credit line expiring on July 31, 2006,
+and a $1 million equipment loan facility which may be drawn down through July
+31, 2004. Borrowings under the revolving credit line bear a floating rate of
+interest at the prime rate. Borrowings under the equipment loan bear a floating
+rate of interest at the prime rate plus 0.25%. Under certain circumstances, we
+may select a fixed interest rate for a specified period of time of up to 180
+days on borrowings based on the current LIBOR rate plus 2.75% and 3.0% under the
+revolving credit facility and the equipment loan facility, respectively. In
+addition, we may select a fixed interest rate based on the five-year Federal
+Home Loan Bank of Boston rate plus 3.0% for borrowings under the equipment loan
+facility. We also pay a fee of 0.25% on unused borrowings under the revolving
+credit line. Borrowings under the Banknorth Credit Facility are secured by a
+lien on all the assets of the Company. The Banknorth Credit Facility imposes
+certain quarterly financial covenants on the Company and restricts the payment
+of dividends on its common stock and the creation of other liens.
+The borrowing base of the revolving credit line under Banknorth Credit
+Facility is based on the lesser of (a) $11.5 million or (b) 85% of eligible
+accounts receivable plus (i) the lesser of (1) $5,500,000 and (2) 45% of
+eligible raw material inventory plus 50% of eligible finished goods inventory,
+less (ii) a $1,000,000 reserve pending the determination of the Patent
+Resolution Payment (see Note 10 to the Consolidated Financial Statements) and
+less (iii) a $40,000 credit reserve.
+Concurrent with the signing of the Banknorth Credit Facility, we
+borrowed $450,000 under the equipment loan facility. Principal payments for any
+borrowings under the equipment loan facility are due in equal installments plus
+accrued interest based on a sixty month amortization schedule on the first day
+of each month beginning September 1, 2003, with the unpaid principal balance due
+on the earlier of (1) July 31, 2008 or (2) acceleration of the indebtedness
+under the revolving credit line or the equipment line due to an event of
+default.
+We recorded a charge of approximately $103,000 in the third quarter of
+2003 related to the write-off of unamortized deferred financing costs from our
+prior credit facility with LaSalle. Our new credit facility with Banknorth
+contains more favorable terms than those contained in our prior facility with
+LaSalle.
+As of December 31, 2003, we had no outstanding borrowings on the
+revolving credit line and $420,000 outstanding under the term loan. Undrawn
+commitments under the Banknorth Credit Facility were approximately $11,500,000
+at December 31, 2003. However, our maximum additional available borrowings under
+the facility were limited to approximately $6,100,000 at December 31, 2003 based
+on the borrowing base of our collateral. Annual principal payments on the term
+loan are $90,000. We repaid the remaining balance on the term loan in January
+2004. We were in compliance with all financial covenants of the Banknorth Credit
+Facility at December 31, 2003.
+Prior to the Banknorth Credit Facility, we operated under a three-year,
+$13.5 million credit facility (the "LaSalle Credit Facility") with LaSalle which
+was scheduled to expire on May 25, 2004. The LaSalle Credit Facility provided a
+$12 million revolving credit line, a $0.5 million term loan and a $1 million
+equipment loan facility. Borrowings under the LaSalle Credit Facility bore a
+floating rate of interest based on LaSalle's prime rate.
+On November 12, 2002, we amended the LaSalle Credit Facility. Under the
+terms of the amendment ("LaSalle Amendment No. 3"), LaSalle (1) waived
+compliance with the minimum EBITDA, minimum tangible net worth and fixed charge
+coverage ratio financial covenants as of September 30, 2002 and (2) revised
+these covenants to exclude the effect of $900,000, of the total $912,000, of
+restructuring charges incurred in the third quarter. On March 24, 2003, we
+amended the LaSalle Credit Facility. Under the terms of the amendment ("LaSalle
+Amendment No. 4"), LaSalle (1) waived compliance with the minimum EBITDA
+covenant as of December 31, 2002, (2) revised this covenant and certain other
+financial covenants through May 2004 and (3) eliminated the availability of the
+$1 million equipment loan facility due to expire in May 2003.
+19
+PREFERRED STOCK
+In connection with our 7% Series B Cumulative Convertible Redeemable
+Preferred Stock (the "Preferred Stock"), we paid $280,000 of cash dividends in
+2003, 2002 and 2001, and expect to pay $70,000 per quarter during 2004. We also
+record non-cash accretion of approximately $20,000 per quarter related to
+preferred stock warrants and issuance costs. The preferred stock is convertible
+at any time by the holders at a conversion price of $9.00 per common share. The
+preferred stock is redeemable at the option of the holders on April 7, 2005 for
+an aggregate of $4,000,000 plus any unpaid dividends. Upon a change of control,
+as defined, holders have the right to redeem the Preferred Stock for an
+aggregate of $8,000,000 plus any unpaid dividends.
+In 2000, we issued to the Preferred Stock holders warrants to purchase
+an aggregate of 44,444 shares of our common stock at an exercise price of $9.00
+per common share. On July 8, 2003, the holders exercised their 44,444 warrants.
+In lieu of cash consideration, we canceled 31,821 of their warrants in exchange
+for the issuance of 12,623 shares of common stock.
+SHAREHOLDERS' EQUITY
+Shareholders' equity increased by $3,802,000 to $10,347,000 at December
+31, 2003 from $6,545,000 at December 31, 2002. The increase was primarily due to
+the following for the year ended December 31, 2003: (1) net income available to
+common shareholders of $1,170,000, (2) the repayment by an officer of an
+outstanding loan of $330,000, (3) proceeds of approximately $1,364,000 from the
+issuance of approximately 241,000 shares of common stock from stock option
+exercises and purchase from our employee stock purchase plan, (4) an increase in
+additional paid in capital of approximately $769,000 resulting from the
+recording of a deferred tax asset from tax deductions arising from stock option
+exercises and (5) an increase in accumulated other comprehensive income of
+$99,000 due to translation adjustments from our U.K. subsidiary.
+CONSOLIDATION EXPENSES
+During 2001, we incurred approximately $4,096,000 of business
+consolidation, restructuring and related charges as a result of the
+Consolidation. These expenses primarily included employee severance and
+termination related expenses, facility closure and consolidation expenses
+(including moving expenses, estimated non-cancelable lease payments and other
+costs) and accelerated depreciation and asset disposal losses on certain
+leasehold improvements and other fixed assets. Although the Consolidation was
+substantially completed in 2001, we incurred an additional $958,000 expenses
+associated with the Consolidation during 2002. During 2002, we revised our
+original estimate for future sublease payments included in the restructuring
+accrual. Based on regional softness in demand in the commercial real estate
+market, we increased the restructuring accrual by $900,000 to reflect the longer
+period of time then projected to sublease our Wallingford, CT facility. After
+expanded efforts in 2003, we determined that because of the continuing regional
+decline in the commercial real estate market during 2003, it was unlikely that
+we would be able to sublease our Wallingford, CT manufacturing facility, which
+has a lease term that expires in March 2008. As a result, during the fourth
+quarter of 2003, we increased our restructuring accrual by $1,270,000 to provide
+for the remaining non-cancelable lease payments and related costs associated
+with the manufacturing facility. This increase represented the reversal of
+estimated sublease income for the remainder of the lease term. In addition, we
+determined that we will not terminate several employees originally included in
+the Consolidation. As a result, we reversed the remaining $142,000 of accrued
+restructuring expenses in 2003 related to employee severance and termination
+expenses, as we completed all required payments for such expenses by December
+31, 2003.
+As a result of the Consolidation, we significantly lowered our cost
+structure in 2002 and 2003, with annual cost savings of over $4 million compared
+to 2001. We believe such cost savings will continue to contribute to additional
+operating leverage in 2004. We do not expect to incur any additional
+restructuring expense related to the Consolidation beyond 2003. See Note 8 to
+the Consolidated Financial Statements for further detail.
+Of the total of $6,182,000 of Consolidation expenses, approximately
+$5,407,000 required or will require cash outlays. We paid approximately
+$721,000, $2,242,000 and $424,000 of these costs in 2003, 2002 and 2001,
+respectively. We expect to pay approximately $480,000 of these costs per year
+from 2004 through 2007, and the remaining $100,000 in 2008. These payments from
+2004 through 2008 relate primarily to lease and occupancy costs in our
+Wallingford, CT facility.
+20
+CONTRACTUAL OBLIGATIONS
+TransAct's contractual obligations as of December 31, 2003 were as
+follows:
+(In thousands) Total < 1 year 1-3 years 3-5 years > 5 years
+-------------- ----- -------- --------- ---------- ---------
+Long term debt obligations $ 420 $ 90 $ 180 $ 150 $ 150
+Operating lease obligations 6,289 952 1,938 1,602 1,797
+Purchase obligations 19,255 16,384 2,871 - -
+Long term debt obligations include originally scheduled payments on our
+term loan with Banknorth as of December 31, 2003. We repaid the remaining
+balance on the term loan ($420,000) in January 2004. Purchase obligations are
+for purchases made in the normal course of business to meet operational
+requirements, primarily of raw material and component part inventory.
+RESOURCE SUFFICIENCY
+We believe that cash flows generated from operations and borrowings
+available under the Banknorth Credit Facility will provide sufficient resources
+to meet our working capital needs, including costs associated with the
+Consolidation and the Patent Resolution Payment, to finance our capital
+expenditures and meet our liquidity requirements through at least December 31,
+2004.
+Our Series B Preferred Stock is redeemable at the option of the holders
+on or after April 7, 2005 for an aggregate of $4,000,000. We believe that cash
+flows generated from operations and borrowings available under the Banknorth
+Credit Facility will also provide sufficient resources to satisfy redemption of
+the Preferred Stock in 2005, if it were to occur. However, we may also consider
+additional financing sources as appropriate, including raising additional equity
+capital.
+(C) IMPACT OF INFLATION
+TransAct believes that its business has not been affected to a
+significant degree by inflationary trends because of the low rate of inflation
+during the past three years, nor does it believe it will be significantly
+affected by inflation during 2004.
+ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
+INTEREST RATE RISK
+Our exposure to market risk for changes in interest rates relates
+primarily to borrowings under our revolving credit facility. These borrowings
+bear interest at variable rates and the fair value of this indebtedness is not
+significantly affected by changes in market interest rates. An effective
+increase or decrease of 10% in the current effective interest rates under our
+credit facility would not have a material effect on our results of operations or
+cash flows.
+FOREIGN CURRENCY EXCHANGE RISK
+A substantial portion of our sales are denominated in U.S. dollars and,
+as a result, we have relatively little exposure to foreign currency exchange
+risk with respect to sales made. This exposure may change over time as business
+practices evolve and could have a material adverse impact on our financial
+results in the future. We do not use forward exchange contracts to hedge
+exposures denominated in foreign currencies or any other derivative financial
+instruments for trading or speculative purposes. The effect of an immediate 10%
+change in exchange rates would not have a material impact on our future results
+of operations or cash flows.
+21
+ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
+Page
+Number
+------
+Report of Independent Auditors 23
+TransAct Technologies Incorporated consolidated financial statements:
+Consolidated balance sheets as of December 31, 2003 and
+December 31, 2002. 24
+Consolidated statements of operations
+for the years ended December 31, 2003, 2002 and 2001. 25
+Consolidated statements of changes in shareholders' equity and
+comprehensive income (loss) for the years ended December 31, 2003,
+2002 and 2001. 26
+Consolidated statements of cash flows for the years ended
+December 31, 2003, 2002 and 2001. 27
+Notes to consolidated financial statements. 28
+22
+REPORT OF INDEPENDENT AUDITORS
+To the Board of Directors and Shareholders
+of TransAct Technologies Incorporated:
+In our opinion, the accompanying consolidated balance sheets and the related
+consolidated statements of operations, of changes in shareholders' equity and
+comprehensive income (loss) and of cash flows, present fairly, in all material
+respects, the financial position of TransAct Technologies Incorporated and its
+subsidiaries at December 31, 2003 and 2002, and the results of their operations
+and their cash flows for each of the three years in the period ended December
+31, 2003 in conformity with accounting principles generally accepted in the
+United States of America. 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 of these
+statements in accordance with auditing standards generally accepted in the
+United States of America, which require that we plan and perform the audit 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, assessing
+the accounting principles used and significant estimates made by management, and
+evaluating the overall financial statement presentation. We believe that our
+audits provide a reasonable basis for the opinion expressed above.
+/s/ PricewaterhouseCoopers LLP
+Hartford, Connecticut
+February 26, 2004, except for Note 21
+which is as of March 4, 2004
+23
+TRANSACT TECHNOLOGIES INCORPORATED
+CONSOLIDATED BALANCE SHEETS
+(In thousands, except share data)
+December 31, December 31,
+2003 2002
+------------ -----------
+ASSETS:
+Current assets:
+Cash and cash equivalents $ 498 $ 902
+Receivables, net 9,074 4,039
+Inventories 8,061 8,435
+Refundable income taxes 130 228
+Deferred tax assets 2,340 2,221
+Other current assets 379 327
+-------- --------
+Total current assets 20,482 16,152
+-------- --------
+Fixed assets, net 3,607 3,924
+Goodwill 1,469 1,469
+Deferred tax assets 684 193
+Other assets 119 292
+-------- --------
+5,879 5,878
+-------- --------
+Total assets $ 26,361 $ 22,030
+======== ========
+LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK
+AND SHAREHOLDERS' EQUITY:
+Current liabilities:
+Current portion of term loan $ 90 $ 100
+Accounts payable 3,288 2,983
+Accrued liabilities 2,892 2,244
+Accrued restructuring expenses 480 900
+Accrued patent license fees 408 160
+Deferred revenue 1,537 967
+-------- --------
+Total current liabilities 8,695 7,354
+-------- --------
+Revolving bank loan payable - 2,541
+Long-term portion of term loan 330 250
+Accrued restructuring expenses 1,645 818
+Accrued patent license fees 750 -
+Accrued product warranty 169 221
+Deferred revenue 523 477
+-------- --------
+3,417 4,307
+-------- --------
+Total liabilities 12,112 11,661
+-------- --------
+Commitments and contingencies
+Series B Redeemable convertible preferred stock, $0.01 par
+value, 8,000 shares authorized, 4,000 shares issued and
+outstanding (liquidation preference of $4,098 and $4,176
+as of December 31,2003 and 2002) 3,902 3,824
+-------- --------
+Shareholders' equity:
+Preferred stock, $0.01 par value, 4,792,000
+authorized, none issued and outstanding - -
+Preferred stock, Series A, $0.01 par value, 200,000
+authorized, none issued and outstanding - -
+Common stock, $0.01 par value, 20,000,000 authorized,
+5,968,433 and 5,715,119 shares issued and outstanding 60 57
+Additional paid-in capital 8,441 6,308
+Retained earnings 1,769 599
+Unamortized restricted stock compensation (30) (97)
+Loan receivable from officer - (330)
+Accumulated other comprehensive income 107 8
+-------- --------
+Total shareholders' equity 10,347 6,545
+-------- --------
+Total liabilities, redeemable convertible preferred stock and
+shareholders' equity $ 26,361 $ 22,030
+======== ========
+See accompanying notes to consolidated financial statements.
+24
+TRANSACT TECHNOLOGIES INCORPORATED
+CONSOLIDATED STATEMENTS OF OPERATIONS
+(In thousands, except per share data)
+Year Ended December 31,
+2003 2002 2001
+---- ---- ----
+Net sales $ 52,098 $ 39,461 $ 43,974
+Cost of sales 36,555 29,245 34,200
+-------- -------- --------
+Gross profit 15,543 10,216 9,774
+-------- -------- --------
+Operating expenses:
+Engineering, design and product development 2,276 2,025 3,070
+Selling and marketing 4,968 4,027 4,570
+General and administrative 4,483 4,190 6,099
+Business consolidation and restructuring 1,128 958 3,321
+-------- -------- --------
+12,855 11,200 17,060
+-------- -------- --------
+Operating income (loss) 2,688 (984) (7,286)
+-------- -------- --------
+Other income (expense):
+Interest expense (219) (217) (430)
+Interest income 9 25 33
+Write-off of deferred financing costs (103) - -
+Other, net (122) 94 13
+-------- -------- --------
+(435) (98) (384)
+-------- -------- --------
+Income (loss) before income taxes 2,253 (1,082) (7,670)
+Income tax provision (benefit) 725 (390) (2,748)
+-------- -------- --------
+Net income (loss) 1,528 (692) (4,922)
+Dividends and accretion charges on preferred
+stock (358) (358) (358)
+-------- -------- --------
+Net income (loss) available to common
+shareholders $ 1,170 $ (1,050) $ (5,280)
+======== ======== ========
+Net income (loss) per common share:
+Basic $ 0.20 $ (0.19) $ (0.95)
+Diluted $ 0.19 $ (0.19) $ (0.95)
+Shares used in per share calculation:
+Basic 5,793 5,636 5,551
+Diluted 6,223 5,636 5,551
+See accompanying notes to consolidated financial statements.
+25
+TRANSACT TECHNOLOGIES INCORPORATED
+CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY AND COMPREHENSIVE
+INCOME (LOSS)
+(In thousands, except share data)
+Unamortized
+Common Stock Additional Restricted
+------------------- Paid-in Retained Stock
+Shares Amount Capital Earnings Compensation
+------ ------ ------- -------- ------------
+Balance, December 31, 2000 5,607,827 56 $ 6,069 $ 6,929 $ (477)
+Issuance of restricted stock 20,000 - 95 - (95)
+Cancellation of restricted stock (3,000) - (22) - 22
+Issuance of shares from exercise of
+stock options 53,500 1 233 - -
+Issuance of shares from employee
+stock purchase plan 6,443 - 28 - -
+Amortization of restricted stock
+compensation - - - - 264
+Tax charge related to restricted
+stock vested - - (100) - -
+Dividends paid on preferred stock - - - (280) -
+Accretion of preferred stock -
+discount and issuance costs - - (78) - -
+Comprehensive loss:
+Foreign currency translation
+adjustment - - - - -
+Net loss - - - (4,922) -
+--------- -------- ---------- ---------- ----------
+Balance, December 31, 2001 5,684,770 57 6,303 1,649 (286)
+Cancellation of restricted stock (600) - (5) - 5
+Issuance of shares from exercise of
+stock options 26,100 - 111 - -
+Issuance of shares from employee
+stock purchase plan 4,849 - 19 - -
+Amortization of restricted stock
+compensation - - - 184 -
+Tax charge related to restricted
+stock vested - - (120) - -
+Dividends paid on preferred stock - - - (280) -
+Accretion of preferred stock
+discount and issuance costs - - - (78) -
+Comprehensive income (loss):
+Foreign currency translation
+adjustment - - - - -
+Net loss - - - (692) -
+--------- -------- ---------- ---------- ----------
+Balance, December 31, 2002 5,715,119 57 6,308 599 (97)
+Issuance of shares from exercise of
+stock options 238,604 3 1,355 - -
+Issuance of shares from employee
+stock purchase plan 2,087 - 9 - -
+Issuance of shares from cashless
+exercise of common stock
+warrants 12,623 - - - -
+Amortization of restricted stock
+compensation - - - - 67
+Tax benefit related to employee
+stock sales - - 769 - -
+Dividends paid on preferred stock - - - (280) -
+Accretion of preferred stock
+discount and issuance costs - - - (78) -
+Repayment of loan from officer - - - - -
+Comprehensive income:
+Foreign currency translation
+adjustment - - - - -
+Net income - - - 1,528 -
+--------- -------- ---------- ---------- ----------
+Balance, December 31, 2003 5,968,433 $ 60 $ 8,441 $ 1,769 $ (30)
+========= ======== ========== ========== ==========
+Loan Accumulated
+Receivable Other Total
+from Comprehensive Comprehensive
+Officer Income (Loss) Total Income (Loss)
+------- ------------- ----- -------------
+Balance, December 31, 2000 $ (330) $ (56) $ 12,191
+Issuance of restricted stock - - -
+Cancellation of restricted stock - - -
+Issuance of shares from exercise of
+stock options - 234 -
+Issuance of shares from employee
+stock purchase plan - - 28
+Amortization of restricted stock
+compensation - - 264
+Tax charge related to restricted
+stock vested - - (100)
+Dividends paid on preferred stock - - (280)
+Accretion of preferred stock
+discount and issuance costs - - (78)
+Comprehensive loss:
+Foreign currency translation
+adjustment - (22) (22) $ (22)
+Net loss - - (4,922) (4,922)
+----------- ---------- ---------- ------------
+Balance, December 31, 2001 (330) (78) 7,315 (4,944)
+============
+Cancellation of restricted stock - - - -
+Issuance of shares from exercise of
+stock options - - 111
+Issuance of shares from employee
+stock purchase plan - - 19
+Amortization of restricted stock
+compensation 184 -
+Tax charge related to restricted
+stock vested - - (120)
+Dividends paid on preferred stock - - (280)
+Accretion of preferred stock
+discount and issuance costs - (78) -
+Comprehensive income (loss):
+Foreign currency translation
+adjustment - 86 86 86
+Net loss - - (692) (692)
+----------- ---------- ---------- ------------
+Balance, December 31, 2002 (330) 8 6,545 (606)
+============
+Issuance of shares from exercise of
+stock options - - 1,358
+Issuance of shares from employee
+stock purchase plan - - 9
+Issuance of shares from cashless
+exercise of common stock
+warrants - - -
+Amortization of restricted stock
+compensation - - 67
+Tax benefit related to employee
+stock sales - - 769
+Dividends paid on preferred stock - - (280)
+Accretion of preferred stock
+discount and issuance costs - - (78)
+Repayment of loan from officer 330 - 330
+Comprehensive income:
+Foreign currency translation
+adjustment - 99 99 99
+Net income - - 1,528 1,528
+----------- ---------- ---------- ------------
+Balance, December 31, 2003 $ - $ 107 $ 10,347 $ 1,627
+=========== ========== ========== ============
+See accompanying notes to consolidated financial statements.
+26
+TRANSACT TECHNOLOGIES INCORPORATED
+CONSOLIDATED STATEMENTS OF CASH FLOWS
+(In thousands)
+Year Ended December 31,
+2003 2002 2001
+------- ------- -------
+Cash flows from operating activities:
+Net income (loss) $ 1,528 $ (692) $(4,922)
+Adjustments to reconcile net income (loss)
+to net cash provided by operating
+activities:
+Non-cash compensation expense 67 184 264
+Write-off of deferred bank financing costs 103 - -
+Depreciation and amortization 1,656 1,935 3,134
+Deferred income taxes 162 968 (2,743)
+Loss (gain) on sale of fixed assets (1) - 209
+Changes in operating assets and liabilities:
+Receivables (5,035) 8 2,090
+Inventories 374 2,198 (776)
+Refundable income taxes 98 (228) -
+Other current assets (52) (115) 599
+Other assets (8) (63) (326)
+Accounts payable 305 80 213
+Accrued liabilities and other liabilities 1,212 528 706
+Accrued patent license fees 998 160 -
+Accrued restructuring expenses 407 (1,284) 2,897
+------- ------- -------
+Net cash provided by operating activities 1,814 3,679 1,345
+------- ------- -------
+Cash flows from investing activities:
+Purchases of fixed assets (1,261) (577) (1,382)
+Proceeds from sale of fixed assets 1 - 2
+Repayment of loan receivable from officer 330 - -
+------- ------- -------
+Net cash used in investing activities (930) (577) (1,380)
+------- ------- -------
+Cash flows from financing activities:
+Revolving bank loan repayments, net (2,541) (2,453) (950)
+Term loan borrowings 450 - 500
+Term loan repayments (380) (100) (50)
+Proceeds from option exercises and employee
+stock purchase plan 1,364 130 262
+Payment of cash dividends on preferred stock (280) (280) (280)
+------- ------- -------
+Net cash provided used in financing
+activities (1,387) (2,703) (518)
+------- ------- -------
+Effect of exchange rate changes 99 86 (22)
+------- ------- -------
+Increase (decrease) in cash and cash
+equivalents (404) 485 (575)
+Cash and cash equivalents, beginning of period 902 417 992
+------- ------- -------
+Cash and cash equivalents, end of period $ 498 $ 902 $ 417
+======= ======= =======
+Supplemental cash flow information:
+Interest paid $ 226 $ 252 $ 403
+Income taxes paid (refunded), net 229 (975) (637)
+Non-cash financing activities:
+Accretion of preferred stock discount and
+issuance costs 78 78 78
+See accompanying notes to consolidated financial statements.
+27
+TRANSACT TECHNOLOGIES INCORPORATED
+NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
+1. DESCRIPTION OF BUSINESS
+TransAct Technologies Incorporated ("TransAct"), which has a
+headquarters in Wallingford, CT and a primary operating facility in Ithaca,
+NY, operates in one industry segment, transaction-based printers and
+related products. TransAct designs, develops, manufactures and markets
+transaction-based printers under the Ithaca(R) and Magnetec(R) brand names.
+In addition, we market related consumables, spare parts and service. Our
+printers are used worldwide to provide transaction records such as
+receipts, tickets, coupons, register journals and other documents. We focus
+on two core markets: point-of-sale and banking ("POS") and gaming and
+lottery. We sell our products to original equipment manufacturers ("OEM"),
+value-added resellers, selected distributors, as well as directly to
+end-users. We operate predominantly in the United States of America,
+however, our product distribution spans across the Americas, Europe, the
+Middle East, Africa, the Caribbean Islands and the South Pacific.
+We design, develop, manufacture and market a broad array of
+transaction-based printers utilizing inkjet, thermal and impact printing
+technology for applications requiring up to 60 character columns in each of
+its vertical markets. Our printers are configurable, which offer customers
+the ability to choose from a variety of features and functions. Options
+typically include printed circuit board configuration, paper cutting
+devices, paper handling capacities and cabinetry color. In addition to our
+configurable printers, we manufacture custom printers for certain OEM
+customers. In collaboration with these customers, we provide engineering
+and manufacturing expertise for the design and development of specialized
+printers.
+2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
+PRINCIPLES OF CONSOLIDATION: The accompanying consolidated financial
+statements were prepared on a consolidated basis to include the accounts of
+the TransAct and its wholly-owned subsidiaries. All significant
+intercompany accounts, transactions and unrealized profit were eliminated
+in consolidation. Certain prior year amounts have been reclassified to
+conform to the current year's presentation.
+USE OF ESTIMATES: The accompanying consolidated financial statements
+were prepared using estimates and assumptions that affect the reported
+amounts of assets, liabilities, revenue and expenses, and disclosure of
+contingent assets and liabilities as of the date of the consolidated
+financial statements and the reported amounts of revenues and expenses
+during the reporting period. Actual results could differ from those
+estimates.
+SEGMENT REPORTING: We apply the provisions of Statement of Financial
+Accounting Standards No. 131, "Disclosures about Segments of an Enterprise
+and Related Information" ("FAS 131"). We view our operations and manage our
+business as one segment, the design, development, manufacture and sale of
+transaction-based printers. Factors used to identify TransAct's single
+operating segment include the organizational structure of the Company and
+the financial information available for evaluation by the chief operating
+decision-maker in making decisions about how to allocate resources and
+assess performance. We operate predominantly in one geographical area, the
+United States of America. See Note 19 for information regarding our
+international operations. We provide the following disclosures of revenues
+from products and services:
+Year ended Year ended Year ended
+(In thousands) December 31, 2003 December 31, 2002 December 31, 2001
+------------------ ----------------- ------------------
+Printers - POS $ 14,027 26.9% $ 12,900 32.7% $ 18,887 43.0%
+Printers - Gaming and lottery 29,528 56.7% 19,578 49.6% 18,965 43.1%
+--------- ----- ------- ----- ---------- -----
+Subtotal - printers 43,555 83.6% 32,478 82.3% 37,852 86.1%
+Services and consumables 8,543 16.4% 6,983 17.7% 6,122 13.9%
+--------- ----- -------- ----- ---------- -----
+Total net sales $ 52,098 100.0% $ 39,461 100.0% $ 43,974 100.0%
+========= ===== ======== ===== ========== =====
+CASH AND CASH EQUIVALENTS: We consider all highly liquid investments with a
+maturity date of three months or less at date of purchase to be cash
+equivalents.
+28
+TRANSACT TECHNOLOGIES INCORPORATED
+NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
+2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
+INVENTORIES: Inventories are stated at the lower of cost (principally
+standard cost which approximates actual cost on a first-in, first-out
+basis) or market. We assess market value based on historical usage and
+estimates of future demand in the market.
+FIXED ASSETS: Fixed assets are stated at cost. Depreciation is
+provided for primarily by the straight-line method over the estimated
+useful lives. The estimated useful life of tooling is five years; machinery
+and equipment is ten years; furniture and office equipment is five to ten
+years; and computer equipment is three years. Leasehold improvements are
+amortized over the shorter of the term of the lease or the useful life of
+the asset. Costs related to repairs and maintenance are expensed as
+incurred. Depreciation was $1,579,000, $1,843,000 and $2,858,000 in 2003,
+2002 and 2001, respectively. Depreciation for 2001 included $680,000 of
+accelerated depreciation on certain leasehold improvements and other fixed
+assets due to the closing of our Wallingford, CT facility. As part of the
+facility closing, we disposed of $2,114,000 and $895,000 of fixed assets at
+cost, net of accumulated depreciation of $2,114,000 and $800,000 during
+2002 and 2001, respectively. This resulted in a loss on disposal of $0 and
+$95,000 in 2002 and 2001, respectively.
+GOODWILL: We adopted the provisions of Statement of Financial
+Accounting Standard No. 142, "Goodwill and Other Intangible Assets" ("FAS
+142") on January 1, 2002. Under FAS 142, goodwill will no longer be
+amortized and will be tested for impairment at least annually at the
+reporting unit level.
+Prior to the adoption of FAS 142 on January 1, 2002, we had been
+amortizing goodwill related to the acquisition of (1) Ithaca Peripherals,
+Inc. ("Ithaca") in 1991 and (2) the ribbon business formerly conducted by
+Tridex ("Tridex Ribbon Business") in 1999. The original amount applicable
+to the Ithaca acquisition totaled $3,536,000 and was being amortized on the
+straight-line method over twenty years. The original amount applicable to
+the Tridex Ribbon Business acquisition totaled $180,000 and was being
+amortized on the straight-line method over five years. We recorded
+amortization of goodwill of approximately $134,000, net of taxes, during
+2001.
+FAS 142 requires that goodwill be tested annually for impairment, or
+whenever events or changes in circumstances indicate that the carrying
+value may not be recoverable. We have performed an impairment test as of
+December 31, 2003 and determined that no impairment has occurred.
+LONG-LIVED ASSETS: We evaluate our long-lived assets, which are
+comprised primarily of fixed assets, for impairment whenever events or
+changes in circumstances indicate that the carrying amount of such assets
+may not be recoverable. Recoverability of assets to be held and used is
+measured by a comparison of the carrying amount of an asset group to future
+undiscounted net cash flows expected to be generated by the asset group. If
+such assets are considered to be impaired, the impairment to be recognized
+is measured by the amount by which the carrying amount of the assets
+exceeds the fair value of the assets. We did not recognize any impairment
+loss for long-lived assets in 2003, 2002 or 2001, other than the assets
+disposed of as part of the closing of our Wallingford, CT facility during
+2001.
+REVENUE RECOGNITION: Our typical contracts include the sale of
+printers, which are sometimes accompanied by separately-priced extended
+warranty contracts. We also sell spare parts, consumables, and other repair
+services (sometimes pursuant to multi-year product maintenance contracts)
+which are not included in the original printer sale and are ordered by the
+customer as needed. We recognize revenue pursuant to the guidance within
+SAB 104, "Revenue Recognition". Specifically, revenue is recognized when
+evidence of an arrangement exists, delivery (based on shipping terms which
+are generally FOB shipping point) has occurred, the selling price is fixed
+and determinable, and collectibility is reasonably assured. We provide for
+an estimate of product returns based on historical experience at the time
+of revenue recognition.
+Revenue related to extended warranty and product maintenance contracts
+is recognized pursuant to FASB Technical Bulletin 90-1 ("FTB 90-1"),
+"Accounting for Separately Priced Extended Warranty and Product Maintenance
+Contracts." Pursuant to FTB 90-1, revenue related to separately priced
+product maintenance contract is deferred and recognized over the term of
+the maintenance period. We record deferred revenue for amounts received
+from customers for maintenance contracts prior to the maintenance period.
+29
+TRANSACT TECHNOLOGIES INCORPORATED
+NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
+2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
+REVENUE RECOGNITION (CONTINUED): In December 2003, the SEC issued
+Staff Accounting Bulletin No. 104, "Revenue Recognition" ("SAB 104"), which
+supersedes SAB 101, "Revenue Recognition in Financial Statements." SAB 104
+rescinds accounting guidance in SAB 101 related to multiple-element
+arrangements as this guidance has been superseded as a result of the
+issuance of EITF 00-21, "Accounting for Revenue Arrangements with Multiple
+Deliverables." The adoption of SAB 104 did not have a material impact on
+our financial position or results of operations.
+In November 2002, the Emerging Issues Task Force (EITF) issued EITF
+Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables." This
+issue addresses revenue recognition for arrangements with multiple
+deliverables which should be considered as separate units of accounting if
+the deliverables meet certain criteria as described in EITF 00-21. This
+issue is effective for revenue arrangements entered into in fiscal periods
+beginning after June 15, 2003. The adoption of EITF No. 00-21 did not have
+a material impact on our financial statements.
+CONCENTRATION OF CREDIT RISK: Financial instruments that potentially
+expose TransAct to concentrations of credit risk are limited to accounts
+receivable. Sales to GTECH Corporation ("GTECH") (for lottery printers)
+accounted for approximately 19%, 27% and 33% of net sales during 2003, 2002
+and 2001, respectively. Sales to Harrah's (for casino slot machine
+printers) accounted for approximately 12% of net sales during 2003. As of
+December 31, 2003, we had an accounts receivable balance due from Harrah's
+(for sales of casino printers) that accounted for 31% of the total accounts
+receivable. No other customer accounts receivable balance exceeded 10% of
+the total balance due at December 31, 2003.
+WARRANTY: We warrant our products for up to 27 months and record the
+estimated cost of such product warranties at the time the sale is recorded.
+Estimated warranty costs are based upon actual past experience of product
+returns and the related estimated cost of labor and material to make the
+necessary repairs.
+The following table summarizes the activity recorded in the accrued
+product warranty liability during 2003, 2002 and 2001:
+Year ended December 31,
+(In thousands) 2003 2002 2001
+------ ------ ------
+Balance, beginning of year $ 644 $ 710 $ 603
+Additions related to warranties issued 409 394 609
+Warranty costs incurred (558) (460) (502)
+------ ------ ------
+Balance, end of year $ 495 $ 644 $ 710
+====== ====== ======
+Approximately $169,000 and $221,000 of the accrued product warranty
+liability were classified as long-term at December 31, 2003 and 2002,
+respectively.
+RESEARCH AND DEVELOPMENT EXPENSES: Research and development expenses
+include engineering, design and product development expenses incurred in
+connection with specialized engineering and design to introduce new
+products and to customize existing products, and are expensed as a
+component of operating expenses as incurred. We spent approximately
+$2,276,000, $2,025,000 and $3,070,000 on research and development expenses
+in 2003, 2002 and 2001, respectively.
+RESTRUCTURING: In 2001, we undertook a plan to consolidate all
+manufacturing and engineering into our existing Ithaca, NY facility and
+close our Wallingford, CT facility. We have applied the consensus set forth
+in EITF 94-3, "Liability Recognition for Certain Employee Termination
+Benefits and Other Costs to Exit an Activity (Including Certain Costs
+Incurred in a Restructuring)" in recognizing restructuring expenses. See
+Note 8.
+30
+TRANSACT TECHNOLOGIES INCORPORATED
+NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
+2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
+INCOME TAXES: The income tax amounts reflected in the accompanying
+financial statements are accounted for under the liability method in
+accordance with FAS 109 "Accounting for Income Taxes." Deferred tax assets
+and liabilities are recognized for the estimated future tax consequences
+attributable to differences between the financial statement carrying
+amounts of existing assets and liabilities and their respective tax bases
+and operating loss and tax credit carryforwards. Deferred tax assets and
+liabilities are measured using enacted tax rates in effect for the year in
+which those temporary differences are expected to be recovered or settled.
+We assess the likelihood that net deferred tax assets will be realized from
+future taxable income, and to the extent that we believe that realization
+is not likely, we establish a valuation allowance.
+FOREIGN CURRENCY TRANSLATION: The financial position and results of
+operations of our foreign subsidiary in the United Kingdom are measured
+using local currency as the functional currency. Assets and liabilities of
+such subsidiary have been translated into U.S. dollars at the year-end
+exchange rate, related revenues and expenses have been translated at the
+weighted average exchange rate for the year, and shareholders' equity has
+been translated at historical exchange rates. The resulting translation
+gains or (losses) are recorded in stockholders' equity as a cumulative
+translation adjustment, which is a component of accumulated other
+comprehensive income. Foreign currency transaction gains and losses are
+recognized in Other Income (Expense) and have not been significant for all
+periods presented.
+STOCK-BASED COMPENSATION: We have elected to follow Accounting
+Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
+("APB 25"), and related interpretations in accounting for its stock
+options. Since the exercise price of employee stock options granted by the
+Company generally equals the market price of the underlying stock on the
+date of grant, no compensation expense is recorded. We have adopted the
+disclosure-only provisions of Statement of Financial Accounting Standards
+No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"), as amended
+by Statement of Financial Standards No. 148, "Accounting for Stock-Based
+Compensation - Transition and Disclosure - an amendment of FAS 123" ("FAS
+148"). See Note 12 for additional disclosures related to our stock-based
+compensation plans.
+The following table illustrates the effect on net income (loss),
+compensation expense and income (loss) per share as if the Black-Scholes
+fair value method described in FAS 123, "Accounting for Stock-Based
+Compensation" had been applied to our stock plans. For the years ended
+December 31, 2002 and 2001, stock-based compensation expense determined
+under the fair value method has been adjusted to properly reflect related
+tax effects.
+Year Ended December 31,
+(In thousands, except per share data) 2003 2002 2001
+---------- --------- ---------
+Net income (loss) available to common shareholders:
+Net income (loss) available to common shareholders,
+as reported $ 1,170 $ (1,050) $ (5,280)
+Add: Stock-based compensation expense included in
+Reported net income (loss), net of tax 43 118 169
+---------- --------- ---------
+Deduct: Stock-based compensation expense determined (229) (753) (1,094)
+under fair value based method for all awards, net of tax
+Pro forma net income (loss) available to common shareholders $ 984 $ (1,685) $ (6,205)
+========== ========= =========
+Net income (loss) per share:
+Basic:
+As reported $ 0.20 $ (0.19) $ (0.95)
+Pro forma 0.17 (0.30) (1.12)
+Diluted:
+As reported $ 0.19 $ (0.19) $ (0.95)
+Pro forma 0.16 (0.30) (1.12)
+31
+TRANSACT TECHNOLOGIES INCORPORATED
+NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
+2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
+FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying amount for cash and
+cash equivalents approximates fair value because of the short maturity of
+these instruments. The carrying amount of receivables, other current
+assets, other assets, accounts payable and accrued liabilities is a
+reasonable estimate of fair value because of the short nature of the
+transactions. The carrying value of long-term debt approximates the fair
+value based upon the variable rate on that debt.
+NET INCOME AND LOSS PER SHARE: We report net income or loss per share
+in accordance with Financial Standard No. 128, "Earnings per Share (EPS)"
+("FAS 128"). Under FAS 128, basic EPS, which excludes dilution, is computed
+by dividing income or loss available to common shareholders by the weighted
+average number of common shares outstanding for the period. Net income or
+loss available to common shareholders represents reported net income or
+loss less accretion of redeemable convertible preferred stock. Diluted EPS
+reflects the potential dilution that could occur if securities or other
+contracts to issue common stock were exercised or converted into common
+stock. Diluted EPS includes in-the-money options and warrants using the
+treasury stock method, and also includes the assumed conversion of
+preferred stock using the if-converted method, but only if dilutive. During
+a loss period, the assumed exercise of in-the-money stock options and
+warrants and the conversion of convertible preferred stock has an
+anti-dilutive effect, and therefore, these instruments are excluded from
+the computation of dilutive EPS.
+COMPREHENSIVE INCOME: Statement of Accounting Standard No. 130,
+"Reporting Comprehensive Income" ("FAS 130"), requires that items defined
+as comprehensive income or loss be separately classified in the financial
+statements and that the accumulated balance of other comprehensive income
+or loss be reported separately from accumulated deficit and additional
+paid-in-capital in the equity section of the balance sheet. We include the
+foreign currency translation adjustment related to our subsidiary in the
+United Kingdom within our calculation of comprehensive income.
+3. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
+COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES: In September 2002,
+the FASB issued Statement of Financial Standard No. 146, "Accounting for
+Costs Associated with Exit or Disposal Activities" ("FAS 146"). This
+statement provides guidance on the recognition and measurement of
+liabilities associated with exit or disposal activities and requires that
+such liabilities be recognized when incurred. This statement is effective
+for exit or disposal activities initiated on or after January 1, 2003 and
+does not impact the recognition of costs under our existing programs. We
+accounted for our business consolidation and restructuring (Note 7) under
+the existing guidance in EITF 94-3, "Liability Recognition for Certain
+Employee Termination Benefits and Other Costs to Exit an Activity
+(Including Certain Costs Incurred in a Restructuring)". Accordingly, FAS
+146 did not impact the timing or recognition of costs associated with our
+current exit or disposal activities.
+GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES: In
+November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
+Accounting and Disclosure Requirements for Guarantees, Including Indirect
+Guarantees of Indebtedness of Others" ("FIN 45"). The interpretation
+provides guidance on the guarantor's accounting and disclosure requirements
+for guarantees, including indirect guarantees of indebtedness. The
+accounting guidelines are applicable to guarantees issued after December
+31, 2002, irrespective of the guarantor's fiscal year-end. However, the
+disclosure requirements are effective for financial statements that end
+after December 15, 2002. We adopted the disclosure provisions of FIN 45
+related to our warranty obligations in the fourth quarter of 2002. (See
+Note 2).
+CONSOLIDATION OF VARIABLE INTEREST ENTITIES: In January 2003, the FASB
+issued FASB Interpretation No. 46, "Consolidation of Variable Interest
+Entities" ("FIN 46"). FIN 46 requires us to consolidate a variable interest
+entity ("VIE") if we have a majority of the risks, rewards or both of that
+entity. FIN 46 will be effective for most VIEs beginning in the fourth
+quarter of 2003. TransAct has no investments in VIEs; therefore, FIN 46 had
+no effect on our financial statements.
+32
+TRANSACT TECHNOLOGIES INCORPORATED
+NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
+3. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
+DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES: In April 2003, the FASB
+issued Statement of Accounting Standard No. 149, "Amendment of Statement
+133 on Derivative Instruments and Hedging Activities" ("FAS 149"). FAS 149
+clarifies when a contract with an initial net investment meets the
+characteristics of a derivative and when a derivative contains a financing
+component that warrants special reporting in the statements of cash flows.
+FAS 149 is generally effective for contracts entered into or modified after
+June 30, 2003. The adoption of FAS 149 had no effect on our financial
+statements
+ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF
+BOTH LIABILITIES AND EQUITY: In May 2003, the FASB issued Statement of
+Accounting Standard No. 150, "Accounting for Certain Financial Instruments
+with Characteristics of both Liabilities and Equity" ("FAS 150"). FAS 150
+changes the accounting for certain financial instruments that, under
+previous guidance, could be classified as equity or "mezzanine" equity,
+including mandatorily redeemable instruments, by now requiring those
+instruments to be classified as liabilities in the statement of financial
+position. Further, FAS 150 requires disclosure regarding the terms of those
+instruments and settlement alternatives. FAS 150 is effective for financial
+instruments entered into or modified after May 31, 2003, and otherwise
+shall be effective at the beginning of the first interim period beginning
+after June 15, 2003. The adoption of FAS 150 did not have a material impact
+on our financial statements.
+4. RECEIVABLES
+Receivables are net of the allowance for doubtful accounts. The
+reconciliation of the allowance for doubtful accounts is as follows:
+Year Ended December 31,
+2003 2002 2001
+---- ---- ----
+(In thousands)
+Balance at beginning of year $ 78 $ 84 $ 107
+Doubtful accounts provision (reversal) 76 (2) 45
+Accounts written off, net of recoveries (54) (4) (68)
+------ ----- ------
+Balance at end of year $ 100 $ 78 $ 84
+====== ===== ======
+5. INVENTORIES
+The components of inventories are:
+December 31,
+(In thousands) 2003 2002
+------- --------
+Raw materials and component parts $ 7,947 $ 8,339
+Work-in-process - 1
+Finished goods 114 95
+-------- --------
+$ 8,061 $ 8,435
+======== ========
+6. FIXED ASSETS
+The components of fixed assets are:
+December 31,
+(In thousands) 2003 2002
+-------- --------
+Tooling, machinery and equipment $ 11,843 $ 10,841
+Furniture, office and computer equipment 3,506 3,291
+Leasehold improvements 486 465
+-------- --------
+15,835 14,597
+Less: accumulated depreciation and amortization (12,228) (10,673)
+-------- --------
+$ 3,607 $ 3,924
+======== ========
+33
+TRANSACT TECHNOLOGIES INCORPORATED
+NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
+7. ACCRUED LIABILITIES
+The components of accrued liabilities are:
+December 31,
+(In thousands) 2003 2002
+------- -------
+Payroll and fringe benefits $ 1,087 $ 505
+Income taxes 560 455
+Warranty - current portion 326 423
+Rent and occupancy 331 326
+Other 588 535
+------- -------
+$ 2,892 $ 2,244
+======= =======
+8. ACCRUED BUSINESS CONSOLIDATION AND RESTRUCTURING EXPENSES
+In February 2001, we announced plans to establish a global engineering
+and manufacturing center at our Ithaca, NY facility. As part of this
+strategic decision, we undertook a plan to consolidate all manufacturing
+and engineering into our existing Ithaca, NY facility and close our
+Wallingford, CT manufacturing facility (the "Consolidation"). As of
+December 31, 2001, substantially all Wallingford product lines were
+successfully transferred to Ithaca, NY. We currently maintain our corporate
+headquarters and a small service depot in Wallingford. The closing of the
+Wallingford facility resulted in the termination of employment of
+approximately 70 production, administrative and management employees. We
+have applied the consensus set forth in EITF 94-3, "Liability Recognition
+for Certain Employee Termination Benefits and Other Costs to Exit an
+Activity (Including Certain Costs Incurred in a Restructuring)" in
+recognizing the accrued restructuring expenses.
+During 2001, we recorded expenses of approximately $4,096,000 related
+to costs associated with the Consolidation, including severance pay, stay
+bonuses, employee benefits, moving expenses, non-cancelable lease payments,
+accelerated depreciation and other costs.
+During 2002, we incurred an additional $958,000 of Consolidation
+expenses. Approximately $900,000 of these expenses was the result of a
+revision to our estimate for non-cancelable lease payments included in the
+restructuring accrual. Based on regional softness in demand in the
+commercial real estate market, we increased our restructuring accrual by
+approximately $900,000 to reflect the longer period of time then projected
+to sublease our Wallingford, CT facility. Based on this revised estimate,
+we had projected estimated sublease income beginning October 1, 2004.
+After expanded efforts in 2003, we determined that because of the
+continuing regional decline in the commercial real estate market during
+2003, it was unlikely that we would be able to sublease our Wallingford, CT
+manufacturing facility, which has a lease term that expires in March 2008.
+As a result, during the fourth quarter of 2003, we increased our
+restructuring accrual by $1,270,000 to provide for the remaining
+non-cancelable lease payments and related costs associated with the
+manufacturing facility. This increase represented the reversal of estimated
+sublease income for the remainder of the lease term. In addition, we
+determined that we will not terminate several employees originally included
+in the Consolidation. As a result, we reversed the remaining $142,000 of
+accrued restructuring expenses in 2003 related to employee severance and
+termination expenses, as we completed all required payments for such
+expenses by December 31, 2003.
+34
+TRANSACT TECHNOLOGIES INCORPORATED
+NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
+8. ACCRUED BUSINESS CONSOLIDATION AND RESTRUCTURING EXPENSES (CONTINUED)
+The following table summarizes the activity recorded in the
+restructuring accrual during 2003, 2002 and 2001.
+Year ended December 31,
+(In thousands) 2003 2002 2001
+-------- --------- -------
+Accrual balance, beginning of year $ 1,718 $ 3,002 $ 105
+-------- --------- -------
+Business consolidation and
+restructuring expenses:
+Employee severance and
+termination expenses (1) (142) 75 2,070
+Facility closure and consolidation
+expenses (2) 1,270 883 1,251
+-------- --------- -------
+1,128 958 3,321
+-------- --------- -------
+Cash payments (721) (2,242) (424)
+-------- --------- -------
+Accrual balance, end of year $ 2,125 $ 1,718 $ 3,002
+======== ========= =======
+(1) Employee severance and termination related expenses are the estimated
+termination salaries, benefits, outplacement, counseling services and
+other related expenses expected to be paid to employees who are
+involuntarily terminated.
+(2) Facility closure and consolidation expenses are the estimated costs to
+close the Wallingford, CT facility including lease termination expenses and
+other related expenses, in accordance with the restructuring plan. The
+Wallingford facility closure was substantially completed by December 31,
+2001.
+At December 31, 2003 and 2002, $1,645,000 and $818,000, respectively,
+of the restructuring accrual was classified as part of long-term
+liabilities. This represents the portion of non-cancelable lease
+termination costs and other costs expected to be paid beyond one year.
+The following table summarizes the components of all charges related
+to the Consolidation.
+Year ended December 31,
+(In thousands) 2003 2002 2001
+------- -------- -------
+Business consolidation and
+restructuring expenses $ 1,128 $ 958 $ 3,321
+Accelerated depreciation and asset
+disposal losses (1) - - 775
+------- ------- -------
+Total business consolidation,
+restructuring and related charges $ 1,128 $ 958 $ 4,096
+======= ======= =======
+(1) Represents accelerated depreciation ($680) and asset disposal losses ($95)
+on certain leasehold improvements and other fixed assets incurred during
+2001, due to the closing of the Wallingford facility. These charges are
+included in general and administrative expenses during the year ended
+December 31, 2001.
+35
+TRANSACT TECHNOLOGIES INCORPORATED
+NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
+9. RETIREMENT SAVINGS PLAN
+On April 1, 1997, we established the TransAct Technologies Retirement
+Savings Plan (the "401(k) Plan"), a defined contribution plan under Section
+401(k) of the Internal Revenue Code. All full-time employees are eligible
+to participate in the 401(k) Plan at the beginning of the calendar quarter
+immediately following their date of hire. We match employees' contributions
+at a rate of 50% of employees' contributions up to the first 6% of the
+employees' compensation contributed to the 401(k) Plan. Our matching
+contributions were $174,000, $158,000 and $204,000 in 2003, 2002 and 2001,
+respectively.
+10. BORROWINGS
+On August 6, 2003, we entered into a new $12.5 million credit facility
+(the "Banknorth Credit Facility") with Banknorth N.A. The Banknorth Credit
+Facility replaced our prior credit facility (the "LaSalle Credit Facility)
+with LaSalle Business Credit, Inc. ("LaSalle"). The Banknorth Credit
+Facility provides for an $11.5 million revolving credit line expiring on
+July 31, 2006, and a $1 million equipment loan facility which may be drawn
+down through July 31, 2004. Borrowings under the revolving credit line bear
+a floating rate of interest at the prime rate. Borrowings under the
+equipment loan bear a floating rate of interest at the prime rate plus
+0.25%. Under certain circumstances, we may select a fixed interest rate for
+a specified period of time of up to 180 days on borrowings based on the
+current LIBOR rate plus 2.75% and 3.0% under the revolving credit facility
+and the equipment loan facility, respectively. In addition, we may select a
+fixed interest rate based on the five-year Federal Home Loan Bank of Boston
+rate plus 3.0% for borrowings under the equipment loan facility. We also
+pay a fee of 0.25% on unused borrowings under the revolving credit line.
+Borrowings under the Banknorth Credit Facility are secured by a lien on all
+the assets of the Company. The Banknorth Credit Facility imposes certain
+quarterly financial covenants on the Company and restricts the payment of
+dividends on our common stock and the creation of other liens. We were in
+compliance with all financial covenants of the Banknorth Credit Facility at
+December 31, 2003.
+The borrowing base of the revolving credit line under Banknorth Credit
+Facility is based on the lesser of (a) $11.5 million or (b) 85% of eligible
+accounts receivable plus (i) the lesser of (1) $5,500,000 and (2) 45% of
+eligible raw material inventory plus 50% of eligible finished goods
+inventory, less (ii) a $1,000,000 reserve pending the determination of the
+Patent Resolution Payment (see Note 10) and less (iii) a $40,000 credit
+reserve.
+Concurrent with the signing of the Banknorth Credit Facility, we
+borrowed $450,000 under the equipment loan facility. Principal payments for
+any borrowings under the equipment loan facility are due in equal
+installments plus accrued interest based on a sixty month amortization
+schedule on the first day of each month beginning September 1, 2003, with
+the unpaid principal balance due on the earlier of (1) July 31, 2008 or (2)
+acceleration of the indebtedness under the revolving credit line or the
+equipment line due to an event of default.
+As of December 31, 2003, we had no outstanding borrowings on the
+revolving credit line and $420,000 outstanding on the term loan. We repaid
+the remaining balance on the term loan in January 2004. Undrawn commitments
+under the Banknorth Credit Facility were approximately $11,500,000 at
+December 31, 2003. However, our maximum additional available borrowings
+under the facility were limited to approximately $6,100,000 at December 31,
+2003 based on the borrowing base of our collateral. Annual principal
+payments on the term loan are $90,000.
+As a result of the refinancing, we recorded a charge of approximately
+$103,000 in 2003 related to the write-off of unamortized deferred financing
+costs from the prior credit facility with LaSalle.
+Prior to the Banknorth Credit Facility, we operated under a
+three-year, $13.5 million credit facility (the "LaSalle Credit Facility")
+with LaSalle, which expired upon signing of the Banknorth Credit Facility
+in August 2003. The LaSalle Credit Facility provided a $12 million
+revolving credit line, a $0.5 million term loan and a $1 million equipment
+loan facility. Borrowings under the revolving credit line originally bore a
+floating rate of interest at LaSalle's prime rate. Borrowings under both
+the term loan and equipment loan originally bore a floating rate of
+interest at LaSalle's prime rate plus 0.50%. Borrowings under the LaSalle
+Credit Facility were collateralized by a lien on all the personal property
+assets of the Company. We had no borrowings under the equipment loan during
+the term of the facility.
+36
+TRANSACT TECHNOLOGIES INCORPORATED
+NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
+10. BORROWINGS (CONTINUED)
+On November 12, 2002, we amended the LaSalle Credit Facility. Under
+the terms of the amendment ("LaSalle Amendment No. 3"), LaSalle (1) waived
+compliance with the minimum EBITDA, minimum tangible net worth and fixed
+charge coverage ratio financial covenants as of September 30, 2002 and (2)
+revised these covenants to exclude the effect of $900,000, of the total
+$912,000, of restructuring charges incurred in the third quarter. On March
+24, 2003, we amended the LaSalle Credit Facility. Under the terms of the
+amendment ("LaSalle Amendment No. 4"), LaSalle (1) waived compliance with
+the minimum EBITDA covenant as of December 31, 2002, (2) revised this
+covenant and certain other financial covenants through May 2004 and (3)
+eliminated the availability of the $1 million equipment loan facility due
+to expire in May 2003.
+11. COMMITMENTS AND CONTINGENCIES
+At December 31, 2003, we were lessee on operating leases for equipment
+and real property. The terms of certain leases provide for escalating rent
+payments in later years of the lease as well as payment of minimum rent and
+real estate taxes. Rent expense was approximately $1,096,000, $975,000 and
+$983,000 in 2003, 2002 and 2001, respectively. Minimum aggregate rental
+payments required under operating leases that have initial or remaining
+non-cancelable lease terms in excess of one year as of December 31, 2003
+are as follows: $952,000 in 2004; $972,000 in 2005; $966,000 in 2006;
+$955,000 in 2007; $647,000 in 2008; and $1,797,000 thereafter. Such
+payments include those related to the lease of our Wallingford, CT
+manufacturing facility.
+12. PATENT LICENSE FEES
+In November 2002, we were advised that certain POS printers sold by us
+since late 1999 may use technology covered by recently issued patents of a
+third party competitor. In an effort to resolve this matter, we originally
+offered to pay approximately $160,000, while the other party sought payment
+of up to $950,000. We recorded a charge of $160,000 in cost of sales in the
+fourth quarter of 2002 related to this matter. Based on the likely outcome
+of current negotiations, we recorded an additional charge of $740,000 in
+the fourth quarter of 2003 related to usage prior to January 1, 2003.
+Although settlement negotiations are continuing, we believe that the total
+accrual of $900,000 reflects the best estimate of the expense related to
+the pre-2003 usage of this third party patented technology. We also accrued
+estimated royalty payments for usage of this technology after January 1,
+2003. We have classified approximately $750,000 of our total accrual
+related to this matter as a long-term liability based on the likely payment
+schedule resulting from our current negotiations.
+13. STOCK INCENTIVE PLANS AND WARRANTS
+STOCK INCENTIVE PLANS. We currently have three primary stock incentive
+plans: the 1996 Stock Plan which provides for the grant of awards to
+officers and other key employees of the Company, the 1996 Directors' Stock
+Plan which provides for non-discretionary awards to non-employee directors,
+and the 2001 Employee Stock Plan which provides for the grant of awards to
+key employees of the Company and other non-employees who may provide
+services to the Company. The plans generally provide for awards in the form
+of: (i) incentive stock options, (ii) non-qualified stock options, (iii)
+shares of restricted stock, (iv) restricted units, (v) stock appreciation
+rights or (vi) limited stock appreciation rights. However, the 2001
+Employee Stock Plan does not provide for incentive stock option awards.
+Options granted under these plans are at prices equal to 100% of the fair
+market value of the common stock at the date of grant. Options granted have
+a ten-year term and generally vest over a three- to five-year period,
+unless automatically accelerated for certain defined events. At December
+31, 2003, we have reserved 1,150,000, 140,000 and 150,000 shares of common
+stock for issuance under the 1996 Stock Plan, the 1996 Directors' Stock
+Plan, and the 2001 Employees Stock Plan, respectively.
+37
+TRANSACT TECHNOLOGIES INCORPORATED
+NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
+13. STOCK INCENTIVE PLANS AND WARRANTS (CONTINUED)
+OPTION EXCHANGE OFFER. In November 2001, we announced an offer to
+certain officers to exchange outstanding employee stock options having an
+exercise price of $9.00 or more per share in return for new stock options
+to be granted by the Company (the "Exchange Offer"). Pursuant to the
+Exchange Offer, the option holder received a commitment for the grant of
+one new option for each option tendered and accepted for exchange, no
+sooner than six months and one day from November 16, 2001. A total of
+215,000 options were accepted for exchange under the Exchange Offer and
+were canceled in November 2001 (and treated as canceled in 2001 in the
+table below). The new options were granted on May 17, 2002, and vested 25%
+immediately upon grant with the remainder vesting 25% annually over the
+next three years. The new options were granted at an exercise price equal
+to the fair market value of our common stock on the date of grant. There
+was no compensation expense recorded as a result of the Exchange Offer.
+EMPLOYEE STOCK PURCHASE PLAN: In May 2000, our shareholders approved
+the Employee Stock Purchase Plan (the "ESPP"), under which 50,000 shares of
+our common stock are available for issuance to employees beginning June 1,
+2000. All full-time employees are eligible to participate in the ESPP at
+the beginning of each six-month period (the "Offering Period"), which
+begins on June 1 and December 1. Eligible employees may elect to withhold
+up to 5% of their salary to purchase shares of our common stock at a price
+equal to 85% of the fair market value of the stock on the first or last day
+of each Offering Period, whichever is lower. The ESPP will terminate at the
+earlier of May 31, 2005 or the date on which all 50,000 shares available
+for issuance under the ESPP have been sold. We sold 2,087, 4,849 and 6,443
+shares of common stock under the ESPP during 2003, 2002 and 2001,
+respectively. At December 31, 2003, 31,794 shares remained available for
+sale.
+The 1996 Stock Plan, 1996 Directors' Stock Plan and 2001 Employee
+Stock Plan option activity is summarized below:
+Year Ended December 31,
+2003 2002 2001
+------------------- -------------------- -------------------
+Weighted Weighted Weighted
+Average Average Average
+Exercise Exercise Exercise
+Shares Price Shares Price Shares Price
+-------- -------- -------- --------- -------- --------
+Outstanding at beginning of
+period: 945,400 $ 6.30 742,750 $ 6.95 919,000 $ 8.34
+Granted 68,000 8.76 366,750 5.47 189,500 5.67
+Exercised (238,604) 5.68 (26,100) 4.24 (53,500) 4.37
+Canceled (25,760) 5.72 (138,000) 7.97 (312,250) 10.71
+-------- -------- -------- --------- -------- -------
+Outstanding at end of period 749,036 $ 6.74 945,400 $ 6.30 742,750 $ 6.95
+======== ======== ======== ========= ======== =======
+Options exercisable at end of
+period 361,753 $ 7.08 429,845 $ 6.81 383,350 $ 7.34
+======== ======== ======== ========= ======== =======
+Options Outstanding Options Exercisable
+------------------------------------------- ---------------------------
+Weighted- Weighted- Weighted-
+Outstanding at Average Average Exercisable at Average
+December 31, Exercise Remaining December 31, Exercise
+Range of Exercise Prices 2003 Price Contractual Life 2003 Price
+-------------- -------- ---------------- -------------- ---------
+(In years)
+$ 2.50 - $ 5.00 112,521 $ 4.40 7.2 48,403 $ 4.02
+5.01 - 7.50 374,765 5.67 8.0 130,200 5.70
+7.51 - 10.00 188,600 8.63 3.7 158,000 8.57
+10.01 - 15.00 71,150 10.63 7.2 25,150 10.75
+15.01 - 25.00 2,000 24.12 9.8 - 10.75
+------- -------
+749,036 6.74 6.72 361,753 7.08
+======= =======
+38
+TRANSACT TECHNOLOGIES INCORPORATED
+NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
+13. STOCK INCENTIVE PLANS AND WARRANTS (CONTINUED)
+The fair value of each option grant is estimated on the date of grant
+using the Black-Scholes option pricing model with the following assumptions
+used for the grants made during the years ended December 31, 2003, 2002 and
+2001.
+Year Ended December 31,
+2003 2002 2001
+---- ---- ----
+Risk-free interest rate 2.6% 4.5% 4.6%
+Dividend yield 0% 0% 0%
+Expected volatility factor 82.1% 83.3% 85.5%
+Expected option term 5.8 years 6.4 years 6.1 years
+Weighted average fair value of options granted during period $6.09 $4.12 $4.25
+RESTRICTED STOCK: Under the 1996 Stock Plan, we have granted shares of
+restricted common stock, for no consideration, to our officers, one outside
+director and certain key employees. The 1996 Stock Plan restricted stock
+activity is summarized below:
+Year Ended December 31,
+2003 2002 2001
+---- ---- ----
+Outstanding shares at beginning of period 46,666 89,360 83,320
+Granted - - 20,000
+Vested (35,333) (42,094) (10,960)
+Canceled - (600) (3,000)
+------ ------ ------
+Outstanding shares at end of period 11,333 46,666 89,360
+====== ====== ======
+The weighted average fair value of restricted stock granted was $4.75
+for 2001. No restricted stock was granted during 2003 and 2002. Of the
+11,333 shares of restricted stock outstanding at December 31, 2003, 3,000
+shares vest over a five-year period, 3,333 shares vest over a three-year
+period and 5,000 shares vest over a two-year period. Under certain
+conditions, vesting may be automatically accelerated. Upon issuance of the
+restricted stock, unearned compensation equivalent to the market value at
+the date of grant is charged to shareholders' equity and subsequently
+amortized over the vesting period. Compensation expense of $67,000,
+$184,000 and $264,000 was recorded during 2003, 2002 and 2001,
+respectively. In the first quarter of 2004, we issued 50,000 shares of
+restricted stock to our officers and certain key employees. These shares
+vest over a five-year period.
+WARRANTS: On April 7, 2000, in connection with the sale of the
+Preferred Stock, we issued to our investment advisors, McFarland Dewey &
+Co. ("McFarland"), warrants to purchase from the Company up to 10,000
+shares of common stock at an exercise price of $9.00 per share. The
+warrants are exercisable through April 7, 2005.
+39
+TRANSACT TECHNOLOGIES INCORPORATED
+NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
+14. STOCKHOLDER RIGHTS PLAN
+In December 1997, the Board of Directors adopted a Stockholder Rights
+Plan declaring a distribution of one right (the "Rights") for each
+outstanding share of our common stock to shareholders of record at December
+15, 1997. Initially, each of the Rights will entitle the registered holder
+to purchase from the Company one one-thousandth of a share of Series A
+Preferred Stock, $0.01 par value, at a price of $69 per one one-thousandth
+of a share. The Rights, however, will not become exercisable unless and
+until, among other things, any person or group of affiliated persons
+acquires beneficial ownership of 15 percent or more of the then outstanding
+shares of the Company's Common Stock. If a person, or group of persons,
+acquires 15 percent or more of the outstanding Common Stock of the Company
+(subject to certain conditions and exceptions more fully described in the
+Rights Agreement), each Right will entitle the holder (other than the
+person, or group of persons, who acquired 15 percent or more of the
+outstanding Common Stock) to purchase Preferred Stock of the Company having
+a market value equal to twice the exercise price of the Right. The Rights
+are redeemable, under certain circumstances, for $0.0001 per Right and will
+expire, unless earlier redeemed, on December 2, 2007.
+On February 16, 1999, we amended its Stockholder Rights Plan to remove
+the provision in the plan that stipulated that the plan may be modified or
+redeemed only by those members of the Board of Directors who are defined as
+continuing directors.
+15. INCOME TAXES
+The components of the income tax provision (benefit) are as follows:
+Year Ended December 31,
+(In thousands) 2003 2002 2001
+---- ---- ----
+Current:
+Federal $ 1,121 $(1,493) $ (62)
+State 94 25 -
+Foreign 131 110 56
+------- ------- -------
+1,346 (1,358) (6)
+Deferred: ------- ------- -------
+Federal (554) 987 (2,523)
+State (67) (19) (219)
+Foreign - - -
+------- ------- -------
+(621) 968 (2,742)
+------- ------- -------
+Total income tax provision (benefit) $ 725 $ (390) $(2,748)
+======= ======= =======
+At December 31, 2003, we have $3,265,000 of state net operating loss
+carryforwards that begin to expire in 2005. We also have approximately
+$300,000 in federal research and development tax credit carryforwards that
+expire in 2020. We had foreign income before taxes of $475,000, $386,000
+and $232,000 in 2003, 2002 and 2001, respectively.
+Deferred income taxes arise from temporary differences between the tax
+basis of assets and liabilities and their reported amounts in the financial
+statements. Our gross deferred tax assets and liabilities were comprised of
+the following:
+40
+TRANSACT TECHNOLOGIES INCORPORATED
+NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
+15. INCOME TAXES (CONTINUED)
+December 31,
+(In thousands) 2003 2002
+------- -------
+Gross deferred tax assets:
+Net operating losses $ 96 $ 188
+Accrued restructuring expenses 854 635
+Inventory reserves 720 749
+Deferred revenue 761 533
+Foreign tax and other credits 627 668
+Accrued license fees 428 59
+Other liabilities and reserves 443 612
+------- -------
+3,929 3,444
+Valuation allowance (331) (439)
+------- -------
+Net deferred tax assets $ 3,598 $ 3,005
+======= =======
+Gross deferred tax liabilities:
+Depreciation $ 511 $ 558
+Other 63 33
+------- -------
+Net deferred tax liabilities $ 574 $ 591
+======= =======
+Based on tax law changes, we carried our federal net operating losses
+back to prior years and received a tax refund of approximately $1,061,000
+in 2002, and expect to receive an additional refund of approximately
+$104,000 in the first quarter of 2004. During 2003 and 2002, we recorded a
+valuation allowance of $331,000 and $439,000 on a portion of our foreign
+tax credits, research and development credits and certain state net
+operating loss carryforwards. Based on future financial projections, we
+have determined that it is more likely than not that the existing net
+deferred tax asset will be realized, and no additional valuation allowance
+is considered necessary.
+Differences between the U.S. statutory federal income tax rate and our
+effective income tax rate are analyzed below:
+Year Ended December 31,
+2003 2002 2001
+---- ---- ----
+Federal statutory tax rate 34.0% (34.0)% (34.0)%
+State income taxes, net of federal income taxes 1.2 (0.3) (0.9)
+Tax benefit from tax credits, net of valuation allowance (10.6) (1.7)
+Foreign rate differential - 9.5 -
+Other (3.0) (0.6) 0.8
+---- ----- -----
+Effective tax rate 32.2% (36.0)% (35.8)%
+==== ===== =====
+41
+TRANSACT TECHNOLOGIES INCORPORATED
+NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
+16. EARNINGS PER SHARE
+For the years ended December 31, 2003, 2002 and 2001, earnings per
+share were computed as follows (in thousands, except per share amounts):
+Year Ended December 31,
+2003 2002 2001
+------- ------- -------
+Net income (loss) $ 1,528 $ (692) $(4,922)
+Dividends and accretion on preferred stock (358) (358) (358)
+------- ------- -------
+Net income (loss) available to common shareholders $ 1,170 $(1,050) $(5,280)
+======= ======= =======
+Shares:
+Basic: Weighted average common shares outstanding 5,793 5,636 5,551
+Add: Dilutive effect of outstanding options and
+warrants as determined by the treasury stock method 430 - -
+------- ------- -------
+Diluted: Weighted average common and common
+equivalent shares outstanding
+6,223 5,636 5,551
+======= ======= =======
+Net income (loss) per common share:
+Basic $ 0.20 $ (0.19) $ (0.95)
+Diluted 0.19 (0.19) (0.95)
+For the year ended, December 31, 2003, all potentially dilutive
+shares, that were excluded from the earnings per share calculation,
+consisted of out-of-the-money stock options and warrants, and amounted to
+2,000 shares. Due to our reported net loss in the years ended December 31,
+2002 and 2001, all potentially dilutive securities, including both
+in-the-money and out-of-the-money stock options and warrants that amounted
+to 597,000 and 539,000 shares, respectively, were excluded from the
+earnings per share calculation, as the effect would have been antidilutive.
+In addition, for all periods presented, earnings per share calculations
+assumed no conversion of the convertible mandatorily redeemable preferred
+stock (which is convertible into 444,444 shares of common stock), as the
+effect would have been anti-dilutive.
+17. SIGNIFICANT TRANSACTIONS
+OTHER INCOME: In June 2002, we received 2,146 shares of common stock
+from our health insurance company, Anthem, Inc., upon its demutualization.
+We sold these shares in August 2002 for approximately $145,000, and
+included this amount in Other Income.
+LOAN TO OFFICER: On February 23, 1999, with the Board of Directors'
+approval, we provided a $330,000 loan to an officer of the Company. The
+loan was payable on February 23, 2004, and was a full recourse obligation
+to the officer collateralized by 154,000 shares of our common stock, which
+included 50,000 shares of restricted stock. The principal amount of the
+loan was recorded as a deduction from shareholders' equity. In June 2003,
+the officer of the Company repaid the outstanding loan of $330,000, plus
+accrued interest of $113,000.
+42
+TRANSACT TECHNOLOGIES INCORPORATED
+NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
+18. PREFERRED STOCK
+On April 7, 2000 we sold 4,000 shares of 7% Series B Cumulative
+Convertible Redeemable Preferred Stock (the "Preferred Stock") in
+consideration of $1,000 per share (the "Stated Value"), for a total of
+$4,000,000, less issuance costs. The Preferred Stock is convertible at any
+time by the holders at a conversion price of $9.00 per common share. In
+addition, we issued warrants pro-rata to the Preferred Stock holders to
+purchase an aggregate of 44,444 shares of our common stock at an exercise
+price of $9.00 per common share, exercisable until April 7, 2005. The
+discount on the preferred stock related to the relative fair value of the
+warrants of $175,000 is being accreted as a direct charge to retained
+earnings ratably over 60 months. The Preferred Stock is subject to
+mandatory conversion into shares of our common stock when such stock has
+traded at $35 per share or more for a 30-day period ending on or after
+April 7, 2003, or for a 60-day period beginning on or after April 7, 2002.
+The Preferred Stock is redeemable at the option of the holders on or after
+April 7, 2005 at $1,000 per share plus any unpaid dividends. On April 7,
+2007, we have the right to require (1) redemption of the Preferred Stock at
+$1,000 per share plus any unpaid dividends or (2) conversion of the
+Preferred Stock at $9.00 per common share. Upon a change of control,
+holders have the right to require us to redeem the Preferred Stock for 200%
+of the Stated Value plus any unpaid dividends. The holders of the Preferred
+Stock have certain voting rights and are entitled to receive a cumulative
+annual dividend of $70 per share, payable quarterly and have preference to
+any other dividends, if any, paid by the Company.
+On July 8, 2003, the holders of the Preferred Stock exercised their
+44,444 warrants to purchase common stock at $9 per share. In lieu of cash
+consideration, we canceled 31,821 of their warrants in exchange for the
+issuance of 12,62 shares of common stock.
+19. INTERNATIONAL OPERATIONS
+We have foreign operations primarily from TransAct Technologies Ltd.,
+a wholly-owned subsidiary, which had sales to its customers of $1,068,000,
+$738,000 and $1,791,000 in 2003, 2002 and 2001, respectively. We had sales
+from the United States to our customers outside of the United States of
+approximately $3,663,000, $3,968,000 and $6,131,000 in 2003, 2002 and 2001,
+respectively.
+20. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
+Our quarterly results of operations for 2003 and 2002 (unaudited) are
+as follows:
+Quarter Ended
+------------------------------------------------------------
+(In thousands, except per share amounts) March 31 June 30 September 30 December 31
+--------- --------- ------------ -----------
+2003:
+Net sales $ 9,012 $ 13,378 $ 15,048 $ 14,660
+Gross profit 2,441 4,212 4,819 4,071
+Net income (loss) (198) 787 1,140 (201)
+Net income (loss) available to common shareholders (288) 698 1,050 (290)
+Net income (loss) per share:
+Basic (0.05) 0.12 0.18 (0.05)
+Diluted (0.05) 0.12 0.17 (0.05)
+March 31 June 30 September 30 December 31
+--------- --------- ------------ -----------
+2002:
+Net sales $ 10,525 $ 10,921 $ 8,852 $ 9,163
+Gross profit 2,626 3,112 2,302 2,176
+Net income (loss) (129) 289 (709) (143)
+Net income (loss) available to common shareholders (219) 200 (799) (232)
+Net income (loss) per share:
+Basic and diluted (0.04) 0.04 (0.14) (0.04)
+43
+TRANSACT TECHNOLOGIES INCORPORATED
+NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
+21. SUBSEQUENT EVENT
+On March 4, 2004, we announced that our Board of Directors approved a
+three-for-two stock split of our common stock to be effected in the form of
+a 50 percent stock dividend. The additional shares will be payable April 2,
+2004 to shareholders of record at the close of business on March 17, 2004.
+As a result of the stock dividend, shareholders of record will be entitled
+to receive one additional share of common stock for every two shares of
+common stock held on the record date, and cash instead of any fractional
+shares. No amounts within the financial statements and footnotes reflect
+the stock split. The following table indicates our net income (loss) per
+share had these amounts been adjusted for the stock split.
+Year Ended December 31,
+2003 2002 2001
+---- ---- ----
+(unaudited)
+Net income (loss) per share:
+Basic:
+Historical $ 0.20 $ (0.19) $(0.95)
+Pro forma, after adjusting for stock split 0.13 (0.12) (0.63)
+Diluted:
+Historical 0.19 (0.19) (0.95)
+Pro forma, after adjusting for stock split 0.13 (0.12) (0.63)
+44
+ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
+FINANCIAL DISCLOSURE.
+None.
+ITEM 9a. CONTROLS AND PROCEDURES
+TransAct's management is responsible for designing and implementing
+disclosure controls and procedures to provide reasonable (not absolute)
+assurances that desired control objectives are achieved including:
+- Filing with the SEC all required disclosures within the time
+limits specified by the SEC
+- Providing all material information to our management,
+including the CEO and CFO, to enable them to make timely
+decisions about required disclosures.
+When designing and evaluating controls and procedures, we make
+assumptions about the likelihood of future events. At the same time, we make
+judgments about the cost-benefit relationship of possible controls and
+procedures. We cannot assure that this design will succeed in achieving its
+stated goals under all potential future conditions. Similarly, we cannot assure
+that our evaluation of controls will detect all control issues or instances of
+fraud, if any.
+We completed our review of disclosure controls and procedures under the
+supervision of the Disclosure Committee, and with the participation of
+management, including the Chief Executive Officer and Chief Financial Officer.
+Based on this review, the Chief Executive Officer and Chief Financial Officer
+concluded that as of December 31, 2003 our disclosure controls and procedures
+were effective to provide reasonable assurance that reports are filed or
+submitted within the time limits specified by the SEC, and that information is
+accumulated and communicated to management to allow timely decisions regarding
+required disclosure. There was no change in our internal control over financial
+reporting that occurred during 2003 that has materially affected, or is
+reasonably likely to materially affect, our internal control over financial
+reporting.
+Reference is made to the Certifications of the Chief Executive Officer
+and Chief Financial Officer about these and other matters following the
+signature page of this report
+45
+PART III
+ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
+Information contained in "Election of Directors", "Code of Ethics" and
+"Section 16(a) Beneficial Ownership Reporting Compliance" of the Company's Proxy
+Statement (the "Proxy Statement") for its Annual Meeting of Shareholders which
+is scheduled to be held on May 26, 2004 is hereby incorporated herein by
+reference. Also, see information under "Executive Officers of Registrant" in
+Item 1.
+ITEM 11. EXECUTIVE COMPENSATION.
+The information contained in "Executive Compensation" other than the
+"Compensation Committee Report on Executive Compensation" of the Proxy Statement
+is hereby incorporated herein by reference.
+ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
+RELATED STOCKHOLDER MATTERS.
+The information contained in "Security Ownership of Certain Beneficial
+Owners and Management" of the Proxy Statement is hereby incorporated herein by
+reference.
+Information regarding our equity compensation plans as of December 31,
+2003 is as follows:
+Number of securities Weighted average
+to be issued upon exercise price of
+exercise of outstanding Number of securities
+outstanding options, options, warrants remaining available
+Plan category warrants and rights and rights for future issuance
+------------------------------------- --------------------- ----------------- --------------------
+Equity compensation plans approved
+by security holders:
+1996 Stock Plan 517,733 $6.19 195,150
+1996 Non-Employee Director Plan 155,000 8.57 77,500
+2000 Employee Stock Purchase Plan - - 31,794
+------- ----- -------
+Total 672,733 $6.74 304,444
+======= ===== =======
+Equity compensation plans not approved
+by security holders:
+2001 Employee Stock Plan 87,636 5.90 29,410
+======= ===== =======
+The TransAct Technologies Incorporated 2001 Employee Stock Plan (the
+"2001 Employee Plan") was adopted by our Board of Directors, without approval of
+our security holders, effective February 26, 2001. Under the 2001 Employee Plan,
+we may issue non-qualified stock options, shares of restricted stock, restricted
+units to acquire shares of common stock, stock appreciation rights and limited
+stock appreciation rights to key employees of TransAct or any of our
+subsidiaries and to non-employees who provide services to TransAct or any of our
+subsidiaries. The 2001 Employee Plan is administered by our Compensation
+Committee, which has the authority to determine the vesting period and other
+similar restrictions and terms of awards, provided that the exercise price of
+options granted under the plan may not be less than the fair market value of the
+underlying shares on the date of grant. Awards may be issued under the 2001
+Employee Plan with respect to up to 150,000 shares of common stock.
+ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
+The information contained in "Certain Relationships and Related
+Transactions" of the Proxy Statement is hereby incorporated herein by reference.
+ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
+The information contained in "Independent Auditors' Fees" of the Proxy
+Statement is herby incorporated herein by reference.
+46
+PART IV
+ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
+(A) THE FOLLOWING FINANCIAL STATEMENTS AND EXHIBITS ARE FILED AS
+PART OF THIS REPORT:
+(i) Financial statements
+See Item 8.
+(ii) Financial statement schedules
+All schedules are omitted since the required information is
+either (a) not present or not present in amounts sufficient
+to require submission of the schedule or (b) included in
+the financial statements or notes thereto.
+(iii) List of exhibits
+3.1(a) Certificate of Incorporation of the Company, filed with the Secretary of State of (2)
+Delaware on June 17, 1996.
+3.1(b) Certificate of Amendment of Certificate of Incorporation of the Company, filed with (4)
+the Secretary of State of Delaware on June 4, 1997.
+3.1(c) Certificate of Designation, Series A Preferred Stock, filed with the Secretary of (5)
+State of Delaware on December 2, 1997.
+3.1(d) Certificate of Designation, Series B Preferred Stock, filed with the Secretary of (8)
+State of Delaware on April 6, 2000.
+3.2 Amended and Restated By-laws of the Company. (6)
+4.1 Specimen Common Stock Certificate. (2)
+4.2 Amended and Restated Rights Agreement between TransAct and American Stock Transfer & (5)
+Trust Company dated February 16, 1998.
+10.1 Tax Sharing Agreement dated as of July 31, 1996 between Tridex and TransAct. (3)
+10.2(x) 1996 Stock Plan, effective July 30, 1996. (3)
+10.3(x) Non-Employee Directors' Stock Plan, effective August 22, 1996. (3)
+10.4(x) 2000 Employee Stock Purchase Plan (9)
+10.5(x) 2001 Employee Stock Plan (11)
+10.6 Lease Agreement by and between Bomax Properties and Ithaca, dated as of March 23, (2)
+1992.
+10.7 Second Amendment to Lease Agreement by and between Bomax Properties and Ithaca, (4)
+dated December 2, 1996.
+10.8 Agreement regarding the Continuation and Renewal of Lease by and between Bomax (14)
+Properties, LLC and TransAct, dated July 18, 2001.
+10.9 Lease Agreement by and between Pyramid Construction Company and Magnetec, dated July (4)
+30, 1997.
+10.10(x) Employment Agreement, dated July 31, 1996, by and between the Company and Bart C. (2)
+Shuldman.
+10.11(x) Employment Agreement, dated July 31, 1996, by and between the Company and Richard L. (2)
+Cote.
+10.12(x) Severance Agreement by and between TransAct and Michael S. Kumpf, dated September 4, (3)
+1996.
+10.13(x) Severance Agreement by and between TransAct and Steven A. DeMartino, dated January (6)
+21, 1998.
+10.14(x) Severance Agreement by and between TransAct and James B. Stetson, dated January 24, (10)
+2001.
+47
+10.15 Loan Agreement by and between the Company and Bart C. Shuldman, dated July 1, 2001 (14)
+10.16 Loan Agreement by and between the Company and Bart C. Shuldman, dated January, 2002 (15)
+10.17 OEM Purchase Agreement by and between GTECH Corporation, TransAct Technologies and (7)
+Magnetec Corporation commencing July 14, 1999. (Pursuant to Rule 24-b-2 under the
+Exchange Act, the Company has requested confidential treatment of portions of this
+exhibit deleted from the filed copy.)
+10.18 OEM Purchase Agreement by and between GTECH Corporation and TransAct Technologies (16)
+Incorporated commencing July 2, 2002. (Pursuant to Rule 24-b-2 under the Exchange
+Act, the Company has requested confidential treatment of portions of this exhibit
+deleted from the filed copy.)
+10.19 OEM Purchase Agreement by and between Okidata Americas, Inc. and TransAct, dated (14)
+June 8, 2001. (Pursuant to Rule 24b-2 under the Exchange Act, the Company has
+requested confidential treatment of portions of this exhibit deleted from the filed
+copy.)
+10.20 Preferred Stock Purchase Agreement and Certificate of Designation dated as of March (8)
+20, 2000 between TransAct Technologies Incorporated and Advance Capital Partners,
+L.P. and affiliate
+10.21 Loan and Security Agreement dated as of May 25, 2001 among TransAct, LaSalle (12)
+Business Credit, Inc. ("LaSalle") and the institutions from time to time a party
+thereto.
+10.22 Waiver and Amendment No. 1 to Loan and Security Agreement dated as of October 30, (13)
+2001 among TransAct, LaSalle and the institutions from time to time a party thereto.
+10.23 Amendment No. 2 to Loan and Security Agreement dated as of December 21, 2001 among (14)
+TransAct, LaSalle and the institutions from time to time a party thereto.
+10.24 Waiver and Amendment No. 3 to Loan and Security Agreement dated as of November 12, (17)
+2002 among TransAct, LaSalle and the institutions from time to time a party thereto.
+10.25 Waiver and Amendment No. 4 to Loan and Security Agreement dated as of March 24, 2003 (18)
+among TransAct, LaSalle and the institutions from time to time a party thereto.
+10.26 OEM Purchase Agreement between Oki Data Americas, Inc. ("Oki Data") and TransAct (19)
+Technologies Incorporated dated as of June 8, 2003. (Pursuant to Rule 24b-2 under
+the Securities Exchange Act of 1934, as amended, the Company has requested
+confidential treatment of portions of this exhibit deleted from the filed copy.)
+10.27 Revolving Credit, Equipment Loan and Security Agreement between TransAct (19)
+Technologies Incorporated and Banknorth N.A. dated August 6, 2003.
+21.1 Subsidiaries of the Company. (1)
+23.1 Consent of PricewaterhouseCoopers LLP. (1)
+31.1 Certification of Chief Executive Officer pursuant to Section 302 of the (1)
+Sarbanes-Oxley Act of 2002
+31.2 Certification of Chief Financial Officer pursuant to Section 302 of the (1)
+Sarbanes-Oxley Act of 2002
+32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as (1)
+adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002
+32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as (1)
+adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002
+48
+(1) These exhibits are filed herewith.
+(2) These exhibits, which were previously filed with the Company's
+Registration Statement on Form S-1 (No. 333-06895), are
+incorporated by reference.
+(3) These exhibits, which were previously filed with the Company's
+Quarterly Report on Form 10-Q for the period ended September
+30, 1996 (Commission File No. 000-21121), are incorporated by
+reference.
+(4) These exhibits, which were previously filed with the Company's
+Annual Report on Form 10-K for the year ended December 31,
+1997 (Commission File No. 000-21121), are incorporated by
+reference.
+(5) This exhibit, which was previously filed with the Company's
+Current Report on Form 8-K filed February 18, 1999 (Commission
+File No. 000-21121), is incorporated by reference.
+(6) These exhibits, which were previously filed with the Company's
+Annual Report on Form 10-K for the year ended December 31,
+1998 (Commission File No. 000-21121), are incorporated by
+reference.
+(7) This exhibit, which was previously filed with the Company's
+Quarterly Report on Form 10-Q for the period ended September
+25, 1999 (Commission File No. 000-21121), is incorporated by
+reference.
+(8) This exhibit, which was previously filed with the Company's
+Quarterly Report on Form 10-Q for the period ended March 25,
+2000, is incorporated by reference.
+(9) This exhibit, which was previously filed with the Company's
+Registration Statement on Form S-8 (No. 333-49540), is
+incorporated by reference.
+(10) These exhibits, which were previously filed with the Company's
+Annual Report on Form 10-K for the year ended December 31,
+2000, are incorporated by reference.
+(11) This exhibit, which was previously filed with the Company's
+Registration Statement on Form S-8 (No. 333-59570), is
+incorporated by reference.
+(12) This exhibit, which was previously filed with the Company's
+Quarterly Report on Form 10-Q for the period ended June 30,
+2001, is incorporated by reference.
+(13) This exhibit, which was previously filed with the Company's
+Quarterly Report on Form 10-Q for the period ended September
+30, 2001, is incorporated by reference.
+(14) These exhibits, which were previously filed with the Company's
+Annual Report on Form 10-K for the year ended December 31,
+2001, are incorporated by reference.
+(15) This exhibit, which was previously filed with the Company's
+Quarterly Report on Form 10-Q for the period ended March 31,
+2002, is incorporated by reference.
+(16) This exhibit, which was previously filed with the Company's
+Quarterly Report on Form 10-Q for the period ended June 30,
+2002, is incorporated by reference.
+(17) This exhibit, which was previously filed with the Company's
+Quarterly Report on Form 10-Q for the period ended September
+30, 2002, is incorporated by reference.
+(18) These exhibits, which were previously filed with the Company's
+Annual Report on Form 10-K for the year ended December 31,
+2002, are incorporated by reference.
+(19) This exhibit, which was previously filed with the Company's
+Quarterly Report on Form 10-Q for the period ended June 30,
+2003, is incorporated by reference.
+(x) Management contract or compensatory plan or arrangement
+required to be filed pursuant to Item 14(c).
+(B) REPORTS ON FORM 8-K.
+A report on Form 8-K was furnished on November 3, 2003 to report under
+Items 7 and 9 a press release announcing the Company's financial results for the
+quarter ended September 30, 2003 pursuant to Item 12 of Form 8-K.
+49
+SIGNATURES
+Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
+1934, the registrant has duly caused this report to be signed on its behalf by
+the undersigned, thereunto duly authorized.
+TRANSACT TECHNOLOGIES INCORPORATED
+By: /s/ Bart C. Shuldman
+---------------------------------
+Bart C. Shuldman
+Chairman of the Board, President
+and Chief Executive Officer
+Date: March 30, 2004
+Pursuant to the requirements of the Securities Act of 1934, this report has been
+signed below by the following persons on behalf of the registrant and in the
+capacities and on the dates indicated.
+Signature Title Date
+--------- ----- ----
+/s/ Bart C. Shuldman Chairman of the Board, President and March 30, 2004
+------------------------------------ Chief Executive Officer
+Bart C. Shuldman (Principal Executive Officer)
+/s/ Richard L. Cote Executive Vice President, Chief Financial March 30, 2004
+------------------------------------ Officer, Treasurer, Secretary and Director
+Richard L. Cote (Principal Financial Officer)
+/s/ Steven A. DeMartino Senior Vice President, Finance March 30, 2004
+------------------------------------ and Information Technology
+Steven A. DeMartino (Principal Accounting Officer)
+/s/ Charles A. Dill Director March 30, 2004
+------------------------------------
+Charles A. Dill
+/s/ Thomas R. Schwarz Director March 30, 2004
+------------------------------------
+Thomas R. Schwarz
+/s/ Graham Y. Tanaka Director March 30, 2004
+------------------------------------
+Graham Y. Tanaka
+50
+EXHIBIT LIST
+The following exhibits are filed herewith.
+Exhibit
+21.1 Subsidiaries of the Company
+23.1 Consent of PricewaterhouseCoopers LLP
+31.1 Certification of Chief Executive Officer pursuant to Section 302 of
+the Sarbanes-Oxley Act of 2002
+31.2 Certification of Chief Financial Officer pursuant to Section 302 of
+the Sarbanes-Oxley Act of 2002
+32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
+Section 1350 as adopted pursuant to section 906 of the
+Sarbanes-Oxley Act of 2002
+32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
+Section 1350 as adopted pursuant to section 906 of the
+Sarbanes-Oxley Act of 2002
+51
\ No newline at end of file
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new file mode 100644
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diff --git a/raw/filings/0001017303/2003/0000950123-04-003987/item1.txt b/raw/filings/0001017303/2003/0000950123-04-003987/item1.txt
new file mode 100644
index 0000000000000000000000000000000000000000..c9a4d976629d540091db39c3f7cef278f3f7d7ae
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@@ -0,0 +1,354 @@
+ITEM 1. BUSINESS.
+THE COMPANY
+TransAct was incorporated in June 1996 and began operating as a
+stand-alone business in August 1996 as a spin-off of the printer business that
+was formerly conducted by certain subsidiaries of Tridex Corporation. We
+completed an initial public offering on August 22, 1996.
+TransAct Technologies Incorporated ("TransAct" or the "Company")
+designs, develops, manufactures and markets transaction-based printers under the
+Ithaca(R) and Magnetec(R) brand names. In addition, we market related
+consumables, spare parts and service. Our printers are used worldwide to provide
+transaction records such as receipts, tickets, coupons, register journals and
+other documents. We focus on two core markets: (1) point-of-sale and banking
+("POS") and (2) gaming and lottery. We sell our products directly to original
+equipment manufacturers ("OEMs"), value-added resellers ("VARs"), selected
+distributors and directly to end-users. Our product distribution spans across
+the Americas, Europe, the Middle East, Africa, the Caribbean Islands and the
+South Pacific. We have one primary operating facility located in Ithaca, New
+York, five sales offices located in the United States, and one sales office and
+service depot in the United Kingdom. Our executive offices are located at 7
+Laser Lane, Wallingford, CT 06492 with a telephone number of (203) 269-1198.
+GENERAL DEVELOPMENT OF BUSINESS
+The year 2003 was a pivotal, and successful, year for TransAct,
+highlighted by the following achievements:
+- Increased revenues by $12,637,000, or 32% over 2002
+- Increased operating income by $3,672,000
+- Reported our first profitable year since 1999 with
+net income of $1,528,000
+- Repaid all our revolving bank borrowings
+We continue to focus on sales growth in our two core markets, point of
+sale and banking ("POS") and gaming and lottery, to drive increased
+profitability.
+The POS market remained soft in 2003 due to continued lower capital
+spending by users of POS products and overall economic weakness, primarily in
+the U.S. We expect to see some improvement in the POS market during 2004,
+although not until the second half of 2004. Despite weakness of the market in
+2003, our POS printer sales increased by 8.7% due primarily to growing sales of
+our POSjet(R) and Bankjet(R) line of inkjet printers. During 2003, we announced
+wins from two major financial services companies for shipments of over 19,000
+Bankjet(R) printers to upgrade bank teller applications, which we began to ship
+in 2003 and expect to complete shipping during 2004. Given our success in 2003
+and in light of the renewed focus we see banks placing on branch banking, we
+plan to more proactively seek opportunities with other banks for upgrading bank
+teller systems, if and when they arise. Our long-term strategy in the POS market
+is to capture at least 20% market share, or approximately $200 million in sales,
+primarily through increasing and enhancing our product portfolio, increasing
+geographic coverage, and growing our customer base.
+Our focus in the gaming and lottery market is two-fold. On the lottery
+side, we continue to hold a leading position based on our long-term purchase
+agreements with GTECH Corporation ("GTECH"), our largest customer and the
+world's largest provider of lottery terminals, with an approximately 70% market
+share. GTECH has been our customer since 1995, and we continue to maintain a
+good relationship with them. Currently, we fulfill substantially all of GTECH's
+printer requirements for lottery terminal installations and upgrades. Our sales
+to GTECH each year are directly dependent on the timing and number of
+new and upgraded lottery terminal installations GTECH performs.
+On the gaming side, our focus lies primarily in supplying printers for
+use in slot machines in casinos. During 2003, we benefited from the increasing
+number of casinos that began to convert traditional coin-issuing slot machines
+into ticket-issuing slot machines. As a result, sales of our gaming and lottery
+printers increased by over 50%. We expect this trend to continue into 2004, as
+more casinos convert their slot machines. The adoption and rollout of the
+ticket-in/ticket-out initiative is happening and we expect all 700,000 slot
+machines in North America to be fitted with a printer within the next two to
+four years. We also expect growth from gaming sales internationally, beginning
+in late 2004, as markets such as Australia and Europe evaluate the use of this
+technology for their slot machines.
+1
+Our services and consumables products, which include the repair of
+printers and the sale of spare parts and consumables (paper, ribbons and inkjet
+cartridges), offer a substantial growth opportunity and recurring revenue stream
+for TransAct. Our services and consumables products revenue has grown to
+$8,543,000 and 16.4% of net sales in 2003, an increase of over 22% from 2002.
+During 2004, we plan to more actively promote and dedicate increased resources
+to our services and consumables products in an effort to substantially increase
+the volume of sales. We have implemented a specialized software system, improved
+our sales lead tracking and prospecting processes, and instituted incentive
+schemes for our sales people to enable us to better cross-sell our services and
+consumables products to our customers. We also believe that the increasing sales
+of our inkjet printers will drive substantially higher inkjet cartridge sales in
+2004 and beyond.
+Operationally, gross margin and operating margin were significantly
+improved. We expect to see further gross margin and operating margin improvement
+in 2004 as the volume of sales increases and we continue to focus on controlling
+expenses. We reported net income for 2003 - the first time since 1999. We also
+generated sufficient cash during 2003 to repay all outstanding revolving
+borrowings under our credit facility, and had almost $500,000 of cash on our
+balance sheet as of December 31, 2003.
+FINANCIAL INFORMATION ABOUT SEGMENTS
+We have assessed our operating and reportable segments and have
+determined that we operate in one reportable segment, the design, development,
+manufacture and marketing of transaction-based printers and printer-related
+products.
+PRODUCTS AND SERVICES
+TransAct designs, develops, manufactures and markets a broad array of
+transaction-based printers utilizing inkjet, thermal and impact printing
+technology for applications requiring up to 60 character columns, primarily in
+the POS and gaming and lottery markets. Our printers are configurable and offer
+customers the ability to choose from a variety of features and functions.
+Options typically include PC board configuration, paper cutting devices, paper
+handling capacities and cabinetry color. In addition to our configurable
+printers, we manufacture custom printers for certain OEM customers. In
+collaboration with these customers, we provide engineering and manufacturing
+expertise for the design and development of specialized printers. In addition,
+we offer inkjet cartridges, printer ribbons, paper and replacement parts for all
+of our products.
+We provide customers with telephone sales and technical support, a
+personal account representative to handle orders, shipping and general
+information, and expedited shipping for orders of our configurable and custom
+products. Technical and sales support personnel receive training on all of our
+products and services manufactured. Our printers generally carry up to a
+two-year limited warranty; extended warranties are available for purchase to
+supplement the original warranty. Service contracts for the repair and
+maintenance of printers beyond the original warranty period are also available
+for purchase.
+SOURCES AND AVAILABILITY OF RAW MATERIALS
+The principal materials used in manufacturing are inkjet, thermal and
+impact printheads, injection molded plastic parts, formed/stamped metal parts,
+circuit boards and electronic components. Although we could experience temporary
+disruption if certain suppliers ceased doing business with us, our requirements
+generally are available from a number of sources, except as described below.
+Okidata Americas, Inc. ("Okidata"), is the sole supplier for a printer
+component kit consisting of a printhead, control board and carriage (the "Oki
+Kit"), that is used in all of our Ithaca(R) brand impact printers. The loss of
+the supply of Oki Kits would have a material adverse effect on TransAct. We have
+a supply agreement with Okidata to provide Oki Kits until June 8, 2005. Prices
+under this agreement are fixed, but may be changed by Okidata after providing
+180 days written notice.
+Hewlett-Packard Company ("HP") is the sole supplier of inkjet
+cartridges that are used in all of our inkjet printers. The loss of the supply
+of HP inkjet cartridges would have a material adverse effect on the sale of our
+inkjet printers. We have a supply agreement with HP to purchase inkjet
+cartridges until February 1, 2005 at fixed prices.
+2
+We believe our relations with Okidata and HP are good and have
+received no indication that these supply agreements will not be renewed beyond
+the respective expiration dates of the current contracts. We cannot be certain,
+however, that these supply agreements will be renewed, or if renewed, that the
+terms will be as favorable as those under the current contracts.
+PATENTS AND PROPRIETARY INFORMATION
+We have significantly expanded our patent portfolio over the past four
+years, and expect to continue to do so in the future. We also believe our patent
+portfolio will provide additional opportunities to license our intellectual
+property in the future. We currently own eight patents, four of which we
+consider material. The earliest expiration date of these eight patents is in
+2008 with the latest expiration date in 2020. Of the material patents, one
+patent covers methods and apparatus for allowing a two-color printer to print
+images using single pass technology by printing during both forward and reverse
+movement of the print mechanism; another patent relates to our proprietary void
+and reprint receipt printing method which is used in certain of our slot machine
+printers; and two other patents cover a method for converting a full color image
+into a two-color image, plus a background color. We also have sought patent
+protection for certain design features of 1) printers using inkjet technology,
+2) POS printers using thermal technology, and 3) thermal printers for use in
+casino slot machines. We regard certain manufacturing processes and designs to
+be proprietary and attempt to protect them through employee and third-party
+nondisclosure agreements and similar means. It may be possible for unauthorized
+third parties to copy certain portions of our products or to reverse engineer or
+otherwise obtain and use, to our detriment, information that we regard as
+proprietary. Moreover, the laws of some foreign countries do not afford the same
+protection to our proprietary rights as do United States laws. There can be no
+assurance that legal protections relied upon by the Company to protect our
+proprietary position will be adequate or that our competitors will not
+independently develop technologies that are substantially equivalent or superior
+to our technologies.
+In November 2002, the Company was advised that certain POS printers
+sold by us since late 1999 may use technology covered by recently issued patents
+of a third party competitor. In an effort to resolve this matter, we originally
+offered to pay approximately $160,000, while the other party sought payment of
+up to $950,000. We recorded a charge of $160,000 in cost of sales in the fourth
+quarter of 2002 related to this matter. Based on the likely outcome of current
+negotiations, we recorded an additional charge of $740,000 in the fourth quarter
+of 2003 related to usage prior to January 1, 2003. Although settlement
+negotiations are continuing, we believe that the total accrual of $900,000 (the
+"Patent Resolution Payment") reflects the best estimate of the expense related
+to the pre-2003 usage of this third party patented technology. We also accrued
+estimated royalty payments for usage of this technology after January 1, 2003.
+SEASONALITY
+Retailers typically reduce purchases of new POS equipment in the fourth
+quarter, due to the increased volume of consumer transactions in the holiday
+period, and our sales of printers in the POS market historically have increased
+in the third quarter and decreased in the fourth quarter. Similarly,
+installations of lottery terminals are typically reduced in the fourth quarter
+resulting in decreased sales of lottery printers. However, we did not experience
+material seasonality in our total net sales, due to significant growth in sales
+from our gaming market (for which we have not experienced seasonality). As a
+result, we experienced little impact from the mild seasonality of our POS and
+lottery market.
+CERTAIN CUSTOMERS
+We currently have two ongoing OEM purchase agreements with GTECH
+Corporation ("GTECH"). The first OEM purchase agreement ("GTECH Impact Printer
+Agreement") provides for the sale of impact on-line lottery printers and spare
+parts through December 31, 2004. The second OEM purchase agreement ("GTECH
+Thermal Printer Agreement") provides for the sale of thermal on-line lottery
+printers and spares parts, at fixed prices, through June 28, 2007. Firm purchase
+orders for printers under either agreement may be placed annually by GTECH.
+Pursuant to orders placed under the GTECH Impact Printer Agreement, we have
+orders for approximately $2,000,000 of impact on-line lottery printers for
+delivery during the second and third quarters of 2004. Because our new thermal
+on-line lottery printer is a replacement for our impact on-line printer, we do
+not expect any further shipments of impact on-line lottery printers in 2004
+beyond the third quarter. Additionally, pursuant to the GTECH Thermal Printer
+Agreement, we have received orders for approximately $1,800,000 worth of thermal
+printers for delivery in 2004. We expect to receive additional orders from GTECH
+for thermal printers during 2004. We also sell printers to GTECH for use in
+lottery terminals at grocery store check-out lanes ("in-lane lottery printers").
+Sales of in-lane lottery printers are project-oriented, and, as such, we cannot
+predict if and when future sales may occur. Sales to GTECH accounted for
+approximately 19%, 27% and 33% of net sales in 2003, 2002 and 2001,
+respectively.
+We also provide printers to Harrah's for use in casino slot machines
+throughout the United States. During 2003, sales to Harrah's accounted for
+approximately 12% of net sales. We have received orders for approximately
+$2,200,000 from Harrah's of printers for delivery in 2004. We expect to receive
+additional orders from them for printers during 2004.
+3
+BACKLOG
+Our backlog of firm orders was approximately $5,344,000 as of March 5,
+2004, including approximately $3,200,000 and $500,000 to GTECH and Harrah's,
+respectively, compared to $7,628,000 as of March 14, 2003, including
+approximately $4,300,000 to GTECH and none to Harrah's. Based on customers'
+current delivery requirements, we expect to fill our entire current backlog
+during 2004.
+COMPETITION
+The market for transaction-based printers is extremely competitive, and
+we expect such competition to continue in the future. We compete with a number
+of companies, many of which have greater financial, technical and marketing
+resources than us. We believe our ability to compete successfully depends on a
+number of factors both within and outside our control, including durability,
+reliability, quality, design capability, product customization, price, customer
+support, success in developing new products, manufacturing expertise and
+capacity, supply of component parts and materials, strategic relationships with
+suppliers, the timing of new product introductions by us and our competitors,
+general market, economic and political conditions and, in some cases, the
+uniqueness of our products.
+In the POS market, our major competitor is Epson America, Inc., which
+controls a dominant portion of the POS markets into which we sell. We also
+compete, to a much lesser extent, with Axiohm Transaction Solutions, Star
+Micronics America, Inc., Citizen -- CBM America Corporation, and Korean Printer
+Solutions. Certain competitors of ours have greater financial resources, lower
+costs attributable to higher volume production, and sometimes offer lower prices
+than us.
+In the lottery market (consisting principally of on-line lottery
+transaction printing), we hold a leading position, based largely on our
+long-term purchase agreements with GTECH, which controls approximately 70% of
+the worldwide on-line lottery market. We compete in this market based solely on
+our ability to provide specialized, custom-engineered products to GTECH.
+In the gaming market (consisting principally of slot machine and video
+lottery terminal transaction printing), we and our major competitor,
+FutureLogic, Inc., comprise a substantial portion of the market. We also
+compete, to a lesser extent, with JCM American Corporation and Money Controls, a
+division of Coin Acceptors, Inc. (Coinco). Certain of our products sold for
+gaming applications compete based upon our ability to provide highly specialized
+products, custom engineering and ongoing technical support.
+Our strategy for competing in our markets is to continue to develop new
+products and product line extensions, to increase our geographic market
+penetration, take advantage of strategic relationships, and to lower product
+costs by sourcing certain products overseas. We expect to particularly focus on
+(1) promoting our line of slot machine printers into the gaming market, (2)
+increasing sales of our new iTherm(TM)280 thermal POS printer and family of
+printers utilizing Hewlett Packard's inkjet printing technology, and (3)
+expanding our consumables, spare parts and service business. Although we believe
+that our products, operations and relationships provide a competitive
+foundation, there can be no assurance that we will compete successfully in the
+future.
+RESEARCH AND DEVELOPMENT ACTIVITIES
+We spent approximately $2,276,000, $2,025,000 and $3,070,000 in 2003,
+2002 and 2001, respectively, on engineering, design and product development
+efforts in connection with specialized engineering and design to introduce new
+products and to customize existing products. During 2004, we expect to focus the
+majority of our research and development activities on the continuing
+development and enhancement of (1) our family of printers for the POS market
+utilizing inkjet and thermal printing technology and (2) our ticket-issuing
+printers for use in the casino market.
+ENVIRONMENT
+We are not aware of any material noncompliance with federal, state and
+local provisions that have been enacted or adopted regulating the discharge of
+materials into the environment, or otherwise relating to the protection of the
+environment.
+EMPLOYEES
+As of March 12, 2004, TransAct Technologies and our subsidiaries
+employed 201 persons, of whom 148 were full-time and 53 were temporary
+employees. None of our employees is unionized, and we consider our relationships
+with our employees to be good.
+4
+FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS
+We have foreign operations primarily from TransAct Technologies Ltd., a
+wholly-owned subsidiary located in the United Kingdom, which had sales to its
+customers of $1,068,000, $738,000, and $1,791,000 (primarily to Fujitsu for
+sales and service of printers used in the British Post Office) in 2003, 2002 and
+2001, respectively. We had export sales to our customers from our domestic
+operations of approximately $3,663,000, $3,968,000 and $6,131,000 in 2003, 2002
+and 2001, respectively. Total international sales, which include sales from our
+foreign subsidiary and export sales from our domestic operations, were
+approximately $4,731,000, $4,706,000 and $7,922,000 in 2003, 2002 and 2001,
+respectively.
+ADDITIONAL INFORMATION
+We make available free of charge through our internet website,
+WWW.TRANSACT-TECH.COM, our annual report on Form 10-K, quarterly reports on Form
+10-Q, current reports on Form 8-K, and all amendments to those reports as soon
+as reasonably practicable after such material is electronically filed with or
+furnished to the SEC.
+We maintain a Code of Business Conduct that is applicable to all
+employees, including our Chief Executive Officer, Chief Financial Officer and
+Controller. This Code, which requires continued observance of high ethical
+standards such as honesty, integrity and compliance with the law in the conduct
+of our business, is available for public access on our internet website.
+EXECUTIVE OFFICERS OF THE REGISTRANT
+Pursuant to General Instructions G(3) of form 10-K, the following list
+is included as an unnumbered item in Part I of this Report in lieu of being
+included in the Proxy Statement for the Annual Meeting of Stockholders to be
+held on May 26, 2004.
+The following is a list of the names and ages of all executive officers
+of the registrant, indicating all positions and offices with the registrant held
+by each such person and each person's principal occupations and employment
+during at least the past five years.
+Name Age Position
+---- --- --------
+Bart C. Shuldman 46 Chairman of the Board, President and Chief Executive Officer
+Richard L. Cote 62 Executive Vice President, Chief Financial Officer, Treasurer, Secretary
+and Director
+James B. Stetson 46 Executive Vice President - Sales and Marketing
+Michael S. Kumpf 54 Executive Vice President - Engineering
+Steven A. DeMartino 34 Senior Vice President - Finance and Information Technology
+BART C. SHULDMAN has been Chief Executive Officer, President and a
+Director of the Company since its formation in June 1996. Previously, Mr.
+Shuldman served as President of Magnetec and later the combined operations of
+Magnetec and Ithaca from August 1993 until June 1996. In February 2001, Mr.
+Shuldman was elected Chairman of the Board.
+RICHARD L. COTE has been Executive Vice President, Chief Financial
+Officer, Treasurer, Secretary and a Director of the Company since its formation
+in June 1996. Prior thereto, he served as Senior Vice President and Chief
+Financial Officer of Tridex from September 1993 to June 1996. On June 1, 2004,
+Mr. Cote will step down as Executive Vice President, Chief Financial Officer,
+Treasurer, Secretary and Director of the Company. Mr. Cote will continue in a
+consulting capacity through the end of 2004.
+JAMES B. STETSON was appointed Executive Vice President, Sales and
+Marketing in November 2001, and served as Senior Vice President of Worldwide
+Sales from February 2000 to November 2001, and Vice President of Sales, Latin
+America from October 1997 to February 2000. Prior to joining TransAct, Mr.
+Stetson served as Vice President and Sales Manager at Gekay Sales and Service
+Company from 1995 until October 1997.
+MICHAEL S. KUMPF was appointed Executive Vice President of Engineering
+in March 2002. He served as Senior Vice President, Engineering from June 1996 to
+March 2002 and Vice President, Engineering of Ithaca from 1991 until June 1996.
+5
+STEVEN A. DEMARTINO, a certified public accountant, joined TransAct as
+Corporate Controller in August 1996 and was appointed an officer of the Company
+in January 1998, Vice President in December 1999, and Senior Vice President,
+Finance and Information Technology in October 2001. Prior to joining TransAct,
+Mr. DeMartino was a self-employed financial consultant from May 1996 to August
+1996. Prior thereto, Mr. DeMartino served as Controller of Copart, Inc. from
+September 1994 to May 1996. On June 1, 2004, Mr. DeMartino will succeed Mr. Cote
+as TransAct's Executive Vice President, Chief Financial Officer, Treasurer and
+Secretary.
\ No newline at end of file
diff --git a/raw/filings/0001017303/2003/0000950123-04-003987/item13.txt b/raw/filings/0001017303/2003/0000950123-04-003987/item13.txt
new file mode 100644
index 0000000000000000000000000000000000000000..6aaf28f561750415b42aaeebfc2caed4df64ff04
--- /dev/null
+++ b/raw/filings/0001017303/2003/0000950123-04-003987/item13.txt
@@ -0,0 +1,3 @@
+ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
+The information contained in "Certain Relationships and Related
+Transactions" of the Proxy Statement is hereby incorporated herein by reference.
\ No newline at end of file
diff --git a/raw/filings/0001017303/2003/0000950123-04-003987/item9a.txt b/raw/filings/0001017303/2003/0000950123-04-003987/item9a.txt
new file mode 100644
index 0000000000000000000000000000000000000000..92c5bcad912410ebdf50c1b4900cab98c4805f9a
--- /dev/null
+++ b/raw/filings/0001017303/2003/0000950123-04-003987/item9a.txt
@@ -0,0 +1,33 @@
+ITEM 9a. CONTROLS AND PROCEDURES
+TransAct's management is responsible for designing and implementing
+disclosure controls and procedures to provide reasonable (not absolute)
+assurances that desired control objectives are achieved including:
+- Filing with the SEC all required disclosures within the time
+limits specified by the SEC
+- Providing all material information to our management,
+including the CEO and CFO, to enable them to make timely
+decisions about required disclosures.
+When designing and evaluating controls and procedures, we make
+assumptions about the likelihood of future events. At the same time, we make
+judgments about the cost-benefit relationship of possible controls and
+procedures. We cannot assure that this design will succeed in achieving its
+stated goals under all potential future conditions. Similarly, we cannot assure
+that our evaluation of controls will detect all control issues or instances of
+fraud, if any.
+We completed our review of disclosure controls and procedures under the
+supervision of the Disclosure Committee, and with the participation of
+management, including the Chief Executive Officer and Chief Financial Officer.
+Based on this review, the Chief Executive Officer and Chief Financial Officer
+concluded that as of December 31, 2003 our disclosure controls and procedures
+were effective to provide reasonable assurance that reports are filed or
+submitted within the time limits specified by the SEC, and that information is
+accumulated and communicated to management to allow timely decisions regarding
+required disclosure. There was no change in our internal control over financial
+reporting that occurred during 2003 that has materially affected, or is
+reasonably likely to materially affect, our internal control over financial
+reporting.
+Reference is made to the Certifications of the Chief Executive Officer
+and Chief Financial Officer about these and other matters following the
+signature page of this report
+45
+PART III
\ No newline at end of file
diff --git a/raw/filings/0001017303/2003/0000950123-04-003987/rp_note.txt b/raw/filings/0001017303/2003/0000950123-04-003987/rp_note.txt
new file mode 100644
index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391
diff --git a/raw/filings/0001017303/2003/0000950123-04-003987/rpt_disclosure.txt b/raw/filings/0001017303/2003/0000950123-04-003987/rpt_disclosure.txt
new file mode 100644
index 0000000000000000000000000000000000000000..386ea8b306ddd65655200063c789d61f6464fbe4
--- /dev/null
+++ b/raw/filings/0001017303/2003/0000950123-04-003987/rpt_disclosure.txt
@@ -0,0 +1,27 @@
+related party transactions involving directors and executive officers of the
+Company.
+Compliance, Internal Controls & Risk Management
+- Compliance Program. The Committee shall be responsible for reviewing and
+recommending the Company's Standards of Business Conduct for approval by the
+Board. The Committee shall oversee the Company's compliance program and
+receive regular reports from management on any significant compliance findings
+and recommendations. The Committee shall also establish procedures for (i) the
+receipt, retention and treatment of complaints received by the Company
+regarding accounting, internal accounting controls and auditing matters; and
+(ii) the confidential, anonymous submission by the Company's employees of
+concerns regarding questionable accounting or auditing matters.
+- Regulatory Action and Investigations. Unless otherwise determined by the
+Board, the Committee (i) shall have the authority to oversee the Company's
+response to regulatory actions, including investigations, involving financial,
+accounting and internal control matters, and (ii) may investigate any matter
+within the scope of its responsibilities that it determines appropriate.
+- Internal Control. The Committee shall review major issues as to the adequacy
+of the Company's internal controls and any audit steps taken in light of
+material control deficiencies.
+- Risk Assessment. The Committee shall discuss the Company's major financial
+and other risk exposures and the steps that management has taken to monitor
+and control such exposures, including the Company's risk assessment and risk
+management policies. In fulfilling this responsibility, the Committee shall
+receive a report from management at least annually regarding the manner in
+which the Company is assessing and managing the Company's exposure to
+financial and other risks.
\ No newline at end of file
diff --git a/raw/filings/0001017303/2004/0000950123-05-003228/filing.txt b/raw/filings/0001017303/2004/0000950123-05-003228/filing.txt
new file mode 100644
index 0000000000000000000000000000000000000000..c9b50dfccef6a8aeccc48c38b1f1162c052401ad
--- /dev/null
+++ b/raw/filings/0001017303/2004/0000950123-05-003228/filing.txt
@@ -0,0 +1,3178 @@
+10-K
+1
+y06777e10vk.txt
+TRANSACT TECHNOLOGIES INCORPORATED
+UNITED STATES
+SECURITIES AND EXCHANGE COMMISSION
+Washington, DC. 20549
+FORM 10-K
+FOR ANNUAL AND TRANSITION REPORTS
+PURSUANT TO SECTIONS 13 OR 15(d) OF THE
+SECURITIES AND EXCHANGE ACT OF 1934
+(Mark One)
+[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
+ACT OF 1934
+For the fiscal year ended December 31, 2004
+or
+[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
+EXCHANGE ACT OF 1934
+For the transition period from __________ to __________.
+Commission file number: 0-21121
+TRANSACT TECHNOLOGIES INCORPORATED
+(Exact name of registrant as specified in its charter)
+DELAWARE 06-1456680
+(State or other jurisdiction of (I.R.S. Employer Identification No.)
+incorporation or organization)
+7 LASER LANE, WALLINGFORD, CT 06492
+(Address of principal executive offices) (Zip Code)
+Registrant's telephone number, including area code 203-269-1198
+Securities registered pursuant to Section 12(b) of the Act:
+NONE
+Securities registered pursuant to Section 12(g) of the Act:
+COMMON STOCK, $0.01 PAR VALUE
+(Title of class)
+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 other 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
+----- -----
+As of June 30, 2004 the aggregate market value of the registrant's issued and
+outstanding voting stock held by non-affiliates of the registrant was
+$291,700,000.
+As of February 25, 2005, the registrant had outstanding 10,071,766 shares of
+common stock, $0.01 par value.
+DOCUMENTS INCORPORATED BY REFERENCE
+Proxy Statement for the Annual Meeting of Shareholders to be held on May 25,
+2005 - Part III (Items 10-14).
+PART I
+ITEM 1. BUSINESS.
+THE COMPANY
+TransAct was incorporated in June 1996 and began operating as a stand-alone
+business in August 1996 as a spin-off of the printer business that was formerly
+conducted by certain subsidiaries of Tridex Corporation. We completed an initial
+public offering on August 22, 1996.
+TransAct Technologies Incorporated ("TransAct" or the "Company") designs,
+develops, manufactures and markets transaction-based printers under the
+ithaca(R) brand name. In addition, we market related consumables, spare parts
+and service. Our printers are used worldwide to provide transaction records such
+as receipts, tickets, coupons, register journals and other documents. We focus
+on two core markets: (1) point-of-sale ("POS") and banking and (2) gaming and
+lottery. We sell our products directly to original equipment manufacturers
+("OEMs"), value-added resellers ("VARs"), selected distributors and directly to
+end-users. Our product distribution spans across the Americas, Europe, the
+Middle East, Africa, the Caribbean Islands and the South Pacific. We have one
+primary operating facility located in Ithaca, New York, seven sales offices
+located in the United States (including our new global gaming and lottery
+headquarters and western region service center in Las Vegas, NV), and a European
+sales and service center in the United Kingdom. Our executive offices and
+eastern region service center are located at 7 Laser Lane, Wallingford, CT
+06492, with a telephone number of (203) 269-1198.
+FINANCIAL INFORMATION ABOUT SEGMENTS
+We have assessed our operating and reportable segments and have determined
+that we operate in one reportable segment, the design, development, manufacture
+and marketing of transaction-based printers and printer-related products.
+PRODUCTS AND SERVICES
+Printers
+TransAct designs, develops, assembles and markets a broad array of
+transaction-based printers utilizing inkjet, thermal and impact printing
+technology for applications requiring up to 60 character columns, primarily in
+the POS and banking, and gaming and lottery markets. Our printers are
+configurable and offer customers the ability to choose from a variety of
+features and functions. Options typically include interface configuration, paper
+cutting devices, paper handling capacities and cabinetry color. In addition to
+our configurable printers, we manufacture custom printers for certain OEM
+customers. In collaboration with these customers, we provide engineering and
+manufacturing expertise for the design and development of specialized printers
+POS and banking: Our POS and banking printers include hundreds of optional
+configurations that can be selected to meet particular customer needs. We
+believe that this is a significant competitive strength, as it allows us to
+satisfy a wide variety of printing applications that our customers request. In
+the POS market, we sell several models of printers utilizing inkjet, thermal and
+impact printing technology. Our printers are used primarily by retailers in the
+hospitality, restaurant (including fine dining, casual dining, and fast food)
+and specialty retail industries to print receipts for consumers, validate
+checks, or print on other inserted media. We also sell printers that are used by
+banks, credit unions and other financial institutions to print and/or validate
+receipts at bank teller stations.
+Gaming and lottery: In the lottery portion of our gaming and lottery
+market, we supply lottery printers to GTECH, our largest customer and the
+world's largest provider of lottery terminals, with an approximately 70% market
+share. These printers are designed for high-volume, high-speed printing of
+lottery tickets for various lottery applications.
+In the gaming portion of our gaming and lottery market, we sell several
+models of printers used in slot machines and video lottery terminals that print
+tickets instead of issuing coins at casinos and racetracks worldwide. These
+printers utilize thermal printing technology and can print tickets in monochrome
+or two-color (depending upon the model), and offer various other features such
+as jam resistant bezels and a dual port interface that will allow casinos to
+print two-color coupons/promotions. We also sell printers using impact printing
+technology for use mainly in video lottery terminals and other gaming devices.
+1
+Service
+Through our recently-established TransAct Services Group, we proactively
+market the sale of consumable products (including inkjet cartridges, ribbons and
+paper), replacement parts and maintenance services for all of our products. Our
+maintenance services include the sale of extended warranties, multi-year
+maintenance contracts, 24-hour guaranteed replacement product service, and other
+repair services for our printer products. Within the United States, we provide
+repair services through our eastern region service center in Wallingford, CT and
+our western region service center in Las Vegas, NV. Internationally, we provide
+repair services through our European service center located in Doncaster, United
+Kingdom, and other partners strategically located around the world.
+We also provide customers with telephone sales and technical support, and a
+personal account representative to handle orders, shipping and general
+information. Technical and sales support personnel receive training on all of
+our manufactured products and our services.
+Product Warranty
+Our printers generally carry up to a two-year limited warranty against
+defects in material and workmanship, Defective equipment may be returned to any
+of our service centers, or our manufacturing facility in Ithaca, NY, for repair
+or replacement during the applicable warranty period.
+PRODUCTION, MANUFACTURING AND SOURCES AND AVAILABILITY OF RAW MATERIALS
+We design our products to optimize product performance, quality,
+reliability and durability. These designs combine cost efficient materials,
+sourcing and assembly methods with high standards of workmanship. We final
+assemble our products in our Ithaca, NY facility largely on a configure-to-order
+basis using components that have been sourced from around the world. Our
+manufacturing engineers work closely with our new product engineers and vendors
+during the development of new products. As a result, this collaboration
+increases manufacturing efficiency by specifying materials and designing
+manufacturing processes in conjunction with new product design.
+We procure component parts and subassemblies for use in the manufacture of
+our products. Critical component parts and subassemblies include inkjet, thermal
+and impact printheads, printing/cutting mechanisms, power supplies, motors,
+injection molded plastic parts, circuit boards and electronic components, which
+are obtained from domestic and foreign suppliers at competitive prices. We
+typically maintain several sources for our component parts and subassemblies to
+reduce the risk of parts shortages or unavailability. However, we could
+experience temporary disruption if certain suppliers ceased doing business with
+us, as described below.
+Okidata Americas, Inc. ("Okidata"), is the sole supplier for a printer
+component kit consisting of a printhead, control board and carriage (the "Oki
+Kit"), that is used in all of our ithaca(R) brand impact printers. The loss of
+the supply of Oki Kits would have a material adverse effect on TransAct. We have
+a supply agreement with Okidata to provide Oki Kits until June 8, 2005. Prices
+under this agreement are fixed, but may be changed by Okidata after providing
+180 days written notice.
+Hewlett-Packard Company ("HP") is the sole supplier of inkjet cartridges
+that are used in all of our inkjet printers. The loss of the supply of HP inkjet
+cartridges would have a material adverse effect on the sale of our inkjet
+printers. We have a supply agreement with HP to purchase inkjet cartridges until
+February 1, 2006 at fixed prices.
+We believe our relations with Okidata and HP are in good standing and have
+received no indication that these supply agreements will not be renewed beyond
+the respective expiration dates of the current contracts. We cannot be certain,
+however, that these supply agreements will be renewed, or if renewed, that the
+terms will be as favorable as those under the current contracts.
+2
+PATENTS AND PROPRIETARY INFORMATION
+We have significantly expanded our patent portfolio over the past five
+years, and expect to continue to do so in the future. We also believe our patent
+portfolio will provide additional opportunities to license our intellectual
+property in the future. We currently own ten patents, six of which we consider
+material. The earliest expiration date of these ten patents is in 2008, with the
+latest expiration date in 2021. Of the material patents, one patent covers
+methods and apparatus for allowing a two-color printer to print images using
+single pass technology by printing during both forward and reverse movement of
+the print mechanism; another patent relates to our proprietary void and reprint
+receipt printing method which is used in certain of our slot machine printers;
+two patents prevent ticket jams resulting from player interference in certain of
+our slot machine printers; and two other patents cover a method for converting a
+full color image into a two-color image, plus a background color. We also have
+sought patent protection for certain design features of 1) printers using inkjet
+technology, 2) POS printers using thermal technology, and 3) thermal printers
+for use in casino slot machines. We regard certain manufacturing processes and
+designs to be proprietary and attempt to protect them through employee and
+third-party nondisclosure agreements and similar means. It may be possible for
+unauthorized third parties to copy certain portions of our products or to
+reverse engineer or otherwise obtain and use, to our detriment, information that
+we regard as proprietary. Moreover, the laws of some foreign countries do not
+afford the same protection to our proprietary rights as do United States laws.
+There can be no assurance that legal protections relied upon by the Company to
+protect our proprietary position will be adequate or that our competitors will
+not independently develop technologies that are substantially equivalent or
+superior to our technologies.
+During the second quarter of 2004, we signed a cross licensing agreement
+with Seiko Epson. Under the agreement, Seiko Epson received a license to three
+of our patents, and we received a license to eighteen of Seiko Epson's patents
+relating to printing applications for the point of sale and banking markets. In
+addition, we agreed to pay $900,000 as a royalty for the usage of certain Seiko
+Epson technology prior to January 1, 2003. In accordance with the terms of the
+agreement, we paid the $900,000 royalty for past usage in full by January 2005.
+Under the agreement, we continue to pay royalties on a quarterly basis related
+to the sales of licensed printers, which is reflected in cost of sales.
+SEASONALITY
+Retailers typically reduce purchases of new POS equipment in the fourth
+quarter, due to the increased volume of consumer transactions in that holiday
+period, and our sales of printers in the POS market historically have increased
+in the third quarter and decreased in the fourth quarter. Similarly,
+installations of lottery terminals are typically reduced in the fourth quarter
+resulting in decreased sales of lottery printers.
+CERTAIN CUSTOMERS
+We currently have one ongoing OEM purchase agreement ("GTECH Thermal
+Printer Agreement") with GTECH Corporation ("GTECH") that provides for the sale
+of thermal on-line lottery printers and spares parts, at fixed prices, through
+June 28, 2007. We also had a second purchase agreement ("GTECH Impact Printer
+Agreement") that provided for the sale of impact on-line lottery printers and
+spare parts through December 31, 2004. Because our new thermal on-line lottery
+printer is a replacement for our impact on-line printer, we do not expect any
+further shipments of impact on-line lottery printers beyond 2004. However, we do
+expect to continue to sell spare parts to GTECH for the significant remaining
+installed base of impact on-line lottery printers. Firm purchase orders for
+printers under the GTECH Thermal Printer Agreement may be placed annually by
+GTECH. Pursuant to the GTECH Thermal Printer Agreement, as of March 4, 2005, we
+have received orders for approximately $2,000,000 of thermal printers for
+delivery in 2005. We expect to receive additional orders from GTECH for thermal
+printers during 2005. We also sell printers to GTECH for use in lottery
+terminals at grocery store check-out lanes ("in-lane lottery printers"). Sales
+of in-lane lottery printers are project-oriented, and, as such, we cannot
+predict if and when future sales may occur. Sales to GTECH accounted for
+approximately 16%, 19% and 27% of net sales in 2004, 2003 and 2002,
+respectively.
+We also provide printers to Harrah's and WMS Gaming for use in casino slot
+machines throughout the United States. During 2004, sales to WMS Gaming
+accounted for approximately 14% of net sales. During 2003, sales to Harrah's
+accounted for approximately 12% of net sales.
+BACKLOG
+Excluding GTECH, our backlog of firm orders was approximately $2,650,000 as
+of March 4, 2005, compared to $2,144,000 as of March 5, 2004. Our backlog from
+GTECH was approximately $600,000 as of March 4, 2005, compared to $3,200,000 as
+of March 5, 2004. Based on customers' current delivery requirements, we expect
+to ship our entire current backlog during 2005.
+3
+COMPETITION
+The market for transaction-based printers is extremely competitive, and we
+expect such competition to continue in the future. We compete with a number of
+companies, many of which have greater financial, technical and marketing
+resources than us. We believe our ability to compete successfully depends on a
+number of factors both within and outside our control, including durability,
+reliability, quality, design capability, product customization, price, customer
+support, success in developing new products, manufacturing expertise and
+capacity, supply of component parts and materials, strategic relationships with
+suppliers, the timing of new product introductions by us and our competitors,
+general market, economic and political conditions and, in some cases, the
+uniqueness of our products.
+In the POS market, our major competitor is Epson America, Inc., which
+controls a dominant portion of the POS markets into which we sell. We also
+compete, to a much lesser extent, with Transaction Printer Group, Star Micronics
+America, Inc., Citizen -- CBM America Corporation, and Korean Printer Solutions.
+Certain competitors of ours have greater financial resources, lower costs
+attributable to higher volume production and sometimes offer lower prices than
+us.
+In the lottery market (consisting principally of on-line lottery
+transaction printing), we hold a leading position, based largely on our
+long-term purchase agreements with GTECH, which controls approximately 70% of
+the worldwide on-line lottery market. We compete in this market based solely on
+our ability to provide specialized, custom-engineered products to GTECH.
+In the gaming market (consisting principally of slot machine and video
+lottery terminal transaction printing), we and our major competitor,
+FutureLogic, Inc., comprise a substantial portion of the market. Certain of our
+products sold for gaming applications compete based upon our ability to provide
+highly specialized products, custom engineering and ongoing technical support.
+Our strategy for competing in our markets is to continue to develop new
+products and product line extensions, to increase our geographic market
+penetration, to take advantage of strategic relationships, and to lower product
+costs by sourcing certain products overseas. We expect to particularly focus on
+(1) promoting our line of slot machine printers into the gaming market including
+our newly launched Epic950(TM) thermal casino printer, (2) increasing sales of
+our new iTherm(R)280 thermal POS printer and family of printers utilizing
+Hewlett Packard's inkjet printing technology, including our BANKjet(R) line of
+inkjet printers used in bank teller applications and (3) expanding our
+consumables, spare parts and service business. Although we believe that our
+products, operations and relationships provide a competitive foundation, there
+can be no assurance that we will compete successfully in the future.
+RESEARCH AND DEVELOPMENT ACTIVITIES
+We spent approximately $2,715,000, $2,276,000 and $2,025,000 in 2004, 2003
+and 2002, respectively, on engineering, design and product development efforts
+in connection with specialized engineering and design to introduce new products
+and to customize existing products. During 2005, we expect to focus the majority
+of our research and development activities on the continuing development and
+enhancement of (1) our family of printers for the POS and banking market
+utilizing inkjet and thermal printing technology and, to a lesser extent, (2)
+our ticket-issuing printers for use in the casino market.
+ENVIRONMENT
+We are not aware of any material noncompliance with federal, state and
+local provisions that have been enacted or adopted regulating the discharge of
+materials into the environment, or otherwise relating to the protection of the
+environment.
+EMPLOYEES
+As of February 25, 2005, TransAct Technologies and our subsidiaries
+employed 197 persons, of whom 160 were full-time and 37 were temporary
+employees. None of our employees is unionized, and we consider our relationships
+with our employees to be good.
+4
+FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS
+We have foreign operations primarily from TransAct Technologies Ltd., a
+wholly-owned subsidiary located in the United Kingdom, which had sales to its
+customers of $1,000,000, $1,068,000, and $738,000, (primarily to Fujitsu for
+sales and service of printers used in the British Post Office) in 2004, 2003 and
+2002, respectively. We had export sales from our domestic operations of
+approximately $5,423,000, $3,663,000 and $3,968,000 in 2004, 2003 and 2002,
+respectively. Total international sales, which include sales from our foreign
+subsidiary and export sales from our domestic operations, were approximately
+$6,423,000, $4,731,000 and $4,706,000 in 2004, 2003 and 2002, respectively.
+ADDITIONAL INFORMATION
+We make available free of charge through our internet website,
+WWW.TRANSACT-TECH.COM, our annual report on Form 10-K, quarterly reports on Form
+10-Q, current reports on Form 8-K, and all amendments to those reports as soon
+as reasonably practicable after such material is electronically filed with or
+furnished to the SEC.
+We maintain a Code of Business Conduct that includes our code of ethics
+that is applicable to all employees, including our Chief Executive Officer,
+Chief Financial Officer and Controller. This Code, which requires continued
+observance of high ethical standards such as honesty, integrity and compliance
+with the law in the conduct of our business, is available for public access on
+our internet website.
+EXECUTIVE OFFICERS OF THE REGISTRANT
+Pursuant to General Instructions G(3) of Form 10-K, the following list is
+included as an unnumbered item in Part I of this Report in lieu of being
+included in the Proxy Statement for the Annual Meeting of Stockholders to be
+held on May 25, 2005.
+The following is a list of the names and ages of all executive officers of
+the registrant, indicating all positions and offices with the registrant held by
+each such person and each person's principal occupations and employment during
+at least the past five years.
+Name Age Position
+---- --- --------
+Bart C. Shuldman 47 Chairman of the Board, President and Chief Executive
+Officer
+Steven A. DeMartino 35 Executive Vice President, Chief Financial Officer,
+Treasurer and Secretary
+Michael S. Kumpf 55 Executive Vice President - Engineering
+BART C. SHULDMAN has been Chief Executive Officer, President and a Director
+of the Company since its formation in June 1996. Previously, Mr. Shuldman served
+as President of Magnetec and later the combined operations of Magnetec and
+Ithaca from August 1993 until June 1996. In February 2001, Mr. Shuldman was
+elected Chairman of the Board.
+STEVEN A. DEMARTINO was named as TransAct's Executive Vice President, Chief
+Financial Officer, Treasurer and Secretary on June 1, 2004. Previously, Mr.
+DeMartino served as Senior Vice President, Finance and Information Technology
+from October 2001 to May 2004, Vice President and Corporate Controller from
+January 1998 to October 2001, and Corporate Controller from August 1996 to
+December 1997. Prior to joining TransAct, Mr. DeMartino was a self-employed
+financial consultant from May 1996 to August 1996. Prior thereto, Mr. DeMartino
+served as Controller of Copart, Inc. from September 1994 to May 1996. Mr.
+DeMartino is a certified public accountant.
+MICHAEL S. KUMPF was appointed Executive Vice President of Engineering in
+March 2002. He served as Senior Vice President, Engineering from June 1996 to
+March 2002 and Vice President, Engineering of Ithaca from 1991 until June 1996.
+5
+ITEM 2. PROPERTIES.
+Our operations are currently conducted at the facilities described below.
+In January 2005, we entered a five-year lease for a 13,700 square foot facility
+in Las Vegas, Nevada. The new facility will serve as our global gaming and
+lottery headquarters and will house our west coast POS and Banking sales unit.
+The facility will also serve as the our new western region service center and
+will provide service to our growing base of installed printers in the region.
+In February 2001, we announced plans to establish a global engineering and
+manufacturing center at our Ithaca, NY facility. As part of this strategic
+decision, we consolidated all manufacturing and engineering from our
+Wallingford, CT facility into our existing Ithaca, NY facility. Our corporate
+headquarters and our eastern region service center are still located in the
+Wallingford, CT facility. Although we are actively seeking to sublease our
+Wallingford, CT facility, in 2003 we determined that because of the continuing
+regional decline in the commercial real estate market, it was unlikely that we
+would be able to sublease our facility. As such, we increased our restructuring
+accrual at December 31, 2003 to provide for the remaining non-cancelable lease
+payments and other related costs for this facility through the expiration of the
+lease (March 31, 2008). The restructuring accrual was further adjusted at
+December 31, 2004 based on the estimated facility costs through the end of the
+lease.
+Size Owned or Lease Expiration
+Location Operations Conducted (Approx. Sq. Ft.) Leased Date
+-------- -------------------- ----------------- -------- ----------------
+Wallingford, Connecticut Executive offices and 49,000 Leased March 31, 2008
+service center
+Ithaca, New York Manufacturing facility 74,000 Leased June 30, 2007
+Las Vegas, Nevada Service center and gaming 13,600 Leased January 31, 2010
+and lottery sales
+headquarters
+Doncaster, United Kingdom Sales office and service 2,800 Leased August 1, 2009
+center
+Georgia (2), Missouri, New York Five regional sales 750 Leased Various
+and Texas offices
+We believe that our facilities generally are in good condition, adequately
+maintained and suitable for their present and currently contemplated uses.
+ITEM 3. LEGAL PROCEEDINGS.
+None.
+ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
+No matters were submitted to a vote of security holders during the last
+quarter of the year covered by this report.
+6
+PART II
+ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
+ISSUER PURCHASES OF EQUITY SECURITIES.
+Our common stock is traded on the Nasdaq National Market under the symbol
+TACT. Prior to September 2004, our stock was traded on the Nasdaq SmallCap
+Market. In April 2004, we completed a three-for-two stock split of our common
+stock effected in the form of a stock dividend. All amounts in the table below
+reflect the stock split on a retroactive basis. As of February 25, 2005, there
+were 669 holders of record of the common stock. The high and low sales bid
+quotations of the common stock reported during each quarter of the years ended
+December 31, 2004 and 2003 were as follows:
+Year Ended Year Ended
+December 31, 2004 December 31, 2003
+----------------- -----------------
+High Low High Low
+------ ------ ------ ------
+First Quarter $26.00 $13.67 $ 3.78 $ 2.60
+Second Quarter 34.00 19.13 9.26 3.37
+Third Quarter 32.89 15.00 11.93 7.83
+90
+Fourth Quarter 29.28 19.30 18.27 10.55
+No dividends on common stock have been declared except for a cash dividend
+paid in lieu of fractional shares resulting from our three-for-two stock split
+in April 2005, and we do not anticipate declaring dividends in the foreseeable
+future. Our credit agreement with Banknorth N.A. restricts the payment of cash
+dividends on our common stock for the term of the agreement.
+ITEM 6. SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
+The following is summarized from our audited financial statements of the past
+five years:
+Year Ended December 31,
+-----------------------------------------------
+2004 2003 2002 2001 2000
+------- ------- ------- ------- -------
+Statement of Operations Data:
+Net sales $59,847 $52,098 $39,461 $43,974 $53,720
+Gross profit 22,042 15,543 10,216 9,774 14,142
+Operating expenses 13,591 12,855 11,200 17,060 14,296
+Operating income (loss) 8,451 2,688 (984) (7,286) (154)
+Net income (loss) 5,458 1,528 (692) (4,922) (344)
+Net income (loss) available
+to common shareholders 5,236 1,087 (1,050) (5,280) (664)
+Net income (loss) per share:
+Basic 0.55 0.13 (0.12) (0.63) (0.08)
+Diluted 0.51 0.12 (0.12) (0.63) (0.08)
+December 31,
+-----------------------------------------------
+2004 2003 2002 2001 2000
+------- ------- ------- ------- -------
+Balance Sheet Data:
+Total assets $34,099 $26,361 $22,030 $25,791 $27,619
+Working capital 20,325 11,787 8,798 8,366 13,631
+Long-term debt, excluding
+current portion -- 330 2,791 5,344 5,944
+Redeemable convertible
+preferred stock -- 3,902 3,824 3,746 3,668
+Shareholders' equity 23,715 10,347 6,545 7,315 12,191
+7
+ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
+OF OPERATIONS.
+This discussion should be read in conjunction with the Consolidated
+Financial Statements and notes thereto.
+FORWARD LOOKING STATEMENTS
+Certain statements included in this report, including without limitation
+statements in this Management's Discussion and Analysis of Financial Condition
+and Results of Operations, which are not historical facts are "forward-looking
+statements" within the meaning of Section 27A of the Securities Act of 1933, as
+amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
+Forward-looking statements generally can be identified by the use of
+forward-looking terminology, such as "may", "will", "expect", "intend",
+"estimate", "anticipate", "believe", "project" or "continue" or the negative
+thereof or other similar words. All forward-looking statements involve risks and
+uncertainties, including, but not limited to, customer acceptance and market
+share gains, both domestically and internationally, in the face of substantial
+competition from competitors that have broader lines of products and greater
+financial resources; introduction of new products into the marketplace by
+competitors; successful product development; dependence on significant
+customers; dependence on significant vendors; the ability to recruit and retain
+quality employees as we grow; dependence on third parties for sales outside the
+United States including Australia, New Zealand, Europe and Latin America;
+economic and political conditions in the United States, Australia, New Zealand,
+Europe and Latin America; marketplace acceptance of new products; availability
+of third-party components at reasonable prices; and the absence of price wars or
+other significant pricing pressures affecting our products in the United States
+and abroad. Actual results may differ materially from those discussed in, or
+implied by, the forward-looking statements. The forward-looking statements speak
+only as of the date of this report and we assume no duty to update them to
+reflect new, changing or unanticipated events or circumstances.
+OVERVIEW
+The year 2004 was a successful year for TransAct, highlighted by the
+following achievements:
+- Increased revenues by $7,749,000, or 15% over 2003
+- Increased operating income by $5,763,000 over 2003
+- Reported record net income of $5,458,000 and diluted earnings per
+share of $0.51
+- Repaid all our outstanding bank debt
+- Finished the year with $8.6 million of cash and cash equivalents
+We continue to focus on sales growth in our two core markets, point of sale
+("POS") and banking and gaming and lottery, and in our newly created TransAct
+Services Group, to drive increased profitability. During 2004, our total net
+sales grew by 15% to approximately $59,847,000. See the table below for a
+breakdown of our sales.
+Change
+Year ended Year ended -------------
+(In thousands) December 31, 2004 December 31, 2003 $ %
+-------------- ----------------- ----------------- ------ ----
+Printers - POS and banking $17,664 29.5% $14,027 26.9% $3,637 25.9%
+Printers - Gaming and lottery 32,144 53.7% 29,528 56.7% 2,616 8.9%
+------- ----- ------- ----- ------
+Subtotal - printers 49,808 83.2% 43,555 83.6% 6,253 14.4%
+Services and consumables 10,039 16.8% 8,543 16.4% 1,496 17.5%
+------- ----- ------- ----- ------
+Total net sales $59,847 100.0% $52,098 100.0% $7,749 14.9%
+======= ===== ======= ===== ======
+We experienced substantial growth in the POS and banking market in 2004,
+primarily in the U.S., despite continued overall economic weakness. We expect
+this upward trend to continue in the POS and banking market during 2005,
+although mostly in the second half of 2005. Our POS and banking printer sales
+increased by 26% to $17,664,000 due primarily to growing sales of our POSjet(R)
+and Bankjet(R) lines of inkjet printers. During 2003, we announced wins from two
+major financial services companies for shipments of over 19,000 Bankjet(R)
+printers to upgrade bank teller applications, which we began to ship in 2003 and
+substantially completed shipping during 2004. Given our success in 2003 and
+2004, and in light of the renewed focus we see banks placing on branch banking,
+we plan to more proactively seek opportunities with other banks and credit
+unions for upgrading bank teller systems, if and when they arise. In 2005, we
+also plan to add two new regional sales people, broaden our product portfolio
+with the planned launch of two new products, and increase our focus on selling
+through our distribution and reseller channels. With the global POS printer
+market of approximately $800 million, we have many opportunities for market
+share gains, primarily through increasing and enhancing our product portfolio,
+increasing geographic coverage, and growing our customer base.
+8
+Our focus in the gaming and lottery market is two-fold. On the lottery
+side, we continue to hold a leading position based on our long-term purchase
+agreement with GTECH Corporation ("GTECH"), our largest customer and the world's
+largest provider of lottery terminals, with an approximate 70% market share.
+GTECH has been our customer since 1995, and we continue to maintain a good
+relationship with them. Currently, we fulfill substantially all of GTECH's
+printer requirements for lottery terminal installations and upgrades. During
+2004, total sales to GTECH were approximately $9,474,000, compared to $9,766,000
+in 2003, representing a decrease of approximately 3 percentage points of total
+revenue from 2003. Based on existing orders and expected future demand for our
+lottery printers based on input from GTECH, we expect overall sales to GTECH in
+2005 to be modestly higher than the 2004 level. Our sales to GTECH each year are
+directly dependent on the timing and number of new and upgraded lottery terminal
+installations GTECH performs. Our sales to GTECH are not indicative of GTECH's
+overall business or revenue.
+On the gaming side, our focus lies primarily in supplying printers for use
+in slot machines in casinos and racetracks. During 2004, we continued to benefit
+from the conversion of traditional coin-issuing slot machines to ticket-issuing
+slot machines by casinos and racetracks across the United States. As a result,
+sales of our gaming printers increased by 16%. We expect this trend to continue
+into 2005, as casinos continue to expand and convert their slot machines, and
+state governments gain approval for slot machines at racetracks. In addition, we
+expect to gain market share in the United States due to our relationship with
+IGT, the world's largest slot machine manufacturer, and the launch of our new
+Epic950(TM) thermal casino printer. Overall, the adoption and rollout of the
+ticket-in/ticket-out initiative continues, and we expect a substantial portion
+of the over 700,000 slot machines in North America to be fitted with a printer
+within the next two to three years. Beginning in 2005, we expect growth from
+gaming sales internationally as well, as markets such as Europe and Australia
+begin to adopt ticket printing for their slot machines. We also plan to broaden
+our sales coverage in the gaming and lottery market during 2005 to exploit the
+rollout of the ticket-in/ticket-out initiative with the addition of two new
+sales people.
+Our services and consumables products, which include the repair of printers
+and the sale of spare parts and consumables (paper, ribbons and inkjet
+cartridges), offer a substantial growth opportunity and recurring revenue stream
+for TransAct. Our services and consumables products revenue has grown to
+$10,039,000, 16.8% of net sales in 2004, an increase of over 17% from 2003.
+During 2005, we plan to more actively promote and dedicate increased resources
+to our services and consumables products in an effort to substantially increase
+the volume of sales. We have added four dedicated sales people, implemented a
+specialized software system, and improved our sales lead tracking and
+prospecting processes to enable us to better cross-sell our services and
+consumables products to our customers. We also have established (in early 2005)
+two new service centers - a western region service center in Las Vegas, NV and
+an eastern region service center in Wallingford, CT - to provide national
+service coverage to our customers. In addition, we believe that the increasing
+sales of our inkjet printers will lead to a growing installed base that will
+drive substantially higher inkjet cartridge sales in 2005 and beyond.
+Operationally, gross margin and operating margin were significantly
+improved and reached record highs in 2004. However, we expect to strategically
+invest $2.5 million in the growth elements of our business during 2005. We
+expect that this investment will accelerate our revenue growth and with our
+operating leverage, should lead to a doubling of revenue and a tripling of
+diluted earnings per share from 2004 to 2008. We anticipate that this investment
+will be made across three areas: an incremental $1.2 million investment in sales
+and marketing; a $400,000 incremental investment in engineering expenses for the
+development of new products, four of which we expect to launch in 2005; and a
+$900,000 investment in operations expenses related to the opening and staffing
+of our new service center in Las Vegas and the hiring of additional services
+personnel in our Wallingford service center, as we broaden our reach and
+aggressively pursue the high margin opportunities of the TransAct Services
+business.
+We reported both record net income and earnings per share (diluted) for
+2004. We also generated sufficient cash during 2004 to repay all outstanding
+borrowings under our credit facility, and accumulated over $8.6 million of cash
+on our balance sheet as of December 31, 2004.
+9
+CRITICAL ACCOUNTING POLICIES AND ESTIMATES
+Our discussion and analysis of our financial condition and results of
+operations are based upon our consolidated financial statements, which have been
+prepared by us in accordance with accounting principles generally accepted in
+the United States of America. These principles require the use of estimates,
+judgments and assumptions. Such estimates and judgments are based upon
+historical experience and certain assumptions that are believed to be reasonable
+in the particular circumstances. Those judgments affect both balance sheet items
+and income statement categories. Our estimates include those related to revenue
+recognition, allowance for doubtful accounts, inventory obsolescence, the
+valuation of deferred tax assets and liabilities, goodwill impairment, warranty
+obligations, restructuring accruals, contingent liabilities and foreign currency
+translation. We evaluate our assumptions on an ongoing basis by comparing actual
+results with our estimates. Actual results may differ from the original
+estimates. The following accounting policies are those that we believe to be
+most critical in the preparation of our financial statements.
+REVENUE RECOGNITION - Our typical contracts include the sale of printers,
+which are sometimes accompanied by separately-priced extended warranty
+contracts. We also sell spare parts, consumables, and other repair services
+(sometimes pursuant to multi-year product maintenance contracts), which are not
+included in the original printer sale and are ordered by the customer as needed.
+We recognize revenue pursuant to the guidance within SAB 104, "Revenue
+Recognition". Specifically, revenue is recognized when evidence of an
+arrangement exists, delivery (based on shipping terms which are generally FOB
+shipping point) has occurred, the selling price is fixed and determinable, and
+collectibility is reasonably assured. We provide for an estimate of product
+returns and price protection based on historical experience at the time of
+revenue recognition.
+Revenue related to extended warranty and product maintenance contracts is
+recognized pursuant to FASB Technical Bulletin 90-1 ("FTB 90-1"), "Accounting
+for Separately Priced Extended Warranty and Product Maintenance Contracts."
+Pursuant to FTB 90-1, revenue related to separately priced product maintenance
+contract is deferred and recognized over the term of the maintenance period. We
+record deferred revenue for amounts received from customers for maintenance
+contracts prior to the maintenance period.
+Our customers have the right to return products that do not function
+properly within a limited time after delivery. We monitor and track product
+returns and record a provision for the estimated future returns based on
+historical experience. Returns have historically been within expectations and
+the provisions established, but we cannot guarantee that we will continue to
+experience return rates consistent with historical patterns.
+We offer some of our customers price protection as an incentive to carry
+inventory of our product. These price protection plans provide that if we lower
+prices, we will credit them for the price decrease on inventory they hold. Our
+customers typically carry limited amounts of inventory, and we infrequently
+lower prices on current products. As a result, the amounts paid under these
+plans have been minimal. However, we cannot guarantee that this minimal level
+will continue.
+ACCOUNTS RECEIVABLE - We have standardized credit granting and review
+policies and procedures for all customer accounts, including: credit reviews of
+all new customer accounts; ongoing credit evaluations of current customers;
+credit limits and payment terms based on available credit information; and
+adjustments to credit limits based upon payment history and the customer's
+current credit worthiness. We also provide an estimate of doubtful accounts
+based on historical experience and specific customer collection issues. Our
+allowance for doubtful accounts as of December 31, 2004 was $175,000, or 1.9% of
+outstanding accounts receivable, which we feel is appropriate considering the
+overall quality of the accounts receivable. While credit losses have
+historically been within expectations and the reserves established, we cannot
+guarantee that our credit loss experience will continue to be consistent with
+historical experience. As of December 31, 2004, we had accounts receivable
+balances due from WMS Gaming, BlueStar (a POS distributor) and GTECH of 18%, 14%
+and 10%, respectively, of the total balance due, and no other customer accounts
+receivable balance exceeded 10%. As of December 31, 2003, we had an accounts
+receivable balance due from Harrah's of 31%, and no other customer accounts
+receivable balance exceeded 10%.
+INVENTORY - Our inventories are valued at the lower of cost or market. We
+assess market value based on historical usage and estimates of future demand.
+Assumptions are reviewed at least quarterly and adjustments are made, as
+necessary, to reflect changed market conditions. Should circumstances change and
+we determine that additional inventory is subject to obsolescence, additional
+write-downs of inventory could result in a charge to income. As of December 31,
+2004, our net inventory included a reserve of $2,010,000, or 19.9% of gross
+inventory to write inventory down to lower of cost or market. Reserves remained
+at approximately the same level as in 2003.
+10
+INCOME TAXES - In preparing our consolidated financial statements, we are
+required to estimate income taxes in each of the jurisdictions in which we
+operate. This involves estimating the actual current tax exposure together with
+assessing temporary differences between the tax basis of certain assets and
+liabilities and their reported amounts in the financial statements, as well as
+net operating losses, tax credits and other carryforwards. These differences
+result in deferred tax assets and liabilities, which are included within our
+consolidated balance sheets. We then assess the likelihood that the deferred tax
+assets will be realized from future taxable income, and to the extent that we
+believe that realization is not likely, we establish a valuation allowance.
+Significant judgment is required in determining the provision for income
+taxes and, in particular, any valuation allowance recorded against our deferred
+tax assets. On a quarterly basis, we evaluate the recoverability of our deferred
+tax assets based upon historical results and forecasted taxable income over
+future years, and match this forecast against the basis differences, deductions
+available in future years and the limitations allowed for net operating loss and
+tax credit carryforwards to ensure that there is adequate support for the
+realization of the deferred tax assets. While we have considered future taxable
+income and ongoing prudent and feasible tax planning strategies in assessing the
+need for the valuation allowance, in the event we were to determine that we
+would not be able to realize all or part of our deferred tax assets in the
+future, an adjustment to the deferred tax assets would be charged as a reduction
+to income in the period such determination was made. Likewise, should we
+determine that we would be able to realize future deferred tax assets in excess
+of its net recorded amount, an adjustment to the deferred tax assets would
+increase net income in the period such determination was made.
+As of December 31, 2004, we recorded a net deferred tax asset of
+approximately $2,643,000 and a valuation allowance of $193,000, primarily on a
+portion of our foreign tax credits. We will need to recognize approximately $7.5
+million in future taxable income in order to realize all of our deferred tax
+assets at December 31, 2004. Based on our projection of future taxable income,
+no additional valuation allowance is considered necessary. Should circumstances
+change and we determine that some or all of the deferred taxes would not be
+realized, a valuation allowance would be recorded, resulting in a charge to
+income in the period such determination is made.
+GOODWILL - We test the impairment of goodwill each year, or more frequently
+if events or changes in circumstances indicate that the carrying value may not
+be recoverable. We completed our last assessment as of December 31, 2004.
+Factors considered that may trigger an impairment review are: significant
+underperformance relative to expected historical or projected future operating
+results; significant changes in the manner of use of acquired assets or the
+strategy for the overall business; significant negative industry or economic
+trends; and significant decline in market capitalization relative to net book
+value. Goodwill amounted to $1,469,000 at December 31, 2004 and we have
+determined that no goodwill impairment has occurred.
+RESTRUCTURING - In February 2001, we announced plans to establish a global
+engineering and manufacturing center at our Ithaca, NY facility. As part of this
+strategic decision, we undertook a plan to consolidate all manufacturing and
+engineering into our existing Ithaca, NY facility and close our Wallingford, CT
+manufacturing facility (the "Consolidation"). However, our Company headquarters
+and a service center remain in Wallingford, CT. Our technology shift to inkjet
+and thermal printing from dot matrix impact printing dramatically reduced the
+labor content in our printers, and therefore, lowered the required production
+capacity. As of December 31, 2001, we successfully transferred substantially all
+our Wallingford product lines to Ithaca, NY, with the exception of a service
+center that remains in Connecticut. The closing of the Wallingford manufacturing
+facility resulted in the termination of employment of approximately 70
+production, administrative and management employees.
+In connection with the Consolidation of manufacturing facilities in 2001,
+we recorded significant accruals. Through December 31, 2004, we have incurred
+approximately $6.0 million of expenses associated with the Consolidation,
+including severance pay, stay bonuses, employee benefits, moving expenses,
+non-cancelable lease payments, and other costs, of which approximately ($0.2
+million), $1.1 million and $1.0 million were recognized in 2004, 2003 and 2002,
+respectively. Management has made reasonable estimates of such costs and
+expenses. However, if actual costs differ from the estimates, charges or credits
+to income could result in the period the adjustments are determined. We changed
+our estimate of the restructuring accrual related to the Wallingford, CT
+facility resulting in additional restructuring expense in 2002 and 2003, and a
+reversal of restructuring expense in 2004. We do not expect to incur any
+additional restructuring expenses related to the Consolidation. See the
+"Liquidity and Capital Resources" section for a discussion of the expected
+impact of the Consolidation on our future results of operations and cash flows.
+11
+WARRANTY - We generally warranty our products for up to 24 months and
+record the estimated cost of such product warranties at the time the sale is
+recorded. Estimated warranty costs are based upon actual past experience of
+product returns and the related estimated cost of labor and material to make the
+necessary repairs. If actual future product return rates or the actual costs of
+material and labor differ from the estimates, adjustments to the accrued
+warranty liability and related warranty expense would be made.
+CONTINGENCIES - We record an estimated liability related to contingencies
+based on our estimates of the probable outcomes pursuant to FAS 5. On a
+quarterly basis, we assess the potential liability related to pending
+litigation, audits and other contingencies and confirm or revise estimates and
+reserves as appropriate.
+ACCUMULATED OTHER COMPREHENSIVE INCOME - Stockholders' equity contains
+certain items classified as other comprehensive income, including foreign
+currency translation adjustments related to our non-U.S. subsidiary that has a
+designated functional currency other than the U.S. dollar. We are required to
+translate the subsidiary functional currency financial statements to U.S.
+dollars using a combination of historical, month-end and weighted average
+foreign exchange rates. This combination of rates creates the foreign currency
+translation adjustments component of other comprehensive income.
+(A) RESULTS OF OPERATIONS
+(I) YEAR ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED DECEMBER 31, 2003
+NET SALES. Net sales, which include printer sales and sales of spare parts,
+consumables and repair services, by market for the years ended December 31, 2004
+and 2003 were as follows:
+Change
+Year ended Year ended -------------
+(In thousands) December 31, 2004 December 31, 2003 $ %
+-------------- ----------------- ----------------- ------ ----
+Point of sale and banking $25,124 42.0% $20,745 39.8% $4,379 21.1%
+Gaming and lottery 34,723 58.0% 31,353 60.2% 3,370 10.7%
+------- ----- ------- ----- ------
+$59,847 100.0% $52,098 100.0% $7,749 14.9%
+======= ===== ======= ===== ======
+International* $ 6,423 10.7% $ 4,731 9.1% $1,692 35.8%
+======= ===== ======= ===== ======
+* International sales do not include sales of printers made to domestic
+distributors or other domestic customers who in turn ship those printers to
+international destinations.
+Net sales for 2004 increased $7,749,000, or 15%, from 2003 due to higher
+shipments into both our POS and banking and gaming and lottery market. Overall,
+international sales increased 36% due largely to increased sales of our casino
+printers into Europe and Australia.
+Point of sale and banking: Sales of our POS products worldwide increased
+approximately $4,379,000, or 21%, from 2003.
+Change
+Year ended Year ended -------------
+(In thousands) December 31, 2004 December 31, 2003 $ %
+-------------- ----------------- ----------------- ------ ----
+Domestic $21,010 83.6% $16,510 79.6% $4,500 27.3%
+International 4,114 16.4% 4,235 20.4% (121) (2.9%)
+------- ----- ------- ----- ------
+$25,124 100.0% $20,745 100.0% $4,379 21.1%
+======= ===== ======= ===== ======
+Domestic POS revenue increased 27% due largely to significantly higher
+sales of our POSjet(R) and BANKjet(R) lines of inkjet printers, and increasing
+sales of our iTherm(R)280 thermal printer. Sales of inkjet printers increased by
+approximately 48% in 2004 compared to 2003, as we shipped our Bankjet(R) line of
+inkjet printers to two major financial services companies to upgrade bank teller
+stations. We completed almost all shipments related to the upgrade during 2004.
+In addition, we reported higher service, spare parts and consumables revenue in
+2004 compared to 2003.
+12
+International POS and banking product revenue decreased by approximately 3%
+due primarily to sales of our thermal fiscal printer in Europe in 2003 that did
+not repeat in 2004. We discontinued our thermal fiscal printer in 2004 and do
+not expect any future shipments.
+We expect sales into the POS market for the first quarter of 2005 to be
+consistent with those reported for the fourth quarter of 2004. However, we
+expect full year sales for 2005 to be modestly higher than those reported during
+2004, with more significant growth in the second half of 2005.Gaming and
+lottery: Sales of our gaming and lottery products increased by $3,370,000, or
+11%, from 2003, primarily due to significantly stronger sales of our slot
+machine and video lottery terminal ("VLT") printers, somewhat offset by lower
+sales of lottery printers to GTECH.
+Change
+Year ended Year ended ----------------
+(In thousands) December 31, 2004 December 31, 2003 $ %
+-------------- ----------------- ----------------- ------ -----
+Domestic $32,414 93.4% $30,857 98.4% $1,557 5.0%
+International 2,309 6.6% 496 1.6% 1,813 365.5%
+------- ----- ------- ----- ------
+$34,723 100.0% $31,353 100.0% $3,370 10.7%
+======= ===== ======= ===== ======
+Change
+Year ended Year ended ----------------
+(In thousands) December 31, 2004 December 31, 2003 $ %
+-------------- ----------------- ----------------- ------ ----
+Gaming $25,249 72.7% $21,587 68.9% $3,662 17.0%
+Lottery 9,474 27.3% 9,766 31.1% (292) (3.0%)
+------- ----- ------- ----- ------
+$34,723 100.0% $31,353 100.0% $3,370 10.7%
+======= ===== ======= ===== ======
+Sales of our gaming products, which include video lottery terminal ("VLT")
+and slot machine printers used in casinos and racetracks ("racinos"), and
+related spare parts and repairs, increased 17% from 2003. This increase resulted
+primarily from increased installations of our casino printers, primarily for use
+in slot machines at casinos throughout North America, Europe and Australia that
+print receipts instead of issuing coins ("ticket-in, ticket-out" or "TITO")
+Although we expect the softness in domestic casino printer sales that we
+experienced in December 2004 to continue into the first half of 2005, we
+expect sales or our gaming products to increase in 2005 compared to 2004 as IGT
+integrates our new Epic 950(TM) printer and casinos and other venues in Europe
+and Australia accelerate the adoption of ticket printing in the second half of
+2005.
+Total sales to GTECH, which included impact and thermal on-line lottery
+printers, impact in-lane lottery printers (primarily found at checkout counters
+of certain grocery stores), and spare parts revenue, decreased by 3% to
+approximately $9,474,000, or 16% of net sales, in 2004, compared to $9,766,000,
+or 19% of net sales, in 2003.
+See the table below for an analysis of revenues from GTECH.
+Year ended
+December 31,
+----------------
+(In thousands, except %) 2004 2003
+------------------------ ------ -------
+Impact on-line lottery printers and spare parts $3,466 $1,596
+Thermal on-line lottery printers 6,008 8,000
+In-lane lottery printers -- 170
+------ ------
+$9,474 $9,766
+====== ======
+% of consolidated net sales 16% 19%
+In July 2002, we entered into a 5-year agreement with GTECH to provide a
+newly designed thermal on-line lottery printer. We shipped approximately
+$6,008,000 and $8,000,000 of these printers during 2004 and 2003, respectively.
+Based on existing orders and expected future demand based on input from GTECH,
+we expect overall sales to GTECH in 2005 to be modestly higher than the 2004
+level. Our sales to GTECH each year are directly dependent on the timing and
+number of new and upgraded lottery terminal installations GTECH performs. Our
+sales to GTECH are not indicative of GTECH's overall business or revenue.
+Sales to GTECH of impact on-line lottery printers and spare parts totaled
+approximately $3,466,000 in 2004, compared to $1,596,000 in 2003. Because our
+thermal on-line lottery printer is a replacement for our impact on-line lottery
+printer, we do not expect any further shipments of impact on-line lottery
+printers to GTECH beyond 2004. However, we do expect to
+13
+continue to sell spare parts to GTECH for the significant remaining installed
+base of impact on-line lottery printers. Shipments of in-lane lottery printers
+totaled approximately $170,000 in 2003, and we made no shipments of such
+printers in 2004. Since sales of in-lane lottery printers are project-oriented,
+we cannot predict if and when future sales may occur.
+International gaming and lottery product sales increased $1,813,000 to
+$2,309,000, from 2003. Such sales represented 7% and less than 2% of total sales
+into our gaming and lottery market during 2004 and 2003, respectively. We
+experienced growth in international gaming revenue in 2004 as markets in Europe
+and Australia begin to adopt and roll out ticket printing in slot machines. We
+expect more substantial growth in 2005, as we expect sales or our gaming
+printers related to the rollout of ticket printing to accelerate in Europe and
+Australia, especially in the second half of 2005.
+GROSS PROFIT. Gross profit is measured as revenue less cost of goods sold.
+Cost of goods sold includes primarily the cost of all raw materials and
+component parts, direct labor, and the associated overhead. Gross profit
+increased by $6,499,000, or 42%, to $22,042,000, and gross margin increased to
+36.8% from 29.8% due primarily to a more favorable sales mix of higher margin
+products and continued reductions in component and sub-component costs in 2004
+compared to 2003. Both gross profit and gross margin for 2004 benefited from a
+substantial increase in the volume of sales (15%) and a more favorable sales
+mix, including increased sales of higher margin gaming and lottery printers in
+2004 compared to 2003. Gross profit in 2003 was impacted by a charge of
+$740,000, or 1.4% of net sales, related to a royalty payable to Seiko Epson for
+past usage of certain technology (see "Contingent Liabilities" in Liquidity and
+Capital Resources). Although we expect gross margin for the first quarter of
+2005 to be substantially lower than the full year 2005 level due to the lower
+expected volume of sales in the quarter, we expect gross margin for 2005 to be
+at approximately the same level as that reported for 2004.
+ENGINEERING AND PRODUCT DEVELOPMENT. Engineering, design and product
+development expenses primarily include salary and payroll related expenses for
+our engineering staff, depreciation and design expenses (including prototype
+printer expense, outside design and testing services and supplies). Such
+expenses increased $439,000, or 19%, to $2,715,000, primarily due to (1)
+compensation related expenses (approximately $100,000) and (2) expenses incurred
+in the fourth quarter of 2004 related to IGT's integration and attainment of
+jurisdictional approvals for our new Epic950(TM) thermal casino printer on all
+of IGT's slot platforms worldwide (the "IGT Integration") (approximately
+$350,000). We expect to incur an additional $150,000 in expenses in the first
+quarter of 2005 related to the IGT Integration. Engineering and product
+development expenses increased as a percentage of net sales to 4.5% from 4.4%,
+primarily due to expenses related to the IGT Integration, largely offset by a
+higher sales volume in 2004 compared to 2003. We expect engineering and product
+development expenses to increase in 2005 as we plan to add staff and utilize
+more contract engineering services to continue increasing product development to
+expand our families of inkjet printers for the POS market and ticket-issuing
+printers for the casino market.
+SELLING AND MARKETING. Selling and marketing expenses primarily include
+salaries and payroll related expenses for our sales and marketing staff, sales
+commissions, travel expenses, expenses associated with the lease of sales
+offices, advertising, trade show expenses and other promotional marketing
+expenses. Selling and marketing expenses increased by $143,000, or 3%, to
+$5,111,000, due primarily to higher recruitment, compensation and travel
+expenses related to additional sales and marketing staff, including expenses
+associated with the opening of our new gaming and lottery headquarters and
+western region service center in Las Vegas, to support our growing gaming
+printer sales (approximately $700,000). Such increases were largely offset by
+lower (1) print advertising and other promotional marketing expense
+(approximately $110,000), (2) sales commissions (approximately $180,000), and
+(3) expenses at our UK facility (approximately $270,000) due largely to a staff
+reduction. Selling and marketing expenses decreased as a percentage of net sales
+to 8.5% from 9.5%, due primarily to higher volume of sales in 2004 compared to
+2003. We expect selling and marketing expenses to increase significantly in
+2005, as we plan to increase and broaden our sales coverage in the POS and
+banking market and the gaming and lottery market with the addition of new sales
+staff and enhanced marketing programs, as well as establish our new TransAct
+Services business unit with a new dedicated sales force and two new service
+centers in Las Vegas, NV and Wallingford, CT. We believe this investment is
+necessary in 2005 to achieve our sales growth strategy for 2005 and beyond.
+14
+GENERAL AND ADMINISTRATIVE. General and administrative expenses primarily
+include: salaries and payroll related expenses for our executive, accounting,
+human resource and information technology staff; expenses for our corporate
+headquarters; professional and legal expenses; and telecommunication expenses.
+General and administrative expenses increased by $1,507,000, or 34%, due largely
+to higher professional expenses, including those related to compliance with the
+Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley"), and additional finance staff (and
+associated recruiting fees) related to Sarbanes Oxley. We incurred approximately
+$650,000 of external expenses directly related to compliance with Sarbanes-Oxley
+during 2004. In addition, during 2004 we expensed approximately $110,000 of
+costs we incurred in conducting due diligence related to our proposed
+acquisition of TPG, Inc., as the proposed acquisition was terminated. We also
+incurred approximately $95,000 of one-time listing fees related to our move back
+onto the Nasdaq National Market from the Nasdaq SmallCap Market. General and
+administrative expenses increased as a percentage of net sales to 10.0% from
+8.6%, due primarily to the factors listed above, partially offset by a higher
+volume of sales in 2004 compared to 2003. We expect general and administrative
+expenses to increase slightly in 2005.
+BUSINESS CONSOLIDATION AND RESTRUCTURING. We recorded a reversal of expense
+of $225,000, and a charge of $1,128,000 related to the Consolidation in 2004 and
+2003, respectively. These amounts were substantially the result of revisions to
+our original estimate for non-cancelable lease payments included in the
+restructuring accrual. As of December 31, 2004, we have provided for the
+estimated remaining non-cancelable lease payments and other related costs for
+this facility through the expiration of the lease (March 31, 2008).
+We do not expect to incur any further restructuring expenses related to the
+Consolidation. See "Consolidation Expenses" in Liquidity and Capital Resources.
+OPERATING INCOME. During 2004, we reported operating income of $8,451,000,
+or 14.1% of net sales, compared to $2,688,000, or 5.2% of net sales, in 2003.
+The significant increase in our operating income and operating margin was due
+largely to higher gross profit on higher sales, partially offset by higher
+operating expenses (primarily general and administrative expenses) in 2004
+compared to 2003. Operating income for 2004 included a reversal of expense
+related to the Consolidation ($225,000) and a charge related to the IGT
+Integration ($350,000). Operating income for 2003 included a charge related to
+the Consolidation ($1,128,000) and a royalty payable to Seiko-Epson for past
+usage of certain technology ($740,000).
+INTEREST. We recorded net interest income of $4,000 in 2004 compared to net
+interest expense of $210,000 in 2003, as we repaid all outstanding revolving
+borrowings at December 31, 2003 and the remaining outstanding balance on our
+term loan in January 2004. We do not expect to draw on our revolving borrowings
+as we expect to continue to generate cash from operations during 2005. During
+2005, we expect to report increasing net interest income as our cash balance
+increases throughout the year. See "Liquidity and Capital Resources" below for
+more information.
+WRITE-OFF OF DEFERRED FINANCING COSTS. In August 2003, we entered into a
+new credit facility with Banknorth N.A., which replaced an existing facility
+with LaSalle Business Credit, Inc. ("LaSalle"). We recorded a charge of
+approximately $103,000 in the third quarter of 2003 related to the write-off of
+unamortized deferred financing costs from our prior credit facility with
+LaSalle. Our new credit facility with Banknorth contains more favorable terms
+than those contained in our prior facility with LaSalle.
+OTHER EXPENSE. Other expense for 2004 and 2003 primarily included
+transaction exchange losses recorded by our UK subsidiary due to the
+strengthening of the British pound against the U.S. dollar.
+INCOME TAXES. We recorded an income tax provision of $2,979,000 and
+$725,000 in 2004 and 2003, respectively, at an effective rate of 35.3% and
+32.2%, respectively. The lower effective rate in 2003 reflects a favorable
+outcome of a state tax audit, benefits from certain tax credits, and utilization
+of state net operating loss carryforwards not previously anticipated. We expect
+to record income taxes at an effective rate of approximately 36.5% during 2005.
+15
+NET INCOME. We reported net income in 2004 of $5,458,000, or $0.51 per
+diluted share compared to net income of $1,528,000, or $0.12 per diluted share
+in 2003. Earnings per share have been retroactively restated for adoption of
+EITF 03-06 "Participating Securities and the Two-Class Method under FASB
+Statement No. 128, Earnings Per Share", which requires the two-class method of
+computing earnings per share. The two-class method is an earnings allocation
+formula that determines earnings per share for common stock and participating
+securities based upon an allocation of earnings as if all of the earnings for
+the period had been distributed in accordance with participation rights on
+undistributed earnings. Dividends paid in 2004 were approximately $86,000, and
+there will be no dividends or allocation of earnings to preferred shareholders
+beyond 2004, as the preferred stock was converted to common stock in April 2004.
+All share and per share amounts reflect the April 2004 stock split on a
+retroactive basis. In December 2004, the FASB issued Accounting Standard No. 123
+(revised 2004), "Share-Based Payment" ("FAS123R"), which requires the
+recognition of compensation expense for share-based compensation (including
+shares issued under employee stock purchase plans, stock options and restricted
+stock) over the period in which the share-based compensation vests. We expect
+the adoption of FAS 123R to have a material impact on our results of operations
+and earnings per share.
+(II) YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002
+NET SALES. Net sales, which include printer sales and sales of spare parts,
+consumables and repair services, by market for the years ended December 31, 2003
+and 2002 were as follows:
+Change
+Year ended Year ended -------------
+(In thousands) December 31, 2003 December 31, 2002 $ %
+-------------- ----------------- ----------------- ------- ---
+Point of sale and banking $20,745 39.8% $18,475 46.8% $ 2,270 12%
+Gaming and lottery 31,353 60.2% 20,986 53.2% 10,367 49%
+------- ----- ------- ----- -------
+$52,098 100.0% $39,461 100.0% $12,637 32%
+======= ===== ======= ===== =======
+International $ 4,731 9.1% $ 4,706 11.9% $ 25 1%
+======= ===== ======= ===== =======
+Net sales for 2003 increased $12,637,000, or 32%, from 2002 largely due to
+significantly higher shipments into our gaming and lottery market, as well as
+increased shipments into our POS market. Overall, international sales remained
+relatively flat in 2003 compared to 2002.
+Point of sale and banking: Sales of our POS products worldwide increased
+approximately $2,270,000, or 12%, from 2002.
+Change
+Year ended Year ended -----------
+(In thousands) December 31, 2003 December 31, 2002 $ %
+-------------- ----------------- ----------------- ------ --
+Domestic $16,510 79.6% $14,119 76.4% $2,391 17%
+International 4,235 20.4% 4,356 23.6% (121) (3%)
+------- ----- ------- ----- ------
+$20,745 100.0% $18,475 100.0% $2,270 12%
+======= ===== ======= ===== ======
+Domestic POS revenue increased 17% due largely to significantly higher
+sales of our POSjet(R) and Bankjet(R) lines of inkjet printers. Sales of such
+inkjet printers increased by approximately 187% in 2003 compared to 2002. The
+overall increase in domestic POS revenue is largely attributable to (1)
+shipments of our Bankjet(R) line of inkjet printers to two major financial
+services companies to upgrade bank teller stations, (2) increased shipments of
+our POSjet(R) line of inkjet printers, including shipments to one of the world's
+largest casual dining restaurant chains for use in their food and beverage
+service operations, and (3) significantly higher service, spare parts and
+consumables (mostly replacement inkjet cartridges) revenue.
+International POS revenue decreased 3% due primarily to lower sales of our
+thermal fiscal printers in Europe (approximately $800,000). Lower thermal fiscal
+printer sales were largely offset by (1) higher sales of printers (approximately
+$300,000) through our expanding network of international distributors and (2)
+higher service, spare parts and consumables revenue (approximately $400,000),
+largely resulting from a service contract related to printers shipped for the
+British Post Office in prior years. Such service contract expires in the second
+quarter of 2005, and provides quarterly revenue of approximately $250,000.
+16
+Gaming and lottery: Sales of our gaming and lottery products increased by
+$10,367,000, or 49%, from 2002, primarily due to significantly stronger sales of
+our slot machine and video lottery terminal ("VLT") printers, somewhat offset by
+lower sales of lottery printers to GTECH.
+Change
+Year ended Year ended -------------
+(In thousands) December 31, 2003 December 31, 2002 $ %
+-------------- ----------------- ----------------- ------- ---
+Domestic $30,857 98.4% $20,636 98.3% $10,221 50%
+International 496 1.6% 350 1.7% 146 42%
+------- ----- ------- ----- -------
+$31,353 100.0% $20,986 100.0% $10,367 49%
+======= ===== ======= ===== =======
+Change
+Year ended Year ended -------------
+(In thousands) December 31, 2003 December 31, 2002 $ %
+-------------- ----------------- ----------------- ------- ---
+Gaming $21,587 68.9% $10,277 49.0% $11,310 110%
+Lottery 9,766 31.4% 10,709 51.0% (943) (9%)
+------- ----- ------- ----- -------
+$31,353 100.0% $20,986 100.0% $10,367 49%
+======= ===== ======= ===== =======
+Sales of our gaming products, which include video lottery terminal ("VLT")
+and slot machine printers used in casinos and racetracks ("racinos"), and
+related spare parts and repairs, more than doubled from 2002. This increase
+resulted primarily from significantly increased installations of our casino
+printers, primarily for use in slot machines at casinos throughout North America
+that print receipts instead of issuing coins ("ticket-in, ticket-out" or
+"TITO").
+Total sales to GTECH, which included impact and thermal on-line lottery
+printers, impact in-lane lottery printers (primarily found at checkout counters
+of certain grocery stores), and spare parts revenue, decreased by $943,000 to
+approximately $9,750,000, or 19% of net sales, in 2003, compared to $10,700,000,
+or 27% of net sales, in 2002.
+See the table below for an analysis of revenues from GTECH.
+Year ended
+December 31,
+----------------
+(In thousands, except %) 2003 2002
+------------------------ ------ -------
+Impact on-line lottery printers and spare parts $1,596 $10,032
+Thermal on-line lottery printers 8,000 --
+In-lane lottery printers 170 677
+------ -------
+$9,766 $10,709
+====== =======
+% of consolidated net sales 19% 27%
+Sales to GTECH of impact on-line lottery printers and spare parts totaled
+approximately $1,596,000 in 2003, compared to $10,032,000 in 2002. Shipments of
+in-lane lottery printers totaled approximately $170,000 in 2003 compared to
+$677,000 in 2002. Since sales of in-lane lottery printers are project-oriented,
+we cannot predict if and when future sales may occur. In July 2002, we entered
+into a 5-year agreement with GTECH to provide a newly designed thermal on-line
+lottery printer. During 2003, we shipped approximately $8,000,000 of these
+printers. We made no shipments of thermal on-line lottery printers during 2002.
+International gaming and lottery product sales increased slightly from
+2002. Such sales represented less than 2% of total sales into this market during
+2003 and 2002.
+GROSS PROFIT. Gross profit increased by $5,327,000, or 52%, to $15,543,000,
+and gross margin increased to 29.8% from 25.9%. Both gross profit and gross
+margin for 2003 benefited from a substantial increase in the volume of sales
+(32%) and a more favorable sales mix, including increased sales of higher margin
+gaming and lottery printers in 2003 compared to 2002. Gross profit included a
+charge of $740,000, or 1.4% of net sales, and $160,000, or 0.4% of net sales,
+related to a royalty payment to Seiko-Epson for past usage of certain
+technology. (see "Contingent Liabilities" in Liquidity and Capital Resources) in
+2003 and 2002, respectively.
+17
+ENGINEERING AND PRODUCT DEVELOPMENT. Engineering, design and product
+development expenses primarily include salary and payroll related expenses for
+our engineering staff, depreciation and design expenses (including prototype
+printer expense, outside design and testing services and supplies). Such
+expenses increased $251,000, or 12%, to $2,276,000, primarily due to higher (1)
+compensation related expenses (approximately $80,000) and (2) expenses
+(including travel) related largely to the development of our new thermal on-line
+lottery printer for GTECH and our iTherm(R)280 thermal POS printer ($170,000).
+Engineering and product development expenses decreased as a percentage of net
+sales to 4.4% from 5.1%, primarily due to significantly higher sales volume in
+2003 compared to 2002.
+SELLING AND MARKETING. Selling and marketing expenses primarily include
+salaries and payroll related expenses for our sales and marketing staff, sales
+commissions, travel expenses, expenses associated with the lease of sales
+offices, advertising, trade show expenses and other promotional marketing
+expenses. Selling and marketing expenses increased by $941,000, or 23%, to
+$4,968,000, due primarily to higher (1) sales commissions resulting from
+increased sales in 2003 compared to 2002 (approximately $440,000), (2)
+compensation related expenses, including additional sales staff and expenses
+associated with the opening of a new sales office in Las Vegas, to support our
+growing gaming printer sales (approximately $250,000), (3) selling expenses at
+our UK facility due largely to the unfavorable impact of exchange rates in the
+period (approximately $140,000) and (4) marketing expenses (approximately
+$100,000). Selling and marketing expenses decreased as a percentage of net sales
+to 9.5% from 10.2%, due primarily to higher volume of sales in 2003 compared to
+2002.
+GENERAL AND ADMINISTRATIVE. General and administrative expenses primarily
+include: salaries and payroll related expenses for our executive, accounting,
+human resource and information technology staff; expenses for our corporate
+headquarters; professional and legal expenses; and telecommunication expenses.
+General and administrative expenses increased by $293,000, or 7%, to $4,483,000.
+During 2003 we incurred higher legal expenses (approximately $250,000) related
+to our growing patent portfolio and a royalty payable to Seiko-Epson for past
+usage of certain technology. In addition, incentive compensation increased by
+approximately $130,000. These increases were somewhat offset by staff reductions
+resulting from the Consolidation (approximately $80,000). General and
+administrative expenses decreased as a percentage of net sales to 8.6% from
+10.6%, due primarily to higher volume of sales in 2003 compared to 2002.
+BUSINESS CONSOLIDATION AND RESTRUCTURING. We incurred $1,128,000 and
+$958,000 of expenses related to the Consolidation in 2003 and 2002,
+respectively. These expenses were substantially the result of revisions to our
+original estimate for non-cancelable lease payments included in the
+restructuring accrual. During the third quarter of 2002, based on regional
+softness in demand in the commercial real estate market, we increased our
+restructuring accrual by $900,000 to reflect the longer period of time then
+projected to sublease our Wallingford, CT facility. The accrual at December 31,
+2002 reflected estimated sublease income after September 30, 2004. After
+expanded efforts during 2003, we determined that because of the continuing
+regional decline in the commercial real estate market in 2003, it was unlikely
+that we would be able to sublease our Wallingford, CT facility. As such, we
+increased our restructuring accrual, which represents the reversal of estimated
+sublease income, in the fourth quarter of 2003 by $1,128,000 to provide for the
+remaining non-cancelable lease payments and other related costs for this
+facility through the expiration of the lease (March 31, 2008).
+OPERATING INCOME (LOSS). During 2003, we reported operating income of
+$2,688,000, or 5.2% of net sales, compared to an operating loss of $984,000, or
+2.5% of net sales, in 2002. The significant increase in our operating income was
+due largely to higher gross profit on higher sales, partially offset by higher
+operating expenses (primarily selling and marketing expenses) in 2003 compared
+to 2002. Operating income (loss) for 2003 and 2002 included charges related to
+the Consolidation ($1,128,000 and $958,000, respectively) and a royalty payable
+to Seiko-Epson for past usage of certain technology ($740,000 and $160,000,
+respectively).
+INTEREST. We reported interest expense of $219,000 in 2003 compared to
+$217,000 in 2002. Interest income decreased by $16,000 to $9,000 in 2003. The
+decrease in interest income was largely attributable to a higher level of
+invested cash in 2002 resulting from the receipt of an advance payment of
+approximately $5.8 million from a major customer in advance of printer
+shipments, the proceeds of which were used to repay outstanding revolving
+borrowings in 2002. At December 31, 2003, we had no outstanding revolving
+borrowings and $420,000 outstanding under a term loan that we repaid during
+January 2004.
+18
+WRITE-OFF OF DEFERRED FINANCING COSTS. In August 2003, we entered into a
+new credit facility with Banknorth N.A., which replaced an existing facility
+with LaSalle Business Credit, Inc. ("LaSalle"). We recorded a charge of
+approximately $103,000 in the third quarter of 2003 related to the write-off of
+unamortized deferred financing costs from our prior credit facility with
+LaSalle.
+OTHER INCOME (EXPENSE). Other expense for 2003 primarily included
+transaction exchange loss recorded by our UK subsidiary. Other income for 2002
+included a one-time gain of $145,000 resulting from the receipt of 2,146 shares
+of common stock from our health insurance company, Anthem, Inc., upon its
+demutualization. We sold these shares during the third quarter of 2002. This
+gain was partially offset by approximately $50,000 of transaction exchange loss
+recorded by our UK subsidiary during 2002, due to the strengthening of the
+British pound against the dollar.
+INCOME TAXES. We recorded an income tax provision of $725,000 at an
+effective rate of 32.2% in 2003, and an income tax benefit of $390,000 at an
+effective rate of 36.0% in 2002. The lower effective rate in 2003 reflects a
+favorable outcome of a state tax audit, benefits from certain tax credits, and
+utilization of state net operating loss carryforwards not previously
+anticipated.
+NET INCOME (LOSS). We reported net income in 2003 of $1,528,000, or $0.12
+per diluted share. This compares to a net loss in 2002 of $692,000, or $0.12 per
+diluted share. Earnings per share have been retroactively restated for adoption
+of EITF 03-6 "Participating Securities and the Two-Class Method under FASB
+Statement No. 128, Earnings Per Share", which requires the two-class method of
+computing earnings per share. The two-class method is an earnings allocation
+formula that determines earnings per share for common stock and participating
+securities based upon an allocation of earnings as if all of the earnings for
+the period had been distributed in accordance with participation rights on
+undistributed earnings. All share and per share amounts reflect the April 2004
+stock split on a retroactive basis.
+(B) LIQUIDITY AND CAPITAL RESOURCES
+CASH FLOW
+Overview: During 2004, we significantly improved our operating results. We
+reported record levels of gross margin, operating margin, and earnings per
+share. We also finished the year with no outstanding bank debt and $8.6 million
+of cash and cash equivalents. Looking forward, we expect to generate
+approximately $8 to $9 million in cash from operations during 2005 and have
+between $13 and $14 million of cash on our balance sheet at the end of 2005. We
+also expect to earn increasing interest income on our available cash balance
+throughout 2005.
+Operating activities: The following significant factors affected our cash
+provided by operations of $8,344,000 in 2004:
+- We reported net income of $5,458,000.
+- We recorded depreciation, amortization and non-cash compensation
+expense of $1,925,000.
+- Accounts payable increased by $516,000 due to the timing of
+payments and increased inventory purchases resulting from ahigher
+volume of sales.
+- Accrued liabilities, including accrued patent license fees,
+increased by $1,180,000, after recognition of a reduction in
+taxes payable of $2,332,000 related to employee stock sales. The
+increase was due primarily to higher compensation related
+accruals and an increase in deferred revenue on extended warranty
+contracts and other customer prepayments.
+- Accrued restructuring expenses decreased by $671,000. (See
+"Consolidation Expenses" below).
+Investing activities: Our capital expenditures were approximately
+$1,178,000 and $1,261,000 in 2004 and 2003, respectively. Expenditures in 2004
+primarily included new product tooling, and to a lesser extent, computer
+hardware and software. We expect to significantly increase our capital
+expenditures in 2005 to approximately $4,000,000, which is substantially higher
+than in recent years. During 2005, we expect to invest in three significant
+projects: (1) the purchase and implementation of Oracle software; (2) office
+renovations to our Ithaca, NY facility; and (3) office renovations to our new
+gaming and lottery headquarters and western region service center in Las Vegas,
+NV. We believe these projects will provide us with improved efficiency and will
+enable us to streamline and more cost effectively manage our business as it
+grows in size, number of locations and overall complexity. In addition to these
+projects, we also expect to continue our focus on product development and the
+purchase of tooling for new products and enhanced versions of our existing
+products.
+19
+Financing activities: We generated approximately $902,000 from financing
+activities during 2004, largely due to proceeds from stock option, warrant and
+stock purchase plan exercises (approximately $1,515,000), somewhat offset by the
+repayment of our term loan (approximately $420,000), payments of cash dividends
+on our preferred stock and common stock (related to cash in lieu of partial
+shares resulting from our stock split) (approximately $91,000) and payments of
+expenses (approximately $102,000) related to conversion of the preferred stock
+into common stock and the subsequent registration of the resulting common stock.
+WORKING CAPITAL
+Our working capital increased to $20,325,000 at December 31, 2004 from
+$11,787,000 at December 31, 2003. The current ratio also increased to 3.32 to 1
+at December 31, 2004 from 2.36 to 1 at December 31, 2003. The increase in both
+working capital and the current ratio was largely due to significantly higher
+cash balance (approximately $8,130,000) from cash generated during the year. We
+also maintained flat accounts receivable and inventory balances on higher sales.
+DEFERRED TAXES
+As of December 31, 2004, we had a net deferred tax asset of approximately
+$2,643,000. In order to utilize this deferred tax asset, we will need to
+generate approximately $7.5 million of taxable income in future years. Based on
+future projections of taxable income, we have determined that it is more likely
+than not that the existing net deferred tax asset will be realized.
+CONTINGENT LIABILITIES
+During the second quarter of 2004, we signed a cross licensing agreement
+with Seiko Epson. Under the agreement, Seiko Epson received a license to three
+of our patents, and we received a license to eighteen of Seiko Epson's patents
+relating to printing applications for the point of sale and banking markets. In
+addition, we agreed to pay $900,000 as a royalty for the usage of certain Seiko
+Epson technology prior to January 1, 2003. We had accrued for the $900,000
+royalty for past usage as of December 31, 2003. In accordance with the terms of
+the agreement, we paid the $900,000 royalty for past usage in full by January
+2005. Under the agreement, we continue to pay royalties on a quarterly basis
+related to the sales of licensed printers, which is reflected in cost of sales.
+CREDIT FACILITY AND BORROWINGS
+On August 6, 2003, we entered into a $12.5 million credit facility (the
+"Banknorth Credit Facility") with Banknorth N.A. The Banknorth Credit Facility
+provides for an $11.5 million revolving credit line expiring on July 31, 2006,
+and a $1 million equipment loan facility which may be drawn down through July
+31, 2004. Borrowings under the revolving credit line bear a floating rate of
+interest at the prime rate. Borrowings under the equipment loan bear a floating
+rate of interest at the prime rate plus 0.25%, which is included in interest
+expense, and are secured by a lien on all the assets of the company. The
+Banknorth Credit Facility imposes certain quarterly financial covenants on the
+Company and restricts the payment of dividends on its common stock and the
+creation of other liens.
+On November 12, 2004, we amended our $12.5 million Banknorth Credit
+Facility. Under the terms of the agreement, we renewed, through July 2005, our
+$1.0 million equipment loan, which had expired on July 31, 2004. The amendment
+also revised certain other terms of the revolving credit facility.
+The borrowing base of the revolving credit line under the Banknorth Credit
+Facility is based on the lesser of (a) $11.5 million or (b) 85% of eligible
+accounts receivable plus (i) the lesser of (1) $5,500,000 and (2) 45% of
+eligible raw material inventory plus 50% of eligible finished goods inventory,
+less (ii) a $40,000 credit reserve.
+As of December 31, 2004, we had no balances outstanding on the revolving
+credit line and term loan, respectively. Undrawn commitments under the Banknorth
+Credit Facility were approximately $12,500,000 at December 31, 2004. However,
+our maximum additional available borrowings under the facility were limited to
+approximately $9,700,000 at December 31, 2004 based on the borrowing base of our
+collateral. We were in compliance with all financial covenants of the Banknorth
+Credit Facility at December 31, 2004.
+20
+PREFERRED STOCK
+In connection with our 7% Series B Cumulative Convertible Redeemable
+Preferred Stock (the "Preferred Stock"), we paid $70,000 of cash dividends per
+quarter. We also recorded non-cash accretion of approximately $20,000 per
+quarter related to preferred stock warrants and issuance costs. The preferred
+stock was convertible at any time by the holders at a conversion price of $6.00
+per common share. In April 2004, all holders of our Series B Preferred Stock
+converted all their preferred shares into common stock. As a result of the
+conversion, a total 666,665 new shares of common stock were issued. No future
+dividend payments are required beyond the second quarter of 2004. The conversion
+will result in a cash savings of approximately $280,000 annually, as we will no
+longer pay dividends previously required under the terms of the preferred stock.
+SHAREHOLDERS' EQUITY
+Shareholders' equity increased by $13,368,000 to $23,715,000 at December
+31, 2004 from $10,347,000 at December 31, 2003. The increase was primarily due
+to the following for the year ended December 31, 2004: (1) net income available
+to common shareholders of $5,458,000, (2) the conversion of our preferred stock
+into common stock, net of costs of $3,824,000 (3) proceeds of approximately
+$1,379,000 from the issuance of approximately 322,000 shares of common stock
+from stock option exercises and purchase from our employee stock purchase plan,
+and (4) an increase in additional paid in capital of approximately $2,332,000
+resulting from the recording of a tax benefit from tax deductions arising from
+stock option exercises.
+CONSOLIDATION EXPENSES
+During 2001 through 2004, we incurred approximately $5,957,000 of business
+consolidation, restructuring and related expenses as a result of the
+Consolidation. These expenses primarily included employee severance and
+termination related expenses, facility closure and consolidation expenses
+(including moving expenses, estimated non-cancelable lease payments and other
+costs) and accelerated depreciation and asset disposal losses on certain
+leasehold improvements and other fixed assets.
+After expanded efforts to sub-lease our facility in 2003, we determined
+that, because of the continuing regional decline in the commercial real estate
+market during 2003, it was unlikely that we would be able to sublease our
+Wallingford, CT manufacturing facility, which has a lease term that expires in
+March 2008. As a result, during the fourth quarter of 2003, we increased our
+restructuring accrual by $1,270,000 to provide for the remaining non-cancelable
+lease payments and related costs associated with the manufacturing facility. In
+2004, we revised our estimate of the amount of remaining non-cancelable lease
+payments and related costs associated with the manufacturing facility, which
+resulted in the reversal of approximately $225,000 of accrued restructuring
+expenses.
+We paid approximately $446,000, $721,000 and $2,242,000 of expenses related
+to the Consolidation in 2004, 2003 and 2002, respectively. We expect to pay
+approximately $420,000 per year from 2005 through 2007, and the remaining
+$200,000 in 2008. These payments from 2005 through 2008 relate primarily to
+lease and occupancy costs in our Wallingford, CT facility.
+21
+CONTRACTUAL OBLIGATIONS
+TransAct's contractual obligations as of December 31, 2004 were as follows:
+Less than More than
+(In thousands) Total 1 year 1-3 years 3-5 years 5 years
+-------------- ------- --------- --------- --------- ---------
+Operating lease obligations $ 6,817 $ 999 $ 2,173 $ 1,850 $ 1,795
+Purchase obligations 15,797 14,066 1,731 -- --
+Purchase obligations are for purchases made in the normal course of
+business to meet operational requirements, primarily of raw material and
+component part inventory.
+RESOURCE SUFFICIENCY
+We believe that cash on-hand and cash flows generated from operations and
+borrowings available under the Banknorth Credit Facility will provide sufficient
+resources to meet our working capital needs, including costs associated with the
+Consolidation, to finance our capital expenditures and meet our liquidity
+requirements through at least December 31, 2005.
+(C) IMPACT OF INFLATION
+TransAct believes that its business has not been affected to a significant
+degree by inflationary trends because of the low rate of inflation during the
+past three years, nor does it believe it will be significantly affected by
+inflation during 2005.
+ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
+INTEREST RATE RISK
+Our exposure to market risk for changes in interest rates relates primarily
+to the investment of our available cash and cash equivalents. In accordance with
+our investment policy, we strive to achieve above market rates of return in
+exchange for accepting a prudent amount of incremental risk, which includes the
+risk of interest rate movements. Risk tolerance is constrained by an overriding
+objective to preserve capital. An effective increase or decrease of 10% in
+interest rates would not have a material effect on our results of operations or
+cash flows.
+FOREIGN CURRENCY EXCHANGE RISK
+A substantial portion of our sales are denominated in U.S. dollars and, as
+a result, we have relatively little exposure to foreign currency exchange risk
+with respect to sales made. This exposure may change over time as business
+practices evolve and could have a material adverse impact on our financial
+results in the future. We do not use forward exchange contracts to hedge
+exposures denominated in foreign currencies or any other derivative financial
+instruments for trading or speculative purposes. The effect of an immediate 10%
+change in exchange rates would not have a material impact on our future results
+of operations or cash flows.
+22
+ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
+Page
+Number
+------
+Report of Independent Registered Public Accounting Firm 24
+TransAct Technologies Incorporated consolidated financial statements:
+Consolidated balance sheets as of December 31, 2004 and 2003 25
+Consolidated statements of operations for the years ended
+December 31, 2004, 2003 and 2002 26
+Consolidated statements of changes in shareholders' equity and
+comprehensive income (loss) for the years ended December 31,
+2004, 2003 and 2002 27
+Consolidated statements of cash flows for the years ended
+December 31, 2004, 2003 and 2002 28
+Notes to consolidated financial statements 29
+23
+REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
+To the Board of Directors and Shareholders of TransAct Technologies
+Incorporated:
+We have completed an integrated audit of TransAct Technologies Incorporated's
+2004 consolidated financial statements and of its internal control over
+financial reporting as of December 31, 2004 and audits of its 2003 and 2002
+consolidated financial statements in accordance with the standards of the Public
+Company Accounting Oversight Board (United States). Our opinions, based on our
+audits, are presented below.
+Consolidated financial statements
+In our opinion, the consolidated financial statements listed in the accompanying
+index present fairly, in all material respects, the financial position of
+TransAct Technologies Incorporated and its subsidiaries (the "Company") at
+December 31, 2004 and 2003, and the results of their operations and their cash
+flows for each of the three years in the period ended December 31, 2004 in
+conformity with accounting principles generally accepted in the United States of
+America. 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 of these statements in
+accordance with the standards of the Public Company Accounting Oversight Board
+(United States). Those standards require that we plan and perform the audit to
+obtain reasonable assurance about whether the financial statements are free of
+material misstatement. An audit of financial statements includes examining, on a
+test basis, evidence supporting the amounts and disclosures in the financial
+statements, assessing the accounting principles used and significant estimates
+made by management, and evaluating the overall financial statement presentation.
+We believe that our audits provide a reasonable basis for our opinion.
+Internal control over financial reporting
+Also, in our opinion, management's assessment, included in the accompanying
+Management's Report on Internal Control Over Financial Reporting, that the
+Company maintained effective internal control over financial reporting as of
+December 31, 2004 based on criteria established in Internal Control - Integrated
+Framework issued by the Committee of Sponsoring Organizations of the Treadway
+Commission (COSO), is fairly stated, in all material respects, based on those
+criteria. Furthermore, in our opinion, the Company maintained, in all material
+respects, effective internal control over financial reporting as of December 31,
+2004, based on criteria established in Internal Control - Integrated Framework
+issued by the COSO. The Company's management is responsible for maintaining
+effective internal control over financial reporting and for its assessment of
+the effectiveness of internal control over financial reporting. Our
+responsibility is to express opinions on management's assessment and on the
+effectiveness of the Company's internal control over financial reporting based
+on our audit. We conducted our audit of internal control over financial
+reporting in accordance with the standards of the Public Company Accounting
+Oversight Board (United States). Those standards require that we plan and
+perform the audit to obtain reasonable assurance about whether effective
+internal control over financial reporting was maintained in all material
+respects. An audit of internal control over financial reporting includes
+obtaining an understanding of internal control over financial reporting,
+evaluating management's assessment, testing and evaluating the design and
+operating effectiveness of internal control, and performing such other
+procedures as we consider necessary in the circumstances. We believe that our
+audit provides a reasonable basis for our opinions.
+A company's internal control over financial reporting is a process designed to
+provide reasonable assurance regarding the reliability of financial reporting
+and the preparation of financial statements for external purposes in accordance
+with generally accepted accounting principles. A company's internal control over
+financial reporting includes those policies and procedures that (i) pertain to
+the maintenance of records that, in reasonable detail, accurately and fairly
+reflect the transactions and dispositions of the assets of the company; (ii)
+provide reasonable assurance that transactions are recorded as necessary to
+permit preparation of financial statements in accordance with generally accepted
+accounting principles, and that receipts and expenditures of the company are
+being made only in accordance with authorizations of management and directors of
+the company; and (iii) provide reasonable assurance regarding prevention or
+timely detection of unauthorized acquisition, use, or disposition of the
+company's assets that could have a material effect on the financial statements.
+Because of its inherent limitations, internal control over financial reporting
+may not prevent or detect misstatements. Also, projections of any evaluation of
+effectiveness to future periods are subject to the risk that controls may become
+inadequate because of changes in conditions, or that the degree of compliance
+with the policies or procedures may deteriorate.
+/s/ PricewaterhouseCoopers LLP
+Hartford, Connecticut
+March 15, 2005
+24
+TRANSACT TECHNOLOGIES INCORPORATED
+CONSOLIDATED BALANCE SHEETS
+(In thousands, except share data)
+December 31, December 31,
+2004 2003
+------------ ------------
+ASSETS:
+Current assets:
+Cash and cash equivalents $ 8,628 $ 498
+Receivables, net 8,910 9,074
+Inventories 8,074 8,061
+Refundable income taxes 510 130
+Deferred tax assets 2,370 2,340
+Other current assets 586 379
+------- -------
+Total current assets 29,078 20,482
+------- -------
+Fixed assets, net 3,177 3,607
+Goodwill 1,469 1,469
+Deferred tax assets 274 684
+Other assets 101 119
+------- -------
+5,021 5,879
+------- -------
+Total assets $34,099 $26,361
+======= =======
+LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK
+AND SHAREHOLDERS' EQUITY:
+Current liabilities:
+Current portion of term loan $ 0 $ 90
+Accounts payable 3,804 3,288
+Accrued liabilities 3,395 2,892
+Accrued restructuring expenses 420 480
+Accrued patent license fees 417 408
+Deferred revenue 717 1,537
+------- -------
+Total current liabilities 8,753 8,695
+------- -------
+Long-term portion of term loan -- 330
+Accrued restructuring expenses 1,034 1,645
+Accrued patent license fees -- 750
+Accrued product warranty 153 169
+Deferred revenue 444 523
+------- -------
+1,631 3,417
+------- -------
+Total liabilities 10,384 12,112
+------- -------
+Commitments and contingencies (Note 11)
+Series B Redeemable convertible preferred stock, $0.01 par
+value, 8,000 shares authorized, none and 4,000 shares
+issued and outstanding (liquidation preference of
+$4,098 as of December 31, 2003) -- 3,902
+------- -------
+Shareholders' equity:
+Preferred stock, $0.01 par value, 4,792,000
+authorized, none issued and outstanding -- --
+Preferred stock, Series A, $0.01 par value, 200,000
+authorized, none issued and outstanding -- --
+Common stock, $0.01 par value, 20,000,000 authorized,
+10,037,766 and 8,952,650 shares issued and outstanding 100 60
+Additional paid-in capital 17,401 8,441
+Retained earnings 7,112 1,769
+Unamortized restricted stock compensation (1,067) (30)
+Accumulated other comprehensive income 169 107
+------- -------
+Total shareholders' equity 23,715 10,347
+------- -------
+Total liabilities, redeemable convertible preferred stock
+and shareholders' equity $34,099 $26,361
+======= =======
+See accompanying notes to consolidated financial statements.
+25
+TRANSACT TECHNOLOGIES INCORPORATED
+CONSOLIDATED STATEMENTS OF OPERATIONS
+(In thousands, except per share data)
+Year Ended December 31,
+---------------------------
+2004 2003 2002
+------- ------- -------
+Net sales $59,847 $52,098 $39,461
+Cost of sales 37,805 36,555 29,245
+------- ------- -------
+Gross profit 22,042 15,543 10,216
+------- ------- -------
+Operating expenses:
+Engineering, design and product development 2,715 2,276 2,025
+Selling and marketing 5,111 4,968 4,027
+General and administrative 5,990 4,483 4,190
+Business consolidation and restructuring (225) 1,128 958
+------- ------- -------
+13,591 12,855 11,200
+------- ------- -------
+Operating income (loss) 8,451 2,688 (984)
+------- ------- -------
+Other income (expense):
+Interest expense (44) (219) (217)
+Interest income 48 9 25
+Write-off of deferred financing costs -- (103) --
+Other, net (18) (122) 94
+------- ------- -------
+(14) (435) (98)
+------- ------- -------
+Income (loss) before income taxes 8,437 2,253 (1,082)
+Income tax provision (benefit) 2,979 725 (390)
+------- ------- -------
+Net income (loss) 5,458 1,528 (692)
+Dividends and accretion charges on preferred
+stock (111) (358) (358)
+Earnings allocated to preferred shareholders (111) (83) --
+------- ------- -------
+Net income (loss) available to common
+shareholders $ 5,236 $ 1,087 $(1,050)
+======= ======= =======
+Net income (loss) per common share:
+Basic $ 0.55 $ 0.13 $ (0.12)
+Diluted $ 0.51 $ 0.12 $ (0.12)
+Shares used in per share calculation:
+Basic 9,593 8,689 8,454
+Diluted 10,231 9,335 8,454
+See accompanying notes to consolidated financial statements.
+26
+TRANSACT TECHNOLOGIES INCORPORATED
+CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY AND
+COMPREHENSIVE INCOME (LOSS)
+(In thousands, except share data)
+Unamortized Loan Accumulated
+Common Stock Additional Restricted Receivable Other Total
+------------------ Paid-in Retained Stock from Comprehensive Comprehensive
+Shares Amount Capital Earnings Compensation Officer Income (Loss) Total Income (Loss)
+---------- ------ ---------- -------- ------------ ---------- ------------- ------- -------------
+Balance, December 31, 2001 8,527,155 $ 57 $ 6,303 $ 1,649 $ (286) $ (330) $ (78) $ 7,315
+Cancellation of
+restricted stock (900) -- (5) -- 5 -- -- --
+Issuance of shares from
+exercise of
+stock options 39,150 -- 111 -- -- -- -- 111
+Issuance of shares from
+employee
+stock purchase plan 7,274 -- 19 -- -- -- -- 19
+Amortization of
+restricted stock
+compensation -- -- -- -- 184 -- -- 184
+Tax charge related to
+restricted
+stock vested -- -- (120) -- -- -- -- (120)
+Dividends paid on
+preferred stock -- -- -- (280) -- -- -- (280)
+Accretion of preferred
+stock discount and
+issuance costs -- -- -- (78) -- -- -- (78)
+Comprehensive income
+(loss):
+Foreign currency -- -- -- -- -- -- 86 86 86
+translation adj
+Net loss -- -- -- (692) -- -- -- (692) (692)
+---------- ---- ------- ------ ------- ----- ---- ------- ------
+Balance, December 31, 2002 8,572,679 57 6,308 599 (97) (330) 8 6,545 (606)
+======
+Issuance of shares from
+exercise of
+stock options 357,906 3 1,355 -- -- -- -- 1,358
+Issuance of shares from
+employee
+stock purchase plan 3,130 -- 9 -- -- -- -- 9
+Issuance of shares from
+exercise of
+common stock
+warrants 18,935 -- -- -- -- -- -- --
+Amortization of
+restricted
+stock compensation -- -- -- -- 67 -- -- 67
+Tax benefit related to
+employee stock sales -- -- 769 -- -- -- -- 769
+Dividends paid on
+preferred stock -- -- -- (280) -- -- -- (280)
+Accretion of preferred
+stock discount and
+issuance costs -- -- -- (78) -- -- -- (78)
+Repayment of loan from
+officer -- -- -- -- -- 330 -- 330
+Comprehensive income:
+Foreign currency
+translation adj. -- -- -- -- -- -- 99 99 99
+Net income -- -- -- 1,528 -- -- -- 1,528 1,528
+---------- ---- ------- ------ ------- ----- ---- ------- ------
+Balance, December 31, 2003 8,952,650 60 8,441 1,769 (30) -- 107 10,347 1,627
+Cancellation of
+restricted stock (3,000) -- (72) -- 72 -- -- --
+Issuance of shares from
+exercise of
+stock options 321,947 3 1,376 -- -- -- -- 1,379
+Issuance of shares from
+employee
+stock purchase plan 3,706 -- 47 -- -- -- -- 47
+Issuance of shares from
+exercise of common
+stock warrants 15,000 -- 90 90
+Issuance of shares from
+conversion of
+preferred stock, net
+of issuance and
+registration costs 666,665 6 3,818 -- -- -- -- 3,824
+Issuance of restricted
+stock 81,000 1 1,399 -- (1,400) -- -- --
+Amortization of
+restricted stock
+compensation -- -- -- -- 291 -- -- 291
+Tax benefit related to
+employee stock sales -- -- 2,332 -- -- -- -- 2,332
+Redemption of partial
+shares of common
+stock in connection
+with the 3:2 stock
+split (202) 30 (30) -- -- -- --
+Dividends paid on
+preferred stock -- -- -- (91) -- -- -- (91)
+Accretion of preferred
+stock discount and
+issuance costs
+Comprehensive
+income: -- -- -- (24) -- -- -- (24)
+Foreign currency
+translation adj. -- -- -- -- -- -- 62 62 62
+Net income -- -- -- 5,458 -- -- -- 5,458 5,458
+---------- ---- ------- ------ ------- ----- ----- ------- ------
+Balance, December 31, 2004 10,037,766 $100 $17,401 $7,112 $(1,067) $ -- $ 169 $23,715 $5,520
+========== ==== ======= ====== ======= ===== ===== ======= ======
+See accompanying notes to consolidated financial statements.
+27
+TRANSACT TECHNOLOGIES INCORPORATED
+CONSOLDIATED STATEMENTS OF CASH FLOWS
+(In thousands)
+Year Ended December 31,
+---------------------------
+2004 2003 2002
+------- ------- -------
+Cash flows from operating activities:
+Net income (loss) $ 5,458 $ 1,528 $ (692)
+Adjustments to reconcile net income (loss) to
+net cash provided by operating activities:
+Non-cash compensation expense 291 67 184
+Write-off of deferred bank financing costs -- 103 --
+Depreciation and amortization 1,634 1,656 1,935
+Deferred income taxes 380 162 968
+Loss (gain) on sale of fixed assets -- (1) --
+Changes in operating assets and liabilities:
+Receivables 164 (5,035) 8
+Inventories (13) 374 2,198
+Refundable income taxes (380) 98 (228)
+Other current assets (207) (52) (115)
+Other assets (8) (8) (63)
+Accounts payable 516 305 80
+Accrued liabilities, deferred revenue and
+other liabilities 1,920 1,212 528
+Accrued patent license fees (741) 998 160
+Accrued restructuring expenses (671) 407 (1,284)
+------- ------- -------
+Net cash provided by operating activities 8,343 1,814 3,679
+------- ------- -------
+Cash flows from investing activities:
+Purchases of fixed assets (1,178) (1,261) (577)
+Proceeds from sale of fixed assets -- 1 --
+Repayment of loan receivable from officer -- 330 --
+------- ------- -------
+Net cash used in investing activities (1,178) (930) (577)
+------- ------- -------
+Cash flows from financing activities:
+Revolving bank loan repayments, net -- (2,541) (2,453)
+Term loan borrowings -- 450 --
+Term loan repayments (420) (380) (100)
+Proceeds from option exercises, employee
+stock purchase plan, and common stock
+warrants 1,516 1,364 130
+Payment of cash dividends (91) (280) (280)
+Payment of preferred stock conversion (102) -- --
+and registration expense ------- ------- -------
+Net cash provided by (used in) financing
+activities 903 (1,387) (2,703)
+------- ------- -------
+Effect of exchange rate changes 62 99 86
+------- ------- -------
+Increase (decrease) in cash and cash equivalents 8,130 (404) 485
+Cash and cash equivalents, beginning of period 498 902 417
+------- ------- -------
+Cash and cash equivalents, end of period $ 8,628 $ 498 $ 902
+======= ======= =======
+Supplemental cash flow information:
+Interest paid $ 44 $ 226 $ 252
+Income taxes paid (refunded), net 379 229 (975)
+Non-cash financing activities:
+Conversion of preferred stock to common
+stock $ 3,926 $ -- $ --
+Tax benefit related to employee stock sales 2,332 769 --
+Accretion of preferred stock discount and
+issuance costs 24 78 78
+Issuance of restricted stock 1,400 -- --
+See accompanying notes to consolidated financial statements.
+28
+TRANSACT TECHNOLOGIES INCORPORATED
+NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
+1. DESCRIPTION OF BUSINESS
+TransAct Technologies Incorporated ("TransAct"), which has its
+headquarters in Wallingford, CT and its primary operating facility in
+Ithaca, NY, operates in one industry segment, transaction-based printers
+and related products. TransAct designs, develops, manufactures and markets
+transaction-based printers under the Ithaca(R) and Magnetec(R) brand names.
+In addition, we market related consumables, spare parts and services. Our
+printers are used worldwide to provide transaction records such as
+receipts, tickets, coupons, register journals and other documents. We focus
+on two core markets: point-of-sale and banking ("POS") and gaming and
+lottery. We sell our products to original equipment manufacturers ("OEM"),
+value-added resellers, selected distributors, as well as directly to
+end-users. Our product distribution spans across the Americas, Europe, the
+Middle East, Africa, the Caribbean Islands and the South Pacific.
+We design, develop, manufacture and market a broad array of
+transaction-based printers utilizing inkjet, thermal and impact printing
+technology for applications requiring up to 60 character columns in each of
+its vertical markets. Our printers are configurable, which offer customers
+the ability to choose from a variety of features and functions. Options
+typically include printed circuit board configuration, paper cutting
+devices, paper handling capacities and cabinetry color. In addition to our
+configurable printers, we manufacture custom printers for certain OEM
+customers. In collaboration with these customers, we provide engineering
+and manufacturing expertise for the design and development of specialized
+printers.
+2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
+STOCK SPLIT: On March 4, 2004, we announced that our Board of
+Directors approved a three-for-two stock split of our common stock to be
+effected in the form of a 50 percent stock dividend. The additional shares
+were payable April 2, 2004 to shareholders of record at the close of
+business on March 17, 2004. As a result of the stock dividend, shareholders
+of record received one additional share of common stock for every two
+shares of common stock held on the record date, and cash instead of any
+fractional shares. All share and per-share amounts within the accompanying
+financial statements and footnotes reflect the stock split.
+PRINCIPLES OF CONSOLIDATION: The accompanying consolidated financial
+statements were prepared on a consolidated basis to include the accounts of
+TransAct and its wholly-owned subsidiaries. All intercompany accounts,
+transactions and unrealized profit were eliminated in consolidation.
+USE OF ESTIMATES: The accompanying consolidated financial statements
+were prepared using estimates and assumptions that affect the reported
+amounts of assets, liabilities, revenue and expenses, and disclosure of
+contingent assets and liabilities as of the date of the consolidated
+financial statements and the reported amounts of revenues and expenses
+during the reporting period. Actual results could differ from those
+estimates.
+29
+TRANSACT TECHNOLOGIES INCORPORATED
+NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
+2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
+SEGMENT REPORTING: We apply the provisions of Statement of Financial
+Accounting Standards No. 131, "Disclosures about Segments of an Enterprise
+and Related Information" ("FAS 131"). We view our operations and manage our
+business as one segment, the design, development, manufacture and sale of
+transaction-based printers. Factors used to identify TransAct's single
+operating segment include the organizational structure of the Company and
+the financial information available for evaluation by the chief operating
+decision-maker in making decisions about how to allocate resources and
+assess performance. We operate predominantly in one geographical area, the
+United States of America. See Note 19 for information regarding our
+international operations. We provide the following disclosures of revenues
+from products and services:
+Year ended Year ended Year ended
+(In thousands) December 31, 2004 December 31, 2003 December 31, 2002
+-------------- ----------------- ----------------- -----------------
+Printers - POS $17,664 29.5% $14,027 26.9% $12,900 32.7%
+Printers - Gaming and lottery 32,144 53.7% 29,528 56.7% 19,578 49.6%
+------- ----- ------- ----- ------- -----
+Subtotal - printers 49,808 83.2% 43,555 83.6% 32,478 82.3%
+Services and consumables 10,039 16.8% 8,543 16.4% 6,983 17.7%
+------- ----- ------- ----- ------- -----
+Total net sales $59,847 100.0% $52,098 100.0% $39,461 100.0%
+======= ===== ======= ===== ======= =====
+CASH AND CASH EQUIVALENTS: We consider all highly liquid investments
+with a maturity date of three months or less at date of purchase to be cash
+equivalents.
+INVENTORIES: Inventories are stated at the lower of cost (principally
+standard cost which approximates actual cost on a first-in, first-out
+basis) or market. We assess market value based on historical usage and
+estimates of future demand in the market.
+FIXED ASSETS: Fixed assets are stated at cost. Depreciation is
+provided for primarily by the straight-line method over the estimated
+useful lives. The estimated useful life of tooling is five years; machinery
+and equipment is ten years; furniture and office equipment is five to ten
+years; and computer equipment is three years. Leasehold improvements are
+amortized over the shorter of the term of the lease or the useful life of
+the asset. Costs related to repairs and maintenance are expensed as
+incurred. Depreciation was $1,608,000, $1,579,000 and $1,843,000 in 2004,
+2003 and 2002, respectively
+GOODWILL: We adopted the provisions of Statement of Financial
+Accounting Standard No. 142, "Goodwill and Other Intangible Assets" ("FAS
+142") on January 1, 2002. Under FAS 142, goodwill is no longer amortized
+and will be tested for impairment at least annually at the reporting unit
+level.
+FAS 142 requires that goodwill be tested annually for impairment, or
+whenever events or changes in circumstances indicate that the carrying
+value may not be recoverable. We have performed an impairment test as of
+December 31, 2004 and determined that no impairment has occurred.
+LONG-LIVED ASSETS: We evaluate our long-lived assets, which are
+comprised primarily of fixed assets, for impairment whenever events or
+changes in circumstances indicate that the carrying amount of such assets
+may not be recoverable. Recoverability of assets to be held and used is
+measured by a comparison of the carrying amount of an asset group to future
+undiscounted net cash flows expected to be generated by the asset group. If
+such assets are considered to be impaired, the impairment to be recognized
+is measured by the amount by which the carrying amount of the assets
+exceeds the fair value of the assets. We did not recognize any impairment
+loss for long-lived assets in 2004, 2003 or 2002.
+30
+TRANSACT TECHNOLOGIES INCORPORATED
+NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
+2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
+REVENUE RECOGNITION: Our typical contracts include the sale of
+printers, which are sometimes accompanied by separately-priced extended
+warranty contracts. We also sell spare parts, consumables, and other repair
+services (sometimes pursuant to multi-year product maintenance contracts)
+which are not included in the original printer sale and are ordered by the
+customer as needed. We recognize revenue pursuant to the guidance within
+SAB 104, "Revenue Recognition". Specifically, revenue is recognized when
+evidence of an arrangement exists, delivery (based on shipping terms which
+are generally FOB shipping point) has occurred, the selling price is fixed
+and determinable, and collectibility is reasonably assured. We provide for
+an estimate of product returns based on historical experience at the time
+of revenue recognition.
+Revenue related to extended warranty and product maintenance contracts
+is recognized pursuant to FASB Technical Bulletin 90-1 ("FTB 90-1"),
+"Accounting for Separately Priced Extended Warranty and Product Maintenance
+Contracts." Pursuant to FTB 90-1, revenue related to separately priced
+product maintenance contract is deferred and recognized over the term of
+the maintenance period. We record deferred revenue for amounts received
+from customers for maintenance contracts prior to the maintenance period.
+CONCENTRATION OF CREDIT RISK: Financial instruments that potentially
+expose TransAct to concentrations of credit risk are limited to accounts
+receivable. Sales to GTECH Corporation ("GTECH") (for lottery printers)
+accounted for approximately 16%, 19% and 27% of net sales during 2004, 2003
+and 2002, respectively. Sales to WMS Gaming (for sales of gaming printers)
+accounted for approximately 14% of net sales during 2004, and sales to
+Harrah's (for casino slot machine printers) accounted for approximately 12%
+of net sales during 2003. As of December 31, 2004, we had accounts
+receivable balances due from WMS Gaming (for sales of gaming printers),
+BlueStar Distributing (for sales of POS printers) and from GTECH (for sales
+of lottery printers) that accounted for 18%, 14% and 10%, respectively, of
+the total accounts receivable. As of December 31, 2003, we had an accounts
+receivable balance due from Harrah's of 31%, of the total accounts
+receivable balance.
+WARRANTY: We warrant our products for up to 27 months and record the
+estimated cost of such product warranties at the time the sale is recorded.
+Estimated warranty costs are based upon actual past experience of product
+returns and the related estimated cost of labor and material to make the
+necessary repairs.
+The following table summarizes the activity recorded in the accrued
+product warranty liability during 2004, 2003 and 2002:
+Year ended December 31,
+-----------------------
+(In thousands) 2004 2003 2002
+-------------- ----- ----- -----
+Balance, beginning of year $ 495 $ 644 $ 710
+Additions related to warranties issued 610 409 394
+Warranty costs incurred (508) (558) (460)
+----- ----- -----
+Balance, end of year $ 597 $ 495 $ 644
+===== ===== =====
+Approximately $153,000 and $169,000 of the accrued product warranty
+liability were classified as long-term at December 31, 2004 and 2003,
+respectively.
+RESEARCH AND DEVELOPMENT EXPENSES: Research and development expenses
+include engineering, design and product development expenses incurred in
+connection with specialized engineering and design to introduce new
+products and to customize existing products, and are expensed as a
+component of operating expenses as incurred. We spent approximately
+$2,715,000, $2,276,000 and $2,025,000 on research and development expenses
+in 2004, 2003 and 2002, respectively.
+31
+TRANSACT TECHNOLOGIES INCORPORATED
+NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
+2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
+RESTRUCTURING: In 2001, we undertook a plan to consolidate all
+manufacturing and engineering into our existing Ithaca, NY facility and
+close our Wallingford, CT facility. We continue to apply the consensus set
+forth in EITF 94-3, "Liability Recognition for Certain Employee Termination
+Benefits and Other Costs to Exit an Activity (Including Certain Costs
+Incurred in a Restructuring)" in recognizing restructuring expenses. See
+Note 8.
+INCOME TAXES: The income tax amounts reflected in the accompanying
+financial statements are accounted for under the liability method in
+accordance with FAS 109 "Accounting for Income Taxes." Deferred tax assets
+and liabilities are recognized for the estimated future tax consequences
+attributable to differences between the financial statement carrying
+amounts of existing assets and liabilities and their respective tax bases
+and operating loss and tax credit carryforwards. Deferred tax assets and
+liabilities are measured using enacted tax rates in effect for the year in
+which those temporary differences are expected to be recovered or settled.
+We assess the likelihood that net deferred tax assets will be realized from
+future taxable income, and to the extent that we believe that realization
+is not likely, we establish a valuation allowance.
+FOREIGN CURRENCY TRANSLATION: The financial position and results of
+operations of our foreign subsidiary in the United Kingdom are measured
+using local currency as the functional currency. Assets and liabilities of
+such subsidiary have been translated into U.S. dollars at the year-end
+exchange rate, related revenues and expenses have been translated at the
+weighted average exchange rate for the year, and shareholders' equity has
+been translated at historical exchange rates. The resulting translation
+gains or losses are recorded in stockholders' equity as a cumulative
+translation adjustment, which is a component of accumulated other
+comprehensive income. Foreign currency transaction gains and losses are
+recognized in other income (expense) and have not been significant for all
+periods presented.
+STOCK-BASED COMPENSATION: We have elected to follow Accounting
+Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
+("APB 25"), and related interpretations in accounting for its stock
+options. Since the exercise price of employee stock options granted by the
+Company equals the market price of the underlying stock on the date of
+grant, no compensation expense is recorded. We have adopted the
+disclosure-only provisions of Statement of Financial Accounting Standards
+No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"), as amended
+by Statement of Financial Standards No. 148, "Accounting for Stock-Based
+Compensation - Transition and Disclosure - an amendment of FAS 123" ("FAS
+148"). See Note 13 for additional disclosures related to our stock-based
+compensation plans.
+32
+================================================================================
+TRANSACT TECHNOLOGIES INCORPORATED
+NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
+2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
+The following table illustrates the effect on net income (loss),
+compensation expense and income (loss) per share as if the Black-Scholes
+fair value method described in FAS 123, "Accounting for Stock-Based
+Compensation" had been applied to our stock plans.
+Year Ended December 31,
+-------------------------
+(In thousands, except per share data) 2004 2003 2002
+------------------------------------- ------ ------ -------
+Net income (loss) available to common shareholders:
+Net income (loss) available to common shareholders,
+as reported $5,236 $1,087 $(1,050)
+Add: Stock-based compensation expense included in
+reported net income (loss), net of tax 205 43 118
+Deduct: Stock-based compensation expense determined
+under fair value based method for all awards, net of tax (390) (229) (753)
+------ ------ -------
+Pro forma net income (loss) available to common shareholders $5,051 $ 901 $(1,685)
+====== ====== =======
+Net income (loss) per share:
+Basic:
+As reported $ 0.51 $ 0.13 $ (0.12)
+Pro forma 0.49 0.10 (0.20)
+Diluted:
+As reported $ 0.55 $ 0.12 $ (0.12)
+Pro forma 0.53 0.10 (0.20)
+FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying amount for cash and
+cash equivalents approximates fair value because of the short maturity of
+these instruments. The carrying amount of receivables, other current
+assets, other assets, accounts payable and accrued liabilities is a
+reasonable estimate of fair value because of the short nature of the
+transactions.
+NET INCOME AND LOSS PER SHARE: We report net income or loss per share
+in accordance with Financial Standard No. 128, "Earnings per Share (EPS)"
+("FAS 128"). Under FAS 128, basic EPS, which excludes dilution, is computed
+by dividing income or loss available to common shareholders by the weighted
+average number of common shares outstanding for the period. Net income or
+loss available to common shareholders represents reported net income or
+loss less accretion of redeemable convertible preferred stock and
+allocation of preferred earnings. Diluted EPS reflects the potential
+dilution that could occur if securities or other contracts to issue common
+stock were exercised or converted into common stock. Diluted EPS includes
+in-the-money options and warrants using the treasury stock method, and also
+includes the assumed conversion of preferred stock using the if-converted
+method, but only if dilutive. During a loss period, the assumed exercise of
+in-the-money stock options and warrants and the conversion of convertible
+preferred stock has an anti-dilutive effect, and therefore, these
+instruments are excluded from the computation of dilutive EPS.
+Beginning in the second quarter of 2004, the Company applied the
+consensus set forth in EITF 03-06 "Participating Securities and the
+Two-Class Method under FASB Statement No. 128, Earnings Per Share", which
+requires the two-class method of computing earnings per share when
+participating securities, such as our redeemable preferred stock, are
+outstanding. The two-class method is an earnings allocation formula that
+determines earnings per share for common stock and participating securities
+based upon an allocation of earnings as if all of the earnings for the
+period had been distributed in accordance with participation rights on
+undistributed earnings. EITF 03-6 became effective for reporting periods
+beginning after March 31, 2004. This guidance impacted the calculation of
+earnings per share for the year ended December 31, 2004 and also requires
+retroactive restatement of earnings per share presented for the year ended
+December 31, 2003. The guidance did not impact the year ended December 31,
+2002, as the Company experienced a net loss in that year. Previously
+reported earning per share amounts for 2003 have been restated as follows:
+33
+TRANSACT TECHNOLOGIES INCORPORATED
+NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
+3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
+Year Ended December 31, 2003
+---------------------------------------
+As previously Restated for
+(In thousands, except per share amounts) reported, split adjusted EITF 03-6
+---------------------------------------- ------------------------ ------------
+Net income available to common shareholder $1,170 $1,087
+Net income per common share
+Basic $ 0.13 $ 0.13
+Diluted $ 0.13 $ 0.12
+Shares used in per share calculation
+Basic 8,689 8,689
+Diluted 9,335 9,335
+Net income available to common shareholders for 2003 using the two class
+method has been computed as follows:
+Net income $1,528
+Dividend and accretion chargers on preferred stock (358)
+Earnings allocation to preferred shareholders (83)
+------
+Net income available to common shareholders $1,087
+COMPREHENSIVE INCOME: Statement of Accounting Standard No. 130,
+"Reporting Comprehensive Income" ("FAS 130"), requires that items defined
+as comprehensive income or loss be separately classified in the financial
+statements and that the accumulated balance of other comprehensive income
+or loss be reported separately from accumulated deficit and additional
+paid-in-capital in the equity section of the balance sheet. We include the
+foreign currency translation adjustment related to our subsidiary in the
+United Kingdom within our calculation of comprehensive income.
+3. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
+INVENTORY COSTS: In November 2004, the FASB issued Accounting Standard
+No. 151, "Inventory Costs - An Amendment of ARB No. 43, Chapter 4" ("FAS
+151"). FAS 151 amends the guidance in Accounting Research Bulletin (ARB)
+No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for
+abnormal amounts of idle facility expense, freight, handling costs, and
+wasted material (spoilage). Among other provisions, the new rule requires
+that items such as idle facility expense, excessive spoilage, double
+freight, and rehandling costs be recognized as current-period charges
+regardless of whether they meet the criterion of "so abnormal" as stated in
+ARB No. 43. Additionally, FAS 151 requires that the allocation of fixed
+production overheads to the costs of conversion be based on the normal
+capacity of the production facilities. FAS 151 is effective for fiscal
+years beginning after June 15, 2005. We do not expect FAS 151 to have a
+material impact on our financial statements.
+34
+TRANSACT TECHNOLOGIES INCORPORATED
+NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
+3. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (CONTINUED)
+SHARE-BASED PAYMENT: In December 2004, the FASB issued Accounting
+Standard No. 123 (revised 2004), "Share-Based Payment" ("FAS 123R"). FAS
+123R supersedes APB Opinion No. 25, and requires the determination of the
+fair value (using an option pricing model) of share-based compensation,
+including shares issued under employee stock purchase plans, stock options
+and restricted stock, at the grant date and the recognition of compensation
+expense over the period in which the share-based compensation vests. FAS
+123R allows for either prospective recognition of compensation expense, or
+retrospective recognition under which financial statements for prior
+periods are adjusted. We are required to adopt the provisions of FAS 123R
+effective July 1, 2005, at which time we will begin recognizing an expense
+for unvested share-based compensation that has been issued or will be
+issued after that date. We are currently evaluating the transition methods.
+We expect the adoption of FAS 123R to have a material impact on our results
+of operations and earnings per share.
+TAX DEDUCTION ON QUALIFIED PRODUCTION ACTIVITIES: In December 2004,
+the FASB issued Staff Position No. FAS 109-1, Application of FASB Statement
+109, "Accounting for Income Taxes," to the Tax Deduction on Qualified
+Production Activities Provided by the American Jobs Creation Act of 2004,
+which provides guidance regarding the deduction for income from qualified
+domestic production activities. The deduction will be phased in from 2005
+through 2010. The deduction will be treated as a "special deduction" as
+described in FASB Statement 109. As such, the special deduction has no
+effect on deferred tax assets and liabilities existing at the enactment
+date. Rather, the impact of this deduction will be reported in the period
+in which the deduction is claimed on our tax return. We have not yet
+quantified the impact that this guidance will have on our financial
+statements.
+FOREIGN EARNINGS REPATRIATION: In December 2004, the FASB issued FASB
+Staff Position No. 109-2, "Accounting and Disclosure Guidance for the
+Foreign Earnings Repatriation Provision within the American Jobs Creation
+Act of 2004" ("FSP 109-2"), which provides guidance under FAS 109,
+"Accounting for Income Taxes," with respect to recording the potential
+impact of the repatriation provisions of the American Jobs Creation Act of
+2004 (the "Jobs Act") on enterprises' income tax expense and deferred tax
+liability. The Jobs Act was enacted on October 22, 2004. The Jobs Act
+creates a temporary incentive for U.S. corporations to repatriate
+accumulated income earned abroad by providing an 85% dividends received
+deduction for certain dividends from controlled foreign corporations. FSP
+109-2 states that an enterprise is allowed time beyond the financial
+reporting period of enactment to evaluate the effect of the Jobs Act on its
+plan for reinvestment or repatriation of foreign earnings for purposes of
+applying FAS 109. The deduction is subject to a number of limitations and
+uncertainty remains as to how to interpret certain provisions in the Act.
+As such, we have not yet determined whether, and to what extent, we might
+repatriate foreign earnings that have not yet been remitted to the U.S.
+4. RECEIVABLES
+Receivables are net of the allowance for doubtful accounts. The
+reconciliation of the allowance for doubtful accounts is as follows:
+Year Ended December 31,
+-----------------------
+2004 2003 2002
+---- ---- ----
+(In thousands)
+Balance at beginning of year $100 $ 78 $84
+Doubtful accounts provision (reversal) 73 76 (2)
+Accounts written off, net of recoveries 2 (54) (4)
+---- ---- ----
+Balance at end of year $175 $100 $78
+==== ==== ====
+5. INVENTORIES
+The components of inventories are:
+December 31,
+---------------
+(In thousands) 2004 2003
+-------------- ------ ------
+Raw materials and component parts $7,869 $7,947
+Finished goods 205 114
+------ ------
+$8,074 $8,061
+====== ======
+35
+TRANSACT TECHNOLOGIES INCORPORATED
+NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
+6. FIXED ASSETS
+The components of fixed assets are:
+December 31,
+-------------------
+(In thousands) 2004 2003
+-------------- -------- --------
+Tooling, machinery and equipment $ 12,627 $ 11,843
+Furniture, office and computer equipment 3,864 3,506
+Leasehold improvements 522 486
+-------- --------
+17,013 15,835
+Less: accumulated depreciation and amortization (13,836) (12,228)
+-------- --------
+$ 3,177 $ 3,607
+======== ========
+7. ACCRUED LIABILITIES
+The components of accrued liabilities are:
+December 31,
+---------------
+(In thousands) 2004 2003
+-------------- ------ ------
+Payroll and fringe benefits $1,334 $1,087
+Income taxes 735 560
+Warranty - current portion 444 326
+Rent and occupancy 336 331
+Other 546 588
+------ ------
+$3,395 $2,892
+====== ======
+36
+TRANSACT TECHNOLOGIES INCORPORATED
+NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
+8. ACCRUED BUSINESS CONSOLIDATION AND RESTRUCTURING EXPENSES
+In February 2001, we announced plans to establish a global engineering
+and manufacturing center at our Ithaca, NY facility. As part of this
+strategic decision, we undertook a plan to consolidate all manufacturing
+and engineering into our existing Ithaca, NY facility and close our
+Wallingford, CT manufacturing facility (the "Consolidation"). As of
+December 31, 2001, substantially all Wallingford product lines were
+successfully transferred to Ithaca, NY. We currently maintain our corporate
+headquarters and a service center in Wallingford. The closing of the
+Wallingford facility resulted in the termination of employment of
+approximately 70 production, administrative and management employees. We
+continue to apply the consensus set forth in EITF 94-3, "Liability
+Recognition for Certain Employee Termination Benefits and Other Costs to
+Exit an Activity (Including Certain Costs Incurred in a Restructuring)" in
+recognizing the accrued restructuring expenses.
+During 2001, we recorded expenses of approximately $4,096,000 related
+to costs associated with the Consolidation, including severance pay, stay
+bonuses, employee benefits, moving expenses, non-cancelable lease payments,
+accelerated depreciation and other costs.
+During 2002, we incurred an additional $958,000 of Consolidation
+expenses. Approximately $900,000 of these expenses was the result of a
+revision to our estimate for non-cancelable lease payments included in the
+restructuring accrual. Based on regional softness in demand in the
+commercial real estate market, we increased our restructuring accrual by
+approximately $900,000 to reflect the longer period of time than projected
+to sublease our Wallingford, CT facility. Based on this revised estimate,
+we had projected estimated sublease income beginning October 1, 2004.
+After expanded efforts in 2003, we determined that because of the
+continuing regional decline in the commercial real estate market during
+2003, it was unlikely that we would be able to sublease our Wallingford, CT
+manufacturing facility, which has a lease term that expires in March 2008.
+As a result, during the fourth quarter of 2003, we increased our
+restructuring accrual by $1,270,000 to provide for the remaining
+non-cancelable lease payments and related costs associated with the
+manufacturing facility. This increase represented the reversal of estimated
+sublease income for the remainder of the lease term. In addition, we did
+not terminate several employees originally included in the Consolidation.
+As a result, we reversed the remaining $142,000 of accrued restructuring
+expenses in 2003 related to employee severance and termination expenses, as
+we completed all required payments for such expenses by December 31, 2003.
+In December 2004, we determined that certain functions would be
+relocated and/or expanded in our Wallingford, CT corporate offices. In
+order to achieve the benefit of these changes, we expanded our use of space
+in our current facility. Because of this increase in useful space in the
+Wallingford facility, and because we have experienced lower than expected
+operating and maintenance costs than previously estimated, we reversed
+$225,000 of previously accrued reserve provided for the remaining
+non-cancelable lease payments and related costs.
+37
+TRANSACT TECHNOLOGIES INCORPORATED
+NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
+8. ACCRUED BUSINESS CONSOLIDATION AND RESTRUCTURING EXPENSES (CONTINUED)
+The following table summarizes the activity recorded in the restructuring
+accrual during 2004, 2003 and 2002.
+Year ended December 31,
+-------------------------
+(In thousands) 2004 2003 2002
+-------------- ------ ------ -------
+Accrual balance, beginning of year $2,125 $1,718 $ 3,002
+------ ------ -------
+Business consolidation and
+restructuring expenses:
+Employee severance and
+termination expenses(1) -- (142) 75
+Facility closure and consolidation
+expenses(2) (225) 1,270 883
+------ ------ -------
+(225) 1,128 958
+------ ------ -------
+Cash payments (446) (721) (2,242)
+------ ------ -------
+Accrual balance, end of year $1,454 $2,125 $ 1,718
+====== ====== =======
+(1) Employee severance and termination related expenses are the estimated
+termination salaries, benefits, outplacement, counseling services and other
+related expenses expected to be paid to employees who are involuntarily
+terminated.
+(2) Facility closure and consolidation expenses are the estimated costs to
+close the Wallingford, CT facility including lease termination expenses and
+other related expenses, in accordance with the restructuring plan. The
+Wallingford facility closure was substantially completed by December 31,
+2001.
+At December 31, 2004 and 2003, $1,034,000 and $1,645,000,
+respectively, of the restructuring accrual was classified as part of
+long-term liabilities. This represents the portion of non-cancelable lease
+termination costs and other costs expected to be paid beyond one year.
+9. RETIREMENT SAVINGS PLAN
+On April 1, 1997, we established the TransAct Technologies Retirement
+Savings Plan (the "401(k) Plan"), a defined contribution plan under Section
+401(k) of the Internal Revenue Code. All full-time employees are eligible
+to participate in the 401(k) Plan at the beginning of the calendar quarter
+immediately following their date of hire. We match employees' contributions
+at a rate of 50% of employees' contributions up to the first 6% of the
+employees' compensation contributed to the 401(k) Plan. Our matching
+contributions were $201,000, $174,000 and $158,000 in 2004, 2003 and 2002,
+respectively.
+38
+TRANSACT TECHNOLOGIES INCORPORATED
+NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
+10. BORROWINGS
+On August 6, 2003, we entered into a $12.5 million credit facility
+(the "Banknorth Credit Facility") with Banknorth N.A. The Banknorth Credit
+Facility provides for an $11.5 million revolving credit line expiring on
+July 31, 2006, and a $1 million equipment loan facility which could have
+been drawn down through July 31, 2004. Borrowings under the revolving
+credit line bear a floating rate of interest at the prime rate. Borrowings
+under the equipment loan bear a floating rate of interest at the prime rate
+plus 0.25%. Under certain circumstances, we may select a fixed interest
+rate for a specified period of time of up to 180 days on borrowings based
+on the current LIBOR rate plus 2.75% and 3.0% under the revolving credit
+facility and the equipment loan facility, respectively. In addition, we may
+select a fixed interest rate based on the five-year Federal Home Loan Bank
+of Boston rate plus 3.0% for borrowings under the equipment loan facility.
+We also pay a fee of 0.25% on unused borrowings under the revolving credit
+line. Borrowings under the Banknorth Credit Facility are secured by a lien
+on all the assets of the Company. The Banknorth Credit Facility imposes
+certain quarterly financial covenants on the Company and restricts the
+payment of dividends on our common stock and the creation of other liens.
+We were in compliance with all financial covenants of the Banknorth Credit
+Facility at December 31, 2004. In 2003, we recorded a charge of
+approximately $103,000 in 2003 related to the write-off of unamortized
+deferred financing costs from the prior credit facility.
+On November 12, 2004, we amended our $12.5 million Banknorth Credit
+Facility. Under the terms of the agreement, we renewed, through July 2005,
+our $1.0 million equipment loan, which had expired on July 31, 2004. The
+amendment also revised certain other terms of the revolving credit
+facility.
+The borrowing base of the revolving credit line under Banknorth Credit
+Facility is based on the lesser of (a) $11.5 million or (b) 85% of eligible
+accounts receivable plus (i) the lesser of (1) $5,500,000 and (2) 45% of
+eligible raw material inventory plus 50% of eligible finished goods
+inventory, less (ii) $40,000 credit reserve.
+Concurrent with the signing of the Banknorth Credit Facility, we
+borrowed $450,000 under the equipment loan facility which was paid in full
+in 2004. We had $420,000 of outstanding borrowings under the term loan at
+December 31, 2003 at an interest rate of 4.25%.
+As of December 31, 2004, we had no outstanding borrowings on the
+revolving credit line or the term loan. Undrawn commitments under the
+Banknorth Credit Facility were approximately $12,500,000 at December 31,
+2004. However, our maximum additional available borrowings under the
+facility were limited to approximately $9,700,000 at December 31, 2004
+based on the borrowing base of our collateral.
+11. COMMITMENTS AND CONTINGENCIES
+At December 31, 2004, we were lessee on operating leases for equipment
+and real property. The terms of certain leases provide for escalating rent
+payments in later years of the lease as well as payment of minimum rent and
+real estate taxes. The Company records rent expense related to leases with
+escalating rent payments on a straight-line basis over the term of the
+lease. Rent expense was approximately $1,098,000, $1,096,000 and $975,000
+in 2004, 2003 and 2002, respectively. Minimum aggregate rental payments
+required under operating leases that have initial or remaining
+non-cancelable lease terms in excess of one year as of December 31, 2004
+are as follows: $999,000 in 2005; 1,088,000 in 2006; $1,085,000 in 2007;
+$1,084,000 in 2008; $766,000 in 2009; and $1,795,000 thereafter. Such
+payments include those related to the lease of our Wallingford, CT
+manufacturing facility.
+39
+TRANSACT TECHNOLOGIES INCORPORATED
+NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
+12. PATENT LICENSE FEES
+During the second quarter of 2004, we signed a cross licensing
+agreement with Seiko Epson. Under the agreement, Seiko Epson received a
+license to three of our patents, and we received a license to eighteen of
+Seiko Epson's patents relating to printing applications for the point of
+sale and banking markets. In addition, we agreed to pay $900,000 as a
+royalty for the usage of certain Seiko Epson technology prior to January 1,
+2003. We had accrued for the $900,000 royalty for past usage as of December
+31, 2003. In accordance with the terms of the agreement, we have paid the
+royalty for past usage in full in January 2005. Under the agreement, we
+continue to pay royalties on a quarterly basis related to the sales of
+licensed printers, which is reflected in cost of sales.
+13. STOCK INCENTIVE PLANS AND WARRANTS
+STOCK INCENTIVE PLANS. We currently have three primary stock incentive
+plans: the 1996 Stock Plan which provides for the grant of awards to
+officers and other key employees of the Company, the 1996 Directors' Stock
+Plan which provides for non-discretionary awards to non-employee directors,
+and the 2001 Employee Stock Plan which provides for the grant of awards to
+key employees of the Company and other non-employees who may provide
+services to the Company. The plans generally provide for awards in the form
+of: (i) incentive stock options, (ii) non-qualified stock options, (iii)
+shares of restricted stock, (iv) restricted units, (v) stock appreciation
+rights or (vi) limited stock appreciation rights. However, the 2001
+Employee Stock Plan does not provide for incentive stock option awards.
+Options granted under these plans are at prices equal to 100% of the fair
+market value of the common stock at the date of grant. Options granted have
+a ten-year term and generally vest over a three- to five-year period,
+unless automatically accelerated for certain defined events. At December
+31, 2004, we have reserved 1,725,000, 360,000 and 225,000 shares of common
+stock for issuance under the 1996 Stock Plan, the 1996 Directors' Stock
+Plan, and the 2001 Employees Stock Plan, respectively.
+EMPLOYEE STOCK PURCHASE PLAN: In May 2000, our shareholders approved
+the Employee Stock Purchase Plan (the "ESPP"), under which 75,000 shares of
+our common stock are available for issuance to employees beginning June 1,
+2000. All full-time employees are eligible to participate in the ESPP at
+the beginning of each six-month period (the "Offering Period"), which
+begins on June 1 and December 1. Eligible employees may elect to withhold
+up to 5% of their salary to purchase shares of our common stock at a price
+equal to 85% of the fair market value of the stock on the first or last day
+of each Offering Period, whichever is lower. The ESPP will terminate at the
+earlier of May 31, 2005 or the date on which all 75,000 shares available
+for issuance under the ESPP have been sold. We sold 3,706, 3,130 and 7,274
+shares of common stock under the ESPP during 2004, 2003 and 2002,
+respectively. At December 31, 2004, 43,985 shares remained available for
+sale.
+40
+TRANSACT TECHNOLOGIES INCORPORATED
+NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
+13. STOCK INCENTIVE PLANS AND WARRANTS (CONTINUED)
+The 1996 Stock Plan, 1996 Directors' Stock Plan and 2001 Employee
+Stock Plan option activity is summarized below:
+Year Ended December 31,
+------------------------------------------------------------------
+2004 2003 2002
+-------------------- -------------------- --------------------
+Weighted Weighted Weighted
+Average Average Average
+Exercise Exercise Exercise
+Shares Price Shares Price Shares Price
+--------- -------- --------- -------- --------- --------
+Outstanding at beginning of
+period: 1,123,533 $ 6.74 1,418,079 $4.20 1,114,104 $4.63
+Granted 52,750 26.81 102,000 5.84 550,125 3.65
+Exercised (321,947) 4.30 (357,906) 3.79 (39,150) 2.83
+Canceled (40,672) 5.74 (38,640) 3.81 (207,000) 5.31
+--------- ------ --------- ----- --------- -----
+Outstanding at end of period 813,664 $ 5.96 1,123,533 $4.49 1,418,079 $4.20
+========= ====== ========= ===== ========= =====
+Options exercisable at end of
+period 458,382 $ 4.67 542,630 $4.72 644,768 $4.54
+========= ====== ========= ===== ========= =====
+Options Outstanding Options Exercisable
+--------------------------------------------- --------------------------
+Weighted- Weighted- Weighted-
+Outstanding at Average Average Exercisable at Average
+December 31, Exercise Remaining December 31, Exercise
+Range of Exercise Prices 2004 Price Contractual Life 2004 Price
+------------------------ -------------- --------- ---------------- -------------- ---------
+(In years)
+$ 2.00 - $ 5.00 510,877 $ 3.66 6.6 267,870 $ 3.62
+5.01 - 7.50 233,787 6.11 4.0 176,262 5.95
+7.51 - 10.00 14,250 8.12 3.0 13,250 8.04
+10.01 - 25.00 19,000 16.24 9.0 1,000 16.08
+25.01 - 35.00 35,750 31.66 9.4 -- --
+------- -------
+813,664 5.96 6.0 458,382 4.67
+======= =======
+The fair value of each option grant is estimated on the date of grant
+using the Black-Scholes option pricing model with the following assumptions
+used for the grants made during the years ended December 31, 2004, 2003 and
+2002.
+Year Ended December 31,
+---------------------------------
+2004 2003 2002
+--------- --------- ---------
+Risk-free interest rate 3.6% 2.6% 4.5%
+Dividend yield 0% 0% 0%
+Expected volatility factor 81.5% 82.1% 83.3%
+Expected option term 8.9 years 5.8 years 6.4 years
+Weighted average fair value of options granted during period $20.64 $6.09 $4.12
+41
+TRANSACT TECHNOLOGIES INCORPORATED
+NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
+13. STOCK INCENTIVE PLANS AND WARRANTS (CONTINUED)
+RESTRICTED STOCK: Under the 1996 Stock Plan, we have granted shares of
+restricted common stock, for no consideration, to our officers, one outside
+director and certain key employees. The 1996 Stock Plan restricted stock
+activity is summarized below:
+Year Ended December 31,
+---------------------------
+2004 2003 2002
+------- ------- -------
+Outstanding shares at beginning of period 16,999 69,999 134,040
+Granted 81,000 -- --
+Vested (15,499) (53,000) (63,141)
+Canceled (3,000) -- (900)
+------- ------- -------
+Outstanding shares at end of period 79,500 16,999 69,999
+======= ======= =======
+We granted 81,000 shares of restricted stock during 2004 at weighted
+average grant price of $17.28. No restricted stock was granted during 2003
+or 2002. Of the 79,500 shares of restricted stock outstanding at December
+31, 2004, 75,750 shares vest over a five-year period, 3,000 shares vest
+over a three-year period and 750 shares vest over a one-year period. Under
+certain conditions, vesting may be automatically accelerated. Upon issuance
+of the restricted stock, unearned compensation equivalent to the market
+value at the date of grant is charged to shareholders' equity and
+subsequently amortized as compensation expense over the vesting period.
+Compensation expense of $291,000, $67,000 and $184,000 was recorded during
+2004, 2003 and 2002, respectively.
+WARRANTS: On April 7, 2000, in connection with the sale of the
+Preferred Stock, we issued to our investment advisors, McFarland Dewey &
+Co. ("McFarland"), warrants to purchase from the Company up to 15,000
+shares of common stock at an exercise price of $6.00 per share. These
+warrants were exercised March 9, 2004 and are no longer outstanding as of
+December 31, 2004.
+14. STOCKHOLDER RIGHTS PLAN
+In December 1997, the Board of Directors adopted a Stockholder Rights
+Plan declaring a distribution of one right (the "Rights") for each
+outstanding share of our common stock to shareholders of record at December
+15, 1997. Initially, each of the Rights will entitle the registered holder
+to purchase from the Company one one-thousandth of a share of Series A
+Preferred Stock, $0.01 par value, at a price of $69 per one one-thousandth
+of a share. The Rights, however, will not become exercisable unless and
+until, among other things, any person or group of affiliated persons
+acquires beneficial ownership of 15 percent or more of the then outstanding
+shares of the Company's Common Stock. If a person, or group of persons,
+acquires 15 percent or more of the outstanding Common Stock of the Company
+(subject to certain conditions and exceptions more fully described in the
+Rights Agreement), each Right will entitle the holder (other than the
+person, or group of persons, who acquired 15 percent or more of the
+outstanding Common Stock) to purchase Preferred Stock of the Company having
+a market value equal to twice the exercise price of the Right. The Rights
+are redeemable, under certain circumstances, for $0.0001 per Right and will
+expire, unless earlier redeemed, on December 2, 2007.
+On February 16, 1999, we amended the Stockholder Rights Plan to remove
+the provision in the plan that stipulated that the plan may be modified or
+redeemed only by those members of the Board of Directors who are defined as
+continuing directors.
+42
+TRANSACT TECHNOLOGIES INCORPORATED
+NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
+15. INCOME TAXES
+The components of the income tax provision (benefit) are as follows:
+Year Ended December 31,
+-------------------------
+(In thousands) 2004 2003 2002
+-------------- ------ ------ -------
+Current:
+Federal $2,077 $1,121 $(1,493)
+State 216 94 25
+Foreign 306 131 110
+------ ------ -------
+2,599 1,346 (1,358)
+------ ------ -------
+Deferred:
+Federal 363 (554) 987
+State 17 (67) (19)
+Foreign -- -- --
+------ ------ -------
+380 (621) 968
+------ ------ -------
+Total income tax provision (benefit) $2,979 $ 725 $ (390)
+====== ====== =======
+At December 31, 2004, we have $3,434,000 of state net operating loss
+carryforwards that begin to expire in 2005, and $946,000 of federal net
+operating loss carryforwards that expire in 2024. We also have approximately
+$326,000 in federal research and development tax credit carryforwards that
+expire in 2020. We had foreign income before taxes of $1,084,000, $475,000 and
+$386,000 in 2004, 2003 and 2002, respectively.
+Deferred income taxes arise from temporary differences between the tax
+basis of assets and liabilities and their reported amounts in the financial
+statements. Our gross deferred tax assets and liabilities were comprised of the
+following:
+December 31,
+---------------
+(In thousands) 2004 2003
+-------------- ------ ------
+Gross deferred tax assets:
+Net operating losses $ 423 $ 96
+Accrued restructuring expenses 605 854
+Inventory reserves 742 720
+Deferred revenue 429 761
+Foreign tax and other credits 649 627
+Accrued license fees - 428
+Other liabilities and reserves 636 443
+------ ------
+3,484 3,929
+Valuation allowance (193) (331)
+------ ------
+Net deferred tax assets $3,291 $3,598
+====== ======
+Gross deferred tax liabilities:
+Depreciation $ 540 $ 511
+Other 107 63
+------ ------
+Net deferred tax liabilities $ 647 $ 574
+====== ======
+43
+TRANSACT TECHNOLOGIES INCORPORATED
+NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
+15. INCOME TAXES (CONTINUED)
+Based on tax law changes, we carried our federal net operating losses
+back to prior years and received a tax refund of approximately $1,061,000
+in 2002, and received an additional refund of approximately $104,000 in the
+first quarter of 2004. During 2004 and 2003, we recorded a valuation
+allowance of $193,000 and $331,000 on a portion of our foreign tax credits,
+research and development credits and certain state net operating loss
+carryforwards. We have determined that it is more likely than not that the
+remaining net deferred tax assets will be realized, and no additional
+valuation allowance is considered necessary as of December 31, 2004.
+Differences between the U.S. statutory federal income tax rate and our
+effective income tax rate are analyzed below:
+Year Ended December 31,
+-----------------------
+2004 2003 2002
+---- ---- -----
+Federal statutory tax rate 34.0% 34.0% (34.0)%
+State income taxes, net of federal income taxes 1.0 1.2 (0.3)
+Tax benefit from tax credits, net of valuation allowance (0.8) -- (10.6)
+Foreign rate differential (0.7) -- 9.5
+Other 1.8 (3.0) (0.6)
+---- ---- -----
+Effective tax rate 35.3% 32.2% (36.0)%
+==== ==== =====
+16. EARNINGS PER SHARE
+For the years ended December 31, 2004, 2003 and 2002, earnings per
+share were computed as follows (in thousands, except per share amounts):
+Year Ended December 31,
+--------------------------
+2004 2003 2002
+------- ------ -------
+Net income (loss) $ 5,458 $1,528 $ (692)
+Dividends and accretion on preferred stock (111) (358) (358)
+Earnings allocation to preferred shareholders (111) (83) --
+------- ------ -------
+Net income (loss) available to common shareholders $ 5,236 $1,087 $(1,050)
+======= ====== =======
+Shares:
+Basic: Weighted average common shares outstanding 9,593 8,690 8,454
+Add: Dilutive effect of outstanding options and
+warrants as determined by the treasury stock method 638 645 --
+------- ------ -------
+Diluted: Weighted average common and common
+equivalent shares outstanding 10,231 9,335 8,454
+======= ====== =======
+Net income (loss) per common share:
+Basic $ 0.55 $ 0.13 $ (0.12)
+Diluted 0.51 0.12 (0.12)
+44
+TRANSACT TECHNOLOGIES INCORPORATED
+NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
+16. EARNINGS PER SHARE (CONTINUED)
+For the years ended December 31, 2004 and December 31, 2003,
+potentially dilutive shares that were excluded from the earnings per share
+calculation, consisted of out-of-the-money stock options and warrants, and
+amounted to 35,750 and 2,000 shares, respectively. Due to our reported net
+loss in the year ended December 31, 2002, all potentially dilutive
+securities, including both in-the-money and out-of-the-money stock options
+and warrants that amounted to 597,000 shares were excluded from the
+earnings per share calculation, as the effect would have been antidilutive.
+In addition, for all periods presented, earnings per share calculations
+assumed no conversion of the convertible mandatorily redeemable preferred
+stock (which is convertible into 666,665 shares of common stock), as the
+effect would have been anti-dilutive.
+17. LOAN TO OFFICER
+On February 23, 1999, with the Board of Directors' approval,
+we provided a $330,000 loan to an officer of the Company. The loan
+was payable on February 23, 2004, and was a full recourse obligation
+to the officer collateralized by 154,000 shares of our common stock, which
+included 50,000 shares of restricted stock. The principal amount of the
+loan was recorded as a deduction from shareholders' equity. In June 2003,
+the officer of the Company repaid the outstanding loan of $330,000, plus
+accrued interest of $113,000.
+18. PREFERRED STOCK
+On April 7, 2000 we sold 4,000 shares of 7% Series B Cumulative
+Convertible Redeemable Preferred Stock (the "Preferred Stock") in
+consideration of $1,000 per share (the "Stated Value"), for a total of
+$4,000,000, less issuance costs. The Preferred Stock was convertible at any
+time by the holders at a conversion price of $6.00 per common share. In
+addition, we issued warrants pro-rata to the Preferred Stock holders to
+purchase an aggregate of 66,666 shares of our common stock at an exercise
+price of $6.00 per common share, exercisable until April 7, 2005. The
+discount on the preferred stock related to the relative fair value of the
+warrants of $175,000 was being accreted as a direct charge to retained
+earnings ratably over 60 months. The holders of the Preferred Stock were
+entitled to receive a cumulative annual dividend of $70 per share, payable
+quarterly and had preference to any other dividends, if any, paid by the
+Company.
+On July 8, 2003, the holders of the Preferred Stock exercised their
+66,666 warrants to purchase common stock at $6 per share. In lieu of cash
+consideration, we canceled 47,731 of their warrants in exchange for the
+issuance of 18,934 shares of common stock.
+In April 2004, all shareholders of our Series B Preferred Stock
+converted all their preferred shares into common stock. Under the
+conversion, a total of 666,665 new shares of common stock were issued. At
+the time of the conversion, dividends in the amount of approximately
+$16,000 were paid to the preferred shareholders through the date of the
+conversion, and no future dividend payments are required. The Company
+recorded the costs of registering and issuing these shares as a deduction
+in Additional Paid-In Capital.
+19. INTERNATIONAL OPERATIONS
+We have foreign operations primarily from TransAct Technologies Ltd.,
+a wholly-owned subsidiary, which had sales to its customers of
+approximately $1,000,000, $1,068,000 and $738,000 in 2004, 2003 and 2002,
+respectively. We had sales from the United States to our customers outside
+of the United States of approximately $5,423,000, $3,663,000 and $3,968,000
+in 2004, 2003 and 2002, respectively. International sales do not include
+sales of printers made to domestic distributors or other domestic customers
+who in turn ship those printers to international destinations.
+45
+TRANSACT TECHNOLOGIES INCORPORATED
+NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
+20. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
+Our quarterly results of operations for 2004 and 2003 are as follows:
+Quarter Ended
+-----------------------------------------------
+(In thousands, except per share amounts) March 31 June 30 September 30 December 31
+-------- ------- ------------ -----------
+2004:
+Net sales $15,075 $14,694 $15,482 $14,596
+Gross profit 5,418 5,617 5,897 5,110
+Net income 1,342 1,465 1,625 1,026
+Net income available to common shareholders 1,165 1,421 1,625 1,026
+Net income per share:
+Basic 0.13 0.15 0.16 0.10
+Diluted 0.12 0.14 0.15 0.10
+March 31 June 30 September 30 December 31
+-------- ------- ------------ -----------
+2003:
+Net sales $9,012 $13,378 $15,048 $14,660
+Gross profit 2,441 4,212 4,819 4,071
+Net income (loss) (198) 787 1,140 (201)
+Net income (loss) available to common shareholders (288) 641 976 (290)
+Net income (loss) per share:
+Basic (0.03) 0.07 0.11 (0.03)
+Diluted (0.03) 0.07 0.10 (0.03)
+46
+ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
+FINANCIAL DISCLOSURE.
+None.
+ITEM 9A. CONTROLS AND PROCEDURES
+Attached as exhibits to this Form 10-K are certifications of our Chief
+Executive Officer (CEO) and Chief Financial Officer (CFO), which are required in
+accordance with Rule 13a-14 of the Securities Exchange Act of 1934, as amended
+(the Exchange Act). This "Controls and Procedures" section includes information
+concerning the controls and controls evaluation referred to in the
+certifications. Part II, Item 8 of this Form 10-K sets forth the report of
+PricewaterhouseCoopers LLP, our independent registered public accounting firm,
+regarding its audit of TransAct's internal control over financial reporting as
+of December 31, 2004 and of management's assessment of internal control over
+financial reporting as of December 31, 2004 set forth below in this section.
+This section should be read in conjunction with the certifications and the
+PricewaterhouseCoopers LLP report for a more complete understanding of the
+topics presented.
+EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
+We conducted an evaluation of the effectiveness of the design and operation
+of our "disclosure controls and procedures" (Disclosure Controls) as of the end
+of the period covered by this Form 10-K. The controls evaluation was conducted
+under the supervision and with the participation of management, including our
+CEO and CFO. Disclosure Controls are controls and procedures designed to
+reasonably assure that information required to be disclosed in our reports filed
+under the Exchange Act, such as this Form 10-K, is recorded, processed,
+summarized and reported within the time periods specified in the U.S. Securities
+and Exchange Commission's (SEC's) rules and forms. Disclosure Controls are also
+designed to reasonably assure that such information is accumulated and
+communicated to our management, including the CEO and CFO, as appropriate to
+allow timely decisions regarding required disclosure. Our quarterly evaluation
+of Disclosure Controls includes an evaluation of some components of our internal
+control over financial reporting, and internal control over financial reporting
+is also separately evaluated on an annual basis for purposes of providing the
+management report which is set forth below.
+The evaluation of our Disclosure Controls included a review of the
+controls' objectives and design, the company's implementation of the controls
+and the effect of the controls on the information generated for use in this Form
+10-K. In the course of the controls evaluation, we reviewed identified data
+errors, control problems or acts of fraud and sought to confirm that appropriate
+corrective actions, including process improvements, were being undertaken. This
+type of evaluation is performed on a quarterly basis so that the conclusions of
+management, including the CEO and CFO, concerning the effectiveness of the
+Disclosure Controls can be reported in our periodic reports on Form 10-Q and
+Form 10-K. Many of the components of our Disclosure Controls are also evaluated
+on an ongoing basis by personnel in our finance organization. The overall goals
+of these various evaluation activities are to monitor our Disclosure Controls,
+and to modify them as necessary. Our intent is to maintain the Disclosure
+Controls as dynamic systems that change as conditions warrant.
+Based upon the controls evaluation, our CEO and CFO have concluded that, as
+of the end of the period covered by this Form 10-K, our Disclosure Controls were
+effective to provide reasonable assurance that information required to be
+disclosed in our Exchange Act reports is recorded, processed, summarized and
+reported within the time periods specified by the SEC, and that material
+information relating to TransAct and our consolidated subsidiaries is made known
+to management, including the CEO and CFO, particularly during the period when
+our periodic reports are being prepared.
+MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
+Our management is responsible for establishing and maintaining adequate
+internal control over financial reporting to provide reasonable assurance
+regarding the reliability of our financial reporting and the preparation of
+financial statements for external purposes in accordance with generally accepted
+accounting principles. Internal control over financial reporting includes those
+policies and procedures that (i) pertain to the maintenance of records that in
+reasonable detail accurately and fairly reflect the transactions and
+dispositions of the assets of the company; (ii) provide reasonable assurance
+that transactions are recorded as necessary to permit preparation of financial
+statements in accordance with generally accepted accounting principles, and that
+receipts and expenditures of the company are being made only in accordance with
+authorizations of management and directors of the company; and (iii) provide
+reasonable assurance regarding prevention or timely detection of unauthorized
+acquisition, use or disposition of the company's assets that could have a
+material effect on the financial statements.
+Management assessed our internal control over financial reporting as of
+December 31, 2004. Management based its assessment on criteria established in
+Internal Control-Integrated Framework issued by the Committee of Sponsoring
+Organizations of the Treadway Commission.
+47
+Based on our assessment, management has concluded that our internal control
+over financial reporting was effective as of December 31, 2004 based on the COSO
+criteria identified above, to provide reasonable assurance regarding the
+reliablity of financial reporting and the preparation of financial statements
+for external reporting purposes in accordance with generally accepted accounting
+principles.
+Our management's assessment of the effectiveness of the Company's internal
+control over financial reporting as of December 31, 2004 has been audited by
+PricewaterhouseCoopers LLP, an independent registered public accounting firm, as
+stated in their report which appears herein.
+INHERENT LIMITATIONS ON EFFECTIVENESS OF CONTROLS
+The company's management, including the CEO and CFO, does not expect that
+our Disclosure Controls and procedures or our internal control over financial
+reporting will prevent or detect all error and all fraud. A control system, no
+matter how well designed and operated, can provide only reasonable, not
+absolute, assurance that the control system's objectives will be met. The design
+of a control system must reflect the fact that there are resource constraints,
+and the benefits of controls must be considered relative to their costs.
+Further, because of the inherent limitations in all control systems, no
+evaluation of controls can provide absolute assurance that misstatements due to
+error or fraud will not occur or that all control issues and instances of fraud,
+if any, within the company have been detected.
+These inherent limitations include the realities that judgments in
+decision-making can be faulty and that breakdowns can occur because of simple
+error or mistake. Controls can also be circumvented by the individual acts of
+some persons, by collusion of two or more people, or by management override of
+the controls. The design of any system of controls is based in part on certain
+assumptions about the likelihood of future events, and there can be no assurance
+that any design will succeed in achieving its stated goals under all potential
+future conditions. Projections of any evaluation of controls effectiveness to
+future periods are subject to risks. Over time, controls may become inadequate
+because of changes in conditions or deterioration in the degree of compliance
+with policies or procedures.
+PART III
+ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
+All information in response to this item is incorporated by reference from
+the Proxy Statement sections entitled "Election of Directors" and "Executive
+Officers."
+ITEM 11. EXECUTIVE COMPENSATION.
+The information contained in "Executive Compensation" other than the
+"Compensation Committee Report on Executive Compensation" of the Proxy Statement
+is hereby incorporated herein by reference.
+ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
+RELATED STOCKHOLDER MATTERS.
+The information contained in "Security Ownership of Certain Beneficial
+Owners and Management" of the Proxy Statement is hereby incorporated herein by
+reference.
+48
+Information regarding our equity compensation plans as of December 31, 2004
+is as follows:
+(c)Number of securities
+(a) (b) remaining available for
+Number of securities Weighted average future issuance under
+to be issued upon exercise price of equity compensation
+exercise of outstanding plans (excluding
+outstanding options, options, warrants securities reflected
+Plan category warrants and rights and rights in column (a))
+-------------------------------------- -------------------- ----------------- -----------------------
+Equity compensation plans approved
+by security holders:
+1996 Stock Plan 588,899 $3.75 208,649
+1996 Non-Employee Director Plan 206,250 9.99 112,500
+2000 Employee Stock Purchase Plan -- -- 39,733
+------- ----- -------
+Total 795,149 $5.37 360,882
+======= ===== =======
+Equity compensation plans not approved
+by security holders:
+2001 Employee Stock Plan 98,015 5.94 41,859
+======= ===== =======
+The TransAct Technologies Incorporated 2001 Employee Stock Plan (the "2001
+Employee Plan") was adopted by our Board of Directors, without approval of our
+security holders, effective February 26, 2001. Under the 2001 Employee Plan, we
+may issue non-qualified stock options, shares of restricted stock, restricted
+units to acquire shares of common stock, stock appreciation rights and limited
+stock appreciation rights to key employees of TransAct or any of our
+subsidiaries and to non-employees who provide services to TransAct or any of our
+subsidiaries. The 2001 Employee Plan is administered by our Compensation
+Committee, which has the authority to determine the vesting period and other
+similar restrictions and terms of awards, provided that the exercise price of
+options granted under the plan may not be less than the fair market value of the
+underlying shares on the date of grant. Awards may be issued under the 2001
+Employee Plan with respect to up to 225,000 shares of common stock.
+ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
+The information contained in "Certain Relationships and Related
+Transactions" of the Proxy Statement is hereby incorporated herein by reference.
+ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
+The information contained in "Independent Auditors' Fees" of the Proxy
+Statement is herby incorporated herein by reference.
+49
+PART IV
+ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
+THE FOLLOWING FINANCIAL STATEMENTS AND EXHIBITS ARE FILED AS PART OF THIS
+REPORT:
+Financial statements
+(i) See Item 8.
+(ii) Financial statement schedules
+All schedules are omitted since the required information is either (a)
+not present or not present in amounts sufficient to require submission
+of the schedule or (b) included in the financial statements or notes
+thereto.
+(iii) List of exhibits
+3.1(a) Certificate of Incorporation of the Company, filed with the (2)
+Secretary of State of Delaware on June 17, 1996.
+3.1(b) Certificate of Amendment of Certificate of Incorporation of the (4)
+Company, filed with the Secretary of State of Delaware on June
+4, 1997.
+3.1(c) Certificate of Designation, Series A Preferred Stock, filed (5)
+with the Secretary of State of Delaware on December 2, 1997.
+3.1(d) Certificate of Designation, Series B Preferred Stock, filed (8)
+with the Secretary of State of Delaware on April 6, 2000.
+3.2 Amended and Restated By-laws of the Company. (6)
+4.1 Specimen Common Stock Certificate. (2)
+4.2 Amended and Restated Rights Agreement between TransAct and (5)
+American Stock Transfer & Trust Company dated February 16,
+1998.
+10.1(x) 1996 Stock Plan, effective July 30, 1996. (3)
+10.2(x) Non-Employee Directors' Stock Plan, effective August 22, 1996. (3)
+10.3(x) 2000 Employee Stock Purchase Plan. (9)
+10.4(x) 2001 Employee Stock Plan. (10)
+10.5(x) Employment Agreement, dated July 31, 1996, by and between the (2)
+Company and Bart C. Shuldman.
+10.6(x) Employment Agreement, dated July 31, 1996, by and between the (2)
+Company and Richard L. Cote.
+10.7(x) Severance Agreement by and between TransAct and Michael S. (3)
+Kumpf, dated September 4, 1996.
+10.8(x) Severance Agreement by and between TransAct and Steven A. (1)
+DeMartino, dated January 1, 2004.
+10.9 Lease Agreement by and between Bomax Properties and Ithaca, (2)
+dated as of March 23, 1992.
+10.10 Second Amendment to Lease Agreement by and between Bomax (4)
+Properties and Ithaca, dated December 2, 1996.
+10.11 Agreement regarding the Continuation and Renewal of Lease by (13)
+and between Bomax Properties, LLC and TransAct, dated July 18,
+2001.
+10.12 Lease Agreement by and between Pyramid Construction Company and (4)
+Magnetec, dated July 30, 1997.
+10.13 Lease Agreement by and between Las Vegas Airport Properties LLC (1)
+and TransAct Technologies Incorporated dated December 2, 2004.
+50
+10.14 OEM Purchase Agreement by and between GTECH Corporation, (7)
+TransAct Technologies and Magnetec Corporation commencing July
+14, 1999. (Pursuant to Rule 24-b-2 under the Exchange Act, the
+Company has requested confidential treatment of portions of
+this exhibit deleted from the filed copy.)
+10.15 OEM Purchase Agreement by and between GTECH Corporation and (12)
+TransAct Technologies Incorporated commencing July 2, 2002.
+(Pursuant to Rule 24-b-2 under the Exchange Act, the Company
+has requested confidential treatment of portions of this
+exhibit deleted from the filed copy.)
+10.16 OEM Purchase Agreement by and between Okidata Americas, Inc. (11)
+and TransAct, dated June 8, 2001. (Pursuant to Rule 24b-2 under
+the Exchange Act, the Company has requested confidential
+treatment of portions of this exhibit deleted from the filed
+copy.)
+10.17 OEM Purchase Agreement between Oki Data Americas, Inc. ("Oki (13)
+Data") and TransAct Technologies Incorporated dated as of June
+8, 2003. (Pursuant to Rule 24b-2 under the Securities Exchange
+Act of 1934, as amended, the Company has requested confidential
+treatment of portions of this exhibit deleted from the filed
+copy.)
+10.18 Revolving Credit, Equipment Loan and Security Agreement between (13)
+TransAct Technologies Incorporated and Banknorth N.A. dated
+August 6, 2003.
+10.19 First Amendment to Revolving Credit, Equipment Loan and (15)
+Security Agreement dated as of November 12, 2004 between
+TransAct Technologies Incorporated and Banknorth N.A.
+10.20 License Agreement between Seiko Epson Corporation and TransAct (14)
+Technologies Incorporated dated May 17, 2004 (Pursuant to Rule
+24b-2 under the Exchange Act, the Company has requested
+confidential treatment of portions of this exhibit deleted from
+the filed copy.)
+10.21 Preferred Stock Purchase Agreement and Certificate of (8)
+Designation dated as of March 20, 2000 between TransAct
+Technologies Incorporated and Advance Capital Partners, L.P.
+and affiliate 21.1 Subsidiaries of the Company. (1) 23.1
+Consent of PricewaterhouseCoopers LLP. (1) 31.1 Certification
+of Chief Executive Officer pursuant to Section 302 of the (1)
+Sarbanes-Oxley Act of 2002
+31.2 Certification of Chief Financial Officer pursuant to Section (1)
+302 of the Sarbanes-Oxley Act of 2002
+32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. (1)
+Section 1350 as adopted pursuant to Section 906 of the
+Sarbanes-Oxley Act of 2002
+32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. (1)
+Section 1350 as adopted pursuant to Section 906 of the
+Sarbanes-Oxley Act of 2002
+51
+(1) These exhibits are filed herewith.
+(2) These exhibits, which were previously filed with the Company's
+Registration Statement on Form S-1 (No. 333-06895), are incorporated
+by reference.
+(3) These exhibits, which were previously filed with the Company's
+Quarterly Report on Form 10-Q for the period ended September 30,
+1996 (Commission File No. 000-21121), are incorporated by reference.
+(4) These exhibits, which were previously filed with the Company's
+Annual Report on Form 10-K for the year ended December 31, 1997
+(Commission File No. 000-21121), are incorporated by reference.
+(5) This exhibit, which was previously filed with the Company's Current
+Report on Form 8-K filed February 18, 1999 (Commission File No.
+000-21121), is incorporated by reference.
+(6) These exhibits, which were previously filed with the Company's
+Annual Report on Form 10-K for the year ended December 31, 1998
+(Commission File No. 000-21121), are incorporated by reference.
+(7) This exhibit, which was previously filed with the Company's
+Quarterly Report on Form 10-Q for the period ended September 25,
+1999 (Commission File No. 000-21121), is incorporated by reference.
+(8) This exhibit, which was previously filed with the Company's
+Quarterly Report on Form 10-Q for the period ended March 25, 2000,
+is incorporated by reference.
+(9) This exhibit, which was previously filed with the Company's
+Registration Statement on Form S-8 (No. 333-49540), is incorporated
+by reference.
+(10) This exhibit, which was previously filed with the Company's Annual
+Report on Form S-8 (No. 333-59570), is incorporated by reference.
+(11) This exhibit, which was previously filed with the Company's Annual
+Report on Form S-8 (No. 333-59570), is incorporated by reference.
+(12) This exhibit, which was previously filed with the Company's
+Quarterly Report on Form 10-Q for the period ended June 30, 2002, is
+incorporated by reference.
+(13) This exhibit, which was previously filed with the Company's Annual
+Report on Form 10-Q for the year ended June 30, 2003, is
+incorporated by reference.
+(14) This exhibit, which was previously filed with the Company's
+Quarterly Report on Form 10-Q for the period ended June 30, 2004, is
+incorporated by reference.
+(15) This exhibit, which was previously filed with the Company's
+Quarterly Report on Form 10-Q for the period ended September 30,
+2004, is incorporated by reference.
+(x) Management contract or compensatory plan or arrangement required to
+be filed pursuant to Item 14(c).
+52
+SIGNATURES
+Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
+Act of 1934, the registrant has duly caused this report to be signed on its
+behalf by the undersigned, thereunto duly authorized.
+TRANSACT TECHNOLOGIES INCORPORATED
+By: /s/ Bart C. Shuldman
+------------------------------------
+Bart C. Shuldman
+Chairman of the Board, President and
+Chief Executive Officer
+Date: March 16, 2005
+Pursuant to the requirements of the Securities Exchange Act of 1934, this report
+has been signed below by the following persons on behalf of the registrant and
+in the capacities and on the dates indicated.
+Signature Title Date
+--------- ----- ----
+/s/ Bart C. Shuldman Chairman of the Board, President and March 16, 2005
+-------------------------- Chief Executive Officer
+Bart C. Shuldman (Principal Executive Officer)
+/s/ Steven A. DeMartino Executive Vice President, Chief Financial March 16, 2005
+-------------------------- Officer, Treasurer and Secretary
+Steven A. DeMartino (Principal Financial and Accounting Officer)
+/s/ Charles A. Dill Director March 16, 2005
+--------------------------
+Charles A. Dill
+/s/ Thomas R. Schwarz Director March 16, 2005
+--------------------------
+Thomas R. Schwarz
+/s/ Graham Y. Tanaka Director March 16, 2005
+--------------------------
+Graham Y. Tanaka
+53
+EXHIBIT LIST
+The following exhibits are filed herewith.
+Exhibit
+-------
+21.1 Subsidiaries of the Company
+23.1 Consent of PricewaterhouseCoopers LLP
+31.1 Certification of Chief Executive Officer pursuant to Section 302 of
+the Sarbanes-Oxley Act of 2002
+31.2 Certification of Chief Financial Officer pursuant to Section 302 of
+the Sarbanes-Oxley Act of 2002
+32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
+1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
+2002
+32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section
+1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
+2002
+10.8(x) Severance Agreement by and between TransAct and Steven A. DeMartino,
+dated June 1, 2004.
+10.13 Lease Agreement by and between Las Vegas Airport Properties LLC and
+TransAct Technologies Incorporated dated December 2, 2004.
+54
\ No newline at end of file
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@@ -0,0 +1,2 @@
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+0001017303,TACT,TRANSACT TECHNOLOGIES INC,10-K,2005-03-16,2004-12-31,2005-03-16T20:17:44.000Z,0000950123-05-003228,y06777e10vk.txt,TRANSACT TECHNOLOGIES INCORPORATED,468785,0,0,https://www.sec.gov/Archives/edgar/data/1017303/000095012305003228/y06777e10vk.txt,https://www.sec.gov/Archives/edgar/data/1017303/000095012305003228/,2004,2004,1
diff --git a/raw/filings/0001017303/2004/0000950123-05-003228/item1.txt b/raw/filings/0001017303/2004/0000950123-05-003228/item1.txt
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+ITEM 1. BUSINESS.
+THE COMPANY
+TransAct was incorporated in June 1996 and began operating as a stand-alone
+business in August 1996 as a spin-off of the printer business that was formerly
+conducted by certain subsidiaries of Tridex Corporation. We completed an initial
+public offering on August 22, 1996.
+TransAct Technologies Incorporated ("TransAct" or the "Company") designs,
+develops, manufactures and markets transaction-based printers under the
+ithaca(R) brand name. In addition, we market related consumables, spare parts
+and service. Our printers are used worldwide to provide transaction records such
+as receipts, tickets, coupons, register journals and other documents. We focus
+on two core markets: (1) point-of-sale ("POS") and banking and (2) gaming and
+lottery. We sell our products directly to original equipment manufacturers
+("OEMs"), value-added resellers ("VARs"), selected distributors and directly to
+end-users. Our product distribution spans across the Americas, Europe, the
+Middle East, Africa, the Caribbean Islands and the South Pacific. We have one
+primary operating facility located in Ithaca, New York, seven sales offices
+located in the United States (including our new global gaming and lottery
+headquarters and western region service center in Las Vegas, NV), and a European
+sales and service center in the United Kingdom. Our executive offices and
+eastern region service center are located at 7 Laser Lane, Wallingford, CT
+06492, with a telephone number of (203) 269-1198.
+FINANCIAL INFORMATION ABOUT SEGMENTS
+We have assessed our operating and reportable segments and have determined
+that we operate in one reportable segment, the design, development, manufacture
+and marketing of transaction-based printers and printer-related products.
+PRODUCTS AND SERVICES
+Printers
+TransAct designs, develops, assembles and markets a broad array of
+transaction-based printers utilizing inkjet, thermal and impact printing
+technology for applications requiring up to 60 character columns, primarily in
+the POS and banking, and gaming and lottery markets. Our printers are
+configurable and offer customers the ability to choose from a variety of
+features and functions. Options typically include interface configuration, paper
+cutting devices, paper handling capacities and cabinetry color. In addition to
+our configurable printers, we manufacture custom printers for certain OEM
+customers. In collaboration with these customers, we provide engineering and
+manufacturing expertise for the design and development of specialized printers
+POS and banking: Our POS and banking printers include hundreds of optional
+configurations that can be selected to meet particular customer needs. We
+believe that this is a significant competitive strength, as it allows us to
+satisfy a wide variety of printing applications that our customers request. In
+the POS market, we sell several models of printers utilizing inkjet, thermal and
+impact printing technology. Our printers are used primarily by retailers in the
+hospitality, restaurant (including fine dining, casual dining, and fast food)
+and specialty retail industries to print receipts for consumers, validate
+checks, or print on other inserted media. We also sell printers that are used by
+banks, credit unions and other financial institutions to print and/or validate
+receipts at bank teller stations.
+Gaming and lottery: In the lottery portion of our gaming and lottery
+market, we supply lottery printers to GTECH, our largest customer and the
+world's largest provider of lottery terminals, with an approximately 70% market
+share. These printers are designed for high-volume, high-speed printing of
+lottery tickets for various lottery applications.
+In the gaming portion of our gaming and lottery market, we sell several
+models of printers used in slot machines and video lottery terminals that print
+tickets instead of issuing coins at casinos and racetracks worldwide. These
+printers utilize thermal printing technology and can print tickets in monochrome
+or two-color (depending upon the model), and offer various other features such
+as jam resistant bezels and a dual port interface that will allow casinos to
+print two-color coupons/promotions. We also sell printers using impact printing
+technology for use mainly in video lottery terminals and other gaming devices.
+1
+Service
+Through our recently-established TransAct Services Group, we proactively
+market the sale of consumable products (including inkjet cartridges, ribbons and
+paper), replacement parts and maintenance services for all of our products. Our
+maintenance services include the sale of extended warranties, multi-year
+maintenance contracts, 24-hour guaranteed replacement product service, and other
+repair services for our printer products. Within the United States, we provide
+repair services through our eastern region service center in Wallingford, CT and
+our western region service center in Las Vegas, NV. Internationally, we provide
+repair services through our European service center located in Doncaster, United
+Kingdom, and other partners strategically located around the world.
+We also provide customers with telephone sales and technical support, and a
+personal account representative to handle orders, shipping and general
+information. Technical and sales support personnel receive training on all of
+our manufactured products and our services.
+Product Warranty
+Our printers generally carry up to a two-year limited warranty against
+defects in material and workmanship, Defective equipment may be returned to any
+of our service centers, or our manufacturing facility in Ithaca, NY, for repair
+or replacement during the applicable warranty period.
+PRODUCTION, MANUFACTURING AND SOURCES AND AVAILABILITY OF RAW MATERIALS
+We design our products to optimize product performance, quality,
+reliability and durability. These designs combine cost efficient materials,
+sourcing and assembly methods with high standards of workmanship. We final
+assemble our products in our Ithaca, NY facility largely on a configure-to-order
+basis using components that have been sourced from around the world. Our
+manufacturing engineers work closely with our new product engineers and vendors
+during the development of new products. As a result, this collaboration
+increases manufacturing efficiency by specifying materials and designing
+manufacturing processes in conjunction with new product design.
+We procure component parts and subassemblies for use in the manufacture of
+our products. Critical component parts and subassemblies include inkjet, thermal
+and impact printheads, printing/cutting mechanisms, power supplies, motors,
+injection molded plastic parts, circuit boards and electronic components, which
+are obtained from domestic and foreign suppliers at competitive prices. We
+typically maintain several sources for our component parts and subassemblies to
+reduce the risk of parts shortages or unavailability. However, we could
+experience temporary disruption if certain suppliers ceased doing business with
+us, as described below.
+Okidata Americas, Inc. ("Okidata"), is the sole supplier for a printer
+component kit consisting of a printhead, control board and carriage (the "Oki
+Kit"), that is used in all of our ithaca(R) brand impact printers. The loss of
+the supply of Oki Kits would have a material adverse effect on TransAct. We have
+a supply agreement with Okidata to provide Oki Kits until June 8, 2005. Prices
+under this agreement are fixed, but may be changed by Okidata after providing
+180 days written notice.
+Hewlett-Packard Company ("HP") is the sole supplier of inkjet cartridges
+that are used in all of our inkjet printers. The loss of the supply of HP inkjet
+cartridges would have a material adverse effect on the sale of our inkjet
+printers. We have a supply agreement with HP to purchase inkjet cartridges until
+February 1, 2006 at fixed prices.
+We believe our relations with Okidata and HP are in good standing and have
+received no indication that these supply agreements will not be renewed beyond
+the respective expiration dates of the current contracts. We cannot be certain,
+however, that these supply agreements will be renewed, or if renewed, that the
+terms will be as favorable as those under the current contracts.
+2
+PATENTS AND PROPRIETARY INFORMATION
+We have significantly expanded our patent portfolio over the past five
+years, and expect to continue to do so in the future. We also believe our patent
+portfolio will provide additional opportunities to license our intellectual
+property in the future. We currently own ten patents, six of which we consider
+material. The earliest expiration date of these ten patents is in 2008, with the
+latest expiration date in 2021. Of the material patents, one patent covers
+methods and apparatus for allowing a two-color printer to print images using
+single pass technology by printing during both forward and reverse movement of
+the print mechanism; another patent relates to our proprietary void and reprint
+receipt printing method which is used in certain of our slot machine printers;
+two patents prevent ticket jams resulting from player interference in certain of
+our slot machine printers; and two other patents cover a method for converting a
+full color image into a two-color image, plus a background color. We also have
+sought patent protection for certain design features of 1) printers using inkjet
+technology, 2) POS printers using thermal technology, and 3) thermal printers
+for use in casino slot machines. We regard certain manufacturing processes and
+designs to be proprietary and attempt to protect them through employee and
+third-party nondisclosure agreements and similar means. It may be possible for
+unauthorized third parties to copy certain portions of our products or to
+reverse engineer or otherwise obtain and use, to our detriment, information that
+we regard as proprietary. Moreover, the laws of some foreign countries do not
+afford the same protection to our proprietary rights as do United States laws.
+There can be no assurance that legal protections relied upon by the Company to
+protect our proprietary position will be adequate or that our competitors will
+not independently develop technologies that are substantially equivalent or
+superior to our technologies.
+During the second quarter of 2004, we signed a cross licensing agreement
+with Seiko Epson. Under the agreement, Seiko Epson received a license to three
+of our patents, and we received a license to eighteen of Seiko Epson's patents
+relating to printing applications for the point of sale and banking markets. In
+addition, we agreed to pay $900,000 as a royalty for the usage of certain Seiko
+Epson technology prior to January 1, 2003. In accordance with the terms of the
+agreement, we paid the $900,000 royalty for past usage in full by January 2005.
+Under the agreement, we continue to pay royalties on a quarterly basis related
+to the sales of licensed printers, which is reflected in cost of sales.
+SEASONALITY
+Retailers typically reduce purchases of new POS equipment in the fourth
+quarter, due to the increased volume of consumer transactions in that holiday
+period, and our sales of printers in the POS market historically have increased
+in the third quarter and decreased in the fourth quarter. Similarly,
+installations of lottery terminals are typically reduced in the fourth quarter
+resulting in decreased sales of lottery printers.
+CERTAIN CUSTOMERS
+We currently have one ongoing OEM purchase agreement ("GTECH Thermal
+Printer Agreement") with GTECH Corporation ("GTECH") that provides for the sale
+of thermal on-line lottery printers and spares parts, at fixed prices, through
+June 28, 2007. We also had a second purchase agreement ("GTECH Impact Printer
+Agreement") that provided for the sale of impact on-line lottery printers and
+spare parts through December 31, 2004. Because our new thermal on-line lottery
+printer is a replacement for our impact on-line printer, we do not expect any
+further shipments of impact on-line lottery printers beyond 2004. However, we do
+expect to continue to sell spare parts to GTECH for the significant remaining
+installed base of impact on-line lottery printers. Firm purchase orders for
+printers under the GTECH Thermal Printer Agreement may be placed annually by
+GTECH. Pursuant to the GTECH Thermal Printer Agreement, as of March 4, 2005, we
+have received orders for approximately $2,000,000 of thermal printers for
+delivery in 2005. We expect to receive additional orders from GTECH for thermal
+printers during 2005. We also sell printers to GTECH for use in lottery
+terminals at grocery store check-out lanes ("in-lane lottery printers"). Sales
+of in-lane lottery printers are project-oriented, and, as such, we cannot
+predict if and when future sales may occur. Sales to GTECH accounted for
+approximately 16%, 19% and 27% of net sales in 2004, 2003 and 2002,
+respectively.
+We also provide printers to Harrah's and WMS Gaming for use in casino slot
+machines throughout the United States. During 2004, sales to WMS Gaming
+accounted for approximately 14% of net sales. During 2003, sales to Harrah's
+accounted for approximately 12% of net sales.
+BACKLOG
+Excluding GTECH, our backlog of firm orders was approximately $2,650,000 as
+of March 4, 2005, compared to $2,144,000 as of March 5, 2004. Our backlog from
+GTECH was approximately $600,000 as of March 4, 2005, compared to $3,200,000 as
+of March 5, 2004. Based on customers' current delivery requirements, we expect
+to ship our entire current backlog during 2005.
+3
+COMPETITION
+The market for transaction-based printers is extremely competitive, and we
+expect such competition to continue in the future. We compete with a number of
+companies, many of which have greater financial, technical and marketing
+resources than us. We believe our ability to compete successfully depends on a
+number of factors both within and outside our control, including durability,
+reliability, quality, design capability, product customization, price, customer
+support, success in developing new products, manufacturing expertise and
+capacity, supply of component parts and materials, strategic relationships with
+suppliers, the timing of new product introductions by us and our competitors,
+general market, economic and political conditions and, in some cases, the
+uniqueness of our products.
+In the POS market, our major competitor is Epson America, Inc., which
+controls a dominant portion of the POS markets into which we sell. We also
+compete, to a much lesser extent, with Transaction Printer Group, Star Micronics
+America, Inc., Citizen -- CBM America Corporation, and Korean Printer Solutions.
+Certain competitors of ours have greater financial resources, lower costs
+attributable to higher volume production and sometimes offer lower prices than
+us.
+In the lottery market (consisting principally of on-line lottery
+transaction printing), we hold a leading position, based largely on our
+long-term purchase agreements with GTECH, which controls approximately 70% of
+the worldwide on-line lottery market. We compete in this market based solely on
+our ability to provide specialized, custom-engineered products to GTECH.
+In the gaming market (consisting principally of slot machine and video
+lottery terminal transaction printing), we and our major competitor,
+FutureLogic, Inc., comprise a substantial portion of the market. Certain of our
+products sold for gaming applications compete based upon our ability to provide
+highly specialized products, custom engineering and ongoing technical support.
+Our strategy for competing in our markets is to continue to develop new
+products and product line extensions, to increase our geographic market
+penetration, to take advantage of strategic relationships, and to lower product
+costs by sourcing certain products overseas. We expect to particularly focus on
+(1) promoting our line of slot machine printers into the gaming market including
+our newly launched Epic950(TM) thermal casino printer, (2) increasing sales of
+our new iTherm(R)280 thermal POS printer and family of printers utilizing
+Hewlett Packard's inkjet printing technology, including our BANKjet(R) line of
+inkjet printers used in bank teller applications and (3) expanding our
+consumables, spare parts and service business. Although we believe that our
+products, operations and relationships provide a competitive foundation, there
+can be no assurance that we will compete successfully in the future.
+RESEARCH AND DEVELOPMENT ACTIVITIES
+We spent approximately $2,715,000, $2,276,000 and $2,025,000 in 2004, 2003
+and 2002, respectively, on engineering, design and product development efforts
+in connection with specialized engineering and design to introduce new products
+and to customize existing products. During 2005, we expect to focus the majority
+of our research and development activities on the continuing development and
+enhancement of (1) our family of printers for the POS and banking market
+utilizing inkjet and thermal printing technology and, to a lesser extent, (2)
+our ticket-issuing printers for use in the casino market.
+ENVIRONMENT
+We are not aware of any material noncompliance with federal, state and
+local provisions that have been enacted or adopted regulating the discharge of
+materials into the environment, or otherwise relating to the protection of the
+environment.
+EMPLOYEES
+As of February 25, 2005, TransAct Technologies and our subsidiaries
+employed 197 persons, of whom 160 were full-time and 37 were temporary
+employees. None of our employees is unionized, and we consider our relationships
+with our employees to be good.
+4
+FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS
+We have foreign operations primarily from TransAct Technologies Ltd., a
+wholly-owned subsidiary located in the United Kingdom, which had sales to its
+customers of $1,000,000, $1,068,000, and $738,000, (primarily to Fujitsu for
+sales and service of printers used in the British Post Office) in 2004, 2003 and
+2002, respectively. We had export sales from our domestic operations of
+approximately $5,423,000, $3,663,000 and $3,968,000 in 2004, 2003 and 2002,
+respectively. Total international sales, which include sales from our foreign
+subsidiary and export sales from our domestic operations, were approximately
+$6,423,000, $4,731,000 and $4,706,000 in 2004, 2003 and 2002, respectively.
+ADDITIONAL INFORMATION
+We make available free of charge through our internet website,
+WWW.TRANSACT-TECH.COM, our annual report on Form 10-K, quarterly reports on Form
+10-Q, current reports on Form 8-K, and all amendments to those reports as soon
+as reasonably practicable after such material is electronically filed with or
+furnished to the SEC.
+We maintain a Code of Business Conduct that includes our code of ethics
+that is applicable to all employees, including our Chief Executive Officer,
+Chief Financial Officer and Controller. This Code, which requires continued
+observance of high ethical standards such as honesty, integrity and compliance
+with the law in the conduct of our business, is available for public access on
+our internet website.
+EXECUTIVE OFFICERS OF THE REGISTRANT
+Pursuant to General Instructions G(3) of Form 10-K, the following list is
+included as an unnumbered item in Part I of this Report in lieu of being
+included in the Proxy Statement for the Annual Meeting of Stockholders to be
+held on May 25, 2005.
+The following is a list of the names and ages of all executive officers of
+the registrant, indicating all positions and offices with the registrant held by
+each such person and each person's principal occupations and employment during
+at least the past five years.
+Name Age Position
+---- --- --------
+Bart C. Shuldman 47 Chairman of the Board, President and Chief Executive
+Officer
+Steven A. DeMartino 35 Executive Vice President, Chief Financial Officer,
+Treasurer and Secretary
+Michael S. Kumpf 55 Executive Vice President - Engineering
+BART C. SHULDMAN has been Chief Executive Officer, President and a Director
+of the Company since its formation in June 1996. Previously, Mr. Shuldman served
+as President of Magnetec and later the combined operations of Magnetec and
+Ithaca from August 1993 until June 1996. In February 2001, Mr. Shuldman was
+elected Chairman of the Board.
+STEVEN A. DEMARTINO was named as TransAct's Executive Vice President, Chief
+Financial Officer, Treasurer and Secretary on June 1, 2004. Previously, Mr.
+DeMartino served as Senior Vice President, Finance and Information Technology
+from October 2001 to May 2004, Vice President and Corporate Controller from
+January 1998 to October 2001, and Corporate Controller from August 1996 to
+December 1997. Prior to joining TransAct, Mr. DeMartino was a self-employed
+financial consultant from May 1996 to August 1996. Prior thereto, Mr. DeMartino
+served as Controller of Copart, Inc. from September 1994 to May 1996. Mr.
+DeMartino is a certified public accountant.
+MICHAEL S. KUMPF was appointed Executive Vice President of Engineering in
+March 2002. He served as Senior Vice President, Engineering from June 1996 to
+March 2002 and Vice President, Engineering of Ithaca from 1991 until June 1996.
+5
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@@ -0,0 +1,3 @@
+ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
+The information contained in "Certain Relationships and Related
+Transactions" of the Proxy Statement is hereby incorporated herein by reference.
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@@ -0,0 +1,108 @@
+ITEM 9A. CONTROLS AND PROCEDURES
+Attached as exhibits to this Form 10-K are certifications of our Chief
+Executive Officer (CEO) and Chief Financial Officer (CFO), which are required in
+accordance with Rule 13a-14 of the Securities Exchange Act of 1934, as amended
+(the Exchange Act). This "Controls and Procedures" section includes information
+concerning the controls and controls evaluation referred to in the
+certifications. Part II, Item 8 of this Form 10-K sets forth the report of
+PricewaterhouseCoopers LLP, our independent registered public accounting firm,
+regarding its audit of TransAct's internal control over financial reporting as
+of December 31, 2004 and of management's assessment of internal control over
+financial reporting as of December 31, 2004 set forth below in this section.
+This section should be read in conjunction with the certifications and the
+PricewaterhouseCoopers LLP report for a more complete understanding of the
+topics presented.
+EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
+We conducted an evaluation of the effectiveness of the design and operation
+of our "disclosure controls and procedures" (Disclosure Controls) as of the end
+of the period covered by this Form 10-K. The controls evaluation was conducted
+under the supervision and with the participation of management, including our
+CEO and CFO. Disclosure Controls are controls and procedures designed to
+reasonably assure that information required to be disclosed in our reports filed
+under the Exchange Act, such as this Form 10-K, is recorded, processed,
+summarized and reported within the time periods specified in the U.S. Securities
+and Exchange Commission's (SEC's) rules and forms. Disclosure Controls are also
+designed to reasonably assure that such information is accumulated and
+communicated to our management, including the CEO and CFO, as appropriate to
+allow timely decisions regarding required disclosure. Our quarterly evaluation
+of Disclosure Controls includes an evaluation of some components of our internal
+control over financial reporting, and internal control over financial reporting
+is also separately evaluated on an annual basis for purposes of providing the
+management report which is set forth below.
+The evaluation of our Disclosure Controls included a review of the
+controls' objectives and design, the company's implementation of the controls
+and the effect of the controls on the information generated for use in this Form
+10-K. In the course of the controls evaluation, we reviewed identified data
+errors, control problems or acts of fraud and sought to confirm that appropriate
+corrective actions, including process improvements, were being undertaken. This
+type of evaluation is performed on a quarterly basis so that the conclusions of
+management, including the CEO and CFO, concerning the effectiveness of the
+Disclosure Controls can be reported in our periodic reports on Form 10-Q and
+Form 10-K. Many of the components of our Disclosure Controls are also evaluated
+on an ongoing basis by personnel in our finance organization. The overall goals
+of these various evaluation activities are to monitor our Disclosure Controls,
+and to modify them as necessary. Our intent is to maintain the Disclosure
+Controls as dynamic systems that change as conditions warrant.
+Based upon the controls evaluation, our CEO and CFO have concluded that, as
+of the end of the period covered by this Form 10-K, our Disclosure Controls were
+effective to provide reasonable assurance that information required to be
+disclosed in our Exchange Act reports is recorded, processed, summarized and
+reported within the time periods specified by the SEC, and that material
+information relating to TransAct and our consolidated subsidiaries is made known
+to management, including the CEO and CFO, particularly during the period when
+our periodic reports are being prepared.
+MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
+Our management is responsible for establishing and maintaining adequate
+internal control over financial reporting to provide reasonable assurance
+regarding the reliability of our financial reporting and the preparation of
+financial statements for external purposes in accordance with generally accepted
+accounting principles. Internal control over financial reporting includes those
+policies and procedures that (i) pertain to the maintenance of records that in
+reasonable detail accurately and fairly reflect the transactions and
+dispositions of the assets of the company; (ii) provide reasonable assurance
+that transactions are recorded as necessary to permit preparation of financial
+statements in accordance with generally accepted accounting principles, and that
+receipts and expenditures of the company are being made only in accordance with
+authorizations of management and directors of the company; and (iii) provide
+reasonable assurance regarding prevention or timely detection of unauthorized
+acquisition, use or disposition of the company's assets that could have a
+material effect on the financial statements.
+Management assessed our internal control over financial reporting as of
+December 31, 2004. Management based its assessment on criteria established in
+Internal Control-Integrated Framework issued by the Committee of Sponsoring
+Organizations of the Treadway Commission.
+47
+Based on our assessment, management has concluded that our internal control
+over financial reporting was effective as of December 31, 2004 based on the COSO
+criteria identified above, to provide reasonable assurance regarding the
+reliablity of financial reporting and the preparation of financial statements
+for external reporting purposes in accordance with generally accepted accounting
+principles.
+Our management's assessment of the effectiveness of the Company's internal
+control over financial reporting as of December 31, 2004 has been audited by
+PricewaterhouseCoopers LLP, an independent registered public accounting firm, as
+stated in their report which appears herein.
+INHERENT LIMITATIONS ON EFFECTIVENESS OF CONTROLS
+The company's management, including the CEO and CFO, does not expect that
+our Disclosure Controls and procedures or our internal control over financial
+reporting will prevent or detect all error and all fraud. A control system, no
+matter how well designed and operated, can provide only reasonable, not
+absolute, assurance that the control system's objectives will be met. The design
+of a control system must reflect the fact that there are resource constraints,
+and the benefits of controls must be considered relative to their costs.
+Further, because of the inherent limitations in all control systems, no
+evaluation of controls can provide absolute assurance that misstatements due to
+error or fraud will not occur or that all control issues and instances of fraud,
+if any, within the company have been detected.
+These inherent limitations include the realities that judgments in
+decision-making can be faulty and that breakdowns can occur because of simple
+error or mistake. Controls can also be circumvented by the individual acts of
+some persons, by collusion of two or more people, or by management override of
+the controls. The design of any system of controls is based in part on certain
+assumptions about the likelihood of future events, and there can be no assurance
+that any design will succeed in achieving its stated goals under all potential
+future conditions. Projections of any evaluation of controls effectiveness to
+future periods are subject to risks. Over time, controls may become inadequate
+because of changes in conditions or deterioration in the degree of compliance
+with policies or procedures.
+PART III
\ No newline at end of file
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@@ -0,0 +1,3674 @@
+10-K
+1
+y18554e10vk.txt
+FORM 10-K
+UNITED STATES
+SECURITIES AND EXCHANGE COMMISSION
+Washington, DC. 20549
+FORM 10-K
+FOR ANNUAL AND TRANSITION REPORTS
+PURSUANT TO SECTIONS 13 OR 15(d) OF THE
+SECURITIES AND EXCHANGE ACT OF 1934
+(Mark One)
+[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
+ACT OF 1934
+For the fiscal year ended December 31, 2005
+or
+[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
+EXCHANGE ACT OF 1934
+For the transition period from __________________ to __________________.
+Commission file number: 0-21121
+TRANSACT TECHNOLOGIES INCORPORATED
+(Exact name of registrant as specified in its charter)
+DELAWARE 06-1456680
+(State or other jurisdiction (I.R.S. Employer
+of incorporation or organization) Identification No.)
+7 LASER LANE, WALLINGFORD, CT 06492
+(Address of principal executive offices) (Zip Code)
+Registrant's telephone number, including area code 203-859-6800
+Securities registered pursuant to Section 12 (b) of the Act:
+NONE
+Securities registered pursuant to Section 12 (g) of the Act:
+COMMON STOCK, $0.01 PAR VALUE
+(Title of class)
+Indicate by check mark if the registrant is a well-known seasoned issuer (as
+defined in Rule 405 of the Securities Act).
+Yes [ ] No [X]
+Indicate by check mark if the registrant is not required to file reports
+pursuant to Section 13 or Section 15(d) of the Securities Act.
+Yes [ ] No [X]
+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 other amendment
+to this Form 10-K. [ ]
+Indicate by check mark whether the registrant is a large accelerated filer, an
+accelerated filer, or a non-accelerated filer. See definition of "accelerated
+filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (check
+one):
+Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]
+Indicate by check mark whether the registrant is a shell company (as defined in
+Rule 12b-2 of the Exchange Act).
+Yes [ ] No [X]
+As of June 30, 2005 the aggregate market value of the registrant's issued and
+outstanding voting stock held by non-affiliates of the registrant was
+$79,000,000.
+As of February 27, 2006, the registrant had outstanding 9,752,670 shares of
+common stock, $0.01 par value.
+DOCUMENTS INCORPORATED BY REFERENCE
+Proxy Statement for the Annual Meeting of Shareholders to be held on May 18,
+2006 - Part III (Items 10-14).
+1
+TRANSACT TECHNOLOGIES INCORPORATED
+INDEX
+Page No.
+--------
+PART I.
+Item 1. Business 3 - 7
+Item 1A. Risk Factors 8 - 10
+Item 1B. Unresolved Staff Comments 10
+Item 2. Properties 10
+Item 3. Legal Proceedings 11
+Item 4. Submission of Matters to a Vote of Security Holders 11
+PART II.
+Item 5. Market for Registrant's Common Equity, Related
+Stockholder Matters and Issuer Purchases of Equity
+Securities 11 - 12
+Item 6. Selected Consolidated Financial Data 12
+Item 7. Management's Discussion and Analysis of Financial
+Condition and Results of Operations 13 - 27
+Item 7A. Quantitative and Qualitative Disclosures About Market
+Risk 27 - 28
+Item 8. Financial Statements and Supplementary Data 29 - 52
+Item 9. Changes in and Disagreements with Accountants on
+Accounting and Financial Disclosure 53
+Item 9A. Controls and Procedures 53 - 54
+PART III.
+Item 10. Directors and Executive Officers of the Registrant 54
+Item 11. Executive Compensation 54
+Item 12. Security Ownership of Certain Beneficial Owners and
+Management and Related Stockholder Matters 54 - 55
+Item 13. Certain Relationships and Related Transactions 55
+Item 14. Principal Accountant Fees and Services 55
+PART IV.
+Item 15. Exhibits and Financial Statement Schedules 56 - 58
+Signatures 59
+2
+PART I
+ITEM 1. BUSINESS.
+THE COMPANY
+TransAct was incorporated in June 1996 and began operating as a stand-alone
+business in August 1996 as a spin-off of the printer business that was formerly
+conducted by certain subsidiaries of Tridex Corporation. We completed an initial
+public offering on August 22, 1996.
+TransAct Technologies Incorporated ("TransAct" or the "Company") designs,
+develops, assembles, markets and services world-class transaction printers under
+the Epic and Ithaca(R) brand names. Known and respected worldwide for innovative
+designs and real-world service reliability, our impact, thermal and inkjet
+printers generate top-quality transaction records such as receipts, tickets,
+coupons, register journals and other documents. We focus on two core markets:
+(1) point-of-sale ("POS") and banking and (2) gaming and lottery. We sell our
+products to original equipment manufacturers ("OEMs"), value-added resellers
+("VARs"), selected distributors, as well as directly to end-users. Our product
+distribution spans across the Americas, Europe, the Middle East, Africa, the
+Caribbean Islands and the South Pacific. In addition, we have a strong focus on
+the after-market side of the business, with a growing commitment to printer
+service, supplies and spare parts. We have one primary operating facility
+located in Ithaca, NY, seven sales offices located in the United States
+(including our new global gaming and lottery headquarters and western region
+service center in Las Vegas, NV), and a European sales and service center in the
+United Kingdom. Our executive offices and eastern region service center are
+located at 7 Laser Lane, Wallingford, CT 06492, with a telephone number of (203)
+859-6800.
+FINANCIAL INFORMATION ABOUT SEGMENTS
+We have assessed our operating and reportable segments and have determined
+that we operate in one reportable segment, the design, development, assembly and
+marketing of transaction printers and printer-related service, supplies and
+spare parts. See the Consolidated Financial Statements contained herein.
+PRODUCTS AND SERVICES
+Printers
+TransAct designs, develops, assembles and markets a broad array of
+transaction-based printers utilizing inkjet, thermal and impact printing
+technology for applications requiring up to 60 character columns, primarily in
+the POS and banking, and gaming and lottery markets. Our printers are
+configurable and offer customers the ability to choose from a variety of
+features and functions. Options typically include interface configuration, paper
+cutting devices, paper handling capacities and cabinetry color. In addition to
+our configurable printers, we design and assemble custom printers for certain
+OEM customers. In collaboration with these customers, we provide engineering and
+manufacturing expertise for the design and development of specialized printers.
+POS and banking: Our POS and banking printers include hundreds of optional
+configurations that can be selected to meet particular customer needs. We
+believe that this is a significant competitive strength, as it allows us to
+satisfy a wide variety of printing applications that our customers request. In
+the POS market, we sell several models of printers utilizing inkjet, thermal and
+impact printing technology. Our printers are used primarily by retailers in the
+hospitality, restaurant (including fine dining, casual dining, and fast food)
+and specialty retail industries to print receipts for consumers, validate
+checks, or print on other inserted media. We also sell printers that are used by
+banks, credit unions and other financial institutions to print and/or validate
+receipts at bank teller stations.
+Gaming and lottery: In the lottery portion of our gaming and lottery
+market, we supply lottery printers to GTECH, our largest customer and the
+world's largest provider of lottery terminals, with an approximate 70% market
+share. These printers are designed for high-volume, high-speed printing of
+lottery tickets for various lottery applications.
+In the gaming portion of our gaming and lottery market, we sell several
+models of printers used in slot machines and video lottery terminals that print
+tickets instead of issuing coins at casinos, racetracks and other gaming
+establishments worldwide. These printers utilize thermal printing technology and
+can print tickets in monochrome or two-color (depending upon the model), and
+offer various other features such as jam resistant bezels and a dual port
+interface that will allow casinos to print coupons/promotions. We also sell
+printers using impact printing technology for use mainly in video lottery
+terminals and other gaming devices.
+3
+TransAct Services Group
+Through our recently-established TransAct Services Group, we proactively
+market the sale of consumable products (including inkjet cartridges, ribbons and
+paper), replacement parts and maintenance services for all of our products. Our
+maintenance services include the sale of extended warranties, multi-year
+maintenance contracts, 24-hour guaranteed replacement product service ("TransAct
+Xpress"), and other repair services for our printers. Within the United States,
+we provide repair services through our eastern region service center in
+Wallingford, CT and our western region service center in Las Vegas, NV.
+Internationally, we provide repair services through our European service center
+located in Doncaster, United Kingdom, and through partners strategically located
+around the world.
+We also provide customers with telephone sales and technical support, and a
+personal account representative to handle orders, shipping and general
+information. Technical and sales support personnel receive training on all of
+our manufactured products and our services.
+Product Warranty
+Our printers generally carry up to a two-year limited warranty against
+defects in material and workmanship. Defective equipment may be returned to any
+of our service centers, or our manufacturing facility in Ithaca, NY, for
+newly-released printers only, for repair or replacement during the
+applicable warranty period.
+PRODUCTION, MANUFACTURING AND SOURCES AND AVAILABILITY OF RAW MATERIALS
+We design our products to optimize product performance, quality,
+reliability and durability. These designs combine cost efficient materials,
+sourcing and assembly methods with high standards of workmanship. We finalize
+assembly for our products in our Ithaca, NY facility largely on a
+configure-to-order basis using components that have been sourced from around the
+world. Our manufacturing engineers work closely with our new product engineers
+and vendors during the development of new products. As a result, this
+collaboration increases manufacturing efficiency by specifying materials and
+designing manufacturing processes in conjunction with new product design.
+We procure component parts and subassemblies for use in the manufacture and
+assembly of our products. Critical component parts and subassemblies include
+inkjet, thermal and impact printheads, printing/cutting mechanisms, power
+supplies, motors, injection molded plastic parts, circuit boards and electronic
+components, which are obtained from domestic and foreign suppliers at
+competitive prices. We typically strive to maintain more than one source for our
+component parts and subassemblies to reduce the risk of parts shortages or
+unavailability. However, we could experience temporary disruption if certain
+suppliers ceased doing business with us, as described below.
+Okidata Americas, Inc. ("Okidata"), is the sole supplier for an impact
+printer component kit consisting of a printhead, control board and carriage (the
+"Oki Kit"), that is used in all of our Ithaca(R) brand impact printers. The loss
+of the supply of Oki Kits would have a material adverse effect on TransAct. We
+have a supply agreement with Okidata to provide Oki Kits until June 8, 2006.
+Prices under this agreement are fixed, but may be changed by Okidata after
+providing 180 days written notice.
+We believe our relationship with Okidata is in good standing and have
+received no indication that the supply agreement will not be renewed beyond the
+respective expiration date of the current contract. We cannot be certain,
+however, that the supply agreement will be renewed, or if renewed, that the
+terms will be as favorable as those under the current contract.
+Hewlett-Packard Company ("HP") is the sole supplier of inkjet cartridges
+that are used in all of our inkjet printers. The loss of the supply of HP inkjet
+cartridges would have a material adverse effect on the sale of our inkjet
+printers. Prior to February 2006, we had a supply agreement with HP to purchase
+inkjet cartridges at fixed prices. This agreement expired on February 1, 2006
+and was not renewed, as HP informed us that they no longer maintain supply
+agreements for these inkjet cartridges. Although we no longer have a supply
+agreement with HP, our relationship with HP remains strong and we have no reason
+to believe that HP will discontinue its supply of inkjet cartridges to us. The
+inkjet cartridges we purchase from HP are used not only in our inkjet printers
+for the POS and banking market, but also in other printing devices across
+several other markets.
+4
+PATENTS AND PROPRIETARY INFORMATION
+We have significantly expanded our patent portfolio over the past five
+years, and expect to continue to do so in the future. We also believe our patent
+portfolio will provide additional opportunities to license our intellectual
+property in the future. We currently own fifteen patents, eleven of which we
+consider material. The earliest expiration date of these eleven patents is in
+2008, with the latest expiration date in 2022. Of the material patents, one
+patent covers methods and apparatus for allowing a two-color printer to print
+images using single pass technology by printing during both forward and reverse
+movement of the print mechanism; another patent relates to our proprietary void
+and reprint receipt printing method which is used in certain of our slot machine
+printers; two patents prevent ticket jams resulting from player interference in
+certain of our slot machine printers; three patents cover a method for
+converting a full color image into a two-color image, plus a background color;
+one patent for a standard configurable universal serial bus ("USB") device
+identifier that enables a printer to be interchanged with another printer from
+the same printer model line without requiring reinstallation of the device
+driver or reconfiguration of the communication port by the host; two patents
+relate to methods and apparatus for automatically stacking printed sheets from a
+printer; and one patent covers our dual port technology where in a printer, one
+driver or port receives data indicative of voucher information from a local
+controller and a second driver or port receives data indicative of coupon
+information from a central system controller, thereby allowing the same printer
+to be used to print both vouchers and coupons. We also have sought patent
+protection for certain design features of 1) printers using inkjet technology,
+2) POS printers using thermal technology, and 3) thermal printers for use in
+casino slot machines. We regard certain manufacturing processes and designs to
+be proprietary and attempt to protect them through employee and third-party
+nondisclosure agreements and similar means. It may be possible for unauthorized
+third parties to copy certain portions of our products or to reverse engineer or
+otherwise obtain and use, to our detriment, information that we regard as
+proprietary. Moreover, the laws of some foreign countries do not afford the same
+protection to our proprietary rights as do United States laws. There can be no
+assurance that legal protections relied upon by the Company to protect our
+proprietary position will be adequate or that our competitors will not
+independently develop technologies that are substantially equivalent or superior
+to our technologies.
+During 2004, we signed a cross licensing agreement with Seiko Epson. Under
+the agreement, Seiko Epson received a license to three of our patents, and we
+received a license to eighteen of Seiko Epson's patents relating to printing
+applications for the point of sale and banking markets. In addition, we agreed
+to pay $900,000 as a royalty for the usage of certain Seiko Epson technology
+prior to January 1, 2003, which was paid in full by January 2005. Under the
+agreement, we continue to pay royalties on a quarterly basis related to the
+sales of licensed printers, which is reflected in cost of sales.
+SEASONALITY
+Retailers typically reduce purchases of new POS equipment in the fourth
+quarter, due to the increased volume of consumer transactions in that holiday
+period, and our sales of printers in the POS market historically have increased
+in the third quarter and decreased in the fourth quarter. Similarly,
+installations of lottery terminals are typically reduced in the fourth quarter
+resulting in decreased sales of lottery printers.
+CERTAIN CUSTOMERS
+We currently have an ongoing OEM purchase agreement, as amended in February
+2006, ( the "GTECH Thermal Printer Agreement") with GTECH Corporation ("GTECH")
+that provides for the sale of thermal on-line lottery printers and spare parts,
+at fixed prices, through June 28, 2012. Prior to this agreement, we had a
+purchase agreement with GTECH that provided for the sale of impact on-line
+lottery printers and spare parts through December 31, 2004. Because our new
+thermal on-line lottery printer is a replacement for our impact on-line printer,
+we do not expect any further shipments of impact on-line lottery printers beyond
+2004. However, we do expect to continue to sell spare parts to GTECH for the
+significant remaining installed base of impact on-line lottery printers. Firm
+purchase orders for printers under the GTECH Thermal Printer Agreement may be
+placed as required by GTECH.
+BACKLOG
+Our backlog of firm orders was approximately $8,300,000 as of February 28,
+2006, compared to $3,250,000 as of March 4, 2005. Based on customers' current
+delivery requirements, we expect to ship our entire current backlog during 2006.
+5
+COMPETITION
+The market for transaction-based printers is extremely competitive, and we
+expect such competition to continue in the future. We compete with a number of
+companies, many of which have greater financial, technical and marketing
+resources than us. We believe our ability to compete successfully depends on a
+number of factors both within and outside our control, including durability,
+reliability, quality, design capability, product customization, price, customer
+support, success in developing new products, manufacturing expertise and
+capacity, supply of component parts and materials, strategic relationships with
+suppliers, the timing of new product introductions by us and our competitors,
+general market, economic and political conditions and, in some cases, the
+uniqueness of our products.
+In the POS market, our major competitor is Epson America, Inc., which
+controls a dominant portion of the POS markets into which we sell. We also
+compete, to a much lesser extent, with Transaction Printer Group, Star Micronics
+America, Inc., Citizen -- CBM America Corporation, and Korean Printer Solutions
+(makers of Bixolon/Samsung printers). Certain competitors of ours have greater
+financial resources, lower costs attributable to higher volume production and
+sometimes offer lower prices than us.
+In the lottery market (consisting principally of on-line lottery
+transaction printing), we hold a leading position, based largely on our
+long-term purchase agreements with GTECH, which controls approximately 70% of
+the worldwide on-line lottery market. We compete in this market based solely on
+our ability to provide specialized, custom-engineered products to GTECH.
+In the gaming market (consisting principally of slot machine and video
+lottery terminal transaction printing), we and our major competitor,
+FutureLogic, Inc., comprise a substantial portion of the market. Certain of our
+products sold for gaming applications compete based upon our ability to provide
+highly specialized products, custom engineering and ongoing technical support.
+Our strategy for competing in our markets is to continue to develop new
+products and product line extensions, to increase our geographic market
+penetration, to take advantage of strategic relationships, and to lower product
+costs by sourcing certain products overseas. We expect to particularly focus on
+(1) promoting our line of slot machine printers into the gaming market including
+our recently launched Epic 950(TM) thermal casino printer, as well as our new
+Epic 430(TM) and Epic 630(TM) printers for the international off-premise gaming
+market, (2) increasing sales of our iTHERM(TM) 280 thermal POS printer, new
+Ithaca(R) 8000 linerless label printer and our family of printers utilizing
+Hewlett Packard's inkjet printing technology, including our BANKjet(R) line of
+inkjet printers used in bank teller applications and (3) expanding our
+consumables, spare parts and service business. Although we believe that our
+products, operations and relationships provide a competitive foundation, there
+can be no assurance that we will compete successfully in the future.
+RESEARCH AND DEVELOPMENT ACTIVITIES
+We spent approximately $2,726,000, $2,715,000 and $2,276,000 in 2005, 2004
+and 2003, respectively, on engineering, design and product development efforts
+in connection with specialized engineering and design to introduce new products
+and to customize existing products. During 2006, we expect to focus the majority
+of our research and development activities on the continuing development and
+enhancement of (1) our family of printers for the POS and banking market
+utilizing inkjet and thermal printing technology and (2) our ticket-issuing
+printers for use in the worldwide casino and gaming market.
+ENVIRONMENT
+We are not aware of any material noncompliance with federal, state and
+local provisions that have been enacted or adopted regulating the discharge of
+materials into the environment, or otherwise relating to the protection of the
+environment.
+EMPLOYEES
+As of February 27, 2006, TransAct and our subsidiaries employed 213
+persons, of whom 174 were full-time and 39 were temporary employees. None of our
+employees is unionized, and we consider our relationships with our employees to
+be good.
+6
+FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS
+We have foreign operations primarily from TransAct Technologies Ltd., a
+wholly-owned subsidiary located in the United Kingdom, which had sales to its
+customers of $2,181,000, $1,000,000, and $1,068,000, (primarily for the service
+of printers used in the British Post Office) in 2005, 2004 and 2003,
+respectively. We had export sales from our domestic operations of approximately
+$10,137,000, $5,423,000 and $3,663,000 in 2005, 2004 and 2003, respectively.
+Total international sales, which include sales from our foreign subsidiary and
+export sales from our domestic operations, were approximately $12,318,000,
+$6,423,000 and $4,731,000 in 2005, 2004 and 2003, respectively.
+ADDITIONAL INFORMATION
+We make available free of charge through our internet website,
+WWW.TRANSACT-TECH.COM, our annual report on Form 10-K, quarterly reports on Form
+10-Q, current reports on Form 8-K, and all amendments to those reports as soon
+as reasonably practicable after such material is electronically filed with or
+furnished to the SEC.
+We maintain a Code of Business Conduct that includes our code of ethics
+that is applicable to all employees, including our Chief Executive Officer,
+Chief Financial Officer and Controller. This Code, which requires continued
+observance of high ethical standards such as honesty, integrity and compliance
+with the law in the conduct of our business, is available for public access on
+our internet website.
+EXECUTIVE OFFICERS OF THE REGISTRANT
+The following list is included as an unnumbered item in Part I of this
+Report in lieu of being included in the Proxy Statement for the Annual Meeting
+of Stockholders to be held on May 18, 2006.
+The following is a list of the names and ages of all executive officers of
+the registrant, indicating all positions and offices with the registrant held by
+each such person and each person's principal occupations and employment during
+at least the past five years.
+Name Age Position
+---- --- --------
+Bart C. Shuldman 48 Chairman of the Board, President and Chief Executive Officer
+Steven A. DeMartino 36 Executive Vice President, Chief Financial Officer, Treasurer and Secretary
+Michael S. Kumpf 56 Executive Vice President - Engineering
+BART C. SHULDMAN has been Chief Executive Officer, President and a Director
+of the Company since its formation in June 1996. Previously, Mr. Shuldman served
+as President of Magnetec and later the combined operations of Magnetec and
+Ithaca Peripherals from August 1993 until June 1996. In February 2001, Mr.
+Shuldman was elected Chairman of the Board.
+STEVEN A. DEMARTINO was named as TransAct's Executive Vice President, Chief
+Financial Officer, Treasurer and Secretary on June 1, 2004. Previously, Mr.
+DeMartino served as Senior Vice President, Finance and Information Technology
+from October 2001 to May 2004, Vice President and Corporate Controller from
+January 1998 to October 2001, and Corporate Controller from August 1996 to
+December 1997. Prior to joining TransAct, Mr. DeMartino was a self-employed
+financial consultant from May 1996 to August 1996. Prior to that, Mr. DeMartino
+served as Controller of Copart, Inc. from September 1994 to May 1996. Mr.
+DeMartino is a certified public accountant.
+MICHAEL S. KUMPF was appointed Executive Vice President of Engineering in
+March 2002. He served as Senior Vice President, Engineering from June 1996 to
+March 2002 and Vice President, Engineering of Ithaca Peripherals from 1991 until
+June 1996.
+7
+ITEM 1A. RISK FACTORS
+Investors should carefully consider the risks, uncertainties and other factors
+described below, as well as other disclosures in Management's Discussion and
+Analysis of Financial Condition and Results of Operations, because they could
+have a material adverse effect on TransAct's business, financial condition,
+operating results, and growth prospects. The risks described below and
+incorporated by reference are not the only ones facing our Company. Additional
+risks not known to us now or that we currently deem immaterial may also impair
+our business operations.
+Our stock price may fluctuate significantly.
+The market price of our common stock could fluctuate significantly in response
+to variations in quarterly operating results and other factors, such as:
+- changes in our business, operations or prospects;
+- developments in our relationships with our customers;
+- announcements of new products or services by us or by our competitors;
+- announcement or completion of acquisitions by us or by our
+competitors;
+- changes in existing or adoption of additional government regulations;
+- unfavorable or reduced analyst coverage; and
+- prevailing domestic and international market and economic conditions.
+In addition, the stock market has experienced significant price fluctuations in
+recent years. Broad market fluctuations, general economic conditions and
+specific conditions in the industry in which we operate may adversely affect the
+market price of our common stock.
+Limited trading volume of our capital stock may contribute to its price
+volatility.
+Our common stock is traded on the NASDAQ National Market. During the twelve
+months ended December 31, 2005, the average daily trading volume for our common
+stock as reported by the NASDAQ National Market was approximately 131,600
+shares. We are uncertain whether a more active trading market in our common
+stock will develop. In addition, many investment banks no longer find it
+profitable to provide securities research on micro-cap and small-cap companies.
+If analysts were to discontinue coverage of our common stock, our trading volume
+may be further reduced. As a result, relatively small trades may have a
+significant impact on the market price of our common stock, which could increase
+the volatility and depress the price of our common stock.
+Future sales of our common stock may cause our stock price to decline.
+In the future, we may sell additional shares of our common stock in public or
+private offerings, and we may also issue additional shares of our common stock
+to finance future acquisitions. Shares of our common stock are also available
+for future sale pursuant to stock options that we have granted to our employees,
+and in the future we may grant additional stock options and other forms of
+equity compensation to our employees. Sales of our common stock or the
+perception that such sales could occur may adversely affect prevailing market
+prices for shares of our common stock and could impair our ability to raise
+capital through future offerings.
+We depend on key personnel, the loss of which could materially impact our
+business.
+Our future success will depend in significant part upon the continued service of
+certain key management and other personnel and our continuing ability to attract
+and retain highly qualified managerial, technical and sales and marketing
+personnel. There can be no assurance that we will be able to recruit and retain
+such personnel. The loss of Bart C. Shuldman, the Company's Chairman of the
+Board, President and Chief Executive Officer, or the loss of certain groups of
+key employees, could have a material adverse effect on our results of
+operations.
+Our business could be adversely affected by actual or threatened terrorist
+attacks or the related heightened security measures, military actions and other
+efforts to combat terrorism.
+Our business could be adversely affected by actual or threatened terrorist
+attacks or the related heightened security measures, military actions and other
+efforts to combat terrorism. It is possible that terrorist attacks could be
+directed at important locations for the gaming industry. Heightened security
+measures and other efforts to combat terrorism may also have an adverse effect
+on the gaming industry by reducing tourism. Any of these developments could also
+negatively affect the general economy and consumer confidence. Any downturn in
+the economy or in the gaming industry in particular could reduce demand for our
+products and adversely affect our business and results of operations. In
+addition, heightened security measures may cause certain governments to
+restrict the import/export of goods, which may have an adverse effect on our
+ability to buy/sell goods.
+8
+Our success will depend on our ability to sustain and manage growth.
+As part of our business strategy, we intend to pursue an aggressive growth
+strategy. Assuming this growth occurs, it will require the expansion of
+distribution relationships in international markets, the successful development
+and marketing of new products, expanded customer service and support, an
+increased number of personnel throughout the Company and the continued
+implementation and improvement of our operational, financial and management
+information systems.
+To the extent that we seek growth through acquisitions, our ability to manage
+our growth will also depend on our ability to integrate businesses that have
+previously operated independently. We may not be able to achieve this
+integration without encountering difficulties or experiencing the loss of key
+employees, customers or suppliers. It may be difficult to design and implement
+effective financial controls for combined operations and differences in existing
+controls for each business may result in weaknesses that require remediation
+when the financial controls and reporting functions are combined.
+There can be no assurance that we will be able to implement successfully our
+growth strategy, or that we can successfully manage expanded operations. As the
+Company expands, we may from time to time experience constraints that will
+adversely affect our ability to satisfy customer demand in a timely fashion.
+Failure to manage growth effectively could adversely affect our results of
+operations and financial condition.
+We compete in a highly competitive market, which is likely to become more
+competitive. Competitors may be able to respond more quickly to new or emerging
+technology and changes in customer requirements. We face significant competition
+in developing and selling our printers and services. Principal competitors have
+substantial marketing, financial, development and personnel resources. To remain
+competitive, we believe we must continue to provide:
+- Technologically advanced printers that satisfy the user demands,
+- Superior customer service,
+- High levels of quality and reliability, and
+- Dependable and efficient distribution networks.
+We cannot assure we will be able to compete successfully against current or
+future competitors. Increased competition in printers or supplies may result in
+price reductions, lower gross profit margins and loss of market share, and could
+require increased spending on research and development, sales and marketing and
+customer support. Some competitors may make strategic acquisitions or establish
+cooperative relationships with suppliers or companies that produce complementary
+products. Any of these factors could reduce our earnings.
+We source some of our component parts from sole source supplier; any disruptions
+may impact our ability to manufacture and sell our products.
+A disruption in the supply of such component parts could have a material adverse
+effect on our operations and financial results.
+The inability to protect intellectual property could harm our reputation, and
+our competitive position may be materially damaged.
+Our intellectual property is valuable and provides us with certain competitive
+advantages. Copyrights, patents, trade secrets and contracts are used to protect
+these proprietary rights. Despite these precautions, it may be possible for
+third parties to copy aspects of our products or, without authorization, to
+obtain and use information which we regard as trade secrets.
+Infringement on the proprietary rights of others could put us at a competitive
+disadvantage, and any related litigation could be time consuming and costly.
+Third parties may claim that we violated their intellectual property rights. To
+the extent of a violation of a third party's patent or other intellectual
+property right, we may be prevented from operating our business as planned and
+may be required to pay damages, to obtain a license, if available, or to use a
+non-infringing method, if possible, to accomplish our objectives. Any of these
+claims, with or without merit, could result in costly litigation and divert the
+attention of key personnel. If such claims are successful, they could result in
+costly judgments or settlements.
+9
+We sell a significant portion of our products internationally and purchase
+important components from foreign suppliers. These circumstances create a number
+of risks.
+We sell a significant amount of our products to customers outside the
+United States. Shipments to international customers are expected to continue to
+account for a material portion of net sales. Risks associated with sales and
+purchases outside the United States include:
+- Fluctuating foreign currency rates could restrict sales, or
+increase costs of purchasing, in foreign countries.
+- Foreign governments may impose burdensome tariffs, quotas, taxes,
+trade barriers or capital flow restrictions.
+- Political and economic instability may reduce demand for our
+products or put our foreign assets at risk.
+- Restrictions on the export or import of technology may reduce or
+eliminate the ability to sell in or purchase from certain
+markets.
+- Potentially limited intellectual property protection in certain
+countries, such as China, may limit recourse against infringing
+products or cause us to refrain from selling in certain
+geographic territories.
+ITEM 1B. UNRESOLVED STAFF COMMENTS
+Not applicable.
+ITEM 2. PROPERTIES.
+Our operations are currently conducted at the facilities described below.
+In January 2005, we entered a five-year lease for a 13,700 square foot facility
+in Las Vegas, NV. This facility serves as our global gaming and lottery
+headquarters and houses our west coast POS and Banking sales unit. The facility
+also serves as our western region service center to provide service to our large
+base of installed printers in the region.
+In February 2001, we announced plans to establish a global engineering and
+manufacturing center at our Ithaca, NY facility. As part of this strategic
+decision, we consolidated all manufacturing and engineering from our
+Wallingford, CT facility into our existing Ithaca, NY facility. Our corporate
+headquarters and our eastern region service center are still located in the
+Wallingford, CT facility. Although we are actively seeking to sublease our
+Wallingford, CT facility, in 2003 we determined that because of the continuing
+regional decline in the commercial real estate market, it was unlikely that we
+would be able to sublease our facility. As such, we increased our restructuring
+accrual at December 31, 2003 to provide for the remaining non-cancelable lease
+payments and other related costs for this facility through the expiration of the
+lease (March 31, 2008). The restructuring accrual was further adjusted at
+December 31, 2004 based on the estimated facility costs through the end of the
+lease.
+Size Owned or Lease Expiration
+Location Operations Conducted (Approx. Sq. Ft.) Leased Date
+-------- ------------------------- ----------------- -------- ----------------
+Wallingford, Connecticut Executive offices and 49,000 Leased March 31, 2008
+service center
+Ithaca, New York Manufacturing facility 74,000 Leased June 30, 2012
+Las Vegas, Nevada Service center and gaming 13,700 Leased January 31, 2010
+and lottery sales
+headquarters
+Doncaster, United Kingdom Sales office and service 2,800 Leased August 1, 2009
+center
+Georgia (2), Missouri, New Jersey, Six regional sales 900 Leased Various
+New York and Texas offices
+We believe that our facilities generally are in good condition, adequately
+maintained and suitable for their present and currently contemplated uses.
+10
+ITEM 3. LEGAL PROCEEDINGS.
+On April 28, 2005 we announced that we filed a complaint in Connecticut
+Superior Court against FutureLogic, Inc. ("FutureLogic") of Glendale,
+California. The complaint charges FutureLogic with disseminating false and
+misleading statements, which impugn our business reputation with the intent of
+damaging our business. We assert claims of defamation, tortious interference
+with contractual relations, tortious interference with business expectancy, and
+violation of the Connecticut Unfair Trade Practices Act, and seek an award of
+compensatory and punitive damages, attorneys' fees and costs. FutureLogic
+removed this action to the United States District Court for the District of
+Connecticut and, on June 7, 2005, filed a motion to dismiss the claims for lack
+of jurisdiction. On December 7, 2005, we amended our complaint in the action
+pending in the District of Connecticut to add claims that FutureLogic's conduct
+violated the Lanham Act's bar on false and deceptive advertising.
+On May 20, 2005, FutureLogic filed a complaint in the United States
+District Court for the Central District of California against us. The complaint
+charges us with false advertising, defamation, trade libel, intentional
+interference with prospective economic advantage, common law unfair competition
+and statutory unfair competition and seeks an award of compensatory and punitive
+damages, attorneys' fees and costs. On August 3, 2005, FutureLogic amended its
+complaint in California to seek a declaratory judgment that Patent No.
+6,924,903 issued to us by the United States Patent and Trademark Office ("PTO")
+on August 2, 2005, for our dual-port printer technology, is invalid, and that
+FutureLogic is not infringing our patent. We moved to dismiss FutureLogic's
+action in California, on the grounds that any claims raised in that action
+should have been brought as part of the case filed by us in the District of
+Connecticut. In the alternative, we moved to stay the California action pending
+the resolution of jurisdictional motions in the Connecticut court.
+On January 20, 2006, the California District Court filed an order granting
+our motion to stay the California proceeding pending the resolution of
+jurisdictional motions in the Connecticut case. Under the California court's
+order, should the Connecticut court find that it has jurisdiction over
+FutureLogic, FutureLogic's patent case will be transferred to the District of
+Connecticut for consolidation with the action pending in that forum. The
+jurisdictional motions before the District of Connecticut were fully briefed as
+of February 17, 2006 and await the decision of the Connecticut court. Regardless
+in what forum we eventually face FutureLogic's patent claims, we intend to
+defend against the claims vigorously, as we believe them to be without merit or
+factual basis. This action is in the pre-trial motion stage and we are currently
+unable to calculate any potential or probable liability associated with this
+action at this time.
+ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
+No matters were submitted to a vote of security holders during the last
+quarter of the year covered by this report.
+PART II
+ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
+ISSUER PURCHASES OF EQUITY SECURITIES.
+Our common stock is traded on the NASDAQ National Market under the symbol
+TACT. Prior to September 2004, our stock was traded on the NASDAQ SmallCap
+Market. In April 2004, we completed a three-for-two stock split of our common
+stock effected in the form of a stock dividend. All amounts in the table below
+reflect the stock split on a retroactive basis. As of February 28, 2006, there
+were 646 holders of record of the common stock. The high and low sales bid
+quotations of the common stock reported during each quarter of the years ended
+December 31, 2005 and 2004 were as follows:
+Year Ended Year Ended
+December 31, 2005 December 31, 2004
+----------------- -----------------
+High Low High Low
+------ ----- ------ ------
+First Quarter $22.19 $9.90 $26.00 $13.67
+Second Quarter 10.65 6.71 34.00 19.13
+Third Quarter 10.35 6.95 32.89 15.00
+Fourth Quarter 8.70 6.09 29.28 19.30
+No dividends on common stock have been declared except for a cash dividend
+paid in lieu of fractional shares resulting from our three-for-two stock split
+in April 2004, and we do not anticipate declaring dividends in the foreseeable
+future. Our credit agreement with TD Banknorth, N.A. restricts the payment of
+cash dividends on our common stock for the term of the agreement.
+11
+SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
+See Part III, Item 12.
+ISSUER PURCHASES OF EQUITY SECURITIES
+On March 25, 2005, the Board of Directors approved a stock repurchase program
+("the Stock Repurchase Program"). Under the Stock Repurchase Program, we are
+authorized to repurchase up to $10 million of our outstanding shares of common
+stock from time to time in the open market over a three year period ending on
+March 25, 2008, depending on market conditions, share price and other factors.
+The following table summarizes repurchases of our common stock in the quarter
+ended December 31, 2005:
+Total Number
+of Shares Approximate
+Purchased as Dollar Value of
+Part of Shares that May
+Total Average Publicly Yet Be
+Number of Price Announced Purchased under
+Shares Paid per Plans or the
+Period Purchased Share Programs Plans or Programs
+------ --------- -------- ------------ -----------------
+October 1, 2005 - October 31, 2005 -- $ -- -- $6,865,000
+November 1, 2005 - November 30, 2005 48,200 $7.00 48,200 $6,528,000
+December 1, 2005 - December 31, 2005 47,900 $8.24 47,900 $6,133,000
+------ ----- ------
+Total 96,100 $7.62 96,100
+====== ===== ======
+ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE
+AMOUNTS)
+The following is summarized from our audited financial statements of the past
+five years:
+Year Ended December 31,
+-----------------------------------------------
+2005 2004 2003 2002 2001
+------- ------- ------- ------- -------
+Consolidated Statement of
+Operations Data:
+Net sales $51,091 $59,847 $52,098 $39,461 $43,974
+Gross profit 15,590 22,042 15,543 10,216 9,774
+Operating expenses 15,366 13,591 12,855 11,200 17,060
+Operating income (loss) 224 8,451 2,688 (984) (7,286)
+Net income (loss) 377 5,458 1,528 (692) (4,922)
+Net income (loss) available
+to common shareholders 377 5,236 1,087 (1,050) (5,280)
+Net income (loss) per share:
+Basic 0.04 0.55 0.13 (0.12) (0.63)
+Diluted 0.04 0.51 0.12 (0.12) (0.63)
+December 31,
+-----------------------------------------------
+2005 2004 2003 2002 2001
+------- ------- ------- ------- -------
+Balance Sheet Data:
+Total assets $29,332 $34,099 $26,361 $22,030 $25,791
+Working capital 15,375 20,511 11,787 8,798 8,366
+Long-term debt, excluding
+current portion -- -- 330 2,791 5,344
+Redeemable convertible
+preferred stock -- -- 3,902 3,824 3,746
+Shareholders' equity 21,257 23,715 10,347 6,545 7,315
+12
+ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
+OF OPERATIONS.
+This discussion should be read in conjunction with the Consolidated
+Financial Statements and notes thereto.
+FORWARD LOOKING STATEMENTS
+Certain statements included in this report, including without limitation
+statements in this Management's Discussion and Analysis of Financial Condition
+and Results of Operations, which are not historical facts are "forward-looking
+statements" within the meaning of Section 27A of the Securities Act of 1933, as
+amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
+Forward-looking statements generally can be identified by the use of
+forward-looking terminology, such as "may", "will", "expect", "intend",
+"estimate", "anticipate", "believe", "project" or "continue" or the negative
+thereof or other similar words. All forward-looking statements involve risks and
+uncertainties, including, but not limited to, customer acceptance and market
+share gains, both domestically and internationally, in the face of substantial
+competition from competitors that have broader lines of products and greater
+financial resources; the introduction of new products into the marketplace by
+competitors; successful product development; dependence on significant
+customers; dependence on significant vendors; the ability to recruit and retain
+quality employees as we grow; dependence on third parties for sales outside the
+United States including Australia, New Zealand, Europe and Latin America;
+economic and political conditions in the United States, Australia, New Zealand,
+Europe and Latin America; marketplace acceptance of new products; availability
+of third-party components at reasonable prices; the absence of price wars or
+other significant pricing pressures affecting our products in the United States
+and abroad; and the outcome of lawsuits between TransAct and FutureLogic, Inc.
+Actual results may differ materially from those discussed in, or implied by, the
+forward-looking statements. The forward-looking statements speak only as of the
+date of this report and we assume no duty to update them to reflect new,
+changing or unanticipated events or circumstances.
+OVERVIEW
+The year 2005 was a challenging year for TransAct. Our 2005 results were
+dramatically impacted by an overall slowdown in the domestic gaming market,
+including the effect of Hurricane Katrina, an issue at a major gaming OEM
+customer as it depletes a large inventory position, lower capital spending due
+to mergers of major casino operators, and lower than historical
+levels of lottery printer sales to GTECH, our largest customer. Despite our
+disappointing financial results and a less than ideal set of market conditions,
+we continued on our planned course of making substantial strategic investments
+into the growth elements of our business. This led to a number of strategic
+successes during 2005 including the following:
+- Established three Strategic Sales Units to focus on each of our
+markets
+- Doubled the size of our sales force company-wide
+- Opened our new Gaming and Lottery headquarters and western regional
+service center in Las Vegas, Nevada
+- Launched seven new products, including our new line of Epic printers
+for the new off-premise global gaming market, and our new line of
+printers, exclusively for our POS distributors
+- Entered into a strategic sales alliance with JCM American Corporation
+("JCM"), the worldwide leading bill acceptor company, to sell our
+casino printers
+- Grew our international gaming sales by over 193% to $6.6 million
+- Achieved standard printer status with IGT, including the integration
+of our Epic 950(TM) casino printer in every slot machine platform in
+every jurisdiction in which IGT competes
+- Received five new patents, including a key one in connection with dual
+port technology
+We continue to focus on sales growth in our two core markets, point of sale
+("POS") and banking and gaming and lottery, and in our recently established
+TransAct Services Group, to drive increased profitability. During 2005, our
+total net sales decreased by 15% to approximately $51,091,000. See the table
+below for a breakdown of our sales.
+Change
+Year ended Year ended ---------------
+(In thousands) December 31, 2005 December 31, 2004 $ %
+----------------- ----------------- ------- -----
+POS and banking $16,410 32.1% $17,659 29.5% $(1,249) (7.1%)
+Gaming and lottery 23,634 46.3% 31,937 53.4% (8,303) (26.0%)
+TransAct Services Group 11,047 21.6% 10,251 17.1% 796 7.8%
+------- ----- ------- ----- -------
+Total net sales $51,091 100.0% $59,847 100.0% $(8,756) (14.6%)
+======= ===== ======= ===== =======
+13
+We experienced a decrease of approximately 7% in sales of POS and banking
+printers in 2005, driven primarily by lower project-oriented banking printer
+sales. During 2003, we announced wins from two major financial services
+companies for shipments of over 19,000 BANKjet(R) printers to upgrade bank
+teller applications, which we began to ship in 2003 and substantially completed
+shipping during 2004. During 2005, we announced and shipped approximately 6,000
+BANKjet(R) printers for our third major bank win. Excluding the project-oriented
+banking market, sales of POS printers increased by 2% from 2004. We expect the
+upward trend in the POS market to accelerate during 2006. Given our success over
+the last three years, and in light of the renewed focus we see banks placing on
+branch banking, we plan to continue proactively to seek opportunities with other
+banks and credit unions for upgrading bank teller systems. In 2006, we also plan
+to increase our focus on selling through our distribution and reseller channels
+in an effort to expand sales of our new line of printers exclusively for these
+channels, and to continue to broaden our product portfolio. With the global POS
+printer market of approximately $800 million, we have many opportunities for
+market share gains, primarily through increasing and enhancing our product
+portfolio, increasing geographic coverage, and growing our customer base.
+Our focus in the gaming and lottery market is two-fold. On the lottery
+side, we continue to hold a leading position based on our long-term purchase
+agreement through 2012 with GTECH Corporation ("GTECH"), our largest customer
+and the world's largest provider of lottery terminals, with approximately a 70%
+market share. GTECH has been our customer since 1995, and we continue to
+maintain a good relationship with them. Currently, we fulfill substantially all
+of GTECH's printer requirements for lottery terminal installations and upgrades.
+During 2005, total printer sales to GTECH were approximately $1,153,000 lower
+than in 2004, representing a decrease of approximately 14%. Based on existing
+orders and expected future demand for our lottery printers estimated with input
+from GTECH, we expect overall sales to GTECH in 2006 to be modestly higher than
+the 2005 level. Our sales to GTECH each year are directly dependent on the
+timing and number of new and upgraded lottery terminal installations GTECH
+performs. Our sales to GTECH are not indicative of GTECH's overall business or
+revenue.
+On the gaming side, our focus lies primarily in supplying printers for use
+in slot machines in casinos and racetracks, as well as in other gaming devices
+that print tickets, primarily in the United States, Europe and Australia. During
+2005, our gaming printer sales were significantly impacted by a weak domestic
+casino market, including the effect of Hurricane Katrina, lower capital spending
+due to mergers of major casino operators, and an issue at a large gaming OEM
+customer as it depletes a large inventory position. As a result, sales of our
+gaming printers decreased by 30%. Although we are not projecting a recovery of
+the domestic gaming market during 2006, we still expect to see approximately
+double digit growth in our worldwide gaming sales in 2006 compared to 2005. We
+expect to gain market share in the United States due to (1) our new strategic
+alliance agreement with JCM, the worldwide leading bill acceptor company, to
+sell our casino printers (2) our relationship with IGT, the world's largest slot
+machine manufacturer, and (3) expanded acceptance of our new Epic 950(TM)
+thermal casino printer. In addition, we expect a return to more normalized
+purchasing levels by the large gaming OEM customer mentioned above beginning in
+the second quarter 2006. Overall, we expect to continue to exploit opportunities
+for casino printer sales as the rollout of the ticket-in/ticket-out initiative
+continues and the size of the North American slot machine market continues to
+expand to over 850,000 slot machines. In the international gaming market, we
+experienced record sales growth during 2005, as our international gaming sales
+almost tripled to $6.6 million. We expect continued strength from gaming sales
+internationally during 2006, as markets such as Europe and Australia continue to
+adopt ticket printing for their slot machines and other gaming machines, and as
+our new line of Epic printer launched in 2005 for the off-premise gaming market
+begin to take hold.
+Our TransAct Services Group ("TSG"), which sells service and consumable
+products, including printer repairs and the sale of spare parts and consumables
+(paper, ribbons and inkjet cartridges), offers a substantial growth opportunity
+and recurring revenue stream for TransAct. TSG revenue has grown to $11,047,000
+or 21.6% of net sales in 2005, representing an increase of 8% from 2004. During
+2006, we plan to continue to actively promote our service and consumable
+products in an effort to increase the volume of sales. With the investments we
+made in TSG during 2005 - including the addition of four dedicated sales people,
+a specialized software system that improved our sales lead tracking and
+prospecting processes, and the establishment of two new service centers - a
+western region service center in Las Vegas, NV and an eastern region service
+center in Wallingford, CT - we believe we are now even better positioned to
+accelerate the growth of TSG sales in 2006. In addition, we believe that the
+increasing sales of our inkjet printers will lead to a growing installed base
+that will drive substantially higher inkjet cartridge sales in 2006 and beyond.
+Operationally, gross margin and operating margin for 2005 were impacted by
+lower sales, and our decision to make a strategic investment of $2.5 million in
+the growth elements of our business. We made this investment across three areas:
+an incremental $1.2 million investment in sales and marketing; a $400,000
+incremental investment in engineering expenses for the development and launch of
+seven new products; and a $900,000 investment in operating expenses related to
+the opening and staffing of our new service center in Las Vegas and the hiring
+of additional services personnel in our Wallingford service center. We expect
+that, over the long-term, the investment we made in 2005 will accelerate our
+revenue growth and with our operating leverage, should lead to improved
+operating results beginning in the first quarter 2006.
+14
+Despite the challenging year and our increased level of investment, we
+reported net income and positive earnings per share (diluted) for 2005. We also
+generated sufficient cash during 2005 to fund $2.8 million of capital
+expenditures and repurchase $3.9 million of our common stock (approximately 5%
+of our common stock outstanding) and finished the year with $4.6 million of cash
+and no debt on our balance sheet as of December 31, 2005.
+CRITICAL ACCOUNTING POLICIES AND ESTIMATES
+Our discussion and analysis of our financial condition and results of
+operations are based upon our consolidated financial statements, which have been
+prepared by us in accordance with accounting principles generally accepted in
+the United States of America. These principles require the use of estimates,
+judgments and assumptions. Such estimates and judgments are based upon
+historical experience and certain assumptions that are believed to be reasonable
+in the particular circumstances. Those judgments affect both balance sheet items
+and income statement categories. Our estimates include those related to revenue
+recognition, allowance for doubtful accounts, inventory obsolescence, the
+valuation of deferred tax assets and liabilities, goodwill impairment, warranty
+obligations, restructuring accruals and contingent liabilities. We evaluate our
+assumptions on an ongoing basis by comparing actual results with our estimates.
+Actual results may differ from the original estimates. The following accounting
+policies are those that we believe to be most critical in the preparation of our
+financial statements.
+REVENUE RECOGNITION - Our typical contracts include the sale of printers,
+which are sometimes accompanied by separately-priced extended warranty
+contracts. We also sell spare parts, consumables, and other repair services
+(sometimes pursuant to multi-year product maintenance contracts), which are not
+included in the original printer sale and are ordered by the customer as needed.
+We recognize revenue pursuant to the guidance within SAB 104, "Revenue
+Recognition." Specifically, revenue is recognized when evidence of an
+arrangement exists, delivery (based on shipping terms which are generally FOB
+shipping point) has occurred, the selling price is fixed and determinable, and
+collectibility is reasonably assured. We provide for an estimate of product
+returns and price protection based on historical experience at the time of
+revenue recognition.
+Revenue related to extended warranty and product maintenance contracts is
+recognized pursuant to FASB Technical Bulletin 90-1 ("FTB 90-1"), "Accounting
+for Separately Priced Extended Warranty and Product Maintenance Contracts."
+Pursuant to FTB 90-1, revenue related to separately priced product maintenance
+contracts is deferred and recognized over the term of the maintenance period. We
+record deferred revenue for amounts received from customers for maintenance
+contracts prior to the maintenance period.
+Our customers have the right to return products that do not function
+properly within a limited time after delivery. We monitor and track product
+returns and record a provision for the estimated future returns based on
+historical experience. Returns have historically been within expectations and
+the provisions established, but we cannot guarantee that we will continue to
+experience return rates consistent with historical patterns.
+We offer some of our customers price protection as an incentive to carry
+inventory of our product. These price protection plans provide that if we lower
+prices, we will credit them for the price decrease on inventory they hold. Our
+customers typically carry limited amounts of inventory, and we infrequently
+lower prices on current products. As a result, the amounts paid under these
+plans have not been material. However, we cannot guarantee that this minimal
+level will continue.
+ACCOUNTS RECEIVABLE - We have standardized credit granting and review
+policies and procedures for all customer accounts, including: credit reviews of
+all new customer accounts; ongoing credit evaluations of current customers;
+credit limits and payment terms based on available credit information; and
+adjustments to credit limits based upon payment history and the customer's
+current creditworthiness. We also provide an estimate of doubtful accounts based
+on historical experience and specific customer collection issues. Our allowance
+for doubtful accounts as of December 31, 2005 was $240,000, or 2.8% of
+outstanding accounts receivable, which we feel is appropriate considering the
+overall quality of our accounts receivable. While credit losses have
+historically been within expectations and the reserves established, we cannot
+guarantee that our credit loss experience will continue to be consistent with
+historical experience. As of December 31, 2005, we had accounts receivable
+balances due from one customer of approximately 19% of the total balance due,
+and no other customer accounts receivable balance exceeded 10%. As of December
+31, 2004, we had accounts receivable balances due from three customers of 18%,
+14% and 10%, respectively, of the total balance due, and no other customer
+accounts receivable balance exceeded 10%.
+15
+INVENTORY - Our inventories are valued at the lower of cost or market. We
+assess market value based on historical usage and estimates of future demand.
+Assumptions are reviewed at least quarterly and adjustments are made, as
+necessary, to reflect changing market conditions. Should circumstances change
+and we determine that additional inventory is subject to obsolescence,
+additional write-downs of inventory could result in a charge to income. As of
+December 31, 2005, our net inventory included a reserve of $2,165,000, or 26.4%
+of gross inventory to write inventory down to lower of cost or market. During
+the fourth quarter of 2005, we recorded a charge of approximately $600,000
+related primarily to the write-down of inventory for our Model 850 casino
+printer, as demand for this printer is declining due to the faster than expected
+acceptance of our new Epic 950(TM) casino printer. We also disposed of
+approximately $500,000 of fully-reserved inventory related to discontinued
+printer models during the fourth quarter of 2005. As a result, our inventory
+reserve at December 31, 2005 increased by only approximately 8% from December
+31, 2004.
+GOODWILL - We test the impairment of goodwill each year or more frequently
+if events or changes in circumstances indicate that the carrying value may not
+be recoverable. We completed our last assessment as of December 31, 2005.
+Factors considered that may trigger an impairment review are: significant
+underperformance relative to expected historical or projected future operating
+results; significant changes in the manner of use of acquired assets or the
+strategy for the overall business; significant negative industry or economic
+trends; and significant decline in market capitalization relative to net book
+value. Goodwill amounted to $1,469,000 at December 31, 2005 and we have
+determined that no goodwill impairment has occurred.
+INCOME TAXES - In preparing our consolidated financial statements, we are
+required to estimate income taxes in each of the jurisdictions in which we
+operate. This involves estimating the actual current tax exposure together with
+assessing temporary differences between the tax basis of certain assets and
+liabilities and their reported amounts in the financial statements, as well as
+net operating losses, tax credits and other carryforwards. These differences
+result in deferred tax assets and liabilities, which are included within our
+consolidated balance sheets. We then assess the likelihood that the deferred tax
+assets will be realized from future taxable income, and to the extent that we
+believe that realization is not likely, we establish a valuation allowance.
+Significant judgment is required in determining the provision for income
+taxes and, in particular, any valuation allowance or tax reserves with respect
+to our deferred tax assets. On a quarterly basis, we evaluate the recoverability
+of our deferred tax assets based upon historical results and forecasted taxable
+income over future years, and match this forecast against the basis differences,
+deductions available in future years and the limitations allowed for net
+operating loss and tax credit carryforwards to ensure that there is adequate
+support for the realization of the deferred tax assets. While we have considered
+future taxable income and ongoing prudent and feasible tax planning strategies
+in assessing the need for a valuation allowance or tax reserve, in the event we
+were to determine that we would not be able to realize all or part of our
+deferred tax assets in the future, an adjustment to the valuation allowance or
+tax reserves would be charged as a reduction to income in the period such
+determination was made. Likewise, should we determine that we would be able to
+realize future deferred tax assets in excess of its net recorded amount, an
+adjustment to the valuation allowance or tax reserves would increase net income
+in the period such determination was made.
+As of December 31, 2005, we recorded a net deferred tax asset of
+approximately $3,292,000, net of a valuation allowance of $207,000, and a tax
+reserve of $133,000, primarily on portions of certain tax credits. We will need
+to recognize approximately $7.9 million in future taxable income in order to
+realize all of our deferred tax assets at December 31, 2005. Based on our
+projection of future taxable income, no additional valuation allowance is
+considered necessary. Should circumstances change and we determine that some or
+all of the deferred taxes would not be realized, a valuation allowance would be
+recorded, resulting in a charge to income in the period such determination is
+made.
+RESTRUCTURING - In February 2001, we announced plans to establish a global
+engineering and manufacturing center at our Ithaca, NY facility. As part of this
+strategic decision, we undertook a plan to consolidate all manufacturing and
+engineering into our existing Ithaca, NY facility and close our Wallingford, CT
+manufacturing facility (the "Consolidation"). However, our Company headquarters
+and a service center remain in Wallingford, CT. Our technology shift to inkjet
+and thermal printing from dot matrix impact printing dramatically reduced the
+labor content in our printers, and therefore, lowered the required production
+capacity. As of December 31, 2001, we successfully transferred substantially all
+our Wallingford product lines to Ithaca, NY, with the exception of a service
+center that remains in Connecticut. The closing of the Wallingford manufacturing
+facility resulted in the related termination of employment of approximately 70
+production, administrative and management employees.
+16
+In connection with the Consolidation of manufacturing facilities in 2001,
+we recorded significant accruals. Through December 31, 2005, we have recognized
+approximately $6.0 million of expenses associated with the Consolidation,
+including severance pay, stay bonuses, employee benefits, moving expenses,
+non-cancelable lease payments, and other costs, of which approximately ($0.2
+million) and $1.1 million were recognized in 2004 and 2003, respectively. No
+additional restructuring expense was recognized in 2005. Management has made
+reasonable estimates of such costs and expenses. However, if actual costs differ
+from the estimates, charges or credits to income could result in the period the
+adjustments are determined. We changed our estimate of the restructuring accrual
+related to the Wallingford, CT facility, resulting in additional restructuring
+expense in 2003, and a reversal of restructuring expense in 2004. We do not
+expect to incur any additional restructuring expenses related to the
+Consolidation. See the "Liquidity and Capital Resources" section for a
+discussion of the expected impact of the Consolidation on our future results of
+operations and cash flows.
+WARRANTY - We generally warrant our products for up to 24 months and record
+the estimated cost of such product warranties at the time the sale is recorded.
+Estimated warranty costs are based upon actual past experience of product
+repairs and the related estimated cost of labor and material to make the
+necessary repairs. If actual future product repair rates or the actual costs of
+material and labor differ from the estimates, adjustments to the accrued
+warranty liability and related warranty expense would be made.
+CONTINGENCIES - We record an estimated liability related to contingencies
+based on our estimates of the probable outcomes pursuant to FAS 5. On a
+quarterly basis, we assess the potential liability related to pending
+litigation, audits and other contingencies and confirm or revise estimates and
+reserves as appropriate.
+During the fourth quarter of 2005, we recorded a charge to cost of goods
+sold of approximately $135,000 related to estimated settlement/cancellation
+payments for non-cancelable purchase orders for certain excess inventory
+components related to our Model 850 casino ticket printer. The charge was
+largely the result of the faster than expected acceptance of our new Epic
+950(TM) casino ticket printer, which replaces our Model 850 casino ticket
+printer.
+STOCK-BASED COMPENSATION - We apply the intrinsic value recognition and
+measurement principles whereby compensation expense is recognized over the
+vesting period to the extent that the fair market value of the underlying stock
+on the date of grant exceeds the exercise price of the employee stock option.
+Beginning January 1, 2006, we will be required to recognize expense pursuant to
+Financial Accounting Standards No. 123 (revised 2004), "Share-Based Payment"
+("FAS 123R") for stock-based compensation. We will utilize the Black-Scholes
+model to value share-based payments and will follow the modified prospective
+transition method. The Black-Scholes model uses judgmental inputs such as option
+life, expected volatility and expected forfeiture rate. Changes in these inputs
+may change the amount of expense recognized for stock options issued during the
+period of change.
+(A) RESULTS OF OPERATIONS
+CERTAIN SALES BY MARKET AMOUNTS FOR 2003 AND 2004 HAVE BEEN RECLASSIFIED TO
+CONFORM WITH THE CURRENT YEAR PRESENTATION IN THE NARRATIVE BELOW.
+(I) YEAR ENDED DECEMBER 31, 2005 COMPARED TO YEAR ENDED DECEMBER 31, 2004
+NET SALES. Net sales, which include printer sales and sales of spare parts,
+consumables and repair services, by market for the years ended December 31, 2005
+and 2004 were as follows:
+Change
+Year ended Year ended ---------------
+(In thousands) December 31, 2005 December 31, 2004 $ %
+----------------- ----------------- ------- -----
+Point of sale and banking $16,410 32.1% $17,659 29.5% $(1,249) (7.1%)
+Gaming and lottery 23,634 46.3% 31,937 53.4% (8,303) (26.0%)
+TransAct Services Group 11,047 21.6% 10,251 17.1% 796 7.8%
+------- ----- ------- ----- -------
+$51,091 100.0% $59,847 100.0% $(8,756) (14.6%)
+======= ===== ======= ===== =======
+International* $12,318 24.1% $ 6,423 10.7% $ 5,895 91.8%
+======= ===== ======= ===== =======
+* International sales do not include sales of printers made to domestic
+distributors or other domestic customers who in turn ship those printers to
+international destinations.
+17
+Net sales for 2005 decreased $8,756,000, or 15%, from 2004 due to
+significantly lower printer shipments into our gaming and lottery market, as
+well as lower printer shipments into our POS and banking market. However, sales
+from our TransAct Services Group increased by $796,000, or 8%, from 2004, as our
+installed base of printers grows and as we continue to aggressively pursue these
+after-market sales. Overall, international sales almost doubled to $12,318,000,
+due largely to higher international shipments of our gaming printers, primarily
+to Europe and Australia, as well as international shipments of lottery printers
+to GTECH.
+Point of sale and banking: Revenue from the POS and banking market includes
+sales of inkjet, thermal and impact printers used primarily by retailers in the
+hospitality, restaurant (including fine dining, casual dining and fast food) and
+specialty retail industries to print receipts for consumers, validate checks, or
+print on other inserted media. Revenue from this market also includes sales of
+printers used by banks, credit unions and other financial institutions to print
+and/or validate receipts at bank teller stations. Sales of our POS and banking
+printers worldwide decreased approximately $1,249,000, or 7%, from 2004.
+Change
+Year ended Year ended --------------
+(In thousands) December 31, 2005 December 31, 2004 $ %
+----------------- ----------------- ------- ----
+Domestic $14,188 86.5% $15,734 89.1% $(1,546) (9.8%)
+International 2,222 13.5% 1,925 10.9% 297 15.4%
+------- ----- ------- ----- -------
+$16,410 100.0% $17,659 100.0% $(1,249) (7.1%)
+======= ===== ======= ===== =======
+Domestic POS and banking printer sales decreased to $14,188,000, or 10%,
+due largely to significantly lower shipments of our BANKjet(R) line of inkjet
+printers in 2005 as compared to 2004. We experienced this decrease due to the
+project-oriented nature of banking printer sales. During 2004, we shipped
+banking printers to two top-tier financial services companies. However, during
+2005, we shipped banking printers primarily to only one top-tier financial
+services company. The decrease in banking printer sales was slightly offset by
+increasing sales of our POS printers, primarily our iTHERM(TM) 280 thermal
+printer and our new line of printers exclusively for POS distributors. Excluding
+banking printers, sales of our POS printers increased by 2% in 2005 compared to
+2004.
+International POS and banking printer sales increased by approximately
+$297,000, or 15%, due primarily to higher sales through our growing network of
+international POS distributors in Europe and Latin America, somewhat offset by
+lower sales to distributors in the Pacific Rim.
+We expect sales into the POS and banking market for the first quarter of
+2006 to be higher than those reported for the fourth quarter of 2005, due
+largely to expected shipments of banking printers to an existing financial
+services company. We also expect full year sales for 2006 to be modestly higher
+than those reported during 2005, as we expect our initiatives and four new POS
+products launched in 2005 to begin to take hold.
+Gaming and lottery: Revenue from the gaming and lottery market includes
+sales of printers used in slot machines, video lottery terminals ("VLTs") and
+other gaming machines that print tickets instead of issuing coins ("ticket-in,
+ticket-out" or "TITO") at casinos, racetracks ("racinos") and other gaming
+venues worldwide. Revenue from this market also includes sales of lottery
+printers to GTECH, the world's largest provider of lottery terminals, for
+various lottery applications. Sales of our gaming and lottery printers decreased
+by $8,303,000, or 26%, from 2004, primarily due to a decrease in sales of slot
+machine printers in North America, as well as a decrease in sales of lottery
+printers to GTECH. This decrease was partially offset by significantly higher
+sales of our slot machine and other gaming printers in Europe and Australia.
+Change
+Year ended Year ended ----------------
+(In thousands) December 31, 2005 December 31, 2004 $ %
+----------------- ----------------- -------- -----
+Domestic $16,271 68.8% $29,692 93.0% $(13,421) (45.2%)
+International 7,363 31.2% 2,245 7.0% 5,118 228.0%
+------- ----- ------- ----- --------
+$23,634 100.0% $31,937 100.0% $ (8,303) (26.0%)
+======= ===== ======= ===== ========
+Domestic sales of our gaming and lottery printers declined by $13,421,000,
+or 45%, from 2004. Due to the continued decline in slot machine sales into the
+domestic casino market, including the effects of Hurricane Katrina, lower
+capital spending due to mergers of major casino operators, and the loss of
+revenue from a large slot machine manufacturer as it depletes a large inventory
+position, we experienced significantly lower sales of our TITO casino printers
+throughout North America during 2005.
+18
+Although we are not projecting a recovery of the domestic casino market during
+2006, we expect sales into the gaming market for the first quarter of 2006 to be
+higher than those reported for the fourth quarter of 2005, and also expect full
+year sales for 2006 to be modestly higher than those reported during 2005. We
+expect growth in our gaming sales during 2006 due to (1) expected continued
+market share gains in the domestic market, aided by our new strategic sales
+alliance with JCM American Corporation, the worldwide leading bill acceptor
+company, to sell our casino printers (2) a return to normalized purchasing
+levels by the large slot machine manufacturer mentioned above during the second
+quarter 2006, and (3) expanded acceptance of our new Epic 950(TM) casino ticket
+printer by casinos.
+Printer sales to GTECH Corporation (a worldwide lottery terminal provider
+and major customer), which include impact and thermal on-line lottery printers,
+decreased by approximately $1,153,000, or 14%, in 2005 compared to 2004. This
+decrease was largely due to shipments of legacy impact printers to GTECH in 2004
+that did not recur in 2005. We do not expect any future orders for legacy impact
+printers, as GTECH replaced our legacy impact on-line lottery printer with our
+new thermal on-line lottery printer. However, we do expect to continue to sell
+spare parts to GTECH for the significant remaining installed base of impact
+on-line lottery printers. Based on existing orders and expected future demand
+based on input from GTECH, we expect overall sales to GTECH in 2006 to be higher
+than those reported for 2005, with more substantial growth expected in the first
+half of 2006. Our sales to GTECH each year are directly dependent on the timing
+and number of new and upgraded lottery terminal installations GTECH performs and
+are not indicative of GTECH's overall business or revenue.
+International gaming and lottery printer sales more than tripled to
+$7,363,000 in 2005 compared to 2004. Such sales represented 31% and 7% of total
+sales into our gaming and lottery market during 2005 and 2004, respectively. We
+experienced growth in both international gaming and lottery printer sales in
+2005 as markets in Europe and Australia continue to adopt and roll out ticket
+printing in slot machines and other gaming/amusement machines, and GTECH
+installs our lottery printers in its international markets. Due to the
+significant growth of our international gaming and lottery sales in 2005, we
+expect sales levels in 2006 to be relatively consistent with those reported
+during 2005. However, we continue to pursue additional opportunities in
+international markets, including those related to ticket printing for the new
+off-premise gaming market for which we launched two products in 2005.
+TransAct Services Group: Revenue from TSG includes sales of consumable
+products (inkjet cartridges, ribbons and paper), replacement parts, maintenance
+and repair services, refurbished printers and shipping and handling charges.
+Sales by TSG increased by approximately $796,000, or 8%.
+Change
+Year ended Year ended -----------
+(In thousands) December 31, 2005 December 31, 2004 $ %
+----------------- ----------------- ---- ----
+Domestic $ 8,314 75.3% $ 7,998 78.0% $316 4.0%
+International 2,733 24.7% 2,253 22.0% 480 21.3%
+------- ----- ------- ----- ---- ----
+$11,047 100.0% $10,251 100.0% $796 7.8%
+======= ===== ======= ===== ==== ====
+Domestic TSG revenue increased by approximately $316,000 or 4%, to
+$8,314,000 largely due to higher revenue from maintenance and repair services
+and refurbished printer sales, offset by a decline in the sale of spare parts,
+mostly for legacy printers. International TSG sales increased by approximately
+$480,000, or 21%, to $2,733,000, due primarily to an increase in service
+revenue. With the investments we made in 2005, including our new service centers
+in Wallingford, CT and Las Vegas, NV, as well as the addition of a dedicated
+direct sales force and a growing installed base of printers, we expect
+significant sales growth from TSG during 2006.
+GROSS PROFIT. Gross profit is measured as revenue less cost of goods sold.
+Cost of goods sold includes primarily the cost of all raw materials and
+component parts, direct labor, and the associated overhead expenses. Gross
+profit decreased by $6,452,000, or 29%, to $15,590,000, and gross margin
+decreased to 30.5% from 36.8% due primarily to lower volume of sales in 2005
+compared to 2004 and a less favorable sales mix. In addition, gross profit for
+2005 was negatively impacted by a charge of $600,000, or 1.2% of net sales,
+related to the write-down of inventory and accrual for estimated
+settlement/cancellation payments for non-cancelable purchase orders for certain
+excess inventory components related primarily to our Model 850 casino ticket
+printer. The charge was largely the result of the faster than expected
+acceptance of our new Epic 950(TM) casino ticket printer, which replaces our
+Model 850 casino ticket printer. We expect gross margin for the first quarter of
+2006 to be higher than the fourth quarter of 2005 due to the higher expected
+volume of sales in the first quarter. We expect gross margin for 2006 also to be
+higher than 2005 due to the higher expected volume of sales.
+19
+ENGINEERING AND PRODUCT DEVELOPMENT. Engineering, design and product
+development expenses primarily include salary and payroll related expenses for
+our engineering staff, depreciation and design expenses (including prototype
+printer expenses, outside design and testing services and supplies). Such
+expenses increased slightly by $11,000, or less than 1%, to $2,726,000, from
+2004 as we incurred higher expenses related to increased engineering staffing
+and other employee compensation expenses, which were almost entirely offset by a
+decrease in costs associated with IGT's integration and attainment of
+jurisdictional approvals for our new Epic 950(TM) thermal casino printer on all
+of IGT's slot platforms worldwide (the "IGT Integration"). We incurred
+approximately $150,000 of IGT Integration costs in 2005 compared to $350,000 in
+2004. Engineering and product development expenses increased as a percentage of
+net sales to 5.3% from 4.5%, primarily due to lower sales volume in 2005
+compared to 2004. We expect engineering and product development expenses to
+increase in 2006 as we plan to utilize more contract engineering services to
+continue increasing product development to expand our product families for the
+POS market and ticket-issuing printers for the gaming market.
+SELLING AND MARKETING. Selling and marketing expenses primarily include
+salaries and payroll related expenses for our sales and marketing staff, sales
+commissions, travel expenses, expenses associated with the lease of sales
+offices, advertising, trade show expenses and other promotional marketing
+expenses. Selling and marketing expenses increased by $1,208,000, or 24%, to
+$6,319,000, due primarily to increased expenses related to (1) the addition of
+new sales staff for our three business units and our new service centers in Las
+Vegas, NV and Wallingford, CT, (2) marketing, promotional and trade show
+expenses related to the launch of our new line of printers exclusively for POS
+distributors and our increased presence at this year's Global Gaming Exposition
+(G2E) trade show in Las Vegas, NV, and (3) the recruitment and hiring of a
+Senior Vice President of Marketing during the second quarter of 2005. Selling
+and marketing expenses increased as a percentage of net sales to 12.4% from
+8.5%, due primarily to the increases noted above in proportion to lower sales
+volume in 2005 compared to 2004. We expect selling and marketing expenses to be
+higher in 2006 compared to 2005, as we incur the full year effect of our 2005
+initiatives. These initiatives included the formation of our three strategic
+sales units, the doubling in size of our overall sales force, the addition of a
+new Senior Vice President of Marketing, and the establishment of two new service
+centers in Las Vegas, NV and Wallingford, CT. We believe these investments made
+in 2005 will allow us to achieve our sales growth strategy for 2006 and beyond.
+GENERAL AND ADMINISTRATIVE. General and administrative expenses primarily
+include: salaries and payroll related expenses for our executive, accounting,
+human resource and information technology staff; expenses for our corporate
+headquarters; professional and legal expenses; and telecommunication expenses.
+General and administrative expenses increased by $331,000, or 6%, due primarily
+to (1) recruiting and compensation related expenses associated with the
+re-location of our accounting department from Ithaca, NY to Wallingford, CT, (2)
+higher legal expenses related to our lawsuit against FutureLogic, Inc., and (3)
+increased software maintenance, travel, training and temporary help expenses
+associated with our Oracle software implementation. These increases were
+partially offset by (1) a decrease related to a one-time listing fee incurred in
+2004 resulting from our move back onto the NASDAQ National Market from the
+NASDAQ SmallCap Market, (2) lower audit and professional expenses related to
+compliance with the Sarbanes-Oxley Act of 2002 incurred during 2005 (our second
+year of compliance) compared to 2004 (our initial year of compliance), and (3)
+expenses incurred in 2004 associated with our proposed acquisition of TPG, Inc.
+that was terminated and did not recur in 2005. General and administrative
+expenses increased as a percentage of net sales to 12.4% from 10.0%, due
+primarily to the increased expenses noted above in proportion to a lower volume
+of sales in 2005 compared to 2004. We expect general and administrative expenses
+to increase in 2006 due primarily to annual increases in compensation expenses,
+as well as depreciation and other expenses related to our implementation of new
+Oracle software.
+BUSINESS CONSOLIDATION AND RESTRUCTURING. We recorded a reversal of expense
+of $225,000 related to the Consolidation in 2004. This amount was the result of
+a revision to our original estimate for non-cancelable lease payments included
+in the restructuring accrual. As of December 31, 2005, we have provided for the
+estimated remaining non-cancelable lease payments and other related costs for
+this facility through the expiration of the lease (March 31, 2008).
+We do not expect to incur any further restructuring expenses related to the
+Consolidation. See "Consolidation Expenses" in Liquidity and Capital Resources.
+OPERATING INCOME. During 2005, we reported operating income of $224,000, or
+0.4% of net sales, compared to $8,451,000, or 14.1% of net sales, in 2004. The
+significant decrease in our operating income and operating margin was due
+largely to lower sales and gross margin, and higher operating expenses
+(primarily selling and marketing expenses and general and administrative
+expenses).
+20
+INTEREST. We recorded net interest income of $73,000 in 2005 compared to
+net interest income of $4,000 in 2004, due to our higher average cash balances
+and slightly higher interest rates throughout 2005 as compared to 2004. We do
+not expect to draw on our revolving borrowings as we expect to continue to
+generate cash from operations during 2006. During 2006, we expect to report
+increasing net interest income as our cash balance increases throughout the
+year. See "Liquidity and Capital Resources" below for more information.
+OTHER EXPENSE. We recorded other income of $32,000 in 2005 compared to
+other expense of $18,000 in 2004, due primarily to transaction exchange gains
+recorded by our UK subsidiary in 2005 due to the weakening of the British pound
+against the U.S. dollar as compared to transaction exchange losses recorded in
+2004 due to the strengthening of the British pound against the U.S. dollar.
+INCOME TAXES. We recorded an income tax benefit of $48,000, at an effective
+rate of (14.6%) during 2005 compared to an income tax provision of $2,979,000,
+at an effective rate of 35.3% in 2004. Despite reporting $329,000 of income
+before taxes in 2005, we recorded a net income tax benefit, resulting largely
+from the recognition of certain discrete tax benefits and tax credits, as well
+as the reversal of valuation allowances during the year, combined with an
+unusually low level of income before taxes. We expect to record income taxes at
+an effective rate of approximately 36% during 2006.
+NET INCOME. We reported net income in 2005 of $377,000, or $0.04 per
+diluted share compared to net income of $5,458,000, or $0.51 per diluted share
+in 2004. Dividends paid in 2004 were approximately $86,000, and there will be no
+dividends or allocation of earnings to preferred shareholders beyond 2004, as
+the preferred stock was converted to common stock in April 2004. All share and
+per share amounts reflect the April 2004 stock split on a retroactive basis. In
+December 2004, the FASB issued Accounting Standard No. 123 (revised 2004),
+"Share-Based Payment" ("FAS 123R"), which requires the recognition of
+compensation expense for share-based compensation (including shares issued under
+employee stock purchase plans, stock options and restricted stock) over the
+period in which the share-based compensation vests. Although our Board of
+Directors accelerated the vesting of all outstanding unvested stock options
+granted under all our stock plans as of November 2, 2005, we will recognize
+compensation expense with respect to stock options granted after January 1, 2006
+pursuant to FAS 123R.
+(II) YEAR ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED DECEMBER 31, 2003
+NET SALES. Net sales, which include printer sales and sales of spare parts,
+consumables and repair services, by market for the years ended December 31, 2004
+and 2003 were as follows:
+Change
+Year ended Year ended -------------
+(In thousands) December 31, 2004 December 31, 2003 $ %
+----------------- ----------------- ------ ----
+Point of sale and banking $17,659 29.5% $14,027 26.9% $3,632 25.9%
+Gaming and lottery 31,937 53.4% 29,274 56.2% 2,663 9.1%
+TransAct Services Group 10,251 17.1% 8,797 16.9% 1,454 16.5%
+_______ _____ _______ _____ ______
+$59,847 100.0% $52,098 100.0% $7,749 14.9%
+======= ===== ======= ===== ======
+International $ 6,423 10.7% $ 4,731 9.1% $1,692 35.8%
+======= ===== ======= ===== ======
+* International sales do not include sales of printers made to domestic
+distributors or other domestic customers who in turn ship those printers to
+international destinations.
+Net sales for 2004 increased $7,749,000, or 15%, from 2003 due to higher
+shipments into both our POS and banking and gaming and lottery market. Overall,
+international sales increased 36% due largely to increased sales of our casino
+printers into Europe and Australia.
+Point of sale and banking: Sales of our POS and banking printers worldwide
+increased approximately $3,632,000, or 26%, from 2003.
+21
+Change
+Year ended Year ended --------------
+(In thousands) December 31, 2004 December 31, 2003 $ %
+----------------- ----------------- ------ -----
+Domestic $15,734 89.1% $11,889 84.8% $3,845 32.3%
+International 1,925 10.9% 2,138 15.2% (213) (10.0%)
+------- ----- ------- ----- ------
+$17,659 100.0% $14,027 100.0% $3,632 25.9%
+======= ===== ======= ===== ======
+Domestic POS and banking printer sales increased 32% due largely to
+significantly higher sales of our POSjet(R) and BANKjet(R) lines of inkjet
+printers, and increasing sales of our iTHERM(TM) 280 thermal printer. Sales of
+inkjet printers increased by approximately 48% in 2004 compared to 2003, as we
+shipped our BANKjet(R) line of inkjet printers to two top-tier financial
+services companies to upgrade bank teller stations. We completed almost all
+shipments related to the upgrade during 2004.
+International POS and banking printer sales decreased by approximately 10%
+due primarily to sales of our thermal fiscal printer in Europe in 2003 that did
+not repeat in 2004. We discontinued our thermal fiscal printer in 2004.
+Gaming and lottery: Sales of our gaming and lottery printers increased by
+$2,663,000, or 9%, from 2003, primarily due to significantly stronger sales of
+our slot machine and VLT printers, somewhat offset by lower sales of lottery
+printers to GTECH.
+Change
+Year ended Year ended --------------
+(In thousands) December 31, 2004 December 31, 2003 $ %
+----------------- ----------------- ------ -----
+Domestic $29,692 93.0% $28,790 98.3% $ 902 3.1%
+International 2,245 7.0% 484 1.7% 1,761 363.8%
+------- ------ ------- ------ ------
+$31,937 100.0% $29,274 100.0% $2,663 9.1%
+======= ====== ======= ====== ======
+Sales of our domestic gaming printers, which include VLT and slot machine
+printers used in racinos, increased 8% from 2003. This increase resulted
+primarily from increased installations of our casino printers, as we benefited
+from the adoption and rollout of slot machines at casinos throughout North
+America that print receipts instead of issuing coins.
+Lottery printer sales to GTECH, which included impact and thermal on-line
+lottery printers and impact in-lane lottery printers (primarily found at
+checkout counters of certain grocery stores), decreased by approximately
+$630,000, or 7%, in 2004 compared to 2003. The decrease was largely due to
+shipments of in-lane lottery printers in 2003 that did not recur in 2004. Our
+sales to GTECH each year are directly dependent on the timing and number of new
+and upgraded lottery terminal installations GTECH performs and are not
+indicative of GTECH's overall business or revenue.
+International gaming and lottery printer sales increased $1,761,000, or
+364%, to $2,245,000, from 2003. Such sales represented 7% and 2% of total sales
+into our gaming and lottery market during 2004 and 2003, respectively. We
+experienced growth in international gaming revenue in 2004 as markets in Europe
+and Australia began to adopt and roll out ticket printing in slot machines.
+TransAct Services Group: Revenue from TSG includes sales of consumable
+products (inkjet cartridges, ribbons and paper), replacement parts, maintenance
+and repair services, refurbished printers and shipping and handling charges.
+Sales from TSG increased by approximately $1,454,000, or 17%.
+Change
+Year ended Year ended -------------
+(In thousands) December 31, 2004 December 31, 2003 $ %
+----------------- ------------------ ------ ----
+Domestic $ 7,998 78.0% $6,688 76.0% $1,310 19.6%
+International 2,253 22.0% 2,109 24.0% 144 6.8%
+------- ------ ------ ----- ------
+$10,251 100.0% $8,797 100.0% $1,454 16.5%
+======= ====== ====== ===== ======
+Domestic TSG revenue increased by approximately $1,310,000, or 20%, to
+$7,998,000 largely due to higher spare parts and consumable product (largely
+inkjet cartridges) sales, as well as higher revenue from maintenance and repair
+services. Internationally, sales increased by approximately $144,000, or 7%, to
+$2,253,000 largely due to an increase in services revenue.
+22
+GROSS PROFIT. Gross profit increased by $6,499,000, or 42%, to $22,042,000,
+and gross margin increased to 36.8% from 29.8% due primarily to a more favorable
+sales mix of higher margin products and continued reductions in component and
+sub-component costs in 2004 compared to 2003. Both gross profit and gross margin
+for 2004 benefited from a substantial increase in the volume of sales (15%) and
+a more favorable sales mix, including increased sales of higher margin gaming
+and lottery printers in 2004 compared to 2003. Gross profit in 2003 was impacted
+by a charge of $740,000, or 1.4% of net sales, related to a royalty payable to
+Seiko Epson for past usage of certain technology (see "Contingent Liabilities"
+in Liquidity and Capital Resources).
+ENGINEERING AND PRODUCT DEVELOPMENT. Engineering, design and product
+development expenses increased $439,000, or 19%, to $2,715,000, primarily due to
+(1) compensation related expenses (approximately $100,000) and (2) expenses
+incurred in the fourth quarter of 2004 related to the IGT Integration
+(approximately $350,000). Engineering and product development expenses increased
+as a percentage of net sales to 4.5% from 4.4%, primarily due to expenses
+related to the IGT Integration, largely offset by a higher sales volume in 2004
+compared to 2003.
+SELLING AND MARKETING. Selling and marketing expenses increased by
+$143,000, or 3%, to $5,111,000, due primarily to higher recruitment,
+compensation and travel expenses related to additional sales and marketing
+staff, including expenses associated with the opening of our new gaming and
+lottery headquarters and western region service center in Las Vegas, to support
+our growing gaming printer sales (approximately $700,000). Such increases were
+largely offset by lower (1) print advertising and other promotional marketing
+expense (approximately $110,000), (2) sales commissions (approximately
+$180,000), and (3) expenses at our UK facility (approximately $270,000) due
+largely to a staff reduction. Selling and marketing expenses decreased as a
+percentage of net sales to 8.5% from 9.5%, due primarily to higher volume of
+sales in 2004 compared to 2003.
+GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
+by $1,507,000, or 34%, due largely to higher professional expenses, including
+those related to initial year compliance with the Sarbanes-Oxley Act of 2002
+("Sarbanes-Oxley"), and additional finance staff (and associated recruiting
+fees) related to Sarbanes Oxley. We incurred approximately $650,000 of external
+expenses directly related to compliance with Sarbanes-Oxley during 2004. In
+addition, during 2004 we expensed approximately $110,000 of costs we incurred in
+conducting due diligence related to a potential acquisition of TPG, Inc., as the
+proposed acquisition was terminated. We also incurred approximately $95,000 of
+one-time listing fees related to our move back onto the NASDAQ National Market
+from the NASDAQ SmallCap Market. General and administrative expenses increased
+as a percentage of net sales to 10.0% from 8.6%, due primarily to the factors
+listed above, partially offset by a higher volume of sales in 2004 compared to
+2003.
+BUSINESS CONSOLIDATION AND RESTRUCTURING. We recorded a reversal of expense
+of $225,000, and a charge of $1,128,000 related to the Consolidation in 2004 and
+2003, respectively. These amounts were substantially the result of revisions to
+our original estimate for non-cancelable lease payments included in the
+restructuring accrual. As of December 31, 2004, we provided for the estimated
+remaining non-cancelable lease payments and other related costs for this
+facility through the expiration of the lease (March 31, 2008).
+OPERATING INCOME. During 2004, we reported operating income of $8,451,000,
+or 14.1% of net sales, compared to $2,688,000, or 5.2% of net sales, in 2003.
+The significant increase in our operating income and operating margin was due
+largely to higher gross profit on higher sales, partially offset by higher
+operating expenses (primarily general and administrative expenses) in 2004
+compared to 2003. Operating income for 2004 included a reversal of expense
+related to the Consolidation ($225,000) and a charge related to the IGT
+Integration ($350,000). Operating income for 2003 included a charge related to
+the Consolidation ($1,128,000) and a royalty payable to Seiko-Epson for past
+usage of certain technology ($740,000).
+INTEREST. We recorded net interest income of $4,000 in 2004 compared to net
+interest expense of $210,000 in 2003, as we repaid all outstanding revolving
+borrowings at December 31, 2003, and the remaining outstanding balance on our
+term loan in January 2004.
+WRITE-OFF OF DEFERRED FINANCING COSTS. In August 2003, we entered into a
+new credit facility with TD Banknorth, N.A., which replaced an existing facility
+with LaSalle Business Credit, Inc. ("LaSalle"). We recorded a charge of
+approximately $103,000 in 2003 related to the write-off of unamortized deferred
+financing costs from our prior credit facility with LaSalle. Our new credit
+facility with TD Banknorth, N.A. contains more favorable terms than those
+contained in our prior facility with LaSalle.
+23
+OTHER EXPENSE. Other expense for 2004 and 2003 primarily included
+transaction exchange losses recorded by our UK subsidiary due to the
+strengthening of the British pound against the U.S. dollar.
+INCOME TAXES. We recorded an income tax provision of $2,979,000 and
+$725,000 in 2004 and 2003, respectively, at an effective rate of 35.3% and
+32.2%, respectively. The lower effective rate in 2003 reflects a favorable
+outcome of a state tax audit, benefits from certain tax credits, and utilization
+of state net operating loss carryforwards not previously anticipated.
+NET INCOME. We reported net income in 2004 of $5,458,000, or $0.51 per
+diluted share compared to net income of $1,528,000, or $0.12 per diluted share
+in 2003. Earnings per share have been retroactively restated for adoption of
+EITF 03-06 "Participating Securities and the Two-Class Method under FASB
+Statement No. 128, Earnings Per Share", which requires the two-class method of
+computing earnings per share. The two-class method is an earnings allocation
+formula that determines earnings per share for common stock and participating
+securities based upon an allocation of earnings as if all of the earnings for
+the period had been distributed in accordance with participation rights on
+undistributed earnings. Dividends paid in 2004 were approximately $86,000, and
+there will be no dividends or allocation of earnings to preferred shareholders
+beyond 2004, as the preferred stock was converted to common stock in April 2004.
+All share and per share amounts reflect the April 2004 stock split on a
+retroactive basis.
+(B) LIQUIDITY AND CAPITAL RESOURCES
+CASH FLOW
+Overview: During 2005, our cash flow was impacted by lower sales volume and
+net income, the repurchase of outstanding common stock (approximately $3.9
+million), the purchase of certain intangible assets from Bally Gaming, Inc.
+("Bally") (approximately $0.5 million) and increased investment in new systems,
+product tooling and our new service center in Las Vegas, NV (approximately $2.7
+million). However, we finished the year with no outstanding bank debt and $4.6
+million of cash and cash equivalents. Looking forward, we expect to generate
+approximately $7 to $8 million in cash from operations during 2006. We also
+expect to earn increasing interest income on our available cash balance
+throughout 2006.
+Operating activities: The following significant factors primarily affected
+our cash provided by operations of $2,874,000 in 2005:
+- We reported net income of $377,000.
+- We recorded depreciation, amortization and non-cash compensation
+expense of $1,977,000.
+- Accounts receivable decreased by $551,000 due primarily to a
+lower volume of sales in the fourth quarter of 2005 compared to
+the fourth quarter of 2004.
+- Inventories decreased by $2,038,000 due to lower inventory
+purchases related to lower sales volume and continued improved
+inventory management.
+- Accounts payable decreased by $945,000 due to lower inventory
+purchases related to lower sales volume and the timing of
+payments.
+- Accrued liabilities and other liabilities decreased by $580,000
+due to the following: (1) lower compensation related accruals,
+(2) lower deferred revenue balances based on the completion of a
+significant prepaid service contract in 2005, (3) lower royalty
+accruals associated with the purchase of intangible assets from
+Bally and a final royalty payment for past usage made to
+Seiko-Epson in 2005.
+- Accrued restructuring decreased by $447,000 due to continued
+lease payments on our Wallingford, CT facility.
+Investing activities: Our capital expenditures were approximately
+$2,756,000 and $1,178,000 in 2005 and 2004, respectively. During 2005, we
+invested in two significant projects: (1) the purchase and implementation of a
+new Oracle ERP system (including software, hardware and outside consulting fees)
+the implementation of which we expect to complete in 2006 (approximately
+$900,000) and (2) office renovations to our new gaming and lottery headquarters
+and western region service center in Las Vegas, NV (approximately $700,000). We
+believe these projects will provide us with improved efficiency and will enable
+us to streamline and more cost effectively manage our business as it grows in
+size, number of locations and overall complexity. In addition to these projects,
+the remaining amount of capital expenditures for 2005 was primarily for the
+purchase of new product tooling.
+24
+During the second quarter of 2005, we acquired certain intangible assets
+related to casino printer designs and technology from Bally for $475,000, plus
+the costs of effecting the acquisition (approximately $35,000). Prior to the
+acquisition, pursuant to the terms of a license agreement, we were required to
+pay Bally a royalty on sales of certain gaming printers utilizing the licensed
+technology. As a result of the acquisition, effective July 1, 2005, we are no
+longer required to pay any future royalties to Bally. The elimination of future
+royalty payments to Bally resulted in a cost savings to the Company beginning in
+the third quarter of 2005.
+We expect our capital expenditures in 2006 to be approximately $2.6
+million, largely for the completion of our Oracle system implementation, as well
+as component cost reduction initiatives and our continued focus on product
+development and the purchase of tooling for new products and enhanced versions
+of our existing products.
+Financing activities: We used approximately $3,524,000 from financing
+activities during 2005, largely due to repurchases of Company stock
+(approximately $3,867,000), although partly offset by proceeds from stock option
+exercises and employee stock purchase plan transactions (approximately
+$346,000).
+WORKING CAPITAL
+Our working capital decreased to $15,375,000 at December 31, 2005 from
+$20,511,000 at December 31, 2004. The current ratio also decreased to 3.2 to 1
+at December 31, 2005 compared to 3.4 to 1 at December 31, 2004. The decrease in
+working capital was largely due to the lower cash balance, resulting largely
+from our stock repurchases, and lower inventory levels at December 31, 2005 as
+compared to December 31, 2004.
+DEFERRED TAXES
+As of December 31, 2005, we had a net deferred tax asset of approximately
+$3,292,000. In order to utilize this deferred tax asset, we will need to
+generate approximately $7.9 million of taxable income in future years. Based on
+future projections of taxable income, we have determined that it is more likely
+than not that the existing net deferred tax asset will be realized.
+CREDIT FACILITY AND BORROWINGS
+On August 6, 2003, we entered into a $12.5 million credit facility (the "TD
+Banknorth Credit Facility") with TD Banknorth, N.A. The TD Banknorth Credit
+Facility provides for an $11.5 million revolving credit line expiring on July
+31, 2006, and a $1 million equipment loan facility, which expired in July 2005.
+Borrowings under the revolving credit line bear a floating rate of interest at
+the prime rate and are secured by a lien on all the assets of the company. The
+TD Banknorth Credit Facility imposes certain quarterly financial covenants on
+the Company and restricts the payment of dividends on our common stock and the
+creation of other liens. We expect to renew the TD Banknorth Credit Facility
+during 2006.
+On March 28, 2005, we received a consent from TD Banknorth, N.A. to permit
+us to repurchase our common stock pursuant to the terms of the Stock Repurchase
+Program as explained below.
+On February 24, 2006, we amended the TD Banknorth Credit Facility to revise
+a financial covenant effective December 31, 2005, which resulted in covenant
+compliance.
+The borrowing base of the revolving credit line under the TD Banknorth
+Credit Facility is based on the lesser of (a) $11.5 million or (b) 85% of
+eligible accounts receivable plus (i) the lesser of (1) $5,500,000 and (2) 45%
+of eligible raw material inventory plus 50% of eligible finished goods
+inventory, less (ii) a $40,000 credit reserve.
+As of December 31, 2005, we had no balances outstanding on the revolving
+credit line. Undrawn commitments under the TD Banknorth Credit Facility were
+approximately $11,500,000 at December 31, 2005. However, our maximum additional
+available borrowings under the facility were limited to approximately $6,500,000
+at December 31, 2005 based on the borrowing base of our collateral.
+STOCK REPURCHASE PROGRAM
+On March 25, 2005, the Board of Directors approved a stock repurchase
+program ("the Stock Repurchase Program"). Under the Stock Repurchase Program, we
+are authorized to repurchase up to $10 million of our outstanding shares of
+common stock from time to time in the open market over a three year period
+ending on March 25, 2008, depending on market conditions, share price and other
+factors. As of December 31, 2005, we repurchased a total of 505,000 shares of
+common stock for approximately $3,867,000, at an average price of $7.66 per
+share.
+25
+PREFERRED STOCK
+In connection with our 7% Series B Cumulative Convertible Redeemable
+Preferred Stock (the "Preferred Stock"), we paid $70,000 of cash dividends per
+quarter. In April 2004, all holders of our Series B Preferred Stock converted
+all their preferred shares into common stock. Under the conversion, a total
+666,665 new shares of common stock were issued. No dividend payments were
+required beyond the second quarter of 2004.
+SHAREHOLDERS' EQUITY
+Shareholders' equity decreased by $2,458,000 to $21,257,000 at December 31,
+2005 from $23,715,000 at December 31, 2004. The decrease was primarily due to
+treasury stock purchases of 505,000 shares of common stock for approximately
+$3,867,000 and non-cash compensation expense of $484,000 related to restricted
+stock grants and the acceleration of vesting of all outstanding unvested options
+granted under all our stock incentive plans, offset by: (1) net income of
+$377,000, (2) proceeds of approximately $346,000 from the issuance of
+approximately 74,000 shares of common stock from stock option exercises and
+purchases from our employee stock purchase plan, and (3) an increase in
+additional paid-in capital of approximately $337,000 resulting from tax benefits
+from tax deductions arising from the sale of employee stock from stock option
+exercises and vesting of restricted stock.
+CONSOLIDATION EXPENSES
+During 2001 through 2005, we recognized approximately $6.0 million of
+business consolidation, restructuring and related expenses as a result of the
+Consolidation. These expenses primarily included employee severance and
+termination related expenses, facility closure and consolidation expenses
+(including moving expenses, estimated non-cancelable lease payments and other
+costs) and accelerated depreciation and asset disposal losses on certain
+leasehold improvements and other fixed assets.
+After expanded efforts to sub-lease our facility in 2003, we determined
+that, because of the continuing regional decline in the commercial real estate
+market during 2003, it was unlikely that we would be able to sublease our
+Wallingford, CT manufacturing facility, which has a lease term that expires in
+March 2008. As a result, during 2003, we increased our restructuring accrual by
+$1,270,000 to provide for the remaining non-cancelable lease payments and
+related costs associated with the manufacturing facility through the lease
+expiration date. In 2004, we revised our estimate of the amount of remaining
+non-cancelable lease payments and related costs associated with the
+manufacturing facility, which resulted in the reversal of approximately $225,000
+of accrued restructuring expenses. No additional restructuring expense was
+recognized in 2005.
+As of December 31, 2005 and 2004, our restructuring accrual amounted to
+$1,007,000 and $1,454,000, respectively. The decrease of $447,000 is related
+solely to payments made on our Wallingford, CT facility lease obligation. We
+paid approximately $447,000, $446,000 and $721,000 of expenses related to the
+Consolidation in 2005, 2004 and 2003, respectively. We continue actively to seek
+to sublease this facility, and to consider opportunities to modify or exit our
+existing lease. However, there can be no assurance that we will be successful in
+these endeavors. Absent our ability to sublease or modify our existing
+Wallingford facility lease, we expect to pay approximately $420,000 of these
+expenses per year in 2006 and 2007, and the remaining $167,000 in 2008. These
+payments from 2006 through 2008 relate primarily to lease obligation costs for
+unused space in our Wallingford, CT facility, which terminates March 31, 2008.
+CONTRACTUAL OBLIGATIONS
+TransAct's contractual obligations as of December 31, 2005 were as follows:
+(In thousands) Total < 1 year 1-3 years 3-5 years > 5 years
+------- -------- --------- --------- ---------
+Operating lease obligations $ 5,407 $ 1,206 $2,074 $1,288 $839
+Purchase obligations 19,750 16,450 3,300 - -
+------- ------- ------ ------ ----
+Total $25,157 $17,656 $5,374 $1,288 $839
+======= ======= ====== ====== ====
+Purchase obligations are for purchases made in the normal course of
+business to meet operational requirements, primarily of raw material and
+component part inventory.
+26
+RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
+SHARE-BASED PAYMENT: In December 2004, the FASB issued Statement of
+Financial Accounting Standards No. 123 (revised 2004), "Share-Based Payment"
+("FAS 123R"). FAS 123R replaced Statement of Financial Accounting Standards No.
+123, "Accounting for Stock-Based Compensation" ("FAS 123"), and superseded
+Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
+Employees" ("APB 25"). In March 2005, the U.S. Securities and Exchange
+Commission ("SEC") issued Staff Accounting Bulletin No. 107 ("SAB 107"), which
+expresses views of the SEC staff regarding the interaction between FAS 123R and
+certain SEC rules and regulations, and provides the staff's views regarding the
+valuation of share-based payment arrangements for public companies. FAS 123R
+will require compensation cost related to share-based payment transactions to be
+recognized in the financial statements. FAS 123R requires measurement of the
+cost of share-based payment transactions to employees at the fair value of the
+award on the grant date and recognition of expense over the requisite service or
+vesting period. FAS 123R allows for implementation using a modified prospective
+method, under which compensation expense for the unvested portion of previously
+granted awards and all new awards will be recognized on or after the date of
+adoption. FAS 123R also allows companies to adopt FAS 123R by restating
+previously issued financial statements, basing the amounts on the expense
+previously calculated and reported in their pro forma footnote disclosures
+required under FAS 123. In April 2005, the FASB changed the implementation date
+for FAS 123R and the provisions of this statement will now be effective for the
+Company during the first quarter of 2006.
+We are currently reviewing the method of adoption, including the transition
+method, method of attribution for compensation cost, valuation methods and
+support for the assumptions that underlie the valuation of awards. Currently, we
+anticipate utilizing the modified prospective application ("MPA") as our
+transition method. A company that chooses to utilize the MPA will not restate
+its prior financial statements. Because the vesting of all existing stock option
+awards was accelerated on November 2, 2005, we will recognize compensation
+expense solely for new awards granted after January 1, 2006. The Company
+anticipates allocating expense on a straight-line basis over the requisite
+service period and using the "short-cut method" for calculating the pool of
+windfall tax benefits. In addition, with regard to valuation methods, the
+Company also anticipates relying exclusively on historical volatility.
+ACCOUNTING CHANGES AND ERROR CORRECTIONS: In May 2005, FASB issued
+Statement of Financial Accounting Standards No. 154, "Accounting Changes and
+Error Corrections" ("FAS 154"), a replacement of Accounting Principles Board
+Opinion No. 20 "Accounting Changes" and Statement of Financial Accounting
+Standards No. 3 "Reporting Accounting Changes in Interim Financial Statements --
+An Amendment of APB Opinion No. 28." FAS 154 applies to all voluntary changes in
+accounting principle and changes required by an accounting pronouncement where
+no specific transition provisions are included. FAS 154 requires retrospective
+application to prior period's financial statements of changes in accounting
+principle, unless it is impracticable to determine either the period-specific
+effects or the cumulative effect of the change. The provisions of FAS 154 are
+effective for accounting changes and correction of errors made in fiscal periods
+that begin after December 15, 2005, although early adoption is permitted. We do
+not anticipate that the implementation of this standard will have a material
+impact on our financial position, results of operations or cash flows.
+RESOURCE SUFFICIENCY
+We believe that cash on-hand and cash flows generated from operations will
+provide sufficient resources to meet our working capital needs, including costs
+associated with the Consolidation, to finance our capital expenditures and meet
+our liquidity requirements through at least the next twelve months.
+(C) IMPACT OF INFLATION
+TransAct believes that its business has not been affected to a significant
+degree by inflationary trends because of the low rate of inflation during the
+past three years, nor does it believe it will be significantly affected by
+inflation during 2006.
+ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
+INTEREST RATE RISK
+Our exposure to market risk for changes in interest rates relates primarily
+to the investment of our available cash and cash equivalents. In accordance with
+our investment policy, we strive to achieve above market rates of return in
+exchange for accepting a prudent amount of incremental risk, which includes the
+risk of interest rate movements. Risk tolerance is constrained by an overriding
+objective to preserve capital. An effective increase or decrease of 10% in
+interest rates would not have a material effect on our results of operations or
+cash flows.
+FOREIGN CURRENCY EXCHANGE RISK
+A substantial portion of our sales are denominated in U.S. dollars and, as
+a result, we have relatively little exposure to foreign currency exchange risk
+with respect to sales made. This exposure may change over time as business
+practices evolve and could have a material adverse impact on our financial
+results in the future. We do not use forward exchange contracts to hedge
+exposures denominated in foreign currencies or any other derivative financial
+instruments for trading or speculative purposes. The effect of an immediate 10%
+change in exchange rates would not have a material impact on our future results
+of operations or cash flows.
+27
+ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
+Page
+Number
+-------
+Report of Independent Registered Public Accounting Firm 30
+TransAct Technologies Incorporated consolidated financial statements:
+Consolidated balance sheets as of December 31, 2005 and 2004 31
+Consolidated statements of income for the years ended
+December 31, 2005, 2004 and 2003 32
+Consolidated statements of changes in shareholders' equity and
+comprehensive income for 33
+the years ended December 31, 2005, 2004 and 2003
+Consolidated statements of cash flows for the years ended
+December 31, 2005, 2004 and 2003 34
+Notes to consolidated financial statements 35 - 51
+Financial Statement Schedule
+The following financial statement schedule is included herein:
+Schedule II - Valuation and Qualifying Accounts 52
+All other financial statement schedules are omitted because they are not
+applicable or the required information is shown in the consolidated financial
+statements or notes thereto
+28
+REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
+To the Board of Directors and Shareholders of TransAct Technologies
+Incorporated:
+We have completed integrated audits of TransAct Technologies Incorporated's 2005
+and 2004 consolidated financial statements and of its internal control over
+financial reporting as of December 31, 2005, and an audit of its 2003
+consolidated financial statements in accordance with the standards of the Public
+Company Accounting Oversight Board (United States). Our opinions, based on our
+audits, are presented below.
+Consolidated financial statements and financial statement schedule
+In our opinion, the consolidated financial statements listed in the accompanying
+index present fairly, in all material respects, the financial position of
+TransAct Technologies Incorporated and its subsidiaries at December 31, 2005 and
+2004, and the results of their operations and their cash flows for each of the
+three years in the period ended December 31, 2005 in conformity with accounting
+principles generally accepted in the United States of America. In addition, in
+our opinion, the financial statement schedule listed in the accompanying index
+presents fairly, in all material respects the information set forth therein when
+read in conjunction with the related consolidated financial statements. These
+financial statements and financial statement schedule are the responsibility of
+the Company's management. Our responsibility is to express an opinion on these
+financial statements and financial statement schedule based on our audits. We
+conducted our audits of these statements in accordance with the standards of the
+Public Company Accounting Oversight Board (United States). Those standards
+require that we plan and perform the audit to obtain reasonable assurance about
+whether the financial statements are free of material misstatement. An audit of
+financial statements includes examining, on a test basis, evidence supporting
+the amounts and disclosures in the financial statements, assessing the
+accounting principles used and significant estimates made by management, and
+evaluating the overall financial statement presentation. We believe that our
+audits provide a reasonable basis for our opinion.
+Internal control over financial reporting
+Also, in our opinion, management's assessment, included in Management's Report
+on Internal Control Over Financial Reporting appearing under Item 9A, that the
+Company maintained effective internal control over financial reporting as of
+December 31, 2005 based on criteria established in Internal Control - Integrated
+Framework issued by the Committee of Sponsoring Organizations of the Treadway
+Commission (COSO), is fairly stated, in all material respects, based on those
+criteria. Furthermore, in our opinion, the Company maintained, in all material
+respects, effective internal control over financial reporting as of December 31,
+2005, based on criteria established in Internal Control - Integrated Framework
+issued by the COSO. The Company's management is responsible for maintaining
+effective internal control over financial reporting and for its assessment of
+the effectiveness of internal control over financial reporting. Our
+responsibility is to express opinions on management's assessment and on the
+effectiveness of the Company's internal control over financial reporting based
+on our audit. We conducted our audit of internal control over financial
+reporting in accordance with the standards of the Public Company Accounting
+Oversight Board (United States). Those standards require that we plan and
+perform the audit to obtain reasonable assurance about whether effective
+internal control over financial reporting was maintained in all material
+respects. An audit of internal control over financial reporting includes
+obtaining an understanding of internal control over financial reporting,
+evaluating management's assessment, testing and evaluating the design and
+operating effectiveness of internal control, and performing such other
+procedures as we consider necessary in the circumstances. We believe that our
+audit provides a reasonable basis for our opinions.
+A company's internal control over financial reporting is a process designed to
+provide reasonable assurance regarding the reliability of financial reporting
+and the preparation of financial statements for external purposes in accordance
+with generally accepted accounting principles. A company's internal control over
+financial reporting includes those policies and procedures that (i) pertain to
+the maintenance of records that, in reasonable detail, accurately and fairly
+reflect the transactions and dispositions of the assets of the company; (ii)
+provide reasonable assurance that transactions are recorded as necessary to
+permit preparation of financial statements in accordance with generally accepted
+accounting principles, and that receipts and expenditures of the company are
+being made only in accordance with authorizations of management and directors of
+the company; and (iii) provide reasonable assurance regarding prevention or
+timely detection of unauthorized acquisition, use, or disposition of the
+company's assets that could have a material effect on the financial statements.
+Because of its inherent limitations, internal control over financial reporting
+may not prevent or detect misstatements. Also, projections of any evaluation of
+effectiveness to future periods are subject to the risk that controls may become
+inadequate because of changes in conditions, or that the degree of compliance
+with the policies or procedures may deteriorate.
+/s/ PricewaterhouseCoopers LLP
+PricewaterhouseCoopers LLP
+Hartford, CT
+March 15, 2006
+29
+TRANSACT TECHNOLOGIES INCORPORATED
+CONSOLIDATED BALANCE SHEETS
+(In thousands, except share data)
+December 31, December 31,
+2005 2004
+------------ ------------
+ASSETS:
+Current assets:
+Cash and cash equivalents $ 4,579 $ 8,628
+Receivables, net 8,359 8,910
+Inventories 6,036 8,074
+Refundable income taxes 295 510
+Deferred tax assets 2,735 2,370
+Other current assets 258 586
+------- -------
+Total current assets 22,262 29,078
+------- -------
+Fixed assets, net 4,510 3,177
+Goodwill 1,469 1,469
+Deferred tax assets 557 274
+Intangible and other assets, net of accumulated amortization of
+$41 and $0, respectively 534 101
+------- -------
+7,070 5,021
+------- -------
+Total assets $29,332 $34,099
+======= =======
+LIABILITIES AND SHAREHOLDERS' EQUITY:
+Current liabilities:
+Accounts payable $ 2,859 $ 3,804
+Accrued liabilities 3,162 3,209
+Accrued restructuring expenses 420 420
+Accrued patent license fees 36 417
+Deferred revenue 410 717
+------- -------
+Total current liabilities 6,887 8,567
+------- -------
+Accrued restructuring expenses, net of current portion 587 1,034
+Deferred revenue, net of current portion 270 444
+Other liabilities 331 339
+------- -------
+1,188 1,817
+------- -------
+Total liabilities 8,075 10,384
+------- -------
+Commitments and contingencies (Note 11)
+Shareholders' equity:
+Preferred stock, $0.01 par value, 4,800,000
+authorized, none issued and outstanding -- --
+Preferred stock, Series A, $0.01 par value, 200,000
+authorized, none issued and outstanding -- --
+Common stock, $0.01 par value, 20,000,000 authorized,
+9,731,670 and 10,037,766 shares issued and outstanding 102 100
+Additional paid-in capital 19,334 17,401
+Retained earnings 7,489 7,112
+Unamortized restricted stock compensation (1,837) (1,067)
+Accumulated other comprehensive income, net of tax 36 169
+Treasury stock, 505,000 and 0 shares at cost (3,867) --
+------- -------
+Total shareholders' equity 21,257 23,715
+------- -------
+Total liabilities and shareholders' equity $29,332 $34,099
+======= =======
+See accompanying notes to consolidated financial statements.
+30
+TRANSACT TECHNOLOGIES INCORPORATED
+CONSOLIDATED STATEMENTS OF INCOME
+(In thousands, except per share data)
+Year Ended December 31,
+---------------------------
+2005 2004 2003
+------- ------- -------
+Net sales $51,091 $59,847 $52,098
+Cost of sales 35,501 37,805 36,555
+------- ------- -------
+Gross profit 15,590 22,042 15,543
+------- ------- -------
+Operating expenses:
+Engineering, design and product development 2,726 2,715 2,276
+Selling and marketing 6,319 5,111 4,968
+General and administrative 6,321 5,990 4,483
+Business consolidation and restructuring -- (225) 1,128
+------- ------- -------
+15,366 13,591 12,855
+------- ------- -------
+Operating income 224 8,451 2,688
+------- ------- -------
+Other income (expense):
+Interest expense (41) (44) (219)
+Interest income 114 48 9
+Write-off of deferred financing costs -- -- (103)
+Other, net 32 (18) (122)
+------- ------- -------
+105 (14) (435)
+------- ------- -------
+Income before income taxes 329 8,437 2,253
+Income tax provision (benefit) (48) 2,979 725
+------- ------- -------
+Net income 377 5,458 1,528
+Dividends and accretion charges on preferred
+stock -- (111) (358)
+Earnings allocated to preferred shareholders -- (111) (83)
+------- ------- -------
+Net income available to common shareholders
+$ 377 $ 5,236 $ 1,087
+======= ======= =======
+Net income per common share:
+Basic $ 0.04 $ 0.55 $ 0.13
+Diluted $ 0.04 $ 0.51 $ 0.12
+Shares used in per-share calculation:
+Basic 9,849 9,593 8,689
+Diluted 10,163 10,231 9,335
+See accompanying notes to consolidated financial statements.
+31
+TRANSACT TECHNOLOGIES INCORPORATED
+CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
+AND COMPREHENSIVE INCOME
+(In thousands, except share data)
+Unamortized Loan Accumulated
+Common Stock Additional Restricted Receivable Other Total
+----------------- Paid-in Retained Stock Treasury from Comprehensive Comprehensive
+Shares Amount Capital Earnings Compensation Stock Officer Income(Loss) Total Income
+---------- ------ ----------- -------- ------------ -------- ---------- ------------- ------- -------------
+Balance, December 31,
+2002 8,572,679 $ 57 $ 6,308 $ 599 $ (97) $ -- $(330) $ 8 $ 6,545
+Issuance of shares
+from exercise of
+stock options 357,906 3 1,355 -- -- -- -- -- 1,358
+Issuance of shares
+from employee
+stock purchase
+plan 3,130 -- 9 -- -- -- -- -- 9
+Issuance of shares
+from exercise of
+common stock
+warrants 18,935 -- -- -- -- -- -- -- --
+Amortization of
+restricted stock
+compensation -- -- -- -- 67 -- -- -- 67
+Tax benefit related
+to employee
+stock sales -- -- 769 -- -- -- -- -- 769
+Dividends paid on
+preferred stock -- -- -- (280) -- -- -- -- (280)
+Accretion of
+preferred stock
+discount and
+issuance costs -- -- -- (78) -- -- -- -- (78)
+Repayment of loan
+from officer -- -- -- -- -- -- 330 -- 330
+Comprehensive
+income:
+Foreign currency
+translation
+adj -- -- -- -- -- -- -- 99 99 99
+Net income -- -- -- 1,528 -- -- -- -- 1,528 1,528
+---------- ---- -------- ------ ------- ------- ----- ----- ------- ------
+Balance, December 31,
+2003 8,952,650 60 8,441 1,769 (30) -- -- 107 10,347 1,627
+Cancellation of ======
+restricted stock (3,000) -- (72) -- 72 -- -- -- --
+Issuance of shares
+from exercise of
+stock options 321,947 3 1,376 -- -- -- -- -- 1,379
+Issuance of shares
+from employee
+stock purchase
+plan 3,706 -- 47 -- -- -- -- -- 47
+Issuance of shares
+from exercise of
+common stock
+warrants 15,000 -- 90 -- -- -- -- -- 90
+Issuance of shares
+from conversion
+of preferred
+stock, net of
+issuance and
+registration
+costs 666,665 6 3,818 -- -- -- -- -- 3,824
+Issuance of
+restricted stock 81,000 1 1,399 -- (1,400) -- -- -- --
+Amortization of
+restricted stock
+compensation -- -- -- -- 291 -- -- -- 291
+Tax benefit related
+to employee
+stock sales -- -- 2,332 -- -- -- -- -- 2,332
+Redemption of
+partial shares
+of common stock
+in connection
+with the 3:2
+stock split (202) 30 (30) -- -- -- -- -- --
+Dividends paid on
+preferred stock -- -- -- (91) -- -- -- -- (91)
+Accretion of
+preferred stock
+discount and
+issuance costs -- -- -- (24) -- -- -- -- (24)
+Comprehensive
+income:
+Foreign currency
+translation
+adj -- -- -- -- -- -- -- 62 62 62
+Net income -- -- -- 5,458 -- -- -- -- 5,458 5,458
+---------- ---- -------- ------ ------- ------- ----- ----- ------- ------
+Balance, December 31,
+2004 10,037,766 100 17,401 7,112 (1,067) -- -- 169 23,715 5,520
+======
+Cancellation of
+restricted stock (250) -- (3) -- 3 -- -- -- --
+Issuance of shares
+from exercise of
+stock options 71,064 1 323 -- -- -- -- -- 324
+Issuance of shares
+from employee
+stock purchase
+plan 2,690 -- 23 -- -- -- -- -- 23
+Acceleration of
+outstanding
+stock options -- -- 26 -- -- -- -- -- 26
+Issuance of
+restricted stock 125,400 1 1,230 -- (1,231) -- -- -- --
+Amortization of
+restricted stock
+compensation -- -- -- -- 458 -- -- -- 458
+Tax benefit related
+to employee
+stock sales and
+vesting of
+restricted stock -- -- 337 -- -- -- -- -- 337
+Purchase of
+treasury stock (505,000) -- -- -- -- (3,867) -- -- (3,867)
+Expenses related to
+preferred stock
+conversion -- -- (3) -- -- -- -- -- (3)
+Comprehensive
+income:
+Foreign currency
+translation
+adj., net of
+tax -- -- -- -- -- -- -- (133) (133) (133)
+Net income -- -- -- 377 -- -- -- -- 377 377
+---------- ---- -------- ------ ------- ------- ----- ----- ------- ------
+Balance, December 31,
+2005 9,731,670 $102 $ 19,334 $7,489 $(1,837) $(3,867) $ -- $ 36 $21,257 $ 244
+========== ==== ======== ====== ======= ======= ===== ===== ======= ======
+See accompanying notes to consolidated financial statements.
+32
+TRANSACT TECHNOLOGIES INCORPORATED
+CONSOLIDATED STATEMENTS OF CASH FLOWS
+(In thousands)
+Year Ended December 31,
+---------------------------
+2005 2004 2003
+------- ------- -------
+Cash flows from operating activities:
+Net income $ 377 $ 5,458 $ 1,528
+Adjustments to reconcile net income to net cash provided by
+operating activities:
+Non-cash compensation expense 484 291 67
+Write-off of deferred bank financing costs -- -- 103
+Depreciation and amortization 1,493 1,634 1,656
+Deferred income taxes (648) 380 162
+Loss (gain) on sale of fixed assets 4 -- (1)
+Changes in operating assets and liabilities:
+Receivables 551 164 (5,035)
+Inventories 2,038 (13) 374
+Refundable income taxes 215 (380) 98
+Other current assets 328 (207) (52)
+Other assets 3 (8) (8)
+Accounts payable (945) 516 305
+Accrued liabilities and deferred revenue (199) 1,920 1,212
+Accrued patent license fees (381) (741) 998
+Accrued restructuring expenses (447) (671) 407
+------- ------- -------
+Net cash provided by operating activities 2,873 8,343 1,814
+------- ------- -------
+Cash flows from investing activities:
+Purchases of fixed assets (2,756) (1,178) (1,261)
+Proceeds from sale of fixed assets -- -- 1
+Purchase of intangible assets (510) -- --
+Repayment of loan receivable from officer -- -- 330
+------- ------- -------
+Net cash used in investing activities (3,266) (1,178) (930)
+------- ------- -------
+Cash flows from financing activities:
+Revolving bank loan repayments, net -- -- (2,541)
+Term loan borrowings -- -- 450
+Term loan repayments -- (420) (380)
+Proceeds from option exercises, employee
+stock purchase plan, 347 1,516 1,364
+and common stock warrants
+Purchases of common stock for treasury (3,867) -- --
+Payment of cash dividends -- (91) (280)
+Payment of preferred stock conversion and
+registration expense (3) (102) --
+------- ------- -------
+Net cash provided by (used in) financing activities (3,523) 903 (1,387)
+------- ------- -------
+Effect of exchange rate changes (133) 62 99
+------- ------- -------
+Increase (decrease) in cash and cash equivalents (4,049) 8,130 (404)
+Cash and cash equivalents, beginning of period 8,628 498 902
+------- ------- -------
+Cash and cash equivalents, end of period $ 4,579 $ 8,628 $ 498
+======= ======= =======
+Supplemental cash flow information:
+Interest paid $ 41 $ 44 $ 226
+Income taxes paid, net 117 379 229
+Non-cash financing activities:
+Conversion of preferred stock to common stock $ -- $ 3,926 $ --
+Tax benefit related to employee stock
+sales and restricted stock 337 2,332 769
+Accretion of preferred stock discount and issuance costs -- 24 78
+Issuance of restricted stock 1,231 1,400 --
+See accompanying notes to consolidated financial statements.
+33
+TRANSACT TECHNOLOGIES INCORPORATED
+NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
+1. DESCRIPTION OF BUSINESS
+TransAct Technologies Incorporated ("TransAct"), which has its
+headquarters in Wallingford, CT and its primary operating facility in
+Ithaca, NY, operates in one industry segment, transaction-based printers
+and related products. TransAct designs, develops, assembles, markets and
+services world-class transaction printers under the Epic and Ithaca(R)
+brand names. Known and respected worldwide for innovative designs and
+real-world service reliability, our impact, thermal and inkjet printers
+generate top-quality receipts, tickets, coupons, register journals and
+other documents. We focus on two core markets: point-of-sale (POS) and
+banking, and gaming and lottery. We sell our products to original equipment
+manufacturers, value-added resellers and selected distributors, as well as
+directly to end-users. Our product distribution spans across the Americas,
+Europe, the Middle East, Africa, the Caribbean Islands and the South
+Pacific. In addition, we have a strong focus on the after-market side of
+the business, with a growing commitment to printer service, supplies and
+spare parts.
+We design, develop, manufacture and market a broad array of
+transaction-based printers utilizing inkjet, thermal and impact printing
+technology for applications requiring up to 60 character columns in each of
+our vertical markets. Our printers are configurable, which offer customers
+the ability to choose from a variety of features and functions. Options
+typically include printed circuit board configuration, paper cutting
+devices, paper handling capacities and cabinetry color. In addition to our
+configurable printers, we manufacture custom printers for certain OEM
+customers. In collaboration with these customers, we provide engineering
+and manufacturing expertise for the design and development of specialized
+printers.
+2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
+STOCK SPLIT: On March 17, 2004, we effected a three-for-two split of
+our common stock in the form of a 50 percent stock dividend. All share and
+per-share amounts within the accompanying financial statements and
+footnotes reflect the stock split.
+PRINCIPLES OF CONSOLIDATION: The accompanying consolidated financial
+statements were prepared on a consolidated basis to include the accounts of
+TransAct and its wholly-owned subsidiaries. All intercompany accounts,
+transactions and unrealized profit were eliminated in consolidation.
+RECLASSIFICATIONS: Certain amounts in the prior years' financial
+statements have been reclassified to conform to the current year's
+presentation.
+USE OF ESTIMATES: The accompanying consolidated financial statements
+were prepared using estimates and assumptions that affect the reported
+amounts of assets, liabilities, revenue and expenses, and disclosure of
+contingent assets and liabilities as of the date of the consolidated
+financial statements and the reported amounts of revenues and expenses
+during the reporting period. Actual results could differ from those
+estimates.
+34
+TRANSACT TECHNOLOGIES INCORPORATED
+NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
+2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
+SEGMENT REPORTING: We apply the provisions of Statement of Financial
+Accounting Standards No. 131, "Disclosures about Segments of an Enterprise
+and Related Information" ("FAS 131"). We view our operations and manage our
+business as one segment, the design, development, manufacture and sale of
+transaction-based printers. Factors used to identify TransAct's single
+operating segment include the organizational structure of the Company and
+the financial information available for evaluation by the chief operating
+decision-maker in making decisions about how to allocate resources and
+assess performance. We operate predominantly in one geographical area, the
+United States of America. See Note 20 for information regarding our
+international operations. We provide the following disclosures of revenues
+from products and services:
+Year ended Year ended Year ended
+(In thousands) December 31, 2005 December 31, 2004 December 31, 2003
+----------------- ----------------- -----------------
+POS and banking printers $16,410 32.1% $17,659 29.5% $14,027 26.9%
+Gaming and lottery printers 23,634 46.3% 31,937 53.4% 29,274 56.2%
+Services, spare parts and
+consumables 11,047 21.6% 10,251 17.1% 8,797 16.9%
+------- ----- ------- ----- ------- -----
+Total net sales $51,091 100.0% $59,847 100.0% $52,098 100.0%
+======= ===== ======= ===== ======= =====
+CASH AND CASH EQUIVALENTS: We consider all highly liquid investments
+with a maturity date of three months or less at date of purchase to be cash
+equivalents.
+ACCOUNTS RECEIVABLE: We have standardized credit granting and review
+policies and procedures for all customer accounts, including:
+- Credit reviews of all new customer accounts,
+- Ongoing credit evaluations of current customers,
+- Credit limits and payment terms based on available credit
+information,
+- Adjustments to credit limits based upon payment history and the
+customer's current creditworthiness.
+PROVISIONS FOR LOSSES ON UNCOLLECTIBLE RECEIVABLES: We establish an
+allowance for doubtful accounts to ensure trade receivables are valued
+appropriately. We maintain an allowance for doubtful accounts based on a
+variety of factors, including the length of time receivables are past due,
+significant one-time events and historical experience. We record a specific
+allowance for individual accounts when we become aware of a customer's
+inability to meet its financial obligations, such as in the case of
+bankruptcy filings or deterioration in the customer's operating results or
+financial position. If circumstances related to customers change, we would
+further adjust estimates of the recoverability of receivables. Allowances
+for doubtful accounts on accounts receivable balances were $240,000 and
+$175,000, as of December 31, 2005 and 2004, respectively.
+INVENTORIES: Inventories are stated at the lower of cost (principally
+standard cost which approximates actual cost on a first-in, first-out
+basis) or market. We assess market value based on historical usage and
+estimates of future demand in the market.
+FIXED ASSETS: Fixed assets are stated at cost. Depreciation is
+recorded using the straight-line method over the estimated useful lives.
+The estimated useful life of tooling is five years; machinery and equipment
+is ten years; furniture and office equipment is five to ten years; and
+computer software and equipment is three to five years. Leasehold
+improvements are amortized over the shorter of the term of the lease or the
+useful life of the asset. Costs related to repairs and maintenance are
+expensed as incurred. The costs of sold or retired assets are removed from
+the related asset and accumulated depreciation accounts and any gain or
+loss is recognized. Depreciation expense was $1,419,000, $1,608,000 and
+$1,579,000 in 2005, 2004 and 2003, respectively.
+35
+TRANSACT TECHNOLOGIES INCORPORATED
+NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
+2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
+LEASES: Rent expense under non-cancelable operating leases with
+scheduled rent increases or free rent periods is accounted for on a
+straight-line basis over the lease term, beginning on the date of control
+of physical use of the asset or of initial possession, which is generally
+when we enter the space and begin construction build-out. The amount of the
+excess of straight-line rent expense over scheduled payments is recorded as
+a deferred liability. Construction allowances and other such lease
+incentives are recorded as deferred credits, and are amortized on a
+straight-line basis as a reduction of rent expense beginning in the period
+they are deemed to be earned, which generally coincides with the occupancy
+date.
+GOODWILL: We adopted the provisions of Statement of Financial
+Accounting Standard No. 142, "Goodwill and Other Intangible Assets" ("FAS
+142") on January 1, 2002. Under FAS 142, goodwill is no longer amortized
+and is tested for impairment at least annually at the reporting unit level.
+We test goodwill annually for impairment, or whenever events or
+changes in circumstances indicate that the carrying value may not be
+recoverable. We have performed an impairment test as of December 31, 2005
+and determined that no impairment has occurred.
+REVENUE RECOGNITION: Our typical contracts include the sale of
+printers, which are sometimes accompanied by separately-priced extended
+warranty contracts. We also sell spare parts, consumables, and other repair
+services (sometimes pursuant to multi-year product maintenance contracts)
+which are not included in the original printer sale and are ordered by the
+customer as needed. We recognize revenue pursuant to the guidance within
+SAB 104, "Revenue Recognition." Specifically, revenue is recognized when
+evidence of an arrangement exists, delivery (based on shipping terms, which
+are generally FOB shipping point) has occurred, the selling price is fixed
+and determinable, and collectibility is reasonably assured. We provide for
+an estimate of product returns based on historical experience at the time
+of revenue recognition.
+Revenue related to extended warranty and product maintenance contracts
+is recognized pursuant to FASB Technical Bulletin 90-1 ("FTB 90-1"),
+"Accounting for Separately Priced Extended Warranty and Product Maintenance
+Contracts." Pursuant to FTB 90-1, revenue related to separately priced
+product maintenance contracts is deferred and recognized over the term of
+the maintenance period. We record deferred revenue for amounts received
+from customers for maintenance contracts prior to the maintenance period.
+CONCENTRATION OF CREDIT RISK: Financial instruments that potentially
+expose TransAct to concentrations of credit risk are limited to accounts
+receivable.
+Accounts receivable from customers representing 10% or more of total
+accounts receivable were as follows:
+December 31,
+------------
+2005 2004
+---- ----
+Customer A 19% 10%
+Customer B * 18%
+Customer C * 14%
+* - customer balances were less than 10% of total accounts receivable
+Sales to customers representing 10% or more of total net sales were as
+follows:
+Year ended December 31,
+-----------------------
+2005 2004 2003
+---- ---- ----
+Customer A 17% 16% 19%
+Customer B 14% * *
+Customer C * 14% *
+Customer D * -- 12%
+* - customer balances were less than 10% of total net sales
+36
+TRANSACT TECHNOLOGIES INCORPORATED
+NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
+2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
+WARRANTY: We generally warrant our products for up to 24 months and
+record the estimated cost of such product warranties at the time the sale
+is recorded. Estimated warranty costs are based upon actual past experience
+of product repairs and the related estimated cost of labor and material to
+make the necessary repairs.
+The following table summarizes the activity recorded in the accrued
+product warranty liability during 2005, 2004 and 2003:
+Year ended December 31,
+-----------------------
+(In thousands) 2005 2004 2003
+----- ----- -----
+Balance, beginning of year $ 597 $ 495 $ 644
+Additions related to warranties issued 613 610 409
+Warranty costs incurred (566) (508) (558)
+----- ----- -----
+Balance, end of year $ 644 $ 597 $ 495
+===== ===== =====
+Approximately $145,000 and $153,000 of the accrued product warranty
+liability were classified as long-term at December 31, 2005 and 2004,
+respectively.
+RESEARCH AND DEVELOPMENT EXPENSES: Research and development expenses
+include engineering, design and product development expenses incurred in
+connection with specialized engineering and design to introduce new
+products and to customize existing products, and are expensed as a
+component of operating expenses as incurred. We spent approximately
+$2,726,000, $2,715,000 and $2,276,000 on research and development expenses
+in 2005, 2004 and 2003, respectively.
+ADVERTISING: Advertising costs are expensed as incurred. Advertising
+expenses for the years ended December 31, 2005, 2004 and 2003 totaled
+$371,000, $343,000 and $417,000, respectively.
+RESTRUCTURING: In 2001, we undertook a plan to consolidate all
+manufacturing and engineering into our existing Ithaca, NY facility and
+close our Wallingford, CT manufacturing facility. We continue to apply the
+consensus set forth in EITF 94-3, "Liability Recognition for Certain
+Employee Termination Benefits and Other Costs to Exit an Activity
+(Including Certain Costs Incurred in a Restructuring)" in recognizing
+restructuring expenses. See Note 8 for additional disclosures related to
+our restructuring plan.
+INCOME TAXES: The income tax amounts reflected in the accompanying
+financial statements are accounted for under the liability method in
+accordance with FAS 109 "Accounting for Income Taxes." Deferred tax assets
+and liabilities are recognized for the estimated future tax consequences
+attributable to differences between the financial statement carrying
+amounts of existing assets and liabilities and their respective tax bases
+and operating loss and tax credit carryforwards. Deferred tax assets and
+liabilities are measured using enacted tax rates in effect for the year in
+which those temporary differences are expected to be recovered or settled.
+We assess the likelihood that net deferred tax assets will be realized from
+future taxable income, and to the extent that we believe that realization
+is not likely, we establish a valuation allowance.
+FOREIGN CURRENCY TRANSLATION: The financial position and results of
+operations of our foreign subsidiary in the United Kingdom are measured
+using local currency as the functional currency. Assets and liabilities of
+such subsidiary have been translated into U.S. dollars at the year-end
+exchange rate, related revenues and expenses have been translated at the
+weighted average exchange rate for the year, and shareholders' equity has
+been translated at historical exchange rates. The resulting translation
+gains or losses, net of tax, are recorded in stockholders' equity as a
+cumulative translation adjustment, which is a component of accumulated
+other comprehensive income. Foreign currency transaction gains and losses
+are recognized in other income (expense) and have not been significant for
+all periods presented.
+FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying amount for cash and
+cash equivalents approximates fair value because of the short maturity of
+these instruments. The carrying amount of receivables, accounts payable and
+accrued liabilities is a reasonable estimate of fair value because of the
+short-term nature of the transactions.
+37
+TRANSACT TECHNOLOGIES INCORPORATED
+NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
+2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
+COMPREHENSIVE INCOME: Statement of Accounting Standard No. 130,
+"Reporting Comprehensive Income" ("FAS 130"), requires that items defined
+as comprehensive income or loss be separately classified in the financial
+statements and that the accumulated balance of other comprehensive income
+or loss be reported separately from accumulated deficit and additional
+paid-in-capital in the equity section of the balance sheet. We include the
+foreign currency translation adjustment, net of tax, related to our
+subsidiary in the United Kingdom within our calculation of comprehensive
+income.
+STOCK-BASED COMPENSATION: We have elected to follow Accounting
+Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
+("APB 25"), and related interpretations in accounting for stock options.
+Since the exercise price of employee stock options granted by the Company
+equals the market price of the underlying stock on the date of grant, no
+compensation expense is recorded. We have adopted the disclosure-only
+provisions of Statement of Financial Accounting Standards No. 123,
+"Accounting for Stock-Based Compensation" ("FAS 123"), as amended by
+Statement of Financial Standards No. 148, "Accounting for Stock-Based
+Compensation - Transition and Disclosure - an amendment of FAS 123" ("FAS
+148"). See Note 13 for additional disclosures related to our stock-based
+compensation plans.
+The following table illustrates the effect on net income (loss),
+compensation expense and net income (loss) per share as if the
+Black-Scholes fair value method described in FAS 123 had been applied to
+our stock plans.
+Year Ended December 31,
+-------------------------
+(In thousands, except per share data) 2005 2004 2003
+------- ------ ------
+Net income (loss) available to common shareholders:
+Net income available to common shareholders,
+as reported $ 377 $5,236 $1,087
+Add: Stock-based compensation expense included in
+reported net income, net of tax 315 205 43
+Deduct: Stock-based compensation expense determined
+under fair value based method for all awards, net of tax (1,294) (390) (229)
+------- ------ ------
+Pro forma net income (loss) available to common shareholders $ (602) $5,051 $ 901
+======= ====== ======
+Net income (loss) per share:
+Basic:
+As reported $ 0.04 $ 0.55 $ 0.13
+Pro forma (0.06) 0.53 0.10
+Diluted:
+As reported $ 0.04 $ 0.51 $ 0.12
+Pro forma (0.06) 0.49 0.10
+Pro forma stock based compensation expense for the year ended December
+31, 2005 includes pro forma compensation expense of approximately $564,000
+related to the acceleration of stock option vesting.
+NET INCOME AND LOSS PER SHARE: We report net income or loss per share
+in accordance with Financial Standard No. 128, "Earnings per Share (EPS)"
+("FAS 128"). Under FAS 128, basic EPS, which excludes dilution, is computed
+by dividing income or loss available to common shareholders by the weighted
+average number of common shares outstanding for the period. Unvested
+restricted stock is excluded from the calculation of weighted average
+common shares for basic EPS. Net income or loss available to common
+shareholders represents reported net income or loss less accretion of
+redeemable convertible preferred stock and allocation of preferred
+earnings. Diluted EPS reflects the potential dilution that could occur if
+securities or other contracts to issue common stock were exercised or
+converted into common stock. Diluted EPS includes in-the-money options and
+warrants using the treasury stock method, and also includes the assumed
+conversion of preferred stock using the if-converted method, but only if
+dilutive. During a loss period, the assumed exercise of in-the-money stock
+options and warrants and the conversion of convertible preferred stock has
+an anti-dilutive effect, and therefore, these instruments are excluded from
+the computation of dilutive EPS.
+38
+TRANSACT TECHNOLOGIES INCORPORATED
+NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
+2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
+Beginning in the second quarter of 2004, the Company applied the
+consensus set forth in EITF 03-06 "Participating Securities and the
+Two-Class Method under FASB Statement No. 128, Earnings Per Share", which
+requires the two-class method of computing earnings per share when
+participating securities, such as our redeemable preferred stock, are
+outstanding. The two-class method is an earnings allocation formula that
+determines earnings per share for common stock and participating securities
+based upon an allocation of earnings as if all of the earnings for the
+period had been distributed in accordance with participation rights on
+undistributed earnings. EITF 03-6 became effective for reporting periods
+beginning after March 31, 2004. This guidance impacted the calculation of
+earnings per share for the year ended December 31, 2004 and also required
+retroactive restatement of earnings per share presented for the year ended
+December 31, 2003.
+3. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
+SHARE-BASED PAYMENT: In December 2004, the FASB issued Statement of
+Financial Accounting Standards No. 123 (revised 2004), "Share-Based
+Payment" ("FAS 123R"). FAS 123R replaced Statement of Financial Accounting
+Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"),
+and superseded Accounting Principles Board Opinion No. 25, "Accounting for
+Stock Issued to Employees" ("APB 25"). In March 2005, the U.S. Securities
+and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 107
+("SAB 107"), which expresses views of the SEC staff regarding the
+interaction between FAS 123R and certain SEC rules and regulations, and
+provides the staff's views regarding the valuation of share-based payment
+arrangements for public companies. FAS 123R will require compensation cost
+related to share-based payment transactions to be recognized in the
+financial statements. FAS 123R requires measurement of the cost of
+share-based payment transactions to employees at the fair value of the
+award on the grant date and recognition of expense over the requisite
+service or vesting period. FAS 123R allows for implementation using a
+modified prospective method, under which compensation expense for the
+unvested portion of previously granted awards and all new awards will be
+recognized on or after the date of adoption. FAS 123R also allows companies
+to adopt FAS 123R by restating previously issued financial statements,
+basing the amounts on the expense previously calculated and reported in
+their pro forma footnote disclosures required under FAS 123. In April 2005,
+the FASB changed the implementation date for FAS 123R and the provisions of
+this statement will now be effective for the Company during the first
+quarter of 2006.
+We are currently reviewing the method of adoption, including the
+transition method, method of attribution for compensation cost, valuation
+methods and support for the assumptions that underlie the valuation of
+awards. Currently, we anticipate utilizing the modified prospective
+application ("MPA") as our transition method. A company that chooses to
+utilize the MPA will not restate its prior financial statements. Because
+the vesting of all existing stock option awards was accelerated on November
+2, 2005, we will recognize compensation expense solely for new awards
+granted after January 1, 2006. The Company anticipates allocating expense
+on a straight-line basis over the requisite service period and using the
+"short-cut method" for calculating the pool of windfall tax benefits. In
+addition, with regard to valuation methods, the Company also anticipates
+relying exclusively on historical volatility.
+ACCOUNTING CHANGES AND ERROR CORRECTIONS: In May 2005, FASB issued
+Statement of Financial Accounting Standards No. 154, "Accounting Changes
+and Error Corrections" ("FAS 154"), a replacement of Accounting Principles
+Board Opinion No. 20 "Accounting Changes" and Statement of Financial
+Accounting Standards No. 3 "Reporting Accounting Changes in Interim
+Financial Statements -- An Amendment of APB Opinion No. 28." FAS 154
+applies to all voluntary changes in accounting principle and changes
+required by an accounting pronouncement where no specific transition
+provisions are included. FAS 154 requires retrospective application to
+prior period's financial statements of changes in accounting principle,
+unless it is impracticable to determine either the period-specific effects
+or the cumulative effect of the change. The provisions of FAS 154 are
+effective for accounting changes and correction of errors made in fiscal
+periods that begin after December 15, 2005, although early adoption is
+permitted. We do not anticipate that the implementation of this standard
+will have a material impact on our financial position, results of
+operations or cash flows.
+4. INVENTORIES
+The components of inventories are:
+December 31,
+---------------
+(In thousands) 2005 2004
+------ ------
+Raw materials and purchased component parts $5,788 $7,869
+Finished goods 248 205
+------ ------
+$6,036 $8,074
+====== ======
+39
+TRANSACT TECHNOLOGIES INCORPORATED
+NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
+5. FIXED ASSETS
+The components of fixed assets are:
+December 31,
+-------------------
+(In thousands) 2005 2004
+-------- --------
+Tooling, machinery and equipment $ 13,748 $ 12,627
+Furniture, office equipment, computer software
+and equipment 5,068 3,864
+Leasehold improvements 949 522
+-------- --------
+19,765 17,013
+Less: accumulated depreciation and amortization (15,255) (13,836)
+-------- --------
+$ 4,510 $ 3,177
+======== ========
+6. INTANGIBLE ASSETS
+On June 30, 2005, we acquired certain intangible assets related to
+casino ticket printer designs and technology from Bally Gaming, Inc.
+("Bally") for $475,000, plus the costs of effecting the acquisition
+(approximately $35,000). Prior to the acquisition, pursuant to the terms of
+a license agreement, we were required to pay Bally a royalty on sales of
+certain gaming printers utilizing the licensed technology. As a result of
+the acquisition, effective July 1, 2005, we were no longer required to pay
+any future royalties to Bally.
+The purchase price was allocated, based on management's estimates, to
+intangible assets based on their relative fair value at the date of
+acquisition. The fair value of the intangibles, comprised of purchased
+technology and a covenant not to compete, was determined using the future
+cash flows method. The intangible assets are being amortized on a
+straight-line basis over six and seven years, respectively, for the
+estimated life of the assets.
+The following summarizes the allocation of the purchase price for the
+acquisition of certain intangible assets from Bally (in thousands):
+Purchased technology $364
+Covenant not to compete 146
+----
+Consideration paid $510
+====
+Amortization expense associated with the technology purchased from
+Bally was $41,000 for the year ended December 31, 2005. Amortization
+expense for each of the next five years ending December 31 is expected to
+be approximately $82,000 per year.
+7. ACCRUED LIABILITIES
+The components of accrued liabilities are:
+December 31,
+---------------
+(In thousands) 2005 2004
+------ ------
+Payroll and fringe benefits $1,208 $1,334
+Income taxes 679 735
+Warranty - current portion 499 444
+Rent and occupancy 200 150
+Other 576 546
+------ ------
+$3,162 $3,209
+====== ======
+40
+TRANSACT TECHNOLOGIES INCORPORATED
+NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
+8. ACCRUED BUSINESS CONSOLIDATION AND RESTRUCTURING EXPENSES
+In February 2001, we announced plans to establish a global engineering
+and manufacturing center at our Ithaca, NY facility. As part of this
+strategic decision, we undertook a plan to consolidate all manufacturing
+and engineering into our existing Ithaca, NY facility and close our
+Wallingford, CT manufacturing facility (the "Consolidation"). As of
+December 31, 2001, substantially all Wallingford product lines were
+successfully transferred to Ithaca, NY. We currently maintain our corporate
+headquarters and a service center in Wallingford. The closing of the
+Wallingford manufacturing facility resulted in the termination of
+employment of approximately 70 production, administrative and management
+employees. We continue to apply the consensus set forth in EITF 94-3,
+"Liability Recognition for Certain Employee Termination Benefits and Other
+Costs to Exit an Activity (Including Certain Costs Incurred in a
+Restructuring)" in recognizing the accrued restructuring expenses.
+During 2001, we recorded expenses of approximately $4,096,000 related
+to costs associated with the Consolidation, including severance pay, stay
+bonuses, employee benefits, moving expenses, non-cancelable lease payments,
+accelerated depreciation and other costs.
+During 2002, we incurred an additional $958,000 of Consolidation
+expenses, primarily due to a revision to our estimate for non-cancelable
+lease payments included in the restructuring accrual.
+After expanded efforts in 2003, we determined that because of the
+continuing regional decline in the commercial real estate market during
+2003, it was unlikely that we would be able to sublease our Wallingford, CT
+manufacturing facility, which has a lease term that expires in March 2008.
+As a result, during 2003, we increased our restructuring accrual by
+$1,270,000 to provide for the remaining non-cancelable lease payments and
+related costs associated with the manufacturing facility. This increase
+represented the reversal of estimated sublease income for the remainder of
+the lease term. In addition, we did not terminate certain employees
+originally included in the Consolidation. As a result, we reversed the
+remaining $142,000 of accrued restructuring expenses in 2003 related to
+employee severance and termination expenses, as we completed all required
+payments for such expenses by December 31, 2003.
+In December 2004, we determined that certain functions would be
+relocated and/or expanded in our Wallingford, CT corporate offices. In
+order to achieve the benefit of these changes, we expanded our use of space
+in our current facility. Because of this increase in useful space in the
+Wallingford facility, and because we had experienced lower than expected
+operating and maintenance costs than previously estimated, we reversed
+$225,000 of previously accrued amounts provided for the remaining
+non-cancelable lease payments and related costs.
+41
+TRANSACT TECHNOLOGIES INCORPORATED
+NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
+8. ACCRUED BUSINESS CONSOLIDATION AND RESTRUCTURING EXPENSES (CONTINUED)
+The following table summarizes the activity recorded in the
+restructuring accrual during 2005, 2004 and 2003.
+Year ended December 31,
+------------------------
+(In thousands) 2005 2004 2003
+------ ------ ------
+Accrual balance, beginning of year $1,454 $2,125 $1,718
+------ ------ ------
+Business consolidation and
+restructuring expenses:
+Employee severance and
+termination expenses (1) -- -- (142)
+Facility closure and consolidation
+expenses (2) -- (225) 1,270
+------ ------ ------
+-- (225) 1,128
+------ ------ ------
+Cash payments (447) (446) (721)
+------ ------ ------
+Accrual balance, end of year $1,007 $1,454 $2,125
+====== ====== ======
+(1) Employee severance and termination related expenses are the estimated
+termination salaries, benefits, outplacement, counseling services and other
+related expenses expected to be paid to employees who are involuntarily
+terminated.
+(2) Facility closure and consolidation expenses are the estimated costs to
+close the Wallingford, CT facility including lease termination expenses and
+other related expenses, in accordance with the restructuring plan. The
+Wallingford facility closure was substantially completed by December 31,
+2001.
+At December 31, 2005 and 2004, $587,000 and $1,034,000, respectively,
+of the restructuring accrual was classified as part of long-term
+liabilities. The long-term portion represents the portion of non-cancelable
+lease termination costs and other costs expected to be paid beyond one
+year.
+9. RETIREMENT SAVINGS PLAN
+On April 1, 1997, we established the TransAct Technologies Retirement
+Savings Plan (the "401(k) Plan"), a defined contribution plan under Section
+401(k) of the Internal Revenue Code. All full-time employees are eligible
+to participate in the 401(k) Plan at the beginning of the calendar quarter
+immediately following their date of hire. We match employees' contributions
+at a rate of 50% of employees' contributions up to the first 6% of the
+employees' compensation contributed to the 401(k) Plan. Our matching
+contributions were $225,000, $201,000 and $174,000 in 2005, 2004 and 2003,
+respectively.
+10. BORROWINGS
+On August 6, 2003, we entered into a $12.5 million credit facility
+(the "TD Banknorth Credit Facility") with TD Banknorth, N.A. The TD
+Banknorth Credit Facility provides for an $11.5 million revolving credit
+line expiring on July 31, 2006, and a $1 million equipment loan facility
+which, as amended, was available through July 2005. The equipment loan
+facility expired in July 2005. Borrowings under the revolving credit line
+bear a floating rate of interest at the prime rate and are collateralized
+by a lien on all the assets of the company. Under certain circumstances, we
+may select a fixed interest rate for a specified period of time of up to
+180 days on borrowings based on the current LIBOR rate plus 2.75% under the
+revolving credit facility. We also pay a fee of 0.25% on unused borrowings
+under the revolving credit line. The TD Banknorth Credit Facility imposes
+certain quarterly financial covenants on the Company and restricts the
+payment of dividends on our common stock and the creation of other liens.
+In 2003, we recorded interest expense of approximately $103,000 related to
+the write-off of unamortized deferred financing costs from the prior credit
+facility.
+42
+TRANSACT TECHNOLOGIES INCORPORATED
+NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
+10. BORROWINGS (CONTINUED)
+Concurrent with the signing of the TD Banknorth Credit Facility, we
+borrowed $450,000 under the equipment loan facility, which was paid in full
+in 2004.
+On March 28, 2005, we received a consent from TD Banknorth, N.A. to
+permit us to repurchase our common stock pursuant to the terms of the Stock
+Repurchase Program as explained in Note 19.
+On February 24, 2006, we amended the TD Banknorth Credit Facility to
+revise a financial covenant effective December 31, 2005, which resulted in
+debt covenant compliance.
+The borrowing base of the revolving credit line under the TD Banknorth
+Credit Facility is based on the lesser of (a) $11.5 million or (b) 85% of
+eligible accounts receivable plus (i) the lesser of (1) $5,500,000 and (2)
+45% of eligible raw material inventory plus 50% of eligible finished goods
+inventory, less (ii) $40,000 credit reserve.
+As of December 31, 2005, we had no outstanding borrowings on the
+revolving credit line. Undrawn commitments under the TD Banknorth Credit
+Facility were approximately $11,500,000 at December 31, 2005. However, our
+maximum additional available borrowings under the facility were limited to
+approximately $6,500,000 at December 31, 2005 based on the borrowing base
+of our collateral.
+11. COMMITMENTS AND CONTINGENCIES
+In April 2005, we announced a complaint against FutureLogic, Inc.
+("FutureLogic"), which charges FutureLogic with disseminating false and
+misleading statements. We assert claims of defamation and certain other
+charges. In May 2005, FutureLogic filed a complaint against us, asserting
+false advertising, defamation, trade libel and certain other charges. The
+action is currently in the pre-trial motion stage, and, as of December 31,
+2005, we are currently unable to estimate any potential liability or range
+of loss associated with this litigation. Accordingly, no amounts have been
+accrued in the financial statements related to this matter.
+43
+TRANSACT TECHNOLOGIES INCORPORATED
+NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
+11. COMMITMENTS AND CONTINGENCIES (CONTINUED)
+During the fourth quarter of 2005, we recorded an expense to cost of
+goods sold of approximately $135,000 related to estimated
+settlement/cancellation payments for non-cancelable purchase orders for
+certain excess inventory components related primarily to our Model 850
+casino ticket printer.
+At December 31, 2005, we were lessee on operating leases for equipment
+and real property. The terms of certain leases provide for escalating rent
+payments in later years of the lease as well as payment of minimum rent and
+real estate taxes. The Company records rent expense related to leases with
+escalating rent payments or periods of free rent on a straight-line basis
+over the term of the lease. Rent expense was approximately $1,294,000,
+$1,098,000 and $1,096,000 in 2005, 2004 and 2003, respectively. Minimum
+aggregate rental payments required under operating leases that have initial
+or remaining non-cancelable lease terms in excess of one year as of
+December 31, 2005 are as follows: $1,206,000 in 2006; 1,222,000 in 2007;
+$853,000 in 2008; $717,000 in 2009; $571,000 in 2010; and $839,000
+thereafter. Such payments include those related to the lease of our
+Wallingford, CT manufacturing facility, a portion of which has been
+recognized within the restructuring accrual described in Note 8.
+12. PATENT LICENSE FEES
+During 2004, we signed a cross licensing agreement with Seiko Epson.
+Under the agreement, Seiko Epson received a license to three of our
+patents, and we received a license to eighteen of Seiko Epson's patents
+relating to printing applications for the point of sale and banking
+markets. In addition, we agreed to pay $900,000 as a royalty for the usage
+of certain Seiko Epson technology prior to January 1, 2003, which we paid
+in full by January 2005. Under the agreement, we continue to pay royalties
+on a quarterly basis related to the sales of licensed printers, which is
+reflected in cost of sales.
+13. STOCK INCENTIVE PLANS AND WARRANTS
+STOCK INCENTIVE PLANS. We currently have four primary stock incentive
+plans: the 1996 Stock Plan, which provides for the grant of awards to
+officers and other key employees of the Company; the 1996 Directors' Stock
+Plan, which provides for non-discretionary awards to non-employee
+directors; the 2001 Employee Stock Plan, which provides for the grant of
+awards to key employees of the Company and other non-employees who may
+provide services to the Company; and the 2005 Equity Incentive Plan, which
+provides for awards to executives, key employees, directors and
+consultants. The plans generally provide for awards in the form of: (i)
+incentive stock options, (ii) non-qualified stock options, (iii) restricted
+stock, (iv) restricted stock units, (v) stock appreciation rights or (vi)
+limited stock appreciation rights. However, the 2001 Employee Stock Plan
+does not provide for incentive stock option awards. Options granted under
+these plans are at prices equal to 100% of the fair market value of the
+common stock at the date of grant. Options granted have a ten-year term and
+generally vest over a three- to five-year period, unless automatically
+accelerated for certain defined events. Effective upon the approval of the
+2005 Equity Incentive Plan on May 25, 2005, no new awards will be made
+under the 1996 Stock Plan, the 1996 Directors' Stock Plan or the 2001
+Employee Stock Plan. At December 31, 2005, approximately 582,000 shares of
+common stock remained available for issuance under the 2005 Equity
+Incentive Plan.
+EMPLOYEE STOCK PURCHASE PLAN: In May 2000, our shareholders approved
+the Employee Stock Purchase Plan (the "ESPP"), under which 75,000 shares of
+our common stock were available for issuance to employees beginning June 1,
+2000. All full-time employees were eligible to participate in the ESPP at
+the beginning of each six-month period (the "Offering Period"), which began
+on June 1 and December 1. Eligible employees could elect to withhold up to
+5% of their salary to purchase shares of our common stock at a price equal
+to 85% of the fair market value of the stock on the first or last day of
+each Offering Period, whichever is lower. The ESPP was terminated on May
+31, 2005. We issued 2,690, 3,706, and 3,130 shares of common stock under
+the ESPP during 2005, 2004 and 2003, respectively. At December 31, 2005, no
+shares remained available for issuance due to the termination of the ESPP.
+44
+TRANSACT TECHNOLOGIES INCORPORATED
+NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
+13. STOCK INCENTIVE PLANS AND WARRANTS (CONTINUED)
+The 1996 Stock Plan, 1996 Directors' Stock Plan, 2001 Employee Stock
+Plan and 2005 Equity Incentive Plan option activity is summarized below:
+Year Ended December 31,
+----------------------------------------------------------------
+2005 2004 2003
+------------------ -------------------- --------------------
+Weighted Weighted Weighted
+Average Average Average
+Exercise Exercise Exercise
+Shares Price Shares Price Shares Price
+------- -------- --------- -------- --------- --------
+Outstanding at beginning of
+period: 813,664 $5.97 1,123,533 $ 4.50 1,418,079 $4.20
+Granted -- -- 52,750 26.81 102,000 5.84
+Exercised (71,064) 4.55 (321,947) 4.28 (357,906) 3.79
+Canceled (1,099) 3.93 (40,672) 5.74 (38,640) 3.81
+------- ----- --------- ------ --------- -----
+Outstanding at end of period 741,501 $6.10 813,664 $ 5.97 1,123,533 $4.50
+======= ===== ========= ====== ========= =====
+Options exercisable at end of
+Period 741,501 $6.10 458,382 $ 4.67 542,630 $4.72
+======= ===== ========= ====== ========= =====
+Options Outstanding Options Exercisable
+---------------------------------------------------- ---------------------------------
+Outstanding at Weighted-Average Exercisable at
+December 31, Weighted-Average Remaining December 31, Weighted-Average
+Range of Exercise Prices 2005 Exercise Price Contractual Life 2005 Exercise Price
+------------------------ -------------- ---------------- ---------------- -------------- ----------------
+(In years)
+$ 2.00 - $ 5.00 461,414 $ 3.67 6.0 461,414 $ 3.67
+5.01 - 7.50 213,587 6.15 3.3 213,587 6.15
+7.51 - 10.00 14,250 8.12 2.0 14,250 8.12
+10.01 - 25.00 16,500 16.52 6.6 16,500 16.52
+25.01 - 35.00 35,750 31.66 8.4 35,750 31.66
+------- ---- --- ------- ------
+741,501 6.10 5.3 741,501 6.10
+======= ==== === ======= ======
+The fair value of each option grant is estimated on the date of grant
+using the Black-Scholes option pricing model with the following assumptions
+used for the grants made during the years ended December 31, 2005, 2004 and
+2003. No stock option grants were made in 2005.
+Year Ended December 31,
+---------------------
+2004 2003
+--------- ---------
+Risk-free interest rate 3.6% 2.6%
+Dividend yield 0% 0%
+Expected volatility factor 81.5% 82.1%
+Expected option term 8.9 years 5.8 years
+Weighted average fair value
+of options granted during period $ 20.64 $6.09
+45
+TRANSACT TECHNOLOGIES INCORPORATED
+NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
+13. STOCK INCENTIVE PLANS AND WARRANTS (CONTINUED)
+On November 2, 2005, the Compensation Committee of the Board of
+Directors approved accelerating the vesting of all outstanding unvested
+stock options granted to directors, officers and employees of the Company
+under our applicable stock incentive plans. The closing price of our common
+stock on the NASDAQ National Market Quotation System to be used for
+measurement of compensation as of the date of acceleration was $6.99. As a
+result of the acceleration, options to acquire approximately 109,500 shares
+of our common stock, which otherwise would have vested from time to time
+over the next four years, become immediately exercisable. All other terms
+and conditions applicable to outstanding stock option grants remain in
+effect. The option plans under which accelerated grants were issued are our
+1996 Stock Plan, 1996 Directors' Stock Plan and the 2001 Employee Stock
+Plan.
+The Compensation Committee's decision to accelerate the vesting of
+affected stock options was primarily based upon our required adoption of
+FAS 123R effective January 1, 2006. We believe that the acceleration of
+vesting of unvested options will eliminate the need to recognize any future
+compensation expense in our income statement with respect to these options.
+We will recognize compensation expense with respect to stock options
+granted after January 1, 2006 pursuant to FAS 123R. We recorded
+approximately $26,000 of compensation expense in the fourth quarter of 2005
+related to the acceleration of vesting.
+RESTRICTED STOCK: Under the 1996 Stock Plan, 2001 Employee Stock Plan
+and 2005 Equity Incentive Plan, we have granted shares of restricted common
+stock, for no consideration, to our officers, directors and certain key
+employees. Restricted stock activity for the 1996 Stock Plan, 2001 Employee
+Stock Plan and 2005 Equity Incentive Plan is summarized below:
+Year Ended December 31,
+---------------------------
+2005 2004 2003
+------- ------- -------
+Outstanding shares at beginning of period 79,500 16,999 69,999
+Granted 125,400 81,000 --
+Vested (17,100) (15,499) (53,000)
+Canceled (250) (3,000) --
+Outstanding shares at end of period 187,550 79,500 16,999
+We granted 125,400 shares of restricted stock during 2005 at weighted
+average grant price of $9.82. We granted 81,000 shares of restricted stock
+during 2004 at weighted average grant price of $17.28. No restricted stock
+was granted during 2003. Of the 187,550 shares of restricted stock
+outstanding at December 31, 2005, 169,550 shares vest over the original
+five-year vesting period, 4,000 shares vest over the original four-year
+vesting period and 14,000 shares vest over the original three-year vesting
+period. Under certain conditions such as a change in control as defined by
+the Plans, vesting may be automatically accelerated.
+Unearned compensation for restricted stock award grants is recorded on
+the date of grant based on the fair value of such awards. Such unearned
+compensation is expensed, using the straight-line method, over the period
+during which the related restrictions on such stock lapse. Upon termination
+of employment, unvested restricted stock awards are forfeited and the
+related compensation expense and unearned compensation previously
+recognized are reversed. Compensation expense resulting from these
+restricted shares was $458,000, $291,000 and $67,000 during 2005, 2004 and
+2003, respectively. Upon adoption of FAS 123R in the first quarter of 2006,
+the Company will reverse all amounts previously recorded in Unamortized
+Restricted Stock Compensation and continue to record expense as the
+restricted stock vests. In the first quarter of 2006, the Company will also
+measure a cumulative effect adjustment for estimated forfeitures on
+previously recognized restricted stock compensation.
+46
+TRANSACT TECHNOLOGIES INCORPORATED
+NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
+14. STOCKHOLDER RIGHTS PLAN
+In December 1997, our Board of Directors adopted a Stockholder Rights
+Plan declaring a distribution of one right (the "Rights") for each
+outstanding share of our common stock to shareholders of record at December
+15, 1997. Initially, each of the Rights will entitle the registered holder
+to purchase from the Company one one-thousandth of a share of Series A
+Preferred Stock, $0.01 par value, at a price of $69 per one one-thousandth
+of a share. The Rights, however, will not become exercisable unless and
+until, among other things, any person or group of affiliated persons
+acquires beneficial ownership of 15 percent or more of the then outstanding
+shares of the Company's Common Stock. If a person, or group of persons,
+acquires 15 percent or more of the outstanding Common Stock of the Company
+(subject to certain conditions and exceptions more fully described in the
+Rights Agreement), each Right will entitle the holder (other than the
+person, or group of persons, who acquired 15 percent or more of the
+outstanding Common Stock) to purchase Preferred Stock of the Company having
+a market value equal to twice the exercise price of the Right. The Rights
+are redeemable, under certain circumstances, for $0.0001 per Right and will
+expire, unless earlier redeemed, on December 2, 2007.
+On February 16, 1999, we amended the Stockholder Rights Plan to remove
+the provision in the plan that stipulated that the plan may be modified or
+redeemed only by those members of the Board of Directors who are defined as
+continuing directors.
+15. INCOME TAXES
+The components of the income tax provision (benefit) are as follows:
+Year Ended December 31,
+-----------------------
+(In thousands) 2005 2004 2003
+----- ------ ------
+Current:
+Federal $ 7 $2,077 $1,121
+State 68 216 94
+Foreign 525 306 131
+----- ------ ------
+600 2,599 1,346
+----- ------ ------
+Deferred:
+Federal (634) 363 (554)
+State (14) 17 (67)
+Foreign -- -- --
+----- ------ ------
+(648) 380 (621)
+----- ------ ------
+Income tax
+provision (benefit) $ (48) $2,979 $ 725
+===== ====== ======
+At December 31, 2005, we have $2,274,000 of state net operating loss
+carryforwards that begin to expire in 2009, and no federal net operating
+loss carryforwards. We also have approximately $383,000 in federal research
+and development tax credit carryforwards that begin to expire in 2011. We
+also have foreign tax credit carryforwards of approximately $483,000 that
+begin to expire in 2011. We had foreign income before taxes of $1,833,000,
+$1,084,000 and $475,000 in 2005, 2004 and 2003, respectively.
+47
+TRANSACT TECHNOLOGIES INCORPORATED
+NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
+15. INCOME TAXES (CONTINUED)
+Deferred income taxes arise from temporary differences between the tax
+basis of assets and liabilities and their reported amounts in the financial
+statements. Our gross deferred tax assets and liabilities were comprised of
+the following:
+December 31,
+-----------------
+(In thousands) 2005 2004
+------- -------
+Gross deferred tax assets:
+Net operating losses $ 67 $ 423
+Accrued restructuring expenses 418 605
+Capitalized research and development 790 --
+Inventory reserves 800 742
+Deferred revenue 165 429
+Foreign tax and other credits 927 649
+Other liabilities and reserves 829 636
+------ ------
+3,996 3,484
+Valuation allowance (207) (193)
+------ ------
+Net deferred tax assets 3,789 3,291
+------ ------
+Gross deferred tax liabilities:
+Depreciation 401 540
+Other 96 107
+------ ------
+Net deferred tax liabilities 497 647
+------ ------
+Net deferred tax assets $3,292 $2,644
+====== ======
+During 2005 and 2004, we recorded a valuation allowance of $207,000
+and $193,000 on a portion of our foreign tax credits, research and
+development credits and certain state net operating loss carryforwards. We
+have determined that it is more likely than not that the remaining net
+deferred tax assets will be realized, and no additional valuation allowance
+is considered necessary, as of December 31, 2005 and 2004.
+Differences between the U.S. statutory federal income tax rate and our
+effective income tax rate are analyzed below:
+Year Ended
+December 31,
+--------------------
+2005 2004 2003
+----- ---- ----
+Federal statutory tax rate 34.0% 34.0% 34.0%
+State income taxes, net of federal income taxes (9.1) 1.0 1.2
+Tax benefit from tax credits, net of valuation (17.5) (0.8) --
+allowance
+Foreign rate differential 9.4 (0.7) --
+Reversal of valuation allowance and tax accruals (41.7) -- --
+Permanent item 13.0 -- --
+Other (2.7) 1.8 (3.0)
+----- ---- ----
+Effective tax rate (14.6%) 35.3% 32.2%
+===== ==== ====
+48
+TRANSACT TECHNOLOGIES INCORPORATED
+NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
+16. EARNINGS PER SHARE
+For the years ended December 31, 2005, 2004 and 2003, earnings per
+share were computed as follows (in thousands, except per share amounts):
+Year Ended December 31,
+--------------------------
+2005 2004 2003
+------- ------- ------
+Net income $ 377 $ 5,458 $1,528
+Dividends and accretion on preferred stock -- (111) (358)
+Earnings allocation to preferred shareholders -- (111) (83)
+------- ------- ------
+Net income available to common shareholders $ 377 $ 5,236 $1,087
+======= ======= ======
+Shares:
+Basic: Weighted average common shares outstanding 9,849 9,593 8,690
+Add: Dilutive effect of outstanding options and
+warrants as determined by the treasury stock method 314 638 645
+------- ------- ------
+Diluted: Weighted average common and common
+equivalent shares outstanding 10,163 10,231 9,335
+======= ======= ======
+Net income per common share:
+Basic $ 0.04 $ 0.55 $ 0.13
+Diluted 0.04 0.51 0.12
+Unvested restricted stock is excluded from the calculation of weighted
+average common shares for basic EPS. For diluted EPS, weighted average
+common shares include the impact of restricted stock using the treasury
+method.
+For the years ended December 31, 2005 and 2004, potentially dilutive
+shares that were excluded from the earnings per share calculation,
+consisting of out-of-the-money stock options and warrants, were 52,250
+and 35,750 shares, respectively. In April 2004, we completed a
+three-for-two stock split of our common stock effected in the form of a
+stock dividend. All amounts in the table above reflect the stock split on a
+retroactive basis.
+17. LOAN TO OFFICER
+On February 23, 1999, with the Board of Directors' approval, we
+provided a $330,000 loan to an officer of the Company. The loan was payable
+on February 23, 2004, and was a full recourse obligation to the officer
+collateralized by 154,000 shares of our common stock, which included 50,000
+shares of restricted stock. The principal amount of the loan was recorded
+as a deduction from shareholders' equity. In June 2003, the officer of the
+Company repaid the outstanding loan of $330,000, plus accrued interest of
+$113,000.
+18. PREFERRED STOCK
+On April 7, 2000 we sold 4,000 shares of 7% Series B Cumulative
+Convertible Redeemable Preferred Stock (the "Preferred Stock") in
+consideration of $1,000 per share (the "Stated Value"), for a total of
+$4,000,000, less issuance costs. The holders of the Preferred Stock were
+entitled to receive a cumulative annual dividend of $70 per share, payable
+quarterly and had preference to any other dividends, if any, paid by the
+Company.
+In April 2004, all shareholders of our Series B Preferred Stock
+converted all their preferred shares into common stock. Under the
+conversion, a total of 666,665 new shares of common stock were issued. We
+recorded the costs of registering and issuing these shares as a deduction
+in Additional Paid-In Capital.
+49
+TRANSACT TECHNOLOGIES INCORPORATED
+NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
+19. STOCK REPURCHASE PROGRAM
+On March 25, 2005, our Board of Directors approved a stock repurchase
+program ("the Stock Repurchase Program"). Under the Stock Repurchase
+Program, we are authorized to repurchase up to $10 million of our
+outstanding shares of common stock from time to time in the open market
+over a three year period ending on March 25, 2008, depending on market
+conditions, share price and other factors. As of December 31, 2005, we
+repurchased a total of 505,000 shares of common stock for approximately
+$3,867,000, at an average price of $7.66 per share. We use the cost method
+to account for treasury stock purchases, under which the price paid for the
+stock is charged to the treasury stock account.
+20. INTERNATIONAL OPERATIONS
+We have foreign operations primarily from TransAct Technologies Ltd.,
+a wholly-owned subsidiary, which had sales to its customers of
+approximately $2,181,000, $1,000,000 and $1,068,000 in 2005, 2004 and 2003,
+respectively. Tangible assets at foreign locations are not material. We had
+sales from the United States to our customers outside of the United States
+of approximately $10,137,000, $5,423,000 and $3,663,000 in 2005, 2004 and
+2003, respectively. International sales do not include sales of printers
+made to domestic distributors or other domestic customers who in turn ship
+those printers to international destinations.
+21. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
+Our quarterly results of operations for 2005 and 2004 are as follows:
+Quarter Ended
+-----------------------------------------------
+(In thousands, except per share amounts) March 31 June 30 September 30 December 31
+-------- ------- ------------ -----------
+2005:
+Net sales $12,036 $12,346 $14,210 $12,499
+Gross profit 3,677 4,254 4,576 3,083
+Net income (loss) 163 267 674 (727)
+Net income (loss) available to common shareholders 163 267 674 (727)
+Net income (loss) per share:
+Basic 0.02 0.03 0.07 (0.08)
+Diluted 0.02 0.03 0.07 (0.08)
+March 31 June 30 September 30 December 31
+-------- ------- ------------ -----------
+2004:
+Net sales $15,075 $14,694 $15,482 $14,596
+Gross profit 5,418 5,617 5,897 5,110
+Net income 1,342 1,465 1,625 1,026
+Net income available to common shareholders 1,165 1,421 1,625 1,026
+Net income per share:
+Basic 0.13 0.15 0.16 0.10
+Diluted 0.12 0.14 0.15 0.10
+50
+TRANSACT TECHNOLOGIES INCORPORATED
+Schedule II
+Valuation and Qualifying Accounts
+(Amounts in thousands)
+Balance at Write-offs, Balance at
+Beginning of net of End of
+Description Period Provision recoveries Period
+----------- ------------ --------- ----------- ----------
+Valuation account for accounts receivable:
+Year ended December 31, 2005 $ 175 $ 68 $ (3) $ 240
+Year ended December 31, 2004 $ 100 $ 73 $ 2 $ 175
+Year ended December 31, 2003 $ 78 $ 76 $ (54) $ 100
+Valuation account for inventories:
+Year ended December 31, 2005 $2,010 $995 $(840) $2,165
+Year ended December 31, 2004 $1,950 $148 $ (88) $2,010
+Year ended December 31, 2003 $2,027 $441 $(518) $1,950
+51
+ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
+FINANCIAL DISCLOSURE.
+None.
+ITEM 9A. CONTROLS AND PROCEDURES
+Attached as exhibits to this Form 10-K are certifications of our Chief
+Executive Officer (CEO) and Chief Financial Officer (CFO), which are required in
+accordance with Rule 13a-14 of the Securities Exchange Act of 1934, as amended
+(the Exchange Act). This "Controls and Procedures" section includes information
+concerning the controls and controls evaluation referred to in the
+certifications. Part II, Item 8 of this Form 10-K sets forth the report of
+PricewaterhouseCoopers LLP, our independent registered public accounting firm,
+regarding its audit of TransAct's internal control over financial reporting as
+of December 31, 2005 and of management's assessment of internal control over
+financial reporting as of December 31, 2005 set forth below in this section.
+This section should be read in conjunction with the CEO and CFO certifications
+and the PricewaterhouseCoopers LLP report for a more complete understanding of
+the topics presented.
+EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
+We conducted an evaluation of the effectiveness of the design and operation
+of our "disclosure controls and procedures" ("Disclosure Controls") for the
+period covered by this Form 10-K. The controls evaluation was conducted under
+the supervision and with the participation of management, including our CEO and
+CFO. Disclosure Controls are controls and procedures designed to reasonably
+assure that information required to be disclosed in our reports filed under the
+Exchange Act, such as this Form 10-K, is recorded, processed, summarized and
+reported within the time periods specified in the U.S. Securities and Exchange
+Commission's (SEC's) rules and forms. Disclosure Controls are also designed to
+reasonably assure that such information is accumulated and communicated to our
+management, including the CEO and CFO, as appropriate to allow timely decisions
+regarding required disclosure. Our quarterly evaluation of Disclosure Controls
+includes an evaluation of some components of our internal control over financial
+reporting, and internal control over financial reporting is also separately
+evaluated on an annual basis for purposes of providing the management report
+which is set forth below.
+The evaluation of our Disclosure Controls included a review of the
+controls' objectives and design, the company's implementation of the controls
+and the effect of the controls on the information generated for use in this Form
+10-K. In the course of the controls evaluation, we review data errors, control
+problems or acts of fraud, if any, and seek to confirm that appropriate
+corrective actions, including process improvements, are being undertaken. This
+type of evaluation is performed on a quarterly basis so that the conclusions of
+management, including the CEO and CFO, concerning the effectiveness of the
+Disclosure Controls can be reported in our periodic reports on Form 10-Q and
+Form 10-K. Many of the components of our Disclosure Controls are also evaluated
+on an ongoing basis by personnel in our finance organization. The overall goals
+of these various evaluation activities are to monitor our Disclosure Controls,
+and to modify them as necessary. Our intent is to maintain the Disclosure
+Controls as dynamic systems that change as conditions warrant.
+Based upon the evaluation of the controls, our CEO and CFO have concluded
+that, as of the end of the period covered by this Form 10-K, our Disclosure
+Controls were effective to provide reasonable assurance that information
+required to be disclosed in our Exchange Act reports is recorded, processed,
+summarized and reported within the time periods specified by the SEC, and that
+material information relating to TransAct and our consolidated subsidiaries is
+made known to management, including the CEO and CFO, particularly during the
+period when our periodic reports are being prepared.
+MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
+Our management is responsible for establishing and maintaining adequate
+internal control over financial reporting to provide reasonable assurance
+regarding the reliability of our financial reporting and the preparation of
+financial statements for external purposes in accordance with generally accepted
+accounting principles. Internal control over financial reporting includes those
+policies and procedures that (i) pertain to the maintenance of records that in
+reasonable detail accurately and fairly reflect the transactions and
+dispositions of the assets of the company; (ii) provide reasonable assurance
+that transactions are recorded as necessary to permit preparation of financial
+statements in accordance with generally accepted accounting principles, and that
+receipts and expenditures of the company are being made only in accordance with
+authorizations of management and directors of the company; and (iii) provide
+reasonable assurance regarding prevention or timely detection of unauthorized
+acquisition, use or disposition of the company's assets that could have a
+material effect on the financial statements.
+Management assessed our internal control over financial reporting as of
+December 31, 2005. Management based its assessment on criteria established in
+Internal Control-Integrated Framework issued by the Committee of Sponsoring
+Organizations of the Treadway Commission (COSO).
+Based on our assessment, management has concluded that our internal control
+over financial reporting was effective as of December 31, 2005 based on the COSO
+criteria identified above, to provide reasonable assurance regarding the
+reliability
+52
+of financial reporting and the preparation of financial statements for external
+reporting purposes in accordance with generally accepted accounting principles.
+Our management's assessment of the effectiveness of the Company's internal
+control over financial reporting as of December 31, 2005 has been audited by
+PricewaterhouseCoopers LLP, an independent registered public accounting firm, as
+stated in their report which appears herein.
+INHERENT LIMITATIONS ON EFFECTIVENESS OF CONTROLS
+A control system, no matter how well designed and operated, can provide
+only reasonable, not absolute, assurance that the control system's objectives
+will be met. The design of a control system must reflect the fact that there are
+resource constraints, and the benefits of controls must be considered relative
+to their costs. Further, because of the inherent limitations in all control
+systems, no evaluation of controls can provide absolute assurance that
+misstatements due to error or fraud will not occur or that all control issues
+and instances of fraud, if any, within the company have been detected.
+These inherent limitations include the realities that judgments in
+decision-making can be faulty and that breakdowns can occur because of simple
+errors or mistakes. Controls can also be circumvented by the individual acts of
+some persons, by collusion of two or more people, or by management override of
+the controls. The design of any system of controls is based in part on certain
+assumptions about the likelihood of future events, and there can be no assurance
+that any design will succeed in achieving its stated goals under all potential
+future conditions. Projections of any evaluation of controls effectiveness to
+future periods are subject to risks. Over time, controls may become inadequate
+because of changes in conditions or deterioration in the degree of compliance
+with policies or procedures.
+PART III
+ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
+Some of the information in response to this item is incorporated by
+reference from the Proxy Statement sections entitled "Election of Directors" and
+"Executive Officers."
+ITEM 11. EXECUTIVE COMPENSATION.
+The information contained in "Executive Compensation" other than the
+"Compensation Committee Report on Executive Compensation" of the Proxy Statement
+is hereby incorporated herein by reference.
+ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
+RELATED STOCKHOLDER MATTERS.
+The information contained in "Security Ownership of Certain Beneficial
+Owners and Management" of the Proxy Statement is hereby incorporated herein by
+reference.
+53
+Information regarding our equity compensation plans as of December 31, 2005
+is as follows:
+(c)
+Number of securities
+remaining available
+(a) (b) for future issuance
+Number of securities Weighted average under equity
+to be issued upon exercise price of compensation plans
+exercise of outstanding (excluding securities
+outstanding options, options, warrants reflected in column
+Plan category warrants and rights and rights (a))
+------------- -------------------- ----------------- ---------------------
+Equity compensation plans approved
+by security holders:
+1996 Stock Plan 614,374 $3.12 --
+1996 Non-Employee Director Plan 206,250 9.99 --
+2005 Equity Incentive Plan 18,000 -- 582,000
+------- ----- -------
+Total 838,624 $4.74 582,000
+------- ----- -------
+Equity compensation plans not approved
+by security holders:
+2001 Employee Stock Plan 90,427 $6.05 --
+------- ----- -------
+929,051 $4.87 582,000
+======= ===== =======
+The TransAct Technologies Incorporated 2001 Employee Stock Plan (the "2001
+Employee Plan") was adopted by our Board of Directors, without approval of our
+security holders, effective February 26, 2001. Under the 2001 Employee Plan, we
+may issue non-qualified stock options, shares of restricted stock, restricted
+units to acquire shares of common stock, stock appreciation rights and limited
+stock appreciation rights to key employees of TransAct or any of our
+subsidiaries and to non-employees who provide services to TransAct or any of our
+subsidiaries. The 2001 Employee Plan is administered by our Compensation
+Committee, which has the authority to determine the vesting period and other
+similar restrictions and terms of awards, provided that the exercise price of
+options granted under the plan may not be less than the fair market value of the
+underlying shares on the date of grant.
+In May 2005, our shareholders approved the adoption of the 2005 Equity
+Incentive Plan. No new awards will be available for future issuance under any
+existing TransAct equity plan other than the 2005 Equity Incentive Plan.
+ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
+The information contained in "Certain Relationships and Related
+Transactions" of the Proxy Statement is hereby incorporated herein by reference.
+ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
+The information contained in "Independent Registered Public Accounting
+Firm's Fees" of the Proxy Statement is herby incorporated herein by reference.
+54
+PART IV
+ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
+THE FOLLOWING FINANCIAL STATEMENTS AND EXHIBITS ARE FILED AS PART OF THIS
+REPORT:
+Financial statements
+(i) See Item 8.
+(ii) Financial statement schedules
+All other schedules are omitted since the required information is
+either (a) not present or not present in amounts sufficient to require
+submission of the schedule or (b) included in the financial statements
+or notes thereto.
+(iii) List of exhibits
+3.1(a) Certificate of Incorporation of TransAct Technologies Incorporated
+("TransAct" or the "Company"), filed with the Secretary of State of
+Delaware on June 17, 1996. (2)
+3.1(b) Certificate of Amendment of Certificate of Incorporation of the
+Company, filed with the Secretary of State of Delaware on June 4,
+1997. (4)
+3.1(c) Certificate of Designation, Series A Preferred Stock, filed with the
+Secretary of State of Delaware on December 2, 1997. (5)
+3.1(d) Certificate of Designation, Series B Preferred Stock, filed with the
+Secretary of State of Delaware on April 6, 2000. (8)
+3.2 Amended and Restated By-laws of the Company. (6)
+4.1 Specimen Common Stock Certificate. (2)
+4.2 Amended and Restated Rights Agreement between TransAct and American
+Stock Transfer & Trust Company dated February 16, 1998. (5)
+10.1(x) 1996 Stock Plan, effective July 30, 1996. (3)
+10.2(x) Non-Employee Directors' Stock Plan, effective August 22, 1996. (3)
+10.3(x) 2000 Employee Stock Purchase Plan. (9)
+10.4(x) 2001 Employee Stock Plan. (10)
+10.5(x) 2005 Equity Incentive Plan (17)
+10.6(x) Employment Agreement, dated July 31, 1996, by and between TransAct and
+Bart C. Shuldman. (2)
+10.7(x) Severance Agreement by and between TransAct and Michael S. Kumpf,
+dated September 4, 1996. (3)
+10.8(x) Severance Agreement by and between TransAct and Steven A. DeMartino,
+dated June 1, 2004. (15)
+10.9 Lease Agreement by and between Bomax Properties and Ithaca, dated
+as of March 23, 1992. (2)
+10.10 Second Amendment to Lease Agreement by and between Bomax Properties
+and Ithaca, dated December 2, 1996. (4)
+10.11 Agreement regarding the Continuation and Renewal of Lease by and
+between Bomax Properties, LLC and TransAct, dated July 18, 2001. (12)
+10.12 Lease Agreement by and between Pyramid Construction Company and
+Magnetec, dated July 30, 1997. (4)
+10.13 Lease Agreement by and between Las Vegas Airport Properties LLC and (15)
+TransAct dated December 2, 2004.
+55
+10.14 OEM Purchase Agreement by and between GTECH Corporation, TransAct and
+Magnetec Corporation commencing July 14, 1999. (Pursuant to Rule
+24-b-2 under the Exchange Act, the Company has requested confidential
+treatment of portions of this exhibit deleted from the filed copy.) (7)
+10.15 OEM Purchase Agreement by and between GTECH Corporation and TransAct
+commencing July 2, 2002. (Pursuant to Rule 24-b-2 under the Exchange
+Act, the Company has requested confidential treatment of portions of
+this exhibit deleted from the filed copy.) (11)
+10.16 Amendment to OEM Purchase Agreement by and between GTECH Corporation
+and TransAct, dated February 17, 2006. (Pursuant to Rule 24-b-2 under
+the Exchange Act, the Company has requested confidential treatment of
+portions of this exhibit deleted from the filed copy.) (1)
+10.17 OEM Sales Agreement by and between Okidata Americas, Inc. and
+TransAct, dated June 8, 2005. (Pursuant to Rule 24b-2 under the
+Exchange Act, the Company has requested confidential treatment of
+portions of this exhibit deleted from the filed copy.) (1)
+10.18 Revolving Credit, Equipment Loan and Security Agreement between
+TransAct and TD Banknorth, N.A. dated August 6, 2003. (12)
+10.19 First Amendment to Revolving Credit, Equipment Loan and Security
+Agreement dated as of November 12, 2004 between TransAct and TD
+Banknorth, N.A. (14)
+10.20 Consent by TD Banknorth, N.A. dated as of March 28, 2005 to permit
+stock repurchases under the Revolving Credit, Equipment Loan and
+Security Agreement. (16)
+10.21 Second Amendment to Revolving Credit, Equipment Loan and Security
+Agreement dated as of February 24, 2006 between TransAct and TD
+Banknorth, N.A. (1)
+10.22 License Agreement between Seiko Epson Corporation and TransAct dated
+May 17, 2004 (Pursuant to Rule 24b-2 under the Exchange Act, the
+Company has requested confidential treatment of portions of this
+exhibit deleted from the filed copy.) (13)
+10.23 Preferred Stock Purchase Agreement and Certificate of Designation
+dated as of March 20, 2000 between TransAct and Advance Capital
+Partners, L.P. and affiliate (8)
+23.1 Consent of PricewaterhouseCoopers LLP. (1)
+31.1 Certification of Chief Executive Officer pursuant to Section 302 of
+the Sarbanes-Oxley Act of 2002 (1)
+31.2 Certification of Chief Financial Officer pursuant to Section 302 of
+the Sarbanes-Oxley Act of 2002 (1)
+32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
+1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
+2002 (1)
+32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section
+1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
+2002 (1)
+56
+(1) These exhibits are filed herewith.
+(2) These exhibits, which were previously filed with the Company's
+Registration Statement on Form S-1 (No. 333-06895), are incorporated by
+reference.
+(3) These exhibits, which were previously filed with the Company's Quarterly
+Report on Form 10-Q for the period ended September 30, 1996 (Commission
+File No. 000-21121), are incorporated by reference.
+(4) These exhibits, which were previously filed with the Company's Annual
+Report on Form 10-K for the year ended December 31, 1997 (Commission File
+No. 000-21121), are incorporated by reference.
+(5) These exhibits, which were previously filed with the Company's Current
+Report on Form 8-K filed February 18, 1999 (Commission File No.
+000-21121), are incorporated by reference.
+(6) This exhibit, which was previously filed with the Company's Annual Report
+on Form 10-K for the year ended December 31, 1998 (Commission File No.
+000-21121), is incorporated by reference.
+(7) This exhibit, which was previously filed with the Company's Quarterly
+Report on Form 10-Q for the period ended September 25, 1999 (Commission
+File No. 000-21121), is incorporated by reference.
+(8) These exhibits, which were previously filed with the Company's Quarterly
+Report on Form 10-Q for the period ended March 25, 2000, are incorporated
+by reference.
+(9) This exhibit, which was previously filed with the Company's Registration
+Statement on Form S-8 (No. 333-49540), is incorporated by reference.
+(10) This exhibit, which was previously filed with the Company's Registration
+Statement on Form S-8 (No. 333-59570), is incorporated by reference.
+(11) This exhibit, which was previously filed with the Company's Quarterly
+Report on Form 10-Q for the period ended June 30, 2002, is incorporated
+by reference.
+(12) This exhibit, which was previously filed with the Company's Quarterly
+Report on Form 10-Q for the period ended June 30, 2003, is incorporated
+by reference.
+(13) This exhibit, which was previously filed with the Company's Quarterly
+Report on Form 10-Q for the period ended June 30, 2004, is incorporated
+by reference.
+(14) This exhibit, which was previously filed with the Company's Quarterly
+Report on Form 10-Q for the period ended September 30, 2004, is
+incorporated by reference.
+(15) These exhibits, which were previously filed with the Company's Annual
+Report on Form 10-K for the year ended December 31, 2004, are
+incorporated by reference.
+(16) This exhibit, which was previously filed with the Company's Quarterly
+Report on Form 10-Q for the period ended March 31, 2005, is incorporated
+by reference.
+(17) This exhibit, which was previously filed with the Company's Current
+Report on Form 8-K filed June 1, 2005 (Commission File No. 000-21121), is
+incorporated by reference.
+(x) Management contract or compensatory plan or arrangement required to be
+filed pursuant to Item 14(c).
+57
+SIGNATURES
+Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
+Act of 1934, the registrant has duly caused this report to be signed on its
+behalf by the undersigned, thereunto duly authorized.
+TRANSACT TECHNOLOGIES INCORPORATED
+By: /s/ Bart C. Shuldman
+------------------------------------
+Name: Bart C. Shuldman
+Title: Chairman of the Board, President
+and Chief Executive Officer
+Date: March 15, 2006
+Pursuant to the requirements of the Securities Exchange Act of 1934, this report
+has been signed below by the following persons on behalf of the registrant and
+in the capacities and on the dates indicated.
+Signature Title Date
+--------- ----- ----
+/s/ Bart C. Shuldman Chairman of the Board, President and March 15, 2006
+------------------------------------- Chief Executive Officer
+Bart C. Shuldman (Principal Executive Officer)
+/s/ Steven A. DeMartino Executive Vice President, Chief Financial March 15, 2006
+------------------------------------- Officer, Treasurer and Secretary
+Steven A. DeMartino (Principal Financial and Accounting Officer)
+/s/ Charles A. Dill Director March 15, 2006
+-------------------------------------
+Charles A. Dill
+/s/ Thomas R. Schwarz Director March 15, 2006
+-------------------------------------
+Thomas R. Schwarz
+/s/ Graham Y. Tanaka Director March 15, 2006
+-------------------------------------
+Graham Y. Tanaka
+58
+EXHIBIT LIST
+The following exhibits are filed herewith.
+Exhibit
+-------
+10.16 Amendment to OEM Purchase Agreement by and between GTECH Corporation and
+TransAct, dated February 17, 2006. (Pursuant to Rule 24-b-2 under the
+Exchange Act, the Company has requested confidential treatment of
+portions of this exhibit deleted from the filed copy.)
+10.17 OEM Sales Agreement by and between Okidata Americas, Inc. and TransAct,
+dated June 8, 2005. (Pursuant to Rule 24b-2 under the Exchange Act, the
+Company has requested confidential treatment of portions of this exhibit
+deleted from the filed copy.)
+10.21 Second Amendment to Revolving Credit, Equipment Loan and Security
+Agreement dated as of February 24, 2006 between TransAct and TD
+Banknorth, N.A.
+23.1 Consent of PricewaterhouseCoopers LLP
+31.1 Certification of Chief Executive Officer pursuant to Section 302 of the
+Sarbanes-Oxley Act of 2002
+31.2 Certification of Chief Financial Officer pursuant to Section 302 of the
+Sarbanes-Oxley Act of 2002
+32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
+1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
+2002
+32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section
+1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
+2002
+59
\ No newline at end of file
diff --git a/raw/filings/0001017303/2005/0000950123-06-003185/filing_metadata.csv b/raw/filings/0001017303/2005/0000950123-06-003185/filing_metadata.csv
new file mode 100644
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+0001017303,TACT,TRANSACT TECHNOLOGIES INC,10-K,2006-03-15,2005-12-31,2006-03-15T19:15:21.000Z,0000950123-06-003185,y18554e10vk.txt,FORM 10-K,306582,0,0,https://www.sec.gov/Archives/edgar/data/1017303/000095012306003185/y18554e10vk.txt,https://www.sec.gov/Archives/edgar/data/1017303/000095012306003185/,2005,2005,1
diff --git a/raw/filings/0001017303/2005/0000950123-06-003185/item1.txt b/raw/filings/0001017303/2005/0000950123-06-003185/item1.txt
new file mode 100644
index 0000000000000000000000000000000000000000..4bbd8135b39e70ba35fb178a4bd58987926e98ff
--- /dev/null
+++ b/raw/filings/0001017303/2005/0000950123-06-003185/item1.txt
@@ -0,0 +1,321 @@
+ITEM 1. BUSINESS.
+THE COMPANY
+TransAct was incorporated in June 1996 and began operating as a stand-alone
+business in August 1996 as a spin-off of the printer business that was formerly
+conducted by certain subsidiaries of Tridex Corporation. We completed an initial
+public offering on August 22, 1996.
+TransAct Technologies Incorporated ("TransAct" or the "Company") designs,
+develops, assembles, markets and services world-class transaction printers under
+the Epic and Ithaca(R) brand names. Known and respected worldwide for innovative
+designs and real-world service reliability, our impact, thermal and inkjet
+printers generate top-quality transaction records such as receipts, tickets,
+coupons, register journals and other documents. We focus on two core markets:
+(1) point-of-sale ("POS") and banking and (2) gaming and lottery. We sell our
+products to original equipment manufacturers ("OEMs"), value-added resellers
+("VARs"), selected distributors, as well as directly to end-users. Our product
+distribution spans across the Americas, Europe, the Middle East, Africa, the
+Caribbean Islands and the South Pacific. In addition, we have a strong focus on
+the after-market side of the business, with a growing commitment to printer
+service, supplies and spare parts. We have one primary operating facility
+located in Ithaca, NY, seven sales offices located in the United States
+(including our new global gaming and lottery headquarters and western region
+service center in Las Vegas, NV), and a European sales and service center in the
+United Kingdom. Our executive offices and eastern region service center are
+located at 7 Laser Lane, Wallingford, CT 06492, with a telephone number of (203)
+859-6800.
+FINANCIAL INFORMATION ABOUT SEGMENTS
+We have assessed our operating and reportable segments and have determined
+that we operate in one reportable segment, the design, development, assembly and
+marketing of transaction printers and printer-related service, supplies and
+spare parts. See the Consolidated Financial Statements contained herein.
+PRODUCTS AND SERVICES
+Printers
+TransAct designs, develops, assembles and markets a broad array of
+transaction-based printers utilizing inkjet, thermal and impact printing
+technology for applications requiring up to 60 character columns, primarily in
+the POS and banking, and gaming and lottery markets. Our printers are
+configurable and offer customers the ability to choose from a variety of
+features and functions. Options typically include interface configuration, paper
+cutting devices, paper handling capacities and cabinetry color. In addition to
+our configurable printers, we design and assemble custom printers for certain
+OEM customers. In collaboration with these customers, we provide engineering and
+manufacturing expertise for the design and development of specialized printers.
+POS and banking: Our POS and banking printers include hundreds of optional
+configurations that can be selected to meet particular customer needs. We
+believe that this is a significant competitive strength, as it allows us to
+satisfy a wide variety of printing applications that our customers request. In
+the POS market, we sell several models of printers utilizing inkjet, thermal and
+impact printing technology. Our printers are used primarily by retailers in the
+hospitality, restaurant (including fine dining, casual dining, and fast food)
+and specialty retail industries to print receipts for consumers, validate
+checks, or print on other inserted media. We also sell printers that are used by
+banks, credit unions and other financial institutions to print and/or validate
+receipts at bank teller stations.
+Gaming and lottery: In the lottery portion of our gaming and lottery
+market, we supply lottery printers to GTECH, our largest customer and the
+world's largest provider of lottery terminals, with an approximate 70% market
+share. These printers are designed for high-volume, high-speed printing of
+lottery tickets for various lottery applications.
+In the gaming portion of our gaming and lottery market, we sell several
+models of printers used in slot machines and video lottery terminals that print
+tickets instead of issuing coins at casinos, racetracks and other gaming
+establishments worldwide. These printers utilize thermal printing technology and
+can print tickets in monochrome or two-color (depending upon the model), and
+offer various other features such as jam resistant bezels and a dual port
+interface that will allow casinos to print coupons/promotions. We also sell
+printers using impact printing technology for use mainly in video lottery
+terminals and other gaming devices.
+3
+TransAct Services Group
+Through our recently-established TransAct Services Group, we proactively
+market the sale of consumable products (including inkjet cartridges, ribbons and
+paper), replacement parts and maintenance services for all of our products. Our
+maintenance services include the sale of extended warranties, multi-year
+maintenance contracts, 24-hour guaranteed replacement product service ("TransAct
+Xpress"), and other repair services for our printers. Within the United States,
+we provide repair services through our eastern region service center in
+Wallingford, CT and our western region service center in Las Vegas, NV.
+Internationally, we provide repair services through our European service center
+located in Doncaster, United Kingdom, and through partners strategically located
+around the world.
+We also provide customers with telephone sales and technical support, and a
+personal account representative to handle orders, shipping and general
+information. Technical and sales support personnel receive training on all of
+our manufactured products and our services.
+Product Warranty
+Our printers generally carry up to a two-year limited warranty against
+defects in material and workmanship. Defective equipment may be returned to any
+of our service centers, or our manufacturing facility in Ithaca, NY, for
+newly-released printers only, for repair or replacement during the
+applicable warranty period.
+PRODUCTION, MANUFACTURING AND SOURCES AND AVAILABILITY OF RAW MATERIALS
+We design our products to optimize product performance, quality,
+reliability and durability. These designs combine cost efficient materials,
+sourcing and assembly methods with high standards of workmanship. We finalize
+assembly for our products in our Ithaca, NY facility largely on a
+configure-to-order basis using components that have been sourced from around the
+world. Our manufacturing engineers work closely with our new product engineers
+and vendors during the development of new products. As a result, this
+collaboration increases manufacturing efficiency by specifying materials and
+designing manufacturing processes in conjunction with new product design.
+We procure component parts and subassemblies for use in the manufacture and
+assembly of our products. Critical component parts and subassemblies include
+inkjet, thermal and impact printheads, printing/cutting mechanisms, power
+supplies, motors, injection molded plastic parts, circuit boards and electronic
+components, which are obtained from domestic and foreign suppliers at
+competitive prices. We typically strive to maintain more than one source for our
+component parts and subassemblies to reduce the risk of parts shortages or
+unavailability. However, we could experience temporary disruption if certain
+suppliers ceased doing business with us, as described below.
+Okidata Americas, Inc. ("Okidata"), is the sole supplier for an impact
+printer component kit consisting of a printhead, control board and carriage (the
+"Oki Kit"), that is used in all of our Ithaca(R) brand impact printers. The loss
+of the supply of Oki Kits would have a material adverse effect on TransAct. We
+have a supply agreement with Okidata to provide Oki Kits until June 8, 2006.
+Prices under this agreement are fixed, but may be changed by Okidata after
+providing 180 days written notice.
+We believe our relationship with Okidata is in good standing and have
+received no indication that the supply agreement will not be renewed beyond the
+respective expiration date of the current contract. We cannot be certain,
+however, that the supply agreement will be renewed, or if renewed, that the
+terms will be as favorable as those under the current contract.
+Hewlett-Packard Company ("HP") is the sole supplier of inkjet cartridges
+that are used in all of our inkjet printers. The loss of the supply of HP inkjet
+cartridges would have a material adverse effect on the sale of our inkjet
+printers. Prior to February 2006, we had a supply agreement with HP to purchase
+inkjet cartridges at fixed prices. This agreement expired on February 1, 2006
+and was not renewed, as HP informed us that they no longer maintain supply
+agreements for these inkjet cartridges. Although we no longer have a supply
+agreement with HP, our relationship with HP remains strong and we have no reason
+to believe that HP will discontinue its supply of inkjet cartridges to us. The
+inkjet cartridges we purchase from HP are used not only in our inkjet printers
+for the POS and banking market, but also in other printing devices across
+several other markets.
+4
+PATENTS AND PROPRIETARY INFORMATION
+We have significantly expanded our patent portfolio over the past five
+years, and expect to continue to do so in the future. We also believe our patent
+portfolio will provide additional opportunities to license our intellectual
+property in the future. We currently own fifteen patents, eleven of which we
+consider material. The earliest expiration date of these eleven patents is in
+2008, with the latest expiration date in 2022. Of the material patents, one
+patent covers methods and apparatus for allowing a two-color printer to print
+images using single pass technology by printing during both forward and reverse
+movement of the print mechanism; another patent relates to our proprietary void
+and reprint receipt printing method which is used in certain of our slot machine
+printers; two patents prevent ticket jams resulting from player interference in
+certain of our slot machine printers; three patents cover a method for
+converting a full color image into a two-color image, plus a background color;
+one patent for a standard configurable universal serial bus ("USB") device
+identifier that enables a printer to be interchanged with another printer from
+the same printer model line without requiring reinstallation of the device
+driver or reconfiguration of the communication port by the host; two patents
+relate to methods and apparatus for automatically stacking printed sheets from a
+printer; and one patent covers our dual port technology where in a printer, one
+driver or port receives data indicative of voucher information from a local
+controller and a second driver or port receives data indicative of coupon
+information from a central system controller, thereby allowing the same printer
+to be used to print both vouchers and coupons. We also have sought patent
+protection for certain design features of 1) printers using inkjet technology,
+2) POS printers using thermal technology, and 3) thermal printers for use in
+casino slot machines. We regard certain manufacturing processes and designs to
+be proprietary and attempt to protect them through employee and third-party
+nondisclosure agreements and similar means. It may be possible for unauthorized
+third parties to copy certain portions of our products or to reverse engineer or
+otherwise obtain and use, to our detriment, information that we regard as
+proprietary. Moreover, the laws of some foreign countries do not afford the same
+protection to our proprietary rights as do United States laws. There can be no
+assurance that legal protections relied upon by the Company to protect our
+proprietary position will be adequate or that our competitors will not
+independently develop technologies that are substantially equivalent or superior
+to our technologies.
+During 2004, we signed a cross licensing agreement with Seiko Epson. Under
+the agreement, Seiko Epson received a license to three of our patents, and we
+received a license to eighteen of Seiko Epson's patents relating to printing
+applications for the point of sale and banking markets. In addition, we agreed
+to pay $900,000 as a royalty for the usage of certain Seiko Epson technology
+prior to January 1, 2003, which was paid in full by January 2005. Under the
+agreement, we continue to pay royalties on a quarterly basis related to the
+sales of licensed printers, which is reflected in cost of sales.
+SEASONALITY
+Retailers typically reduce purchases of new POS equipment in the fourth
+quarter, due to the increased volume of consumer transactions in that holiday
+period, and our sales of printers in the POS market historically have increased
+in the third quarter and decreased in the fourth quarter. Similarly,
+installations of lottery terminals are typically reduced in the fourth quarter
+resulting in decreased sales of lottery printers.
+CERTAIN CUSTOMERS
+We currently have an ongoing OEM purchase agreement, as amended in February
+2006, ( the "GTECH Thermal Printer Agreement") with GTECH Corporation ("GTECH")
+that provides for the sale of thermal on-line lottery printers and spare parts,
+at fixed prices, through June 28, 2012. Prior to this agreement, we had a
+purchase agreement with GTECH that provided for the sale of impact on-line
+lottery printers and spare parts through December 31, 2004. Because our new
+thermal on-line lottery printer is a replacement for our impact on-line printer,
+we do not expect any further shipments of impact on-line lottery printers beyond
+2004. However, we do expect to continue to sell spare parts to GTECH for the
+significant remaining installed base of impact on-line lottery printers. Firm
+purchase orders for printers under the GTECH Thermal Printer Agreement may be
+placed as required by GTECH.
+BACKLOG
+Our backlog of firm orders was approximately $8,300,000 as of February 28,
+2006, compared to $3,250,000 as of March 4, 2005. Based on customers' current
+delivery requirements, we expect to ship our entire current backlog during 2006.
+5
+COMPETITION
+The market for transaction-based printers is extremely competitive, and we
+expect such competition to continue in the future. We compete with a number of
+companies, many of which have greater financial, technical and marketing
+resources than us. We believe our ability to compete successfully depends on a
+number of factors both within and outside our control, including durability,
+reliability, quality, design capability, product customization, price, customer
+support, success in developing new products, manufacturing expertise and
+capacity, supply of component parts and materials, strategic relationships with
+suppliers, the timing of new product introductions by us and our competitors,
+general market, economic and political conditions and, in some cases, the
+uniqueness of our products.
+In the POS market, our major competitor is Epson America, Inc., which
+controls a dominant portion of the POS markets into which we sell. We also
+compete, to a much lesser extent, with Transaction Printer Group, Star Micronics
+America, Inc., Citizen -- CBM America Corporation, and Korean Printer Solutions
+(makers of Bixolon/Samsung printers). Certain competitors of ours have greater
+financial resources, lower costs attributable to higher volume production and
+sometimes offer lower prices than us.
+In the lottery market (consisting principally of on-line lottery
+transaction printing), we hold a leading position, based largely on our
+long-term purchase agreements with GTECH, which controls approximately 70% of
+the worldwide on-line lottery market. We compete in this market based solely on
+our ability to provide specialized, custom-engineered products to GTECH.
+In the gaming market (consisting principally of slot machine and video
+lottery terminal transaction printing), we and our major competitor,
+FutureLogic, Inc., comprise a substantial portion of the market. Certain of our
+products sold for gaming applications compete based upon our ability to provide
+highly specialized products, custom engineering and ongoing technical support.
+Our strategy for competing in our markets is to continue to develop new
+products and product line extensions, to increase our geographic market
+penetration, to take advantage of strategic relationships, and to lower product
+costs by sourcing certain products overseas. We expect to particularly focus on
+(1) promoting our line of slot machine printers into the gaming market including
+our recently launched Epic 950(TM) thermal casino printer, as well as our new
+Epic 430(TM) and Epic 630(TM) printers for the international off-premise gaming
+market, (2) increasing sales of our iTHERM(TM) 280 thermal POS printer, new
+Ithaca(R) 8000 linerless label printer and our family of printers utilizing
+Hewlett Packard's inkjet printing technology, including our BANKjet(R) line of
+inkjet printers used in bank teller applications and (3) expanding our
+consumables, spare parts and service business. Although we believe that our
+products, operations and relationships provide a competitive foundation, there
+can be no assurance that we will compete successfully in the future.
+RESEARCH AND DEVELOPMENT ACTIVITIES
+We spent approximately $2,726,000, $2,715,000 and $2,276,000 in 2005, 2004
+and 2003, respectively, on engineering, design and product development efforts
+in connection with specialized engineering and design to introduce new products
+and to customize existing products. During 2006, we expect to focus the majority
+of our research and development activities on the continuing development and
+enhancement of (1) our family of printers for the POS and banking market
+utilizing inkjet and thermal printing technology and (2) our ticket-issuing
+printers for use in the worldwide casino and gaming market.
+ENVIRONMENT
+We are not aware of any material noncompliance with federal, state and
+local provisions that have been enacted or adopted regulating the discharge of
+materials into the environment, or otherwise relating to the protection of the
+environment.
+EMPLOYEES
+As of February 27, 2006, TransAct and our subsidiaries employed 213
+persons, of whom 174 were full-time and 39 were temporary employees. None of our
+employees is unionized, and we consider our relationships with our employees to
+be good.
+6
+FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS
+We have foreign operations primarily from TransAct Technologies Ltd., a
+wholly-owned subsidiary located in the United Kingdom, which had sales to its
+customers of $2,181,000, $1,000,000, and $1,068,000, (primarily for the service
+of printers used in the British Post Office) in 2005, 2004 and 2003,
+respectively. We had export sales from our domestic operations of approximately
+$10,137,000, $5,423,000 and $3,663,000 in 2005, 2004 and 2003, respectively.
+Total international sales, which include sales from our foreign subsidiary and
+export sales from our domestic operations, were approximately $12,318,000,
+$6,423,000 and $4,731,000 in 2005, 2004 and 2003, respectively.
+ADDITIONAL INFORMATION
+We make available free of charge through our internet website,
+WWW.TRANSACT-TECH.COM, our annual report on Form 10-K, quarterly reports on Form
+10-Q, current reports on Form 8-K, and all amendments to those reports as soon
+as reasonably practicable after such material is electronically filed with or
+furnished to the SEC.
+We maintain a Code of Business Conduct that includes our code of ethics
+that is applicable to all employees, including our Chief Executive Officer,
+Chief Financial Officer and Controller. This Code, which requires continued
+observance of high ethical standards such as honesty, integrity and compliance
+with the law in the conduct of our business, is available for public access on
+our internet website.
+EXECUTIVE OFFICERS OF THE REGISTRANT
+The following list is included as an unnumbered item in Part I of this
+Report in lieu of being included in the Proxy Statement for the Annual Meeting
+of Stockholders to be held on May 18, 2006.
+The following is a list of the names and ages of all executive officers of
+the registrant, indicating all positions and offices with the registrant held by
+each such person and each person's principal occupations and employment during
+at least the past five years.
+Name Age Position
+---- --- --------
+Bart C. Shuldman 48 Chairman of the Board, President and Chief Executive Officer
+Steven A. DeMartino 36 Executive Vice President, Chief Financial Officer, Treasurer and Secretary
+Michael S. Kumpf 56 Executive Vice President - Engineering
+BART C. SHULDMAN has been Chief Executive Officer, President and a Director
+of the Company since its formation in June 1996. Previously, Mr. Shuldman served
+as President of Magnetec and later the combined operations of Magnetec and
+Ithaca Peripherals from August 1993 until June 1996. In February 2001, Mr.
+Shuldman was elected Chairman of the Board.
+STEVEN A. DEMARTINO was named as TransAct's Executive Vice President, Chief
+Financial Officer, Treasurer and Secretary on June 1, 2004. Previously, Mr.
+DeMartino served as Senior Vice President, Finance and Information Technology
+from October 2001 to May 2004, Vice President and Corporate Controller from
+January 1998 to October 2001, and Corporate Controller from August 1996 to
+December 1997. Prior to joining TransAct, Mr. DeMartino was a self-employed
+financial consultant from May 1996 to August 1996. Prior to that, Mr. DeMartino
+served as Controller of Copart, Inc. from September 1994 to May 1996. Mr.
+DeMartino is a certified public accountant.
+MICHAEL S. KUMPF was appointed Executive Vice President of Engineering in
+March 2002. He served as Senior Vice President, Engineering from June 1996 to
+March 2002 and Vice President, Engineering of Ithaca Peripherals from 1991 until
+June 1996.
+7
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@@ -0,0 +1,3 @@
+ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
+The information contained in "Certain Relationships and Related
+Transactions" of the Proxy Statement is hereby incorporated herein by reference.
\ No newline at end of file
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--- /dev/null
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@@ -0,0 +1,105 @@
+ITEM 9A. CONTROLS AND PROCEDURES
+Attached as exhibits to this Form 10-K are certifications of our Chief
+Executive Officer (CEO) and Chief Financial Officer (CFO), which are required in
+accordance with Rule 13a-14 of the Securities Exchange Act of 1934, as amended
+(the Exchange Act). This "Controls and Procedures" section includes information
+concerning the controls and controls evaluation referred to in the
+certifications. Part II, Item 8 of this Form 10-K sets forth the report of
+PricewaterhouseCoopers LLP, our independent registered public accounting firm,
+regarding its audit of TransAct's internal control over financial reporting as
+of December 31, 2005 and of management's assessment of internal control over
+financial reporting as of December 31, 2005 set forth below in this section.
+This section should be read in conjunction with the CEO and CFO certifications
+and the PricewaterhouseCoopers LLP report for a more complete understanding of
+the topics presented.
+EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
+We conducted an evaluation of the effectiveness of the design and operation
+of our "disclosure controls and procedures" ("Disclosure Controls") for the
+period covered by this Form 10-K. The controls evaluation was conducted under
+the supervision and with the participation of management, including our CEO and
+CFO. Disclosure Controls are controls and procedures designed to reasonably
+assure that information required to be disclosed in our reports filed under the
+Exchange Act, such as this Form 10-K, is recorded, processed, summarized and
+reported within the time periods specified in the U.S. Securities and Exchange
+Commission's (SEC's) rules and forms. Disclosure Controls are also designed to
+reasonably assure that such information is accumulated and communicated to our
+management, including the CEO and CFO, as appropriate to allow timely decisions
+regarding required disclosure. Our quarterly evaluation of Disclosure Controls
+includes an evaluation of some components of our internal control over financial
+reporting, and internal control over financial reporting is also separately
+evaluated on an annual basis for purposes of providing the management report
+which is set forth below.
+The evaluation of our Disclosure Controls included a review of the
+controls' objectives and design, the company's implementation of the controls
+and the effect of the controls on the information generated for use in this Form
+10-K. In the course of the controls evaluation, we review data errors, control
+problems or acts of fraud, if any, and seek to confirm that appropriate
+corrective actions, including process improvements, are being undertaken. This
+type of evaluation is performed on a quarterly basis so that the conclusions of
+management, including the CEO and CFO, concerning the effectiveness of the
+Disclosure Controls can be reported in our periodic reports on Form 10-Q and
+Form 10-K. Many of the components of our Disclosure Controls are also evaluated
+on an ongoing basis by personnel in our finance organization. The overall goals
+of these various evaluation activities are to monitor our Disclosure Controls,
+and to modify them as necessary. Our intent is to maintain the Disclosure
+Controls as dynamic systems that change as conditions warrant.
+Based upon the evaluation of the controls, our CEO and CFO have concluded
+that, as of the end of the period covered by this Form 10-K, our Disclosure
+Controls were effective to provide reasonable assurance that information
+required to be disclosed in our Exchange Act reports is recorded, processed,
+summarized and reported within the time periods specified by the SEC, and that
+material information relating to TransAct and our consolidated subsidiaries is
+made known to management, including the CEO and CFO, particularly during the
+period when our periodic reports are being prepared.
+MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
+Our management is responsible for establishing and maintaining adequate
+internal control over financial reporting to provide reasonable assurance
+regarding the reliability of our financial reporting and the preparation of
+financial statements for external purposes in accordance with generally accepted
+accounting principles. Internal control over financial reporting includes those
+policies and procedures that (i) pertain to the maintenance of records that in
+reasonable detail accurately and fairly reflect the transactions and
+dispositions of the assets of the company; (ii) provide reasonable assurance
+that transactions are recorded as necessary to permit preparation of financial
+statements in accordance with generally accepted accounting principles, and that
+receipts and expenditures of the company are being made only in accordance with
+authorizations of management and directors of the company; and (iii) provide
+reasonable assurance regarding prevention or timely detection of unauthorized
+acquisition, use or disposition of the company's assets that could have a
+material effect on the financial statements.
+Management assessed our internal control over financial reporting as of
+December 31, 2005. Management based its assessment on criteria established in
+Internal Control-Integrated Framework issued by the Committee of Sponsoring
+Organizations of the Treadway Commission (COSO).
+Based on our assessment, management has concluded that our internal control
+over financial reporting was effective as of December 31, 2005 based on the COSO
+criteria identified above, to provide reasonable assurance regarding the
+reliability
+52
+of financial reporting and the preparation of financial statements for external
+reporting purposes in accordance with generally accepted accounting principles.
+Our management's assessment of the effectiveness of the Company's internal
+control over financial reporting as of December 31, 2005 has been audited by
+PricewaterhouseCoopers LLP, an independent registered public accounting firm, as
+stated in their report which appears herein.
+INHERENT LIMITATIONS ON EFFECTIVENESS OF CONTROLS
+A control system, no matter how well designed and operated, can provide
+only reasonable, not absolute, assurance that the control system's objectives
+will be met. The design of a control system must reflect the fact that there are
+resource constraints, and the benefits of controls must be considered relative
+to their costs. Further, because of the inherent limitations in all control
+systems, no evaluation of controls can provide absolute assurance that
+misstatements due to error or fraud will not occur or that all control issues
+and instances of fraud, if any, within the company have been detected.
+These inherent limitations include the realities that judgments in
+decision-making can be faulty and that breakdowns can occur because of simple
+errors or mistakes. Controls can also be circumvented by the individual acts of
+some persons, by collusion of two or more people, or by management override of
+the controls. The design of any system of controls is based in part on certain
+assumptions about the likelihood of future events, and there can be no assurance
+that any design will succeed in achieving its stated goals under all potential
+future conditions. Projections of any evaluation of controls effectiveness to
+future periods are subject to risks. Over time, controls may become inadequate
+because of changes in conditions or deterioration in the degree of compliance
+with policies or procedures.
+PART III
\ No newline at end of file
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--- /dev/null
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@@ -0,0 +1,18 @@
+CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
+The Company maintains policies that relate to the identification, review
+and approval of related party transactions. As part of a review of possible
+related person transactions, the Company annually distributes and collects
+questionnaires that solicit information about any direct or indirect
+transactions with the Company from each of our directors and officers.
+Our Standards of Business Conduct require all directors, officers and
+employees to avoid any situation that involves an actual or apparent conflict of
+interest in personal and professional relationships or with their duty to, or
+with any interest of, the Company. Under the Standards of Business Conduct,
+situations that involve, or may reasonably be inferred to involve, a conflict
+between a director, officer or employee's personal interests and the interests
+of the Company should be disclosed to the Chair of the Audit Committee. No
+related party transaction shall be approved or ratified if such transaction is
+contrary to the best interests of the Company.
+From January 1, 2006 to the date of this proxy statement, there have not
+been any transactions of the type described in Item 404 of Regulation S-K, and
+currently no such transactions are proposed.
\ No newline at end of file
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@@ -0,0 +1,4515 @@
+10-K
+1
+d10k.htm
+FORM 10-K
+Form 10-K 
+Table of Contents 
+UNITED STATES 
+SECURITIES AND EXCHANGE COMMISSION 
+Washington, DC. 20549 
+FORM 10-K 
+FOR ANNUAL AND TRANSITION
+REPORTS 
+PURSUANT TO SECTIONS 13 OR 15(d) OF THE 
+SECURITIES AND EXCHANGE ACT OF 1934 
+(Mark One) 
+x 
+ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
+For the fiscal year ended December 31, 2007 
+or 
+¨ 
+TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 
+For the transition period from 
+to . 
+Commission file number: 0-21121 
+TRANSACT TECHNOLOGIES
+INCORPORATED 
+(Exact name of registrant as specified in its charter) 
+Delaware 
+06-1456680 
+(State or other jurisdiction of 
+incorporation or organization) 
+(I.R.S. Employer 
+Identification No.) 
+One Hamden Center, 2319 Whitney Avenue, 
+Suite 3B, Hamden, CT 
+06518 
+(Zip Code) 
+(Address of principal executive offices) 
+Registrant’s telephone number, including area code 203-859-6800 
+Securities registered pursuant to Section 12(b) of the Act: 
+Title of Each Class 
+Name of Exchange on which Registered 
+Common Stock, par value $.01 per share 
+NASDAQ Global Market 
+Securities registered pursuant
+to Section 12(g) of the Act: None 
+Indicate by check mark if the registrant is a well-known seasoned issuer (as defined in
+Rule 405 of the Securities Act). Yes ¨ No x 
+Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities
+Act. Yes ¨ No x 
+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 other amendment to this Form 10-K. ¨ 
+Indicate by check mark
+whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (check one): 
+Large accelerated filer ¨ 
+Accelerated filer x 
+Non-accelerated filer ¨ 
+Indicate by check mark whether the registrant is a shell company
+(as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x 
+As of June 30, 2007 the aggregate market value of the registrant’s issued and outstanding voting stock held by non-affiliates of the registrant
+was $52,700,000. 
+As of February 29, 2008, the registrant had outstanding 9,370,365 shares of common stock, $0.01 par value.
+DOCUMENTS INCORPORATED BY REFERENCE 
+Proxy Statement for the Annual Meeting of Shareholders to be held on May 28, 2008—Part III (Items 10-14). 
+Table of Contents 
+TRANSACT TECHNOLOGIES INCORPORATED 
+INDEX 
+PART I. 
+Item 1. 
+Business 
+1 
+Item 1A. 
+Risk Factors 
+6 
+Item 1B. 
+Unresolved Staff Comments 
+11 
+Item 2. 
+Properties 
+12 
+Item 3. 
+Legal Proceedings 
+12 
+Item 4. 
+Submission of Matters to a Vote of Security Holders 
+13 
+PART II. 
+Item 5. 
+Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 
+14 
+Item 6. 
+Selected Consolidated Financial Data 
+16 
+Item 7. 
+Management’s Discussion and Analysis of Financial Condition and Results of Operations 
+16 
+Item 7A. 
+Quantitative and Qualitative Disclosures About Market Risk 
+34 
+Item 8. 
+Financial Statements and Supplementary Data 
+34 
+Item 9. 
+Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 
+34 
+Item 9A. 
+Controls and Procedures 
+34 
+Item 9B. 
+Other Information 
+36 
+PART III. 
+Item 10. 
+Directors and Executive Officers of the Registrant 
+37 
+Item 11. 
+Executive Compensation 
+37 
+Item 12. 
+Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 
+37 
+Item 13. 
+Certain Relationships and Related Transactions 
+37 
+Item 14. 
+Principal Accountant Fees and Services 
+37 
+PART IV. 
+Item 15. 
+Exhibits and Financial Statement Schedules 
+38 
+SIGNATURES 
+Signatures 
+39 
+CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE 
+Index to Consolidated Financial Statements and Schedule 
+F-1 
+EXHIBITS 
+Index to Exhibits 
+Table of Contents 
+PART I 
+Item 1. Business. 
+The Company 
+TransAct Technologies Incorporated (“TransAct” or the “Company”) was incorporated in June 1996 and began operating as a stand-alone business in August 1996 as a spin-off of the printer business
+that was formerly conducted by certain subsidiaries of Tridex Corporation. We completed an initial public offering on August 22, 1996. 
+TransAct designs, develops, assembles, markets and services world-class transaction printers under
+the Epic and Ithaca ® brand names. Known and respected worldwide for innovative designs and real-world service reliability, our thermal, inkjet and impact printers generate top-quality
+transaction records such as receipts, tickets, coupons, register journals and other documents. We focus on two core markets: (1) banking and point-of-sale (“POS”) and (2) casino, gaming and lottery. We sell our products to
+original equipment manufacturers (“OEMs”), value-added resellers (“VARs”), selected distributors, as well as directly to end-users. Our product distribution spans across the Americas, Europe, the Middle East, Africa, Asia,
+Australia, the Caribbean Islands and the South Pacific. In addition, we have a strong focus on the after-market side of the business, with a growing commitment to printer service, supplies and spare parts. We have one primary operating facility
+located in Ithaca, NY, our printer sales headquarters and western region service center in Las Vegas, NV, an eastern region service center located in New Britain, CT, a European sales and service center in the United Kingdom, and a sales office
+located in Macau and two other sales offices located in the United States. Our executive offices are located at One Hamden Center, 2319 Whitney Avenue, Suite 3B, Hamden, CT, 06518, with a telephone number of (203) 859-6800. 
+Financial Information about Segments 
+We have
+determined that we operate in one reportable segment, the design, development, assembly and marketing of transaction printers and printer-related service, supplies and spare parts. 
+Products and Services 
+Printers 
+TransAct designs, develops, assembles and markets a broad array of transaction-based printers utilizing inkjet, thermal and impact printing technology for applications requiring up to 60 character columns, primarily
+in the banking and POS, and casino, gaming and lottery markets. Our printers are configurable and offer customers the ability to choose from a variety of features and functions. Options typically include interface configuration, paper cutting
+devices, paper handling capacities and cabinetry color. In addition to our configurable printers, we design and assemble custom printers for certain OEM customers. In collaboration with these customers, we provide engineering and manufacturing
+expertise for the design and development of specialized printers. 
+Banking and POS: Our banking and POS printers include hundreds of
+optional configurations that can be selected to meet particular customer needs. We believe that this is a significant competitive strength, as it allows us to satisfy a wide variety of printing applications that our customers request. In the banking
+market, we sell printers that are used by banks, credit unions and other financial institutions to print and/or validate receipts at bank teller stations. In the POS market, we sell several models of printers utilizing inkjet, thermal and impact
+printing technology. Our printers are used primarily by retailers in the restaurant (including fine dining, casual dining, and fast food), hospitality, and specialty retail industries to print receipts for consumers, validate checks, or print on
+other inserted media. 
+Casino, gaming and lottery: In the lottery portion of our gaming and lottery market, we supply lottery printers to
+Lottomattica’s GTECH Corporation (“GTECH”), our largest customer and the world’s largest provider of lottery terminals, with an approximate 70% market share. These printers are designed for high-volume, high-speed printing of
+lottery tickets for various lottery applications. 
+1 
+Table of Contents 
+In the casino and gaming portion of our casino, gaming and lottery market, we sell several models of
+printers used in slot machines and video lottery terminals that print tickets or receipts instead of issuing coins at casinos, racetracks and other gaming establishments worldwide. These printers utilize thermal printing technology and can print
+tickets or receipts in monochrome or two-color (depending upon the model), and offer various other features such as jam resistant bezels and a dual port interface that will allow casinos to print coupons/promotions. In addition, we sell printers
+using thermal and impact printing technology for use in non-casino establishments, including game types such as Amusements with Prizes (“AWP”), Skills with Prizes (“SWP”), Video lottery terminals (“VLT”), Fixed Odds
+Betting Terminals (“FOBT”) and other off-premise gaming type machines around the world. 
+TransAct Services Group 
+Through our TransAct Services Group, we proactively market the sale of consumable products
+(including inkjet cartridges, ribbons and receipt paper), replacement parts and maintenance services for all of our products and certain competitor’s products. Our maintenance services include the sale of extended warranties, multi-year
+maintenance contracts, 24-hour guaranteed replacement product service TransAct Xpress SM , and other repair services for our printers. Within the
+United States, we provide repair services through our eastern region service center in New Britain, CT and our western region service center in Las Vegas, NV. Internationally, we provide repair services through our European service center located in
+Doncaster, United Kingdom, and through partners strategically located around the world. 
+We also provide customers with telephone sales and
+technical support, and a personal account representative to handle orders, shipping and general information. Technical and sales support personnel receive training on all of our manufactured products and our services. 
+In addition to personalized telephone and technical support, we also market and sell consumable products 24 hours a day, seven days a week, via our
+online webstore transactsupplies.com. 
+Product Warranty 
+Our printers generally carry up to a two-year limited warranty against defects in material and workmanship. Defective equipment may be returned to any of our service centers, or our assembly facility in Ithaca, NY for
+newly-released printers only, for repair or replacement during the applicable warranty period. 
+Production, Manufacturing and Sources and Availability
+of Raw Materials 
+We design our products to optimize product performance, quality, reliability and durability. These designs combine
+cost efficient materials, sourcing and assembly methods with high standards of workmanship. We finalize assembly for some of our products in our Ithaca, NY facility largely on a configure-to-order basis using components and subassemblies that have
+been sourced from vendors or contract manufacturers around the world. Our manufacturing engineers work closely with our new product engineers and vendors during the development of new products. As a result, this collaboration increases manufacturing
+efficiency by specifying materials and designing manufacturing processes in conjunction with new product design. 
+We procure component
+parts and subassemblies for use in the assembly of our products. Critical component parts and subassemblies include inkjet, thermal and impact printheads, printing/cutting mechanisms, power supplies, motors, injection molded plastic parts, circuit
+boards and electronic components, which are obtained from domestic and foreign suppliers at competitive prices. In addition, we procure fully assembled printers from a foreign contract manufacturer. We typically strive to maintain more than one
+source for our component parts, subassemblies and fully assembled printers to reduce the risk of parts shortages or unavailability. However, we could experience temporary disruption if certain suppliers ceased doing business with us, as described
+below. 
+2 
+Table of Contents 
+We currently buy substantially all of our thermal print mechanisms, an important component of our thermal
+printers, and fully assembled printers for several of our printer models, from one foreign contract manufacturer. Although we believe that other contract manufacturers could provide similar thermal print mechanisms or fully assembled printers, on
+comparable terms, a change in contract manufacturers could cause a delay in manufacturing and possible loss of sales, which may have a material adverse effect on our operating results. 
+Hewlett-Packard Company (“HP”) is the sole supplier of inkjet cartridges that are used in all of our inkjet printers. The loss of the supply of
+HP inkjet cartridges would have a material adverse effect on the sale of our inkjet printers. Prior to February 2006, we had a supply agreement with HP to purchase inkjet cartridges at fixed prices. This agreement expired on February 1, 2006
+and was not renewed, as HP informed us that they no longer maintain supply agreements for these inkjet cartridges; however, we continue to purchase inkjet cartridges from HP. Although we no longer have a supply agreement with HP, our relationship
+with HP remains strong and we have no reason to believe that HP will discontinue its supply of inkjet cartridges to us. The inkjet cartridges we purchase from HP are used not only in our inkjet printers for the banking and POS market, but also in
+other manufacturer’s printing devices across several other markets. 
+Okidata
+Americas, Inc. (“Okidata”), is the sole supplier for an impact printer component kit consisting of a printhead, control board and carriage (the “Oki Kit”), that is used in all of our Ithaca ® brand impact printers. The loss of the supply of Oki Kits would have a material adverse effect on TransAct. However, sales of impact printers continue to decline as sales of these printers are replaced by sales of
+thermal and inkjet printers. As such, we believe that any possible loss of supply of Oki Kits will have less of an impact on TransAct in 2008 and beyond. Although we do not have a supply agreement with Okidata, our relationship with Okidata remains
+strong and we have no reason to believe that Okidata will discontinue its supply of Oki Kits to us or that their terms to us will be any less favorable than they have been historically. 
+Patents and Proprietary Information 
+We have significantly expanded our patent portfolio over the
+past six years, and expect to continue to do so in the future. We also believe our patent portfolio could provide additional opportunities to license our intellectual property in the future. We hold 22 United States and 12 foreign patents and have
+10 United States and 84 foreign patent applications pending pertaining to our products. The duration of these patents range from 11 to 18 years. The expiration of any individual patent would not have a significant negative impact on our business. We
+regard certain manufacturing processes and designs to be proprietary and attempt to protect them through employee and third-party nondisclosure agreements and similar means. It may be possible for unauthorized third parties to copy certain portions
+of our products or to reverse engineer or otherwise obtain and use, to our detriment, information that we regard as proprietary. Moreover, the laws of some foreign countries do not afford the same protection to our proprietary rights as do United
+States laws. There can be no assurance that legal protections relied upon by the Company to protect our proprietary position will be adequate or that our competitors will not independently develop technologies that are substantially equivalent or
+superior to our technologies. 
+Seasonality 
+Retailers typically reduce purchases of new POS equipment in the fourth quarter, due to the increased volume of consumer transactions in that holiday period, and our sales of printers in the POS market historically have increased in the
+third quarter and decreased in the fourth quarter. Similarly, installations of lottery terminals are typically reduced in the fourth quarter, resulting in decreased sales of lottery printers. 
+Certain Customers 
+We currently have an ongoing OEM
+purchase agreement, as amended in February 2006 (the “GTECH Thermal Printer Agreement”) with GTECH that provides for the sale of thermal on-line lottery printers and spare parts, at fixed prices, through June 28, 2012. Firm purchase
+orders for printers under the GTECH Thermal Printer 
+3 
+Table of Contents 
+Agreement may be placed as required by GTECH. Prior to this agreement, we had a purchase agreement with GTECH that provided for the sale of impact on-line
+lottery printers and spare parts through December 31, 2004. Because our new thermal on-line lottery printer is a replacement for our impact on-line printer, we do not expect any further shipments of impact on-line lottery printers. However, we
+do expect to continue to sell spare parts to GTECH for the remaining installed base of impact on-line lottery printers, although we expect such sales to decline as the installed base of impact on-line lottery printers are replaced with our thermal
+printer. 
+Backlog 
+Our backlog of firm
+orders was approximately $9,123,000 as of February 29, 2008, compared to $4,300,000 as of February 28, 2007. Based on customers’ current delivery requirements, we expect to ship our entire current backlog during 2008. 
+Competition 
+The market for transaction-based
+printers is extremely competitive, and we expect such competition to continue in the future. We compete with a number of companies, many of which have greater financial, technical and marketing resources than us. We believe our ability to compete
+successfully depends on a number of factors both within and outside our control, including durability, reliability, quality, design capability, product customization, price, customer support, success in developing new products, manufacturing
+expertise and capacity, supply of component parts and materials, strategic relationships with suppliers, the timing of new product introductions by us and our competitors, general market, economic and political conditions and, in some cases, the
+uniqueness of our products. 
+In the banking and POS market, our major competitor is Epson America, Inc., which holds a dominant market
+position of the POS markets into which we sell. We also compete, to a much lesser extent, with Transaction Printer Group, Star Micronics America, Inc., Citizen—CBM America Corporation, Pertech Resources, Inc., Addmaster, and Samsung/Bixolon.
+Certain competitors of ours have greater financial resources, lower costs attributable to higher volume production and sometimes offer lower prices than us. 
+In the lottery market (consisting principally of on-line lottery transaction printing), we hold a leading position, based largely on our long-term purchase agreement with GTECH, which holds approximately 70% market
+share of the worldwide on-line lottery market. We compete in this market based solely on our ability to provide specialized, custom-engineered products to GTECH. 
+In the casino and gaming market (consisting principally of slot machine and video lottery terminal transaction printing), we compete with several companies including FutureLogic, Inc., Nanoptix, Inc., Custom
+Engineering SPA and others. Certain of our products sold for casino and gaming applications compete based upon our ability to provide highly specialized products, custom engineering and ongoing technical support. 
+The TransAct Services Group business is highly fragmented, and we compete with numerous competitors of various sizes depending on the geographic area.
+Our strategy for competing in our markets is to continue to develop new products and product line extensions, to increase our geographic
+market penetration, to take advantage of strategic relationships, and to lower product costs by sourcing certain products overseas. Although we believe that our products, operations and relationships provide a competitive foundation, there can be no
+assurance that we will compete successfully in the future. In addition, our products utilize certain inkjet, thermal and impact printing technology. If other technologies, or variations to existing technologies were to evolve or become available to
+us, it is possible that we would incorporate these technologies into our products. Alternatively, if such technologies were to evolve or become available to our competitors, our products could become obsolete, which would have a significant negative
+impact on our business. 
+4 
+Table of Contents 
+Research and Development Activities 
+We spent approximately $3,129,000, $2,824,000 and $2,726,000 in 2007, 2006 and 2005, respectively, on engineering, design and product development efforts in connection with specialized engineering and design to
+introduce new products and to customize existing products. 
+Environment 
+We are not aware of any material noncompliance with federal, state and local provisions that have been enacted or adopted regulating the discharge of
+materials into the environment, or otherwise relating to the protection of the environment. 
+Employees 
+As of February 29, 2008, TransAct and our subsidiaries employed 164 persons, of whom 153 were full-time and 11 were temporary employees. None of our
+employees are unionized, and we consider our relationships with our employees to be good. 
+Financial Information About Geographic Areas 
+We have foreign operations primarily from TransAct Technologies Ltd., a wholly-owned subsidiary located in the United Kingdom, which had sales to its
+customers of $2,121,000, $2,722,000, and $2,181,000, (primarily for the service of printers used in the British Post Office) in 2007, 2006 and 2005, respectively. We had export sales from our domestic operations of approximately $8,674,000,
+$11,416,000 and $10,137,000 in 2007, 2006 and 2005, respectively. Total international sales, which include sales from our foreign subsidiary and export sales from our domestic operations, were approximately $10,795,000, $14,138,000 and $12,318,000
+in 2007, 2006 and 2005, respectively. 
+Additional Information 
+We make available free of charge through our internet website, www.transact-tech.com , our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those
+reports as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. 
+We maintain a Code of
+Business Conduct that includes our code of ethics that is applicable to all employees, including our Chief Executive Officer, Chief Financial Officer and Controller. This Code, which requires continued observance of high ethical standards such as
+honesty, integrity and compliance with the law in the conduct of our business, is available for public access on our internet website. Any person may request a copy of our Code of Business Conduct free of charge by calling (203) 859-6800.
+Executive Officers of the Registrant 
+The following list is included as an unnumbered item in Part I of this Report in lieu of being included in the Proxy Statement for the Annual Meeting of Stockholders to be held on May 28, 2008. 
+5 
+Table of Contents 
+The following is a list of the names and ages of all executive officers of the registrant, indicating all
+positions and offices with the registrant held by each such person and each person’s principal occupations and employment during at least the past five years. 
+Name 
+Age 
+Position 
+Bart C. Shuldman 
+50 
+Chairman of the Board, President and Chief Executive Officer 
+Steven A. DeMartino 
+38 
+Executive Vice President, Chief Financial Officer, Treasurer and Secretary 
+Michael S. Kumpf 
+58 
+Executive Vice President—Engineering 
+James B. Stetson 
+51 
+Senior Vice President and Business Manager of TransAct Services Group 
+Tracey S. Chernay 
+48 
+Senior Vice President—Sales and Marketing 
+Andrew Hoffman 
+50 
+Senior Vice President—Operations 
+B ART C. S HULDMAN has been Chief Executive Officer, President and a
+Director of the Company since its formation in June 1996. In February 2001, Mr. Shuldman was elected Chairman of the Board. 
+S TEVEN A. D E M ARTINO was named as TransAct’s Executive Vice President, Chief Financial Officer, Treasurer and Secretary on June 1, 2004. Previously, Mr. DeMartino served as Senior
+Vice President, Finance and Information Technology from October 2001 to May 2004, Vice President and Corporate Controller from January 1998 to October 2001, and Corporate Controller from August 1996 to December 1997. Mr. DeMartino is a
+certified public accountant. 
+M ICHAEL S. K UMPF was appointed Executive Vice President of Engineering in March
+2002. He served as Senior Vice President, Engineering from June 1996 to March 2002. 
+J AMES B. S TETSON was
+appointed Senior Vice President and Business Manager of TransAct Services Group in January 2005. Previously, Mr. Stetson held the position of Executive Vice President of Sales and Marketing from February 2000 to December 2004, and Vice
+President of Latin American Sales from October 1997 to February 2000. 
+T RACEY S. C HERNAY was appointed Senior
+Vice President, Sales and Marketing in June 2007, with responsibility for the sales and marketing of all TransAct printer products worldwide. Previously Ms. Chernay served as Sr. Vice President, Marketing & Sales, POS &
+Banking with the Company from July 2006 to June 2007, and joined TransAct in May of 2005 as Senior Vice President, Marketing. Prior to joining TransAct, Ms. Chernay was employed with Xerox Corporation where she held the role of Manager,
+Worldwide Marketing since 2003, and Manager, Sales Operations from 2000 to 2002. She joined Xerox Corporation in 1983. 
+A NDREW H OFFMAN was appointed Senior Vice President, Operations for TransAct worldwide in November 2004. He served as Vice President, Operations from September 1994 to November 2004. 
+Item 1A. Risk Factors 
+Investors should carefully consider the risks, uncertainties and other factors
+described below, as well as other disclosures in Management’s Discussion and Analysis of Financial Condition and Results of Operations, because they could have a material adverse effect on our business, financial condition, operating results,
+and growth prospects. The risks described below and incorporated by reference are not the only ones facing our Company. Additional risks not known to us now or that we currently deem immaterial may also impair our business operations. 
+We assume no obligation (and specifically disclaim any such obligation) to update these Risk Factors or any other forward-looking statements contained in
+this Annual Report to reflect actual results, changes in assumptions or other factors affecting such forward-looking statements, except as required by law. 
+6 
+Table of Contents 
+Our success will depend on our ability to sustain and manage growth. 
+As part of our business strategy, we intend to pursue an aggressive growth strategy. Assuming this growth occurs, it will require the expansion of
+distribution relationships in international markets, the successful development and marketing of new products, expanded customer service and support, and the continued implementation and improvement of our operational, financial and management
+information systems. 
+To the extent that we seek growth through acquisitions, our ability to manage our growth will also depend on our
+ability to integrate businesses that have previously operated independently. We may not be able to achieve this integration without encountering difficulties or experiencing the loss of key employees, customers or suppliers. It may be difficult to
+design and implement effective financial controls for combined operations and differences in existing controls for each business may result in weaknesses that require remediation when the financial controls and reporting functions are combined.
+There can be no assurance that we will be able to successfully implement our growth strategy, or that we can successfully manage expanded
+operations. As the Company expands, we may from time to time experience constraints that will adversely affect our ability to satisfy customer demand in a timely fashion. Failure to manage growth effectively could adversely affect our results of
+operations and financial condition. 
+We compete in a highly competitive market, which is likely to become more competitive. Competitors may be able
+to respond more quickly to new or emerging technology and changes in customer requirements. 
+We face significant competition in
+developing and selling our printers and services. Principal competitors have substantial marketing, financial, development and personnel resources. To remain competitive, we believe we must continue to provide: 
+• 
+Technologically advanced printers that satisfy the user demands, 
+• 
+Superior customer service, 
+• 
+High levels of quality and reliability, and 
+• 
+Dependable and efficient distribution networks. 
+We cannot ensure we will be able to compete successfully against current or future competitors. Increased competition in printers or supplies may result in price reductions, lower gross profit margins and loss of
+market share, and could require increased spending on research and development, sales and marketing and customer support. Some competitors may make strategic acquisitions or establish cooperative relationships with suppliers or companies that
+produce complementary products. Any of these factors could reduce our earnings. 
+In the lottery market, we have been dependent on sales to one large
+customer; the loss of this customer or reduction in orders from this customer could materially affect our sales. 
+We expect that
+sales to one large customer will continue to represent a significant percentage of our net sales for the foreseeable future. A reduction, delay or cancellation in orders from this customer, including reductions or delays due to market, economic, or
+competitive conditions in the industries in which we serve, could have a material adverse effect upon our results of operations. 
+We rely on
+resellers to sell our products and services. 
+We use a variety of distribution channels, including OEMs and distributors, to market
+our products. We may be adversely impacted by any conflicts that could arise between and among our various sales channels. 
+Our dependence
+upon resellers exposes us to numerous risks, including: 
+• 
+loss of channel and the ability to bring new products to market; 
+7 
+Table of Contents 
+• 
+concentration of credit risk, including disruption in distribution should the resellers’ financial condition deteriorate; 
+• 
+reduced visibility to end user demand and pricing issues which makes forecasting more difficult; 
+• 
+resellers leveraging their buying power to change the terms of pricing, payment and product delivery schedules; and 
+• 
+direct competition should a reseller decide to manufacture printers internally or source printers from a competitor. 
+We cannot guarantee that resellers will not reduce, delay or eliminate purchases from us, which could have a material adverse effect upon the business,
+consolidated results of operations and financial condition. 
+Our operating results and financial condition may fluctuate. 
+Our operating results and financial condition may fluctuate from quarter to quarter and year to year and are likely to continue to vary due to a number of
+factors, many of which are not within our control. If our operating results do not meet the expectations of securities analysts or investors, who may derive their expectations by extrapolating data from recent historical operating results, the
+market price of our common stock will likely decline. Fluctuations in our operating results and financial condition may be due to a number of factors, including, but not limited to, those identified throughout this “Risk Factors” section:
+• 
+changes in accounting rules 
+• 
+changes in the amount that we spend to develop, acquire or license new products, consumables, technologies or businesses; 
+• 
+changes in the amount we spend to promote our products and services; 
+• 
+changes in the cost of satisfying our warranty obligations and servicing our installed base of printers; 
+• 
+delays between our expenditures to develop and market new or enhanced printers and consumables and the generation of sales from those products;
+• 
+development of new competitive printers by others; 
+• 
+the geographic distribution of our sales; 
+• 
+our responses to price competition; 
+• 
+the outcome of the lawsuit between TransAct and FutureLogic, Inc. 
+• 
+market acceptance of our products, both domestically and internationally; 
+• 
+availability of third-party components at reasonable prices; 
+• 
+general economic and industry conditions, including changes in interest rates affecting returns on cash balances and investments, that affect customer demand;
+• 
+severe weather events (such as hurricanes) that can disrupt or interrupt the operation of our customers facilities; and 
+• 
+our level of research and development activities. 
+Due to all of the foregoing factors, and the other risks discussed in this report, quarter-to-quarter comparisons of our operating results may not be an indicator of future performance. 
+Our stock price may fluctuate significantly. 
+The market price of our common stock could fluctuate significantly in response to variations in quarterly operating results and other factors, such as: 
+• 
+changes in our business, operations or prospects; 
+8 
+Table of Contents 
+• 
+developments in our relationships with our customers; 
+• 
+announcements of new products or services by us or by our competitors; 
+• 
+announcement or completion of acquisitions by us or by our competitors; 
+• 
+changes in existing or adoption of additional government regulations; 
+• 
+unfavorable or reduced analyst coverage; and 
+• 
+prevailing domestic and international market and economic conditions. 
+In addition, the stock market has experienced significant price fluctuations in recent years. Broad market fluctuations, general economic conditions and
+specific conditions in the industry in which we operate may adversely affect the market price of our common stock. 
+Limited trading volume of our
+capital stock may contribute to its price volatility. 
+Our common stock is traded on the NASDAQ Global Market. During the twelve
+months ended December 31, 2007, the average daily trading volume for our common stock as reported by the NASDAQ Global Market was approximately 40,941 shares. We are uncertain whether a more active trading market in our common stock will
+develop. In addition, many investment banks no longer find it profitable to provide securities research on micro-cap and small-cap companies. If any analyst were to discontinue coverage of our common stock, our trading volume may be further reduced.
+As a result, relatively small trades may have a significant impact on the market price of our common stock, which could increase the volatility and depress the price of our common stock. 
+We depend on key personnel, the loss of which could materially impact our business. 
+Our
+future success will depend in significant part upon the continued service of certain key management and other personnel and our continuing ability to attract and retain highly qualified managerial, technical and sales and marketing personnel. There
+can be no assurance that we will be able to recruit and retain such personnel. The loss of either Bart C. Shuldman, the Company’s Chairman of the Board, President and Chief Executive Officer, or Steven A. DeMartino, Executive Vice President,
+Chief Financial Officer, Treasurer and Secretary, or the loss of certain groups of key employees, could have a material adverse effect on our results of operations. 
+We source some of our component parts from sole source suppliers; any disruptions may impact our ability to manufacture and sell our products. 
+A disruption in the supply of such component parts could have a material adverse effect on our operations and financial results. 
+The inability to protect intellectual property could harm our reputation, and our competitive position may be materially damaged. 
+Our intellectual property is valuable and provides us with certain competitive advantages. Copyrights, patents, trade secrets and contracts are used to
+protect these proprietary rights. Despite these precautions, it may be possible for third parties to copy aspects of our products or, without authorization, to obtain and use information which we regard as trade secrets. 
+Infringement on the proprietary rights of others could put us at a competitive disadvantage, and any related litigation could be time consuming and costly.
+Third parties may claim that we violated their intellectual property rights. To the extent of a violation of a third party’s
+patent or other intellectual property right, we may be prevented from operating our business as planned and may be required to pay damages, to obtain a license, if available, or to use a non-infringing method, 
+9 
+Table of Contents 
+if possible, to accomplish our objectives. Any of these claims, with or without merit, could result in costly litigation and divert the attention of key
+personnel. If such claims are successful, they could result in costly judgments or settlements. 
+We sell a significant portion of our products
+internationally and purchase important components from foreign suppliers. These circumstances create a number of risks. 
+We sell a
+significant amount of our products to customers outside the United States. Shipments to international customers are expected to continue to account for a material portion of net sales. Risks associated with sales and purchases outside the United
+States include: 
+• 
+Fluctuating foreign currency rates could restrict sales, or increase costs of purchasing, in foreign countries. 
+• 
+Foreign governments may impose burdensome tariffs, quotas, taxes, trade barriers or capital flow restrictions. 
+• 
+Political and economic instability may reduce demand for our products or put our foreign assets at risk. 
+• 
+Restrictions on the export or import of technology may reduce or eliminate the ability to sell in or purchase from certain markets. 
+• 
+Potentially limited intellectual property protection in certain countries, such as China, may limit recourse against infringing products or cause us to refrain from
+selling in certain geographic territories. 
+We cannot provide any assurance that current laws, or any laws enacted in the future,
+will not have a material adverse effect on our business. 
+Our operations are subject to laws, rules, regulations, including
+environmental regulations, government policies and other requirements in each of the jurisdictions in which we conduct business. Changes in laws, rules, regulations, policies or requirements could result in the need to modify our products and could
+affect the demand for our products, which may have an adverse impact on our future operating results. In addition, we must comply with new regulations restricting our ability to include lead and certain other substances in our products. If we do not
+comply with applicable laws, rules and regulations we could be subject to costs and liabilities and our business may be adversely impacted. 
+Future
+sales of our common stock may cause our stock price to decline. 
+In the future, we may sell additional shares of our common stock in
+public or private offerings, and we may also issue additional shares of our common stock to finance future acquisitions. Shares of our common stock are also available for future sale pursuant to stock options that we have granted to our employees,
+and in the future we may grant additional stock options and other forms of equity compensation to our employees. Sales of our common stock or the perception that such sales could occur may adversely affect prevailing market prices for shares of our
+common stock and could impair our ability to raise capital through future offerings. 
+If market conditions deteriorate or future results of
+operations are less than expected, a valuation allowance may be required for all or a portion of our deferred tax assets. 
+We
+currently have significant deferred tax assets, which may be used to reduce taxable income in the future. We assess the realization of these deferred tax assets on a quarterly basis, and if we determine that it is more likely than not that some
+portion of these assets will not be realized, an income tax valuation allowance is recorded. If market conditions deteriorate or future results of operations are less than expected, or there is a change to applicable tax rules, future assessments
+may result in a determination that it is more likely than not that some or all of our net deferred tax assets are not realizable. As a result, we may need to establish a valuation allowance for all or a portion of our net deferred tax assets, which
+may have a material adverse effect on our business, results of operations and financial condition. 
+10 
+Table of Contents 
+Our business could be adversely affected by actual or threatened terrorist attacks or the related heightened
+security measures, military actions and other efforts to combat terrorism. 
+Our business could be adversely affected by actual or
+threatened terrorist attacks or the related heightened security measures, military actions and other efforts to combat terrorism. It is possible that terrorist attacks could be directed at important locations for the gaming industry. Heightened
+security measures and other efforts to combat terrorism may also have an adverse effect on the gaming industry by reducing tourism. Any of these developments could also negatively affect the general economy and consumer confidence. Any downturn in
+the economy or in the gaming industry in particular could reduce demand for our products and adversely affect our business and results of operations. In addition, heightened security measures may cause certain governments to restrict the
+import/export of goods, which may have an adverse effect on our ability to buy/sell goods. 
+If we are unable to enforce our patents or if it is
+determined that we infringe patents held by others it could damage our business. 
+Prosecuting and defending patent lawsuits is very
+expensive. We are committed to aggressively asserting and defending our technology and related intellectual property, which we have spent a significant amount of money to develop. These factors could cause us to become involved in new patent
+litigation in the future. The expense of prosecuting or defending these future lawsuits could also have a material adverse effect on our business, financial condition and results of operations. 
+If we were to lose a patent lawsuit in which another party is asserting that our products infringe its patents, we would likely be prohibited from
+marketing those products and could also be liable for significant damages. Either or both of these results may have a material adverse effect on our business, financial condition and results of operations. If we lose a patent lawsuit in which we are
+claiming that another party’s products are infringing our patents and thus, are unable to enforce our patents, it may have a material adverse effect on our business, financial condition and results of operations. In addition to disputes
+relating to the validity or alleged infringement of other parties’ rights, we may become involved in disputes relating to our assertion of our own intellectual property rights. Whether we are defending the assertion of intellectual property
+rights against us or asserting our intellectual property rights against others, intellectual property litigation can be complex, costly, protracted, and highly disruptive to business operations by diverting the attention and energies of management
+and key technical personnel. Plaintiffs in intellectual property cases often seek injunctive relief, and the measures of damages in intellectual property litigation are complex and often subjective or uncertain. Thus, any adverse determinations in
+this type of litigation could subject us to significant liabilities and costs. During the course of these lawsuits there may be public announcements of the results of hearings, motions, and other interim proceedings or developments in the
+litigation. If securities analysts or investors perceive these results to be negative, it could harm the market price of our stock. 
+Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial also may adversely impact our business. Should any risks or uncertainties develop into actual events, these developments could have
+material adverse effects on our business, financial condition, and results of operations. 
+Item 1B. Unresolved Staff Comments 
+Not applicable. 
+11 
+Table of Contents 
+Item 2. Properties. 
+Our corporate headquarters is currently located in Hamden, CT. Our global engineering
+and assembly center is located in Ithaca, NY. We also maintain a facility in Las Vegas, NV that serves as our printer sales headquarters and western region service center. Our eastern region service center is currently located in New Britain, CT.
+Our principal facilities as of December 31, 2007 are listed below: 
+Location 
+Operations Conducted 
+Size 
+(Approx. Sq. Ft.) 
+Owned or 
+Leased 
+Lease Expiration 
+Date 
+Hamden, Connecticut 
+Executive offices and TransAct Services Group sales office 
+11,100 
+Leased 
+April 23, 2017 
+Ithaca, New York 
+Research, design and assembly facility 
+73,900 
+Leased 
+June 30, 2012 
+Las Vegas, Nevada 
+Service center and printer sales headquarters 
+13,700 
+Leased 
+January 31, 2010 
+New Britain, Connecticut 
+Service center 
+11,500 
+Leased 
+April 1, 2012 
+Doncaster, United Kingdom 
+Sales office and service center 
+2,800 
+Leased 
+August 1, 2009 
+Georgia and New York 
+Two regional sales offices 
+300 
+Leased 
+Various 
+Total 
+113,300 
+We believe that our facilities generally are in good condition, adequately maintained and suitable
+for their present and currently contemplated uses. 
+Item 3. Legal Proceedings. 
+On April 28, 2005, we announced that we filed a complaint in Connecticut
+Superior Court against FutureLogic, Inc. (“FutureLogic”) of Glendale, California. The complaint charges FutureLogic with disseminating false and misleading statements, which impugn our business reputation with the intent of damaging our
+business. We assert claims of defamation, tortious interference with contractual relations, tortious interference with business expectancy, and violation of the Connecticut Unfair Trade Practices Act, and seek an award of compensatory and punitive
+damages, attorneys’ fees and costs. FutureLogic removed this action to the United States District Court for the District of Connecticut and, on June 7, 2005, filed a motion to dismiss the claims for lack of jurisdiction. On
+December 7, 2005, we amended our complaint in the action pending in the District of Connecticut to add claims that FutureLogic’s conduct violated the Lanham Act’s bar on false and deceptive advertising. 
+On May 20, 2005, FutureLogic filed a complaint in the United States District Court for the Central District of California against us. The complaint
+charges us with false advertising, defamation, trade libel, intentional interference with prospective economic advantage, common law unfair competition and statutory unfair competition and seeks an award of compensatory and punitive damages,
+attorneys’ fees and costs. On August 3, 2005, FutureLogic amended its complaint in California to seek a declaratory judgment that U.S. Patent No. 6,924,903 (the “903 Patent”) issued to us by the United States Patent and
+Trademark Office (“PTO”) on August 2, 2005, for our dual-port printer technology, is invalid, and that FutureLogic is not infringing our patent. We moved to dismiss FutureLogic’s action in California, on the grounds that any
+claims raised in that action should have been brought as part of the case filed by us in the District of Connecticut. In the alternative, we moved to stay the California action pending the resolution of jurisdictional motions in the Connecticut
+court. 
+On September 1, 2006, the District of Connecticut dismissed our case because of a lack of jurisdiction. The decision was not
+on the merits of our claims, but on the jurisdiction of the court in which the suit was brought. On June 12, 2007, we filed an answer to FutureLogic’s amended complaint and filed a counterclaim that FutureLogic infringes the 903 Patent. We
+also filed a motion for a preliminary injunction to stop infringement by 
+12 
+Table of Contents 
+FutureLogic’s dual port printers. Our motion for preliminary injunction was heard on July 30, 2007. Through our preliminary injunction motion and
+hearing, we showed that FutureLogic has constructed a prototype printer, the GEN2 Universal with the ProMatrix system, which the judge ruled has a likelihood of infringing the 903 Patent covering dual port technology. The court denied our motion on
+August 6, 2007, but the court ruled that “Should TransAct discover that FutureLogic has sold or offered to sell any GEN2 Universal printers with the ProMatrix system that infringe the 903 Patent during the course of this action, it may
+renew this motion on an expedited ex parte basis and—assuming it shows the requisite likelihood of success on the merits—the court will afford it the relief it seeks.” 
+On August 27, 2007, FutureLogic lodged an amended complaint that sought a declaratory judgment that our U.S. Patent No. 7,099,035 (“the
+035 Patent”) is invalid and not infringed by FutureLogic, and that the 903 and 035 Patents are unenforceable for inequitable conduct. Concurrently, we filed an amended answer that added a counterclaim that FutureLogic infringes the 035 Patent.
+Also on August 27, 2007, FutureLogic filed a motion for leave to file a Second Amended Complaint to add monopolization and attempted monopolization claims against us. The proposed claims were each based on “Walker Process fraud” and
+“sham litigation.” The Court held a hearing on this motion on October 29, 2007 and issued an opinion that same day. In its opinion, the Court denied FutureLogic’s motion to add a claim for actual monopolization based on either
+the “Walker Process fraud” theory or the “sham litigation.” theory. The Court also denied FutureLogic’s motion to add a claim for attempted monopolization based on the “sham litigation” theory. The Court did,
+however, permit FutureLogic to assert a claim of attempted monopolization based on the “Walker Process fraud” theory. We believe that FutureLogic’s claim in this matter is without merit and intend to defend vigorously against it.
+On February 20, 2008, we filed an application to renew our preliminary injunction motion. The Court heard our motion on March 3,
+2008. The Court denied our renewed motion. We intend to vigorously defend TransAct against FutureLogic’s claims, which we believe to be without merit. We also intend to pursue vigorously our claim against FutureLogic for infringement of the 903
+and 035 Patents. The case is in the discovery process. We are currently unable to estimate any potential or probable liability. 
+Item 4. Submission of Matters to a Vote of Security Holders. 
+No matters were submitted to a vote of
+security holders during the last quarter of the year covered by this report. 
+13 
+Table of Contents 
+PART II 
+Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. 
+Our common stock is traded on the NASDAQ Global Market under the symbol TACT. As of February 29, 2008, there were 584 holders of record of the common stock. The high and low sales prices of the common stock
+reported during each quarter of the years ended December 31, 2007 and 2006 were as follows: 
+Year Ended 
+December 31, 2007 
+Year Ended 
+December 31, 2006 
+High 
+Low 
+High 
+Low 
+First Quarter 
+$ 
+10.10 
+$ 
+6.75 
+$ 
+9.90 
+$ 
+7.80 
+Second Quarter 
+7.80 
+5.95 
+14.87 
+8.95 
+Third Quarter 
+6.80 
+5.70 
+11.23 
+8.49 
+Fourth Quarter 
+6.56 
+4.70 
+9.38 
+7.47 
+No dividends on common stock have been declared and we do not anticipate declaring dividends in
+the foreseeable future. Our credit agreement with TD Banknorth, N.A. restricts the payment of cash dividends on our common stock for the term of the agreement. 
+Issuer Purchases of Equity Securities 
+On March 25, 2005, the Board of Directors approved a stock repurchase program
+(“the Stock Repurchase Program”). Under the Stock Repurchase Program, we are authorized to repurchase up to $10 million of our outstanding shares of common stock from time to time in the open market over a three year period ending on
+March 25, 2008, depending on market conditions, share price and other factors. 
+On November 1, 2007, our Board of Directors
+approved an increase in our stock repurchase authorization under the Stock Repurchase Program to $15 million from $10 million. In addition, the Board approved a two-year extension of the Stock Repurchase Program to March 31, 2010. 
+The following table summarizes repurchases of our common stock in the quarter ended December 31, 2007: 
+Period 
+Total 
+Number 
+of Shares 
+Purchased 
+Average 
+Price 
+Paid per 
+Share 
+Total Number 
+of Shares 
+Purchased
+as 
+Part of Publicly 
+Announced 
+Plans or 
+Programs 
+Approximate 
+Dollar Value of 
+Shares that May 
+Yet Be Purchased 
+under the Plans 
+or Programs 
+October 1, 2007—October 31, 2007 
+— 
+$ 
+— 
+— 
+$ 
+2,242,000 
+November 1, 2007—November 30, 2007 
+46,900 
+$ 
+5.06 
+46,900 
+$ 
+7,005,000 
+December 1, 2007—December 31, 2007 
+— 
+$ 
+— 
+— 
+$ 
+7,005,000 
+Total 
+46,900 
+$ 
+5.06 
+46,900 
+14 
+Table of Contents 
+CORPORATE PERFORMANCE GRAPH 
+The following graph compares the cumulative total return on the Company’s Common Stock from December 31, 2002 through December 31, 2007, with the CRSP Total Return Index for the Nasdaq Stock Market
+(U.S.) and the Nasdaq Computer Manufacturer Stocks Index. The graph assumes that $100 was invested on December 31, 2002 in each of the Company’s common stock, the CRSP Total Return Index for the Nasdaq Stock Market (U.S.) and the Nasdaq
+Computer Manufacturer Stocks Index, and that all dividends were reinvested. 
+COMPARISON OF CUMULATIVE TOTAL RETURN AMONG 
+TRANSACT TECHNOLOGIES INCORPORATED COMMON STOCK, 
+THE CRSP TOTAL RETURN INDEX FOR THE NASDAQ STOCK MARKET (U.S.), 
+AND THE NASDAQ COMPUTER
+MANUFACTURER STOCKS INDEX 
+12/31/02 
+12/31/03 
+12/31/04 
+12/31/05 
+12/31/06 
+12/31/07 
+TransAct Technologies Incorporated Common Stock 
+$ 
+100.00 
+$ 
+513.71 
+$ 
+675.95 
+$ 
+250.00 
+$ 
+262.66 
+$ 
+151.58 
+CRSP Total Return Index for the Nasdaq Stock Market (U.S.) 
+$ 
+100.00 
+$ 
+149.52 
+$ 
+162.72 
+$ 
+166.18 
+$ 
+182.59 
+$ 
+198.01 
+Nasdaq Computer Manufacturer Stocks Index 
+$ 
+100.00 
+$ 
+139.10 
+$ 
+181.88 
+$ 
+186.11 
+$ 
+190.60 
+$ 
+276.83 
+15 
+Table of Contents 
+Item 6. Selected Consolidated Financial Data (in thousands, except per share amounts) 
+The following is
+summarized from our audited financial statements of the past five years: 
+Year Ended December 31, 
+2007 
+2006 
+2005 
+2004 
+2003¹ 
+Consolidated Statement of Operations Data: 
+Net sales 
+$ 
+48,766 
+$ 
+64,328 
+$ 
+51,091 
+$ 
+59,847 
+$ 
+52,098 
+Gross profit 
+15,996 
+22,365 
+15,590 
+22,042 
+15,543 
+Operating expenses 
+19,751 
+16,277 
+15,366 
+13,591 
+12,855 
+Operating income (loss) 
+(3,755 
+) 
+6,088 
+224 
+8,451 
+2,688 
+Net income (loss) 
+(2,274 
+) 
+3,916 
+377 
+5,458 
+1,528 
+Net income (loss) available to common shareholders 
+(2,274 
+) 
+3,916 
+377 
+5,236 
+1,087 
+Net income (loss) per share: 
+Basic 
+(0.24 
+) 
+0.41 
+0.04 
+0.55 
+0.13 
+Diluted 
+(0.24 
+) 
+0.40 
+0.04 
+0.51 
+0.12 
+December 31, 
+2007 
+2006 
+2005 
+2004 
+2003 
+Balance Sheet Data: 
+Total assets 
+$ 
+30,604 
+$ 
+33,706 
+$ 
+29,332 
+$ 
+34,099 
+$ 
+26,361 
+Working capital 
+11,234 
+16,643 
+15,375 
+20,511 
+11,787 
+Long-term debt, excluding current portion 
+— 
+— 
+— 
+— 
+330 
+Redeemable convertible preferred stock 
+— 
+— 
+— 
+— 
+3,902 
+Shareholders’ equity 
+21,608 
+24,290 
+21,257 
+23,715 
+10,347 
+1 
+Net income per share amount has been restated to reflect a three-for-two stock split effected in the form of a stock dividend in April 2004. 
+Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 
+This
+discussion should be read in conjunction with the Consolidated Financial Statements and notes thereto. 
+Forward Looking Statements 
+Certain statements included in this report, including without limitation statements in this Management’s Discussion and Analysis of Financial
+Condition and Results of Operations, which are not historical facts are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of
+1934, as amended. Forward-looking statements generally can be identified by the use of forward-looking terminology, such as “may”, “will”, “expect”, “intend”, “estimate”, “anticipate”,
+“believe”, “project” or “continue” or the negative thereof or other similar words. All forward-looking statements involve risks and uncertainties, including, but not limited to those listed in Item 1A of this
+Annual Report. Actual results may differ materially from those discussed in, or implied by, the forward-looking statements. The forward-looking statements speak only as of the date of this report and we assume no duty to update them. 
+Overview 
+2007 was a difficult year for TransAct
+as compared to 2006. During 2007, we were affected by decreased sales levels across the majority of our sales units and increased expenses, primarily due to legal expenses associated with our patent infringement counterclaim. 
+16 
+Table of Contents 
+We continue to focus on sales growth in our three core markets, banking and POS, casino, gaming and
+lottery, and in our TransAct Services Group, to drive increased profitability. During 2007, our total net sales decreased by 24% to approximately $48,766,000. See the table below for a breakdown of our sales by market. 
+(In thousands) 
+Year ended 
+December 31, 2007 
+Year ended 
+December 31, 2006 
+Change 
+$ 
+% 
+Banking and POS 
+$ 
+11,046 
+22.6 
+% 
+$ 
+16,858 
+26.2 
+% 
+$ 
+(5,812 
+) 
+(34.5 
+)% 
+Casino, gaming and lottery 
+25,338 
+52.0 
+% 
+34,677 
+53.9 
+% 
+(9,339 
+) 
+(26.9 
+)% 
+TransAct Services Group 
+12,382 
+25.4 
+% 
+12,793 
+19.9 
+% 
+(411 
+) 
+(3.2 
+)% 
+Total net sales 
+$ 
+48,766 
+100.0 
+% 
+$ 
+64,328 
+100.0 
+% 
+$ 
+(15,562 
+) 
+(24.2 
+)% 
+We experienced a decrease of approximately
+35% in sales of Banking and POS printers in 2007. We experienced decreases in sales of our Bankjet ® line of inkjet bank teller printers due to the non-recurrence of sales that were made in
+2006 to two large banking customers. In addition to lower banking printer sales, we also experienced a decline in sales from our line of POS thermal printers due primarily to a large hospitality customer that has slowed and deferred equipment
+purchases while it implements a new point-of-sale software system. We continued to experience lower sales of our legacy line of POS impact printers, as these printers are being replaced by our newer thermal and inkjet printers. Our sales into the
+Banking and POS market over the last several years continue to be impacted by a market shift in technology from impact printing to thermal and inkjet printing. This change in technology has resulted in declining sales of our impact printers that
+were at higher average selling prices and increasing sales of our thermal and inkjet printers that are at lower average selling prices. Although our unit sales volume has increased over the last several years, the revenue generated from those sales
+have not increased to the same extent due to lower average selling prices based on the lower cost of the technology utilized, of thermal and inkjet printers as compared to impact printers. In fact, since 1996, unit sales of all of our printers,
+including Banking and POS printers, have increased by approximately 60%, while average selling prices of these printers have declined by approximately 40%. We expect sales of our legacy impact printers to continue to decline during 2008, although at
+a slower rate than in 2007, as these printers continue to be replaced by our newer thermal and inkjet printers. 
+Our focus in the casino,
+gaming and lottery market is two-fold. On the lottery side, we continue to hold a leading position based on our long-term purchase agreement with Lottomatica’s GTECH Corporation (“GTECH”), our largest customer and the world’s
+largest provider of lottery terminals, with approximately a 70% market share. GTECH has been our customer since 1995, and we continue to maintain a good relationship with them. In fact, our contract with GTECH continues through 2012. Currently, we
+fulfill substantially all of GTECH’s printer requirements for lottery terminal installations and upgrades worldwide. During 2007, we experienced lower than historical sales levels from GTECH, with total printer sales decreasing by approximately
+$5,622,000, or 51%, compared to 2006. However, our sales to GTECH each year are directly dependent on the timing and number of new and upgraded lottery terminal installations GTECH performs. Our sales to GTECH are not indicative of GTECH’s
+overall business or revenue. 
+On the casino and gaming side, our focus lies primarily in supplying printers for use in slot machines at
+casinos and racetracks, as well as in other gaming devices that print tickets or receipts, primarily in the United States, Europe and Australia, as well as in the emerging Asian market, including Macau. During 2007, our domestic casino printer sales
+decreased by 14% from 2006, due to continued softness in the domestic casino market. In the international casino and gaming market, sales decreased by 21% to $6.6 million, largely due to the Australian markets slowdown in its conversion to
+ticket-in, ticket-out slot machines. 
+Our TransAct Services Group (“TSG”), which sells service, replacement parts and consumable
+products, including receipt paper, ribbons and inkjet cartridges, continues to offer a substantial growth opportunity and recurring revenue stream for TransAct. Even with declining sales of replacement parts for legacy impact printers as the
+installed base of these printers in the market declines, TSG domestic revenue continued to increase in 2007 by 5% from 2006. During 2007, our domestic sales benefited from higher inkjet cartridge sales including four 
+17 
+Table of Contents 
+months of incremental sales resulting from the signing of an agreement with a leading national office supply chain to supply inkjet cartridges in 2006 as
+well as increased sales from our maintenance services, including extended warranty contracts and our innovative 24-hour guaranteed replacement product service called TransAct Xpress SM . Internationally, TSG sales declined due to the decrease in maintenance and repair services revenue from a service contract with a single customer in the United Kingdom. 
+Operationally, our gross margin and operating margin showed the results of a lower volume of sales and the resulting lower gross profit as well as
+higher operating expenses during 2007. During 2007, our gross margin declined to 32.8% compared to 34.8% in 2006, and our operating margin also declined to (7.7%) compared to 9.5% in 2006. 
+Overall, we reported a net loss of $2.3 million and loss per share (diluted) of $0.24 per share for 2007. We also utilized cash during 2007 to fund $2.2
+million of capital expenditures, repurchased $1.5 million of our common stock (approximately 2.5% of our common stock outstanding), and we finished the year with $2.6 million of cash and no debt on our balance sheet as of December 31, 2007.
+Critical Accounting Policies and Estimates 
+Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared by us in accordance with accounting principles generally accepted in the United
+States of America. These principles require the use of estimates, judgments and assumptions. Such estimates and judgments are based upon historical experience and certain assumptions that are believed to be reasonable in the particular
+circumstances. Those judgments affect both balance sheet items and income statement categories. Our estimates include those related to revenue recognition, allowance for doubtful accounts, inventory obsolescence, the valuation of deferred tax assets
+and liabilities, goodwill impairment, warranty obligations, restructuring accruals, share-based compensation and contingent liabilities. We evaluate our assumptions on an ongoing basis by comparing actual results with our estimates. Actual results
+may differ from the original estimates. The following accounting policies are those that we believe to be most critical in the preparation of our financial statements. 
+Revenue Recognition —Our typical contracts include the sale of printers, which are sometimes accompanied by separately-priced extended warranty contracts. We also sell
+spare parts, consumables, and other repair services (sometimes pursuant to multi-year product maintenance contracts), which are not included in the original printer sale and are ordered by the customer as needed. We recognize revenue pursuant to the
+guidance within SAB 104, “Revenue Recognition.” Specifically, revenue is recognized when evidence of an arrangement exists, delivery (based on shipping terms which are generally FOB shipping point) has occurred, the selling price is fixed
+and determinable, and collectibility is reasonably assured. We provide for an estimate of product returns and price protection based on historical experience at the time of revenue recognition. 
+Revenue related to extended warranty and product maintenance contracts is recognized pursuant to FASB Technical Bulletin 90-1 (“FTB 90-1”),
+“Accounting for Separately Priced Extended Warranty and Product Maintenance Contracts.” Pursuant to FTB 90-1, revenue related to separately priced product maintenance contracts is deferred and recognized over the term of the maintenance
+period. We record deferred revenue for advance payments received from customers for maintenance contracts. 
+Our customers have the right to
+return products that do not function properly within a limited time after delivery. We monitor and track product returns and record a provision for the estimated future returns based on historical experience. Returns have historically been within
+expectations and the provisions established, but we cannot guarantee that we will continue to experience return rates consistent with historical patterns. 
+We offer some of our customer’s price protection as an incentive to carry inventory of our product. These price protection plans provide that if we lower prices, we will credit them for the price decrease on
+inventory 
+18 
+Table of Contents 
+they hold. Our customers typically carry limited amounts of inventory, and we infrequently lower prices on current products. As a result, the amounts paid
+under these plans have not been material. However, we cannot guarantee that this minimal level will continue. 
+We charge our customers for
+shipping and handling services. The amounts billed to customers are recorded as revenue when the product ships. Any costs incurred related to these services are included in cost of sales. 
+Accounts Receivable — We have standardized credit granting and review policies and procedures for all customer accounts,
+including: credit reviews of all new customer accounts; ongoing credit evaluations of current customers; credit limits and payment terms based on available credit information; and adjustments to credit limits based upon payment history and the
+customer’s current creditworthiness. We also provide an estimate of doubtful accounts based on historical experience and specific customer collection issues. Our allowance for doubtful accounts as of December 31, 2007 was $62,000, or 1.0%
+of outstanding accounts receivable, which we feel is appropriate considering the overall quality of our accounts receivable. While credit losses have historically been within expectations and the reserves established, we cannot guarantee that our
+credit loss experience will continue to be consistent with historical experience. As of December 31, 2007, we had accounts receivable balances due from three customers of approximately 13%, 12% and 10%, respectively, of the total balance due,
+and no other customer accounts receivable balance exceeded 10%. As of December 31, 2006, we had accounts receivable balances due from three customers of 14%, 14% and 10% of the total balance due, and no other customer accounts receivable
+balance exceeded 10%. 
+Inventory — Our inventories are stated at the lower of cost (principally standard cost,
+which approximates actual cost on a first-in, first-out basis) or market. We review market value based on historical usage and estimates of future demand. Assumptions are reviewed at least quarterly and adjustments are made, as necessary, to reflect
+changing market conditions. Based on these reviews, inventory write-downs are recorded, as necessary, to reflect estimated obsolescence, excess quantities and market value. Should circumstances change and we determine that additional inventory is
+subject to obsolescence, additional write-downs of inventory could result in a charge to income. As of December 31, 2007, our net inventory included a reserve of $2,850,000, or 24.7% of gross inventory, to write inventory down to lower of cost
+or market. 
+Goodwill— We test the impairment of goodwill each year or more frequently if events or changes in
+circumstances indicate that the carrying value may not be recoverable. We completed our last assessment as of December 31, 2007. Factors considered that may trigger an impairment review are: significant underperformance relative to expected
+historical or projected future operating results; significant changes in the manner of use of acquired assets or the strategy for the overall business; significant negative industry or economic trends; and significant decline in market
+capitalization relative to net book value. Goodwill amounted to $1,469,000 at December 31, 2007 and we have determined that no goodwill impairment has occurred. 
+Income Taxes — In preparing our consolidated financial statements, we are required to estimate income taxes in each of the jurisdictions in which we operate. This involves estimating the actual
+current tax exposure together with assessing temporary differences between the tax basis of certain assets and liabilities and their reported amounts in the financial statements, as well as net operating losses, tax credits and other carryforwards.
+These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheets. We then assess the likelihood that the deferred tax assets will be realized from future taxable income, and to the extent
+that we believe that realization is not likely, we establish a valuation allowance. 
+Significant judgment is required in determining the
+provision for income taxes and, in particular, any valuation allowance or tax reserves with respect to our deferred tax assets and uncertain tax positions. On a quarterly basis, we evaluate the recoverability of our deferred tax assets based upon
+historical results and forecasted taxable income over future years, and match this forecast against the basis differences, deductions available in future years and the limitations allowed for net operating loss and tax credit carryforwards to ensure
+that there is adequate support for the realization of the deferred tax assets. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation 
+19 
+Table of Contents 
+allowance or tax reserve, in the event we were to determine that we would not be able to realize all or part of our deferred tax assets in the future, an
+adjustment to the valuation allowance or tax reserves would be charged as a reduction to income in the period such determination was made. Likewise, should we determine that we would be able to realize future deferred tax assets in excess of its net
+recorded amount, an adjustment to the valuation allowance or tax reserves would increase net income in the period such determination was made. 
+In July 2006, the Financial Accounting Standards Board (the “FASB”) issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, (“FIN 48”). Among other
+things, FIN 48 prescribes a minimum recognition threshold that an income tax position must meet before it is recorded in the reporting entity’s financial statements. FIN 48 requires that the effects of such income tax positions be recognized
+only if, as of the balance sheet reporting date, it is “more likely than not” (i.e., more than a 50% likelihood) that the income tax position will be sustained based solely on its technical merits. When making this assessment, management
+must assume that the responsible taxing authority will examine the income tax position and have full knowledge of all relevant facts and other pertinent information. The new accounting guidance also clarifies the method of accruing for interest and
+penalties when there is a difference between the amount claimed, or expected to be claimed, on a company’s income tax returns and the benefits recognized in the financial statements. Additionally, FIN 48 requires significant new and expanded
+footnote disclosures in all annual periods. 
+We adopted FIN 48 with an effective date of January 1, 2007. Retrospective application of
+FIN 48 was prohibited. As a result of the implementation, we recognized a decrease to reserves for uncertain tax positions. This decrease was accounted for as a $318,000 adjustment to the beginning balance of retained earnings on the Condensed
+Consolidated Balance Sheet. 
+As of December 31, 2007, we recorded a net deferred tax asset of approximately $4,548,000 and a tax
+reserve of $125,000, primarily on portions of certain tax credits. We will need to recognize approximately $13.0 million in future taxable income in order to realize all of our deferred tax assets at December 31, 2007. In two of the last three
+years, we have had U.S. taxable losses and there is no assurance that we will generate future taxable income sufficient to realize all of our deferred tax assets. However, based on our current projection of future taxable income as of
+December 31, 2007, no valuation allowance is considered necessary. Should circumstances change and we determine that some or all of the deferred taxes would not be realized, a valuation allowance would be recorded, resulting in a charge to
+income in the period such determination is made. 
+Restructuring —In February 2001, we announced plans to
+establish a global engineering and manufacturing center at our Ithaca, NY facility. As part of this strategic decision, we undertook a plan to consolidate all manufacturing and engineering into our existing Ithaca, NY facility and close our
+Wallingford, CT manufacturing facility (the “Consolidation”). As of December 31, 2001, we successfully transferred substantially all our Wallingford operations to Ithaca, NY, with the exception of our corporate headquarters and a
+service center that remains in Connecticut. The closing of the Wallingford manufacturing facility resulted in the termination of employment of approximately 70 production, administrative and management employees. 
+In connection with the Consolidation of manufacturing facilities in 2001, we recorded significant accruals. Through December 31, 2007, we have
+recognized approximately $5.5 million of expenses associated with the Consolidation, including severance pay, stay bonuses, employee benefits, moving expenses, non-cancelable lease payments, and other costs. Management has made reasonable estimates
+of such costs and expenses. During November 2006, we executed an agreement, effective May 1, 2007, to terminate the lease agreement for our Wallingford, CT facility. As a result, we changed our estimate of the restructuring accrual and reversed
+approximately $479,000 of restructuring expenses in 2006. During the second quarter of 2007, we recorded an additional $12,000 of expense to finalize the termination of the lease agreement. As of September 30, 2007, all non-cancelable lease
+payments related to our Wallingford, CT facility have been made and we do not expect to incur any additional restructuring expenses related to the Consolidation. 
+20 
+Table of Contents 
+Warranty —We generally warrant our products for up to 24 months and record the
+estimated cost of such product warranties at the time the sale is recorded. Estimated warranty costs are based upon actual past experience of product repairs and the related estimated cost of labor and material to make the necessary repairs. If
+actual future product repair rates or the actual costs of material and labor differ from the estimates, adjustments to the accrued warranty liability and related warranty expense would be made. 
+Contingencies —We record an estimated liability related to contingencies based on our estimates of the probable outcomes pursuant to
+FAS 5. On a quarterly basis, we assess the potential liability related to pending litigation, audits and other contingencies and confirm or revise estimates and reserves as appropriate. If the actual liabilities are settled in an amount greater than
+those recorded on the balance sheet, a change to income would be recorded. 
+Share-Based Compensation — We calculate
+share-based compensation expense in accordance with SFAS 123(R), “Share-Based Payment (as amended)” using the Black-Scholes option-pricing model to calculate the fair value of share-based awards. The key assumptions for this valuation
+method include the expected term of an option grant, and the stock price volatility, risk-free interest rate, dividend yield, and forfeiture rate. The determination of these assumptions is based on past history and future expectations, and is
+subject to a high level of judgment. To the extent any of the assumptions were to change from year to year, the fair value of new option grants may vary significantly. 
+Results of Operations: Year ended December 31, 2007 compared to year ended December 31, 2006 
+Net Sales. Net sales, which include printer sales and sales of spare parts, consumables and repair services, by market for the years ended December 31, 2007 and 2006 were as follows: 
+(In thousands) 
+Year ended 
+December 31, 2007 
+Year ended 
+December 31, 2006 
+Change 
+$ 
+% 
+Banking and point of sale 
+$ 
+11,046 
+22.6 
+% 
+$ 
+16,858 
+26.2 
+% 
+$ 
+(5,812 
+) 
+(34.5 
+)% 
+Casino, gaming and lottery 
+25,338 
+52.0 
+% 
+34,677 
+53.9 
+% 
+(9,339 
+) 
+(26.9 
+)% 
+TransAct Services Group 
+12,382 
+25.4 
+% 
+12,793 
+19.9 
+% 
+(411 
+) 
+(3.2 
+)% 
+$ 
+48,766 
+100.0 
+% 
+$ 
+64,328 
+100.0 
+% 
+$ 
+(15,562 
+) 
+(24.2 
+)% 
+International* 
+$ 
+10,795 
+22.1 
+% 
+$ 
+14,138 
+22.0 
+% 
+$ 
+(3,343 
+) 
+(23.6 
+)% 
+* 
+International sales do not include sales of printers made to domestic distributors or other domestic customers who may in turn ship those printers to international destinations.
+Net sales for 2007 decreased $15,562,000, or 24%, from 2006 due to sales decreases in each of our three markets: banking and
+point of sale (“POS”) (a decrease of approximately $5,812,000, or 35%), casino, gaming and lottery (a decrease of approximately $9,339,000, or 27%), and TSG (a decrease of approximately $411,000, or 3%). Overall, international sales
+decreased by $3,343,000, or 24%, due largely to lower international shipments of our banking and POS and casino, gaming and lottery printers, and to a lesser extent, decreased TSG sales internationally. 
+Banking and point of sale : Revenue from the banking and POS market includes sales of printers used by banks, credit unions and other financial
+institutions to print and/or validate receipts at bank teller stations. Revenue from this market also includes sales of inkjet, thermal and impact printers used primarily by retailers in the restaurant (including fine dining, casual dining and fast
+food), hospitality, and specialty retail industries to print receipts for consumers, validate checks, or print on other inserted media. Sales of our banking and POS printers worldwide decreased approximately $5,812,000, or 35%, from 2006.
+21 
+Table of Contents 
+(In thousands) 
+Year ended 
+December 31, 2007 
+Year ended 
+December 31, 2006 
+Change 
+$ 
+% 
+Domestic 
+$ 
+9,775 
+88.5 
+% 
+$ 
+15,410 
+91.4 
+% 
+$ 
+(5,635 
+) 
+(36.6 
+)% 
+International 
+1,271 
+11.5 
+% 
+1,448 
+8.6 
+% 
+(177 
+) 
+(12.2 
+)% 
+$ 
+11,046 
+100.0 
+% 
+$ 
+16,858 
+100.0 
+% 
+$ 
+(5,812 
+) 
+(34.5 
+)% 
+Domestic banking and POS printer sales
+decreased to $9,775,000, representing a $5,635,000, or 37%, decrease from 2006, due largely to the non-recurrence of significant sales (approximately $2.6 million) of our Bankjet ® line of
+inkjet bank teller printers to two large banking customers that were made in 2006. Although we are currently pursuing additional banking opportunities, due to the project-oriented nature of these sales, we cannot predict if and when future sales may
+occur. In addition to lower banking printer sales, we also experienced a decline in sales from our line of POS thermal printers due primarily to a large hospitality customer that has slowed and deferred equipment purchases while it implements a new
+point-of-sale software system. We also experienced a decline in sales of our legacy line of POS impact printers as these printers are being replaced by our newer thermal and inkjet printers. We expect sales of our legacy impact printers to continue
+to decline during 2008, although at a slower rate than in 2007, as these printers continue to be replaced by our newer thermal and inkjet printers. Our sales into the banking and POS market over the last several years have been impacted by a shift
+in technology in the market from impact printing technology to thermal and inkjet printing technology. This change in technology has resulted in declining sales of our impact printers that were at higher average selling prices and increasing sales
+of our thermal and inkjet printers that are at lower average selling prices. 
+International banking and POS printer shipments decreased by
+approximately $177,000, or 12%, to $1,271,000, due primarily to lower sales to our international POS distributors in Latin America and Europe. 
+Casino, gaming and lottery : Revenue from the casino, gaming and lottery market includes sales of printers used in slot machines, video lottery terminals (“VLTs”) and other gaming machines that print tickets or receipts
+instead of issuing coins (“ticket-in, ticket-out” or “TITO”) at casinos, racetracks (“racinos”) and other gaming venues worldwide. Revenue from this market also includes sales of lottery printers to Lottomatica’s
+GTECH Corporation (“GTECH”), the world’s largest provider of lottery terminals, for various lottery applications. Sales of our casino, gaming and lottery printers decreased by $9,339,000, or 27%, from 2006, primarily due to lower
+sales of lottery printers to GTECH, both domestically and internationally, and lower casino and other gaming printer sales, both domestically and internationally. 
+(In thousands) 
+Year ended 
+December 31, 2007 
+Year ended 
+December 31, 2006 
+Change 
+$ 
+% 
+Domestic 
+$ 
+18,095 
+71.4 
+% 
+$ 
+25,198 
+72.7 
+% 
+$ 
+(7,103 
+) 
+(28.2 
+)% 
+International 
+7,243 
+28.6 
+% 
+9,479 
+27.3 
+% 
+(2,236 
+) 
+(23.6 
+)% 
+$ 
+25,338 
+100.0 
+% 
+$ 
+34,677 
+100.0 
+% 
+$ 
+(9,339 
+) 
+(26.9 
+)% 
+Domestic sales of our casino, gaming and lottery printers decreased by $7,103,000, or 28%, due
+primarily to a decrease in domestic sales of lottery printers to GTECH and, to a lesser extent, a decrease in sales of our thermal casino printers due to continued softness in the domestic casino market during 2007 as compared to 2006. 
+Domestic and international printer sales to GTECH, which include thermal on-line and other lottery printers, decreased by approximately $5,622,000, or
+51%, in 2007 compared to 2006, with domestic sales declining approximately $5,053,000 and international sales declining approximately $569,000. Our sales to GTECH are directly dependent on the timing and number of new and upgraded lottery terminal
+installations GTECH performs, and as a result, may fluctuate significantly quarter-to-quarter. Our sales to GTECH are not indicative of GTECH’s overall business or revenue. We currently have approximately $8.6 million of lottery printers on
+order for shipment in 2008. 
+22 
+Table of Contents 
+International casino, gaming and lottery printer sales decreased $2,236,000, or 24%, to $7,243,000 in
+2007 compared to 2006. Such sales represented 29% and 27% of total sales into our casino, gaming and lottery market during 2007 and 2006, respectively. This decrease was primarily due to lower international gaming printer sales, primarily in
+Australia due to a slower than anticipated conversion to ticket-in, ticket-out slot machines in that region, partially offset by higher sales in Europe and Asia as well as lower international lottery printer sales to GTECH. 
+TransAct Services Group : Revenue from the TransAct Services Group (“TSG”) includes sales of consumable products (inkjet cartridges,
+ribbons and receipt paper), replacement parts, maintenance and repair services, refurbished printers, and shipping and handling charges. Sales from TSG decreased by approximately $411,000, or 3%. 
+(In thousands) 
+Year ended 
+December 31, 2007 
+Year ended 
+December 31, 2006 
+Change 
+$ 
+% 
+Domestic 
+$ 
+10,101 
+81.6 
+% 
+$ 
+9,582 
+74.9 
+% 
+$ 
+519 
+5.4 
+% 
+International 
+2,281 
+18.4 
+% 
+3,211 
+25.1 
+% 
+(930 
+) 
+(29.0 
+)% 
+$ 
+12,382 
+100.0 
+% 
+$ 
+12,793 
+100.0 
+% 
+$ 
+(411 
+) 
+(3.2 
+)% 
+Domestic TSG revenue increased by approximately $519,000, or 5%, to $10,101,000, largely due to
+increased sales of consumable products, including higher sales of inkjet cartridges as we continue to benefit from the agreement we signed in August 2006 to supply inkjet cartridges to a leading national office supply chain. The increase in domestic
+revenue was also due, to a lesser extent, to maintenance and repair services performed as we continue to win new service contracts and expand existing contracts for our service products including extended warranty contracts and our 24-hour
+guaranteed replacement product service called TransAct Xpress™. These increases were largely offset by a decline in the sale of refurbished printers and replacement parts for certain legacy printers, as the installed base of these legacy
+printers in the market continues to decline. 
+Internationally, TSG sales decreased by approximately $930,000, or 29%, to $2,281,000, due
+largely to a decrease in maintenance and repair services revenue from a service contract with a single customer in the United Kingdom, as well as a decline in sales of consumable products and replacement parts. The primary operations of our United
+Kingdom subsidiary, a European sales and service center, relate to revenue generated from a service contract with a single customer in the United Kingdom. The service contract, which represented a substantial portion of our U.K. subsidiary’s
+revenue, was renewed in April 2007 through November 2007 at a lower minimum sales value compared to the minimum sales value of the prior year’s contract. The contract ended in November 2007 and was not renewed, as the customer has begun to
+replace our printers with newer technology that we were unable to provide. As a result, we expect international TSG revenue to be lower in 2008 compared to 2007. 
+Gross Profit. Gross profit information is summarized below (in thousands, except percentages): 
+December 31, 
+Percent 
+Change 
+Percent of 
+Total Sales - 2007 
+Percent of 
+Total Sales - 2006 
+2007 
+2006 
+Year ended 
+$ 
+15,996 
+$ 
+22,365 
+28.4 
+% 
+32.8 
+% 
+34.8 
+% 
+Gross profit is measured as revenue less cost of goods sold. Cost of goods sold includes primarily
+the cost of all raw materials and component parts, direct labor, and the associated manufacturing overhead expenses. Gross profit and gross margin decreased due primarily to a lower volume of sales and a less favorable sales mix in 2007 compared to
+2006, somewhat offset by lower component part and labor costs resulting from our initiatives to increasingly move production to Asia. In addition, gross profit for 2007 was negatively impacted by an incremental inventory reserve charge of
+approximately $528,000, or 1.1% of net sales, specifically related to certain obsolete electronic components and certain discontinued printer products. 
+23 
+Table of Contents 
+Engineering and Product Development. Engineering and product development information is
+summarized below (in thousands, except percentages): 
+December 31, 
+Percent 
+Change 
+Percent of 
+Total Sales - 2007 
+Percent of 
+Total Sales - 2006 
+2007 
+2006 
+Year ended 
+$ 
+3,129 
+$ 
+2,824 
+10.8 
+% 
+6.4 
+% 
+4.4 
+% 
+Engineering, design and product development expenses primarily include salary and payroll related
+expenses for our engineering staff, depreciation and design expenses (including prototype printer expenses, outside design and testing services and supplies). Such expenses increased as we incurred increased outside design, prototype and development
+expenses associated largely with new product development for the banking market, as well as increased professional consulting related expenses. These increases were somewhat offset by lower expenses related to engineering staffing and other employee
+compensation expenses. Engineering and product development expenses increased as a percentage of net sales due primarily to lower sales volume in proportion to a higher level of expenses in the 2007 compared to 2006. 
+Selling and Marketing. Selling and marketing information is summarized below (in thousands, except percentages): 
+December 31, 
+Percent 
+Change 
+Percent of 
+Total Sales - 2007 
+Percent of 
+Total Sales - 2006 
+2007 
+2006 
+Year ended 
+$ 
+6,708 
+$ 
+6,892 
+(2.7 
+)% 
+13.8 
+% 
+10.7 
+% 
+Selling and marketing expenses primarily include salaries and payroll related expenses for our
+sales and marketing staff, sales commissions, travel expenses, expenses associated with the lease of sales offices, advertising, trade show expenses and other promotional marketing expenses. Selling and marketing expenses decreased as we incurred
+lower employee sales commission expenses based on lower sales volume, lower demonstration printer expenses, and the non-recurrence of expenses incurred in 2006 related to the redesign of our website. These decreases were partly offset by increased
+trade show, advertising and other promotional marketing expenses compared with 2006. Selling and marketing expenses increased as a percentage of net sales due primarily to lower sales volume in proportion to a lower level of expenses in 2007
+compared to 2006. 
+General and Administrative. General and administrative information is summarized below (in thousands,
+except percentages): 
+December 31, 
+Percent 
+Change 
+Percent of 
+Total Sales - 2007 
+Percent of 
+Total Sales - 2006 
+2007 
+2006 
+Year ended 
+$ 
+6,995 
+$ 
+6,925 
+1.0 
+% 
+14.3 
+% 
+10.8 
+% 
+General and administrative expenses primarily include: salaries and payroll related expenses for
+our executive, accounting, human resource and information technology staff, expenses for our corporate headquarters, professional and legal expenses, telecommunication expenses, and other expenses related to being a publicly-traded company. General
+and administrative expenses increased due primarily to (1) higher legal expense related to the expansion of our international patent portfolio, (2) higher depreciation and amortization expense associated with the completion of the
+implementation of new Oracle software at the beginning of 2007 and the purchase of office furniture and leasehold improvements for our new corporate headquarters in Hamden, CT, and (3) increased rent and facility-related expenses associated
+with our new corporate headquarters. These increases were somewhat offset by a decrease in incentive compensation expenses and acquisition-related expenses, as we incurred approximately $220,000 of legal and consulting services related to a
+potential acquisition in the second quarter of 2006 that was not consummated. These expenses did not recur during 2007. General and administrative expenses for 2007 also included a charge of approximately $187,000 for severance 
+24 
+Table of Contents 
+resulting from the termination of certain employees as part of cost reduction actions. We expect to realize cost savings of approximately $600,000, mostly as
+a reduction in selling and marketing expenses, in 2008 as a result of these actions. General and administrative expenses increased as a percentage of net sales due primarily to lower sales volume in proportion to a higher level of expenses in 2007
+compared to 2006. 
+Legal Fees associated with lawsuit. During 2007, we incurred approximately $2,907,000 of legal fees
+related to our lawsuit with FutureLogic, Inc. compared to approximately $115,000 in 2006. The substantial increase was due primarily to our patent infringement counterclaim against FutureLogic, Inc. We expect to incur $1,000,000 to $1,500,000 of
+legal fees per quarter related to the FutureLogic lawsuit through the expedited trial date of August 2008. See “Item 3—Legal Proceedings” in Part I of this annual report for more information. 
+Business Consolidation and Restructuring. During the fourth quarter of 2006, we executed an agreement, effective May 1, 2007, to
+terminate the lease agreement for our existing corporate headquarters and eastern region service center facility located in Wallingford, CT (the “Release Agreement”). Prior to the execution of the Release Agreement, we accrued for the
+remaining non-cancelable lease payments and other related costs for this facility through the expiration date of the lease (March 31, 2008). As a result of the Release Agreement and the early termination of the old lease, we were released from the
+legal obligation for lease payments after May 1, 2007 and, accordingly, we reversed $479,000 of previously accrued expenses related to the Consolidation in the fourth quarter of 2006. During the second quarter of 2007, we recorded an additional
+$12,000 in expense to finalize the termination of the lease agreement for our prior corporate headquarters and eastern region service center facility located in Wallingford, CT. We do not expect to incur any additional restructuring expenses related
+to the Consolidation. 
+Operating Income (Loss). Operating income (loss) information is summarized below (in thousands, except
+percentages): 
+December 31, 
+Percent 
+Change 
+Percent of 
+Total Sales - 2007 
+Percent of 
+Total Sales - 2006 
+2007 
+2006 
+Year ended 
+$ 
+(3,755 
+) 
+$ 
+6,088 
+(161.7 
+)% 
+(7.7 
+)% 
+9.5 
+% 
+During 2007, the substantial decrease in our operating income and operating margin was due largely
+to lower sales and the resulting lower gross profit and higher operating expenses (largely legal expenses of approximately $2.9 million related to the FutureLogic lawsuit) in 2007 compared to that of 2006. 
+Interest. We recorded net interest income of $76,000 in 2007 compared to net interest income of $104,000 in 2006. The decrease in our net
+interest income was largely due to a lower average cash balance being lower in 2007 as compared to 2006. See “Liquidity and Capital Resources” below for more information. 
+Other Income (Expense). We recorded other income of $21,000 in 2007 due primarily to gains recorded from the sale of certain assets from
+our prior corporate headquarters and Eastern Regional Service Center in Wallingford, CT, partially offset by transaction exchange losses recorded by our UK subsidiary resulting from the weakening of the U.S. dollar against the British pound. We
+recorded other expense of $159,000 in 2006 due primarily to transaction exchange losses recorded by our UK subsidiary resulting from the weakening of the U.S. dollar against the British pound during that period. 
+Income Taxes. We recorded an income tax benefit of $1,384,000, at an effective rate of 37.8% during 2007 compared to an income tax
+provision of $2,117,000, at an effective rate of 35.1% in 2006. The effective tax rate for 2007 increased compared to 2006, due largely to an increase in the recognition of certain deferred tax credits. We expect our annual effective tax rate for
+2008 to be approximately 36%. 
+Net Income (Loss) . We reported a net loss in 2007 of $2,274,000, or ($0.24) per diluted
+share compared to net income of $3,916,000, or $0.40 per diluted share in 2006. 
+25 
+Table of Contents 
+Results of Operations: Year ended December 31, 2006 compared to year ended December 31, 2005 
+Net Sales. Net sales, which include printer sales and sales of spare parts, consumables and repair services, by market for the years
+ended December 31, 2006 and 2005 were as follows: 
+(In thousands) 
+Year ended 
+December 31, 2006 
+Year ended 
+December 31, 2005 
+Change 
+$ 
+% 
+Banking and point of sale 
+$ 
+16,858 
+26.2 
+% 
+$ 
+16,410 
+32.1 
+% 
+$ 
+448 
+2.7 
+% 
+Casino, gaming and lottery 
+34,677 
+53.9 
+% 
+23,634 
+46.3 
+% 
+11,043 
+46.7 
+% 
+TransAct Services Group 
+12,793 
+19.9 
+% 
+11,047 
+21.6 
+% 
+1,746 
+15.8 
+% 
+$ 
+64,328 
+100.0 
+% 
+$ 
+51,091 
+100.0 
+% 
+$ 
+13,237 
+25.9 
+% 
+International 
+$ 
+14,138 
+22.0 
+% 
+$ 
+12,318 
+24.1 
+% 
+$ 
+1,820 
+14.8 
+% 
+* 
+International sales do not include sales of printers made to domestic distributors or other domestic customers who in turn ship those printers to international destinations.
+Net sales for 2006 increased $13,237,000, or 26%, from 2005 due to significantly higher printer shipments into our casino,
+gaming and lottery market, as well as increased sales from our TransAct Services Group and a slight increase in printer shipments into our POS and banking market. Overall, international sales increased by $1,820,000, or 15%, due largely to higher
+international shipments of our casino and gaming printers, primarily to Australia, somewhat offset by lower POS printer shipments through our international distributors. 
+Banking and point of sale : Sales of our banking and POS printers worldwide increased approximately $448,000, or 3%, from 2005. 
+(In thousands) 
+Year ended 
+December 31, 2006 
+Year ended 
+December 31, 2005 
+Change 
+$ 
+% 
+Domestic 
+$ 
+15,410 
+91.4 
+% 
+$ 
+14,188 
+86.5 
+% 
+$ 
+1,222 
+8.6 
+% 
+International 
+1,448 
+8.6 
+% 
+2,222 
+13.5 
+% 
+(774 
+) 
+(34.8 
+)% 
+$ 
+16,858 
+100.0 
+% 
+$ 
+16,410 
+100.0 
+% 
+$ 
+448 
+2.7 
+% 
+Domestic banking and POS printer sales
+increased to $15,410,000, representing a $1,222,000, or 9%, increase from 2005, due primarily to higher sales of (1) our line of thermal printers including our new thermal printer launched in 2005 exclusively for POS distributors and
+(2) our Bankjet ® line of inkjet printers to existing banking customers. Although we are currently pursuing additional banking opportunities, due to the project-oriented nature of these
+sales, we cannot predict if and when future sales may occur. These increases were offset by lower sales of our legacy line of POS impact printers, as expected, as these printers are being replaced by our newer thermal and inkjet printers. Our sales
+into the POS and banking market over the last several years have been impacted by a shift in technology in the market from impact printing technology to thermal and inkjet printing technology. This change in technology has resulted in declining
+sales of our impact printers that were at higher average selling prices and increasing sales of our thermal and inkjet printers that are at lower average selling prices. And, although our unit sales volume has increased over the last several years,
+the revenue generated from those sales have not increased to the same extent due to lower average selling prices of thermal and inkjet printers as compared to impact printers. 
+International POS and banking printer sales decreased by approximately $774,000, or 35%, due
+primarily to lower sales of our legacy impact printers to our international POS distributors in Europe and Latin America, somewhat offset by higher sales of our iTHERM ® 280 thermal printer
+to our distributors in Latin America. 
+26 
+Table of Contents 
+Casino, gaming and lottery : Sales of our casino, gaming and lottery printers increased by
+$11,043,000, or 47%, from 2005, primarily due to an increase in sales of our casino and other gaming printers, both domestically and internationally, as well as higher sales of lottery printers to GTECH. 
+(In thousands) 
+Year ended 
+December 31, 2006 
+Year ended 
+December 31, 2005 
+Change 
+$ 
+% 
+Domestic 
+$ 
+25,198 
+72.7 
+% 
+$ 
+16,271 
+68.8 
+% 
+$ 
+8,927 
+54.9 
+% 
+International 
+9,479 
+27.3 
+% 
+7,363 
+31.2 
+% 
+2,116 
+28.7 
+% 
+$ 
+34,677 
+100.0 
+% 
+$ 
+23,634 
+100.0 
+% 
+$ 
+11,043 
+46.7 
+% 
+Domestic sales of our casino, gaming and lottery printers increased by $8,927,000, or 55%, from
+2005 due largely to a significant increase in both sales of lottery printers to GTECH and thermal casino printers. Lottery printer sales to GTECH (excluding any international sales), which include thermal on-line lottery and other lottery printers,
+increased by approximately $4,512,000, or 77%, in 2006 compared to 2005. Our sales to GTECH are directly dependent on the timing and number of new and upgraded lottery terminal installations GTECH performs, and as a result, may fluctuate
+significantly between quarters and years. Our sales to GTECH are not indicative of GTECH’s overall business or revenue. 
+Domestic
+casino and gaming printer sales increased by approximately $4,415,000 driven primarily by increased market share as we benefited from our sales relationship with JCM American Corporation. 
+International casino, gaming and lottery printer sales increased by approximately $2,116,000, or 29%, to $9,479,000 in 2006 compared to 2005. Such sales
+represented 27% and 31% of total sales into our casino, gaming and lottery market during 2006 and 2005, respectively. This increase was led primarily by continued growth in international casino and gaming printer sales, primarily in Australia and
+Asia, as these international markets continued to expand ticket and receipt printing in slot machines and other gaming machines. In addition, we experienced higher casino and gaming printer sales in Canada, and slightly lower international lottery
+printer sales to GTECH. 
+TransAct Services Group : Sales by TSG increased by approximately $1,746,000, or 16%. 
+(In thousands) 
+Year ended 
+December 31, 2006 
+Year ended 
+December 31, 2005 
+Change 
+$ 
+% 
+Domestic 
+$ 
+9,582 
+74.9 
+% 
+$ 
+8,314 
+75.3 
+% 
+$ 
+1,268 
+15.3 
+% 
+International 
+3,211 
+25.1 
+% 
+2,733 
+24.7 
+% 
+478 
+17.5 
+% 
+$ 
+12,793 
+100.0 
+% 
+$ 
+11,047 
+100.0 
+% 
+$ 
+1,746 
+15.8 
+% 
+Domestic TSG revenue increased by approximately $1,268,000 or 15%, to $9,582,000 due to revenue
+generated from service contracts, as well as increased sales of refurbished printers and consumable products. These increases were somewhat offset by a decline in the sale of replacement parts for certain legacy impact printers, as the installed
+base of these legacy printers in the market declined. International TSG sales increased by approximately $478,000, or 18%, to $3,211,000, due largely to an increase in maintenance and repair services revenue from a service contract from a single
+customer in the United Kingdom, as well as increased sales of consumable products. 
+Gross Profit. Gross profit information is
+summarized below (in thousands, except percentages): 
+December 31, 
+Percent 
+Change 
+Percent of 
+Total Sales - 2006 
+Percent of 
+Total Sales - 2005 
+2006 
+2005 
+Year ended 
+$ 
+22,365 
+$ 
+15,590 
+43.5 
+% 
+34.8 
+% 
+30.5 
+% 
+27 
+Table of Contents 
+Gross profit and gross margin increased due
+primarily to a higher volume of sales and a more favorable sales mix in 2006 compared to 2005, as well as lower product costs resulting from increased sourcing of components for our printers in Asia. In addition, gross profit for 2005 was negatively
+impacted by a charge of $600,000, or 1.2% of net sales, related to the write-down of inventory and accrual for estimated settlement/cancellation payments for non-cancelable purchase orders for certain excess inventory components related primarily to
+our Model 850 casino ticket printer. The charge was largely the result of the faster than expected acceptance of our new Epic 950 ® casino ticket printer, which replaced our Model 850 casino
+ticket printer. 
+Engineering and Product Development. Engineering and product development information is summarized below (in
+thousands, except percentages): 
+December 31, 
+Percent 
+Change 
+Percent of 
+Total Sales - 2006 
+Percent of 
+Total Sales - 2005 
+2006 
+2005 
+Year ended 
+$ 
+2,824 
+$ 
+2,726 
+3.6 
+% 
+4.4 
+% 
+5.3 
+% 
+Engineering, design and product development
+expenses increased as we incurred higher expenses related to increased engineering staffing and other employee compensation expenses and product development expenses related to our new line of off-premise gaming receipt printers, which were largely
+offset by a decrease in costs associated with International Game Technology’s (“IGT”) integration and attainment of jurisdictional approvals for our Epic 950 ® thermal casino
+printer on all of IGT’s slot platforms worldwide (the “IGT Integration”). We incurred approximately $150,000 of IGT Integration costs in 2005 that did not recur in 2006. Engineering and product development expenses decreased as a
+percentage of net sales primarily due to higher sales volume in 2006 compared to 2005. 
+Selling and Marketing. Selling and
+marketing information is summarized below (in thousands, except percentages): 
+December 31, 
+Percent 
+Change 
+Percent of 
+Total Sales - 2006 
+Percent of 
+Total Sales - 2005 
+2006 
+2005 
+Year ended 
+$ 
+6,892 
+$ 
+6,319 
+9.1 
+% 
+10.7 
+% 
+12.4 
+% 
+Selling and marketing expenses increased as we incurred the full year effect in 2006 of expenses
+related to the addition of new corporate marketing staff, and new sales staff for our three strategic sales units, including those for our service centers in Las Vegas, NV and Wallingford, CT, made throughout 2005. We also incurred increased
+expenses related to demonstration printers and the redesign of our website that we re-launched in August 2006. These increases were somewhat offset by decreased travel, trade show, advertising, consulting and other promotional marketing expenses
+compared with 2005. Selling and marketing expenses decreased as a percentage of net sales due primarily to higher sales volume in proportion to a higher level of expenses in 2006 compared to 2005. 
+General and Administrative. General and administrative information is summarized below (in thousands, except percentages): 
+December 31, 
+Percent 
+Change 
+Percent of 
+Total Sales - 2006 
+Percent of 
+Total Sales - 2005 
+2006 
+2005 
+Year ended 
+$ 
+6,925 
+$ 
+6,321 
+9.6 
+% 
+10.8 
+% 
+12.4 
+% 
+General and administrative expenses increased due primarily to (1) the full year effect in
+2006 of compensation related expenses associated with the relocation of our accounting department from Ithaca, NY to Wallingford, CT during 2005, (2) expenses associated with the Company’s Oracle implementation including data conversion
+expenses, temporary help, travel and compensation related expenses, (3) approximately $220,000 of legal and consulting services related to a potential acquisition that was not consummated, (4) higher incentive 
+28 
+Table of Contents 
+compensation expenses based on the Company’s improved performance in 2006 and (5) increased telecommunications expenses associated with the
+implementation of our new company-wide phone system. These increases were partially offset by lower travel expenses and a decrease in recruiting costs incurred during 2005 related to the relocation of our accounting department and the increased
+staffing of the TSG sales unit that did not recur in 2006. General and administrative expenses decreased as a percentage of net sales due primarily to increased sales in proportion to higher expenses in 2006 as compared to 2005. 
+Business Consolidation and Restructuring. During the fourth quarter of 2006, we executed an agreement, effective May 1,
+2007, to terminate the lease agreement for our existing corporate headquarters and eastern region service center facility located in Wallingford, CT (the “Release Agreement”). Prior to the execution of the Release Agreement, we accrued for
+the remaining non-cancelable lease payments and other related costs for this facility through the expiration date of the lease (March 31, 2008). As a result of the Release Agreement and the early termination of the old lease, we were released from
+the legal obligation for lease payments after May 1, 2007 and, accordingly, we reversed $479,000 of previously accrued expenses related to the Consolidation in the fourth quarter of 2006. 
+Operating Income. Operating income (loss) information is summarized below (in thousands, except percentages): 
+December 31, 
+Percent 
+Change 
+Percent of 
+Total Sales - 2006 
+Percent of 
+Total Sales - 2005 
+2006 
+2005 
+Year ended 
+$ 
+6,088 
+$ 
+224 
+2,617.9 
+% 
+9.5 
+% 
+0.4 
+% 
+During 2006, the substantial increase in our operating income and operating margin was due largely
+to the operating leverage we experienced in 2006 resulting from higher sales and gross profit, somewhat offset by higher operating expenses, compared to that of 2005. 
+Interest. We recorded net interest income of $104,000 in 2006 compared to net interest income of $73,000 in 2005. Even though our average cash balance was lower in 2006 compared to 2005 due largely to
+the repurchase of common stock under our stock repurchase program, our net interest income still increased as we substantially improved our overall rate of return on our invested cash balance. 
+Other Expense. We recorded other expense of $159,000 in 2006 due primarily to transaction exchange losses recorded by our UK subsidiary in
+2006 due to the weakening of the U.S. dollar against the British pound. We recorded other income of $32,000 in 2005 due primarily to transaction exchange gains due to the strengthening of the U.S. dollar against the British pound in 2005.
+Income Taxes. We recorded an income tax provision of $2,117,000, at an effective rate of 35.1% during 2006 compared to an
+income tax benefit of $48,000, at an effective rate of 14.6% in 2005. During 2005, we recorded an income tax benefit, as compared to an income tax provision in 2006, as we recognized certain discrete tax benefits and tax credits and reversed certain
+valuation allowances during 2005, combined with an unusually low level of income before taxes. 
+Net Income. We reported net
+income in 2006 of $3,916,000, or $0.40 per diluted share compared to net income of $377,000, or $0.04 per diluted share in 2005. 
+Liquidity and Capital
+Resources 
+During 2007, our cash flows reflected the investment in the build-out of our new, leased corporate headquarters in Hamden,
+CT, the continued repurchase of our common stock, and the results of lower sales volume compared to 2006. However, even with the repurchase of approximately $1,503,000 of our common stock and capital expenditures of approximately $2,166,000 during
+2007, our cash balance only decreased by $875,000 from December 31, 2006. We ended 2007 with approximately $2.6 million in cash and cash equivalents and no debt outstanding. 
+29 
+Table of Contents 
+Operating activities : The following significant factors primarily affected our cash provided by
+operations of $2,604,000 in 2007 as compared to $3,300,000 in 2006. 
+During 2007: 
+• 
+We reported a net loss of $2,274,000. 
+• 
+We recorded depreciation, amortization and non-cash compensation expense of $2,559,000. 
+• 
+Deferred taxes increased by $1,839,000 due to our net operating loss during 2007. 
+• 
+Accounts receivable decreased by $5,294,000 due to lower sales during 2007 and improved collection efforts. 
+• 
+Inventory increased by $2,053,000 due to an increase in consignment inventory programs with certain of our customers, higher stocking levels resulting from our
+initiatives to move increased production to Asia, and expected increased sales demand in the first quarter of 2008. 
+• 
+Accounts payable increased by $691,000 due to higher inventory purchases and the timing of payments during the year. 
+• 
+Accrued liabilities decreased by $575,000 due to the following: (1) lower compensation related accruals and (2) a lower income tax accrual based on the
+decreased level of income before taxes. These decreases were somewhat offset by increases in accrued legal fees, primarily related to our lawsuit with FutureLogic, Inc. and deferred rent related to the lease of our new corporate headquarters in
+Hamden, CT. 
+• 
+As of December 31, 2007 and December 31, 2006, our restructuring accrual amounted to $0 and $315,000, respectively. The decrease of $315,000 is related
+largely to final payments made on our Wallingford lease obligation. 
+During 2006: 
+• 
+We reported net income of $3,916,000. 
+• 
+We recorded depreciation, amortization and non-cash compensation expense of $2,149,000. 
+• 
+Accounts receivable increased by $3,063,000 due primarily to a higher volume of sales in the fourth quarter of 2006 compared to the fourth quarter of 2005.
+• 
+Inventories increased by $1,797,000 and accounts payable increased by $1,138,000 due to higher inventory purchases and inventory levels related to higher sales
+volume in the fourth quarter of 2006 compared to the fourth quarter of 2005. 
+• 
+Accrued liabilities and other liabilities increased by $1,423,000 due to increases in: (1) compensation related accruals, (2) income tax accrual based on
+the increased level of income before taxes, (3) deferred revenue balances related to increased sales of extended service contracts, (4) accruals for legal fees and (5) consulting services accruals related to our Oracle software
+implementation. These increases were partly offset by a decrease in warranty accruals. 
+• 
+Accrued restructuring expenses decreased by $878,000 due to $399,000 of payments made on our Wallingford, CT lease obligation and the reversal of $479,000 of
+expense related to the execution of an agreement effective May 1, 2007 to terminate the lease agreement for our existing corporate headquarters located in Wallingford, CT. 
+Investing activities: Our capital expenditures were approximately $2,166,000 and $2,891,000 in 2007 and 2006, respectively. Expenditures in 2007
+included approximately $1,248,000 for the purchase of leasehold improvements and office furniture for our new corporate headquarters in Hamden, CT, approximately $135,000 for the purchase of leasehold improvements and office furniture for our new
+Eastern Region service center in 
+30 
+Table of Contents 
+New Britain, CT, approximately $338,000 for the purchase of new computer hardware and software including outside consulting costs related to our Oracle
+software implementation, and the remaining amount primarily for the purchase of new product tooling. 
+Financing activities: We used
+approximately $1,360,000 for financing activities during 2007, largely due to the repurchase of Company stock of approximately $1,503,000. The repurchases were offset by proceeds from stock option exercises of approximately $149,000 during 2007.
+During 2006, we used approximately $1,684,000 from financing activities, largely due to the repurchase of Company stock of approximately $2,625,000, partly offset by proceeds and tax benefits from stock option exercises of approximately $1,029,000.
+We also used approximately $88,000 of cash related to deferred financing costs for the new revolving credit facility we entered into with TD Banknorth during November 2006. 
+Working Capital 
+Our working capital decreased to $11,234,000 at December 31, 2007 from
+$16,643,000 at December 31, 2006. Our current ratio also decreased to 2.4 to 1 at December 31, 2007, compared to 3.0 to 1 at December 31, 2006. The decrease in our working capital and current ratio was largely due to lower accounts
+receivable balances resulting from decreased sales and improved collection efforts and higher accounts payable resulting from higher inventory purchases and the timing of payments, somewhat offset by higher inventory levels and lower accrued
+liabilities. 
+Deferred Taxes 
+As of
+December 31, 2007, we had a net deferred tax asset of approximately $4,548,000. In order to utilize this deferred tax asset, we will need to generate approximately $13.0 million of taxable income in future years. In two of the last three years,
+we have had U.S. taxable losses and there is no assurance that we will generate future taxable income sufficient to realize all of our deferred tax assets. However, based on our current projection of future taxable income as of December 31,
+2007, we believe that it is more likely than not that the existing net deferred tax asset will be realized. However, if our future projections of taxable income are less than expected, we may need to establish a valuation allowance for all or a
+portion of our net deferred tax asset, which may have a material adverse effect on our results of operations and financial condition. 
+Credit Facility
+and Borrowings 
+On November 28, 2006, we signed a, five-year $20 million credit facility (the “TD Banknorth Credit
+Facility”) with TD Banknorth, N.A. (“TD Banknorth”). The credit facility provides for a $20 million revolving credit line expiring on November 28, 2011. The TD Banknorth Credit facility replaces a previous $11.5 million credit
+facility also with TD Banknorth. Our TD Banknorth Credit Facility provides substantially improved terms compared to our prior credit facility. Borrowings under the revolving credit line bear a floating rate of interest at the prime rate minus one
+percent and are secured by a lien on all of our assets. We also pay a fee of 0.25% on unused borrowings under the revolving credit line. The total deferred financing costs relating to expenses incurred to complete the TD Banknorth Credit Facility
+was $94,000. The TD Banknorth Credit Facility imposes certain quarterly financial covenants on us and restricts the payment of dividends on our common stock and the creation of other liens. On November 7, 2007, we amended the TD Banknorth
+Credit Facility to revise a financial covenant effective September 30, 2007. 
+As of December 31, 2007, we had no balances
+outstanding on the revolving credit line. Undrawn commitments under the TD Banknorth Credit facility were approximately $20,000,000 at December 31, 2007. 
+Stock Repurchase Program 
+On March 25, 2005, our Board of Directors approved a stock repurchase program (“the
+Stock Repurchase Program”). Under the Stock Repurchase Program, we were authorized to repurchase up to $10 million of our 
+31 
+Table of Contents 
+outstanding shares of common stock from time to time in the open market over a three year period ending on March 25, 2008, depending on market
+conditions, share price and other factors. 
+On November 1, 2007, our Board of Directors approved an increase in our stock repurchase
+authorization under the Stock Repurchase Program to $15 million from $10 million. In addition, the Board approved a two-year extension of the Stock Repurchase Program to March 31, 2010. During 2007, we repurchased a total of 232,700 shares of
+common stock for approximately $1,503,000 at an average price of $6.46 per share. As of December 31, 2007, we have repurchased a total of 1,034,000 shares of common stock for approximately $7,995,000, at an average price of $7.73 per share,
+since the inception of the Stock Repurchase Program. 
+Shareholders’ Equity 
+Shareholders’ equity decreased by $2,682,000 to $21,608,000 at December 31, 2007 from $24,290,000 at December 31, 2006. The decrease was
+primarily due to a net loss of $2,274,000, treasury stock purchases of 232,700 shares of common stock for approximately $1,503,000, and a decrease in additional paid-in capital of approximately $97,000 resulting from a tax charge resulting from
+employee stock transactions. These decreases were offset by proceeds of approximately $149,000 from the issuance of approximately 33,000 shares of common stock from stock option exercises, compensation expense related to stock options and restricted
+stock of $715,000, and a cumulative adjustment to retained earnings due to the implementation of FIN 48 in the amount of $318,000. 
+Consolidation
+Expenses 
+During 2001 through 2007, we recognized approximately $5.5 million of business consolidation, restructuring and related
+expenses as a result of the Consolidation. These expenses primarily included employee severance and termination related expenses, facility closure and consolidation expenses (including moving expenses, estimated non-cancelable lease payments and
+other costs) and accelerated depreciation and asset disposal losses on certain leasehold improvements and other fixed assets. 
+In November
+2006, we executed an agreement effective May 1, 2007 to terminate the lease agreement for our Wallingford, CT facility (the “Release Agreement”). Prior to the execution of the Release Agreement, we accrued the remaining non-cancelable
+lease payments and other related costs for the unused portion of this facility through the expiration date of the lease (March 31, 2008). As a result of the Release Agreement and the early termination of the lease, we were released from the legal
+obligation to make lease payments after May 1, 2007 and, accordingly, we reversed approximately $479,000 of previously accrued restructuring reserve in the fourth quarter of 2006. During the second quarter of 2007, we recorded an additional
+$12,000 of expense to finalize the termination of the lease agreement. As of September 30, 2007, all remaining non-cancelable lease payments related to our Wallingford, CT facility were made. We paid approximately $327,000, $399,000 and
+$447,000 of expenses related to the Consolidation in 2007, 2006 and 2005, respectively. 
+Contractual Obligations 
+TransAct’s contractual obligations as of December 31, 2007 were as follows: 
+(In thousands) 
+Total 
+< 1 year 
+1-3 years 
+3-5 years 
+> 5 years 
+Operating lease obligations 
+$ 
+4,922 
+$ 
+948 
+$ 
+1,715 
+$ 
+1,262 
+$ 
+997 
+Purchase obligations 
+19,997 
+19,893 
+104 
+— 
+— 
+Total 
+$ 
+24,919 
+$ 
+20,841 
+$ 
+1,819 
+$ 
+1,262 
+$ 
+997 
+Purchase obligations are for purchases made in the normal course of business to meet operational
+requirements, primarily of component part inventory. 
+32 
+Table of Contents 
+Recently Issued Accounting Pronouncements 
+Fair Value Measurements: In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value
+Measurements” (“FAS 157”) which is effective for fiscal years beginning after November 15, 2007 and for interim periods within those years. This statement defines fair value, establishes a framework for measuring fair value and
+expands the related disclosure requirements. Management has not yet determined the impact, if any, of adopting the provisions of FAS 157 on the Company’s financial position and results of operations. 
+Fair Value Option for Financial Assets and Financial Liabilities: In February 2007, the FASB issued Statement of Financial Accounting
+Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“FAS 159”), which allows entities to voluntarily choose, at specified election dates, to measure many financial assets and financial
+liabilities (as well as certain non-financial instruments) at fair value (the “fair value option”). The election is made on an instrument-by-instrument basis and is irrevocable. If the fair value option is elected for an instrument, the
+Statement specifies that all subsequent changes in fair value for that instrument shall be reported in earnings. This Statement is effective for TransAct for the fiscal year ending December 31, 2008. We have not yet determined the effect this
+Statement will have on our operations or financial position. 
+Business Combinations: In December 2007, the FASB issued
+Statement of Financial Accounting Standards No. 141 (revised 2007), “Business Combinations” (“FAS 141(R)”), which replaces FAS No. 141, “Business Combinations.” FAS 141(R) retains the underlying concepts of
+SFAS 141 in that all business combinations are still required to be accounted for at fair value under the acquisition method of accounting but FAS 141(R) changed the method of applying the acquisition method in a number of significant aspects
+including the following: (i) acquisition costs will generally be expensed as incurred; (ii) non-controlling interests will be valued at fair value at the acquisition date; (iii) in-process research and development will be recorded at
+fair value as an indefinite-lived intangible asset at the acquisition date; (iv) restructuring costs associated with a business combination will generally be expensed subsequent to the acquisition date; and (v) changes in deferred tax
+asset valuation allowances and income tax uncertainties after the acquisition date generally will affect income tax expense. FAS 141(R) is effective on a prospective basis for all business combinations for which the acquisition date is on or after
+the beginning of the first annual period subsequent to December 15, 2008, with the exception of the accounting for valuation allowances on deferred taxes and acquired tax contingencies. FAS 141(R) amends FAS 109 such that adjustments made
+to valuation allowances on deferred taxes and acquired tax contingencies associated with acquisitions that closed prior to the effective date of FAS 141(R) would also apply the provisions of FAS 141(R). Early adoption of FAS 141(R) is not permitted.
+Resource Sufficiency 
+We believe that
+our cash on hand, cash flows generated from operations and borrowings available under the TD Banknorth Credit Facility will provide sufficient resources to meet our working capital needs to finance our capital expenditures, to fund our Stock
+Repurchase Program, and meet our liquidity requirements through at least the next twelve months. 
+Impact of Inflation 
+We believe that our business has not been affected to a significant degree by inflationary trends because of the low rate of inflation during the past
+three years, nor do we believe that we will be significantly affected by inflation during 2008. 
+33 
+Table of Contents 
+Item 7A. Quantitative and Qualitative Disclosures about Market Risk. 
+Interest Rate Risk 
+Our exposure to market risk for changes in interest rates relates primarily to the investment of our available cash and cash equivalents. In accordance
+with our investment policy, we strive to achieve above market rates of return in exchange for accepting a prudent amount of incremental risk, which includes the risk of interest rate movements. Risk tolerance is constrained by an overriding
+objective to preserve capital. An effective increase or decrease of 10% in interest rates would not have a material effect on our results of operations or cash flows. 
+Foreign Currency Exchange Risk 
+A substantial portion of our sales are denominated in U.S.
+dollars and, as a result, we have relatively little exposure to foreign currency exchange risk with respect to sales made. This exposure may change over time as business practices evolve and could have a material adverse impact on our financial
+results in the future. We do not use forward exchange contracts to hedge exposures denominated in foreign currencies or any other derivative financial instruments for trading or speculative purposes. The effect of an immediate 10% change in exchange
+rates would not have a material impact on our future results of operations or cash flows. 
+Item 8. Financial Statements and Supplementary Data. 
+The financial statements and schedule of the
+Company are annexed to this report as pages F-2 through F-25. An index to such materials appears on page F-1. 
+Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. 
+None.
+Item 9A. Controls and Procedures 
+Attached as exhibits to this Form 10-K are certifications of our Chief
+Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), which are required in accordance with Rule 13a-14 of the Securities Exchange Act of 1934, as amended (the Exchange Act). This “Controls and Procedures”
+section includes information concerning the controls and controls evaluation referred to in the certifications. Part II, Item 8 of this Form 10-K sets forth the report of PricewaterhouseCoopers LLP, our independent registered public accounting
+firm, regarding its audit of TransAct’s internal control over financial reporting as of December 31, 2007. This section should be read in conjunction with the CEO and CFO certifications and the PricewaterhouseCoopers LLP report for a more
+complete understanding of the topics presented. 
+Evaluation of Disclosure Controls and Procedures 
+We conducted an evaluation of the effectiveness of the design and operation of our “disclosure controls and procedures” (“Disclosure
+Controls”) as of the end of the period covered by this Form 10-K. The controls evaluation was conducted under the supervision and with the participation of management, including our CEO and CFO. Disclosure Controls are controls and procedures
+designed to reasonably assure that information required to be disclosed in our reports filed under the Exchange Act, such as this Form 10-K, is recorded, processed, summarized and reported within the time periods specified in the U.S. Securities and
+Exchange Commission’s (“SEC”) rules and forms. Disclosure Controls are also designed to reasonably assure that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate to allow
+timely decisions regarding required disclosure. Our quarterly evaluation of Disclosure Controls includes an evaluation of some components of our internal control over financial reporting, and internal control over financial reporting is also
+separately evaluated on an annual basis for purposes of providing the management report which is set forth below. 
+34 
+Table of Contents 
+The evaluation of our Disclosure Controls included a review of the controls’ objectives and design,
+the company’s implementation of the controls and the effect of the controls on the information generated for use in this Form 10-K. In the course of the controls evaluation, we review data errors, control problems or acts of fraud, if any, and
+seek to confirm that appropriate corrective actions, including process improvements, are being undertaken. This type of evaluation is performed on a quarterly basis so that the conclusions of management, including the CEO and CFO, concerning the
+effectiveness of the Disclosure Controls can be reported in our periodic reports on Form 10-Q and Form 10-K. Many of the components of our Disclosure Controls are also evaluated on an ongoing basis by personnel in our finance organization. The
+overall goals of these various evaluation activities are to monitor our Disclosure Controls, and to modify them as necessary. Our intent is to maintain the Disclosure Controls as dynamic systems that change as conditions warrant. 
+Based upon the evaluation of the controls, our CEO and CFO have concluded that, as of the end of the period covered by this Form 10-K, our Disclosure
+Controls were effective to provide reasonable assurance that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified by the SEC, and that material information
+relating to TransAct and our consolidated subsidiaries is made known to management, including the CEO and CFO, particularly during the period when our periodic reports are being prepared. 
+Changes in Internal Control over Financial Reporting 
+The implementation of our new Oracle enterprise resource planning and accounting system, completed effective January 8, 2007, required us to modify, add and remove certain internal controls and processes and procedures. Otherwise, no
+change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the three months ended December 31, 2007 that has materially affected, or is reasonably likely to
+materially affect, our internal control over financial reporting. 
+Management’s Report on Internal Control Over Financial Reporting 
+Our management is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance
+regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and
+procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are
+recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management
+and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial
+statements. 
+Management assessed our internal control over financial reporting as of December 31, 2007. Management based its
+assessment on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). 
+Based on our assessment, management has concluded that our internal control over financial reporting was effective as of December 31, 2007, based on
+the COSO criteria identified above, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with generally accepted accounting
+principles. 
+The effectiveness of the Company’s internal control over financial reporting as of December 31, 2007, has been
+audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein. 
+35 
+Table of Contents 
+Inherent Limitations on Effectiveness of Controls 
+A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives
+will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no
+evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the company have been detected. 
+These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple errors
+or mistakes. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about
+the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to
+risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. 
+Item 9B. Other Information 
+Not applicable. 
+36 
+Table of Contents 
+PART III 
+Item 10. Directors and Executive Officers of the Registrant 
+The information in response to this item is
+incorporated by reference from the Proxy Statement sections entitled “Election of Directors” and “Executive Officers.” 
+Item 11. Executive Compensation 
+The information in response to this item is incorporated by reference
+from the Proxy Statement sections entitled “Executive Compensation and Certain Transactions” and “Compensation Discussion and Analysis.” 
+Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 
+The information in response to this item is incorporated by reference from the Proxy Statement section entitled “Security Ownership of Certain Beneficial Owners and Management.” 
+Information regarding our equity compensation plans as of December 31, 2007 is as follows: 
+Plan category 
+(a) 
+Number of securities to 
+be issued upon exercise 
+of
+outstanding options, 
+warrants and rights 
+(b) 
+Weighted average 
+exercise price
+of 
+outstanding options, 
+warrants and rights 
+(c) 
+Number of securities 
+remaining available for 
+future issuance under 
+equity compensation 
+plans (excluding 
+securities reflected in 
+column (a)) 
+Equity compensation plans approved by security holders: 
+1996 Stock Plan 
+424,070 
+$ 
+3.21 
+— 
+1996 Non-Employee Director Plan 
+165,000 
+11.13 
+— 
+2005 Equity Incentive Plan 
+241,250 
+7.92 
+349,750 
+Total 
+830,320 
+$ 
+6.15 
+349,750 
+Equity compensation plans not approved by security holders: 
+2001 Employee Stock Plan 
+41,059 
+$ 
+5.06 
+— 
+871,379 
+$ 
+6.10 
+349,750 
+The TransAct Technologies Incorporated 2001 Employee Stock Plan (the “2001 Employee
+Plan”) was adopted by our Board of Directors, without approval of our security holders, effective February 26, 2001. Under the 2001 Employee Plan, we may issue non-qualified stock options, shares of restricted stock, restricted units to
+acquire shares of common stock, stock appreciation rights and limited stock appreciation rights to key employees of TransAct or any of our subsidiaries and to non-employees who provide services to TransAct or any of our subsidiaries. The 2001
+Employee Plan is administered by our Compensation Committee, which has the authority to determine the vesting period and other similar restrictions and terms of awards, provided that the exercise price of options granted under the plan may not be
+less than the fair market value of the underlying shares on the date of grant. 
+In May 2005, our shareholders approved the adoption of the
+2005 Equity Incentive Plan. No new awards will be available for future issuance under any existing TransAct equity plan other than the 2005 Equity Incentive Plan. 
+Item 13. Certain Relationships and Related Transactions. 
+The information in response to this item is
+incorporated by reference from the Proxy Statement section entitled “Certain Relationships and Related Transactions.” 
+Item 14. Principal Accountant Fees and Services. 
+The information in response to this item is
+incorporated by reference from the Proxy Statement section entitled “Independent Registered Public Accounting Firm’s Services and Fees.” 
+37 
+Table of Contents 
+PART IV 
+Item 15. Exhibits and Financial Statement Schedules 
+The financial statements and schedule filed as part
+of this report are listed in the accompanying Index to Financial Statements and Schedule. The exhibits filed as a part of this report are listed in the accompanying Index to Exhibits. 
+38 
+Table of Contents 
+SIGNATURES 
+Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
+registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. 
+TRANSACT TECHNOLOGIES INCORPORATED 
+By: 
+/s/ B ART C.
+S HULDMAN 
+Name: 
+Bart C. Shuldman 
+Title: 
+Chairman of the Board, President and 
+Chief Executive Officer 
+Date: March 14, 2008 
+Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. 
+Signature 
+Title 
+Date 
+/s/ B ART C.
+S HULDMAN 
+Bart C. Shuldman 
+Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer) 
+March 14, 2008 
+/s/ S TEVEN A.
+D E M ARTINO 
+Steven A. DeMartino 
+Executive Vice President, 
+Chief Financial Officer, Treasurer and Secretary (Principal Financial and Accounting Officer) 
+March 14, 2008 
+/s/ C HARLES A.
+D ILL 
+Charles A. Dill 
+Director 
+March 14, 2008 
+/s/ T HOMAS R.
+S CHWARZ 
+Thomas R. Schwarz 
+Director 
+March 14, 2008 
+/s/ G RAHAM Y.
+T ANAKA 
+Graham Y. Tanaka 
+Director 
+March 14, 2008 
+39 
+Table of Contents 
+TRANSACT TECHNOLOGIES INCORPORATED 
+INDEX TO FINANCIAL STATEMENTS AND SCHEDULE 
+Financial Statements 
+Report of Independent Registered Public Accounting Firm 
+F-2 
+Consolidated balance sheets as of December 31, 2007 and 2006 
+F-3 
+Consolidated statements of operations for the years ended December 31, 2007, 2006 and 2005 
+F-4 
+Consolidated statements of changes in shareholders’ equity and comprehensive income (loss) for the years ended December 31, 2007, 2006 and 2005 
+F-5 
+Consolidated statements of cash flows for the years ended December 31, 2007, 2006 and 2005 
+F-6 
+Notes to consolidated financial statements 
+F-7 
+Financial Statement Schedule 
+The following financial statement schedule is included herein: 
+Schedule II—Valuation and Qualifying Accounts 
+F-25 
+All other financial statement schedules are omitted because they are not applicable or the
+required information is shown in the consolidated financial statements or notes thereto 
+F-1 
+Table of Contents 
+Report of Independent Registered Public Accounting Firm 
+To the Board of Directors and Stockholders of
+TransAct Technologies Incorporated: 
+In our opinion, the consolidated financial statements listed in the accompanying index present fairly,
+in all material respects, the financial position of TransAct Technologies Incorporated and its subsidiaries at December 31, 2007 and December 31, 2006, and the results of their operations and their cash flows for each of the three years in
+the period ended December 31, 2007 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in
+all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial
+reporting as of December 31, 2007, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible
+for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in
+Management’s Annual Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company’s
+internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the
+audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial
+statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial
+statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the
+design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for
+our opinions. 
+As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for
+uncertain tax positions in 2007 and the manner in which it accounts for share-based compensation in 2006. 
+A company’s internal
+control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
+accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions
+and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that
+receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
+acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. 
+Because of
+its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
+of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. 
+/s/ PricewaterhouseCoopers LLP 
+Hartford, Connecticut 
+March 14, 2008 
+F-2 
+Table of Contents 
+TRANSACT TECHNOLOGIES INCORPORATED 
+CONSOLIDATED BALANCE SHEETS 
+(In thousands, except share data) 
+December 31, 
+2007 
+December 31, 
+2006 
+Assets: 
+Current assets: 
+Cash and cash equivalents 
+$ 
+2,561 
+$ 
+3,436 
+Receivables, net 
+6,128 
+11,422 
+Inventories, net 
+8,665 
+7,567 
+Refundable income taxes 
+51 
+42 
+Deferred tax assets 
+1,529 
+2,167 
+Other current assets 
+362 
+506 
+Total current assets 
+19,296 
+25,140 
+Fixed assets, net 
+6,338 
+5,938 
+Goodwill 
+1,469 
+1,469 
+Deferred tax assets 
+3,019 
+542 
+Intangible and other assets, net of accumulated amortization of $221 and $136, respectively 
+482 
+617 
+11,308 
+8,566 
+Total assets 
+$ 
+30,604 
+$ 
+33,706 
+Liabilities and Shareholders’ Equity: 
+Current liabilities: 
+Accounts payable 
+$ 
+4,688 
+$ 
+3,997 
+Accrued liabilities 
+2,852 
+3,796 
+Accrued restructuring expenses 
+— 
+315 
+Deferred revenue 
+522 
+389 
+Total current liabilities 
+8,062 
+8,497 
+Deferred revenue, net of current portion 
+211 
+508 
+Accrued warranty, net of current portion 
+91 
+160 
+Deferred rent 
+507 
+251 
+Other liabilities 
+125 
+— 
+934 
+919 
+Total liabilities 
+8,996 
+9,416 
+Commitments and contingencies (Note 11) 
+Shareholders’ equity: 
+Preferred stock, $0.01 par value, 4,800,000 authorized, none issued and outstanding 
+— 
+— 
+Preferred stock, Series A, $0.01 par value, 200,000 authorized, none issued and outstanding 
+— 
+— 
+Common stock, $0.01 par value, 20,000,000 authorized at December 31, 2007 and 2006; 10,399,866 and 10,376,417 shares issued; 9,365,866 and
+9,575,117 shares outstanding, at December 31, 2007 and 2006, respectively 
+104 
+104 
+Additional paid-in capital 
+19,872 
+19,105 
+Retained earnings 
+9,449 
+11,405 
+Accumulated other comprehensive income, net of tax 
+178 
+168 
+Treasury stock, 1,034,000 and 801,300 shares, at cost 
+(7,995 
+) 
+(6,492 
+) 
+Total shareholders’ equity 
+21,608 
+24,290 
+Total liabilities and shareholders’ equity 
+$ 
+30,604 
+$ 
+33,706 
+See accompanying notes to consolidated financial statements. 
+F-3 
+Table of Contents 
+TRANSACT TECHNOLOGIES INCORPORATED 
+CONSOLIDATED STATEMENTS OF OPERATIONS 
+(In thousands, except per share data) 
+Year Ended December 31, 
+2007 
+2006 
+2005 
+Net sales 
+$ 
+48,766 
+$ 
+64,328 
+$ 
+51,091 
+Cost of sales 
+32,770 
+41,963 
+35,501 
+Gross profit 
+15,996 
+22,365 
+15,590 
+Operating expenses: 
+Engineering, design and product development 
+3,129 
+2,824 
+2,726 
+Selling and marketing 
+6,708 
+6,892 
+6,319 
+General and administrative 
+6,995 
+6,925 
+6,321 
+Legal fees associated with lawsuit (See Note 11) 
+2,907 
+115 
+— 
+Business consolidation and restructuring 
+12 
+(479 
+) 
+— 
+19,751 
+16,277 
+15,366 
+Operating income (loss) 
+(3,755 
+) 
+6,088 
+224 
+Interest and other income (expense): 
+Interest expense 
+(69 
+) 
+(44 
+) 
+(41 
+) 
+Interest income 
+145 
+148 
+114 
+Other, net 
+21 
+(159 
+) 
+32 
+97 
+(55 
+) 
+105 
+Income (loss) before income taxes 
+(3,658 
+) 
+6,033 
+329 
+Income tax provision (benefit) 
+(1,384 
+) 
+2,117 
+(48 
+) 
+Net income (loss) 
+$ 
+(2,274 
+) 
+$ 
+3,916 
+$ 
+377 
+Net income (loss) per common share: 
+Basic 
+$ 
+(0.24 
+) 
+$ 
+0.41 
+$ 
+0.04 
+Diluted 
+$ 
+(0.24 
+) 
+$ 
+0.40 
+$ 
+0.04 
+Shares used in per-share calculation: 
+Basic 
+9,364 
+9,577 
+9,849 
+Diluted 
+9,364 
+9,870 
+10,163 
+See accompanying notes to consolidated financial statements. 
+F-4 
+Table of Contents 
+TRANSACT TECHNOLOGIES INCORPORATED 
+CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY AND
+COMPREHENSIVE INCOME (LOSS) 
+(In thousands, except share data) 
+Common Stock 
+Additional 
+Paid-in 
+Capital 
+Retained 
+Earnings 
+Unamortized 
+Restricted 
+Stock 
+Compensation 
+Treasury 
+Stock 
+Accumulated 
+Other 
+Comprehensive 
+Income (Loss) 
+Total 
+Total 
+Comprehensive 
+Income (Loss) 
+Shares 
+Amount 
+Balance, December 31, 2004 
+10,038,106 
+$ 
+100 
+$ 
+17,401 
+$ 
+7,112 
+$ 
+(1,067 
+) 
+$ 
+— 
+$ 
+169 
+$ 
+23,715 
+Cancellation of restricted stock 
+(250 
+) 
+— 
+(3 
+) 
+— 
+3 
+— 
+— 
+— 
+Issuance of shares from exercise of stock options 
+71,064 
+1 
+323 
+— 
+— 
+— 
+— 
+324 
+Issuance of shares from employee stock purchase plan 
+2,690 
+— 
+23 
+— 
+— 
+— 
+— 
+23 
+Acceleration of outstanding stock options 
+— 
+— 
+26 
+— 
+— 
+— 
+— 
+26 
+Issuance of restricted stock 
+125,400 
+1 
+1,230 
+— 
+(1,231 
+) 
+— 
+— 
+— 
+Share-based compensation expense 
+— 
+— 
+— 
+— 
+458 
+— 
+— 
+458 
+Tax benefit related to employee stock sales and vesting of restricted stock 
+— 
+— 
+337 
+— 
+— 
+— 
+— 
+337 
+Purchase of treasury stock 
+(505,000 
+) 
+— 
+— 
+— 
+— 
+(3,867 
+) 
+— 
+(3,867 
+) 
+Expenses related to preferred stock conversion 
+— 
+— 
+(3 
+) 
+— 
+— 
+— 
+— 
+(3 
+) 
+Comprehensive income: 
+Foreign currency translation adj. 
+— 
+— 
+— 
+— 
+— 
+— 
+(133 
+) 
+(133 
+) 
+(133 
+) 
+Net income 
+— 
+— 
+— 
+377 
+— 
+— 
+— 
+377 
+377 
+Balance, December 31, 2005 
+9,732,010 
+102 
+19,334 
+7,489 
+(1,837 
+) 
+(3,867 
+) 
+36 
+21,257 
+$ 
+244 
+Impact of adoption of new accounting pronouncements 
+— 
+— 
+(1,837 
+) 
+— 
+1,837 
+— 
+— 
+— 
+Cancellation of restricted stock 
+(11,750 
+) 
+— 
+— 
+— 
+— 
+— 
+— 
+— 
+Issuance of shares from exercise of stock options 
+136,157 
+2 
+685 
+— 
+— 
+— 
+— 
+687 
+Issuance of restricted stock 
+15,000 
+— 
+— 
+— 
+— 
+— 
+— 
+— 
+Tax benefit related to employee stock sales and vesting of restricted stock 
+— 
+— 
+342 
+— 
+— 
+— 
+— 
+342 
+Purchase of treasury stock 
+(296,300 
+) 
+— 
+— 
+— 
+— 
+(2,625 
+) 
+— 
+(2,625 
+) 
+Share-based compensation expense 
+— 
+— 
+581 
+— 
+— 
+— 
+— 
+581 
+Comprehensive income: 
+Foreign currency translation adj., net of tax 
+— 
+— 
+— 
+— 
+— 
+— 
+132 
+132 
+132 
+Net income 
+— 
+— 
+— 
+3,916 
+— 
+— 
+— 
+3,916 
+3,916 
+Balance, December 31, 2006 
+9,575,117 
+104 
+19,105 
+11,405 
+— 
+(6,492 
+) 
+168 
+24,290 
+$ 
+4,048 
+Adoption of FASB Interpretation No. 48 
+— 
+— 
+— 
+318 
+— 
+— 
+— 
+318 
+Opening balance at January 1, 2007, as adjusted 
+9,575,117 
+104 
+19,105 
+11,723 
+— 
+(6,492 
+) 
+168 
+24,608 
+Cancellation of restricted stock 
+(9,750 
+) 
+— 
+— 
+— 
+— 
+— 
+— 
+— 
+Issuance of shares from exercise of stock options 
+33,199 
+— 
+149 
+— 
+— 
+— 
+— 
+149 
+Tax charge related to vesting of restricted stock 
+— 
+— 
+(97 
+) 
+— 
+— 
+— 
+— 
+(97 
+) 
+Purchase of treasury stock 
+(232,700 
+) 
+— 
+— 
+— 
+— 
+(1,503 
+) 
+— 
+(1,503 
+) 
+Share-based compensation expense 
+— 
+— 
+715 
+— 
+— 
+— 
+— 
+715 
+Comprehensive income (loss): 
+Foreign currency translation adj., net of tax 
+— 
+— 
+— 
+— 
+— 
+— 
+10 
+10 
+10 
+Net loss 
+— 
+— 
+— 
+(2,274 
+) 
+— 
+— 
+— 
+(2,274 
+) 
+(2,274 
+) 
+Balance, December 31, 2007 
+9,365,866 
+$ 
+104 
+$ 
+19,872 
+$ 
+9,449 
+$ 
+— 
+$ 
+(7,995 
+) 
+$ 
+178 
+$ 
+21,608 
+$ 
+(2,264 
+) 
+See accompanying notes to consolidated financial statements. 
+F-5 
+Table of Contents 
+TRANSACT TECHNOLOGIES INCORPORATED 
+CONSOLIDATED STATEMENTS OF CASH FLOWS 
+(In thousands) 
+Year Ended December 31, 
+2007 
+2006 
+2005 
+Cash flows from operating activities: 
+Net income (loss) 
+$ 
+(2,274 
+) 
+$ 
+3,916 
+$ 
+377 
+Adjustments to reconcile net income (loss) to net cash provided by operating activities: 
+Share-based compensation expense 
+715 
+581 
+484 
+Incremental tax benefits from stock options exercised 
+— 
+(342 
+) 
+— 
+Depreciation and amortization 
+1,844 
+1,568 
+1,493 
+Deferred income taxes 
+(1,839 
+) 
+583 
+(648 
+) 
+Provision for excess and obsolete inventory 
+955 
+266 
+995 
+(Gain) loss on sale of fixed assets 
+(14 
+) 
+— 
+4 
+Reversal of accrued restructuring expense 
+— 
+(479 
+) 
+— 
+Changes in operating assets and liabilities: 
+Receivables 
+5,294 
+(3,063 
+) 
+551 
+Inventories 
+(2,053 
+) 
+(1,797 
+) 
+1,043 
+Refundable income taxes 
+(9 
+) 
+253 
+215 
+Other current assets 
+144 
+(276 
+) 
+328 
+Other assets 
+40 
+(72 
+) 
+3 
+Accounts payable 
+691 
+1,138 
+(945 
+) 
+Accrued liabilities and other liabilities 
+(575 
+) 
+1,423 
+(580 
+) 
+Accrued restructuring expenses 
+(315 
+) 
+(399 
+) 
+(447 
+) 
+Net cash provided by operating activities 
+2,604 
+3,300 
+2,873 
+Cash flows from investing activities: 
+Purchases of fixed assets 
+(2,166 
+) 
+(2,891 
+) 
+(2,756 
+) 
+Proceeds from sale of assets 
+37 
+— 
+— 
+Purchase of intangible assets 
+— 
+— 
+(510 
+) 
+Net cash used in investing activities 
+(2,129 
+) 
+(2,891 
+) 
+(3,266 
+) 
+Cash flows from financing activities: 
+Payment of deferred financing costs 
+(6 
+) 
+(88 
+) 
+— 
+Proceeds from stock option exercises 
+149 
+687 
+347 
+Purchases of common stock for treasury 
+(1,503 
+) 
+(2,625 
+) 
+(3,867 
+) 
+Incremental tax benefits from stock options exercised 
+— 
+342 
+— 
+Payment of preferred stock conversion and registration expense 
+— 
+— 
+(3 
+) 
+Net cash used in financing activities 
+(1,360 
+) 
+(1,684 
+) 
+(3,523 
+) 
+Effect of exchange rate changes on cash 
+10 
+132 
+(133 
+) 
+Decrease in cash and cash equivalents 
+(875 
+) 
+(1,143 
+) 
+(4,049 
+) 
+Cash and cash equivalents, beginning of period 
+3,436 
+4,579 
+8,628 
+Cash and cash equivalents, end of period 
+$ 
+2,561 
+$ 
+3,436 
+$ 
+4,579 
+Supplemental cash flow information: 
+Interest paid 
+$ 
+51 
+$ 
+43 
+$ 
+41 
+Income taxes paid 
+742 
+1,201 
+431 
+Non-cash financing activities: 
+Tax benefit related to employee stock sales and restricted stock 
+— 
+342 
+337 
+Issuance of restricted stock 
+— 
+207 
+1,231 
+See accompanying notes to consolidated financial statements. 
+F-6 
+Table of Contents 
+TRANSACT TECHNOLOGIES INCORPORATED 
+NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
+1. Description of business 
+TransAct Technologies Incorporated (“TransAct” or the “Company”), which has its headquarters in Hamden, CT and its primary operating facility in Ithaca, NY, operates in one industry segment,
+market-specific printers for transaction-based industries. These industries include casino, gaming, lottery, banking, kiosk and point-of-sale. Our printers are designed based on market specific requirements and are sold under the Ithaca ® and Epic product brands. We distribute our products through OEMs, value-added resellers, selected distributors, and directly to end-users. Our product distribution spans across the Americas,
+Europe, the Middle East, Africa, Asia, Australia, the Caribbean Islands and the South Pacific. We also generate revenue from the after-market side of the business, providing printer service, supplies and spare parts. 
+2. Summary of significant accounting policies 
+Principles of consolidation: The accompanying consolidated financial statements were prepared on a consolidated basis to include the accounts of TransAct and its wholly-owned subsidiaries. All intercompany accounts,
+transactions and unrealized profit were eliminated in consolidation. 
+Reclassifications: Certain amounts in the prior
+years’ financial statements have been reclassified to conform to the current year’s presentation. 
+Use of estimates:
+The accompanying consolidated financial statements were prepared using estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and disclosure of contingent assets and liabilities as of the
+date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 
+Segment reporting: We apply the provisions of Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of
+an Enterprise and Related Information” (“FAS 131”). We view our operations and manage our business as one segment: the design, development, manufacture and sale of transaction-based printers. Factors used to identify TransAct’s
+single operating segment include the organizational structure of the Company and the financial information available for evaluation by the chief operating decision-maker in making decisions about how to allocate resources and assess performance. We
+operate predominantly in one geographical area, the United States of America. See Note 17 for information regarding our international operations. We provide the following disclosures of revenues from products and services: 
+(In thousands) 
+Year ended 
+December 31, 2007 
+Year ended 
+December 31, 2006 
+Year ended 
+December 31, 2005 
+Banking and POS printers 
+$ 
+11,046 
+22.6 
+% 
+$ 
+16,858 
+26.2 
+% 
+$ 
+16,410 
+32.1 
+% 
+Casino, gaming and lottery printers 
+25,338 
+52.0 
+% 
+34,677 
+53.9 
+% 
+23,634 
+46.3 
+% 
+Services, spare parts and consumables 
+12,382 
+25.4 
+% 
+12,793 
+19.9 
+% 
+11,047 
+21.6 
+% 
+Total net sales 
+$ 
+48,766 
+100.0 
+% 
+$ 
+64,328 
+100.0 
+% 
+$ 
+51,091 
+100.0 
+% 
+Cash and cash equivalents: We consider all highly liquid investments with a maturity
+date of three months or less at date of purchase to be cash equivalents. 
+Accounts receivable and allowance for doubtful
+accounts: We have standardized credit granting and review policies and procedures for all customer accounts, including: 
+• 
+Credit reviews of all new customer accounts, 
+• 
+Ongoing credit evaluations of current customers, 
+• 
+Credit limits and payment terms based on available credit information, 
+• 
+Adjustments to credit limits based upon payment history and the customer’s current creditworthiness. 
+F-7 
+Table of Contents 
+TRANSACT TECHNOLOGIES INCORPORATED 
+NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 
+We establish an allowance for doubtful accounts to ensure trade receivables are valued appropriately.
+We maintain an allowance for doubtful accounts based on a variety of factors, including the length of time receivables are past due, significant one-time events and historical experience. We record a specific allowance for individual accounts when
+we become aware of a customer’s inability to meet its financial obligations, such as in the case of bankruptcy filings or deterioration in the customer’s operating results or financial position. If circumstances related to customers
+change, we would further adjust estimates of the recoverability of receivables. Allowances for doubtful accounts on accounts receivable balances were $62,000 and $204,000, as of December 31, 2007 and 2006, respectively. 
+Inventories: Inventories are stated at the lower of cost (principally standard cost, which approximates actual cost on a first-in,
+first-out basis) or market. We review market value based on historical usage and estimates of future demand. Based on these reviews, inventory write-downs are recorded, as necessary, to reflect estimated obsolescence, excess quantities and market
+value. Our net inventory included a reserve of $2,850,000 and $1,900,000, as of December 31, 2007 and 2006, respectively. 
+Fixed
+assets: Fixed assets are stated at cost. Depreciation is recorded using the straight-line method over the estimated useful lives. The estimated useful life of tooling is five years; machinery and equipment is ten years; furniture and office
+equipment is five to ten years; and computer software and equipment is three to seven years. Leasehold improvements are amortized over the shorter of the term of the lease or the useful life of the asset. Costs related to repairs and maintenance are
+expensed as incurred. The costs of sold or retired assets are removed from the related asset and accumulated depreciation accounts and any gain or loss is recognized. Depreciation expense was $1,743,000, $1,466,000 and $1,419,000 in 2007, 2006 and
+2005, respectively. 
+Leases: Rent expense under non-cancelable operating leases with scheduled rent increases or free rent
+periods is accounted for on a straight-line basis over the lease term, beginning on the date of control of physical use of the asset or of initial possession. The amount of the excess of straight-line rent expense over scheduled payments is recorded
+as a deferred liability. Construction allowances and other such lease incentives are recorded as deferred credits, and are amortized on a straight-line basis as a reduction of rent expense beginning in the period they are deemed to be earned, which
+generally coincides with the occupancy date. 
+Goodwill: We account for goodwill in accordance with the provisions of
+Statement of Financial Accounting Standard No. 142, “Goodwill and Other Intangible Assets” (“FAS 142”) on January 1, 2002. We test goodwill annually for impairment, or whenever events or changes in circumstances
+indicate that the carrying value may not be recoverable. We have performed an impairment test as of December 31, 2007 and determined that no impairment has occurred. 
+Revenue recognition: Our typical contracts include the sale of printers, which are sometimes accompanied by separately-priced extended warranty contracts. We also sell spare parts, consumables, and other
+repair services (sometimes pursuant to multi-year product maintenance contracts) which are not included in the original printer sale and are ordered by the customer as needed. We recognize revenue pursuant to the guidance within SAB 104,
+“Revenue Recognition.” Specifically, revenue is recognized when evidence of an arrangement exists, delivery (based on shipping terms, which are generally FOB shipping point) has occurred, the selling price is fixed and determinable, and
+collectibility is reasonably assured. We provide for an estimate of product returns and price protection based on historical experience at the time of revenue recognition. 
+Revenue related to extended warranty and product maintenance contracts is recognized pursuant to FASB Technical Bulletin 90-1 (“FTB 90-1”),
+“Accounting for Separately Priced Extended Warranty and Product Maintenance Contracts.” Pursuant to FTB 90-1, revenue related to separately priced product maintenance 
+F-8 
+Table of Contents 
+TRANSACT TECHNOLOGIES INCORPORATED 
+NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 
+contracts is deferred and recognized over the term of the maintenance period. We record deferred revenue for advance payments received from customers for
+maintenance contracts. 
+Our customers have the right to return products that do not function properly within a limited time after delivery.
+We monitor and track product returns and record a provision for the estimated future returns based on historical experience. Returns have historically been within expectations and the provisions established. 
+We offer some of our customer’s price protection as an incentive to carry inventory of our product. These price protection plans provide that if we
+lower prices, we will credit them for the price decrease on inventory they hold. Our customers typically carry limited amounts of inventory, and we infrequently lower prices on current products. As a result, the amounts paid under these plans have
+not been material. 
+Concentration of credit risk: Financial instruments that potentially expose TransAct to concentrations of
+credit risk are limited to cash and cash equivalents held by our banks in excess of insured limits and accounts receivable. 
+Accounts
+receivable from customers representing 10% or more of total accounts receivable were as follows: 
+December 31, 
+2007 
+2006 
+Customer A 
+12 
+% 
+14 
+% 
+Customer B 
+13 
+% 
+10 
+% 
+Customer C 
+* 
+14 
+% 
+Customer D 
+10 
+% 
+* 
+*- 
+customer balances were less than 10% of total accounts receivable 
+Sales to customers representing 10% or more of total net sales were as follows: 
+Year ended December 31, 
+2007 
+2006 
+2005 
+Customer A 
+14 
+% 
+20 
+% 
+17 
+% 
+Customer B 
+* 
+* 
+14 
+% 
+Customer C 
+10 
+% 
+* 
+* 
+*- 
+customer balances were less than 10% of total net sales 
+The primary operations of our United Kingdom subsidiary, a European sales and service center, relate to revenue generated from a service contract with a single customer in the United Kingdom. The service contract, which represented a
+substantial portion of our U.K. subsidiary’s revenue, was renewed in April 2007 through November 2007 at a lower minimum sales value compared to the minimum sales value of the prior year’s contract. The service contract ended in November
+2007 and was not renewed, as the customer has begun to replace our printers with a different technology that we were unable to provide. 
+Warranty: We generally warrant our products for up to 24 months and record the estimated cost of such product warranties at the time the sale is recorded. Estimated warranty costs are based upon actual past experience of
+product repairs and the related estimated cost of labor and material to make the necessary repairs. 
+F-9 
+Table of Contents 
+TRANSACT TECHNOLOGIES INCORPORATED 
+NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 
+The following table summarizes the activity recorded in the accrued product warranty liability:
+Year ended December 31, 
+(In thousands) 
+2007 
+2006 
+2005 
+Balance, beginning of year 
+$ 
+603 
+$ 
+644 
+$ 
+597 
+Additions related to warranties issued 
+356 
+595 
+613 
+Warranty costs incurred 
+(459 
+) 
+(636 
+) 
+(566 
+) 
+Balance, end of year 
+$ 
+500 
+$ 
+603 
+$ 
+644 
+Approximately $91,000 and $160,000 of the accrued product warranty liability were classified as
+long-term at December 31, 2007 and 2006, respectively. 
+Research and development expenses: Research and development
+expenses include engineering, design and product development expenses incurred in connection with specialized engineering and design to introduce new products and to customize existing products, and are expensed as a component of operating expenses
+as incurred. We recorded approximately $3,129,000, $2,824,000 and $2,726,000 of research and development expense in 2007, 2006 and 2005, respectively. 
+Advertising: Advertising costs are expensed as incurred. Advertising expenses, which are included in selling and marketing expense on the accompanying consolidated statements of operations, for 2007,
+2006 and 2005 totaled $136,000, $182,000 and $371,000, respectively. 
+Restructuring: In 2001, we undertook a plan to
+consolidate all manufacturing and engineering into our existing Ithaca, NY facility and close our Wallingford, CT manufacturing facility. We applied the consensus set forth in EITF 94-3, “Liability Recognition for Certain Employee Termination
+Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring)” in recognizing restructuring expenses. For all future exit costs, we will apply the guidance set forth in Statement of Financial Accounting
+Standard No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“FAS 146”). See Note 8 for additional disclosures related to our restructuring and exit costs. 
+Income taxes: The income tax amounts reflected in the accompanying financial statements are accounted for under the liability method in
+accordance with FAS 109 “Accounting for Income Taxes” (“FAS 109”). Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying
+amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary
+differences are expected to be recovered or settled. We assess the likelihood that net deferred tax assets will be realized from future taxable income, and to the extent that we believe that realization is not likely, we establish a valuation
+allowance. 
+On January 1, 2007, we adopted FASB Interpretation 48, Accounting for Uncertainty in Income Taxes (“FIN 48”). In
+accordance with FIN 48, we identified, evaluated and measured the amount of benefits to be recognized for our tax return positions. Upon adoption of FIN 48, we recognized a $318,000 decrease to reserves for uncertain tax positions that was accounted
+for as a cumulative adjustment to the beginning balance of retained earnings on the Consolidated Balance Sheet. 
+Foreign currency
+translation: The financial position and results of operations of our foreign subsidiary in the United Kingdom are measured using local currency as the functional currency. Assets and liabilities of such subsidiary have been translated into
+U.S. dollars at the year-end exchange rate, related revenues and expenses 
+F-10 
+Table of Contents 
+TRANSACT TECHNOLOGIES INCORPORATED 
+NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 
+have been translated at the weighted average exchange rate for the year, and shareholders’ equity has been translated at historical exchange rates. The
+resulting translation gains or losses, net of tax, are recorded in stockholders’ equity as a cumulative translation adjustment, which is a component of accumulated other comprehensive income. Foreign currency transaction gains and losses,
+including those related to intercompany balances, are recognized in other income (expense). 
+Fair value of financial
+instruments: The carrying amount for cash and cash equivalents approximates fair value because of the short maturity of these instruments. The carrying amount of receivables, accounts payable and accrued liabilities is a reasonable
+estimate of fair value because of the short-term nature of these accounts. 
+Comprehensive income: Statement of Accounting
+Standard No. 130, “Reporting Comprehensive Income” (“FAS 130”), requires that items defined as comprehensive income or loss be separately classified in the financial statements and that the accumulated balance of other
+comprehensive income or loss be reported separately from accumulated deficit and additional paid-in-capital in the equity section of the balance sheet. We include the foreign currency translation adjustment, net of tax, related to our subsidiary in
+the United Kingdom within our calculation of comprehensive income. 
+Share-based Payments: In December 2004, the Financial
+Accounting Standards Board (“FASB”) revised Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (“FAS 123R”), which establishes accounting for share-based awards exchanged for
+employee services and requires companies to expense the estimated fair value of these awards over the requisite employee service period. We adopted the accounting provisions of FAS 123R beginning in the first quarter of 2006. Prior to
+January 1, 2006, we accounted for share-based compensation to employees in accordance with Accounting Principles Board Opinion No. 25, (“APB 25”) “Accounting for Stock Issued to Employees,” and related interpretations.
+We also followed the disclosure requirements of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“FAS 123”), as amended by Statement of Financial Accounting Standards 148,
+“Accounting for Stock-Based Compensation—Transition and Disclosure” (“FAS 148”). 
+Under FAS 123R, share-based
+compensation expense is measured at the grant date, based on the estimated fair value of the award, and is recognized as expense over the employee’s requisite service period. We have no awards with market or performance conditions. We adopted
+the provisions of FAS 123R on January 1, 2006, using a modified prospective application (“MPA”), which provides for certain changes to the method for valuing share-based compensation. Under the MPA, prior periods are not revised for
+comparative purposes. The valuation provisions of FAS 123R apply to new awards and to modifications or cancellations of awards that are outstanding on the effective date. 
+In November 2005, the FASB issued FASB Staff Position No. FAS 123(R)-3, “Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards.” We have elected to adopt the alternative
+transition method provided in this FASB Staff Position for calculating the tax effects of share-based compensation pursuant to FAS 123R. The alternative transition method includes a simplified method to establish the beginning balance of the
+additional paid-in capital pool related to the tax effects of employee share-based compensation, which is available to absorb tax deficiencies recognized subsequent to the adoption of FAS 123R. 
+We use the Black-Scholes option-pricing model to calculate the fair value of share based awards. The key assumptions for this valuation method include
+the expected term of the option, stock price volatility, risk-free interest rate, dividend yield, market price of our underlying stock and exercise price. Many of these assumptions are judgmental and highly sensitive in the determination of
+compensation expense. In addition, we estimate forfeitures when recognizing compensation expense, and we will adjust our estimate of forfeitures over the requisite service period based on the extent to which actual forfeitures differ, or are
+expected to differ, from such 
+F-11 
+Table of Contents 
+TRANSACT TECHNOLOGIES INCORPORATED 
+NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 
+estimates. Changes in estimated forfeitures will be recognized through a cumulative true-up adjustment in the period of change and will also impact the
+amount of compensation expense to be recognized in future periods. 
+On November 2, 2005, the Compensation Committee of the Board of
+Directors approved the acceleration of the vesting of all outstanding unvested stock options granted to directors, officers and employees of the Company under our applicable stock incentive plans. As a result of the acceleration, options to acquire
+approximately 109,500 shares of our common stock, which otherwise would have vested from time to time over the next four years, became immediately exercisable. All other terms and conditions applicable to the outstanding stock option grants remain
+in effect. The option plans under which accelerated vesting of stock option grants were issued are our 1996 Stock Plan, 1996 Directors’ Stock Plan and the 2001 Employee Stock Plan. 
+The Compensation Committee’s decision to accelerate the vesting of affected stock options was primarily based upon our required adoption of FAS 123R
+effective January 1, 2006. Due to the acceleration of vesting of unvested options prior to the adoption of FAS123R, we are only recording compensation expense related to stock options granted in 2006 and beyond. We recorded approximately
+$26,000 of compensation expense in the fourth quarter of 2005 related to the acceleration of vesting. 
+Net income and loss per
+share: We report net income or loss per share in accordance with Financial Standard No. 128, “Earnings per Share (EPS)” (“FAS 128”). Under FAS 128, basic EPS, which excludes dilution, is computed by dividing income
+or loss available to common shareholders by the weighted average number of common shares outstanding for the period. Unvested restricted stock is excluded from the calculation of weighted average common shares for basic EPS. Diluted EPS reflects the
+potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Diluted EPS includes restricted stock and in-the-money stock options using the treasury stock method. During a
+loss period, the assumed exercise of in-the-money stock options has an anti-dilutive effect, and therefore, these instruments are excluded from the computation of dilutive EPS. See Note 15 for EPS calculation. 
+3. Recently issued accounting pronouncements 
+Fair Value Measurements: In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“FAS 157”) which is effective for fiscal years beginning
+after November 15, 2007 and for interim periods within those years. This statement defines fair value, establishes a framework for measuring fair value and expands the related disclosure requirements. Management has not yet determined the
+impact, if any, of adopting the provisions of FAS 157 on the Company’s financial position and results of operations. 
+Fair Value
+Option for Financial Assets and Financial Liabilities: In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“FAS
+159”), which allows entities to voluntarily choose, at specified election dates, to measure many financial assets and financial liabilities (as well as certain non-financial instruments) at fair value (the “fair value option”). The
+election is made on an instrument-by-instrument basis and is irrevocable. If the fair value option is elected for an instrument, the Statement specifies that all subsequent changes in fair value for that instrument shall be reported in earnings.
+This Statement is effective for TransAct for the fiscal year ending December 31, 2008. We have not yet determined the effect this Statement will have on our operations or financial position. 
+Business Combinations: In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised 2007),
+“Business Combinations” (“FAS 141(R)”), which replaces FAS No. 141, “Business Combinations.” FAS 141(R) retains the underlying concepts of SFAS 141 in that all business combinations are still required to be
+accounted for at fair value under the acquisition method of accounting but FAS 141(R) 
+F-12 
+Table of Contents 
+TRANSACT TECHNOLOGIES INCORPORATED 
+NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 
+changed the method of applying the acquisition method in a number of significant aspects including the following: (i) acquisition costs will generally
+be expensed as incurred; (ii) non-controlling interests will be valued at fair value at the acquisition date; (iii) in-process research and development will be recorded at fair value as an indefinite-lived intangible asset at the
+acquisition date; (iv) restructuring costs associated with a business combination will generally be expensed subsequent to the acquisition date; and (v) changes in deferred tax asset valuation allowances and income tax uncertainties after
+the acquisition date generally will affect income tax expense. FAS 141(R) is effective on a prospective basis for all business combinations for which the acquisition date is on or after the beginning of the first annual period subsequent to
+December 15, 2008, with the exception of the accounting for valuation allowances on deferred taxes and acquired tax contingencies. FAS 141(R) amends FAS 109 such that adjustments made to valuation allowances on deferred taxes and acquired tax
+contingencies associated with acquisitions that closed prior to the effective date of FAS 141(R) would also apply the provisions of FAS 141(R). Early adoption of FAS 141(R) is not permitted. 
+4. Inventories 
+The components of inventories, net of
+allowances, are: 
+December 31, 
+(In thousands) 
+2007 
+2006 
+Raw materials and purchased component parts 
+$ 
+8,019 
+$ 
+7,337 
+Work-in-process 
+57 
+— 
+Finished goods 
+589 
+230 
+$ 
+8,665 
+$ 
+7,567 
+5. Fixed assets 
+The components of fixed assets are: 
+December 31, 
+(In thousands) 
+2007 
+2006 
+Tooling, machinery and equipment 
+$ 
+12,697 
+$ 
+12,407 
+Furniture and office equipment 
+1,730 
+1,560 
+Computer software and equipment 
+4,940 
+4,985 
+Leasehold improvements 
+1,867 
+1,051 
+21,234 
+20,003 
+Less: accumulated depreciation and amortization 
+(14,896 
+) 
+(14,065 
+) 
+$ 
+6,338 
+$ 
+5,938 
+6. Intangible assets 
+On June 30, 2005, we acquired certain intangible assets related to casino ticket printer designs and technology from Bally Gaming, Inc. (“Bally”) for $475,000, plus the costs of effecting the
+acquisition (approximately $35,000). Prior to the acquisition, pursuant to the terms of a license agreement, we were required to pay Bally a royalty on sales of certain gaming printers utilizing the licensed technology. As a result of the
+acquisition, effective July 1, 2005, we were no longer required to pay any future royalties to Bally. 
+F-13 
+Table of Contents 
+TRANSACT TECHNOLOGIES INCORPORATED 
+NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 
+The purchase price was allocated, based on management’s estimates, to intangible assets based on
+their relative fair value at the date of acquisition. The fair value of the intangibles, comprised of purchased technology and a covenant not to compete, was determined using the future discounted cash flows method. The intangible assets are being
+amortized on a straight-line basis over six and seven years, respectively, for the estimated life of the assets. 
+The following summarizes
+the allocation of the purchase price for the acquisition of certain intangible assets from Bally (in thousands): 
+Purchased technology 
+$ 
+364 
+Covenant not to compete 
+146 
+Consideration paid 
+$ 
+510 
+As of December 31, 2007 and 2006, the net intangible asset balance associated with the
+technology purchased from Bally was $307,000 and $388,000, respectively. Amortization expense associated with the technology purchased from Bally was $81,000, $81,000 and $41,000 for 2007, 2006 and 2005, respectively. Amortization expense for each
+of the next five years ending December 31 is expected to be as follows: $81,000 in each of 2008 through 2010; $54,000 in 2011; and $10,000 in 2012. 
+7. Accrued liabilities 
+The components of accrued liabilities (current portion) are: 
+December 31, 
+(In thousands) 
+2007 
+2006 
+Payroll and fringe benefits 
+$ 
+1,004 
+$ 
+1,671 
+Income taxes 
+— 
+710 
+Warranty 
+409 
+443 
+Professional and consulting 
+782 
+364 
+Other 
+657 
+608 
+$ 
+2,852 
+$ 
+3,796 
+8. Accrued business consolidation and restructuring expenses 
+In February 2001, we announced plans to establish a global engineering and manufacturing center at our Ithaca, NY facility. As part of this strategic
+decision, we undertook a plan to consolidate all manufacturing and engineering into our existing Ithaca, NY facility and close our Wallingford, CT manufacturing facility (the “Consolidation”). As of December 31, 2001, we successfully
+transferred substantially all our Wallingford operations to Ithaca, NY, with the exception of our corporate headquarters and a service center that remain in Connecticut. The closing of the Wallingford manufacturing facility resulted in the
+termination of employment of approximately 70 production, administrative and management employees. 
+During 2001 through 2004, we recorded
+expenses of approximately $5,957,000 related to costs associated with the Consolidation, including severance pay, stay bonuses, employee benefits, moving expenses, non-cancelable lease payments, accelerated depreciation and other costs. 
+F-14 
+Table of Contents 
+TRANSACT TECHNOLOGIES INCORPORATED 
+NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 
+In November 2006, we executed an agreement effective May 1, 2007 to terminate the lease
+agreement for our Wallingford, CT facility (the “Release Agreement”). Prior to the execution of the Release Agreement, we accrued the remaining non-cancelable lease payments and other related costs for the unused portion of this facility
+through the expiration date of the lease (March 31, 2008). As a result of the Release Agreement and the early termination of the lease, we were released from the legal obligation to make lease payments after May 1, 2007 and, accordingly, we
+reversed approximately $479,000 of previously accrued restructuring reserve in the fourth quarter of 2006. During the second quarter of 2007, we recorded an additional $12,000 of expense to finalize the termination of the lease agreement. As of
+December 31, 2007, all non-cancelable lease payments related to our Wallingford, CT facility had been made. 
+The following table
+summarizes the activity recorded in the restructuring accrual: 
+Year ended December 31, 
+(In thousands) 
+2007 
+2006 
+2005 
+Accrual balance, beginning of year 
+$ 
+315 
+$ 
+1,193 
+$ 
+1,640 
+Business consolidation and restructuring expenses: 
+Facility closure and consolidation expenses 
+12 
+— 
+— 
+Reversal of lease obligation related to unused space 
+— 
+(479 
+) 
+— 
+12 
+(479 
+) 
+— 
+Cash payments 
+(327 
+) 
+(399 
+) 
+(447 
+) 
+Accrual balance, end of year 
+$ 
+— 
+$ 
+315 
+$ 
+1,193 
+9. Retirement savings plan 
+On April 1, 1997, we established the TransAct Technologies Retirement Savings Plan (the “401(k) Plan”), a defined contribution plan under Section 401(k) of the Internal Revenue Code. All full-time
+employees are eligible to participate in the 401(k) Plan at the beginning of the calendar quarter immediately following their date of hire. We match employees’ contributions at a rate of 50% of employees’ contributions up to the first 6%
+of the employees’ compensation contributed to the 401(k) Plan. Our matching contributions were $247,000, $249,000 and $225,000 in 2007, 2006 and 2005, respectively. 
+10. Borrowings 
+On November 28, 2006, we signed a five-year $20 million credit facility (the
+“TD Banknorth Credit Facility”) with TD Banknorth, N.A. (“TD Banknorth”). The credit facility provides for a $20 million revolving credit line expiring on November 28, 2011. The TD Banknorth Credit facility replaces a
+previous $11.5 million credit facility also with TD Banknorth. Borrowings under the revolving credit line bear a floating rate of interest at the prime rate minus one-percent and are secured by a lien on all of our assets. We also pay a fee of 0.25%
+on unused borrowings under the revolving credit line. Deferred financing costs relating to expenses incurred to complete the TD Banknorth Credit Facility were $94,000 at December 31, 2007. The TD Banknorth Credit Facility imposes certain
+quarterly financial covenants on us and restricts the payment of dividends on our common stock and the creation of other liens. On November 7, 2007, we amended the TD Banknorth Credit Facility to revise a financial covenant effective
+September 30, 2007. 
+As of December 31, 2007, we had no outstanding borrowings on the revolving credit line. Undrawn commitments
+under the TD Banknorth Credit Facility were $20,000,000 at December 31, 2007. 
+F-15 
+Table of Contents 
+TRANSACT TECHNOLOGIES INCORPORATED 
+NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 
+11. Commitments and contingencies 
+In April 2005, we announced a complaint against FutureLogic, Inc. (“FutureLogic”) in Connecticut, which charged FutureLogic with disseminating
+false and misleading statements. We asserted claims of defamation and certain other charges. In May 2005, FutureLogic filed a complaint against us in California, asserting false advertising, defamation, trade libel and certain other charges. We
+moved to dismiss FutureLogic’s action in California, on the grounds that any claims raised in that action should have been brought as part of the case filed by us in Connecticut. In the alternative, we moved to stay the California action
+pending the resolution of jurisdictional motions in the Connecticut court. In September 2006, the District of Connecticut dismissed our case because of a lack of jurisdiction. The decision was not on the merits of our claims, but on the jurisdiction
+of the court in which the suit was brought. 
+On June 12, 2007, we answered FutureLogic’s complaint and filed a counterclaim that
+FutureLogic infringes U.S. Patent No. 6,924,903 (the “903 Patent”). We also filed a motion for a preliminary injunction to stop infringement by FutureLogic’s dual port printers. Our motion for preliminary injunction was heard on
+July 30, 2007. Through our preliminary injunction motion and hearing, we showed that FutureLogic has constructed a prototype printer, the GEN2 Universal with the ProMatrix system, which the judge ruled has a likelihood of infringing the 903
+Patent covering dual port technology. The court denied our motion on August 6, 2007, but the court ruled that “Should TransAct discover that FutureLogic has sold or offered to sell any GEN2 Universal printers with the ProMatrix system that
+infringe the 903 Patent during the course of this action, it may renew this motion on an expedited ex parte basis and— assuming it shows the requisite likelihood of success on the merits—the court will afford it the relief it seeks.”
+On August 27, 2007, FutureLogic lodged an amended complaint that sought a declaratory judgment that our U.S. Patent
+No. 7,099,035 (“the 035 Patent”) is invalid and not infringed by FutureLogic, and that the 903 and 035 Patents are unenforceable for inequitable conduct. Concurrently, we filed an amended answer that added a counterclaim that
+FutureLogic infringes the 035 Patent. Also on August 27, 2007, FutureLogic filed a motion for leave to file a Second Amended Complaint to add monopolization and attempted monopolization claims against us. The proposed claims were each based on
+“Walker Process fraud” and “sham litigation.” The Court held a hearing on this motion on October 29, 2007 and issued an opinion that same day. In its opinion, the Court denied FutureLogic’s motion to add a claim for
+actual monopolization based on either the “Walter Process fraud” theory or the “sham litigation.” theory. The Court also denied FutureLogic’s motion to add a claim for attempted monopolization based on the “sham
+litigation” theory. The Court did, however, permit FutureLogic to assert a claim of attempted monopolization based on the “Walker Process fraud” theory. We believe that FutureLogic’s claim in this matter is without merit and
+intend to defend vigorously against it. 
+On February 20, 2008, we filed an application to renew our preliminary injunction motion. The
+Court heard our motion on March 3, 2008. The Court denied our renewed motion. We intend to vigorously defend TransAct against FutureLogic’s claims, which we believe to be without merit. We also intend to pursue vigorously our claim against
+FutureLogic for infringement of the 903 and 035 Patents. 
+We are now in the discovery phase of the case. 
+We are currently unable to estimate any potential liability or range of loss associated with this litigation. Accordingly, no amounts have been accrued
+in the financial statements related to this matter. 
+At December 31, 2007, we were lessee on operating leases for equipment and real
+property. Rent expense was approximately $1,152,000, $1,330,000 and $1,294,000 in 2007, 2006 and 2005, respectively. Minimum aggregate rental payments required under operating leases that have initial or remaining non-cancelable lease 
+F-16 
+Table of Contents 
+TRANSACT TECHNOLOGIES INCORPORATED 
+NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 
+terms in excess of one year as of December 31, 2007 are as follows: $948,000 in 2008; $938,000 in 2009; $777,000 in 2010; $804,000 in 2011; $459,000 in
+2012; and $997,000 thereafter. 
+12. Stock incentive plans 
+Employee Stock Purchase Plan: In May 2000, our shareholders approved the Employee Stock Purchase Plan (the “ESPP”), under which 75,000 shares of our common stock were available for issuance to
+employees beginning June 1, 2000. The ESPP was terminated on May 31, 2005. We issued 2,690 shares of common stock under the ESPP during 2005. At December 31, 2005, no shares remained available for issuance due to the termination of
+the ESPP. 
+Stock incentive plans . We currently have four primary stock incentive plans: the 1996 Stock Plan, which
+provides for the grant of awards to officers and other key employees of the Company; the 1996 Directors’ Stock Plan, which provides for non-discretionary awards to non-employee directors; the 2001 Employee Stock Plan, which provides for the
+grant of awards to key employees of the Company and other non-employees who may provide services to the Company; and the 2005 Equity Incentive Plan, which provides for awards to executives, key employees, directors and consultants. The plans
+generally provide for awards in the form of: (i) incentive stock options, (ii) non-qualified stock options, (iii) restricted stock, (iv) restricted stock units, (v) stock appreciation rights or (vi) limited stock
+appreciation rights. However, the 2001 Employee Stock Plan does not provide for incentive stock option awards. Options granted under these plans have exercise prices equal to 100% of the fair market value of the common stock at the date of grant.
+Options granted have a ten-year term and generally vest over a three- to five-year period, unless automatically accelerated for certain defined events. As of May 2005, no new awards will be made under the 1996 Stock Plan, the 1996 Directors’
+Stock Plan or the 2001 Employee Stock Plan. At December 31, 2007, approximately 349,750 shares of common stock remained available for issuance under the 2005 Equity Incentive Plan. 
+Under the assumptions indicated below, the weighted-average fair value of stock option grants for the years ended December 31, 2007 and 2006 was
+$5.81 and $5.91, respectively. No fair value or assumptions have been disclosed for the year ended December 31, 2005 as no stock option grants were made during this period. The table below indicates the key assumptions used in the option
+valuation calculations for options granted in the years ended December 31, 2007 and 2006 and a discussion of our methodology for developing each of the assumptions used in the valuation model: 
+Year ended 
+December 31, 2007 
+Year ended 
+December 31, 2006 
+Expected option term 
+6.0 years 
+5.2 years 
+Expected volatility 
+71.2 
+% 
+78.4 
+% 
+Risk-free interest rate 
+4.5 
+% 
+4.5 
+% 
+Dividend yield 
+0 
+% 
+0 
+% 
+Expected Option Term—This is the weighted average period of time over which the options
+granted are expected to remain outstanding giving consideration to our historical exercise patterns. Options granted have a maximum term of ten years. An increase in the expected term will increase compensation expense. 
+Expected Volatility—The stock volatility for each grant is measured using the weighted average of historical daily price changes of our common stock
+over the most recent period approximately equal to the expected option term of the grant. An increase in the expected volatility factor will increase compensation expense. 
+F-17 
+Table of Contents 
+TRANSACT TECHNOLOGIES INCORPORATED 
+NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 
+Risk-Free Interest Rate—This is the U.S. Treasury rate in effect at the time of grant having a
+term approximately equal to the expected term of the option. An increase in the risk-free interest rate will increase compensation expense. 
+Dividend Yield—We have not made any dividend payments on our common stock, and we have no plans to pay dividends in the foreseeable future. An increase in the dividend yield will decrease compensation expense. 
+Prior to adopting the provisions of FAS 123R, we recorded estimated compensation expense for employee stock options based upon their intrinsic value on
+the date of grant pursuant to APB 25 and provided the required pro forma disclosures of FAS 123. Because we established the exercise price based on the fair market value of our common stock at the date of grant, the stock options had no intrinsic
+value upon grant, and therefore no expense was recorded prior to adopting FAS 123R. We recorded compensation expense for restricted stock at the fair value of the stock at the date of grant, recognized over the service period. Each accounting
+period, we reported the potential dilutive impact of stock options in our diluted earnings per common share using the treasury-stock method. Out-of-the-money stock options (i.e., the average stock price during the period was below the strike price
+of the stock option) were not included in diluted earnings per common share as their effect was anti-dilutive. 
+For purposes of pro forma
+disclosures under FAS 123 for the year ended December 31, 2005, the estimated fair value of the share-based awards was assumed to be amortized to expense over the stock option’s vesting periods. The pro forma effects of recognizing
+estimated compensation expense under the fair value method on net income and net income per common share were as follows: 
+(In thousands, except per share data) 
+Year ended 
+December 31, 2005 
+Net income available to common shareholders: 
+Net income available to common shareholders, as reported 
+$ 
+377 
+Add: Stock-based compensation expense included in reported net income, net of tax 
+315 
+Deduct: Stock-based compensation expense determined under fair value based method for all awards, net of tax 
+(1,294 
+) 
+Pro forma net (loss) income available to common shareholders 
+$ 
+(602 
+) 
+Net income (loss) per common share: 
+Basic: 
+As reported 
+$ 
+0.04 
+Pro forma 
+$ 
+(0.06 
+) 
+Diluted: 
+As reported 
+$ 
+0.04 
+Pro forma 
+$ 
+(0.06 
+) 
+The fair values used to reflect the pro forma effects of estimated share-based compensation
+expense on net income and earnings per common share for the year ended December 31, 2005 were estimated at the date of grant using the Black-Scholes option-pricing model. 
+We recognize compensation expense associated with awards granted after January 1, 2006, and the unvested portion of previously granted restricted
+stock awards that were outstanding as of January 1, 2006, in our consolidated statement of operations. During 2006, we recognized compensation expense of $111,000 for stock options and $470,000 for restricted stock, which was recorded in our
+consolidated statement of operations in accordance with FAS123R. The income tax benefits from share-based payments recorded in our consolidated statement of operations totaled $204,000 for 2006. 
+F-18 
+Table of Contents 
+TRANSACT TECHNOLOGIES INCORPORATED 
+NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 
+During 2007, we recognized compensation expense of $225,000 for stock options and $490,000 for
+restricted stock, which was recorded in our consolidated statement of operations in accordance with FAS123R. The income tax benefits from share-based payments recorded in our consolidated statement of operations totaled $270,000 for 2007.
+The 1996 Stock Plan, 1996 Directors’ Stock Plan, 2001 Employee Stock Plan and 2005 Equity Incentive Plan option activity is
+summarized below: 
+Year Ended December 31, 2007 
+Shares 
+Weighted 
+Average 
+Exercise Price 
+Weighted-Average 
+Remaining 
+Contractual Life 
+Aggregate 
+Intrinsic 
+Value 
+Outstanding at beginning of period 
+707,344 
+$ 
+6.67 
+Granted 
+144,500 
+8.82 
+Exercised 
+(33,199 
+) 
+4.49 
+Canceled 
+(53,949 
+) 
+9.69 
+Outstanding at end of period 
+764,696 
+$ 
+6.95 
+5.3 
+$ 
+447,000 
+Options exercisable at end of period 
+565,696 
+$ 
+6.32 
+4.1 
+$ 
+447,000 
+Options Outstanding 
+Options Exercisable 
+Range of Exercise Prices 
+Outstanding at 
+December 31, 
+2007 
+Weighted- 
+Average 
+Exercise 
+Price 
+Weighted- 
+Average 
+Remaining 
+Contractual Life 
+Exercisable at 
+December 31, 
+2007 
+Weighted- 
+Average 
+Exercise 
+Price 
+(In years) 
+$2.00 – $5.00 
+386,696 
+$ 
+3.64 
+4.0 
+386,696 
+$ 
+3.64 
+5.01 – 7.50 
+147,500 
+6.50 
+4.7 
+115,500 
+6.53 
+7.51 – 10.00 
+187,500 
+9.18 
+8.6 
+20,500 
+8.86 
+10.01 – 25.00 
+8,250 
+16.08 
+1.9 
+8,250 
+16.08 
+25.01 – 35.00 
+34,750 
+31.66 
+6.4 
+34,750 
+31.66 
+764,696 
+6.95 
+5.3 
+565,696 
+6.32 
+At December 31, 2007 and 2006, outstanding stock options that are vested or expected to vest
+were 712,800 and 658,603 at a weighted average exercise price of $6.95 and $6.67, respectively. In addition, at December 31, 2007 and 2006, outstanding stock options that are vested or expected to vest had an intrinsic value of $419,000 and
+$2,042,000 with a weighted average remaining contractual life of 3.6 and 4.0 years, respectively. As of December 31, 2007, unrecognized compensation cost related to stock options totaled $912,000, which is expected to be recognized over a
+weighted average period of 3.8 years. 
+In addition, at December 31, 2007 and 2006, exercisable stock options that are vested or
+expected to vest were 523,028 and 556,417 and had an intrinsic value of $419,000 and $2,022,000 at a weighted average exercise price of $6.32 and $6.29, respectively. Shares that are issued upon exercise of employee stock options are newly issued
+shares and not issued from treasury stock. As a result of the exercise of non-qualified stock options, we have net operating loss carry forwards of approximately $20,000 attributable to excess tax benefits from stock compensation deductions, which
+can be used to offset future taxable income, if any. If and when realized, the related tax benefits of these net operating losses carry forwards will be credited directly to paid-in capital. 
+The total intrinsic value of stock options exercised was $61,000 and $825,000 for 2007 and 2006, respectively. Approximately 21,000 stock options vested
+during 2007. No stock options vested during 2006. 
+F-19 
+Table of Contents 
+TRANSACT TECHNOLOGIES INCORPORATED 
+NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 
+Restricted stock: Under the 1996 Stock Plan, 2001 Employee Stock Plan and 2005 Equity
+Incentive Plan, we have granted shares of restricted common stock, for no consideration, to our officers, directors and certain key employees. Restricted stock activity for the 1996 Stock Plan, 2001 Employee Stock Plan and 2005 Equity Incentive Plan
+is summarized below: 
+Year Ended 
+December 31, 
+2007 
+Weighted 
+Average Grant 
+Date Fair Values 
+Nonvested shares at December 31, 2006 
+154,116 
+$ 
+12.22 
+Granted 
+— 
+— 
+Vested 
+(37,683 
+) 
+13.01 
+Canceled 
+(9,750 
+) 
+10.49 
+Nonvested shares at December 31, 2007 
+106,683 
+$ 
+12.10 
+As of December 31, 2007, unrecognized compensation cost related to restricted stock totaled
+$835,000, which is expected to be recognized over a weighted average period of 2.2 years. The total intrinsic value of restricted stock that vested during 2007 and 2006 was $180,000 and $338,000, respectively. 
+13. Stockholder rights plan 
+In December 1997, our
+Board of Directors adopted a Stockholder Rights Plan declaring a distribution of one right (the “Rights”) for each outstanding share of our common stock to shareholders of record at December 15, 1997. Initially, each of the Rights
+entitled the registered holder to purchase from the Company one one-thousandth of a share of Series A Preferred Stock, $0.01 par value, at a price of $69 per one one-thousandth of a share. The Rights, however, will not become exercisable unless and
+until, among other things, any person or group of affiliated persons acquires beneficial ownership of 15 percent or more of the then outstanding shares of the Company’s Common Stock. If a person, or group of persons, acquires 15 percent or more
+of the outstanding Common Stock of the Company (subject to certain conditions and exceptions more fully described in the Rights Agreement), each Right will entitle the holder (other than the person, or group of persons, who acquired 15 percent or
+more of the outstanding Common Stock) to purchase Preferred Stock of the Company having a market value equal to twice the exercise price of the Right. The Rights were redeemable, under certain circumstances, for $0.0001 per Right and expired on
+December 2, 2007. 
+On February 16, 1999, we amended the Stockholder Rights Plan to remove the provision in the plan that
+stipulated that the plan may be modified or redeemed only by those members of the Board of Directors who are defined as continuing directors. 
+14.
+Income taxes 
+We adopted FASB Interpretation 48, Accounting for Uncertainty in Income Taxes (“FIN 48”), at the beginning of
+2007. As a result of the implementation, we recognized a decrease to reserves for uncertain tax positions. This decrease was accounted for as a $318,000 adjustment to the beginning balance of retained earnings on the Consolidated Balance Sheet.
+Including the cumulative effect decrease, at the beginning of 2007 we had approximately $79,000 of total gross unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in any future periods. 
+F-20 
+Table of Contents 
+TRANSACT TECHNOLOGIES INCORPORATED 
+NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 
+At December 31, 2007, we had approximately $125,000 of total gross unrecognized tax benefits
+that, if recognized, would favorably affect the effective income tax rate in any future periods. We are not aware of any events that could occur within the next twelve months that could cause a significant change in the total amount of unrecognized
+tax benefits. A tabular reconciliation of the gross amounts of unrecognized tax benefits excluding interest and penalties at the beginning and end of the year is as follows: 
+Unrecognized tax benefits as of January 1, 2007 
+$ 
+79 
+Tax positions taken during prior periods 
+33 
+Tax positions taken during the current period 
+21 
+Settlements 
+— 
+Lapse of statute of limitations 
+(8 
+) 
+Unrecognized tax benefits as of December 31, 2007 
+$ 
+125 
+We are subject to U.S. federal income tax as well as income tax of certain state and foreign
+jurisdictions. We have substantially concluded all U.S. federal income tax, state and local, and foreign tax matters through 2002. Our federal tax returns for the years 2003 - 2006 remain open to examination with our 2005 and 2006 federal tax
+returns currently under examination. Various state and foreign tax jurisdiction tax years remain open to examination as well, though we believe that any additional assessment would be immaterial to the consolidated financial statements. No state or
+foreign tax jurisdiction income tax returns are currently under examination. 
+We do not anticipate that the total unrecognized tax benefits
+will significantly change due to the settlement of audits and the expiration of statute of limitations prior to December 31, 2008. 
+We
+recognize interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2007, we have approximately $2,000 of accrued interest and penalties related to uncertain tax positions. 
+The components of the income tax provision (benefit) are as follows: 
+Year Ended December 31, 
+(In thousands) 
+2007 
+2006 
+2005 
+Current: 
+Federal 
+$ 
+(32 
+) 
+$ 
+952 
+$ 
+7 
+State 
+35 
+41 
+68 
+Foreign 
+452 
+541 
+525 
+455 
+1,534 
+600 
+Deferred: 
+Federal 
+(1,693 
+) 
+552 
+(634 
+) 
+State 
+(144 
+) 
+31 
+(14 
+) 
+Foreign 
+(2 
+) 
+— 
+— 
+(1,839 
+) 
+583 
+(648 
+) 
+Income tax provision (benefit) 
+$ 
+(1,384 
+) 
+$ 
+2,117 
+$ 
+(48 
+) 
+F-21 
+Table of Contents 
+TRANSACT TECHNOLOGIES INCORPORATED 
+NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 
+At December 31, 2007, we have $3,535,000 of state net operating loss carryforwards that begin to
+expire in 2010, and $4,099,000 of federal net operating loss carryforwards that begin to expire in 2027. We also have approximately $502,000 in federal research and development tax credit carryforwards that begin to expire in 2016, $127,000 in state
+tax credit carryforwards that begin to expire in 2011, and foreign tax credit carryforwards of approximately $280,000 that begin to expire in 2011. We had foreign income before taxes of $1,486,000, $1,813,000 and $1,833,000 in 2007, 2006 and 2005,
+respectively. 
+Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported
+amounts in the financial statements. Our gross deferred tax assets and liabilities were comprised of the following: 
+December 31, 
+(In thousands) 
+2007 
+2006 
+Gross deferred tax assets: 
+Net operating losses 
+$ 
+1,549 
+$ 
+47 
+Accrued restructuring expenses 
+— 
+116 
+Capitalized research and development 
+494 
+574 
+Inventory reserves 
+1,034 
+702 
+Deferred revenue 
+186 
+100 
+Warranty reserve 
+181 
+223 
+Foreign tax and other credits 
+866 
+615 
+Other liabilities and reserves 
+558 
+516 
+4,868 
+2,893 
+Valuation allowance 
+— 
+(64 
+) 
+Net deferred tax assets 
+4,868 
+2,829 
+Gross deferred tax liabilities: 
+Depreciation 
+236 
+12 
+Other 
+84 
+108 
+Net deferred tax liabilities 
+320 
+120 
+Net deferred tax assets 
+$ 
+4,548 
+$ 
+2,709 
+During 2007 and 2006, we recorded a valuation allowance of $0 and $64,000 on a portion of our
+foreign tax credits, research and development credits and certain state net operating loss carryforwards. In order to utilize our deferred tax assets, we will need to generate approximately $13.0 million of taxable income in future years. In two of
+the last three years, we have had U.S. taxable losses and there is no assurance that we will generate future taxable income sufficient to realize all of our deferred tax assets. We have determined that it is more likely than not that the remaining
+net deferred tax assets will be realized, and therefore no valuation allowance is considered necessary, as of December 31, 2007. However, if our future projections of taxable income are less than expected, we may need to establish an additional
+valuation allowance for all or a portion of our net deferred tax assets, which may have a material adverse effect on our results of operations and financial condition. 
+F-22 
+Table of Contents 
+TRANSACT TECHNOLOGIES INCORPORATED 
+NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 
+Differences between the U.S. statutory federal income tax rate and our effective income tax rate are
+analyzed below: 
+Year Ended December 31, 
+2007 
+2006 
+2005 
+Federal statutory tax rate 
+(34.0 
+)% 
+34.0 
+% 
+34.0 
+% 
+State income taxes, net of federal income taxes 
+(2.0 
+) 
+1.1 
+(9.1 
+) 
+Tax benefit from tax credits, net of valuation allowance 
+(4.0 
+) 
+(0.7 
+) 
+(17.5 
+) 
+Foreign rate differential 
+0.2 
+— 
+9.4 
+Valuation allowance and tax accruals 
+— 
+0.4 
+(41.7 
+) 
+Permanent items 
+0.9 
+0.6 
+13.0 
+Other 
+1.1 
+(0.3 
+) 
+(2.7 
+) 
+Effective tax rate 
+(37.8 
+)% 
+35.1 
+% 
+(14.6 
+)% 
+15. Earnings per share 
+For 2007, 2006 and 2005, earnings per share were computed as follows (in thousands, except per share amounts): 
+Year Ended December 31, 
+2007 
+2006 
+2005 
+Net income (loss) 
+$ 
+(2,274 
+) 
+$ 
+3,916 
+$ 
+377 
+Shares: 
+Basic: Weighted average common shares outstanding 
+9,364 
+9,577 
+9,849 
+Add: Dilutive effect of outstanding options as determined by the treasury stock method 
+— 
+293 
+314 
+Diluted: Weighted average common and common equivalent shares outstanding 
+9,364 
+9,870 
+10,163 
+Net income (loss) per common share: 
+Basic 
+$ 
+(0.24 
+) 
+$ 
+0.41 
+$ 
+0.04 
+Diluted 
+(0.24 
+) 
+0.40 
+0.04 
+For the year ended December 31, 2007, there were 871,379 potentially dilutive shares (prior
+to consideration of the treasury stock method), consisting of stock options and nonvested restricted stock, that were excluded from the earnings per share calculation, because such shares would be anti-dilutive due to our net loss in the period.
+For the years ended December 31, 2006 and 2005, potentially dilutive shares that were excluded from the earnings per share
+calculation, consisting of out-of-the-money stock options, were 101,750 and 52,250 shares, respectively. 
+16. Stock repurchase program 
+On March 25, 2005, our Board of Directors approved a stock repurchase program (“the Stock Repurchase Program”). Under the Stock
+Repurchase Program, we were authorized to repurchase up to $10 million of our outstanding shares of common stock from time to time in the open market over a three-year period ending on March 25, 2008, depending on market conditions, share price
+and other factors. 
+F-23 
+Table of Contents 
+TRANSACT TECHNOLOGIES INCORPORATED 
+NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 
+On November 1, 2007, our Board of Directors approved an increase in our stock repurchase
+authorization under the Stock Repurchase Program to $15 million from $10 million. In addition, the Board approved a two-year extension of the Stock Repurchase Program to March 31, 2010. As of December 31, 2007, we repurchased a total of
+1,034,000 shares of common stock for approximately $7,995,000 under this program, at an average price of $7.73 per share. We use the cost method to account for treasury stock purchases, under which the price paid for the stock is charged to the
+treasury stock account. 
+17. International operations 
+We have foreign operations primarily from TransAct Technologies Ltd., a wholly-owned subsidiary in the United Kingdom, which had sales to its customers of approximately $2,121,000, $2,722,000 and $2,181,000 in 2007,
+2006 and 2005, respectively. Tangible assets at foreign locations are not material. We had sales from the United States to our customers outside of the United States of approximately $8,674,000, $11,416,000 and $10,137,000 in 2007, 2006 and 2005,
+respectively. International sales do not include sales of printers made to domestic distributors or other domestic customers who in turn may ship those printers to international destinations. 
+18. Quarterly results of operations (unaudited) 
+Our
+quarterly results of operations for 2007 and 2006 are as follows: 
+Quarter Ended 
+(In thousands, except per share amounts) 
+March 31 
+June 30 
+September 30 
+December 31 
+2007: 
+Net sales 
+$ 
+11,468 
+$ 
+13,947 
+$ 
+11,737 
+$ 
+11,614 
+Gross profit 
+3,753 
+4,940 
+3,885 
+3,418 
+Net income (loss) 
+(223 
+) 
+284 
+(1,016 
+) 
+(1,319 
+) 
+Net income (loss) per share: 
+Basic 
+(0.02 
+) 
+0.03 
+(0.11 
+) 
+(0.14 
+) 
+Diluted 
+(0.02 
+) 
+0.03 
+(0.11 
+) 
+(0.14 
+) 
+2006: 
+Net sales 
+$ 
+16,434 
+$ 
+16,905 
+$ 
+15,276 
+$ 
+15,713 
+Gross profit 
+5,687 
+5,746 
+5,438 
+5,494 
+Net income 
+1,057 
+857 
+1,019 
+983 
+Net income per share: 
+Basic 
+0.11 
+0.09 
+0.11 
+0.10 
+Diluted 
+0.11 
+0.09 
+0.10 
+0.10 
+F-24 
+Table of Contents 
+TRANSACT TECHNOLOGIES INCORPORATED 
+Schedule II 
+Valuation and Qualifying Accounts 
+(Amounts in thousands) 
+Description 
+Balance at 
+Beginning of 
+Period 
+Provision 
+Write-offs, net 
+of recoveries 
+Balance at 
+End of 
+Period 
+Valuation account for accounts receivable: 
+Year ended December 31, 2007 
+$ 
+204 
+$ 
+— 
+$ 
+(142 
+) 
+$ 
+62 
+Year ended December 31, 2006 
+$ 
+240 
+$ 
+— 
+$ 
+(36 
+) 
+$ 
+204 
+Year ended December 31, 2005 
+$ 
+175 
+$ 
+68 
+$ 
+(3 
+) 
+$ 
+240 
+Valuation account for inventories: 
+Year ended December 31, 2007 
+$ 
+1,900 
+$ 
+955 
+$ 
+(5 
+) 
+$ 
+2,850 
+Year ended December 31, 2006 
+$ 
+2,165 
+$ 
+266 
+$ 
+(531 
+) 
+$ 
+1,900 
+Year ended December 31, 2005 
+$ 
+2,010 
+$ 
+995 
+$ 
+(840 
+) 
+$ 
+2,165 
+F-25 
+Table of Contents 
+Index to Exhibits 
+3.1(a) 
+Certificate of Incorporation of TransAct Technologies Incorporated (“TransAct” or the “Company”), filed with the Secretary of State of Delaware on June 17,
+1996. 
+(2 
+) 
+3.1(b) 
+Certificate of Amendment of Certificate of Incorporation of the Company, filed with the Secretary of State of Delaware on June 4, 1997. 
+(4 
+) 
+3.1(c) 
+Certificate of Designation, Series A Preferred Stock, filed with the Secretary of State of Delaware on December 2, 1997. 
+(5 
+) 
+3.1(d) 
+Certificate of Designation, Series B Preferred Stock, filed with the Secretary of State of Delaware on April 6, 2000. 
+(8 
+) 
+3.2 
+Amended and Restated By-laws of the Company. 
+(6 
+) 
+4.1 
+Specimen Common Stock Certificate. 
+(2 
+) 
+4.2 
+Amended and Restated Rights Agreement between TransAct and American Stock Transfer & Trust Company dated February 16, 1998. 
+(5 
+) 
+10.1(x) 
+1996 Stock Plan, effective July 30, 1996. 
+(3 
+) 
+10.2(x) 
+Non-Employee Directors’ Stock Plan, effective August 22, 1996. 
+(3 
+) 
+10.3(x) 
+2001 Employee Stock Plan. 
+(10 
+) 
+10.4(x) 
+2005 Equity Incentive Plan. 
+(15 
+) 
+10.5(x) 
+Employment Agreement, dated July 31, 1996, by and between TransAct and Bart C. Shuldman. 
+(2 
+) 
+10.6(x) 
+Severance Agreement by and between TransAct and Michael S. Kumpf, dated September 4, 1996. 
+(3 
+) 
+10.7(x) 
+Severance Agreement by and between TransAct and Steven A. DeMartino, dated June 1, 2004. 
+(14 
+) 
+10.8(x) 
+Severance Agreement by and between TransAct and James B. Stetson, dated January 24, 2001. 
+(9 
+) 
+10.9(x) 
+Severance Agreement by and between TransAct and Tracey S. Chernay, dated July 29, 2005. 
+(1 
+) 
+10.10 
+Lease Agreement by and between Bomax Properties and Ithaca, dated as of March 23, 1992. 
+(2 
+) 
+10.11 
+Second Amendment to Lease Agreement by and between Bomax Properties and Ithaca, dated December 2, 1996. 
+(4 
+) 
+10.12 
+Agreement regarding the Continuation and Renewal of Lease by and between Bomax Properties, LLC and TransAct, dated July 18, 2001. 
+(12 
+) 
+10.13 
+Lease Agreement by and between Las Vegas Airport Properties LLC and TransAct dated December 2, 2004. 
+(14 
+) 
+10.14 
+Lease Agreement by and between 2319 Hamden Center I, L.L.C. and TransAct dated November 27, 2006. 
+(17 
+) 
+10.15 
+OEM Purchase Agreement by and between GTECH Corporation, TransAct and Magnetec Corporation commencing July 14, 1999. (Pursuant to Rule 24-b-2 under the Exchange Act, the Company has requested
+confidential treatment of portions of this exhibit deleted from the filed copy.) 
+(7 
+) 
+10.16 
+OEM Purchase Agreement by and between GTECH Corporation and TransAct commencing July 2, 2002. (Pursuant to Rule 24-b-2 under the Exchange Act, the Company has requested confidential treatment of
+portions of this exhibit deleted from the filed copy.) 
+(11 
+) 
+10.17 
+Amendment to OEM Purchase Agreement by and between GTECH Corporation and TransAct, dated February 17, 2006. (Pursuant to Rule 24-b-2 under the Exchange Act, the Company has requested
+confidential treatment of portions of this exhibit deleted from the filed copy.) 
+(16 
+) 
+Table of Contents 
+10.18 
+Amended and Restated Revolving Credit and Security Agreement between TransAct and TD Banknorth, N.A. dated November 28, 2006 
+(17 
+) 
+10.19 
+First Amendment to Amended and Restated Revolving Credit and Security Agreement between TransAct and TD Banknorth, N.A. effective September 30, 2007. 
+(18 
+) 
+10.20 
+License Agreement between Seiko Epson Corporation and TransAct dated May 17, 2004 (Pursuant to Rule 24b-2 under the Exchange Act, the Company has requested confidential treatment of
+portions of this exhibit deleted from the filed copy.) 
+(13 
+) 
+23.1 
+Consent of PricewaterhouseCoopers LLP. 
+(1 
+) 
+31.1 
+Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 
+(1 
+) 
+31.2 
+Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 
+(1 
+) 
+32.1 
+Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 
+(1 
+) 
+32.2 
+Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 
+(1 
+) 
+(1) 
+These exhibits are filed herewith. 
+(2) 
+These exhibits, which were previously filed with the Company’s Registration Statement on Form S-1 (No. 333-06895), are incorporated by reference. 
+(3) 
+These exhibits, which were previously filed with the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 1996, are incorporated by reference.
+(4) 
+These exhibits, which were previously filed with the Company’s Annual Report on Form 10-K for the year ended December 31, 1997, are incorporated by reference.
+(5) 
+These exhibits, which were previously filed with the Company’s Current Report on Form 8-K filed February 18, 1999, are incorporated by reference. 
+(6) 
+This exhibit, which was previously filed with the Company’s Annual Report on Form 10-K for the year ended December 31, 1998, is incorporated by reference.
+(7) 
+This exhibit, which was previously filed with the Company’s Quarterly Report on Form 10-Q for the period ended September 25, 1999, is incorporated by reference.
+(8) 
+These exhibits, which were previously filed with the Company’s Quarterly Report on Form 10-Q for the period ended March 25, 2000, are incorporated by reference.
+(9) 
+This exhibit, which was previously filed with the Company’s Annual Report on Form 10-K for the year ended December 31, 2000, is incorporated by reference.
+(10) 
+This exhibit, which was previously filed with the Company’s Registration Statement on Form S-8 (No. 333-59570), is incorporated by reference. 
+(11) 
+This exhibit, which was previously filed with the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2002, is incorporated by reference.
+(12) 
+This exhibit, which was previously filed with the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2003, is incorporated by reference.
+(13) 
+This exhibit, which was previously filed with the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2004, is incorporated by reference.
+(14) 
+These exhibits, which were previously filed with the Company’s Annual Report on Form 10-K for the year ended December 31, 2004, are incorporated by reference.
+(15) 
+This exhibit, which was previously filed with the Company’s Current Report on Form 8-K filed June 1, 2005, is incorporated by reference. 
+(16) 
+These exhibits, which were previously filed with the Company’s Annual Report on Form 10-K for the year ended December 31, 2005, are incorporated by reference.
+(17) 
+These exhibits, which were previously filed with the Company’s Annual Report on Form 10-K for the year ended December 31, 2006, are incorporated by reference.
+(18) 
+This exhibit, which was previously filed with the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 1997, is incorporated by reference.
+(x) 
+Management contract or compensatory plan or arrangement required to be filed pursuant to Item 14(c). 
+Table of Contents 
+EXHIBIT LIST 
+The following exhibits are filed herewith. 
+Exhibit 
+10.9(x) 
+Severance Agreement by and between TransAct and Tracey S. Chernay, dated July 29, 2005. 
+23.1 
+Consent of PricewaterhouseCoopers LLP. 
+31.1 
+Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 
+31.2 
+Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 
+32.1 
+Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 
+32.2 
+Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
\ No newline at end of file
diff --git a/raw/filings/0001017303/2007/0001193125-08-057494/filing_metadata.csv b/raw/filings/0001017303/2007/0001193125-08-057494/filing_metadata.csv
new file mode 100644
index 0000000000000000000000000000000000000000..ce9f9bcccdc561d32b830dc5df43132600eee443
--- /dev/null
+++ b/raw/filings/0001017303/2007/0001193125-08-057494/filing_metadata.csv
@@ -0,0 +1,2 @@
+cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing
+0001017303,TACT,TRANSACT TECHNOLOGIES INC,10-K,2008-03-14,2007-12-31,2008-03-14T20:51:04.000Z,0001193125-08-057494,d10k.htm,FORM 10-K,1088883,0,0,https://www.sec.gov/Archives/edgar/data/1017303/000119312508057494/d10k.htm,https://www.sec.gov/Archives/edgar/data/1017303/000119312508057494/,2007,2007,1
diff --git a/raw/filings/0001017303/2007/0001193125-08-057494/item1.txt b/raw/filings/0001017303/2007/0001193125-08-057494/item1.txt
new file mode 100644
index 0000000000000000000000000000000000000000..2a1599c56159709b2afd613eca70add2477186c6
--- /dev/null
+++ b/raw/filings/0001017303/2007/0001193125-08-057494/item1.txt
@@ -0,0 +1,180 @@
+Item 1. Business. 
+The Company 
+TransAct Technologies Incorporated (“TransAct” or the “Company”) was incorporated in June 1996 and began operating as a stand-alone business in August 1996 as a spin-off of the printer business
+that was formerly conducted by certain subsidiaries of Tridex Corporation. We completed an initial public offering on August 22, 1996. 
+TransAct designs, develops, assembles, markets and services world-class transaction printers under
+the Epic and Ithaca ® brand names. Known and respected worldwide for innovative designs and real-world service reliability, our thermal, inkjet and impact printers generate top-quality
+transaction records such as receipts, tickets, coupons, register journals and other documents. We focus on two core markets: (1) banking and point-of-sale (“POS”) and (2) casino, gaming and lottery. We sell our products to
+original equipment manufacturers (“OEMs”), value-added resellers (“VARs”), selected distributors, as well as directly to end-users. Our product distribution spans across the Americas, Europe, the Middle East, Africa, Asia,
+Australia, the Caribbean Islands and the South Pacific. In addition, we have a strong focus on the after-market side of the business, with a growing commitment to printer service, supplies and spare parts. We have one primary operating facility
+located in Ithaca, NY, our printer sales headquarters and western region service center in Las Vegas, NV, an eastern region service center located in New Britain, CT, a European sales and service center in the United Kingdom, and a sales office
+located in Macau and two other sales offices located in the United States. Our executive offices are located at One Hamden Center, 2319 Whitney Avenue, Suite 3B, Hamden, CT, 06518, with a telephone number of (203) 859-6800. 
+Financial Information about Segments 
+We have
+determined that we operate in one reportable segment, the design, development, assembly and marketing of transaction printers and printer-related service, supplies and spare parts. 
+Products and Services 
+Printers 
+TransAct designs, develops, assembles and markets a broad array of transaction-based printers utilizing inkjet, thermal and impact printing technology for applications requiring up to 60 character columns, primarily
+in the banking and POS, and casino, gaming and lottery markets. Our printers are configurable and offer customers the ability to choose from a variety of features and functions. Options typically include interface configuration, paper cutting
+devices, paper handling capacities and cabinetry color. In addition to our configurable printers, we design and assemble custom printers for certain OEM customers. In collaboration with these customers, we provide engineering and manufacturing
+expertise for the design and development of specialized printers. 
+Banking and POS: Our banking and POS printers include hundreds of
+optional configurations that can be selected to meet particular customer needs. We believe that this is a significant competitive strength, as it allows us to satisfy a wide variety of printing applications that our customers request. In the banking
+market, we sell printers that are used by banks, credit unions and other financial institutions to print and/or validate receipts at bank teller stations. In the POS market, we sell several models of printers utilizing inkjet, thermal and impact
+printing technology. Our printers are used primarily by retailers in the restaurant (including fine dining, casual dining, and fast food), hospitality, and specialty retail industries to print receipts for consumers, validate checks, or print on
+other inserted media. 
+Casino, gaming and lottery: In the lottery portion of our gaming and lottery market, we supply lottery printers to
+Lottomattica’s GTECH Corporation (“GTECH”), our largest customer and the world’s largest provider of lottery terminals, with an approximate 70% market share. These printers are designed for high-volume, high-speed printing of
+lottery tickets for various lottery applications. 
+1 
+Table of Contents 
+In the casino and gaming portion of our casino, gaming and lottery market, we sell several models of
+printers used in slot machines and video lottery terminals that print tickets or receipts instead of issuing coins at casinos, racetracks and other gaming establishments worldwide. These printers utilize thermal printing technology and can print
+tickets or receipts in monochrome or two-color (depending upon the model), and offer various other features such as jam resistant bezels and a dual port interface that will allow casinos to print coupons/promotions. In addition, we sell printers
+using thermal and impact printing technology for use in non-casino establishments, including game types such as Amusements with Prizes (“AWP”), Skills with Prizes (“SWP”), Video lottery terminals (“VLT”), Fixed Odds
+Betting Terminals (“FOBT”) and other off-premise gaming type machines around the world. 
+TransAct Services Group 
+Through our TransAct Services Group, we proactively market the sale of consumable products
+(including inkjet cartridges, ribbons and receipt paper), replacement parts and maintenance services for all of our products and certain competitor’s products. Our maintenance services include the sale of extended warranties, multi-year
+maintenance contracts, 24-hour guaranteed replacement product service TransAct Xpress SM , and other repair services for our printers. Within the
+United States, we provide repair services through our eastern region service center in New Britain, CT and our western region service center in Las Vegas, NV. Internationally, we provide repair services through our European service center located in
+Doncaster, United Kingdom, and through partners strategically located around the world. 
+We also provide customers with telephone sales and
+technical support, and a personal account representative to handle orders, shipping and general information. Technical and sales support personnel receive training on all of our manufactured products and our services. 
+In addition to personalized telephone and technical support, we also market and sell consumable products 24 hours a day, seven days a week, via our
+online webstore transactsupplies.com. 
+Product Warranty 
+Our printers generally carry up to a two-year limited warranty against defects in material and workmanship. Defective equipment may be returned to any of our service centers, or our assembly facility in Ithaca, NY for
+newly-released printers only, for repair or replacement during the applicable warranty period. 
+Production, Manufacturing and Sources and Availability
+of Raw Materials 
+We design our products to optimize product performance, quality, reliability and durability. These designs combine
+cost efficient materials, sourcing and assembly methods with high standards of workmanship. We finalize assembly for some of our products in our Ithaca, NY facility largely on a configure-to-order basis using components and subassemblies that have
+been sourced from vendors or contract manufacturers around the world. Our manufacturing engineers work closely with our new product engineers and vendors during the development of new products. As a result, this collaboration increases manufacturing
+efficiency by specifying materials and designing manufacturing processes in conjunction with new product design. 
+We procure component
+parts and subassemblies for use in the assembly of our products. Critical component parts and subassemblies include inkjet, thermal and impact printheads, printing/cutting mechanisms, power supplies, motors, injection molded plastic parts, circuit
+boards and electronic components, which are obtained from domestic and foreign suppliers at competitive prices. In addition, we procure fully assembled printers from a foreign contract manufacturer. We typically strive to maintain more than one
+source for our component parts, subassemblies and fully assembled printers to reduce the risk of parts shortages or unavailability. However, we could experience temporary disruption if certain suppliers ceased doing business with us, as described
+below. 
+2 
+Table of Contents 
+We currently buy substantially all of our thermal print mechanisms, an important component of our thermal
+printers, and fully assembled printers for several of our printer models, from one foreign contract manufacturer. Although we believe that other contract manufacturers could provide similar thermal print mechanisms or fully assembled printers, on
+comparable terms, a change in contract manufacturers could cause a delay in manufacturing and possible loss of sales, which may have a material adverse effect on our operating results. 
+Hewlett-Packard Company (“HP”) is the sole supplier of inkjet cartridges that are used in all of our inkjet printers. The loss of the supply of
+HP inkjet cartridges would have a material adverse effect on the sale of our inkjet printers. Prior to February 2006, we had a supply agreement with HP to purchase inkjet cartridges at fixed prices. This agreement expired on February 1, 2006
+and was not renewed, as HP informed us that they no longer maintain supply agreements for these inkjet cartridges; however, we continue to purchase inkjet cartridges from HP. Although we no longer have a supply agreement with HP, our relationship
+with HP remains strong and we have no reason to believe that HP will discontinue its supply of inkjet cartridges to us. The inkjet cartridges we purchase from HP are used not only in our inkjet printers for the banking and POS market, but also in
+other manufacturer’s printing devices across several other markets. 
+Okidata
+Americas, Inc. (“Okidata”), is the sole supplier for an impact printer component kit consisting of a printhead, control board and carriage (the “Oki Kit”), that is used in all of our Ithaca ® brand impact printers. The loss of the supply of Oki Kits would have a material adverse effect on TransAct. However, sales of impact printers continue to decline as sales of these printers are replaced by sales of
+thermal and inkjet printers. As such, we believe that any possible loss of supply of Oki Kits will have less of an impact on TransAct in 2008 and beyond. Although we do not have a supply agreement with Okidata, our relationship with Okidata remains
+strong and we have no reason to believe that Okidata will discontinue its supply of Oki Kits to us or that their terms to us will be any less favorable than they have been historically. 
+Patents and Proprietary Information 
+We have significantly expanded our patent portfolio over the
+past six years, and expect to continue to do so in the future. We also believe our patent portfolio could provide additional opportunities to license our intellectual property in the future. We hold 22 United States and 12 foreign patents and have
+10 United States and 84 foreign patent applications pending pertaining to our products. The duration of these patents range from 11 to 18 years. The expiration of any individual patent would not have a significant negative impact on our business. We
+regard certain manufacturing processes and designs to be proprietary and attempt to protect them through employee and third-party nondisclosure agreements and similar means. It may be possible for unauthorized third parties to copy certain portions
+of our products or to reverse engineer or otherwise obtain and use, to our detriment, information that we regard as proprietary. Moreover, the laws of some foreign countries do not afford the same protection to our proprietary rights as do United
+States laws. There can be no assurance that legal protections relied upon by the Company to protect our proprietary position will be adequate or that our competitors will not independently develop technologies that are substantially equivalent or
+superior to our technologies. 
+Seasonality 
+Retailers typically reduce purchases of new POS equipment in the fourth quarter, due to the increased volume of consumer transactions in that holiday period, and our sales of printers in the POS market historically have increased in the
+third quarter and decreased in the fourth quarter. Similarly, installations of lottery terminals are typically reduced in the fourth quarter, resulting in decreased sales of lottery printers. 
+Certain Customers 
+We currently have an ongoing OEM
+purchase agreement, as amended in February 2006 (the “GTECH Thermal Printer Agreement”) with GTECH that provides for the sale of thermal on-line lottery printers and spare parts, at fixed prices, through June 28, 2012. Firm purchase
+orders for printers under the GTECH Thermal Printer 
+3 
+Table of Contents 
+Agreement may be placed as required by GTECH. Prior to this agreement, we had a purchase agreement with GTECH that provided for the sale of impact on-line
+lottery printers and spare parts through December 31, 2004. Because our new thermal on-line lottery printer is a replacement for our impact on-line printer, we do not expect any further shipments of impact on-line lottery printers. However, we
+do expect to continue to sell spare parts to GTECH for the remaining installed base of impact on-line lottery printers, although we expect such sales to decline as the installed base of impact on-line lottery printers are replaced with our thermal
+printer. 
+Backlog 
+Our backlog of firm
+orders was approximately $9,123,000 as of February 29, 2008, compared to $4,300,000 as of February 28, 2007. Based on customers’ current delivery requirements, we expect to ship our entire current backlog during 2008. 
+Competition 
+The market for transaction-based
+printers is extremely competitive, and we expect such competition to continue in the future. We compete with a number of companies, many of which have greater financial, technical and marketing resources than us. We believe our ability to compete
+successfully depends on a number of factors both within and outside our control, including durability, reliability, quality, design capability, product customization, price, customer support, success in developing new products, manufacturing
+expertise and capacity, supply of component parts and materials, strategic relationships with suppliers, the timing of new product introductions by us and our competitors, general market, economic and political conditions and, in some cases, the
+uniqueness of our products. 
+In the banking and POS market, our major competitor is Epson America, Inc., which holds a dominant market
+position of the POS markets into which we sell. We also compete, to a much lesser extent, with Transaction Printer Group, Star Micronics America, Inc., Citizen—CBM America Corporation, Pertech Resources, Inc., Addmaster, and Samsung/Bixolon.
+Certain competitors of ours have greater financial resources, lower costs attributable to higher volume production and sometimes offer lower prices than us. 
+In the lottery market (consisting principally of on-line lottery transaction printing), we hold a leading position, based largely on our long-term purchase agreement with GTECH, which holds approximately 70% market
+share of the worldwide on-line lottery market. We compete in this market based solely on our ability to provide specialized, custom-engineered products to GTECH. 
+In the casino and gaming market (consisting principally of slot machine and video lottery terminal transaction printing), we compete with several companies including FutureLogic, Inc., Nanoptix, Inc., Custom
+Engineering SPA and others. Certain of our products sold for casino and gaming applications compete based upon our ability to provide highly specialized products, custom engineering and ongoing technical support. 
+The TransAct Services Group business is highly fragmented, and we compete with numerous competitors of various sizes depending on the geographic area.
+Our strategy for competing in our markets is to continue to develop new products and product line extensions, to increase our geographic
+market penetration, to take advantage of strategic relationships, and to lower product costs by sourcing certain products overseas. Although we believe that our products, operations and relationships provide a competitive foundation, there can be no
+assurance that we will compete successfully in the future. In addition, our products utilize certain inkjet, thermal and impact printing technology. If other technologies, or variations to existing technologies were to evolve or become available to
+us, it is possible that we would incorporate these technologies into our products. Alternatively, if such technologies were to evolve or become available to our competitors, our products could become obsolete, which would have a significant negative
+impact on our business. 
+4 
+Table of Contents 
+Research and Development Activities 
+We spent approximately $3,129,000, $2,824,000 and $2,726,000 in 2007, 2006 and 2005, respectively, on engineering, design and product development efforts in connection with specialized engineering and design to
+introduce new products and to customize existing products. 
+Environment 
+We are not aware of any material noncompliance with federal, state and local provisions that have been enacted or adopted regulating the discharge of
+materials into the environment, or otherwise relating to the protection of the environment. 
+Employees 
+As of February 29, 2008, TransAct and our subsidiaries employed 164 persons, of whom 153 were full-time and 11 were temporary employees. None of our
+employees are unionized, and we consider our relationships with our employees to be good. 
+Financial Information About Geographic Areas 
+We have foreign operations primarily from TransAct Technologies Ltd., a wholly-owned subsidiary located in the United Kingdom, which had sales to its
+customers of $2,121,000, $2,722,000, and $2,181,000, (primarily for the service of printers used in the British Post Office) in 2007, 2006 and 2005, respectively. We had export sales from our domestic operations of approximately $8,674,000,
+$11,416,000 and $10,137,000 in 2007, 2006 and 2005, respectively. Total international sales, which include sales from our foreign subsidiary and export sales from our domestic operations, were approximately $10,795,000, $14,138,000 and $12,318,000
+in 2007, 2006 and 2005, respectively. 
+Additional Information 
+We make available free of charge through our internet website, www.transact-tech.com , our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those
+reports as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. 
+We maintain a Code of
+Business Conduct that includes our code of ethics that is applicable to all employees, including our Chief Executive Officer, Chief Financial Officer and Controller. This Code, which requires continued observance of high ethical standards such as
+honesty, integrity and compliance with the law in the conduct of our business, is available for public access on our internet website. Any person may request a copy of our Code of Business Conduct free of charge by calling (203) 859-6800.
+Executive Officers of the Registrant 
+The following list is included as an unnumbered item in Part I of this Report in lieu of being included in the Proxy Statement for the Annual Meeting of Stockholders to be held on May 28, 2008. 
+5 
+Table of Contents 
+The following is a list of the names and ages of all executive officers of the registrant, indicating all
+positions and offices with the registrant held by each such person and each person’s principal occupations and employment during at least the past five years. 
+Name 
+Age 
+Position 
+Bart C. Shuldman 
+50 
+Chairman of the Board, President and Chief Executive Officer 
+Steven A. DeMartino 
+38 
+Executive Vice President, Chief Financial Officer, Treasurer and Secretary 
+Michael S. Kumpf 
+58 
+Executive Vice President—Engineering 
+James B. Stetson 
+51 
+Senior Vice President and Business Manager of TransAct Services Group 
+Tracey S. Chernay 
+48 
+Senior Vice President—Sales and Marketing 
+Andrew Hoffman 
+50 
+Senior Vice President—Operations 
+B ART C. S HULDMAN has been Chief Executive Officer, President and a
+Director of the Company since its formation in June 1996. In February 2001, Mr. Shuldman was elected Chairman of the Board. 
+S TEVEN A. D E M ARTINO was named as TransAct’s Executive Vice President, Chief Financial Officer, Treasurer and Secretary on June 1, 2004. Previously, Mr. DeMartino served as Senior
+Vice President, Finance and Information Technology from October 2001 to May 2004, Vice President and Corporate Controller from January 1998 to October 2001, and Corporate Controller from August 1996 to December 1997. Mr. DeMartino is a
+certified public accountant. 
+M ICHAEL S. K UMPF was appointed Executive Vice President of Engineering in March
+2002. He served as Senior Vice President, Engineering from June 1996 to March 2002. 
+J AMES B. S TETSON was
+appointed Senior Vice President and Business Manager of TransAct Services Group in January 2005. Previously, Mr. Stetson held the position of Executive Vice President of Sales and Marketing from February 2000 to December 2004, and Vice
+President of Latin American Sales from October 1997 to February 2000. 
+T RACEY S. C HERNAY was appointed Senior
+Vice President, Sales and Marketing in June 2007, with responsibility for the sales and marketing of all TransAct printer products worldwide. Previously Ms. Chernay served as Sr. Vice President, Marketing & Sales, POS &
+Banking with the Company from July 2006 to June 2007, and joined TransAct in May of 2005 as Senior Vice President, Marketing. Prior to joining TransAct, Ms. Chernay was employed with Xerox Corporation where she held the role of Manager,
+Worldwide Marketing since 2003, and Manager, Sales Operations from 2000 to 2002. She joined Xerox Corporation in 1983. 
+A NDREW H OFFMAN was appointed Senior Vice President, Operations for TransAct worldwide in November 2004. He served as Vice President, Operations from September 1994 to November 2004.
\ No newline at end of file
diff --git a/raw/filings/0001017303/2007/0001193125-08-057494/item13.txt b/raw/filings/0001017303/2007/0001193125-08-057494/item13.txt
new file mode 100644
index 0000000000000000000000000000000000000000..e3f6c0c280a2f8d97b9f2f6958b905bb8de1f34e
--- /dev/null
+++ b/raw/filings/0001017303/2007/0001193125-08-057494/item13.txt
@@ -0,0 +1,3 @@
+Item 13. Certain Relationships and Related Transactions. 
+The information in response to this item is
+incorporated by reference from the Proxy Statement section entitled “Certain Relationships and Related Transactions.”
\ No newline at end of file
diff --git a/raw/filings/0001017303/2007/0001193125-08-057494/item9a.txt b/raw/filings/0001017303/2007/0001193125-08-057494/item9a.txt
new file mode 100644
index 0000000000000000000000000000000000000000..443ca929d2f3c106a98ab1136b658fa82332697a
--- /dev/null
+++ b/raw/filings/0001017303/2007/0001193125-08-057494/item9a.txt
@@ -0,0 +1,51 @@
+Item 9A. Controls and Procedures 
+Attached as exhibits to this Form 10-K are certifications of our Chief
+Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), which are required in accordance with Rule 13a-14 of the Securities Exchange Act of 1934, as amended (the Exchange Act). This “Controls and Procedures”
+section includes information concerning the controls and controls evaluation referred to in the certifications. Part II, Item 8 of this Form 10-K sets forth the report of PricewaterhouseCoopers LLP, our independent registered public accounting
+firm, regarding its audit of TransAct’s internal control over financial reporting as of December 31, 2007. This section should be read in conjunction with the CEO and CFO certifications and the PricewaterhouseCoopers LLP report for a more
+complete understanding of the topics presented. 
+Evaluation of Disclosure Controls and Procedures 
+We conducted an evaluation of the effectiveness of the design and operation of our “disclosure controls and procedures” (“Disclosure
+Controls”) as of the end of the period covered by this Form 10-K. The controls evaluation was conducted under the supervision and with the participation of management, including our CEO and CFO. Disclosure Controls are controls and procedures
+designed to reasonably assure that information required to be disclosed in our reports filed under the Exchange Act, such as this Form 10-K, is recorded, processed, summarized and reported within the time periods specified in the U.S. Securities and
+Exchange Commission’s (“SEC”) rules and forms. Disclosure Controls are also designed to reasonably assure that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate to allow
+timely decisions regarding required disclosure. Our quarterly evaluation of Disclosure Controls includes an evaluation of some components of our internal control over financial reporting, and internal control over financial reporting is also
+separately evaluated on an annual basis for purposes of providing the management report which is set forth below. 
+34 
+Table of Contents 
+The evaluation of our Disclosure Controls included a review of the controls’ objectives and design,
+the company’s implementation of the controls and the effect of the controls on the information generated for use in this Form 10-K. In the course of the controls evaluation, we review data errors, control problems or acts of fraud, if any, and
+seek to confirm that appropriate corrective actions, including process improvements, are being undertaken. This type of evaluation is performed on a quarterly basis so that the conclusions of management, including the CEO and CFO, concerning the
+effectiveness of the Disclosure Controls can be reported in our periodic reports on Form 10-Q and Form 10-K. Many of the components of our Disclosure Controls are also evaluated on an ongoing basis by personnel in our finance organization. The
+overall goals of these various evaluation activities are to monitor our Disclosure Controls, and to modify them as necessary. Our intent is to maintain the Disclosure Controls as dynamic systems that change as conditions warrant. 
+Based upon the evaluation of the controls, our CEO and CFO have concluded that, as of the end of the period covered by this Form 10-K, our Disclosure
+Controls were effective to provide reasonable assurance that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified by the SEC, and that material information
+relating to TransAct and our consolidated subsidiaries is made known to management, including the CEO and CFO, particularly during the period when our periodic reports are being prepared. 
+Changes in Internal Control over Financial Reporting 
+The implementation of our new Oracle enterprise resource planning and accounting system, completed effective January 8, 2007, required us to modify, add and remove certain internal controls and processes and procedures. Otherwise, no
+change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the three months ended December 31, 2007 that has materially affected, or is reasonably likely to
+materially affect, our internal control over financial reporting. 
+Management’s Report on Internal Control Over Financial Reporting 
+Our management is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance
+regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and
+procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are
+recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management
+and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial
+statements. 
+Management assessed our internal control over financial reporting as of December 31, 2007. Management based its
+assessment on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). 
+Based on our assessment, management has concluded that our internal control over financial reporting was effective as of December 31, 2007, based on
+the COSO criteria identified above, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with generally accepted accounting
+principles. 
+The effectiveness of the Company’s internal control over financial reporting as of December 31, 2007, has been
+audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein. 
+35 
+Table of Contents 
+Inherent Limitations on Effectiveness of Controls 
+A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives
+will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no
+evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the company have been detected. 
+These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple errors
+or mistakes. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about
+the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to
+risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
\ No newline at end of file
diff --git a/raw/filings/0001017303/2007/0001193125-08-057494/rp_note.txt b/raw/filings/0001017303/2007/0001193125-08-057494/rp_note.txt
new file mode 100644
index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391
diff --git a/raw/filings/0001017303/2007/0001193125-08-057494/rpt_disclosure.txt b/raw/filings/0001017303/2007/0001193125-08-057494/rpt_disclosure.txt
new file mode 100644
index 0000000000000000000000000000000000000000..9935473d992b297b82a006b6c2d2f73fdb760f56
--- /dev/null
+++ b/raw/filings/0001017303/2007/0001193125-08-057494/rpt_disclosure.txt
@@ -0,0 +1,12 @@
+CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 
+The Company maintains policies that relate to the
+identification, review and approval of related party transactions. As part of a review of possible related person transactions, the Company annually distributes and collects questionnaires that solicit information about any direct or indirect
+transactions with the Company from each of our directors and officers. 
+Our Standards of Business Conduct require all directors, officers
+and employees to avoid any situation that involves an actual or apparent conflict of interest in personal and professional relationships or with their duty to, or with any interest of, the Company. Under the Standards of Business Conduct, situations
+that involve, or may reasonably be inferred to involve, a conflict between a director, officer or employee’s personal interests and the interests of the Company should be disclosed to the Chair of the Audit Committee. The Audit Committee is
+then responsible for reviewing the related party transaction. No related party transaction shall be approved or ratified if such transaction is contrary to the best interests of the Company. In determining whether to approve or ratify a related
+party transaction, the Audit Committee takes into account such factors as it deems appropriate, which may include whether the interested transaction is on terms no less favorable than terms generally available to an unaffiliated third party under
+the same or similar circumstances and the extent of the related person’s interest in the transaction. 
+From January 1, 2007 to the
+date of this proxy statement, there have not been any transactions of the type described in Item 404 of Regulation S-K, and currently no such transactions are proposed.
\ No newline at end of file
diff --git a/raw/filings/0001017303/2012/0001017303-13-000017/filing.txt b/raw/filings/0001017303/2012/0001017303-13-000017/filing.txt
new file mode 100644
index 0000000000000000000000000000000000000000..fdab7d62c3bdeb1e64e51c30ce24812fd6c15c2a
--- /dev/null
+++ b/raw/filings/0001017303/2012/0001017303-13-000017/filing.txt
@@ -0,0 +1,3465 @@
+10-K
+1
+form10k2012.htm
+FORM 10K FOR THE YEAR ENDED DECEMBER 31, 2012
+form10k2012.htm 
+UNITED STATES 
+SECURITIES AND EXCHANGE COMMISSION 
+Washington, D.C. 20549 
+FORM 10-K 
+(Mark One) 
+x 
+ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
+For the fiscal year ended December 31, 2012 
+or 
+¨ 
+TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 
+For the transition period from to . 
+Commission file number: 0-21121 
+______________________________________________________________________ 
+(Exact name of registrant as specified in its charter) 
+Delaware 
+06-1456680 
+(State or other jurisdiction of incorporation or organization) 
+(I.R.S. Employer Identification No.) 
+One Hamden Center, 2319 Whitney Avenue, Suite 3B, Hamden, CT 
+06518 
+(Address of principal executive offices) 
+(Zip Code) 
+Registrant's telephone number, including area code 203-859-6800 
+______________________________________________________________________ 
+Securities registered pursuant to Section 12(b) of the Act: 
+Title of Each Class - Common Stock, par value $.01 per share 
+Name of Exchange on which Registered - NASDAQ Global Market 
+______________________________________________________________________ 
+Securities registered pursuant to Section 12(g) of the Act: None 
+Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. 
+Yes o No ý 
+Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. 
+Yes o No ý 
+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 ý No o 
+Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o 
+Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) 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. ý 
+Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. 
+Large accelerated filer o 
+Accelerated filer ý 
+Non-accelerated filer o (Do not check if a smaller reporting company) 
+Smaller reporting company o 
+Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý 
+The aggregate market value of the voting and non-voting common equity stock held by non-affiliates of the Registrant was approximately $64,500,000 based on the last sale price on June 30, 2012. 
+As of February 28, 2013, the number of shares outstanding of the Company’s common stock, $0.01 par value, was 8,651,684. 
+DOCUMENTS INCORPORATED BY REFERENCE 
+Portions of the TransAct Technologies Incorporated Proxy Statement to be filed with the Securities and Exchange Commission (SEC) within 120 days after the year covered by this Form 10-K with respect to the 2013 Annual Meeting of Stockholders are incorporated by reference into Part III hereof. 
+TRANSACT TECHNOLOGIES INCORPORATED 
+INDEX 
+PART I. 
+Item 1. 
+Business 
+1 
+Item 1A. 
+Risk Factors 
+4 
+Item 1B. 
+Unresolved Staff Comments 
+8 
+Item 2. 
+Properties 
+9 
+Item 3. 
+Legal Proceedings 
+9 
+Item 4. 
+Mine Safety Disclosures 
+9 
+PART II. 
+Item 5. 
+Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 
+9 
+Item 6. 
+Selected Financial Data 
+11 
+Item 7. 
+Management's Discussion and Analysis of Financial Condition and Results of Operations 
+11 
+Item 7A. 
+Quantitative and Qualitative Disclosures About Market Risk 
+23 
+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 
+Item 9B. 
+Other Information 
+24 
+PART III. 
+Item 10. 
+Directors, Executive Officers and Corporate Governance 
+24 
+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, and Director Independence 
+25 
+Item 14. 
+Principal Accounting Fees and Services 
+25 
+PART IV. 
+Item 15. 
+Exhibits 
+26 
+SIGNATURES 
+Signatures 
+26 
+CONSOLIDATED FINANCIAL STATEMENTS 
+Index to Consolidated Financial Statements 
+F-1 
+EXHIBITS 
+Index to Exhibits 
+PART I 
+Item 1. Business. 
+The Company 
+TransAct Technologies Incorporated (“TransAct” or the “Company”) was incorporated in June 1996 and began operating as a stand-alone business in August 1996 as a spin-off of the printer business that was formerly conducted by certain subsidiaries of Tridex Corporation. We completed an initial public offering on August 22, 1996. 
+TransAct designs, develops and sells market-specific solutions, including printers, terminals, software and other products for transaction-based and other industries. These world-class products are sold under the Epic, EPICENTRAL TM , Ithaca® and Printrex® brand names. Known and respected worldwide for innovative designs and real-world service reliability, our thermal, inkjet and impact printers generate top-quality transaction records such as receipts, tickets, coupons, register journals and other documents as well as printed logging and plotting of data. We focus on the following core markets: food safety, banking and point-of-sale (“POS”), casino and gaming, lottery, oil and gas and medical and mobile. We sell our products to original equipment manufacturers (“OEMs”), value-added resellers ("VARs"), selected distributors, as well as directly to end-users. Our product distribution spans across the Americas, Europe, the Middle East, Africa, Asia, Australia, the Caribbean Islands and the South Pacific. TransAct also provides world-class printer service, spare parts, accessories and printing supplies to its growing worldwide installed base of printers. Through our TransAct Services Group (“TSG”) we provide a complete range of supplies and consumables used in the printing and scanning activities of customers in the hospitality, banking, retail, gaming, government and oil and gas exploration markets. Through our webstore, www.transactsupplies.com , and our direct selling team, we address the on-line demand for these products. We have one primary operating facility and eastern region service center located in Ithaca, NY, our casino and gaming sales headquarters and western region service center in Las Vegas, NV, a European sales and service center in the United Kingdom, a sales office located in Macau and three other sales or administrative offices located in the United States. Our executive offices are located at One Hamden Center, 2319 Whitney Avenue, Suite 3B, Hamden, CT, 06518, with a telephone number of (203) 859-6800. 
+On August 19, 2011, we completed the acquisition of Printrex, Inc. (“Printrex”) for $4,000,000 in cash and potential future contingent consideration. Printrex is a leading manufacturer of specialty printers primarily sold into the oil and gas exploration and medical and mobile markets. Printrex serves commercial and industrial customers primarily in the United States, Canada, Europe and Asia. This acquisition was completed to complement our existing product offerings. 
+Financial Information about Segments 
+We operate in one reportable segment, the design, development, assembly and sale of transaction-based and specialty printing solutions and related services, supplies and spare parts. 
+Products, Services and Distribution Methods 
+Printers 
+TransAct designs, develops, assembles and markets a broad array of transaction-based and specialty printers utilizing inkjet, thermal and impact printing technology for applications, primarily in the food safety, banking, POS, casino and gaming, lottery, oil and gas and medical and mobile markets. Our printers are configurable and offer customers the ability to choose from a variety of features and functions. Options typically include interface configuration, paper cutting devices, paper handling capacities and cabinetry color. In addition to our configurable printers, we design and assemble custom printers for certain OEM customers. In collaboration with these customers, we provide engineering and manufacturing expertise for the design and development of specialized printers. 
+Food safety, banking and POS: Our banking and POS printers include hundreds of optional configurations that can be selected to meet particular customer needs. We believe that this is a significant competitive strength, as it allows us to satisfy a wide variety of printing applications that our customers request. In the banking market, we sell printers that are used by banks, credit unions and other financial institutions to print and/or validate receipts at bank teller stations. In the POS market, we sell several models of printers utilizing inkjet, thermal and impact printing technology. Our printers are used primarily by retailers in the restaurant (including fine dining, casual dining, and fast food), hospitality, and specialty retail industries to print receipts for consumers, validate checks, or print on linerless labels or other inserted media. During 2012 in an effort to address the Food Safety Modernization Act, we developed a food safety terminal that prints easy-to-read expiration and "enjoy by" date labels using thermal printing technology to help restaurants effectively manage food spoilage. In the POS market, we primarily sell our products through a network of domestic and international distributors and resellers. We use an internal sales force to manage sales through our distributors and resellers, as well as to solicit sales directly from end-users. In the banking market, we primarily sell our products directly to end-user banks and financial institutions through the use of our internal sales force. In the food safety market, we sell our products directly to end-users through the use of our internal sales force with the assistance of sales representatives from a large food safety distributor. 
+Lottery: We supply lottery printers to Lottomattica’s GTECH Corporation (“GTECH”), our largest customer and the world’s largest provider of lottery terminals. These printers are designed for high-volume, high-speed printing of lottery tickets for various lottery applications. Sales of our lottery products are made directly to GTECH and managed by an internal sales representative. 
+Casino and gaming: We sell several models of printers used in slot machines and video lottery terminals (“VLT’s”) and other gaming machines that print tickets or receipts instead of issuing coins (“ticket-in, ticket-out” or “TITO”) at casinos, racetracks (“racinos”) and other gaming venues worldwide. These printers utilize thermal printing technology and can print tickets or receipts in monochrome or two-color (depending upon the model), and offer various other features such as jam resistant bezels and a dual port interface that enables casinos to print coupons and promotions. In addition, we sell printers using thermal and impact printing technology for use in non-casino establishments, including game types such as Amusements with Prizes (“AWP”), Skills with Prizes (“SWP”), Fixed Odds Betting Terminals (“FOBT”) and other off-premise gaming type machines around the world. We sell our products primarily to (1) slot machine manufacturers, who incorporate our printers into slot machines and, in turn, sell completed slot machines directly to casinos and other gaming establishments and (2) through regional distributors (four in the United States and Asia, one in Europe and Africa, one in Latin America and one in Australia). We also maintain a dedicated internal sales force to solicit sales from slot manufacturers and casinos, as well as to manage sales through our distributors. 
+We have also developed a new software solution, the EPICENTRAL TM Print System (“EPICENTRAL TM ”), that enables casino operators to create promotional coupons and marketing messages and print them in real-time at the slot machine. With EPICENTRAL TM , casinos will be able to utilize the system to create multiple promotions and incentives to either increase customer time spent on the casino floor or encourage additional visits to generate more revenue to the casinos. 
+Printrex: Printrex printers include wide format, rack mounted and vehicle mounted thermal printers used by customers to log and plot oil field and down hole well drilling data in the oil and gas exploration industry. During 2012, we launched two new color printers for this market, the Printrex 920 and Printrex 980. The Printrex 920 is the first full-color printer designed from the ground up to perform in the adverse environment of a well logging truck or off-shore platform. Using thermal printer technology, it can print in black and white, or in full color using proprietary color paper without the need for inkjet cartridges or ribbons. The Printrex 980 is the fastest full color printer available for plotting continuous logs in the data centers of the large oil field service companies. This printer uses proprietary inkjet cartridges. In addition, we sell wide format thermal printers used to print test results in ophthalmology devices in the medical industry, as well as vehicle mounted printers used to print schematics and certain other critical information in emergency services vehicles. We primarily sell our Printrex products directly to oil field service and drilling companies and OEM’s, as well as through regional distributors in the United States, Europe, Canada and Asia. We also maintain a dedicated internal sales force and one manufacturer’s representative located in Texas. 
+TSG 
+Through TSG, we proactively market the sale of consumable products (including inkjet cartridges, ribbons, receipt paper, color thermal paper and other printing supplies), replacement parts, maintenance and repair services and paper testing services for all of our products and certain competitor’s products. Our maintenance services include the sale of extended warranties, multi-year maintenance contracts, 24-hour guaranteed replacement product service called TransAct Xpress SM , and other repair services for our printers. Within the United States, we provide repair services through our eastern region service center in Ithaca, NY and our western region service center in Las Vegas, NV. Internationally, we provide repair services through our European service center located in Doncaster, United Kingdom, and through partners strategically located around the world. 
+We also provide customers with telephone sales and technical support, and a personal account representative to handle orders, shipping and general information. Technical and sales support personnel receive training on all of our manufactured products and our services. 
+In addition to personalized telephone and technical support, we also market and sell consumable products 24 hours a day, seven days a week, via our online webstore www.transactsupplies.com . 
+Sources and Availability of Raw Materials 
+We design our products to optimize product performance, quality, reliability and durability. These designs combine cost efficient materials, sourcing and assembly methods with high standards of workmanship. Approximately 85% of our printer production is through two third-party contract manufacturers in Asia, with the remaining 15% of products assembled in our Ithaca, NY facility largely on a configure-to-order basis using components and subassemblies that have been sourced from vendors and contract manufacturers around the world. 
+We procure component parts and subassemblies for use in the assembly of our products in Ithaca, NY. Critical component parts and subassemblies include inkjet, thermal and impact print heads, printing/cutting mechanisms, power supplies, motors, injection molded plastic parts, LCD screens, circuit boards and electronic components, which are obtained from domestic and foreign suppliers at competitive prices. As a result of the majority of our production being performed by our contract manufacturers, purchases of component parts have declined while purchases of fully-assembled printers produced by our contract manufacturers have increased. We typically strive to maintain more than one source for our component parts, subassemblies and fully assembled printers to reduce the risk of parts shortages or unavailability. However, we could experience temporary disruption if certain suppliers ceased doing business with us, as described below. 
+We currently buy substantially all of our thermal print mechanisms, an important component of our thermal printers, and fully assembled printers for several of our printer models, from one foreign contract manufacturer, and to a much lesser extent, a second foreign contract manufacturer. Although we believe that other contract manufacturers could provide similar thermal print mechanisms or fully assembled printers, on comparable terms, a change in contract manufacturers could cause a delay in manufacturing and possible loss of sales, which may have a material adverse effect on our operating results. Although we do not have a supply agreement with our foreign contract manufacturer, our relationship with them remains strong and we have no reason to believe that they will discontinue their supply of thermal print mechanisms to us during 2013 or that their terms to us will be any less favorable than they have been historically. 
+Hewlett-Packard Company (“HP”) is the sole supplier of inkjet cartridges that are used in all of our banking inkjet printers. In addition, we also sell a substantial number of HP inkjet cartridges as a consumable product through TSG. Although other inkjet cartridges that are compatible with the HP inkjet cartridge are available, the loss of the supply of HP inkjet cartridges could have a material adverse effect on both the sale of our inkjet printers and TSG consumable products. Our relationship with HP remains stable and we have no reason to believe that HP will discontinue its supply of inkjet cartridges to us or that their terms to us will be any less favorable than they have been historically. The inkjet cartridges we purchase from HP are used not only in our inkjet printers for the banking and POS market, but also in other manufacturer’s printing devices across several other markets. 
+ZINK Imaging Inc. (“ZINK”) is the sole supplier of proprietary color thermal paper used in our Printrex 920 oil and gas printer. We have a supply agreement with ZINK to exclusively supply us with ZINK color thermal paper for the oil and gas industry at fixed prices through December 31, 2014. The loss of the supply of ZINK color thermal paper would have a material adverse effect on the sale of Printrex 920 printers and Zink color thermal paper. 
+Canon, Inc. (“Canon”) is the sole supplier of inkjet cartridges and other consumable items (“Canon Consumables”) that are used in our Printrex 980 oil and gas printer. The loss of supply of Canon Consumables would have a material adverse effect on the sale of Printrex 980 printers and the Canon Consumables. We have a supply agreement with Canon to supply us with us with Canon Consumables until May 2017. Prices under this agreement are fixed through May 2013, but may be changed due to significant exchange rate fluctuations between the Japanese yen and the U.S. dollar. 
+Patents and Proprietary Information 
+We have significantly expanded our patent portfolio over the past ten years, and expect to continue to do so in the future. We currently license certain technology to two companies in the casino and gaming industry and believe our patent portfolio could provide additional opportunities to license our intellectual property in the future. We hold 29 United States and 25 foreign patents and have 8 United States and 13 foreign patent applications pending pertaining to our products. The duration of these patents range from 5 to 17 years. The expiration of any individual patent would not have a significant negative impact on our business. We regard certain manufacturing processes and designs to be proprietary and attempt to protect them through employee and third-party nondisclosure agreements and similar means. It may be possible for unauthorized third parties to copy certain portions of our products or to reverse engineer or otherwise obtain and use, to our detriment, information that we regard as proprietary. Moreover, the laws of some foreign countries do not afford the same protection to our proprietary rights as do the laws of the United States. There can be no assurance that legal protections relied upon by the Company to protect our proprietary position will be adequate or that our competitors will not independently develop technologies that are substantially equivalent or superior to our technologies. 
+Seasonality 
+We do not believe that any of the markets we serve are materially affected by seasonality. 
+Working Capital 
+Inventory, accounts receivable, and accounts payable levels, payment terms, and where applicable, return policies are in accordance with the general practices of the industry and standard business procedures. See also Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 
+Certain Customers 
+GTECH is our most significant customer. In December 2009, we signed a new five-year agreement effective November 20, 2009, with GTECH (the “GTECH Thermal Printer Agreement”). Under the terms of the agreement, we provide GTECH with their latest generation thermal lottery printers for various lottery applications. The terms of the agreement require that GTECH exclusively purchase all of its requirements for thermal on-line lottery printers from us and that we exclusively sell such printers to GTECH through January 2015. We previously had an additional OEM purchase agreement with GTECH that provided for the sale of older generation thermal on-line lottery printers and spare parts, at fixed prices, through its expiration date of June 28, 2012. This agreement was not renewed as the underlying thermal printers and related spare parts were discontinued at the end of 2012. 
+Sales to GTECH and other customers representing 10% or more of our total net sales were as follows: 
+Year ended December 31, 
+2012 
+2011 
+2010 
+GTECH 
+18% 
+26% 
+12% 
+Customer A 
+15% 
+13% 
+14% 
+Backlog 
+Our backlog of firm orders was approximately $4,776,000 as of February 28, 2013, compared to $7,261,000 as of February 29, 2012. Based on customers’ current delivery requirements, we expect to ship our entire current backlog during 2013. 
+Competition 
+The market for transaction-based and specialty printing solutions is extremely competitive, and we expect such competition to continue in the future. We compete with a number of companies, many of which have greater financial, technical and marketing resources than us. We believe our ability to compete successfully depends on a number of factors both within and outside our control, including durability, reliability, quality, design capability, product customization, price, customer support, success in developing new products, manufacturing expertise and capacity, supply of component parts and materials, strategic relationships with suppliers, the timing of new product introductions by us and our competitors, general market, economic and political conditions and, in some cases, the uniqueness of our products. 
+In the banking and POS market, our major competitor is Epson America, Inc., which holds a dominant market position of the POS markets into which we sell. We also compete, to a much lesser extent, with Transaction Printer Group (“TPG”), Star Micronics America, Inc., Citizen -- CBM America Corporation, Pertech Resources, Inc., Addmaster, and Samsung/Bixolon. Certain competitors of ours have greater financial resources, lower costs attributable to higher volume production and sometimes offer lower prices than us. 
+In the food safety market, we compete with Avery Dennison Corporation, Ecolab Inc. and Integrated Control Corp. We compete in this market based largely on our ability to provide highly specialized products, custom engineering and ongoing technical support. 
+In the lottery market (consisting principally of on-line lottery transaction printing), we hold a leading position, based largely on our long-term purchase agreements with GTECH. We compete in this market based solely on our ability to provide specialized, custom-engineered products to GTECH. 
+In the casino and gaming market (consisting principally of slot machine and video lottery terminal transaction printing and promotional coupon printing), we compete with several companies including FutureLogic, Inc., Nanoptix, Inc., Custom Engineering SPA and others. Certain of our products sold for casino and gaming applications compete based upon our ability to provide highly specialized products, custom engineering and ongoing technical support. 
+In the Printrex market, we compete with the Imaging Systems Group, Inc. (“iSys”), Neuralog Inc., GSI Group and others. We compete in this market based largely on our ability to provide specialized, custom-engineered products. 
+The TSG business is highly fragmented, and we compete with numerous competitors of various sizes, including POS and internet resellers, depending on the geographic area. 
+Our strategy for competing in our markets is to continue to develop new products (hardware and software) and product line extensions, to increase our geographic market penetration, to take advantage of strategic relationships, and to lower product costs by sourcing certain products overseas. Although we believe that our products, operations and relationships provide a competitive foundation, there can be no assurance that we will compete successfully in the future. In addition, our products utilize certain inkjet, thermal and impact printing technology. If other technologies, or variations to existing technologies, were to evolve or become available to us, it is possible that we would incorporate these technologies into our products. Alternatively, if such technologies were to evolve or become available to our competitors, our products could become obsolete, which would have a significant negative impact on our business. 
+Research and Development Activities 
+Research, development, and engineering expenditures represent costs incurred in the experimental or laboratory sense aimed at discovery and/or application of new knowledge in developing a new product or process, or in bringing about significant improvement in an existing product or process. We spent approximately $4,239,000, $3,418,000 and $3,000,000 in 2012, 2011 and 2010, respectively, on engineering, design and product development efforts in connection with specialized engineering and design to introduce new hardware and software products and to customize or improve existing products. 
+Costs incurred in researching and developing a computer software product are charged to expense until technological feasibility has been established, at which point all material software costs are capitalized within Intangible assets in our Consolidated Balance Sheet until the product is available for general release to customers. While judgment is required in determining when technological feasibility of a product is established, we have determined that it is reached after all high-risk development issues have been documented in a formal detailed plan design. The amortization of these costs will be included in cost of sales over the estimated life of the product. During 2010 we began the development of EPICENTRAL TM , that enables casino customers to print coupons and promotions at the slot machine. Unamortized development costs for such software were approximately $528,000 and $682,000 as of December 31, 2012 and 2011, respectively. The total amount charged to cost of sales for capitalized software development costs were approximately $189,000 and $62,000 in 2012 and 2011, respectively. 
+Environment 
+We are not aware of any material noncompliance with federal, state and local provisions that have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment. 
+Employees 
+As of December 31, 2012, TransAct and our subsidiaries employed 140 persons, of whom 124 were full-time and 16 were temporary employees. None of our employees are unionized, and we consider our relationships with our employees to be good. 
+Financial Information About Geographic Areas 
+For financial information regarding our geographic areas see Note 16 – Geographic Area Information in the Notes to the Consolidated Financial Statements. Risks attendant to our foreign operations are described in Item 1A below. 
+Available Information 
+We make available free of charge through our internet website, www.transact-tech.com , our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. You may read and copy any materials filed with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. This information is also available at www.sec.gov. The reference to these website addresses does not constitute incorporation by reference of the information contained on the websites and should not be considered part of this document. 
+We maintain a Code of Business Conduct that includes our code of ethics that is applicable to all employees, including our Chief Executive Officer, Chief Financial Officer and Controller. This Code, which requires continued observance of high ethical standards such as honesty, integrity and compliance with the law in the conduct of our business, is available for public access on our internet website. Any person may request a copy of our Code of Business Conduct free of charge by calling (203) 859-6800. 
+Item 1A. Risk Factors 
+Investors should carefully consider the risks, uncertainties and other factors described below, as well as other disclosures in Management’s Discussion and Analysis of Financial Condition and Results of Operations, because they could have a material adverse effect on our business, financial condition, operating results, and growth prospects. The risks described below are not the only ones facing our Company. Additional risks not known to us now or that we currently deem immaterial may also impair our business operations. 
+We assume no obligation (and specifically disclaim any such obligation) to update these Risk Factors or any other forward-looking statements contained in this Annual Report to reflect actual results, changes in assumptions or other factors affecting such forward-looking statements, except as required by law. 
+Our operating results and financial condition may fluctuate. 
+Our operating results and financial condition may fluctuate from quarter to quarter and year to year and are likely to continue to vary due to a number of factors, many of which are not within our control. If our operating results do not meet the expectations of securities analysts or investors, who may derive their expectations by extrapolating data from recent historical operating results, the market price of our common stock will likely decline. Fluctuations in our operating results and financial condition may be due to a number of factors, including, but not limited to, those identified throughout this “Risk Factors” section: 
+· 
+market acceptance of our products, both domestically and internationally; 
+· 
+development of new competitive products by others; 
+· 
+our responses to price competition; 
+· 
+our level of research and development activities; 
+· 
+changes in the amount that we spend to develop, acquire or license new products, consumables, technologies or businesses; 
+· 
+changes in the amount we spend to promote our products and services; 
+· 
+changes in the cost of satisfying our warranty obligations and servicing our installed base of printers; 
+· 
+delays between our expenditures to develop and market new or enhanced products and consumables and the generation of sales from those products; 
+· 
+the geographic distribution of our sales; 
+· 
+availability of third-party components at reasonable prices; 
+· 
+general economic and industry conditions, including changes in interest rates affecting returns on cash balances and investments, that affect customer demand; 
+· 
+severe weather events (such as hurricanes) that can disrupt or interrupt the operation of our customers or suppliers facilities; and 
+· 
+changes in accounting rules. 
+Due to all of the foregoing factors, and the other risks discussed in this report, quarter-to-quarter comparisons of our operating results may not be an indicator of future performance. 
+Our revenue and profitability depend on our ability to continue to develop, on a timely basis, new products and technologies which are free from hardware or software anomalies and cannot be fraudulently manipulated: 
+The success of newly introduced printers such as the Ithaca® 9700 food safety terminal and the Printrex® 920 and Printrex® 980 oil and gas color printers is dependent on how quickly customers in the related markets accept them given the very little market penetration the printers currently have experienced since they are so new and innovative and have limited competition. Additionally, the success of new technology, such as printing coupons and promotions at the slot machine using our EPICENTRAL™ Print System, is dependent on our casino customers' acceptance of such technology. While we have designed our EPICENTRAL™ Print System to support our customers' existing investment in our Epic 950® thermal casino printers, such acceptance may nevertheless only build gradually over time or not at all. Delays in acceptance by our customers of new technologies may adversely affect our operations. 
+Our success depends upon our ability to adapt our capabilities and processes to meet the demands of producing new and innovative products. Because our newer products are generally more technologically sophisticated than those we have produced in the past, we must continually refine our capabilities to meet the needs of our product innovation. If we cannot efficiently adapt our infrastructure to meet the needs of our product innovations in a timely manner, our business could be negatively impacted. 
+Our business could be negatively affected as a result of actions by activist shareholders. 
+We received multiple public notices during 2012 from a significant shareholder that encouraged our Board of Directors to undertake an extensive review of all strategic opportunities that, in the opinion of such shareholder, would best position us for future growth in addition to maximizing shareholder value. During 2012, the Board of Directors publicly responded to this shareholder addressing his concerns and ensuring that any decisions made would be for the benefit of all shareholders of the Company. If shareholder activism continues or increases, particularly with respect to matters which our Board of Directors, in exercising their fiduciary duties, disagree with or have determined not to pursue, our business could be adversely affected because: 
+· 
+responding to actions by activist shareholders can be costly and time-consuming, disrupting our operations and diverting the attention of management; and 
+· 
+perceived uncertainties as to our future direction may result in the loss of potential business opportunities, and may make it more difficult to attract and retain qualified personnel and business partners. 
+We rely on resellers to sell our products and services. 
+We use a variety of distribution channels, including OEMs and distributors, to market our products. We may be adversely impacted by any conflicts that could arise between and among our various sales channels. 
+Our dependence upon resellers exposes us to numerous risks, including: 
+· 
+loss of channel and the ability to bring new products to market; 
+· 
+concentration of credit risk, including disruption in distribution should the resellers’ financial condition deteriorate; 
+· 
+reduced visibility to end user demand and pricing issues which makes forecasting more difficult; 
+· 
+resellers leveraging their buying power to change the terms of pricing, payment and product delivery schedules; and 
+· 
+direct competition should a reseller decide to manufacture printers internally or source printers from a competitor. 
+We cannot guarantee that resellers will not reduce, delay or eliminate purchases from us, which could have a material adverse effect upon the business, consolidated results of operations and financial condition. 
+General economic conditions and the related deterioration in the global business environment could have a material adverse effect on our business, operating results and financial condition. 
+Global consumer confidence has eroded amidst concerns over, among other things, declining asset values, inflation, volatility in energy costs, geopolitical issues, the availability and cost of credit, rising unemployment, and the stability and solvency of financial institutions, financial markets, businesses and sovereign nations. These concerns have slowed global economic growth and have resulted in recessions in numerous countries, including many of those in North America, Europe and Asia, where the Company does substantially all of its business. As these economic conditions continue to persist, or if they worsen, a number of negative effects on our business could result, including customers or potential customers reducing or delaying orders, the insolvency of key suppliers which could result in production delays, the inability of customers to obtain credit, and the insolvency of one or more customers. Any of these effects could impact our ability to effectively manage inventory levels and collect receivables, create unabsorbed costs due to lower net sales, and ultimately decrease our net sales and profitability including write-downs of assets. 
+In the lottery market, we have been dependent on sales to one large customer; the loss of this customer or reduction in orders from this customer could materially affect our sales. 
+We expect that sales to one large customer will continue to represent a material percentage of our net sales for the foreseeable future. A reduction, delay or cancellation in orders from this customer, including reductions or delays due to market, economic, or competitive conditions in the industries in which we serve, could have a material adverse effect upon our results of operations. 
+Our success will depend on our ability to sustain and manage growth. 
+As part of our business strategy, we intend to pursue a growth strategy. Assuming this growth occurs, it will require the expansion of distribution relationships in international markets, the successful development and marketing of new products for our existing and new markets, expanded customer service and support, and the continued implementation and improvement of our operational, financial and management information systems. 
+To the extent that we seek growth through acquisitions, our ability to manage our growth will also depend on our ability to integrate businesses that have previously operated independently. We may not be able to achieve this integration without encountering difficulties or experiencing the loss of key employees, customers or suppliers. It may be difficult to design and implement effective financial controls for combined operations and differences in existing controls for each business may result in weaknesses that require remediation when the financial controls and reporting functions are combined. As we pursue acquisitions, we may incur legal, accounting and other transaction related expenses for unsuccessful acquisition attempts that could adversely affect our results of operations in the period in which they are incurred. 
+There can be no assurance that we will be able to successfully implement our growth strategy, or that we can successfully manage expanded operations. As we expand, we may from time to time experience constraints that will adversely affect our ability to satisfy customer demand in a timely fashion. Failure to manage growth effectively could adversely affect our results of operations and financial condition. 
+We compete in highly competitive markets, which are likely to become more competitive. Competitors may be able to respond more quickly to new or emerging technology and changes in customer requirements. 
+We face significant competition in developing and selling our printers, transaction supplies and services. Principal competitors have substantial marketing, financial, development and personnel resources. To remain competitive, we believe we must continue to provide: 
+· 
+Technologically advanced printers that satisfy the user demands; 
+· 
+Superior customer service; 
+· 
+High levels of quality and reliability; and 
+· 
+Dependable and efficient distribution networks. 
+We cannot ensure we will be able to compete successfully against current or future competitors. Increased competition in printers or supplies may result in price reductions, lower gross profit margins and loss of market share, and could require increased spending on research and development, sales and marketing and customer support. Some competitors may make strategic acquisitions or establish cooperative relationships with suppliers or companies that produce complementary products. Any of these factors could reduce our earnings. 
+We have outsourced a large portion of the assembly of our printers to two contract manufacturers and will be dependent on them for the manufacturing of such printers. A failure by these contract manufacturers, or any disruption in such manufacturing, may adversely affect our business results. 
+In an effort to achieve additional cost savings and operation benefits, we have continued to outsource the manufacturing and assembly of our printers to contract manufacturers in Asia. 
+However, to the extent we rely on a third-party service provider for manufacturing services, we may incur increased business continuity risks. We will no longer be able to exercise control over the assembly of certain of our printers or any related operations or processes, including the internal controls associated with operations and processes conducted and the quality of our products assembled by contract manufacturers. If we are unable to effectively develop and implement our outsourcing strategy, we may not realize cost structure efficiencies and our operating and financial results could be materially adversely affected. 
+In addition, if either contract manufacturer experiences business difficulties or fails to meet our manufacturing needs, then we may be unable to meet production requirements, may lose revenue and may not be able to maintain relationships with our customers. Without the contract manufacturers continuing to manufacture our products and the continuing operation of the contract manufacturers’ facilities, we will have limited means for the final assembly of a majority of our printers until we are able to secure the manufacturing capability at another facility or develop an alternative manufacturing facility, which could be costly and time consuming and have a material adverse effect on our operating and financial results. 
+The increased elements of risk that arise from conducting certain operating processes in foreign jurisdictions may lead to an increase in reputational risk. 
+Although we carry business interruption insurance to cover lost revenue and profits in an amount we consider adequate, this insurance does not cover all possible situations. In addition, the business interruption insurance would not compensate us for the loss of opportunity and potential adverse impact, both short-term and long-term, on relations with our existing customers resulting from our inability to produce products for them. 
+The contract manufacturers have access to our intellectual property, which increases the risk of infringement or misappropriation of this intellectual property. 
+We source some of our component parts and consumable products from sole source suppliers; any disruptions may impact our ability to manufacture and sell our products. 
+A disruption in the supply of such component parts and consumable products could have a material adverse effect on our operations and financial results. 
+We sell a significant portion of our products internationally and purchase important components from foreign suppliers. These circumstances create a number of risks. 
+We sell a significant amount of our products to customers outside the United States. Shipments to international customers are expected to continue to account for a material portion of net sales. Risks associated with sales and purchases outside the United States include: 
+· 
+Fluctuating foreign currency rates could restrict sales, or increase costs of purchasing, in foreign countries; 
+· 
+Foreign governments may impose burdensome tariffs, quotas, taxes, trade barriers or capital flow restrictions; 
+· 
+Political and economic instability may reduce demand for our products or put our foreign assets at risk; 
+· 
+Restrictions on the export or import of technology may reduce or eliminate the ability to sell in or purchase from certain markets; and 
+· 
+Potentially limited intellectual property protection in certain countries, such as China, may limit recourse against infringing products or cause us to refrain from selling in certain geographic territories. 
+We face risks associated with manufacturing forecasts. 
+If we fail to predict our manufacturing requirements accurately, we could incur additional costs or experience manufacturing delays, which could cause us to lose orders or customers and result in lower net sales. We currently use a rolling 12-month forecast based primarily on our anticipated product orders and our product order history to help determine our requirements for components and materials. It is very important that we accurately predict both the demand for our products and the lead-time required to obtain the necessary components and raw materials. 
+Lead times for materials and components that we order vary significantly and depend on factors such as the specific supplier, the size of the order, contract terms, and demand for each component at a given time. If we underestimate our requirements, we may have inadequate manufacturing capacity or inventory, which could interrupt manufacturing of our products and result in delays in shipments and net sales. If we overestimate our requirements, we could have excess inventory of parts. In addition, delays in the manufacturing of our products could cause us to lose orders or customers. 
+We depend on key personnel, the loss of which could materially impact our business. 
+Our future success will depend in significant part upon the continued service of certain key management and other personnel and our continuing ability to attract and retain highly qualified managerial, technical and sales and marketing personnel. There can be no assurance that we will be able to recruit and retain such personnel. The loss of either Bart C. Shuldman, the Company's Chairman of the Board and Chief Executive Officer, or Steven A. DeMartino, the Company’s President, Chief Financial Officer, Treasurer and Secretary, or the loss of certain groups of key employees, could have a material adverse effect on our results of operations. 
+If we are unable to enforce our patents or if it is determined that we infringe patents held by others it could damage our business. 
+Prosecuting and defending patent lawsuits is very expensive. We are committed to aggressively asserting and defending our technology and related intellectual property, which we have spent a significant amount of money to develop. These factors could cause us to become involved in new patent litigation in the future. The expense of prosecuting or defending these future lawsuits could also have a material adverse effect on our business, financial condition and results of operations. 
+If we were to lose a patent lawsuit in which another party is asserting that our products infringe its patents, we would likely be prohibited from marketing those products and could also be liable for significant damages. Either or both of these results may have a material adverse effect on our business, financial condition and results of operations. If we lose a patent lawsuit in which we are claiming that another party’s products are infringing our patents and thus, are unable to enforce our patents, it may have a material adverse effect on our business, financial condition and results of operations. In addition to disputes relating to the validity or alleged infringement of other parties' rights, we may become involved in disputes relating to our assertion of our own intellectual property rights. Whether we are defending the assertion of intellectual property rights against us or asserting our intellectual property rights against others, intellectual property litigation can be complex, costly, protracted, and highly disruptive to business operations by diverting the attention and energies of management and key technical personnel. Plaintiffs in intellectual property cases often seek injunctive relief, and the measures of damages in intellectual property litigation are complex and often subjective or uncertain. Thus, any adverse determinations in this type of litigation could subject us to significant liabilities and costs. During the course of these lawsuits there may be public announcements of the results of hearings, motions, and other interim proceedings or developments in the litigation. If securities analysts or investors perceive these results to be negative, it could harm the market price of our stock. 
+The inability to protect intellectual property could harm our reputation, and our competitive position may be materially damaged. 
+Our intellectual property is valuable and provides us with certain competitive advantages. Copyrights, patents, trade secrets and contracts are used to protect these proprietary rights. Despite these precautions, it may be possible for third parties to copy aspects of our products or, without authorization, to obtain and use information which we regard as trade secrets. 
+Infringement on the proprietary rights of others could put us at a competitive disadvantage, and any related litigation could be time consuming and costly. 
+Third parties may claim that we violated their intellectual property rights. To the extent of a violation of a third party’s patent or other intellectual property right, we may be prevented from operating our business as planned and may be required to pay damages, to obtain a license, if available, or to use a non-infringing method, if possible, to accomplish our objectives. Any of these claims, with or without merit, could result in costly litigation and divert the attention of key personnel. If such claims are successful, they could result in costly judgments or settlements. Refer to Item 3. “Legal Proceedings” for discussion surrounding litigation we are currently involved in regarding alleged misappropriation of unspecified trade secrets and confidential information. 
+Our stock price may fluctuate significantly. 
+The market price of our common stock could fluctuate significantly in response to variations in quarterly operating results and other factors, such as: 
+· 
+changes in our business, operations or prospects; 
+· 
+developments in our relationships with our customers; 
+· 
+announcements of new products or services by us or by our competitors; 
+· 
+announcement or completion of acquisitions by us or by our competitors; 
+· 
+changes in existing or adoption of additional government regulations; 
+· 
+unfavorable or reduced analyst coverage; and 
+· 
+prevailing domestic and international market and economic conditions. 
+In addition, the stock market has experienced significant price fluctuations in recent years. Broad market fluctuations, general economic conditions and specific conditions in the industries in which we operate may adversely affect the market price of our common stock. 
+Limited trading volume and a reduction in analyst coverage of our capital stock may contribute to its price volatility. 
+Our common stock is traded on the NASDAQ Global Market. During the year ended December 31, 2012, the average daily trading volume for our common stock as reported by the NASDAQ Global Market was approximately 17,000 shares. We are uncertain whether a more active trading market in our common stock will develop. In addition, many investment banks no longer find it profitable to provide securities research on micro-cap and small-cap companies. During 2012, an analyst who previously followed our common stock discontinued coverage of it which may further reduce our trading volume. As a result, relatively small trades may have a significant impact on the market price of our common stock, which could increase the volatility and depress the price of our common stock. 
+Future sales of our common stock may cause our stock price to decline. 
+In the future, we may sell additional shares of our common stock in public or private offerings, and we may also issue additional shares of our common stock to finance future acquisitions. Shares of our common stock are also available for future sale pursuant to stock options that we have granted to our employees, and in the future we may grant additional stock options and other forms of equity compensation to our employees. Sales of our common stock or the perception that such sales could occur may adversely affect prevailing market prices for shares of our common stock and could impair our ability to raise capital through future offerings. 
+If market conditions deteriorate or future results of operations are less than expected, a valuation allowance may be required for all or a portion of our deferred tax assets. 
+We currently have significant deferred tax assets, which may be used to reduce taxable income in the future. We assess the realization of these deferred tax assets on a quarterly basis, and if we determine that it is more likely than not that some portion of these assets will not be realized, an income tax valuation allowance is recorded. If market conditions deteriorate or future results of operations are less than expected, or there is a change to applicable tax rules, future assessments may result in a determination that it is more likely than not that some or all of our net deferred tax assets are not realizable. As a result, we may need to establish a valuation allowance for all or a portion of our net deferred tax assets, which may have a material adverse effect on our business, results of operations and financial condition. 
+We cannot provide any assurance that current laws, or any laws enacted in the future, will not have a material adverse effect on our business. 
+Our operations are subject to laws, rules, regulations, including environmental regulations, government policies and other requirements in each of the jurisdictions in which we conduct business. Changes in laws, rules, regulations, policies or requirements could result in the need to modify our products and could affect the demand for our products, which may have an adverse impact on our future operating results. If we do not comply with applicable laws, rules and regulations we could be subject to costs and liabilities and our business may be adversely impacted. 
+Our business could be adversely affected by actual or threatened terrorist attacks or the related heightened security measures, military actions and other efforts to combat terrorism. 
+Our business could be adversely affected by actual or threatened terrorist attacks or the related heightened security measures, military actions and other efforts to combat terrorism. It is possible that terrorist attacks could be directed at important locations for the gaming industry. Heightened security measures and other efforts to combat terrorism may also have an adverse effect on the gaming industry by reducing tourism. Any of these developments could also negatively affect the general economy and consumer confidence. Any downturn in the economy or in the gaming industry in particular could reduce demand for our products and adversely affect our business and results of operations. In addition, heightened security measures may cause certain governments to restrict the import/export of goods, which may have an adverse effect on our ability to buy/sell goods. 
+Intangible computer software costs may not be recoverable. 
+Costs incurred in researching and developing a computer software product are charged to expense until technological feasibility has been established, at which point all material software costs are capitalized within Intangible assets in our Consolidated Balance Sheet until the product is available for general release to customers. While judgment is required in determining when technological feasibility of a product is established, we have determined that it is reached after all high-risk development issues have been documented in a formal detailed plan design. The amortization of these costs will be included in cost of sales over the estimated life of the product. To the extent technological feasibility of products is not achieved, related capitalized computer software costs may not be recoverable. 
+Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial also may adversely impact our business. Should any risks or uncertainties develop into actual events, these developments could have material adverse effects on our business, financial condition, and results of operations. 
+Item 1B. Unresolved Staff Comments. 
+Not applicable. 
+Item 2. Properties. 
+Our principal facilities as of December 31, 2012 are listed below and we believe that all facilities generally are in good condition, adequately maintained and suitable for their present and currently contemplated uses. 
+Location 
+Operations Conducted 
+Size 
+(Approx. Sq. Ft.) 
+Owned or 
+Leased 
+Lease Expiration 
+Date 
+Hamden, Connecticut 
+Executive offices and Printrex and TSG sales office 
+11,100 
+Leased 
+April 23, 2017 
+Ithaca, New York 
+Global engineering, design, assembly and service facility 
+73,900 
+Leased 
+May 31, 2016 
+Las Vegas, Nevada 
+Service center and casino and gaming sales office 
+13,700 
+Leased 
+December 31, 2016 
+San Jose, California 
+Engineering office 
+1,340 
+Leased 
+February 28, 2014 
+Doncaster, United Kingdom 
+Sales office and service center 
+2,800 
+Leased 
+August 1, 2016 
+Georgia and New York 
+Two regional sales offices 
+300 
+Leased 
+Various 
+Macau, China 
+Sales office 
+180 
+Leased 
+Month-to-month 
+103,320 
+Item 3. Legal Proceedings. 
+On June 8, 2012, Avery Dennison Corporation (“AD”) filed a civil complaint against the Company and a former employee of the Company and of AD, in the Court of Common Pleas (the “Court”) in Lake County, Ohio. The complaint alleges that this former employee and the Company misappropriated unspecified trade secrets and confidential information related to the design of our food safety terminals from AD. The complaint requests a preliminary and permanent injunction against the Company from manufacturing and selling our Ithaca® 9700 and 9800 food safety terminals. On July 16, 2012, the Company filed its answer, affirmative defenses and counterclaims, seeking all available damages including legal fees. A hearing on the plaintiff's motion for preliminary injunction took place in August 2012, and in November 2012, the Court denied this request. AD has since filed an appeal of the Court’s ruling. 
+Item 4. Mine Safety Disclosures. 
+Not applicable. 
+PART II 
+Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. 
+Our common stock is traded on the NASDAQ Global Market under the symbol TACT. As of February 28, 2013, there were 453 holders of record of the common stock. The high and low bid sales prices of the common stock reported during each quarter of the years ended December 31, 2012 and 2011 were as follows: 
+Year Ended 
+Year Ended 
+December 31, 2012 
+December 31, 2011 
+High 
+Low 
+High 
+Low 
+First Quarter 
+$ 
+8.37 
+$ 
+6.46 
+$ 
+11.89 
+$ 
+9.31 
+Second Quarter 
+9.15 
+7.29 
+13.03 
+11.06 
+Third Quarter 
+7.97 
+6.64 
+12.44 
+8.08 
+Fourth Quarter 
+7.91 
+7.01 
+8.01 
+5.89 
+On September 10, 2012, we announced that our Board of Directors approved the initiation of a quarterly cash dividend program. During 2012, our Board of Directors declared a quarterly cash dividend of $0.06 per share for a total of approximately $526,000 which was paid on December 12, 2012 to common shareholders of record at the close of business on November 21, 2012. On February 4, 2013, our Board of Directors approved the first quarter 2013 dividend on its common stock in the amount of $0.06 per share payable on or about March 13, 2013 to common shareholders of record at the close of business on February 20, 2013. 
+Issuer Purchases of Equity Securities 
+We maintain a stock repurchase program (the “Stock Repurchase Program”) whereby we are authorized to repurchase up to $15,000,000, as increased from $10,000,000 in March 2012 through Board of Director approval, of our outstanding shares of common stock from time to time in the open market over a three-year period ending May 27, 2013, depending on market conditions, share price and other factors. We use the cost method to account for treasury stock purchases, under which the price paid for the stock is charged to the treasury stock account. Repurchases of our common stock are accounted for as of the settlement date. During the fourth quarter of 2012, we repurchased 50,536 shares of our common stock for approximately $375,000, at an average price of $7.42. For the year ended December 31, 2012, we repurchased 721,184 shares of common stock for approximately $5,938,000 , at an average price of $8.23 per share, under the Stock Repurchase Program. From January 1, 2005 through December 31, 2012, we repurchased a total of 2,182,877 shares of common stock for approximately $17,333,000 under all of our stock repurchase programs, at an average price of $7.94 per share. At December 31, 2012, approximately $6,206,000 remains authorized for future repurchases under the Stock Repurchase Program. 
+CORPORATE PERFORMANCE GRAPH 
+The following graph compares the cumulative total return on the Company’s Common Stock from December 31, 2007 through December 31, 2012, with the CRSP Total Return Index for the Nasdaq Stock Market (U.S.) and the Nasdaq Computer Manufacturer Stocks Index. The graph assumes that $100 was invested on December 31, 2007 in each of TransAct’s common stock, the CRSP Total Return Index for the Nasdaq Stock Market (U.S.) and the Nasdaq Computer Manufacturer Stocks Index, and that all dividends were reinvested. 
+COMPARISON OF CUMULATIVE TOTAL RETURN AMONG 
+TRANSACT TECHNOLOGIES INCORPORATED COMMON STOCK, 
+THE CRSP TOTAL RETURN INDEX FOR THE NASDAQ STOCK MARKET (U.S.), 
+AND THE NASDAQ COMPUTER MANUFACTURER STOCKS INDEX 
+12/31/07 
+12/31/08 
+12/31/09 
+12/31/10 
+12/31/11 
+12/31/12 
+TransAct Technologies Incorporated Common Stock 
+$ 
+100.00 
+$ 
+95.82 
+$ 
+144.89 
+$ 
+196.66 
+$ 
+151.57 
+$ 
+150.73 
+CRSP Total Return Index for the Nasdaq Stock Market (U.S.) 
+$ 
+100.00 
+$ 
+61.17 
+$ 
+87.93 
+$ 
+104.13 
+$ 
+104.69 
+$ 
+123.85 
+Nasdaq Computer Manufacturer Stocks Index 
+$ 
+100.00 
+$ 
+42.01 
+$ 
+92.26 
+$ 
+131.68 
+$ 
+154.51 
+$ 
+196.39 
+Item 6. Selected Financial Data (in thousands, except per share amounts) 
+The following is summarized from our audited financial statements of the past five years: 
+Year ended December 31, 
+2012 
+2011 
+2010 
+2009 
+2008 
+Consolidated Statement of Operations Data: 
+Net sales 
+$ 
+68,386 
+$ 
+65,969 
+$ 
+63,194 
+$ 
+58,346 
+$ 
+62,207 
+Gross profit 
+25,982 
+24,626 
+22,548 
+18,829 
+20,950 
+Operating expenses 
+20,380 
+17,637 
+16,687 
+15,533 
+19,089 
+Operating income 
+5,602 
+6,989 
+5,861 
+3,296 
+1,861 
+Net income 
+3,621 
+4,676 
+3,904 
+2,140 
+1,444 
+Net income per share: 
+Basic 
+0.40 
+0.50 
+0.42 
+0.23 
+0.16 
+Diluted 
+0.40 
+0.49 
+0.41 
+0.23 
+0.15 
+December 31, 
+2012 
+2011 
+2010 
+2009 
+2008 
+Consolidated Balance Sheet Data: 
+Total assets 
+$ 
+45,228 
+$ 
+42,740 
+$ 
+43,621 
+$ 
+34,899 
+$ 
+32,234 
+Working capital 
+25,492 
+27,222 
+25,525 
+20,474 
+15,051 
+Shareholders’ equity 
+33,369 
+35,313 
+31,134 
+26,354 
+23,282 
+Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. 
+This discussion should be read in conjunction with the Consolidated Financial Statements and notes thereto. 
+Forward Looking Statements 
+Certain statements included in this report, including without limitation statements in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, which are not historical facts are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements generally can be identified by the use of forward-looking terminology, such as “may”, “will”, “expect”, “intend”, ”estimate”, “anticipate”, “believe”, “project” or “continue” or the negative thereof or other similar words. All forward-looking statements involve risks and uncertainties, including, but not limited to those listed in Item 1A of this Annual Report. Actual results may differ materially from those discussed in, or implied by, the forward-looking statements. The forward-looking statements speak only as of the date of this report and we assume no duty to update them. 
+Overview 
+During 2012, we transitioned our business to focus on sales of value-added products and technologies in diversified growth markets while moving away from the low margin, commoditized POS market. To that end, we successfully launched three new products that we believe present the opportunity to significantly change TransAct in terms of growing our printing solution and related consumables revenue as well as expanding our gross margin and operating income margin. We developed two of these new printers a for the oil and gas exploration market which we believe represents a worldwide growth opportunity for us based on studies which show that the U.S. will likely become energy independent in the next twenty years. Our Printrex® 980 printer, the fastest color office printer designed specifically for high-volume printing of oil and gas logging reports, has already won orders and each of these printers has the opportunity to drive significant recurring consumable revenue based on proprietary inkjet cartridges, inkjet print heads and other items that these printers consume as our customers use the printer. Our new Printrex® 920, a thermal truck-mounted printer designed for the rugged and demanding exploration and production market, prints color logging reports at the well site utilizing proprietary color thermal paper which also represents another lucrative recurring consumable revenue stream for us. We have already received positive initial responses from the industry to our new color thermal printing technology which would replace the black and white printing of logging reports done today for drilling, casing and wire-line analysis. The Printrex® 920 printer has to be integrated into the many oil and gas explorations systems around the world and we are working closely with customers in this market to finalize this integration. Although this integration will take several months, once complete we expect orders to begin. 
+Additionally, we began shipping our new food safety and nutritional labeling terminal, the Ithaca® 9700 food safety terminal, in the fourth quarter of 2012. Initial orders included customers such as McDonalds as well as field tests and trials at several other widely-known restaurant chains. While we anticipate that it will take several months to get the field trials and testing completed at the different venues, we expect the Ithaca® 9700 food safety terminal to be a significant contributor to our sales in 2013. 
+We also benefited from a full year of sales of Printrex printers and the related TSG products in 2012 which provided gross margins above TransAct’s historical average. We also continued to focus on increasing our overall gross profit and leveraging such increase to our operating income primarily by focusing our sales effort on higher margin printers in addition to our continual effort of reducing costs of our foreign-sourced printers. We increased our overall sales 4% and our U.S. casino and gaming printer sales 17%, primarily from new casino openings and market share gains. While our total printer shipments slightly decreased 1% to approximately 199,000 in 2012, the average selling price of printers sold during the year increased by 7%. In addition, our gross margin for 2012 increased from 2011 reaching a record high. Excluding the legal fees incurred in connection with the lawsuit discussed in Item 3. Legal Proceedings and in Note 11 to the Consolidated Financial Statements, our operating margin and diluted earnings per share were relatively consistent with 2011. 
+During 2012, our total net sales increased 4% to approximately $68,386,000. See the table below for a breakdown of our sales by market: 
+Year ended 
+Year ended 
+Change 
+(In thousands) 
+December 31, 2012 
+December 31, 2011 
+$ 
+% 
+Food safety, banking and POS 
+$ 
+9,484 
+13.9% 
+$ 
+9,943 
+15.1% 
+$ 
+(459) 
+(4.6%) 
+Casino and gaming 
+29,129 
+42.6% 
+24,955 
+37.8% 
+4,174 
+16.7% 
+Lottery 
+11,634 
+17.0% 
+14,933 
+22.6% 
+(3,299) 
+(22.1%) 
+Printrex 
+4,673 
+6.8% 
+1,710 
+2.6% 
+2,963 
+173.3% 
+TSG 
+13,466 
+19.7% 
+14,428 
+21.9% 
+(962) 
+(6.7%) 
+Total net sales 
+$ 
+68,386 
+100.0% 
+$ 
+65,969 
+100.0% 
+$ 
+2,417 
+3.7% 
+Sales of our food safety, banking and POS products decreased 5% in 2012 compared to 2011. In the banking market, we focus mainly on supplying printers for use in bank teller stations at banks and financial institutions primarily in the U.S. Opportunities in the banking market are project oriented and, as a result, our banking printer sales can fluctuate significantly year-to-year. During 2012, our banking printer sales increased 110% primarily due to sales from a large order for our Ithaca® 280 thermal receipt printer to a new banking customer that did not occur in 2011. In the POS market, we focus primarily on supplying printers that print receipts or linerless labels for customers in the restaurant, hospitality and specialty retail markets. Sales of our POS printers decreased 20% in 2012 primarily driven by a decrease in both domestic and international sales of our two POS printer products to McDonald’s, the Ithaca® 8000 and Ithaca® 8040, for its combined beverage initiative and its POS system upgrade which includes grill initiative printer upgrades, as the rollout of printers for these initiatives is substantially complete. However, beginning in the second half of 2012, we began to ship Ithaca 8000® printers to McDonald’s for a new application that we expect to continue into 2013. We also intend to pursue sales to McDonald’s and other national restaurant chains for the previously discussed new food safety terminal during 2013. During 2012, in an effort to address the Food Safety Modernization Act, we developed a food safety terminal, the Ithaca® 9700 as previously discussed, that prints easy-to-read expiration and "enjoy by" date labels to help restaurants effectively manage food spoilage. We received our first revenue contributions from this product in the fourth quarter 2012. 
+Sales of our casino and gaming printers increased 17% in 2012 compared to 2011. In our casino and gaming market, our focus lies primarily in supplying printers for use in slot machines at casinos and racetracks, as well as in other gaming devices that print tickets or receipts, worldwide. Additionally, we supplement these printer sales with revenue from the EPICENTRAL™ Print System for which we had seven executed contracts as of January 31, 2013. Domestic sales of our casino and gaming printers increased 31%, mostly due from a combination of new casino openings and continued market share gains in the casino market, as we believe the overall replacement cycle of slot machines was lower in 2012 as compared to 2011. International sales also increased by 6%, primarily due to a 14% increase in casino ticket printer sales during 2012 driven by a 100% increase in sales to a Canadian OEM which were partially offset by a 10% decrease in our off-premise thermal gaming printers. Our casino and gaming sales for 2012 also included revenue contribution from our first completed installation of the EPICENTRAL™ Print System at Nisqually Red Wind Casino in Olympia, Washington. 
+In the lottery market, we continue to hold a leading position based on our long-term exclusive purchase agreement with GTECH, our largest customer and the world’s largest provider of lottery terminals. GTECH has been our customer since 1995, and we continue to maintain a good relationship with them. In 2009 we expanded our long-standing relationship with GTECH by executing a new exclusive purchase agreement to develop and supply them with their next generation online thermal lottery printer. Pursuant to the new agreement, GTECH will exclusively purchase all of its requirements for thermal on-line lottery printers from us and we will exclusively sell such printers to GTECH through November 2014. Currently, we fulfill substantially all of GTECH’s printer requirements for lottery terminal installations and upgrades worldwide. During 2012, total printer sales to GTECH decreased approximately 27%, compared to 2011. Our sales to GTECH each year are directly dependent on the timing and number of new and upgraded lottery terminal installations GTECH performs and are not indicative of GTECH’s overall business or revenue. 
+Sales in the Printrex market include wide format, rack mounted and vehicle mounted thermal printers used by customers to log and plot oil field and down hole well drilling data in the oil and gas exploration industry. During 2012, we developed the Printrex® 920 and Printrex® 980 oil and gas color printers, as previously discussed, that we believe will provide customers with more value as data printed in color is easier to read and analyze than the same data printed in black and white. Sales in this market also includes wide format printers used to print test results in ophthalmology devices in the medical industry, as well as vehicle mounted printers used to print schematics and certain other critical information in emergency services vehicles. Printrex printer sales increased by approximately $3,000,000 primarily due to a full twelve months of sales being reported in 2012 as compared to approximately four and one-half months of sales in 2011 as we acquired Printrex on August 19, 2011. 
+Our TSG group, which sells service, replacement parts and consumable products, including receipt paper, ribbons and inkjet cartridges, continues to offer a recurring revenue stream for the Company. TSG sales decreased 7% in 2012 from 2011 primarily due to lower sales of consumables compared to 2011 from the effect of a loss of sales to two OEM customers partially offset by incremental Printrex TSG sales from the full twelve months of sales being reported in 2012 as compared to approximately four and one-half months of sales in 2011 and an increase in service revenue during 2012 from several new contracts for paper testing services that did not occur in 2011. Companies who produce and sell paper products that are used in our printers, utilize this new service for a fee to have their product qualified for use in our printers. 
+Operationally, our gross margin increased to a record high 38.0% compared to 37.3% in 2011. Our gross margin increased due primarily to a more favorable sales mix combined with a continued effort of cost control, specifically in lower production costs, in addition to sales of higher margin Printrex printers in 2012 compared to 2011 due to the full twelve months of sales being reported in 2012 as compared to approximately four and one-half months of sales in 2011 . Our operating margin for 2012 was 8.2% compared to 10.6% in 2011. Excluding the legal fees incurred in connection with the lawsuit discussed in Item 3. Legal Proceedings and in Note 11 to the Consolidated Financial Statements , our operating margin for 2012 was 10.4% in 2012, which is relatively consistent with 2011. 
+We reported net income of $3,621,000 and net income per diluted share of $0.40 for 2012, compared to net income of $4,676,000 and net income per diluted share of $0.49 in 2011. In terms of cash flow for 2012, we generated $8,030,000 of cash from operating activities and utilized $5,938,000 for treasury share repurchases, $1,117,000 for capital expenditures and capitalized software development and $526,000 for our first cash dividend payment to shareholders resulting in cash and cash equivalents of $7,537,000 and no debt on our Consolidated Balance Sheet at December 31, 2012. 
+Critical Accounting Policies and Estimates 
+The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates, judgments and assumptions that affect both Balance Sheet items and Statement of Income categories. Such estimates and judgments are based upon historical experience and certain assumptions that are believed to be reasonable in the particular circumstances. We evaluate our assumptions on an ongoing basis by comparing actual results with our estimates. Actual results may differ from the original estimates. 
+The following accounting policies are those that we believe to be most critical in the preparation of our financial statements. These items utilize assumptions and estimates about the effect of future events that are inherently uncertain and are therefore based on our judgment. Please refer to Note 2 – Summary of significant accounting policies in the accompanying Consolidated Financial Statements for a complete listing of our accounting policies. 
+Revenue Recognition – Our typical contracts include the sale of printers, which are sometimes accompanied by separately-priced extended warranty contracts. We also sell replacement parts, consumables, and other repair services (sometimes pursuant to multi-year product maintenance contracts), which are not included in the original printer sale and are ordered by the customer as needed. We recognize revenue pursuant to the guidance within Accounting Standards Codification (“ASC”) 605, “Revenue Recognition” (ASC 605). Specifically, revenue is recognized when evidence of an arrangement exists, delivery (based on shipping terms which are generally FOB shipping point) has occurred, the selling price is fixed and determinable, and collectability is reasonably assured. We recognize revenue from the sale of printers to our distributors and resellers on a sell-in basis and on substantially the same terms as we recognize revenue from all our other customers. We provide for an estimate of product returns and price protection based on historical experience at the time of revenue recognition. 
+We have developed a new software solution, EPICENTRAL TM , that enables casino operators to create promotional coupons and marketing messages and to print them in real-time at the slot machine. Revenue arrangements for EPICENTRAL TM include multiple deliverables and as a result such arrangements are accounted for in accordance with both ASC 605-25, “Multiple-Element Arrangements” and ASC 985-605, “Software.” EPICENTRAL TM is primarily comprised of both a software component, which is licensed, and a hardware component, which can either be leased or sold to end users, and both components are integrated to deliver the system’s full functionality. Under leasing arrangements, revenue is generally recognized ratably over the lease term, excluding revenue allocated to installation, which is recognized upon completion. In an arrangement where the hardware is purchased, revenue, inclusive of software license fees, is generally recognized upon installation and formal acceptance by the customer. For EPICENTRAL TM and other multiple deliverable arrangements, we consider whether the deliverables in an arrangement are within the scope of existing higher-level GAAP and apply such literature to the extent that it provides guidance regarding whether to separate multiple-deliverable arrangements and how to allocate value among those separate units of accounting. We also determine whether revenue arrangements consist of more than one unit of accounting at inception of the arrangement and recognize revenue as each item in the arrangement is delivered. We allocate arrangement consideration to the separate units of accounting based on the relative fair value for all units of accounting in the arrangement, except where amounts allocable to the delivered units is limited to that which is contingent upon the delivery of additional deliverables or meeting other specified performance conditions. 
+Revenue related to extended warranty and product maintenance contracts is recognized pursuant to ASC 605-20-25, “Separately Priced Extended Warranty and Product Maintenance Contracts.” Pursuant to this provision, revenue related to separately priced product maintenance contracts is deferred and recognized over the term of the maintenance period. We record deferred revenue for advance payments received from customers for maintenance contracts. 
+Our customers have the right to return products that do not function properly within a limited time after delivery. We monitor and track product returns and record a provision for the estimated future returns based on historical experience. Returns have historically been within expectations and the provisions established, but we cannot guarantee that we will continue to experience return rates consistent with historical patterns. 
+We offer some of our customers price protection as an incentive to carry inventory of our product. These price protection plans provide that if we lower prices, we will credit them for the price decrease on inventory they hold. Our customers typically carry limited amounts of inventory, and we infrequently lower prices on current products. As a result, the amounts paid under these plans have not been material. However, we cannot guarantee that this minimal level will continue. 
+We charge our customers for shipping and handling services. The amounts billed to customers are recorded as revenue when the product ships. Any costs incurred related to these services are included in cost of sales. 
+Accounts Receivable – We have standardized credit granting and review policies and procedures for all customer accounts, including: credit reviews of all new customer accounts; ongoing credit evaluations of current customers; credit limits and payment terms based on available credit information; and adjustments to credit limits based upon payment history and the customer’s current creditworthiness. We also provide an estimate of doubtful accounts based on historical experience and specific customer collection issues. Our allowance for doubtful accounts as of December 31, 2012 was approximately $66,000, or less than 1.0% of outstanding accounts receivable, which we feel is appropriate considering the overall quality of our accounts receivable. While credit losses have historically been within expectations and the reserves established, we cannot guarantee that our credit loss experience will continue to be consistent with historical experience. 
+Inventories – Our inventories are stated at the lower of cost (principally standard cost, which approximates actual cost on a first-in, first-out basis) or market. We review market value based on historical usage and estimates of future demand. Assumptions are reviewed at least quarterly and adjustments are made, as necessary, to reflect changing market conditions. Based on these reviews, inventory write-downs are recorded, as necessary, to reflect estimated obsolescence, excess quantities and market value. Should circumstances change and we determine that additional inventory is subject to obsolescence, additional write-downs of inventory could result in a charge to income. 
+Goodwill and Intangible Assets – We acquire businesses in purchase transactions that result in the recognition of goodwill and intangible assets. The determination of the value of intangible assets requires management to make estimates and assumptions. In accordance with Accounting Standards Codification (“ASC”) 350-20 “Goodwill”, acquired goodwill is not amortized but is subject to impairment testing at least annually and when an event occurs or circumstances change, that indicate it is more likely than not an impairment exists. Factors considered that may trigger an impairment review are: significant underperformance relative to expected historical or projected future operating results; significant changes in the manner of use of acquired assets or the strategy for the overall business; significant negative industry or economic trends; and significant decline in market capitalization relative to net book value. Definite lived intangible assets are amortized and are tested for impairment when appropriate. We reported $2,621,000 of goodwill and $2,328,000 of unamortized definite-lived intangible assets at December 31, 2012. We have determined that no goodwill impairment has occurred based on our assessment as of December 31, 2012 when the impairment review is performed. 
+Income Taxes – In preparing our Consolidated Financial Statements, we are required to estimate income taxes in each of the jurisdictions in which we operate. This involves estimating the actual current tax exposure together with assessing temporary differences between the tax basis of certain assets and liabilities and their reported amounts in the financial statements, as well as net operating losses, tax credits and other carryforwards. These differences result in deferred tax assets and liabilities, which are included within our Consolidated Balance Sheets. We then assess the likelihood that the deferred tax assets will be realized from future taxable income, and to the extent that we believe that realization is not likely, we establish a valuation allowance. 
+Significant judgment is required in determining the provision for income taxes and, in particular, any valuation allowance or tax reserves with respect to our deferred tax assets and uncertain tax positions. On a quarterly basis, we evaluate the recoverability of our deferred tax assets based upon historical results and forecasted taxable income over future years, and match this forecast against the basis differences, deductions available in future years and the limitations allowed for net operating loss and tax credit carryforwards to ensure that there is adequate support for the realization of the deferred tax assets. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance or tax reserve, in the event we were to determine that we would not be able to realize all or part of our deferred tax assets in the future, an adjustment to the valuation allowance or tax reserves would be charged as a reduction to income in the period such determination was made. Likewise, should we determine that we would be able to realize future deferred tax assets in excess of its net recorded amount, an adjustment to the valuation allowance or tax reserves would increase net income in the period such determination was made. 
+We account for income taxes in accordance with ASC 740, “Income Taxes.” Among other things this provision prescribes a minimum recognition threshold that an income tax position must meet before it is recorded in the reporting entity’s financial statements. It also requires that the effects of such income tax positions be recognized only if, as of the balance sheet reporting date, it is “more likely than not” (i.e., more than a 50% likelihood) that the income tax position will be sustained based solely on its technical merits. When making this assessment, management must assume that the responsible taxing authority will examine the income tax position and have full knowledge of all relevant facts and other pertinent information. The accounting guidance also clarifies the method of accruing for interest and penalties when there is a difference between the amount claimed, or expected to be claimed, on a company’s income tax returns and the benefits recognized in the financial statements. 
+Warranty – We generally warrant our products for up to 36 months and record the estimated cost of such product warranties at the time the sale is recorded. Estimated warranty costs are based upon actual past experience of product repairs and the related estimated cost of labor and material to make the necessary repairs. If actual future product repair rates or the actual costs of material and labor differ from the estimates, adjustments to the accrued warranty liability and related warranty expense would be made. 
+Contingencies – We record an estimated liability related to contingencies based on our estimates of the probable outcomes pursuant to ASC 450, “Contingencies.” On a quarterly basis, we assess the potential liability related to pending litigation, audits and other contingencies and confirm or revise estimates and reserves as appropriate. If the actual liabilities are settled in an amount greater than those recorded on the balance sheet, a charge to income would be recorded. As of December 31, 2012 and 2011, a contingent liability of $960,000 and $680,000, respectively, was recorded in connection with a contingent consideration arrangement entered into as part of the Printrex acquisition. The increase of $280,000 was the result of our revised estimate of the expected payout in connection with this arrangement primarily due to changes in probabilities and increases in revenue and gross margin estimates, and was charged to general and administrative expense during 2012. See Note 3 to the Consolidated Financial Statements for further discussion. 
+Share-Based Compensation – We calculate share-based compensation expense in accordance with ASC 718, “Compensation – Stock Compensation” using the Black-Scholes option-pricing model to calculate the fair value of share-based awards. The key assumptions for this valuation method include the expected term of an option grant, stock price volatility, risk-free interest rate, dividend yield, and forfeiture rate. The determination of these assumptions is based on past history and future expectations, and is subject to a high level of judgment. To the extent any of the assumptions were to change from year to year, the fair value of new option grants may vary significantly. 
+Results of Operations: Year ended December 31, 2012 compared to year ended December 31, 2011 
+Net Sales. Net sales, which include printer sales and sales of replacement parts, consumables and maintenance and repair services, by market for the years ended December 31, 2012 and 2011 were as follows: 
+Year ended 
+Year ended 
+Change 
+(In thousands) 
+December 31, 2012 
+December 31, 2011 
+$ 
+% 
+Food safety, banking and POS 
+$ 
+9,484 
+13.9% 
+$ 
+9,943 
+15.1% 
+$ 
+(459) 
+(4.6%) 
+Casino and gaming 
+29,129 
+42.6% 
+24,955 
+37.8% 
+4,174 
+16.7% 
+Lottery 
+11,634 
+17.0% 
+14,933 
+22.6% 
+(3,299) 
+(22.1%) 
+Printrex 
+4,673 
+6.8% 
+1,710 
+2.6% 
+2,963 
+173.3% 
+TSG 
+13,466 
+19.7% 
+14,428 
+21.9% 
+(962) 
+(6.7%) 
+$ 
+68,386 
+100.0% 
+$ 
+65,969 
+100.0% 
+$ 
+2,417 
+3.7% 
+International* 
+$ 
+18,454 
+27.0% 
+$ 
+16,668 
+25.3% 
+$ 
+1,786 
+10.7% 
+* International sales do not include sales of printers made to domestic distributors or other customers who in turn ship those printers to international destinations. 
+Net sales for 2012 increased $2,417,000, or 4%, from 2011. Printer sales volume decreased 1% to approximately 199,000 units as a 26% decline in lottery printer unit volume was almost entirely offset by an 18% increase in unit volume from the casino and gaming market. The average selling price of our printers increased approximately 7% from 2011 to 2012 due primarily to higher sales of casino and gaming printers as well as our first full year of sales of Printrex printers, both of which have significantly higher average selling prices than all our other printers. Overall, international sales increased $1,786,000, or 11%, primarily driven by higher sales in both the international casino and gaming and lottery markets. 
+Food safety, banking and POS : Revenue from the food safety, banking and POS market includes sales of printers used by banks, credit unions and other financial institutions to print and/or validate receipts at bank teller stations. Revenue from this market also includes sales of inkjet, thermal and impact printers used primarily by retailers in the restaurant (including fine dining, casual dining and fast food), hospitality, and specialty retail industries to print receipts for consumers, validate checks, or print on linerless labels or other inserted media. In addition, revenue includes sales of food safety terminals, hardware devices that consist of a touchscreen and one or two thermal print mechanisms, that print easy-to-read expiration and "enjoy by" date labels to help restaurants effectively manage food spoilage. A summary of sales of our worldwide food safety, banking and POS printers for the years ended December 31, 2012 and 2011 is as follows: 
+Year ended 
+Year ended 
+Change 
+(In thousands) 
+December 31, 2012 
+December 31, 2011 
+$ 
+% 
+Domestic 
+$ 
+8,876 
+93.6% 
+$ 
+8,968 
+90.2% 
+$ 
+(92) 
+(1.0%) 
+International 
+608 
+6.4% 
+975 
+9.8% 
+(367) 
+(37.6%) 
+$ 
+9,484 
+100.0% 
+$ 
+9,943 
+100.0% 
+$ 
+(459) 
+(4.6%) 
+The decrease in domestic food safety, banking and POS printer revenue from 2011 was primarily driven by a decrease in U.S. sales of our two POS printer products to McDonald’s, the Ithaca® 8000 and Ithaca® 8040, for its combined beverage initiative and its POS system upgrade which includes grill initiative printer upgrades, as the U.S. rollout of printers for these initiatives is substantially complete. However, beginning in the second half of 2012, we began to ship Ithaca 8000® printers to McDonald’s for a new application that we expect to continue into 2013. This decrease in sales was largely offset by higher sales of our banking printers mainly due to sales from a large order for our Ithaca® 280 thermal receipt printer to a new banking customer which we completed shipments to in the third quarter of 2012. Although we are currently pursuing several banking opportunities, due to the project-oriented nature of these sales, we cannot predict the level of future sales. Sales for 2012 also benefited from the first revenue contributions from our newly launched Ithaca® 9700 food service terminal. 
+International banking and POS printer sales for 2012 decreased 38% from 2011 due primarily to lower sales for the aforementioned McDonald’s POS system upgrade and grill initiative as well as the combined beverage initiative to its Canadian stores in 2012 compared to 2011. 
+Casino and gaming : Revenue from the casino and gaming market includes sales of printers used in slot machines, video lottery terminals (“VLTs”), and other gaming machines that print tickets or receipts instead of issuing coins (“ticket-in, ticket-out” or “TITO”) at casinos and racetracks (“racinos”) and other gaming venues worldwide. Revenue from this market also includes sales of printers used in the international off-premise gaming market in gaming machines such as Amusement with Prizes (“AWP”), Skills with Prizes (“SWP”) and Fixed Odds Betting Terminals (“FOBT”) at non-casino gaming establishments. Revenue from this market also includes royalties related to our patented casino and gaming technology. In addition, casino and gaming market revenue includes sales of our new software solution, the EPICENTRAL TM print system, that enables casino operators to create promotional coupons and marketing messages and to print them real-time at the slot machine. A summary of sales of our worldwide casino and gaming printers for the years ended December 31, 2012 and 2011 is as follows: 
+Year ended 
+Year ended 
+Change 
+(In thousands) 
+December 31, 2012 
+December 31, 2011 
+$ 
+% 
+Domestic 
+$ 
+14,283 
+49.0% 
+$ 
+11,007 
+44.1% 
+$ 
+3,276 
+29.8% 
+International 
+14,846 
+51.0% 
+13,948 
+55.9% 
+898 
+6.4% 
+$ 
+29,129 
+100.0% 
+$ 
+24,955 
+100.0% 
+$ 
+4,174 
+16.7% 
+The increase in domestic sales of our casino and gaming printers is primarily due to an increase of 31% in sales of our thermal casino printers. We believe that our increased casino printer sales during 2012 resulted from a combination of new casino openings and continued market share gains. Revenue in 2012 also benefited from the first contribution of EPICENTRAL TM software sales. 
+International casino and gaming printer sales increased due primarily to a 14% increase in thermal casino printer sales during 2012 primarily driven by a 100% increase in sales to a Canadian OEM as well as 9% higher sales to our European distributor. Sales of our off-premise thermal gaming printers decreased 10% in 2012 compared to 2011 due largely to a 47% decrease in sales to distribution and an OEM customer in Australia and Asia as well as a 77% decrease in sales to a Canadian OEM. These decreases were somewhat offset by 29% higher sales of off-premise printers to our European distributor. Sales of our off-premise gaming printers are largely project-oriented and we therefore cannot predict the level of future sales. 
+Lottery: Revenue from the lottery market includes sales of thermal on-line and other lottery printers to GTECH and its subsidiaries for various lottery applications. A summary of sales of our worldwide lottery printers for the years ended December 31, 2012 and 2011 is as follows: 
+Year ended 
+Year ended 
+Change 
+(In thousands) 
+December 31, 2012 
+December 31, 2011 
+$ 
+% 
+Domestic 
+$ 
+10,574 
+90.9% 
+$ 
+14,557 
+97.5% 
+$ 
+(3,983) 
+(27.4%) 
+International 
+1,060 
+9.1% 
+376 
+2.5% 
+684 
+181.9% 
+$ 
+11,634 
+100.0% 
+$ 
+14,933 
+100.0% 
+$ 
+(3,299) 
+(22.1%) 
+Our sales to GTECH are directly dependent on the timing and number of new and upgraded lottery terminal installations GTECH performs, and as a result, may fluctuate significantly quarter-to-quarter and year-to-year and are not indicative of GTECH’s overall business or revenue. Based on our backlog of orders and customer’s forecast, we expect total sales to GTECH for 2013 to be approximately $4 to $5 million. 
+Printrex: Printrex branded printers are sold into markets that include wide format, rack mounted and vehicle mounted black/white and color thermal printers used by customers to log and plot oil field and down hole well drilling data in the oil and gas exploration industry. It also includes high-speed color inkjet desktop printers used to print logs at data centers of the large oil and gas field service companies. Revenue in this market also includes sales of wide format printers used to print test results in ophthalmology devices in the medical industry, as well as vehicle mounted printers used to print schematics and certain other critical information in emergency services vehicles. A summary of sales of our worldwide Printrex printers for the years ended December 31, 2012 and 2011 is as follows (in thousands, except percentages): 
+Year ended 
+Year ended 
+Change 
+(In thousands) 
+December 31, 2012 
+December 31, 2011 
+$ 
+% 
+Domestic 
+$ 
+3,915 
+83.8% 
+$ 
+1,391 
+81.3% 
+$ 
+2,524 
+181.4% 
+International 
+758 
+16.2% 
+319 
+18.7% 
+439 
+137.6% 
+$ 
+4,673 
+100.0% 
+$ 
+1,710 
+100.0% 
+$ 
+2,963 
+173.3% 
+The increase in sales is primarily due to a full twelve months of sales being reported in 2012 as compared to approximately four and one-half months of sales in 2011 as we acquired Printrex on August 19, 2011. 
+TSG : Revenue from TSG includes sales of consumable products (inkjet cartridges, ribbons, receipt paper, color thermal paper and other printing supplies), replacement parts, maintenance and repair services, testing services, refurbished printers, and shipping and handling charges. A summary of sales in our worldwide TSG market for the years ended December 31, 2012 and 2011 is as follows: 
+Year ended 
+Year ended 
+Change 
+(In thousands) 
+December 31, 2012 
+December 31, 2011 
+$ 
+% 
+Domestic 
+$ 
+12,284 
+91.2% 
+$ 
+13,378 
+92.7% 
+$ 
+(1,094) 
+(8.2%) 
+International 
+1,182 
+8.8% 
+1,050 
+7.3% 
+132 
+12.6% 
+$ 
+13,466 
+100.0% 
+$ 
+14,428 
+100.0% 
+$ 
+(962) 
+(6.7%) 
+The decrease in domestic revenue from TSG is primarily due to a 19% decrease in sales of consumables from the effect of a loss of sales to two OEM customers partially offset by an increase in service revenue of approximately $582,000 during 2012 from several new contracts for paper testing services that did not occur in 2011. Additionally, Printrex TSG sales increased by approximately $272,000 to reflect a full twelve months of sales being reported in 2012 as compared to approximately four and one-half months of sales in 2011. Internationally, TSG revenue increased due primarily to higher sales of replacement parts as compared to 2011. We expect TSG sales in 2013 to be higher than in 2012, especially in the second half of 2013, as we expect to begin to benefit from sales of consumables from our newly launched Printrex color oil and gas printers. 
+Gross Profit. Gross profit information is summarized below (in thousands, except percentages): 
+December 31, 
+Percent 
+Percent of 
+Percent of 
+2012 
+2011 
+Change 
+Total Sales - 2012 
+Total Sales - 2011 
+Year ended 
+$ 
+25,982 
+$ 
+24,626 
+5.5% 
+38.0% 
+37.3% 
+Gross profit is measured as revenue less cost of sales, which includes primarily the cost of all raw materials and component parts, direct labor, manufacturing overhead expenses, cost of finished products purchased directly from our contract manufacturers and expenses associated with installations of our EPICENTRAL® print system. Gross profit increased $1,356,000, or 6%, and gross margin improved 70 basis points due primarily to a favorable sales mix as we sold more higher margin casino and gaming and Printrex printers, and fewer lower margin lottery printers in 2012 compared to 2011. We expect our gross margin for 2013 to be higher than in 2012 as we expect to benefit from increased sales of our new, value-added products as well significantly reduced sales of our lower margin lottery printers.. 
+Engineering, Design and Product Development. Engineering, design and product development information is summarized below (in thousands, except percentages): 
+December 31, 
+Percent 
+Percent of 
+Percent of 
+2012 
+2011 
+Change 
+Total Sales - 2012 
+Total Sales - 2011 
+Year ended 
+$ 
+4,239 
+$ 
+3,418 
+24.0% 
+6.2% 
+5.2% 
+Engineering, design and product development expenses primarily include salary and payroll related expenses for our engineering staff, depreciation and design expenses (including prototype printer expenses, outside design and testing services, and supplies). Such expenses increased $821,000, or 24%, due primarily to the full twelve months effect of the addition of engineering staff and related expenses from the acquisition of Printrex of approximately $657,000, and higher outside testing and prototype expenses related to new product development from the four new products we launched in the fourth quarter of 2012. We expect engineering, design and product development expenses in 2013 to be relatively consistent with 2012. 
+Selling and Marketing. Selling and marketing information is summarized below (in thousands, except percentages): 
+December 31, 
+Percent 
+Percent of 
+Percent of 
+2012 
+2011 
+Change 
+Total Sales - 2012 
+Total Sales - 2011 
+Year ended 
+$ 
+6,637 
+$ 
+6,402 
+3.7% 
+9.7% 
+9.7% 
+Selling and marketing expenses primarily include salaries and payroll related expenses for our sales and marketing staff, sales commissions, travel expenses, expenses associated with the lease of sales offices, advertising, trade show expenses, e-commerce and other promotional marketing expenses. Such expenses increased $235,000, or 4%, primarily due to higher expenses from the full twelve months effect from the acquisition of Printrex of approximately $365,000, including the addition of new sales staff, partially offset by lower promotional marketing expenses in 2012 as compared to 2011. We expect selling and marketing expenses to be higher in 2013 than in 2012 primarily due to planned expansion of our sales staff and higher trade show and promotional marketing expenses as we focus our selling and marketing efforts on our newly launched, value-added products in 2013. 
+General and Administrative. General and administrative information is summarized below (in thousands, except percentages): 
+December 31, 
+Percent 
+Percent of 
+Percent of 
+2012 
+2011 
+Change 
+Total Sales - 2012 
+Total Sales - 2011 
+Year ended 
+$ 
+7,833 
+$ 
+7,633 
+2.6% 
+11.5% 
+11.6% 
+General and administrative expenses primarily include salaries and payroll related expenses for our executive, accounting, human resource, business development and information technology staff, expenses for our corporate headquarters, professional and legal expenses, telecommunication expenses, and other expenses related to being a publicly-traded company. General and administrative expenses increased $200,000, or 3%, due primarily to an increase in accrued contingent consideration of $280,000 (as discussed in more detail in Note 3 to the Consolidated Financial Statements) and higher amortization of intangible assets of $227,000, both in connection with the acquisition of Printrex. These increases were partially offset by lower recruitment fees of $175,000 as compared to 2011. We expect general and administrative expenses in 2013 to be relatively consistent with 2012. 
+Legal Fees Associated with Lawsuit . Legal fee information is summarized below (in thousands, except percentages): 
+December 31, 
+Percent 
+Percent of 
+Percent of 
+2012 
+2011 
+Change 
+Total Sales - 2012 
+Total Sales - 2011 
+Year ended 
+$ 
+1,533 
+$ 
+- 
+100.0% 
+2.2% 
+- % 
+As disclosed in Note 11 to the Consolidated Financial Statements, in June 2012, Avery Dennison Corporation (“AD”) filed a civil complaint against the Company. In connection with this lawsuit, we incurred legal fees and other related expenses of $1,533,000 in 2012. In November 2012, the Court denied AD’s request for a preliminary injunction against us although AD has since filed an appeal of the Court’s ruling. As a result of AD’s actions, we may incur additional legal fees related to this lawsuit in 2013 and beyond, although we cannot predict the timing and extent of such legal fees. 
+Business Consolidation and Restructuring. Business consolidation and restructuring information is summarized below (in thousands, except percentages): 
+December 31, 
+Percent 
+Percent of 
+Percent of 
+2012 
+2011 
+Change 
+Total Sales - 2012 
+Total Sales - 2011 
+Year ended 
+$ 
+138 
+$ 
+184 
+(25.0%) 
+0.2% 
+0.3% 
+As disclosed in Note 8 to the Consolidated Financial Statements, in January 2012, we determined that we no longer needed to maintain the existing Printrex manufacturing facility in San Jose, California, along with certain redundant headcount. During 2012, we recorded a restructuring charge of $138,000 for employee termination benefits related to these employee reductions as well as moving costs. The closing of the San Jose manufacturing operations was completed as of December 31, 2012. 
+In May 2011, we undertook a plan to close our New Britain, CT service facility. The New Britain facility primarily serviced our first generation legacy impact printers for GTECH. We no longer needed to maintain this facility since these printers were replaced by our thermal lottery printers. During 2011, we recorded a restructuring charge of $184,000 in connection with this facility closure. As of June 30, 2011, all New Britain activities ceased. Please also refer to Note 8 in the Consolidated Financial Statements. 
+Operating Income. Operating income information is summarized below (in thousands, except percentages): 
+December 31, 
+Percent 
+Percent of 
+Percent of 
+2012 
+2011 
+Change 
+Total Sales - 2012 
+Total Sales - 2011 
+Year ended 
+$ 
+5,602 
+$ 
+6,989 
+(19.8%) 
+8.2% 
+10.6% 
+The decrease in our operating income and operating margin was primarily due to the legal fees incurred from the AD lawsuit and higher operating expenses attributable to the Printrex acquisition of approximately $1,145,000 which were partially offset by higher gross profit as previously discussed. 
+Interest. We recorded net interest income of $6,000 in 2012 compared to net interest income of $18,000 in 2011. The decrease in net interest income is primarily due to lower interest income earned a lower average cash balance, as we used a significant amount of our cash (approximately $6,464,000) to repurchase our common stock and pay cash dividends in 2012. Interest expense related to the unused revolving credit line fee and amortization of deferred financing costs on our revolving credit facility with TD Bank remained consistent in 2012 and 2011. See “Liquidity and Capital Resources” below for more information. 
+Other, net. We recorded other expense of $23,000 in 2012 compared to other income of $1,000 in 2011. The change from 2011 was primarily due to foreign currency transaction exchange losses recorded by our U.K. subsidiary in 2012 compared to a small gain in 2011. 
+Income Taxes. We recorded an income tax provision for 2012 of $1,964,000 at an effective tax rate of 35.2% compared to $2,332,000 at an effective tax rate of 33.3% for 2011. The effective tax rate for 2012 is higher because it does not include a benefit from the federal research and development (“R&D”) credit, which is normally included in our tax rate, as this credit expired at the end of 2011 and was not renewed until January 2, 2013 as a component of the American Taxpayer Relief Act of 2012 (the “Act”). Since the Act was not signed until 2013, the cumulative 2012 impact of the R&D credit will be reflected as a discrete item in the first quarter of 2013. Had the R&D credit been included in our effective tax rate for 2012, it would have lowered our income tax provision and effective tax rate, by approximately $220,000 and 400 basis points, respectively. As a result of this accounting treatment, we expect our annual effective tax rate for 2013 to be between 32 and 33%. 
+Net Income . We reported net income during 2012 of $3,621,000, or $0.40, per diluted share, compared to $4,676,000, or $0.49, per diluted share, for 2011. 
+Results of Operations: Year ended December 31, 2011 compared to year ended December 31, 2010 
+Net Sales. Net sales, which include printer sales and sales of replacement parts, consumables and maintenance and repair services, by market for the years ended December 31, 2011 and 2010 were as follows: 
+Year ended 
+Year ended 
+Change 
+(In thousands) 
+December 31, 2011 
+December 31, 2010 
+$ 
+% 
+Banking and POS 
+$ 
+9,943 
+15.1% 
+$ 
+14,528 
+23.0% 
+$ 
+(4,585) 
+(31.6%) 
+Casino and gaming 
+24,955 
+37.8% 
+25,678 
+40.6% 
+(723) 
+(2.8%) 
+Lottery 
+14,933 
+22.6% 
+8,142 
+12.9% 
+6,791 
+83.4% 
+Printrex 
+1,710 
+2.6% 
+- 
+- % 
+1,710 
+100.0% 
+TSG 
+14,428 
+21.9% 
+14,846 
+23.5% 
+(418) 
+(2.8%) 
+$ 
+65,969 
+100.0% 
+$ 
+63,194 
+100.0% 
+$ 
+2,775 
+4.4% 
+International* 
+$ 
+16,668 
+25.3% 
+$ 
+19,093 
+30.2% 
+$ 
+(2,425) 
+(12.7%) 
+* International sales do not include sales of printers made to domestic distributors or other customers who in turn ship those printers to international destinations. 
+Net sales for 2011 increased $2,775,000, or 4%, from 2010. Printer sales volume increased 6% to approximately 201,000 units while the average selling price of our printers remained relatively flat from 2010 to 2011. The increase in unit volume was driven primarily by the lottery market where our unit volume increased 93% compared to 2010, somewhat offset by a 34% decline in unit volume from the banking and POS market. Overall, international sales decreased $2,425,000, or 13%, primarily driven by lower sales to the casino and gaming market. 
+Banking and POS : Sales of our banking and POS printers worldwide decreased $4,585,000, or 32%, from 2010 and a summary follows: 
+Year ended 
+Year ended 
+Change 
+(In thousands) 
+December 31, 2011 
+December 31, 2010 
+$ 
+% 
+Domestic 
+$ 
+8,968 
+90.2% 
+$ 
+13,447 
+92.6% 
+$ 
+(4,479) 
+(33.3%) 
+International 
+975 
+9.8% 
+1,081 
+7.4% 
+(106) 
+(9.8%) 
+$ 
+9,943 
+100.0% 
+$ 
+14,528 
+100.0% 
+$ 
+(4,585) 
+(31.6%) 
+The decrease in domestic banking and POS printer revenue from 2010 was primarily driven by lower sales of our POS printers due to the shipment of a large order for our Ithaca® 280 thermal receipt printer to an existing retail customer as part of a POS system upgrade project in all its U.S. stores in 2010 that did not repeat in 2011. This decrease was coupled with a 37% decrease in U.S. sales of our two printer products for McDonald’s for its combined beverage initiative and its POS system upgrade and grill initiatives. Sales of our banking printers decreased 37% primarily due to sales to a bank customer to upgrade its bank teller stations utilizing our BANKjet® 2500 bank teller printer in 2010 that did not recur in 2011. 
+International banking and POS printer sales for 2011 decreased 10% from 2010 due primarily to lower sales to international distributors in Europe, Latin America and the Pacific Rim. This decrease was largely offset by the roll out of the McDonald’s POS system upgrade and grill initiative as well as the combined beverage initiative to its Canadian stores in 2011 compared to 2010. 
+Casino and gaming : Sales of our worldwide casino and gaming printers decreased $723,000, or 3%, from 2010 and a summary follows: 
+Year ended 
+Year ended 
+Change 
+(In thousands) 
+December 31, 2011 
+December 31, 2010 
+$ 
+% 
+Domestic 
+$ 
+11,007 
+44.1% 
+$ 
+9,287 
+36.2% 
+$ 
+1,720 
+18.5% 
+International 
+13,948 
+55.9% 
+16,391 
+63.8% 
+(2,443) 
+(14.9%) 
+$ 
+24,955 
+100.0% 
+$ 
+25,678 
+100.0% 
+$ 
+(723) 
+(2.8%) 
+The increase in domestic sales of our casino and gaming printers is primarily due to an increase of 16% in sales of our thermal casino printers. We believe that our increased casino printer sales during 2011 resulted from a combination of new casino openings and market share gains, as we believe the overall replacement cycle of slot machines was lower in 2011 as compared to 2010. 
+International casino and gaming printer sales decreased due primarily to a 15% decline in thermal casino printer sales resulting largely from a 27% decrease in our thermal casino printer sales to our OEM and distributor customers in Canada and Europe. This decline was primarily due to higher sales of VLT gaming machines into Italy during 2010 from the government-approved installation of approximately 50,000 VLT games, of which only 30,000 have shipped so far. Since the Italian government significantly slowed the pace of installations in 2011, our resulting printer sales were significantly lower in 2011 compared to 2010. Sales of our off-premise thermal gaming printers decreased 14% in 2011 compared to 2010 due largely to a 16% decrease in sales to a distributor and OEM customer in Australia and Asia as well as an 18% decrease in sales to our European distributor. 
+Lottery: Revenue from the lottery market includes sales of lottery printers to GTECH for various lottery applications and a summary follows: 
+Year ended 
+Year ended 
+Change 
+(In thousands) 
+December 31, 2011 
+December 31, 2010 
+$ 
+% 
+Domestic 
+$ 
+14,557 
+97.5% 
+$ 
+7,813 
+96.0% 
+$ 
+6,744 
+86.3% 
+International 
+376 
+2.5% 
+329 
+4.0% 
+47 
+14.3% 
+$ 
+14,933 
+100.0% 
+$ 
+8,142 
+100.0% 
+$ 
+6,791 
+83.4% 
+Sales to GTECH for 2011 reached a near record level. However, our sales to GTECH are directly dependent on the timing and number of new and upgraded lottery terminal installations GTECH performs, and as a result, may fluctuate significantly quarter-to-quarter and year-to-year and are not indicative of GTECH’s overall business or revenue. 
+Printrex: Sales of our worldwide Printrex printers were as follows: 
+Year ended 
+(In thousands) 
+December 31, 2011 
+Domestic 
+$ 
+1,391 
+81.3% 
+International 
+319 
+18.7% 
+$ 
+1,710 
+100.0% 
+Printrex printers contributed sales of $1,710,000 during 2011. Such sales were included from the period from August 19, 2011, the closing date of our acquisition of Printrex, through December 31, 2011. As Printrex was acquired during the third quarter of 2011, no Printrex printer sales were included in our results for 2010. 
+TSG : Sales from TSG decreased $418,000, or 3%, from 2010 and a summary follows: 
+Year ended 
+Year ended 
+Change 
+(In thousands) 
+December 31, 2011 
+December 31, 2010 
+$ 
+% 
+Domestic 
+$ 
+13,378 
+92.7% 
+$ 
+13,554 
+91.3% 
+$ 
+(176) 
+(1.3%) 
+International 
+1,050 
+7.3% 
+1,292 
+8.7% 
+(242) 
+(18.7%) 
+$ 
+14,428 
+100.0% 
+$ 
+14,846 
+100.0% 
+$ 
+(418) 
+(2.8%) 
+The decrease in domestic revenue from TSG is primarily due to a 4% decrease in sales of consumables, a decline in service revenue related to a price reduction on a large service contract, and testing services revenue recorded in 2010 that did not recur in 2011. These decreases were largely offset by an increase of 51% in sales of replacement parts compared to 2010 in addition to Printrex sales of approximately $182,000. Internationally, TSG revenue decreased due primarily to lower sales of replacement parts as compared to 2010. 
+Gross Profit. Gross profit information is summarized below (in thousands, except percentages): 
+December 31, 
+Percent 
+Percent of 
+Percent of 
+2011 
+2010 
+Change 
+Total Sales - 2011 
+Total Sales - 2010 
+Year ended 
+$ 
+24,626 
+$ 
+22,548 
+9.2% 
+37.3% 
+35.7% 
+Gross profit increased $2,078,000, or 9%, and gross margin improved 160 basis points due primarily to (1) a 4% increase in sales in 2011 compared to 2010, (2) lower product and production costs resulting from increased printer production in Asia and (3) the addition of higher margin Printrex printers in 2011 compared to 2010. 
+Engineering, Design and Product Development. Engineering, design and product development information is summarized below (in thousands, except percentages): 
+December 31, 
+Percent 
+Percent of 
+Percent of 
+2011 
+2010 
+Change 
+Total Sales - 2011 
+Total Sales - 2010 
+Year ended 
+$ 
+3,418 
+$ 
+3,000 
+13.9% 
+5.2% 
+4.7% 
+Engineering, design and product development expenses increased $418,000, or 14%, which was due primarily to the addition of engineering staff and related expenses from the acquisition of Printrex of approximately $241,000, higher outside testing and pre-production expenses related to new product development during 2011 and slightly higher consulting expenses compared to 2010. 
+Selling and Marketing. Selling and marketing information is summarized below (in thousands, except percentages): 
+December 31, 
+Percent 
+Percent of 
+Percent of 
+2011 
+2010 
+Change 
+Total Sales - 2011 
+Total Sales - 2010 
+Year ended 
+$ 
+6,402 
+$ 
+6,407 
+- % 
+9.7% 
+10.1% 
+Selling and marketing were relatively consistent compared to 2010 as lower sales commissions and promotional marketing expenses were almost fully offset by higher expenses associated with the Printrex acquisition. 
+General and Administrative. General and administrative information is summarized below (in thousands, except percentages): 
+December 31, 
+Percent 
+Percent of 
+Percent of 
+2011 
+2010 
+Change 
+Total Sales - 2011 
+Total Sales - 2010 
+Year ended 
+$ 
+7,633 
+$ 
+7,280 
+4.8% 
+11.6% 
+11.5% 
+General and administrative expenses increased $353,000, or 5%, due primarily to higher transaction and integration costs of approximately $129,000 in addition to amortization of intangible assets of approximately $139,000, both related to the acquisition of Printrex. 
+Business Consolidation and Restructuring. Business consolidation and restructuring information is summarized below (in thousands, except percentages): 
+December 31, 
+Percent 
+Percent of 
+Percent of 
+2011 
+2010 
+Change 
+Total Sales - 2011 
+Total Sales - 2010 
+Year ended 
+$ 
+184 
+$ 
+- 
+100.0% 
+0.3% 
+- % 
+During 2011, we closed our New Britain, CT service facility which primarily serviced our first generation legacy impact printers for GTECH and incurred certain facility closure and severance costs. We no longer needed to maintain this facility since these printers have been replaced by our thermal lottery printers. Please also refer to Note 8 in the Consolidated Financial Statements. 
+Operating Income. Operating income information is summarized below (in thousands, except percentages): 
+December 31, 
+Percent 
+Percent of 
+Percent of 
+2011 
+2010 
+Change 
+Total Sales - 2011 
+Total Sales - 2010 
+Year ended 
+$ 
+6,989 
+$ 
+5,861 
+19.2% 
+10.6% 
+9.3% 
+The increase in our operating income and operating margin was primarily due to higher gross profit resulting from the 4% increase in net sales and a 160 basis point improvement in gross margin in 2011 compared to 2010 which was slightly offset by higher operating expenses due primarily to the Printrex acquisition. 
+Interest. We recorded net interest income of $18,000 in 2011 compared to net interest expense of $9,000 in 2010. The increase in net interest income is due to the $26,000 of interest expense incurred in 2010 related to certain prior years’ state and local tax liabilities that did not recur in 2011. Interest expense related to the unused revolving credit line fee and amortization of deferred financing costs on our revolving credit facility with TD Bank remained consistent in 2011 and 2010. See “Liquidity and Capital Resources” below for more information. 
+Other, net. We recorded other income of $1,000 in 2011 compared to other expense of $25,000 in 2010. The change from 2010 was primarily due to foreign currency transaction exchange losses recorded by our U.K. subsidiary in 2010 compared to a small gain in 2011. 
+Income Taxes. We recorded an income tax provision for 2011 of $2,332,000 at an effective tax rate of 33.3% compared to $1,923,000 at an effective tax rate of 33.0% for 2010. The effective tax rate for 2011 increased slightly as compared to 2010 primarily due to higher state taxes from the acquisition of Printrex. 
+Net Income . We reported net income during 2011 of $4,676,000, or $0.49, per diluted share, compared to $3,904,000, or $0.41, per diluted share, for 2010. 
+Liquidity and Capital Resources 
+We assess our liquidity in terms of our ability to generate cash to fund our operating, investing and financing activities. Significant factors affecting the management of liquidity are cash flows from operating activities, capital expenditures, treasury share repurchases, dividend payments, access to bank lines of credit and our ability to attract long-term capital with satisfactory terms. 
+Internal cash generation together with currently available cash and cash equivalents, available borrowing facilities and an ability to access credit lines, if needed, are expected to be sufficient to fund operations, capital expenditures, treasury share repurchases, dividend payments and any increase in working capital that would be required to accommodate a higher level of business activity. We actively seek to expand by acquisition as well as through the growth of our current business. While a significant acquisition may require additional debt and/or equity financing, although no assurances can be given, we believe that we would be able to obtain additional financing based on our historical earnings performance. 
+Cash Flow 
+During 2012, our cash balance increased $674,000, or 10%, from December 31, 2011 as we used a substantial portion of our cash flow to return shareholders in the form of $5,938,000 of repurchases of our common stock and $526,000 of cash dividends paid to our common shareholders. Even after funding these items and our capital expenditures, we ended 2012 with $7,537,000 in cash and cash equivalents and no debt outstanding. . 
+Operating activities : The following significant factors primarily affected our cash provided by operating activities of $8,030,000 in 2012 as compared to $2,096,000 in 2011. During 2012: 
+· 
+We reported net income of $3,621,000. 
+· 
+We recorded depreciation, amortization and non-cash compensation expense of $2,278,000, including $366,000 of amortization related to intangible assets acquired from Printrex. 
+· 
+Accounts receivable increased $6,332,000 due primarily to significantly higher sales volume during the fourth quarter of 2012 compared to the fourth quarter of 2011. 
+· 
+Inventories decreased $3,684,000 due primarily to a focused effort at inventory management through a reduction in inventory purchases and sales fulfillment through existing inventory stock throughout 2012. We expect our inventories to increase during 2013 as we increase stocking levels of our newly launched food safety and Printrex products. 
+· 
+Accounts payable increased $3,403,000 due to primarily to higher inventory purchases made during the fourth quarter 2012 to support significantly higher sales volume compared to the fourth quarter of 2011. 
+· 
+Accrued liabilities and other liabilities increased $1,182,000 due primarily to an increase in income taxes payable of approximately $589,000 resulting from a higher level of income before income taxes in the fourth quarter 2012 compared to 2011. Additionally, we increased our estimate of accrued contingent consideration associated with the acquisition of Printrex by $280,000 during 2012 based on our revised estimate of the expected payout. 
+During 2011: 
+· 
+We reported net income of $4,676,000. 
+· 
+We recorded depreciation, amortization and non-cash compensation expense of $2,195,000, including $139,000 of amortization related to intangible assets acquired from Printrex. 
+· 
+We recorded non-cash deferred income tax expense of $519,000. 
+· 
+Incremental tax benefits from stock options exercised were $498,000 . 
+· 
+Accounts receivable decreased $1,977,000 due to lower sales volume and the timing of sales during the fourth quarter of 2011 compared to the fourth quarter of 2010. 
+· 
+Inventories increased $568,000 due to lower than anticipated sales volume in the last six months of 2011. 
+· 
+Accounts payable decreased $5,427,000 due to significantly lower inventory purchases and the timing of payments during the fourth quarter of 2011 compared to the fourth quarter of 2010. 
+· 
+Accrued liabilities and other liabilities decreased $352,000 due primarily to a reduction of income taxes payable resulting from the overpayment of our 2011 tax liability as certain tax credits were higher than anticipated. Correspondingly, we recorded refundable income taxes of $446,000. 
+Investing activities: Our capital expenditures were $1,082,000 and $640,000 in 2012 and 2011, respectively. Expenditures in 2012 included $490,000 for the purchase of new product tooling with the remaining amount primarily for the purchase of computer hardware and software and manufacturing equipment. Expenditures in 2011 included $325,000 for the purchase of new product tooling, $235,000 for the purchase of computer, networking equipment, and software, $56,000 for the purchase of engineering equipment, and the remaining amount primarily for the purchase of manufacturing equipment, leasehold improvements and furniture and fixtures. Additionally, our capitalized software development costs for the EPICENTRAL™ print system were $35,000 and $616,000 in 2012 and 2011, respectively. 
+Capital expenditures for 2013 are expected to be approximately $1,200,000, primarily for new product tooling and tooling enhancements for our existing products. 
+On August 19, 2011, we completed the purchase of substantially all of the assets of Printrex for $4,000,000 in cash and potential future contingent consideration as previously discussed. 
+Financing activities: We used $6,242,000 of cash from financing activities during 2012 to purchase $5,938,000 of common stock for treasury and $526,000 to make our first ever cash dividend payment, partially offset by $229,000 of proceeds and incremental tax benefits from stock option exercises. During 2011, we used $1,254,000 of cash from financing activities to purchase $2,680,000 of common stock for treasury and $31,000 in financing costs associated with our amended TD Bank Credit Facility (as discussed below), partially offset by $1,457,000 of proceeds and incremental tax benefits from stock option exercises. 
+Working Capital 
+Our working capital decreased approximately 6% to $25,492,000 at December 31, 2012 from $27,222,000 at December 31, 2011. Our current ratio also decreased to 3.5 at December 31, 2012, compared to 5.7 at December 31, 2011. The decrease in our working capital and current ratio was primarily due to higher accounts payable and accrued liabilities balances primarily resulting from increased inventory purchases and the timing of payments in the fourth quarter of 2012 as compared to 2011 in addition to lower inventory balances. These were partially offset by higher accounts receivable balances and cash and cash equivalents, despite the significant treasury share repurchases and cash dividend payments previously discussed, in the fourth quarter of 2012 compared to 2011. 
+Resource Sufficiency 
+We believe that our cash and cash equivalents on hand and cash flows generated from operating activities will provide sufficient resources to meet our working capital needs, finance our capital expenditures, treasury stock repurchases, dividend payments and meet our liquidity requirements through at least the next twelve months. 
+Credit Facility and Borrowings 
+On November 22, 2011, we signed a three-year amendment to renew our existing $20,000,000 credit facility (the “TD Bank Credit Facility”) with TD Bank N.A. (“TD Bank). The TD Bank Credit Facility provides for a $20,000,000 revolving credit line expiring on November 28, 2014. Borrowings under the revolving credit line bear a floating rate of interest at the prime rate minus one percent and are secured by a lien on all of our assets. We also pay a fee of 0.25% on unused borrowings under the revolving credit line. The total deferred financing costs relating to expenses incurred to complete the TD Bank Credit Facility was $31,000. 
+On September 7, 2012, we signed an amendment to TD Bank Credit Facility that allows us to declare and pay cash dividends to holders of our outstanding common shares subject to approval by our Board of Directors and provided that no default or event of default has occurred and is continuing under the credit facility on the date of the dividend payment. The amendment also allows us to use up to $5,000,000 in revolving credit loans to fund future cash dividend payments or treasury share buybacks as well as requires cash dividend payments to be treated as distributions for purposes of quarterly debt covenant calculations. 
+The TD Bank Credit Facility imposes certain quarterly financial covenants on us and restricts, among other things, our ability to incur additional indebtedness and the creation of other liens. We were in compliance with all financial covenants of the TD Bank Credit Facility at December 31, 2012. The following table lists the financial covenants and the performance measurements at December 31, 2012: 
+Financial Covenant 
+Requirement/Restriction 
+Calculation at December 31, 2012 
+Operating cash flow / Total debt service 
+Minimum of 1.25 times 
+104.6 times 
+Funded debt / EBITDA 
+Maximum of 3.0 times 
+0 times 
+As of December 31, 2012, undrawn commitments under the TD Bank Credit facility were $20,000,000. 
+Shareholder Dividend Payments 
+On September 10, 2012, we announced that our Board of Directors approved the initiation of a quarterly cash dividend program which is subject to the Board’s approval each quarter. During 2012, our Board of Directors declared a quarterly cash dividend of $0.06 per share in the amount of approximately $526,000 which was paid on December 12, 2012 to common shareholders of record at the close of business on November 21, 2012. On February 4, 2013, our Board of Directors approved the first quarter 2013 dividend on our common stock in the amount of $0.06 per share payable on or about March 13, 2013 to common shareholders of record at the close of business on February 20, 2013. We expect to pay approximately $2,100,000 in cash dividends to our common shareholders during 2013. 
+Stock Repurchase Program 
+We maintain a stock repurchase program (the “Stock Repurchase Program”) whereby we are authorized to repurchase up to $15,000,000, as increased from $10,000,000 in March 2012 through Board of Director approval, of our outstanding shares of common stock from time to time in the open market over a three-year period ending May 27, 2013, depending on market conditions, share price and other factors. We use the cost method to account for treasury stock purchases, under which the price paid for the stock is charged to the treasury stock account. Repurchases of our common stock are accounted for as of the settlement date. For the year ended December 31, 2012, we repurchased 721,184 shares of common stock for approximately $5,938,000 , at an average price of $8.23 per share, under the Stock Repurchase Program. From January 1, 2005 through December 31, 2012, we repurchased a total of 2,182,877 shares of common stock for approximately $17,333,000 under all of our stock repurchase programs, at an average price of $7.94 per share. At December 31, 2012, approximately $6,206,000 remains authorized for future repurchases under the Stock Repurchase Program. The following table summarizes the repurchase of our common stock for the year ended December 31, 2012: 
+Period 
+Total Number of Shares Purchased 
+Average Price Paid per Share 
+Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs 
+Approximate Dollar Value of Shares that May Yet Be Purchased under the May 2010 Program 
+January 1, 2012 – January 31, 2012 
+447 
+$ 
+7.65 
+447 
+$ 
+7,140,000 
+February 1, 2012 – February 29, 2012 
+- 
+- 
+- 
+$ 
+7,140,000 
+March 1, 2012 – March 31, 2012 
+19,708 
+7.19 
+19,708 
+$ 
+11,998,000 
+* 
+April 1, 2012 – April 30, 2012 
+374,228 
+8.59 
+374,228 
+$ 
+8,784,000 
+* 
+May 1, 2012 – May 31, 2012 
+93,302 
+8.58 
+93,302 
+$ 
+7,983,000 
+* 
+June 1, 2012 – June 30, 2012 
+128,680 
+7.69 
+128,680 
+$ 
+6,993,000 
+* 
+July 1, 2012 – July 31, 2012 
+26,960 
+7.79 
+26,960 
+$ 
+6,783,000 
+* 
+August 1, 2012 – August 31, 2012 
+20,309 
+7.46 
+20,309 
+$ 
+6,631,000 
+* 
+September 1, 2012 – September 30, 2012 
+7,014 
+7.30 
+7,014 
+$ 
+6,581,000 
+* 
+October 1, 2012 – October 31, 2012 
+- 
+- 
+- 
+$ 
+6,581,000 
+* 
+November 1, 2012 – November 30, 2012 
+1,200 
+7.69 
+1,200 
+$ 
+6,572,000 
+* 
+December 1, 2012 – December 31, 2012 
+49,336 
+7.41 
+49,336 
+$ 
+6,206,000 
+* 
+Total 
+721,184 
+$ 
+8.23 
+721,184 
+* Reflects authorized share increase to $15,000,000 in March 2012. 
+Shareholders’ Equity 
+Shareholders’ equity decreased $1,944,000 to $33,369,000 at December 31, 2012 from $35,313,000 at December 31, 2011. The decrease was primarily due to our purchase of 721,184 shares of treasury stock for $5,938,000 and dividend payments of $526,000. These decreases were partially offset by net income of $3,621,000, compensation expense related to stock options of $520,000, proceeds and the associated incremental tax benefits of approximately $229,000 from the issuance of 51,122 shares of common stock from stock option exercises, and approximately $134,000 from the issuance of 20,055 shares of deferred stock units. 
+Contractual Obligations 
+Our contractual obligations as of December 31, 2012 were as follows: 
+Payments due by period 
+(In thousands) 
+Total 
+< 1 year 
+1-3 years 
+3-5 years 
+> 5 years 
+Operating lease obligations 
+$ 
+3,089 
+$ 
+836 
+$ 
+1,614 
+$ 
+639 
+$ 
+- 
+Purchase obligations 
+11,712 
+11,498 
+214 
+- 
+- 
+Accrued contingent consideration 
+960 
+136 
+824 
+- 
+- 
+Total 
+$ 
+15,761 
+$ 
+12,470 
+$ 
+2,652 
+$ 
+639 
+$ 
+- 
+Purchase obligations are for purchases made in the normal course of business to meet operational requirements, primarily of fully assembled printers and component part inventory. Accrued contingent consideration consists of potential future obligations for performance-based cash payments in connection with the Printrex acquisition. 
+Impact of Inflation 
+We believe that our business has not been affected to a significant degree by inflationary trends during the past three years. However, inflation is still a factor in the worldwide economy and may increase the cost of purchasing products from our contract manufacturers in Asia, as well as the cost of certain raw materials, component parts and labor used in the production of our products. It also may increase our operating expenses, manufacturing overhead expenses and the cost to acquire or replace fixed assets. Despite continued growing costs of oil, gas and freight, we have generally been able to maintain or improve our profit margins through productivity and efficiency improvements, cost reduction programs and to a lesser extent, price increases, and we expect to be able to do the same during 2013. As such, we do not believe that inflation will have a significant impact on our business during 2013. 
+Item 7A. Quantitative and Qualitative Disclosures about Market Risk. 
+Interest Rate Risk 
+Our exposure to market risk for changes in interest rates relates primarily to the investment of our available cash and cash equivalents. In accordance with our investment policy, we strive to achieve above market rates of return in exchange for accepting a prudent amount of incremental risk, which includes the risk of interest rate movements. Risk tolerance is constrained by an overriding objective to preserve capital. An increase or decrease of 10% in effective interest rates would not have a material effect on our results of operations or cash flows. 
+Foreign Currency Exchange Risk 
+A substantial portion of our sales are denominated in U.S. dollars and, as a result, we have relatively little exposure to foreign currency exchange risk with respect to sales made. This exposure may change over time as business practices evolve and could have a material adverse impact on our financial results in the future. We do not use forward exchange contracts to hedge exposures denominated in foreign currencies or any other derivative financial instruments for trading or speculative purposes. We estimate that the combined translational and transactional impact of a 10% overall movement in exchange rates from December 31, 2012 (principally the U.K. Pound Sterling) would not have a material impact on our results of operations or cash flows. 
+Item 8. Financial Statements and Supplementary Data. 
+The financial statements of the Company are annexed to this report as pages F-3 through F-18. An index to such materials appears on page F-1. 
+Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. 
+None. 
+Item 9A. Controls and Procedures. 
+Attached as exhibits to this Form 10-K are certifications of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), which are required in accordance with Rule 13a-14 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). This “Controls and Procedures” section includes information concerning the controls and controls evaluation referred to in the certifications. 
+Evaluation of Disclosure Controls and Procedures 
+As of December 31, 2012, the Company, with the participation of its CEO and CFO conducted an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934 (the “Exchange Act”). Based on that evaluation, our CEO and CFO concluded that the Company’s disclosure controls and procedures (as defined in Rule 13a-15 of the Exchange Act) were effective as of December 31, 2012. There has been no change in the Company’s internal control over financial reporting during the quarter ended December 31, 2012 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. 
+Management’s Annual Report on Internal Control Over Financial Reporting 
+Our management is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. 
+Management assessed our internal control over financial reporting as of December 31, 2012. Management based its assessment on criteria established in Internal Control–Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on our assessment, management has concluded that our internal control over financial reporting was effective as of December 31, 2012 
+The effectiveness of the Company’s internal control over financial reporting as of December 31, 2012, has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein. 
+Item 9B. Other Information. 
+Not applicable. 
+PART III 
+Item 10. Directors, Executive Officers and Corporate Governance. 
+The information in response to this item is incorporated by reference from the Proxy Statement sections entitled “Election of Directors” and “Executive Officers.” 
+Executive Officers of the Registrant 
+The following list is included as an unnumbered item in Part III of this Report in lieu of being included in the Proxy Statement for the Annual Meeting of Stockholders to be held on May 28, 2013. 
+The following is a list of the names and ages of all executive officers of the registrant, indicating all positions and offices with the registrant held by each such person and each person’s principal occupations and employment during at least the past five years. 
+Name 
+Age 
+Position 
+Bart C. Shuldman 
+55 
+Chairman of the Board and Chief Executive Officer 
+Steven A. DeMartino 
+43 
+President, Chief Financial Officer, Treasurer and Secretary 
+Donald E. Brooks 
+60 
+Senior Vice President-Engineering 
+Tracey S. Chernay 
+53 
+Executive Vice President, Casino and Gaming Sales and Marketing 
+Andrew J. Hoffman 
+55 
+Senior Vice President-Operations 
+Benjamin C. Wyatt 
+39 
+Vice President-Software Products and Business Development 
+Chad R. Albano 
+40 
+Chief Accounting Officer and Corporate Controller 
+Bart C. Shuldman has been Chief Executive Officer, President and a Director of the Company since its formation in June 1996. In February 2001, Mr. Shuldman was elected Chairman of the Board. Mr. Shuldman relinquished the President title, effective June 1, 2010, to focus on new products and markets, international expansion and potential acquisitions. 
+Steven A. DeMartino was named as TransAct’s President, Chief Financial Officer, Treasurer and Secretary on June 1, 2010. Previously, Mr. DeMartino served as Executive Vice President, Chief Financial Officer, Treasurer and Secretary from June 2004 to May 2010, Senior Vice President, Finance and Information Technology from October 2001 to May 2004, Vice President and Corporate Controller from January 1998 to October 2001, and Corporate Controller from August 1996 to December 1997. Mr. DeMartino is a certified public accountant. 
+Donald E. Brooks was appointed Senior Vice President of Engineering in April 2012. Previously, Mr. Brooks served as Vice President, Engineering from September 2004 to April 2012, Senior Project Engineer from February 1998 to September 2004, Project Engineer from June 1997 to February 1998, Director of Electrical Engineering from March 1986 to June 1997 and Manager of Electronic Development from December 1983 to March 1986. 
+Tracey S. Chernay was appointed Executive Vice President, Casino and Gaming Sales and Marketing in June 2010, with responsibility for the sales and marketing of all casino and gaming printer products. Previously, Ms. Chernay served as Senior Vice President, Sales and Marketing from June 2007 to May 2010, Sr. Vice President, Marketing & Sales, POS & Banking with the Company from July 2006 to June 2007, and joined TransAct in May of 2005 as Senior Vice President, Marketing. Prior to joining TransAct, Ms. Chernay was employed with Xerox Corporation where she held the role of Manager, Worldwide Marketing since 2003, and Manager, Sales Operations from 2000 to 2002. She joined Xerox Corporation in 1983. 
+Andrew J. Hoffman was appointed Senior Vice President, Operations for TransAct worldwide in November 2004. He served as Vice President, Operations from September 1994 to November 2004. 
+Benjamin C. Wyatt was appointed Vice President, Software Products and Business Development in December 2010. Previously, Mr. Wyatt served as Vice President, Business Development for TransAct from May 2008 to November 2010. Prior to joining TransAct, Mr. Wyatt was employed with Pitney Bowes Mail Services where he held the role of Director Business Development since 2006, and Manager Acquisitions and Integration from 2004 to 2006. 
+Chad R. Albano was named as TransAct’s Chief Accounting Officer and Corporate Controller on March 1, 2013. Previously, Mr. Albano served as TransAct’s Corporate Controller since December 2011 when he joined the Company. Prior to joining TransAct, Mr. Albano was employed with Stanley Black and Decker, Inc. where he held the role of Senior Manager of Technical Accounting and Reporting since December 2010. Additionally, from June 2006 to December 2010, Mr. Albano was employed with Amphenol, Inc. where he held the role of Director of Finance. Mr. Albano is a certified public accountant. 
+Item 11. Executive Compensation. 
+The information in response to this item is incorporated by reference from the Proxy Statement sections entitled “Executive Compensation and Certain Transactions” and “Compensation Discussion and Analysis.” 
+Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. 
+The information in response to this item is incorporated by reference from the Proxy Statement section entitled “Security Ownership of Certain Beneficial Owners and Management.” 
+Information regarding our equity compensation plans as of December 31, 2012 is as follows: 
+Plan category 
+(a) 
+Number of securities to be issued upon exercise of outstanding options, warrants and rights 
+(b) 
+Weighted-average exercise price of outstanding options, warrants and rights 
+(c) 
+Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a) 
+Equity compensation plans approved by security holders: 
+1996 Stock Plan 
+- 
+- 
+- 
+1996 Non-Employee Director Plan 
+67,500 
+19.46 
+- 
+2005 Equity Incentive Plan 
+823,043 
+7.21 
+302,243 
+Total 
+890,543 
+$ 
+8.14 
+302,243 
+Equity compensation plans not approved by security holders: 
+2001 Employee Stock Plan 
+4,000 
+$ 
+16.06 
+- 
+894,543 
+$ 
+8.18 
+302,243 
+The TransAct Technologies Incorporated 2001 Employee Stock Plan was adopted by our Board of Directors, without approval of our security holders, effective February 26, 2001. The Company also maintains the 2005 Equity Incentive Plan which was approved by our shareholders. The number of shares of common stock which may be subject to awards granted under the 2005 Equity Incentive Plan is 1,200,000. No new awards will be available for future issuance under any of our existing equity plans other than the 2005 Equity Incentive Plan. 
+Item 13. Certain Relationships and Related Transactions, and Director Independence. 
+The information in response to this item is incorporated by reference from the Proxy Statement section entitled “Certain Relationships and Related Transactions.” 
+Item 14. Principal Accountant Fees and Services. 
+The information in response to this item is incorporated by reference from the Proxy Statement section entitled “Independent Registered Public Accounting Firm’s Services and Fees.” 
+PART IV 
+Item 15. Exhibits. 
+The exhibits filed as a part of this report are listed in the accompanying Index to Exhibits. 
+SIGNATURES 
+Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. 
+TRANSACT TECHNOLOGIES INCORPORATED 
+By: 
+/s/ Bart C. Shuldman 
+Name: 
+Bart C. Shuldman 
+Title: 
+Chairman of the Board and Chief Executive Officer 
+Date: March 15, 2013 
+Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. 
+Signature 
+Title 
+Date 
+/s/ Bart C. Shuldman 
+Chairman of the Board 
+March 15, 2013 
+Bart C. Shuldman 
+and Chief Executive Officer, 
+(Principal Executive Officer) 
+/s/ Steven A. DeMartino 
+President, Chief Financial Officer, 
+March 15, 2013 
+Steven A. DeMartino 
+Treasurer and Secretary 
+(Principal Financial Officer) 
+/s/ Chad R. Albano 
+Chief Accounting Officer 
+March 15, 2013 
+Chad R. Albano 
+and Corporate Controller 
+(Principal Accounting Officer) 
+/s/ John M. Dillon 
+Director 
+March 15, 2013 
+John M. Dillon 
+/s/ Thomas R. Schwarz 
+Director 
+March 15, 2013 
+Thomas R. Schwarz 
+/s/ Graham Y. Tanaka 
+Director 
+March 15, 2013 
+Graham Y. Tanaka 
+TRANSACT TECHNOLOGIES INCORPORATED 
+INDEX TO FINANCIAL STATEMENTS 
+Financial Statements 
+Report of Independent Registered Public Accounting Firm 
+F-2 
+Consolidated Balance Sheets as of December 31, 2012 and 2011 
+F-3 
+Consolidated Statements of Income for the years ended December 31, 2012, 2011 and 2010 
+F-4 
+Consolidated Statements of Comprehensive Income for the years ended December 31, 2012, 2011 and 2010 
+F-5 
+Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2012, 2011 and 2010 
+F-6 
+Consolidated Statements of Cash Flows for the years ended December 31, 2012, 2011 and 2010 
+F-7 
+Notes to Consolidated Financial Statements 
+F-8 
+All other financial statement schedules are omitted because they are not applicable or the required information is shown in the Consolidated Financial Statements or notes thereto. 
+F-1 
+Report of Independent Registered Public Accounting Firm 
+To the Board of Directors and Shareholders of TransAct Technologies Incorporated: 
+In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of TransAct Technologies Incorporated and its subsidiaries at December 31, 2012 and December 31, 2011, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2012 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Annual Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on these financial statements and on the Company's internal control over financial reporting based on our audits (which were integrated audits in 2012 and 2011). We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. 
+A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. 
+Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. 
+/s/ PricewaterhouseCoopers LLP 
+Hartford, Connecticut 
+March 15, 2013 
+F-2 
+TRANSACT TECHNOLOGIES INCORPORATED 
+CONSOLIDATED BALANCE SHEETS 
+(In thousands, except share data) 
+December 31, 
+December 31, 
+2012 
+2011 
+Assets: 
+Current assets: 
+Cash and cash equivalents 
+$ 
+7,537 
+$ 
+6,863 
+Accounts receivable, net 
+15,927 
+9,583 
+Inventories 
+10,321 
+14,151 
+Prepaid income taxes 
+- 
+446 
+Deferred tax assets 
+1,443 
+1,636 
+Other current assets 
+471 
+375 
+Total current assets 
+35,699 
+33,054 
+Fixed assets, net 
+3,302 
+3,358 
+Goodwill 
+2,621 
+2,518 
+Deferred tax assets 
+1,172 
+890 
+Intangible assets, net of accumulated amortization of $1,298 and $730, respectively 
+2,328 
+2,861 
+Other assets 
+106 
+59 
+9,529 
+9,686 
+Total assets 
+$ 
+45,228 
+$ 
+42,740 
+Liabilities and Shareholders’ Equity: 
+Current liabilities: 
+Accounts payable 
+$ 
+6,422 
+$ 
+3,019 
+Accrued liabilities 
+2,927 
+2,632 
+Income taxes payable 
+629 
+40 
+Accrued contingent consideration (Note 3) 
+136 
+- 
+Deferred revenue 
+93 
+141 
+Total current liabilities 
+10,207 
+5,832 
+Deferred revenue, net of current portion 
+168 
+224 
+Deferred rent, net of current portion 
+308 
+357 
+Accrued contingent consideration, net of current portion (Note 3) 
+824 
+680 
+Other liabilities 
+352 
+334 
+1,652 
+1,595 
+Total liabilities 
+11,859 
+7,427 
+Commitments and contingencies (Note 11) 
+Shareholders’ equity: 
+Preferred stock, $0.01 par value, 4,800,000 authorized, none issued and outstanding 
+- 
+- 
+Preferred stock, Series A, $0.01 par value, 200,000 authorized, none issued and outstanding 
+- 
+- 
+Common stock, $0.01 par value, 20,000,000 authorized at December 31, 2012 and 2011; 10,903,077 and 10,851,955 shares issued; 8,720,200 and 9,390,262 shares outstanding, at December 31, 2012 and 2011, respectively 
+109 
+108 
+Additional paid-in capital 
+25,940 
+25,058 
+Retained earnings 
+24,708 
+21,613 
+Accumulated other comprehensive loss, net of tax 
+(55) 
+(71) 
+Treasury stock, 2,182,877 and 1,461,693 shares, at cost 
+(17,333) 
+(11,395) 
+Total shareholders’ equity 
+33,369 
+35,313 
+Total liabilities and shareholders’ equity 
+$ 
+45,228 
+$ 
+42,740 
+See accompanying notes to Consolidated Financial Statements. 
+F-3 
+TRANSACT TECHNOLOGIES INCORPORATED 
+CONSOLIDATED STATEMENTS OF INCOME 
+(In thousands, except per share data) 
+Year Ended December 31, 
+2012 
+2011 
+2010 
+Net sales 
+$ 
+68,386 
+$ 
+65,969 
+$ 
+63,194 
+Cost of sales 
+42,404 
+41,343 
+40,646 
+Gross profit 
+25,982 
+24,626 
+22,548 
+Operating expenses: 
+Engineering, design and product development 
+4,239 
+3,418 
+3,000 
+Selling and marketing 
+6,637 
+6,402 
+6,407 
+General and administrative 
+7,833 
+7,633 
+7,280 
+Legal fees associated with lawsuit (Note 11) 
+1,533 
+- 
+- 
+Business consolidation and restructuring (Note 8) 
+138 
+184 
+- 
+20,380 
+17,637 
+16,687 
+Operating income 
+5,602 
+6,989 
+5,861 
+Interest and other income (expense): 
+Interest expense 
+(61) 
+(69) 
+(96) 
+Interest income 
+67 
+87 
+87 
+Other, net 
+(23) 
+1 
+(25) 
+(17) 
+19 
+(34) 
+Income before income taxes 
+5,585 
+7,008 
+5,827 
+Income tax provision 
+1,964 
+2,332 
+1,923 
+Net income 
+$ 
+3,621 
+$ 
+4,676 
+$ 
+3,904 
+Net income per common share: 
+Basic 
+$ 
+0.40 
+$ 
+0.50 
+$ 
+0.42 
+Diluted 
+$ 
+0.40 
+$ 
+0.49 
+$ 
+0.41 
+Shares used in per-share calculation: 
+Basic 
+9,032 
+9,443 
+9,390 
+Diluted 
+9,121 
+9,603 
+9,590 
+Dividends declared and paid per common share: 
+$ 
+0.06 
+$ 
+- 
+$ 
+- 
+See accompanying notes to Consolidated Financial Statements. 
+F-4 
+TRANSACT TECHNOLOGIES INCORPORATED 
+CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 
+(In thousands, except share data) 
+Year Ended December 31, 
+2012 
+2011 
+2010 
+Net income 
+$ 
+3,621 
+$ 
+4,676 
+$ 
+3,904 
+Foreign currency translation adjustment, net of tax 
+16 
+(2) 
+(3) 
+Comprehensive income 
+$ 
+3,637 
+$ 
+4,674 
+$ 
+3,901 
+See accompanying notes to Consolidated Financial Statements. 
+F-5 
+TRANSACT TECHNOLOGIES INCORPORATED 
+CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY 
+(In thousands, except share data) 
+Common Stock 
+Shares Amount 
+Additional Paid-in 
+Capital 
+Retained 
+Earnings 
+Treasury 
+Stock 
+Accumulated Other Comprehensive 
+Income (Loss) 
+Total 
+Equity 
+Balance, December 31, 2009 
+9,364,109 
+$ 
+105 
+$ 
+21,820 
+$ 
+13,033 
+$ 
+(8,538) 
+$ 
+(66) 
+$ 
+26,354 
+Issuance of shares from exercise of stock options 
+84,672 
+1 
+392 
+- 
+- 
+- 
+393 
+Issuance of deferred stock units 
+- 
+- 
+77 
+- 
+- 
+- 
+77 
+Tax benefit related to employee stock sales and vesting of restricted stock 
+- 
+- 
+21 
+- 
+- 
+- 
+21 
+Purchase of treasury stock 
+(22,338) 
+- 
+- 
+- 
+(177) 
+- 
+(177) 
+Share-based compensation expense 
+- 
+- 
+565 
+- 
+- 
+- 
+565 
+Foreign currency translation adj., net of tax 
+- 
+- 
+- 
+- 
+- 
+(3) 
+(3) 
+Net income 
+- 
+- 
+- 
+3,904 
+- 
+- 
+3,904 
+Balance, December 31, 2010 
+9,426,443 
+106 
+22,875 
+16,937 
+(8,715) 
+(69) 
+31,134 
+Issuance of shares from exercise of stock options 
+239,074 
+2 
+957 
+- 
+- 
+- 
+959 
+Issuance of deferred stock units 
+- 
+- 
+141 
+- 
+- 
+- 
+141 
+Tax benefit related to employee stock sales and vesting of restricted stock 
+- 
+- 
+498 
+- 
+- 
+- 
+498 
+Purchase of treasury stock 
+(275,255) 
+- 
+- 
+- 
+(2,680) 
+- 
+(2,680) 
+Share-based compensation expense 
+- 
+- 
+587 
+- 
+- 
+- 
+587 
+Foreign currency translation adj., net of tax 
+- 
+- 
+- 
+- 
+- 
+(2) 
+(2) 
+Net income 
+- 
+- 
+- 
+4,676 
+- 
+- 
+4,676 
+Balance, December 31, 2011 
+9,390,262 
+108 
+25,058 
+21,613 
+(11,395) 
+(71) 
+35,313 
+Issuance of shares from exercise of stock options 
+51,122 
+1 
+171 
+- 
+- 
+- 
+172 
+Issuance of deferred stock units 
+- 
+- 
+134 
+- 
+- 
+- 
+134 
+Tax benefit related to employee stock sales 
+- 
+- 
+57 
+- 
+- 
+- 
+57 
+Purchase of treasury stock 
+(721,184) 
+- 
+- 
+- 
+(5,938) 
+- 
+(5,938) 
+Dividends declared and paid on common stock 
+- 
+- 
+- 
+(526) 
+- 
+- 
+(526) 
+Share-based compensation expense 
+- 
+- 
+520 
+- 
+- 
+- 
+520 
+Foreign currency translation adj., net of tax 
+- 
+- 
+- 
+- 
+- 
+16 
+16 
+Net income 
+- 
+- 
+- 
+3,621 
+- 
+- 
+3,621 
+Balance, December 31, 2012 
+8,720,200 
+$ 
+109 
+$ 
+25,940 
+$ 
+24,708 
+$ 
+(17,333) 
+$ 
+(55) 
+$ 
+33,369 
+See accompanying notes to Consolidated Financial Statements. 
+F-6 
+TRANSACT TECHNOLOGIES INCORPORATED 
+CONSOLIDATED STATEMENTS OF CASH FLOWS 
+(In thousands) 
+Year Ended December 31, 
+2012 
+2011 
+2010 
+Cash flows from operating activities: 
+Net income 
+$ 
+3,621 
+$ 
+4,676 
+$ 
+3,904 
+Adjustments to reconcile net income to net cash provided by operating activities: 
+Share-based compensation expense 
+520 
+587 
+565 
+Incremental tax benefits from stock options exercised 
+(57) 
+(498) 
+(21) 
+Depreciation and amortization 
+1,758 
+1,608 
+1,549 
+Deferred income taxes (benefit) provision 
+(95) 
+519 
+540 
+(Gain) loss on sale of fixed assets 
+(13) 
+24 
+2 
+Foreign currency transaction losses (gains) 
+34 
+(6) 
+21 
+Changes in operating assets and liabilities: 
+Accounts receivable 
+(6,332) 
+1,977 
+(1,878) 
+Inventories 
+3,684 
+(568) 
+(6,851) 
+Prepaid income taxes 
+479 
+(446) 
+270 
+Other current and long term assets 
+(154) 
+2 
+117 
+Accounts payable 
+3,403 
+(5,427) 
+3,289 
+Accrued liabilities and other liabilities 
+1,182 
+(352) 
+625 
+Net cash provided by operating activities 
+8,030 
+2,096 
+2,132 
+Cash flows from investing activities: 
+Capital expenditures 
+(1,082) 
+(640) 
+(978) 
+Additions to capitalized software 
+(35) 
+(616) 
+(129) 
+Proceeds from sale of fixed assets 
+15 
+1 
+10 
+Acquisitions 
+- 
+(4,000) 
+- 
+Net cash used in investing activities 
+(1,102) 
+(5,255) 
+(1,097) 
+Cash flows from financing activities: 
+Proceeds from stock option exercises 
+172 
+959 
+393 
+Purchases of common stock for treasury 
+(5,938) 
+(2,680) 
+(177) 
+Payment of dividends on common stock 
+(526) 
+- 
+- 
+Incremental tax benefits from stock options exercised 
+57 
+498 
+21 
+Payment of deferred financing costs 
+(7) 
+(31) 
+- 
+Net cash (used in) provided by financing activities 
+(6,242) 
+(1,254) 
+237 
+Effect of exchange rate changes on cash and cash equivalents 
+(12) 
+(9) 
+(4) 
+Increase (decrease) in cash and cash equivalents 
+674 
+(4,422) 
+1,268 
+Cash and cash equivalents, beginning of period 
+6,863 
+11,285 
+10,017 
+Cash and cash equivalents, end of period 
+$ 
+7,537 
+$ 
+6,863 
+$ 
+11,285 
+Supplemental cash flow information: 
+Interest paid 
+$ 
+51 
+$ 
+51 
+$ 
+51 
+Income taxes paid 
+912 
+2,545 
+740 
+Non-cash financing activities 
+Purchases of common stock for treasury at year end 
+$ 
+- 
+$ 
+(61) 
+$ 
+- 
+See accompanying notes to Consolidated Financial Statements. 
+F-7 
+TRANSACT TECHNOLOGIES INCORPORATED 
+NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
+1. Description of business 
+TransAct Technologies Incorporated (“TransAct” or the “Company”), which has its headquarters in Hamden, CT and its primary operating facility in Ithaca, NY, operates in one operating segment: market specific solutions, including printers, terminals, software and other products for transaction-based and other industries. These industries include casino, gaming, lottery, banking, point-of-sale, food safety, oil and gas and medical and mobile. Our printers are designed based on market-specific requirements and are sold under the Ithaca®, Epic and Printrex® product brands. We distribute our products through OEMs, value-added resellers, selected distributors, and directly to end-users. Our product distribution spans across the Americas, Europe, the Middle East, Africa, Asia, Australia, the Caribbean Islands and the South Pacific. We also generate revenue from the after-market side of the business, providing printer service, supplies and spare parts in addition to revenue from our software solution, the EPICENTRAL TM Print System (“EPICENTRAL TM ”), that enables casino operators to create promotional coupons and marketing messages and print them in real-time at the slot machine. 
+2. Summary of significant accounting policies 
+Principles of consolidation: The accompanying Consolidated Financial Statements include the accounts of TransAct and its wholly-owned subsidiaries, which require consolidation, after the elimination of intercompany accounts, transactions and unrealized profit. 
+Reclassifications: Certain amounts in the prior years’ financial statements have been reclassified to conform to the current year’s presentation. 
+Use of estimates: The accompanying Consolidated Financial Statements were prepared using estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and disclosure of contingent assets and liabilities as of the date of the Consolidated Financial Statements and the reported amounts of sales and expenses during the reporting period. Actual results could differ from those estimates. 
+Segment reporting: We apply the provisions of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 280, “Segment Reporting.” We view our operations and manage our business as one segment: the design, development, manufacture and sale of transaction-based and specialty printing solutions and related service, supplies and replacement parts . Factors used to identify TransAct’s single operating segment include the organizational structure of the Company and the financial information available for evaluation by the chief operating decision-maker in making decisions about how to allocate resources and assess performance. 
+Cash and cash equivalents: We consider all highly liquid investments with a maturity date of three months or less at date of purchase to be cash equivalents. 
+Allowance for doubtful accounts: We establish an allowance for doubtful accounts to ensure trade receivables are valued appropriately. We maintain an allowance for doubtful accounts based on a variety of factors, including the length of time receivables are past due, significant one-time events and historical experience. We record a specific allowance for individual accounts when we become aware of a customer’s inability to meet its financial obligations, such as in the case of bankruptcy filings or deterioration in the customer’s operating results or financial position. If circumstances related to customers change, we would further adjust estimates of the recoverability of receivables. Allowances for doubtful accounts on accounts receivable balances were $66,000 as of December 31, 2012 and $70,000 as of December 31, 2011. 
+The following table summarizes the activity recorded in the valuation account for accounts receivable: 
+Year ended December 31, 
+(In thousands) 
+2012 
+2011 
+2010 
+Balance, beginning of period 
+$ 
+70 
+$ 
+57 
+$ 
+57 
+Additions charged to costs and expenses 
+- 
+1 
+- 
+Acquisition of business 
+- 
+15 
+- 
+Deductions 
+(4) 
+(3) 
+- 
+Balance, end of period 
+$ 
+66 
+$ 
+70 
+$ 
+57 
+Inventories: Inventories are stated at the lower of cost (principally standard cost, which approximates actual cost on a first-in, first-out basis) or market. We review market value based on historical usage and estimates of future demand. Based on these reviews, inventory write-downs are recorded, as necessary, to reflect estimated obsolescence, excess quantities and market value. 
+Fixed assets: Fixed assets are stated at cost. Depreciation is recorded using the straight-line method over the estimated useful lives. The estimated useful life of tooling is five years; machinery and equipment is ten years; furniture and office equipment is five to ten years; and computer software and equipment is three to seven years. Leasehold improvements are amortized over the shorter of the term of the lease or the useful life of the asset. Costs related to repairs and maintenance are expensed as incurred. The costs of sold or retired assets are removed from the related asset and accumulated depreciation accounts and any gain or loss is recognized. Depreciation expense was $1,183,000, $1,339,000 and $1,446,000 in 2012, 2011 and 2010, respectively. 
+Leases: Rent expense under non-cancelable operating leases with scheduled rent increases or free rent periods are accounted for on a straight-line basis over the lease term, beginning on the date of control of physical use of the asset or of initial possession. The amount of the excess of straight-line rent expense over scheduled payments is recorded as a deferred liability. Construction allowances and other such lease incentives are recorded as deferred credits, and are amortized on a straight-line basis as a reduction of rent expense beginning in the period they are deemed to be earned, which generally coincides with the occupancy date. 
+F-8 
+TRANSACT TECHNOLOGIES INCORPORATED 
+NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
+2. Summary of significant accounting policies (continued) 
+Goodwill and Intangible assets: We acquire businesses in purchase transactions that result in the recognition of goodwill and intangible assets. The determination of the value of intangible assets requires management to make estimates and assumptions. In accordance with Accounting Standards Codification (“ASC”) 350-20 “Goodwill”, acquired goodwill is not amortized but is subject to impairment testing at least annually and when an event occurs or circumstances change, that indicate it is more likely than not an impairment exists. Factors considered that may trigger an impairment review are: significant underperformance relative to expected historical or projected future operating results; significant changes in the manner of use of acquired assets or the strategy for the overall business; significant negative industry or economic trends; and significant decline in market capitalization relative to net book value. Definite lived intangible assets are amortized and are tested for impairment when appropriate. We have determined that no goodwill impairment has occurred based on our assessment as of December 31, 2012 when the impairment review is performed. 
+Revenue recognition: Our typical contracts include the sale of printers, which are sometimes accompanied by separately-priced extended warranty contracts. We also sell replacement parts, consumables, and other repair services (sometimes pursuant to multi-year product maintenance contracts), which are not included in the original printer sale and are ordered by the customer as needed. We recognize revenue pursuant to the guidance within ASC 605, “Revenue Recognition” (ASC 605). Specifically, revenue is recognized when evidence of an arrangement exists, delivery (based on shipping terms, which are generally FOB shipping point) has occurred, the selling price is fixed and determinable, and collectability is reasonably assured. We recognize revenue from the sale of printers to our distributors and resellers on a sell-in basis and on substantially the same terms as we recognize revenue from all our other customers. We provide for an estimate of product returns and price protection based on historical experience at the time of revenue recognition. 
+We have developed a new software solution, the EPICENTRAL TM Print System (“EPICENTRAL TM ”), that will enable casino operators to create promotional coupons and marketing messages and to print them in real-time at the slot machine. Revenue arrangements for EPICENTRAL TM include multiple deliverables and as a result such arrangements are accounted for in accordance with both ASC 605-25, “Multiple-Element Arrangements” and ASC 985-605, “Software.” EPICENTRAL TM is primarily comprised of both a software component, which is licensed, and a hardware component, which can either be leased or sold to end users, and both components are integrated to deliver the system’s full functionality. Under leasing arrangements, revenue is generally recognized ratably over the lease term, excluding revenue allocated to installation, which is recognized upon completion. In an arrangement where the hardware is purchased, revenue, inclusive of software license fees, is generally recognized upon installation and formal acceptance by the customer. For EPICENTRAL TM and other multiple deliverable arrangements, we consider whether the deliverables in an arrangement are within the scope of existing higher-level GAAP and apply such literature to the extent that it provides guidance regarding whether to separate multiple-deliverable arrangements and how to allocate value among those separate units of accounting. We also determine whether revenue arrangements consist of more than one unit of accounting at inception of the arrangement and recognize revenue as each item in the arrangement is delivered. We allocate arrangement consideration to the separate units of accounting based on the relative fair value for all units of accounting in the arrangement, except where amounts allocable to the delivered units is limited to that which is contingent upon the delivery of additional deliverables or meeting other specified performance conditions. 
+Revenue related to extended warranty and product maintenance contracts is recognized pursuant to ASC 605-20-25, “Separately Priced Extended Warranty and Product Maintenance Contracts.” Pursuant to this provision, revenue related to separately priced product maintenance contracts is deferred and recognized over the term of the maintenance period. We record deferred revenue for advance payments received from customers for maintenance contracts. 
+Our customers have the right to return products that do not function properly within a limited time after delivery. We monitor and track product returns and record a provision for the estimated future returns based on historical experience. Returns have historically been within expectations and the provisions established. 
+We offer some of our customers price protection as an incentive to carry inventory of our product. These price protection plans provide that if we lower prices, we will credit them for the price decrease on inventory they hold. Our customers typically carry limited amounts of inventory, and we infrequently lower prices on current products. As a result, the amounts paid under these plans have not been material. 
+We charge our customers for shipping and handling services. The amounts billed to customers are recorded as revenue when the product ships. Any costs incurred related to these services are included in cost of sales. 
+Concentration of credit risk: Financial instruments that potentially expose us to concentrations of credit risk are limited to cash and cash equivalents held by our banks in excess of insured limits and accounts receivable. 
+Accounts receivable from customers representing 10% or more of total accounts receivable were as follows: 
+December 31, 
+2012 
+2011 
+GTECH 
+37% 
+13% 
+Customer A 
+17% 
+20% 
+F-9 
+TRANSACT TECHNOLOGIES INCORPORATED 
+NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
+2. Summary of significant accounting policies (continued) 
+Sales to customers representing 10% or more of total net sales were as follows: 
+Year ended December 31, 
+2012 
+2011 
+2010 
+GTECH 
+18% 
+26% 
+12% 
+Customer A 
+15% 
+13% 
+14% 
+Warranty: We generally warrant our products for up to 36 months and record the estimated cost of such product warranties at the time the sale is recorded. Estimated warranty costs are based upon actual past experience of product repairs and the related estimated cost of labor and material to make the necessary repairs. 
+The following table summarizes the activity recorded in the accrued product warranty liability: 
+Year ended December 31, 
+(In thousands) 
+2012 
+2011 
+2010 
+Balance, beginning of period 
+$ 
+421 
+$ 
+249 
+$ 
+233 
+Accruals for warranties issued during the period 
+105 
+146 
+84 
+Changes in estimates 
+(1) 
+326 
+172 
+Acquisition of business 
+- 
+25 
+- 
+Settlements during the period 
+(251) 
+(325) 
+(240) 
+Balance, end of period 
+$ 
+274 
+$ 
+421 
+$ 
+249 
+Approximately $101,000 and $106,000 of the accrued product warranty liability were classified as long-term at December 31, 2012 and 2011, respectively. 
+Research and development expenses: Research and development expenses include engineering, design and product development expenses incurred in connection with specialized engineering and design to introduce new products and to customize existing products, and are expensed as a component of operating expenses as incurred. We recorded approximately $4,239,000, $3,418,000 and $3,000,000 of research and development expenses in 2012, 2011 and 2010, respectively. 
+Costs incurred in researching and developing a computer software product are charged to expense until technological feasibility has been established at which point all material software costs are capitalized within Intangible assets in our Consolidated Balance Sheet until the product is available for general release to customers. While judgment is required in determining when technological feasibility of a product is established, we have determined that it is reached after all high-risk development issues have been documented in a formal detailed plan design. The amortization of these costs will be included in cost of sales over the estimated life of the product. During 2010 we began the development of EPICENTRAL TM and unamortized development costs for such software were approximately $528,000 and $682,000 as of December 31, 2012 and 2011, respectively. The total amount charged to cost of sales for capitalized software development costs was approximately $189,000 and $62,000 in 2012 and 2011, respectively, with no such charges in 2010. The weighted-average amortization period of unamortized capitalized software developments costs is 3 years. 
+Advertising: Advertising costs are expensed as incurred. Advertising expenses, which are included in selling and marketing expense on the accompanying Consolidated Statements of Income, for 2012, 2011 and 2010 totaled $949,000, $871,000 and $824,000, respectively. These expenses include items such as consulting and professional services, tradeshows, and print advertising. 
+Restructuring: We continually evaluate our cost structure to ensure that it is appropriately positioned to respond to changing market conditions. We record pre-tax restructuring charges in accordance with ASC 420-10-25-4, “Exit or Disposal Cost Obligations.” See Note 8 for further discussion. 
+Income taxes: The income tax amounts reflected in the accompanying Consolidated Financial Statements are accounted for under the liability method in accordance with ASC 740, “Income Taxes.” Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. We assess the likelihood that net deferred tax assets will be realized from future taxable income, and to the extent that we believe that realization is not likely, we establish a valuation allowance. In accordance with ASC 740, we identified, evaluated and measured the amount of benefits to be recognized for our tax return positions. See Note 13 for information regarding our accounting for income taxes. 
+Foreign currency translation: The financial position and results of operations of our foreign subsidiary in the United Kingdom are measured using local currency as the functional currency. Assets and liabilities of such subsidiary have been translated into U.S. dollars at the year-end exchange rate, related sales and expenses have been translated at the average exchange rate for the year, and shareholders’ equity has been translated at historical exchange rates. The resulting translation gains or losses, net of tax, are recorded in shareholders’ equity as a cumulative translation adjustment, which is a component of 
+F-10 
+TRANSACT TECHNOLOGIES INCORPORATED 
+NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
+2. Summary of significant accounting policies (continued) 
+accumulated other comprehensive income. Foreign currency transaction gains and losses, including those related to intercompany balances, are recognized in Other, net on the Consolidated Statements of Income. 
+Share-based payments: At December 31, 2012, we had share-based employee compensation plans, which are described more fully in Note 12 - Stock incentive plans. We account for those plans under the recognition and measurement principles of ASC 718, “Compensation – Stock Compensation.” Share-based compensation expense is measured at the grant date, based on the estimated fair value of the award, and is recognized as expense over the employee’s requisite service period. We have no awards with market or performance conditions. 
+We use the Black-Scholes option-pricing model to calculate the fair value of share based awards. The key assumptions for this valuation method include the expected term of the option, stock price volatility, risk-free interest rate, dividend yield, market price of our underlying stock and exercise price. Many of these assumptions are judgmental and highly sensitive in the determination of compensation expense. In addition, we estimate forfeitures when recognizing compensation expense, and we adjust our estimate of forfeitures over the requisite service period based on the extent to which actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures are recognized through a cumulative true-up adjustment in the period of change and also impacts the amount of compensation expense to be recognized in future periods. 
+Net income and loss per share: We report net income or loss per share in accordance with ASC 260, “Earnings per Share (EPS).” Under this guidance, basic EPS, which excludes dilution, is computed by dividing income or loss available to common shareholders by the weighted average number of common shares outstanding for the period. Unvested restricted stock is excluded from the calculation of weighted average common shares for basic EPS. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Diluted EPS includes restricted stock and in-the-money stock options using the treasury stock method. During a loss period, the assumed exercise of in-the-money stock options has an anti-dilutive effect, and therefore, these instruments are excluded from the computation of dilutive EPS. See Note 14 - Earnings per Share. 
+3. Business acquisitions 
+On August 19, 2011, we completed the purchase of substantially all of the assets of Printrex, Inc. (“Printrex”) for $4,000,000 in cash and potential future contingent consideration further discussed below. Printrex is a leading manufacturer of specialty printers primarily sold into the oil and gas exploration and medical markets which serve commercial and industrial customers primarily in the United States, Canada, Europe and Asia. This acquisition was completed primarily to expand our product offerings into the oil and gas exploration and medical markets. As of December 31, 2012, we have completed our analysis of fair value attributes of the assets acquired through the Printrex acquisition and the final assessment of values did not differ materially from our preliminary assessment. 
+The following table summarizes the final fair values of the assets acquired and liabilities assumed related to the Printrex acquisition: 
+Purchase Price Allocation (In thousands) : 
+Receivables 
+$ 
+673 
+Inventories 
+677 
+Fixed assets 
+11 
+Other current assets 
+6 
+Intangible assets 
+2,280 
+Goodwill 
+1,152 
+Other assets 
+22 
+Initial estimate for liability related to potential future contingent consideration 
+(680) 
+Other liabilities 
+(141) 
+Total purchase price 
+$ 
+4,000 
+Intangible Assets: 
+Customer relationships 
+$ 
+1,300 
+Trademark 
+480 
+Developed technology 
+420 
+Other 
+80 
+Total Intangible assets 
+$ 
+2,280 
+Intangible Asset Weighted Average Amortization Period: 
+Customer relationships 
+6 years 
+Trademark 
+10 years 
+Developed technology 
+9 years 
+Other 
+1.2 years 
+Total weighted average 
+7.2 years 
+F-11 
+TRANSACT TECHNOLOGIES INCORPORATED 
+NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
+The fair values assigned to intangible assets were determined through the use of the income approach, specifically the relief from royalty method and the multi-period excess earnings method. The valuation of tangible assets was derived using a combination of the income approach, the market approach and the cost approach. 
+We entered into a contingent consideration arrangement with Printrex as part of the acquisition for 30% of the gross profit for a three-year period related to new products under development, less certain other adjustments, beginning on the earlier of 1) January 1, 2012 or 2) the date of first commercial introduction of the new products under development. The undiscounted fair value related to the contingent liability could range from $200,000 to $2,400,000. The fair value of the contingent consideration arrangement was $960,000 and $680,000 at December 31, 2012 and 2011, respectively, which were estimated by applying the income approach. That measure is based on significant inputs that are not observable in the market, which fair value measurement guidance refers to as Level 3 inputs. During 2012, the fair value of the contingent consideration was increased by $280,000 and this charge is included in general and administrative expenses on the Consolidated Statements of Income. No payments were made under the arrangement during 2012 as the underlying conditions of the contingent consideration arrangement were not satisfied. 
+Key assumptions include a discount rate range of 4% to 5% and a probability-adjusted level of gross profit between $1,600,000 and $8,900,000. 
+The Printrex acquisition resulted in $1,152,000 of goodwill, which is deductible for tax purposes, and largely consists of expected synergies resulting from the acquisition. Key areas of potential cost savings include increased purchasing power for raw materials; manufacturing and supply chain work process improvements; and the elimination of redundant manufacturing overhead and operating expenses. We also anticipate that the transaction will produce growth synergies as a result of applying TransAct’s sales and engineering expertise to Printrex’s products. 
+The change in carrying value of goodwill for the year ended December 31, 2012 was as follows (in thousands): 
+Balance at December 31, 2011 
+$ 
+2,518 
+Inventory measurement adjustment in connection with Printrex acquisition 
+103 
+Balance at December 31, 2012 
+$ 
+2,621 
+We incurred acquisition-related costs of $159,000 during the year ended December 31, 2011. These costs included legal, accounting, valuation and other professional services and were included in general and administrative expenses in the Consolidated Statements of Income. In addition, we incurred approximately $78,000 of integration-related expenses in 2011 that were also included in general and administrative expenses in the Consolidated Statements of Income. No such expenses were incurred during 2012. 
+The Printrex acquisition contributed $1,892,000 to net sales and reduced net income by $23,000 for the year ended December 31, 2011. This reduction includes the after-tax impact of $139,000 of amortization expense from the intangible assets acquired from Printrex as well as $78,000 of integration expenses. The following unaudited pro forma consolidated results of operations are provided for illustrative purposes only and assume that the acquisition of Printrex occurred on January 1, 2010. This unaudited pro forma information should not be relied upon as being indicative of the historical results that would have been obtained if the acquisition had occurred on that date, nor of the results that may be obtained in the future. 
+Year ended December 31, 
+(In thousands) 
+2011 
+2010 
+Sales 
+$ 
+69,694 
+$ 
+68,617 
+Net income 
+$ 
+5,025 
+$ 
+3,865 
+4. Inventories 
+The components of inventories are: 
+December 31, 
+(In thousands) 
+2012 
+2011 
+Raw materials and purchased component parts 
+$ 
+6,871 
+$ 
+6,863 
+Work-in-process 
+- 
+71 
+Finished goods 
+3,450 
+7,217 
+$ 
+10,321 
+$ 
+14,151 
+F-12 
+TRANSACT TECHNOLOGIES INCORPORATED 
+NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
+5. Fixed assets 
+The components of fixed assets, net are: 
+December 31, 
+(In thousands) 
+2012 
+2011 
+Tooling, machinery and equipment 
+$ 
+12,913 
+$ 
+12,463 
+Furniture and office equipment 
+1,555 
+1,543 
+Computer software and equipment 
+5,546 
+5,315 
+Leasehold improvements 
+1,800 
+1,763 
+21,814 
+21,084 
+Less: Accumulated depreciation and amortization 
+(18,925) 
+(18,053) 
+2,889 
+3,031 
+Construction in-process 
+413 
+327 
+$ 
+3,302 
+$ 
+3,358 
+6. Intangible assets 
+Identifiable intangible assets are recorded in Intangible assets in the accompanying Consolidated Balance Sheets and are comprised of the following: 
+December 31, 
+2012 
+2011 
+(In thousands) 
+Gross Amount 
+Accumulated Amortization 
+Gross Amount 
+Accumulated Amortization 
+Purchased technology 
+$ 
+1,563 
+$ 
+(679) 
+$ 
+1,528 
+$ 
+(443) 
+Customer relationships 
+1,300 
+(296) 
+1,300 
+(79) 
+Trademark 
+480 
+(65) 
+480 
+(18) 
+Covenant not to compete 
+146 
+(146) 
+146 
+(136) 
+Patents 
+57 
+(32) 
+57 
+(29) 
+Other 
+80 
+(80) 
+80 
+(25) 
+Total 
+$ 
+3,626 
+$ 
+(1,298) 
+$ 
+3,591 
+$ 
+(730) 
+Amortization expense was $568,000 in 2012, $255,000 in 2011 and $85,000 in 2010. Amortization expense for each of the next five years ending December 31 is expected to be as follows: $506,000 each in 2013 and 2014; $446,000 in 2015; $323,000 in 2016; $241,000 in 2017; and $306,000 thereafter. 
+7. Accrued liabilities 
+The components of accrued liabilities are: 
+December 31, 
+(In thousands) 
+2012 
+2011 
+Payroll and fringe benefits 
+$ 
+1,770 
+$ 
+1,702 
+Warranty 
+173 
+315 
+Professional and consulting 
+189 
+95 
+Other 
+795 
+520 
+$ 
+2,927 
+$ 
+2,632 
+8. Accrued business consolidation and restructuring expenses 
+In January 2012, we determined that we no longer needed to maintain the existing Printrex manufacturing facility in San Jose, California, along with certain redundant headcount. As a result, we incurred expenses of $138,000 in 2012 for employee termination benefits related to these employee reductions as well as moving costs and the closing of the San Jose manufacturing operations that was completed as of December 31, 2012. This restructuring charge was recorded in accordance with ASC 420-10-25-4 “Exit or Disposal Cost Obligations” and is included within Business consolidation and restructuring expenses in the accompanying Consolidated Statements of Income. Cash payments made under this restructuring plan were completed by October 2012. 
+In May 2011, we closed our New Britain, CT service facility which primarily serviced our first generation legacy lottery printers for GTECH Corporation (“GTECH”) and incurred $184,000 in facility closure and severance costs in the second quarter of 2011. These restructuring activities reduced the number of employees and closed a facility, which caused us to incur costs for employee termination benefits related to these employee reductions as well as lease termination costs and the disposal of fixed assets. Cash payments made under this restructuring plan were completed by April 2012. 
+F-13 
+TRANSACT TECHNOLOGIES INCORPORATED 
+NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
+8. Accrued business consolidation and restructuring expenses (continued) 
+In 2010, due to the completion of the move of a substantial portion of our printer production to a contract manufacturer in China, we initiated and completed certain restructuring programs to better utilize our workforce. These restructuring activities reduced the number of employees and caused us to incur costs for employee termination benefits related to the employee reductions. During 2010, we recorded restructuring charges of approximately $156,000 which were included within general and administrative expenses in the accompanying Consolidated Statements of Income. The restructuring activity during 2010 included severance costs related to the termination of 16 employees. 
+The following table summarizes the activity recorded in accrued restructuring expenses during 2012 and 2011, and is included in accrued liabilities in the accompanying Consolidated Balance Sheets. 
+December 31, 
+(In thousands) 
+2012 
+2011 
+Accrual balance, beginning of period 
+$ 
+45 
+$ 
+- 
+Severance & moving charges 
+138 
+134 
+Non-cancelable lease payments 
+- 
+26 
+Cash payments 
+(183) 
+(115) 
+Accrual balance, end of period 
+$ 
+- 
+$ 
+45 
+9. Retirement savings plan 
+We maintain a 401(k) plan under which all full-time employees are eligible to participate at the beginning of each month immediately following their date of hire. We match employees’ contributions at a rate of 50% of employees’ contributions up to the first 6% of the employees’ compensation contributed to the 401(k) plan. Our matching contributions were $280,000, $201,000 and $223,000 in 2012, 2011 and 2010, respectively. 
+10. Borrowings 
+On November 22, 2011, we signed a three-year amendment to renew our existing $20,000,000 credit facility (the “TD Bank Credit Facility”) with TD Bank N.A. (“TD Bank”). The TD Bank Credit Facility provides for a $20,000,000 revolving credit line expiring on November 28, 2014. Borrowings under the revolving credit line bear a floating rate of interest at the prime rate minus one percent and are secured by a lien on all of our assets. We also pay a fee of 0.25% on unused borrowings under the revolving credit line. The total deferred financing costs relating to expenses incurred to complete the TD Bank Credit Facility was $31,000. 
+On September 7, 2012, we signed an amendment to the TD Bank Credit Facility that allows us to declare and pay cash dividends to holders of our outstanding common shares subject to approval by our Board of Directors and provided that no default or event of default has occurred and is continuing under the credit facility on the date of the dividend payment. The amendment also allows us to use up to $5,000,000 in Revolving Credit Loans to fund future cash dividend payments or treasury share buybacks as well as requires cash dividend payments to be treated as distributions for purposes of quarterly debt covenant calculations. 
+The TD Bank Credit Facility imposes certain quarterly financial covenants on us and restricts, among other things, our ability to incur additional indebtedness and the creation of other liens. We were in compliance with all financial covenants of the TD Bank Credit Facility at December 31, 2012. 
+As of December 31, 2012, undrawn commitments under the TD Bank Credit Facility were $20,000,000. 
+11. Commitments and contingencies 
+On June 8, 2012, Avery Dennison Corporation (“AD”) filed a civil complaint against the Company and a former employee of the Company and of AD, in the Court of Common Pleas (the “Court”) in Lake County, Ohio. The complaint alleges that this former employee and the Company misappropriated unspecified trade secrets and confidential information related to the design of our food safety terminals from AD. The complaint requests a preliminary and permanent injunction against the Company from manufacturing and selling our Ithaca® 9700 and 9800 food safety terminals. On July 16, 2012, the Company filed its answer, affirmative defenses and counterclaims, seeking all available damages including legal fees. A hearing on the plaintiff's motion for preliminary injunction took place in August 2012 and in November 2012, the Court denied this request. AD has since filed an appeal of the Court’s ruling. 
+At December 31, 2012, we were the lessee on operating leases for equipment and real property. Rent expense was approximately $1,005,000, $1,030,000 and $1,047,000 in 2012, 2011 and 2010, respectively. Minimum aggregate rental payments required under operating leases that have initial or remaining non-cancelable lease terms in excess of one year as of December 31, 2012 are as follows: $836,000 in 2013; $806 ,000 in 2014; $808,000 in 2015; $561,000 in 2016; and $78,000 in 2017. 
+F-14 
+TRANSACT TECHNOLOGIES INCORPORATED 
+NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
+12. Stock incentive plans 
+Stock incentive plans . We currently have four primary stock incentive plans: the 1996 Stock Plan, which provided for the grant of awards to officers and other key employees of the Company; the 1996 Directors’ Stock Plan, which provided for non-discretionary awards to non-employee directors; the 2001 Employee Stock Plan, which provided for the grant of awards to key employees of the Company and other non-employees who provided services to the Company; and the 2005 Equity Incentive Plan, which provides for awards to executives, key employees, directors and consultants. The plans generally provide for awards in the form of: (i) incentive stock options, (ii) non-qualified stock options, (iii) restricted stock, (iv) restricted stock units, (v) stock appreciation rights or (vi) limited stock appreciation rights. However, the 2001 Employee Stock Plan does not provide for incentive stock option awards. Options granted under these plans have exercise prices equal to 100% of the fair market value of the common stock at the date of grant. Options granted have a ten-year term and generally vest over a three- to five-year period, unless automatically accelerated for certain defined events. As of May 2005, no new awards will be made under the 1996 Stock Plan, the 1996 Directors’ Stock Plan or the 2001 Employee Stock Plan. Under our 2005 Equity Incentive Plan, we may authorize up to 1,200,000 of shares of TransAct common stock. At December 31, 2012, 302,243 shares of common stock remained available for issuance under the 2005 Equity Incentive Plan. 
+Under the assumptions indicated below, the weighted-average fair value of stock option grants for the years ended December 31, 2012, 2011 and 2010 was $6.91, $10.42 and $7.45, respectively. The table below indicates the key assumptions used in the option valuation calculations for options granted in the years ended December 31, 2012, 2011 and 2010 and a discussion of our methodology for developing each of the assumptions used in the valuation model: 
+Year ended December 31, 
+2012 
+2011 
+2010 
+Expected option term 
+6.7 years 
+6.8 years 
+6.1 years 
+Expected volatility 
+57.8% 
+62.5% 
+66.8% 
+Risk-free interest rate 
+0.8% 
+2.0% 
+2.3% 
+Dividend yield 
+- % 
+- % 
+- % 
+Expected Option Term - This is the weighted average period of time over which the options granted are expected to remain outstanding giving consideration to our historical exercise patterns. Options granted have a maximum term of ten years and an increase in the expected term will increase compensation expense. 
+Expected Volatility – The stock volatility for each grant is measured using the weighted average of historical daily price changes of our common stock over the most recent period approximately equal to the expected option term of the grant. An increase in the expected volatility factor will increase compensation expense. 
+Risk-Free Interest Rate - This is the U.S. Treasury rate in effect at the time of grant having a term approximately equal to the expected term of the option. An increase in the risk-free interest rate will increase compensation expense. 
+Dividend Yield – We began paying a quarterly dividend of $.06 per share to common shareholders in December 2012. We will develop an assumption for our dividend yield beginning with stock option grants made in 2013. An increase in the dividend yield will decrease compensation expense. 
+For the years ending December 31, 2012, 2011 and 2010, we recorded $520,000, $587,000, and $565,000 of share-based compensation expense, respectively, included primarily in general and administrative expense in our Consolidated Statements of Income. We also recorded income tax benefits of approximately $183,000, $195,000, and $186,000 in 2012, 2011, and 2010 respectively, related to such share-based compensation. At December 31, 2012, these benefits are recorded as a deferred tax asset in the Consolidated Balance Sheets. 
+The 1996 Stock Plan, 1996 Directors’ Stock Plan, 2001 Employee Stock Plan and 2005 Equity Incentive Plan option activity is summarized below: 
+Number of Shares 
+Weighted Average Exercise Price 
+Weighted Average Remaining Contractual Term 
+Aggregate Intrinsic Value 
+Outstanding at December 31, 2011 
+816,708 
+$ 
+8.06 
+Granted 
+145,000 
+6.91 
+Exercised 
+(51,122) 
+3.37 
+Forfeited 
+(60,125) 
+7.42 
+Cancelled 
+(500) 
+7.45 
+Outstanding at December 31, 2012 
+849,961 
+$ 
+8.19 
+5.4 years 
+$ 
+765,000 
+Options exercisable at December 31, 2012 
+525,961 
+$ 
+8.85 
+3.7 years 
+$ 
+463,000 
+Options vested or expected to vest 
+775,860 
+$ 
+7.84 
+5.9 years 
+$ 
+737,000 
+F-15 
+TRANSACT TECHNOLOGIES INCORPORATED 
+NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
+12. Stock incentive plans (continued) 
+Shares that are issued upon exercise of employee stock options are newly issued shares and not issued from treasury stock. As of December 31, 2012, unrecognized compensation cost related to stock options is approximately $1,018,000, which is expected to be recognized over a weighted average period of 2.5 years. 
+The total intrinsic value of stock options exercised was $222,000, $1,576,000 and $299,000 and the total fair value of stock options vested was $641,000, $504,000, and $424,000 during the years ended December 31, 2012, 2011 and 2010, respectively. Cash received from option exercises was $172,000, $959,000 and $393,000 for 2012, 2011 and 2010, respectively. We recorded a realized tax benefit in 2012 from equity-based awards of $57,000 related to options exercised which has been included as a component of cash flows from financing activities in the Consolidated Statement of Cash Flows. 
+Restricted stock: Under the 1996 Stock Plan, 2001 Employee Stock Plan and 2005 Equity Incentive Plan, we granted shares of restricted common stock, for no consideration, to our officers, directors and certain key employees. As of December 31, 2012, there was no unrecognized compensation cost related to restricted stock and all previously issued restricted shares are fully vested. 
+We paid a portion of the 2011, 2010 and 2009 incentive bonus for the chief executive officer and chief financial officer in the form of 20,055, 14,323 and 10,204 deferred stock units, respectively, with a corresponding credit recorded to Additional Paid in Capital in the amounts of $134,000, $141,000 and $77,000 in 2012, 2011 and 2010, respectively. Such deferred stock units were granted in March 2012, 2011 and 2010, respectively, and were fully vested at the time of grant. These units will be converted three years from the grant date to shares of the Company’s common stock on a one-for-one basis. The weighted average exercise price of the deferred stock units was $7.92. 
+13. Income taxes 
+The components of the income tax provision are as follows: 
+Year Ended December 31, 
+(In thousands) 
+2012 
+2011 
+2010 
+Current: 
+Federal 
+$ 
+1,973 
+$ 
+1,695 
+$ 
+1,297 
+State 
+46 
+74 
+51 
+Foreign 
+40 
+44 
+35 
+2,059 
+1,813 
+1,383 
+Deferred: 
+Federal 
+(116) 
+448 
+457 
+State 
+21 
+71 
+82 
+Foreign 
+- 
+- 
+1 
+(95) 
+519 
+540 
+Income tax provision 
+$ 
+1,964 
+$ 
+2,332 
+$ 
+1,923 
+Our effective tax rates were 35.2%, 33.3% and 33.0% for the years ended December 31, 2012, 2011 and 2010, respectively. The effective tax rate for 2012 is higher because it does not include a benefit from the federal research and development (“R&D”) credit, which is normally included in our tax rate, as this credit expired at the end of 2011 and was not renewed until January 2, 2013 as a component of the American Taxpayer Relief Act of 2012 (the “Act”). Since the Act was not signed until 2013, the cumulative impact of the 2012 R&D credit will be reflected as a discrete item in the first quarter of 2013. Had the R&D credit been included in our effective tax rate for 2012, it would have lowered our income tax provision and effective tax rate, by approximately $220,000 and 400 basis points. 
+At December 31, 2012, we have no federal or state net operating loss carryforwards. We also have approximately $51,000 in state tax credit carryforwards that begin to expire in 2013. Foreign income before taxes was $92,000, $68,000 and $35,000 in 2012, 2011 and 2010, respectively. 
+F-16 
+TRANSACT TECHNOLOGIES INCORPORATED 
+NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
+13. Income taxes (continued) 
+Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the Consolidated Financial Statements. Our gross deferred tax assets and liabilities were comprised of the following: 
+December 31, 
+(In thousands) 
+2012 
+2011 
+Deferred tax assets: 
+Foreign net operating losses 
+$ 
+186 
+$ 
+149 
+Capitalized research and development 
+136 
+204 
+Inventory reserves 
+961 
+1,169 
+Deferred revenue 
+79 
+98 
+Warranty reserve 
+96 
+148 
+Stock compensation expense 
+1,036 
+810 
+Foreign tax and other credits 
+34 
+47 
+Other liabilities and reserves 
+705 
+595 
+Gross deferred tax assets 
+3,233 
+3,220 
+Valuation allowance 
+(216) 
+(176) 
+Net deferred tax assets 
+3,017 
+3,044 
+Deferred tax liabilities: 
+Depreciation 
+365 
+422 
+Other 
+37 
+96 
+Net deferred tax liabilities 
+402 
+518 
+Total net deferred tax assets 
+$ 
+2,615 
+$ 
+2,526 
+A valuation allowance of $216,000 has been established for foreign net operating loss carryforwards of $186,000 and state tax credit carryforwards of $30,000 that are not expected to be used. The following table summarizes the activity recorded in the valuation allowance on the deferred tax assets: 
+Year ended December 31, 
+(In thousands) 
+2012 
+2011 
+2010 
+Balance, beginning of period 
+$ 
+176 
+$ 
+125 
+$ 
+76 
+Additions charged to income tax provision 
+40 
+51 
+55 
+Reductions credited to income tax provision 
+- 
+- 
+(6) 
+Balance, end of period 
+$ 
+216 
+$ 
+176 
+$ 
+125 
+Differences between the U.S. statutory federal income tax rate and our effective income tax rate are analyzed below: 
+Year Ended December 31, 
+2012 
+2011 
+2010 
+Federal statutory tax rate 
+34.0% 
+34.0% 
+34.0% 
+State income taxes, net of federal income taxes 
+0.8 
+1.4 
+1.5 
+Tax benefit from tax credits, net of valuation allowance 
+- 
+(2.7) 
+(2.9) 
+Valuation allowance and tax accruals 
+0.9 
+0.7 
+0.8 
+Permanent items 
+(0.8) 
+(0.4) 
+(0.2) 
+Other 
+0.3 
+0.3 
+(0.2) 
+Effective tax rate 
+35.2% 
+33.3% 
+33.0% 
+At December 31, 2012 and 2011, we had approximately $251,000 and $228,000 of total gross unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in any future periods. We are not aware of any events that could occur within the next twelve months that could cause a significant change in the total amount of unrecognized tax benefits. A tabular reconciliation of the gross amounts of unrecognized tax benefits at the beginning and end of the year is as follows: 
+(In thousands) 
+2012 
+2011 
+Unrecognized tax benefits as of January 1 
+$ 
+228 
+$ 
+201 
+Tax positions taken during the current period 
+23 
+53 
+Lapse of statute of limitations 
+- 
+(26) 
+Unrecognized tax benefits as of December 31 
+$ 
+251 
+$ 
+228 
+F-17 
+TRANSACT TECHNOLOGIES INCORPORATED 
+NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
+13. Income taxes (continued) 
+We are subject to U.S. federal income tax as well as income tax of certain state and foreign jurisdictions. We have substantially concluded all U.S. federal income tax, state and local, and foreign tax matters through 2003. During 2008, a limited scope examination of our 2005 and 2006 federal tax returns was completed. However, our federal tax returns for the years 2004 through 2011 remain open to examination. Various state and foreign tax jurisdiction tax years remain open to examination as well, though we believe that any additional assessment would be immaterial to the Consolidated Financial Statements. Subsequent to December 31, 2012, we were notified that our 2010 federal tax return will be examined. No state or foreign tax jurisdiction income tax returns are currently under examination. 
+We do not anticipate that the total unrecognized tax benefits of approximately $251,000 will significantly change due to the settlement of audits and the expiration of statute of limitations prior to December 31, 2013. 
+We recognize interest and penalties related to uncertain tax positions in the income tax provision. As of December 31, 2012 and 2011, we have approximately $46,000 and $23,000, respectively, of accrued interest and penalties related to uncertain tax positions. 
+14. Earnings per share 
+For 2012, 2011 and 2010, earnings per share were computed as follows (in thousands, except per share amounts): 
+Year Ended December 31, 
+2012 
+2011 
+2010 
+Net income 
+$ 
+3,621 
+$ 
+4,676 
+$ 
+3,904 
+Shares: 
+Basic: Weighted average common shares outstanding 
+9,032 
+9,443 
+9,390 
+Add: Dilutive effect of outstanding options as determined by the treasury stock method 
+89 
+160 
+200 
+Diluted: Weighted average common and common equivalent shares outstanding 
+9,121 
+9,603 
+9,590 
+Net income per common share: 
+Basic 
+$ 
+0.40 
+$ 
+0.50 
+$ 
+0.42 
+Diluted 
+0.40 
+0.49 
+0.41 
+We compute earnings per share using the two-class method, which is an earnings allocation formula that determines earnings per share for common stock and participating securities. Restricted stock granted by the Company is considered a participating security since it contains a non-forfeitable right to dividends. 
+Certain stock-based awards were not included in the full year computation of earnings per diluted share because the effect would be anti-dilutive. Anti-dilutive stock options, restricted shares and deferred stock units excluded from the computation of earnings per dilutive share were 585,125, 309,250, and 367,750, at December 31, 2012, 2011 and 2010 respectively. 
+15. Stock repurchase program 
+We maintain a stock repurchase program (the “Stock Repurchase Program”) whereby we are authorized to repurchase up to $15,000,000, as increased from $10,000,000 in March 2012 through Board of Director approval, of our outstanding shares of common stock from time to time in the open market over a three-year period ending May 27, 2013, depending on market conditions, share price and other factors. We use the cost method to account for treasury stock purchases, under which the price paid for the stock is charged to the treasury stock account. Repurchases of our common stock are accounted for as of the settlement date. For the year ended December 31, 2012, we repurchased 721,184 shares of common stock for approximately $5,938,000, at an average price of $8.23 per share, under the Stock Repurchase Program. From January 1, 2005 through December 31, 2012, we repurchased a total of 2,182,877 shares of common stock for approximately $17,333,000 under all of our stock repurchase programs, at an average price of $7.94 per share. At December 31, 2012, approximately $6,206,000 remains authorized for future repurchases under the Stock Repurchase Program. 
+F-18 
+TRANSACT TECHNOLOGIES INCORPORATED 
+NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
+16. Geographic area information 
+Information regarding our operations by geographic area is contained in the following table. These amounts in the geographic area table are based on the location of the customer and vendor. 
+Year Ended December 31, 
+(In thousands) 
+2012 
+2011 
+2010 
+Net sales: 
+United States 
+$ 
+49,932 
+$ 
+49,301 
+$ 
+44,101 
+International 
+18,454 
+16,668 
+19,093 
+Total 
+$ 
+68,386 
+$ 
+65,969 
+$ 
+63,194 
+Fixed assets, net: 
+United States 
+$ 
+1,941 
+$ 
+2,129 
+$ 
+2,694 
+International 
+1,361 
+1,229 
+1,377 
+Total 
+$ 
+3,302 
+$ 
+3,358 
+$ 
+4,071 
+Sales to international customers were approximately 27%, 25%, and 30% in 2012, 2011, and 2010 respectively. Sales to the United Kingdom represented 52%, 51%, and 43%, sales to the Pacific Rim (which includes Australia and Asia) represented 18%, 25%, and 18%, and sales to Canada represented 16%, 6%, and 20% of total international sales in 2012, 2011, and 2010 respectively. International long-lived assets consist of net fixed assets located at our foreign subsidiary in the United Kingdom as well as our contract manufacturers in China, Malaysia and Mexico. 
+17. Quarterly results of operations (unaudited) 
+Our quarterly results of operations for 2012 and 2011 are as follows: 
+Quarter Ended 
+(In thousands, except per share amounts) 
+March 31 
+June 30 
+September 30 
+December 31 
+2012: 
+Net sales 
+$ 
+17,559 
+$ 
+15,853 
+$ 
+15,358 
+$ 
+19,616 
+Gross profit 
+6,778 
+5,842 
+5,679 
+7,683 
+Net income 
+1,208 
+508 
+23 
+1,882 
+Net income per share: 
+Basic 
+0.13 
+0.06 
+0.00 
+0.21 
+Diluted 
+0.13 
+0.06 
+0.00 
+0.21 
+2011: 
+Net sales 
+$ 
+20,694 
+$ 
+17,519 
+$ 
+14,111 
+$ 
+13,645 
+Gross profit 
+6,932 
+6,663 
+5,350 
+5,681 
+Net income 
+1,825 
+1,442 
+839 
+570 
+Net income per share: 
+Basic 
+0.19 
+0.15 
+0.09 
+0.06 
+Diluted 
+0.19 
+0.15 
+0.09 
+0.06 
+F-19 
+Index to Exhibits 
+3.1(a) 
+Certificate of Incorporation of TransAct Technologies Incorporated (“TransAct” or the “Company”), filed with the Secretary of State of Delaware on June 17, 1996. 
+(2) 
+3.1(b) 
+Certificate of Amendment of Certificate of Incorporation of the Company, filed with the Secretary of State of Delaware on June 4, 1997. 
+(4) 
+3.1(c) 
+Certificate of Designation, Series A Preferred Stock, filed with the Secretary of State of Delaware on December 2, 1997. 
+(5) 
+3.1(d) 
+Certificate of Designation, Series B Preferred Stock, filed with the Secretary of State of Delaware on April 6, 2000. 
+(7) 
+3.2 
+Amended and Restated By-laws of the Company. 
+(6) 
+4.1 
+Specimen Common Stock Certificate. 
+(2) 
+10.1(x) 
+1996 Stock Plan, effective July 30, 1996. 
+(3) 
+10.2(x) 
+Non-Employee Directors’ Stock Plan, effective August 22, 1996. 
+(3) 
+10.3(x) 
+2001 Employee Stock Plan. 
+(8) 
+10.4(x) 
+2005 Equity Incentive Plan. 
+(12) 
+10.5(x) 
+Employment Agreement, dated July 31, 1996, by and between TransAct and Bart C. Shuldman. 
+(2) 
+10.6(x) 
+Severance Agreement by and between TransAct and Benjamin C. Wyatt, dated May 27, 2008. 
+(1) 
+10.7(x) 
+Severance Agreement by and between TransAct and Steven A. DeMartino, dated June 1, 2004. 
+(11) 
+10.8(x) 
+Severance Agreement by and between TransAct and Tracey S. Chernay, dated July 29, 2005. 
+(15) 
+10.9(x) 
+Amendment to Employment Agreement, effective January 1, 2008, by and between TransAct and Bart C. Shuldman. 
+(16) 
+10.10(x) 
+Amendment to Severance Agreement by and between TransAct and Benjamin C. Wyatt, effective January 1, 2008. 
+(1) 
+10.11(x) 
+Amendment to Severance Agreement by and between TransAct and Steven A. DeMartino, effective January 1, 2008. 
+(16) 
+10.12(x) 
+Amendment to Severance Agreement by and between TransAct and Tracey S. Chernay, effective January 1, 2008. 
+(16) 
+10.13 
+Lease Agreement by and between Bomax Properties and Ithaca, dated as of March 23, 1992. 
+(2) 
+10.14 
+Second Amendment to Lease Agreement by and between Bomax Properties and Ithaca, dated December 2, 1996. 
+(4) 
+10.15 
+Agreement regarding the Continuation and Renewal of Lease by and between Bomax Properties, LLC and TransAct, dated July 18, 2001. 
+(9) 
+10.16 
+Amendment No. 1 to Lease Agreement between Bomax Properties, LLC and Transact Technologies, Inc. 
+(19) 
+10.17 
+Lease Agreement by and between Las Vegas Airport Properties LLC and TransAct dated December 2, 2004. 
+(11) 
+10.18 
+First Amendment to Lease Agreement by and between Las Vegas Airport Properties LLC and TransAct dated August 31, 2009 
+(17) 
+10.19 
+Lease Agreement by and between 2319 Hamden Center I, L.L.C. and TransAct dated November 27, 2006. 
+(13) 
+10.20 
+OEM Purchase Agreement by and between GTECH Corporation and TransAct, dated November 20, 2009. (Pursuant to Rule 24-b-2 under the Exchange Act, the Company has requested confidential treatment of portions of this exhibit deleted from the filed copy) 
+(17) 
+10.21 
+Amended and Restated Revolving Credit and Security Agreement between TransAct and TD Banknorth, N.A. dated November 28, 2006 
+(13) 
+10.22 
+First Amendment to Amended and Restated Revolving Credit and Security Agreement between TransAct and TD Banknorth, N.A. effective September 30, 2007. 
+(14) 
+10.23 
+Second Amendment to Amended and Restated Revolving Credit and Security Agreement between TransAct and TD Bank, N.A. effective November 22, 2011. 
+(18) 
+10.24 
+Third Amendment to Amended and Restated Revolving Credit and Security Agreement 
+(20) 
+10.25 
+License Agreement between Seiko Epson Corporation and TransAct dated May 17, 2004 (Pursuant to Rule 24b-2 under the Exchange Act, the Company has requested confidential treatment of portions of this exhibit deleted from the filed copy.) 
+(10) 
+23.1 
+Consent of PricewaterhouseCoopers LLP. 
+(1) 
+31.1 
+Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 
+(1) 
+31.2 
+Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 
+(1) 
+32.1 
+Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 
+(1) 
+32.2 
+Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 
+(1) 
+101.INS 
+XBRL Instance Document. 
+(1) 
+101.SCH 
+XBRL Taxonomy Extension Schema Document. 
+(1) 
+101.CAL 
+XBRL Taxonomy Extension Calculation Linkbase Document. 
+(1) 
+101.DEF 
+XBRL Taxonomy Extension Definition Linkbase Document. 
+(1) 
+101.LAB 
+XBRL Taxonomy Extension Label Linkbase Document. 
+(1) 
+101.PRE 
+XBRL Taxonomy Extension Presentation Linkbase Document. 
+(1) 
+(1) 
+These exhibits are filed herewith. 
+(2) 
+These exhibits, which were previously filed with the Company’s Registration Statement on Form S-1 (No. 333-06895), are incorporated by reference. 
+(3) 
+These exhibits, which were previously filed with the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 1996, are incorporated by reference. 
+(4) 
+These exhibits, which were previously filed with the Company’s Annual Report on Form 10-K for the year ended December 31, 1997, are incorporated by reference. 
+(5) 
+This exhibit, which was previously filed with the Company’s Current Report on Form 8-K filed February 18, 1999, is incorporated by reference. 
+(6) 
+This exhibit, which was previously filed with the Company’s Annual Report on Form 10-K for the year ended December 31, 1998, is incorporated by reference. 
+(7) 
+These exhibits, which were previously filed with the Company’s Quarterly Report on Form 10-Q for the period ended March 25, 2000, are incorporated by reference. 
+(8) 
+This exhibit, which was previously filed with the Company’s Registration Statement on Form S-8 (No. 333-59570), is incorporated by reference. 
+(9) 
+This exhibit, which was previously filed with the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2003, is incorporated by reference. 
+(10) 
+This exhibit, which was previously filed with the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2004, is incorporated by reference. 
+(11) 
+These exhibits, which were previously filed with the Company’s Annual Report on Form 10-K for the year ended December 31, 2004, are incorporated by reference. 
+(12) 
+This exhibit, which was previously filed with the Company’s Current Report on Form 8-K filed June 1, 2005, is incorporated by reference. 
+(13) 
+These exhibits, which were previously filed with the Company’s Annual Report on Form 10-K for the year ended December 31, 2006, are incorporated by reference. 
+(14) 
+This exhibit, which was previously filed with the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 1997, is incorporated by reference. 
+(15) 
+This exhibit, which was previously filed with the Company’s Annual Report on Form 10-K for the year ended December 31, 2007, is incorporated by reference. 
+(16) 
+This exhibit, which was previously filed with the Company’s Annual Report on Form 10-K for the year ended December 31, 2008, is incorporated by reference. 
+(17) 
+This exhibit, which was previously filed with the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, is incorporated by reference. 
+(18) 
+This exhibit, which was previously filed with the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, is incorporated by reference. 
+(19) 
+This exhibit, which was previously filed with the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2012, is incorporated by reference. 
+(20) 
+This exhibit, which was previously filed with the Company’s Current Report on Form 8-K filed September 11, 2012, is incorporated by reference. 
+(x) 
+Management contract or compensatory plan or arrangement. 
+EXHIBIT LIST 
+The following exhibits are filed herewith. 
+Exhibit 
+10.6(x) 
+Severance Agreement by and between TransAct and Benjamin C. Wyatt, dated May 27, 2008. 
+10.10(x) 
+Amendment to Severance Agreement by and between TransAct and Benjamin C. Wyatt, effective January 1, 2008. 
+23.1 
+Consent of PricewaterhouseCoopers LLP. 
+31.1 
+Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 
+31.2 
+Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 
+32.1 
+Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 
+32.2 
+Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 
+101.INS 
+XBRL Instance Document. 
+101.SCH 
+XBRL Taxonomy Extension Schema Document. 
+101.CAL 
+XBRL Taxonomy Extension Calculation Linkbase Document. 
+101.DEF 
+XBRL Taxonomy Extension Definition Linkbase Document. 
+101.LAB 
+XBRL Taxonomy Extension Label Linkbase Document. 
+101.PRE 
+XBRL Taxonomy Extension Presentation Linkbase Document.
\ No newline at end of file
diff --git a/raw/filings/0001017303/2012/0001017303-13-000017/filing_metadata.csv b/raw/filings/0001017303/2012/0001017303-13-000017/filing_metadata.csv
new file mode 100644
index 0000000000000000000000000000000000000000..6ec9e292655e8b0324a659120f9c6b30ea3973de
--- /dev/null
+++ b/raw/filings/0001017303/2012/0001017303-13-000017/filing_metadata.csv
@@ -0,0 +1,2 @@
+cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing
+0001017303,TACT,TRANSACT TECHNOLOGIES INC,10-K,2013-03-15,2012-12-31,2013-03-15T19:40:23.000Z,0001017303-13-000017,form10k2012.htm,"FORM 10K FOR THE YEAR ENDED DECEMBER 31, 2012",8823995,1,0,https://www.sec.gov/Archives/edgar/data/1017303/000101730313000017/form10k2012.htm,https://www.sec.gov/Archives/edgar/data/1017303/000101730313000017/,2012,2012,1
diff --git a/raw/filings/0001017303/2012/0001017303-13-000017/item1.txt b/raw/filings/0001017303/2012/0001017303-13-000017/item1.txt
new file mode 100644
index 0000000000000000000000000000000000000000..493916688424fbd252a22f892cae5d9e16bf9ef1
--- /dev/null
+++ b/raw/filings/0001017303/2012/0001017303-13-000017/item1.txt
@@ -0,0 +1,70 @@
+Item 1. Business. 
+The Company 
+TransAct Technologies Incorporated (“TransAct” or the “Company”) was incorporated in June 1996 and began operating as a stand-alone business in August 1996 as a spin-off of the printer business that was formerly conducted by certain subsidiaries of Tridex Corporation. We completed an initial public offering on August 22, 1996. 
+TransAct designs, develops and sells market-specific solutions, including printers, terminals, software and other products for transaction-based and other industries. These world-class products are sold under the Epic, EPICENTRAL TM , Ithaca® and Printrex® brand names. Known and respected worldwide for innovative designs and real-world service reliability, our thermal, inkjet and impact printers generate top-quality transaction records such as receipts, tickets, coupons, register journals and other documents as well as printed logging and plotting of data. We focus on the following core markets: food safety, banking and point-of-sale (“POS”), casino and gaming, lottery, oil and gas and medical and mobile. We sell our products to original equipment manufacturers (“OEMs”), value-added resellers ("VARs"), selected distributors, as well as directly to end-users. Our product distribution spans across the Americas, Europe, the Middle East, Africa, Asia, Australia, the Caribbean Islands and the South Pacific. TransAct also provides world-class printer service, spare parts, accessories and printing supplies to its growing worldwide installed base of printers. Through our TransAct Services Group (“TSG”) we provide a complete range of supplies and consumables used in the printing and scanning activities of customers in the hospitality, banking, retail, gaming, government and oil and gas exploration markets. Through our webstore, www.transactsupplies.com , and our direct selling team, we address the on-line demand for these products. We have one primary operating facility and eastern region service center located in Ithaca, NY, our casino and gaming sales headquarters and western region service center in Las Vegas, NV, a European sales and service center in the United Kingdom, a sales office located in Macau and three other sales or administrative offices located in the United States. Our executive offices are located at One Hamden Center, 2319 Whitney Avenue, Suite 3B, Hamden, CT, 06518, with a telephone number of (203) 859-6800. 
+On August 19, 2011, we completed the acquisition of Printrex, Inc. (“Printrex”) for $4,000,000 in cash and potential future contingent consideration. Printrex is a leading manufacturer of specialty printers primarily sold into the oil and gas exploration and medical and mobile markets. Printrex serves commercial and industrial customers primarily in the United States, Canada, Europe and Asia. This acquisition was completed to complement our existing product offerings. 
+Financial Information about Segments 
+We operate in one reportable segment, the design, development, assembly and sale of transaction-based and specialty printing solutions and related services, supplies and spare parts. 
+Products, Services and Distribution Methods 
+Printers 
+TransAct designs, develops, assembles and markets a broad array of transaction-based and specialty printers utilizing inkjet, thermal and impact printing technology for applications, primarily in the food safety, banking, POS, casino and gaming, lottery, oil and gas and medical and mobile markets. Our printers are configurable and offer customers the ability to choose from a variety of features and functions. Options typically include interface configuration, paper cutting devices, paper handling capacities and cabinetry color. In addition to our configurable printers, we design and assemble custom printers for certain OEM customers. In collaboration with these customers, we provide engineering and manufacturing expertise for the design and development of specialized printers. 
+Food safety, banking and POS: Our banking and POS printers include hundreds of optional configurations that can be selected to meet particular customer needs. We believe that this is a significant competitive strength, as it allows us to satisfy a wide variety of printing applications that our customers request. In the banking market, we sell printers that are used by banks, credit unions and other financial institutions to print and/or validate receipts at bank teller stations. In the POS market, we sell several models of printers utilizing inkjet, thermal and impact printing technology. Our printers are used primarily by retailers in the restaurant (including fine dining, casual dining, and fast food), hospitality, and specialty retail industries to print receipts for consumers, validate checks, or print on linerless labels or other inserted media. During 2012 in an effort to address the Food Safety Modernization Act, we developed a food safety terminal that prints easy-to-read expiration and "enjoy by" date labels using thermal printing technology to help restaurants effectively manage food spoilage. In the POS market, we primarily sell our products through a network of domestic and international distributors and resellers. We use an internal sales force to manage sales through our distributors and resellers, as well as to solicit sales directly from end-users. In the banking market, we primarily sell our products directly to end-user banks and financial institutions through the use of our internal sales force. In the food safety market, we sell our products directly to end-users through the use of our internal sales force with the assistance of sales representatives from a large food safety distributor. 
+Lottery: We supply lottery printers to Lottomattica’s GTECH Corporation (“GTECH”), our largest customer and the world’s largest provider of lottery terminals. These printers are designed for high-volume, high-speed printing of lottery tickets for various lottery applications. Sales of our lottery products are made directly to GTECH and managed by an internal sales representative. 
+Casino and gaming: We sell several models of printers used in slot machines and video lottery terminals (“VLT’s”) and other gaming machines that print tickets or receipts instead of issuing coins (“ticket-in, ticket-out” or “TITO”) at casinos, racetracks (“racinos”) and other gaming venues worldwide. These printers utilize thermal printing technology and can print tickets or receipts in monochrome or two-color (depending upon the model), and offer various other features such as jam resistant bezels and a dual port interface that enables casinos to print coupons and promotions. In addition, we sell printers using thermal and impact printing technology for use in non-casino establishments, including game types such as Amusements with Prizes (“AWP”), Skills with Prizes (“SWP”), Fixed Odds Betting Terminals (“FOBT”) and other off-premise gaming type machines around the world. We sell our products primarily to (1) slot machine manufacturers, who incorporate our printers into slot machines and, in turn, sell completed slot machines directly to casinos and other gaming establishments and (2) through regional distributors (four in the United States and Asia, one in Europe and Africa, one in Latin America and one in Australia). We also maintain a dedicated internal sales force to solicit sales from slot manufacturers and casinos, as well as to manage sales through our distributors. 
+We have also developed a new software solution, the EPICENTRAL TM Print System (“EPICENTRAL TM ”), that enables casino operators to create promotional coupons and marketing messages and print them in real-time at the slot machine. With EPICENTRAL TM , casinos will be able to utilize the system to create multiple promotions and incentives to either increase customer time spent on the casino floor or encourage additional visits to generate more revenue to the casinos. 
+Printrex: Printrex printers include wide format, rack mounted and vehicle mounted thermal printers used by customers to log and plot oil field and down hole well drilling data in the oil and gas exploration industry. During 2012, we launched two new color printers for this market, the Printrex 920 and Printrex 980. The Printrex 920 is the first full-color printer designed from the ground up to perform in the adverse environment of a well logging truck or off-shore platform. Using thermal printer technology, it can print in black and white, or in full color using proprietary color paper without the need for inkjet cartridges or ribbons. The Printrex 980 is the fastest full color printer available for plotting continuous logs in the data centers of the large oil field service companies. This printer uses proprietary inkjet cartridges. In addition, we sell wide format thermal printers used to print test results in ophthalmology devices in the medical industry, as well as vehicle mounted printers used to print schematics and certain other critical information in emergency services vehicles. We primarily sell our Printrex products directly to oil field service and drilling companies and OEM’s, as well as through regional distributors in the United States, Europe, Canada and Asia. We also maintain a dedicated internal sales force and one manufacturer’s representative located in Texas. 
+TSG 
+Through TSG, we proactively market the sale of consumable products (including inkjet cartridges, ribbons, receipt paper, color thermal paper and other printing supplies), replacement parts, maintenance and repair services and paper testing services for all of our products and certain competitor’s products. Our maintenance services include the sale of extended warranties, multi-year maintenance contracts, 24-hour guaranteed replacement product service called TransAct Xpress SM , and other repair services for our printers. Within the United States, we provide repair services through our eastern region service center in Ithaca, NY and our western region service center in Las Vegas, NV. Internationally, we provide repair services through our European service center located in Doncaster, United Kingdom, and through partners strategically located around the world. 
+We also provide customers with telephone sales and technical support, and a personal account representative to handle orders, shipping and general information. Technical and sales support personnel receive training on all of our manufactured products and our services. 
+In addition to personalized telephone and technical support, we also market and sell consumable products 24 hours a day, seven days a week, via our online webstore www.transactsupplies.com . 
+Sources and Availability of Raw Materials 
+We design our products to optimize product performance, quality, reliability and durability. These designs combine cost efficient materials, sourcing and assembly methods with high standards of workmanship. Approximately 85% of our printer production is through two third-party contract manufacturers in Asia, with the remaining 15% of products assembled in our Ithaca, NY facility largely on a configure-to-order basis using components and subassemblies that have been sourced from vendors and contract manufacturers around the world. 
+We procure component parts and subassemblies for use in the assembly of our products in Ithaca, NY. Critical component parts and subassemblies include inkjet, thermal and impact print heads, printing/cutting mechanisms, power supplies, motors, injection molded plastic parts, LCD screens, circuit boards and electronic components, which are obtained from domestic and foreign suppliers at competitive prices. As a result of the majority of our production being performed by our contract manufacturers, purchases of component parts have declined while purchases of fully-assembled printers produced by our contract manufacturers have increased. We typically strive to maintain more than one source for our component parts, subassemblies and fully assembled printers to reduce the risk of parts shortages or unavailability. However, we could experience temporary disruption if certain suppliers ceased doing business with us, as described below. 
+We currently buy substantially all of our thermal print mechanisms, an important component of our thermal printers, and fully assembled printers for several of our printer models, from one foreign contract manufacturer, and to a much lesser extent, a second foreign contract manufacturer. Although we believe that other contract manufacturers could provide similar thermal print mechanisms or fully assembled printers, on comparable terms, a change in contract manufacturers could cause a delay in manufacturing and possible loss of sales, which may have a material adverse effect on our operating results. Although we do not have a supply agreement with our foreign contract manufacturer, our relationship with them remains strong and we have no reason to believe that they will discontinue their supply of thermal print mechanisms to us during 2013 or that their terms to us will be any less favorable than they have been historically. 
+Hewlett-Packard Company (“HP”) is the sole supplier of inkjet cartridges that are used in all of our banking inkjet printers. In addition, we also sell a substantial number of HP inkjet cartridges as a consumable product through TSG. Although other inkjet cartridges that are compatible with the HP inkjet cartridge are available, the loss of the supply of HP inkjet cartridges could have a material adverse effect on both the sale of our inkjet printers and TSG consumable products. Our relationship with HP remains stable and we have no reason to believe that HP will discontinue its supply of inkjet cartridges to us or that their terms to us will be any less favorable than they have been historically. The inkjet cartridges we purchase from HP are used not only in our inkjet printers for the banking and POS market, but also in other manufacturer’s printing devices across several other markets. 
+ZINK Imaging Inc. (“ZINK”) is the sole supplier of proprietary color thermal paper used in our Printrex 920 oil and gas printer. We have a supply agreement with ZINK to exclusively supply us with ZINK color thermal paper for the oil and gas industry at fixed prices through December 31, 2014. The loss of the supply of ZINK color thermal paper would have a material adverse effect on the sale of Printrex 920 printers and Zink color thermal paper. 
+Canon, Inc. (“Canon”) is the sole supplier of inkjet cartridges and other consumable items (“Canon Consumables”) that are used in our Printrex 980 oil and gas printer. The loss of supply of Canon Consumables would have a material adverse effect on the sale of Printrex 980 printers and the Canon Consumables. We have a supply agreement with Canon to supply us with us with Canon Consumables until May 2017. Prices under this agreement are fixed through May 2013, but may be changed due to significant exchange rate fluctuations between the Japanese yen and the U.S. dollar. 
+Patents and Proprietary Information 
+We have significantly expanded our patent portfolio over the past ten years, and expect to continue to do so in the future. We currently license certain technology to two companies in the casino and gaming industry and believe our patent portfolio could provide additional opportunities to license our intellectual property in the future. We hold 29 United States and 25 foreign patents and have 8 United States and 13 foreign patent applications pending pertaining to our products. The duration of these patents range from 5 to 17 years. The expiration of any individual patent would not have a significant negative impact on our business. We regard certain manufacturing processes and designs to be proprietary and attempt to protect them through employee and third-party nondisclosure agreements and similar means. It may be possible for unauthorized third parties to copy certain portions of our products or to reverse engineer or otherwise obtain and use, to our detriment, information that we regard as proprietary. Moreover, the laws of some foreign countries do not afford the same protection to our proprietary rights as do the laws of the United States. There can be no assurance that legal protections relied upon by the Company to protect our proprietary position will be adequate or that our competitors will not independently develop technologies that are substantially equivalent or superior to our technologies. 
+Seasonality 
+We do not believe that any of the markets we serve are materially affected by seasonality. 
+Working Capital 
+Inventory, accounts receivable, and accounts payable levels, payment terms, and where applicable, return policies are in accordance with the general practices of the industry and standard business procedures. See also Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 
+Certain Customers 
+GTECH is our most significant customer. In December 2009, we signed a new five-year agreement effective November 20, 2009, with GTECH (the “GTECH Thermal Printer Agreement”). Under the terms of the agreement, we provide GTECH with their latest generation thermal lottery printers for various lottery applications. The terms of the agreement require that GTECH exclusively purchase all of its requirements for thermal on-line lottery printers from us and that we exclusively sell such printers to GTECH through January 2015. We previously had an additional OEM purchase agreement with GTECH that provided for the sale of older generation thermal on-line lottery printers and spare parts, at fixed prices, through its expiration date of June 28, 2012. This agreement was not renewed as the underlying thermal printers and related spare parts were discontinued at the end of 2012. 
+Sales to GTECH and other customers representing 10% or more of our total net sales were as follows: 
+Year ended December 31, 
+2012 
+2011 
+2010 
+GTECH 
+18% 
+26% 
+12% 
+Customer A 
+15% 
+13% 
+14% 
+Backlog 
+Our backlog of firm orders was approximately $4,776,000 as of February 28, 2013, compared to $7,261,000 as of February 29, 2012. Based on customers’ current delivery requirements, we expect to ship our entire current backlog during 2013. 
+Competition 
+The market for transaction-based and specialty printing solutions is extremely competitive, and we expect such competition to continue in the future. We compete with a number of companies, many of which have greater financial, technical and marketing resources than us. We believe our ability to compete successfully depends on a number of factors both within and outside our control, including durability, reliability, quality, design capability, product customization, price, customer support, success in developing new products, manufacturing expertise and capacity, supply of component parts and materials, strategic relationships with suppliers, the timing of new product introductions by us and our competitors, general market, economic and political conditions and, in some cases, the uniqueness of our products. 
+In the banking and POS market, our major competitor is Epson America, Inc., which holds a dominant market position of the POS markets into which we sell. We also compete, to a much lesser extent, with Transaction Printer Group (“TPG”), Star Micronics America, Inc., Citizen -- CBM America Corporation, Pertech Resources, Inc., Addmaster, and Samsung/Bixolon. Certain competitors of ours have greater financial resources, lower costs attributable to higher volume production and sometimes offer lower prices than us. 
+In the food safety market, we compete with Avery Dennison Corporation, Ecolab Inc. and Integrated Control Corp. We compete in this market based largely on our ability to provide highly specialized products, custom engineering and ongoing technical support. 
+In the lottery market (consisting principally of on-line lottery transaction printing), we hold a leading position, based largely on our long-term purchase agreements with GTECH. We compete in this market based solely on our ability to provide specialized, custom-engineered products to GTECH. 
+In the casino and gaming market (consisting principally of slot machine and video lottery terminal transaction printing and promotional coupon printing), we compete with several companies including FutureLogic, Inc., Nanoptix, Inc., Custom Engineering SPA and others. Certain of our products sold for casino and gaming applications compete based upon our ability to provide highly specialized products, custom engineering and ongoing technical support. 
+In the Printrex market, we compete with the Imaging Systems Group, Inc. (“iSys”), Neuralog Inc., GSI Group and others. We compete in this market based largely on our ability to provide specialized, custom-engineered products. 
+The TSG business is highly fragmented, and we compete with numerous competitors of various sizes, including POS and internet resellers, depending on the geographic area. 
+Our strategy for competing in our markets is to continue to develop new products (hardware and software) and product line extensions, to increase our geographic market penetration, to take advantage of strategic relationships, and to lower product costs by sourcing certain products overseas. Although we believe that our products, operations and relationships provide a competitive foundation, there can be no assurance that we will compete successfully in the future. In addition, our products utilize certain inkjet, thermal and impact printing technology. If other technologies, or variations to existing technologies, were to evolve or become available to us, it is possible that we would incorporate these technologies into our products. Alternatively, if such technologies were to evolve or become available to our competitors, our products could become obsolete, which would have a significant negative impact on our business. 
+Research and Development Activities 
+Research, development, and engineering expenditures represent costs incurred in the experimental or laboratory sense aimed at discovery and/or application of new knowledge in developing a new product or process, or in bringing about significant improvement in an existing product or process. We spent approximately $4,239,000, $3,418,000 and $3,000,000 in 2012, 2011 and 2010, respectively, on engineering, design and product development efforts in connection with specialized engineering and design to introduce new hardware and software products and to customize or improve existing products. 
+Costs incurred in researching and developing a computer software product are charged to expense until technological feasibility has been established, at which point all material software costs are capitalized within Intangible assets in our Consolidated Balance Sheet until the product is available for general release to customers. While judgment is required in determining when technological feasibility of a product is established, we have determined that it is reached after all high-risk development issues have been documented in a formal detailed plan design. The amortization of these costs will be included in cost of sales over the estimated life of the product. During 2010 we began the development of EPICENTRAL TM , that enables casino customers to print coupons and promotions at the slot machine. Unamortized development costs for such software were approximately $528,000 and $682,000 as of December 31, 2012 and 2011, respectively. The total amount charged to cost of sales for capitalized software development costs were approximately $189,000 and $62,000 in 2012 and 2011, respectively. 
+Environment 
+We are not aware of any material noncompliance with federal, state and local provisions that have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment. 
+Employees 
+As of December 31, 2012, TransAct and our subsidiaries employed 140 persons, of whom 124 were full-time and 16 were temporary employees. None of our employees are unionized, and we consider our relationships with our employees to be good. 
+Financial Information About Geographic Areas 
+For financial information regarding our geographic areas see Note 16 – Geographic Area Information in the Notes to the Consolidated Financial Statements. Risks attendant to our foreign operations are described in Item 1A below. 
+Available Information 
+We make available free of charge through our internet website, www.transact-tech.com , our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. You may read and copy any materials filed with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. This information is also available at www.sec.gov. The reference to these website addresses does not constitute incorporation by reference of the information contained on the websites and should not be considered part of this document. 
+We maintain a Code of Business Conduct that includes our code of ethics that is applicable to all employees, including our Chief Executive Officer, Chief Financial Officer and Controller. This Code, which requires continued observance of high ethical standards such as honesty, integrity and compliance with the law in the conduct of our business, is available for public access on our internet website. Any person may request a copy of our Code of Business Conduct free of charge by calling (203) 859-6800.
\ No newline at end of file
diff --git a/raw/filings/0001017303/2012/0001017303-13-000017/item13.txt b/raw/filings/0001017303/2012/0001017303-13-000017/item13.txt
new file mode 100644
index 0000000000000000000000000000000000000000..04c167e20adc5eb1e001215326abd59fdd7e4809
--- /dev/null
+++ b/raw/filings/0001017303/2012/0001017303-13-000017/item13.txt
@@ -0,0 +1,2 @@
+Item 13. Certain Relationships and Related Transactions, and Director Independence. 
+The information in response to this item is incorporated by reference from the Proxy Statement section entitled “Certain Relationships and Related Transactions.”
\ No newline at end of file
diff --git a/raw/filings/0001017303/2012/0001017303-13-000017/item9a.txt b/raw/filings/0001017303/2012/0001017303-13-000017/item9a.txt
new file mode 100644
index 0000000000000000000000000000000000000000..79812a1d6f76b6e9d11d1441146d501448449dc1
--- /dev/null
+++ b/raw/filings/0001017303/2012/0001017303-13-000017/item9a.txt
@@ -0,0 +1,8 @@
+Item 9A. Controls and Procedures. 
+Attached as exhibits to this Form 10-K are certifications of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), which are required in accordance with Rule 13a-14 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). This “Controls and Procedures” section includes information concerning the controls and controls evaluation referred to in the certifications. 
+Evaluation of Disclosure Controls and Procedures 
+As of December 31, 2012, the Company, with the participation of its CEO and CFO conducted an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934 (the “Exchange Act”). Based on that evaluation, our CEO and CFO concluded that the Company’s disclosure controls and procedures (as defined in Rule 13a-15 of the Exchange Act) were effective as of December 31, 2012. There has been no change in the Company’s internal control over financial reporting during the quarter ended December 31, 2012 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. 
+Management’s Annual Report on Internal Control Over Financial Reporting 
+Our management is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. 
+Management assessed our internal control over financial reporting as of December 31, 2012. Management based its assessment on criteria established in Internal Control–Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on our assessment, management has concluded that our internal control over financial reporting was effective as of December 31, 2012 
+The effectiveness of the Company’s internal control over financial reporting as of December 31, 2012, has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.
\ No newline at end of file
diff --git a/raw/filings/0001017303/2012/0001017303-13-000017/rp_note.txt b/raw/filings/0001017303/2012/0001017303-13-000017/rp_note.txt
new file mode 100644
index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391
diff --git a/raw/filings/0001017303/2012/0001017303-13-000017/rpt_disclosure.txt b/raw/filings/0001017303/2012/0001017303-13-000017/rpt_disclosure.txt
new file mode 100644
index 0000000000000000000000000000000000000000..e1dbbf986c6bee804dd08d162a4f131b65a96ce7
--- /dev/null
+++ b/raw/filings/0001017303/2012/0001017303-13-000017/rpt_disclosure.txt
@@ -0,0 +1,4 @@
+CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 
+The Company maintains policies that relate to the identification, review and approval of related party transactions. As part of a review of possible related person transactions, the Company annually distributes and collects questionnaires that solicit information about any direct or indirect transactions with the Company from each of our directors and officers. 
+Our Standards of Business Conduct require all directors, officers and employees to avoid any situation that involves an actual or apparent conflict of interest in personal and professional relationships or with their duty to, or with any interest of, the Company. Under our Standards of Business Conduct, situations that involve, or may reasonably be inferred to involve, a conflict between a director, officer or employee’s personal interests and the interests of the Company should be disclosed to the Chair of the Audit Committee. The Audit Committee is then responsible for reviewing the related party transaction. No related party transaction shall be approved or ratified if such transaction is contrary to the best interests of the Company. In determining whether to approve or ratify a related party transaction, the Audit Committee takes into account such factors as it deems appropriate, which may include whether the interested transaction is on terms no less favorable than terms generally available to an unaffiliated third party under the same or similar circumstances and the extent of the related person’s interest in the transaction . 
+From January 1, 2013 to the date of this proxy statement, there have not been any transactions subject to the Company’s related party transaction policy or of the type described in Item 404 of Regulation S-K, and currently no such transactions are proposed.
\ No newline at end of file