UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2006
- --------------------------------------------------------------------------------
[ ] 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)
Registrant's telephone number, including area code (718) 446-1800
- --------------------------------------------------------------------------------
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 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 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.
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 May 4, 2006 there were 13,873,667 shares of the registrant's common stock,
$.0001 par value, outstanding.
STEVEN MADDEN, LTD.
FORM 10-Q
QUARTERLY REPORT
March 31, 2006
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets........................ 1
Condensed Consolidated Statements of Operations.............. 2
Condensed Consolidated Statements of Cash Flows.............. 3
Notes to Unaudited Condensed Consolidated Financial
Statements................................................... 4
ITEM 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations............. 12
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk... 17
ITEM 4. Controls and Procedures...................................... 18
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings............................................ 18
ITEM 1A. Risk Factors................................................. 19
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds.. 19
ITEM 6. Exhibits..................................................... 20
Signature.................................................... 21
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(in thousands)
March 31, December 31, March 31,
2006 2005 2005
------------ ------------ ------------
(unaudited) (unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 24,121 $ 42,842 $ 30,186
Accounts receivable, net of allowances of $1,864, $813 and $640 5,034 3,294 1,973
Due from factor, net of allowances of $10,151, $7,587 and $3,164 54,687 31,785 40,139
Inventories 36,579 28,412 28,684
Marketable securities - available for sale 14,761 24,092 14,011
Prepaid expenses and other current assets 6,295 2,435 2,986
Prepaid taxes -- 2,512 1,959
Deferred taxes 5,526 5,600 3,030
------------ ------------ ------------
Total current assets 147,003 140,972 122,968
Property and equipment, net 21,128 20,898 20,754
Deferred taxes 5,478 5,568 5,488
Deposits and other 848 586 433
Marketable securities - available for sale 40,147 42,157 33,925
Goodwill - net 6,719 1,547 2,066
Intangibles - net 8,172 -- --
------------ ------------ ------------
Total Assets $ 229,495 $ 211,728 $ 185,634
============ ============ ============
LIABILITIES
Current liabilities:
Accounts payable $ 16,995 15,579 $ 14,900
Accrued expenses 19,168 11,327 6,436
------------ ------------ ------------
Total current liabilities 36,163 26,906 21,336
Deferred rent 3,391 2,757 2,118
------------ ------------ ------------
39,554 29,663 23,454
------------ ------------ ------------
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, 60,000 shares authorized, 16,255,
16,150 and 15,228 shares issued, 13,874, 13,916 and
13,129 outstanding 2 2 2
Additional paid-in capital 101,547 99,950 82,681
Retained earnings 119,698 108,838 104,413
Unearned compensation -- -- (377)
Other comprehensive gain:
Unrealized gain on marketable securities (net of taxes) (1,073) (1,299) (1,354)
Treasury stock - 2,381, 2,234 and 2,099 shares at cost (30,233) (25,426) (23,185)
------------ ------------ ------------
189,941 182,065 162,180
------------ ------------ ------------
Total Liabilities and Stockholders' Equity $ 229,495 $ 211,728 $ 185,634
============ ============ ============
See accompanying notes to condensed consolidated financial statements - unaudited 1
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(unaudited)
(in thousands, except per share data)
Three Months Ended
March 31,
----------------------------
2006 2005
------------ ------------
Net sales:
Wholesale $ 82,982 $ 56,861
Retail 25,333 26,475
------------ ------------
108,315 83,336
------------ ------------
Cost of sales:
Wholesale 48,857 41,441
Retail 13,175 14,543
------------ ------------
62,032 55,984
------------ ------------
Gross profit:
Wholesale 34,125 15,420
Retail 12,158 11,932
------------ ------------
46,283 27,352
Commission and licensing fee income - net 3,762 1,225
Operating expenses (31,590) (27,356)
------------ ------------
Income from operations 18,455 1,221
Interest and other income, net 271 438
------------ ------------
Income before provision for income taxes 18,726 1,659
Provision for income taxes 7,866 697
------------ ------------
Net income $ 10,860 $ 962
============ ============
Basic income per share $ 0.78 $ 0.07
============ ============
Diluted income per share $ 0.74 $ 0.07
============ ============
Basic weighted average common shares outstanding 13,917 13,235
Effect of dilutive securities - options/restricted stock 695 569
------------ ------------
Diluted weighted average common shares outstanding 14,612 13,804
============ ============
See accompanying notes to condensed consolidated financial statements - unaudited 2
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
Three Months Ended
March 31,
----------------------------
2006 2005
------------ ------------
Cash flows from operating activities:
Net income $ 10,860 $ 962
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization 1,507 1,227
Loss on disposal of fixed assets 292 87
Non-cash compensation 60 327
Provision for doubtful accounts and chargebacks 3,354 889
Deferred rent expense 124 30
Realized loss on sale of marketable securities 573 41
Changes in:
Accounts receivable (1,007) 1,245
Due from factor (23,907) (7,213)
Inventories (2,284) 5,700
Prepaid expenses, prepaid taxes, deposits and other assets 195 (1,401)
Accounts payable and other accrued expenses 279 1,659
------------ ------------
Net cash provided by (used in) operating activities (9,954) 3,553
------------ ------------
Cash flows from investing activities:
Purchases of property and equipment (1,508) (1,353)
Purchases of marketable securities (73) (426)
Sale/redemption of marketable securities 11,232 1,003
Acquisition, net of cash acquired (15,148) --
------------ ------------
Net cash used in investing activities (5,497) (776)
------------ ------------
Cash flows from financing activities:
Proceeds from exercise of stock options 1,537 2,050
Common stock purchased for treasury (4,807) (5,494)
------------ ------------
Net cash used in financing activities (3,270) (3,444)
------------ ------------
Net decrease in cash and cash equivalents (18,721) (667)
Cash and cash equivalents - beginning of period 42,842 30,853
------------ ------------
Cash and cash equivalents - end of period $ 24,121 $ 30,186
============ ============
See accompanying notes to condensed consolidated financial statements - unaudited 3
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements - Unaudited
March 31, 2006
($ in thousands except per share data)
Note A - Basis of Reporting
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and pursuant to the
rules and regulations of the Securities and Exchange Commission (the "SEC").
Accordingly, they do not include all of the information and footnotes required
by accounting principles generally accepted in the United States of America for
complete financial statements. In the opinion of management, such statements
include all adjustments (consisting only of normal recurring items) which are
considered necessary for a fair presentation of the financial position of Steven
Madden, Ltd. and subsidiaries (the "Company") and the results of its operations
and cash flows for the periods presented. The results of its operations for the
three-month period ended March 31, 2006 are not necessarily indicative of the
operating results for the full year. It is suggested that these financial
statements be read in conjunction with the financial statements and related
disclosures for the year ended December 31, 2005 included in the Annual Report
of Steven Madden, Ltd. on Form 10-K filed with the SEC on March 14, 2006.
Note B - 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 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 has revised its method for
evaluating its estimate of the allowance for customer chargebacks beginning in
the fourth quarter of 2005. In the past, the Company looked 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 of its major customers. These performance
indicators, which include inventory levels, sell through rates and gross margin
levels, are analyzed by key account executives to estimate the amount of the
anticipated customer allowance.
Note C - Marketable Securities
Marketable securities consist primarily of corporate bonds, U.S. treasury notes
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 shareholders' equity as accumulated other comprehensive income
(loss). Amortization of premiums and discounts are included in interest income
and are not material. The values of these securities may fluctuate as a result
of changes in market interest rates and credit risk.
Note D - Inventories
Inventories, which consist of finished goods, are stated at the lower of cost
(first-in, first-out method) or market.
4
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements - Unaudited
March 31, 2006
($ in thousands except per share data)
Note E - 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
customers purchase order. Sales reductions for anticipated discounts, allowances
and other deductions are recognized 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 earns commission income as a buying 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 from 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 Steve Madden trademark for use in connection with the
manufacturing, marketing and sale of sunglasses, eyewear and hosiery products.
Each license agreement requires the licensee to pay to the Company a royalty and
advertising fee based on net sales as defined in the various agreements. A
minimum royalty and advertising fee is due the Company in the event that
specified net sales targets are not achieved. Licensing revenue is recognized on
the basis of net sales reported by the licensees or, if greater, minimum
guaranteed royalties when earned. In substantially all of the Company's license
agreements, the minimum guaranteed royalty is earned and payable on a quarterly
basis.
Note F - Sales Deductions
The Company supports retailers' initiatives to maximize the sales of its
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 Condensed Consolidated Statement of
Operations as deductions to net sales. For the three-month periods ended March
31, 2006 and 2005, the total deduction to net sales for these expenses was
$6,871 and $8,516, respectively.
Note G - Cost of Sales
All costs incurred to bring finished products to the Company's distribution
center are included in the cost of sales line item on the Condensed Consolidated
Statement of Operations. These include purchase commissions, letter of credit
fees, brokerage fees, material and labor and related items, sample expenses,
custom duty, inbound freight, royalty payments, labels and product packaging.
All warehouse and distribution costs are included in the operating expenses line
item of the Company's Condensed Consolidated Statement of Operations. The
Company classifies all shipping costs to customers as operating expenses. The
Company's gross margins may not be comparable to other companies in the industry
because some companies may include warehouse and distribution as a component of
cost of sales, while other companies report on the same basis as the Company and
include them in operating expenses.
Note H - Stock Incentive Plan
In March of 2006, the Board of Directors approved the Steven Madden, Ltd. Stock
Incentive Plan (the "Plan") under which nonqualified stock options, stock
appreciation rights, performance shares, restricted stock, other stock-based
awards and performance-based cash awards may be granted to employees,
consultants and non-employee directors. The Board's adoption of the Plan is
subject to shareholder approval. The number of shares that may be issued or used
under the Plan cannot exceed 800,000 shares. On March 20, 2006, subject to
shareholder approval, the Company awarded 120,800 restricted stock shares to
employees and directors that will, with some exceptions, vest annually in equal
parts over four years. The compensation associated with the restricted stock
will be valued based on the closing price of the Company's common stock on the
date of shareholder approval.
5
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements - Unaudited
March 31, 2006
($ in thousands except per share data)
Note I - Reclassification
The Company has reclassified royalty payments on its Condensed Consolidated
Statement of Operations from operating expenses to cost of sales. This
reclassification resulted in an increase in the cost of sales for the three
months ended March 31, 2006 and 2005 of $879 and $966, 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.
Note J - Net Income Per Share of Common Stock
Basic income per share is based on the weighted average number of common shares
outstanding during the period. Diluted income per share reflects the potential
dilution assuming common shares were issued upon the exercise of outstanding
options and the proceeds thereof were used to purchase outstanding common
shares. Diluted income per share also reflects the unvested and unissued shares
promised to employees which have a dilutive effect. For the purposes of
calculating the diluted income per share for the three months ended March 31,
2006 and 2005, stock options representing approximately none and 1,202,000,
respectively, have been excluded because including the shares would be
anti-dilutive.
Note K - Stock-Based Compensation
Effective January 1, 2006, the Company adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") 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 three-month period ended March 31, 2006, total equity-based compensation
of $60 related to stock options previously granted was included in operating
expense. As of March 31, 2006, unrecognized equity-based compensation is $60,
which will be recognized in the quarter ended June 30, 2006. The equity-based
compensation for the periods ended March 31 and June 30, 2006 relate to one
employee, and thus no forfeitures were assumed in estimating the amount of
compensation expense.
Prior to the adoption of FAS 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. FAS No. 123R requires
cash flows resulting from the tax benefits from tax deduction in excess of the
compensation cost recognized for those options (excess tax benefits) to be
classified as financing cash flows. The Company did not realize any tax benefits
from the exercise of stock options during the three months ended March 31, 2006.
The weighted average fair value of options granted in 2005 was approximately
$6.11 using the Black-Scholes option-pricing model assuming a volatility of 43%,
risk free interest rate of 3.86%, an expected life of 3 years and no dividend
yield.
There were 85,000 options exercised during the three months ended March 31, 2006
with a total intrinsic value of $1,537. During the three months ended March 31,
2006, 10,000 options vested with a weighted average exercise price of $17.76. As
of March 31, 2006, there were 10,000 unvested options with a weighted average
exercise price of $17.76, which will vest during the quarter ended June 30,
2006.
6
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements - Unaudited
March 31, 2006
($ in thousands except per share data)
Note K - Stock-Based Compensation (continued)
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 period ended March 31, 2005:
Reported net income $ 962
Stock-based employee compensation included in
reported net income, net of tax 82
Stock-based employee compensation determined
under the fair value based method, net of tax (538)
------------
Pro forma net income $ 506
============
Basic income per share:
As reported $ 0.07
Pro forma $ 0.04
Diluted income per share:
As reported $ 0.07
Pro forma $ 0.04
Activity relating to stock options granted under the Company's plans and outside
the plans during the quarters ended March 31, is as follows:
2006 2005
---------------------------- ----------------------------
Weighted Weighted
Average Average
Number Exercise Number Exercise
of Shares Price of Shares Price
------------ ------------ ------------ ------------
Outstanding at January 1 1,300,000 $ 12.71 2,513,000 $ 12.71
Granted -- -- -- --
Exercised (85,000) 18.08 (500,000) 4.10
Cancelled/Forfeited -- -- -- --
------------ ------------
Outstanding at March 31 1,215,000 14.44 2,013,000 14.84
============ ============
Exercisable at March 31 1,205,000 14.41 1,896,000 14.57
============ ============
Note L - 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 is a
manufacturer and distributor of name brand fashion handbags and accessories. The
acquisition was completed for consideration of $18,500 including transaction
costs subject to adjustment, including certain earn out provisions based on
financial performance through 2010.
7
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements - Unaudited
March 31, 2006
($ in thousands except per share data)
Note L - Acquisition (continued)
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, as
well as third- party independent valuations. The total preliminary purchase
price has been allocated as follows:
Current assets $ 9,772
Property, plant and equipment 289
Deposits 62
Intangible assets 8,400
Goodwill 5,172
Liabilities assumed (5,195)
------------
Net assets acquired $ 18,500
============
The purchase price and related allocation are preliminary and may be revised as
a result of adjustments made to the purchase price pursuant to the earn out
provisions or as additional information regarding assets and liabilities
require.
The results of operations of Daniel M. Friedman have been included in the
Company's Condensed Consolidated Statements of Operations from the date of the
acquisition. The following pro forma information presents the results of the
Company's operations as though the Daniel M. Friedman acquisition had been
completed as of the first day of the quarters below:
Three Months Ended March 31,
---------------------------
2006 2005
------------ ------------
Net sales $ 111,000 $ 90,987
Operating income $ 18,634 $ 2,448
Net income $ 10,964 $ 1,646
Basic earnings per share $ 0.79 $ 0.12
Diluted earnings per share $ 0.75 $ 0.12
Note M - Goodwill and Intangible Assets
The following is a summary of goodwill and the related accumulated amortization
for the quarter ended March 31, 2006:
Net
Accumulated carrying
Cost basis Amortization amount
------------ ------------ ------------
Balance at December 31, 2005 $ 2,145 $ 598 $ 1,547
Acquisition of Daniel M. Friedman 5,172 0 5,172
------------ ------------ ------------
Balance at March 31, 2006 $ 7,317 $ 598 $ 6,719
------------ ------------ ------------
8
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements - Unaudited
March 31, 2006
($ in thousands except per share data)
Note M - Goodwill and Intangible Assets (continued)
The following table details intangible assets acquired on February 7, 2006 in
the Daniel M. Friedman transaction as of March 31, 2006:
Accumulated Net carrying
Cost basis Amortization amount
------------ ------------ ------------
Trade name $ 200 $ 5 $ 195
Customer Relationships 2,600 44 2,556
License Agreements 5,600 179 5,421
------------ ------------ ------------
$ 8,400 $ 228 $ 8,172
------------ ------------ ------------
The estimated future amortization expense of purchased intangibles as of March
31, 2006 is as follows:
2006 (remaining nine months) $ 1,028
2007 1,370
2008 1,370
2009 1,267
2010 1,267
Thereafter 1,870
--------
$ 8,172
========
Note N - Comprehensive Income
Comprehensive income for the three-month periods ended March 31, 2006 and 2005,
after considering other comprehensive income including unrealized gain (loss) on
marketable securities of $226 and ($330), was $11,086 and $632, respectively.
NOTE O - 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 Steve Madden, Ltd., and Steve 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 (the Finnley, the Troyy, and
the Soccet) that adidas contends violate the settlement agreement
and infringe adidas' "three-stripe" mark. The parties are
actively engaged in settlement discussions and have reached a
tentative settlement. Settlement drafts have been exchanged but
are still being negotiated. The settlement will not have a
material affect on the Company's financial position.
(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 is
non-dutiable), should be treated as "selling agents commissions"
and hence is dutiable. In the report, Customs estimates that the
Company had underpaid duties during the calendar years of 1998
through 2004 in the amount of $1,051 plus interest and penalties.
Based on management's estimation at this
9
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements - Unaudited
March 31, 2006
($ in thousands except per share data)
NOTE O - COMMITMENTS, CONTINGENCIES AND OTHER (CONTINUED)
point, a reserve of $2,051 covering under-payments, interest and
penalties, has been recorded as of the March 31, 2006 Condensed
Consolidated Financial Statements. Such reserve may in the future
be modified 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 assert 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 allege 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 seek damages on their various claims in
differing amounts, ranging from $500 to $5,000 and they also seek
a declaration that they are 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 is granted in its
entirety, the individual defendants would be dismissed from the
suit and Mr. Friedman's remaining claims would consist 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 April 13th, 2006 Mr.
Friedman also filed his opposition to the motion to dismiss
previously filed by the Company and the individual defendants.
The Company and the individual defendants responded to Mr.
Friedman's opposition to the motion to dismiss on May 3, 2006 and
Mr. Friedman has until May 11, 2006 to respond. Based on
management's estimation at this point, a reserve of $364 has been
recorded as of the March 31, 2006 Condensed Consolidated
Financial Statements. Such reserve may in the future be modified
to reflect the status of this matter.
(d) The Company has been named as a defendant in certain other
lawsuits in the normal course of business. In the opinion of
management, after consulting with legal counsel, the liabilities,
if any, resulting from these matters should not have a material
effect on the Company's financial position or results of
operations. It is the policy of management to disclose the amount
or range of reasonably possible losses in excess of recorded
amounts.
[2] Stock Split
On April 27, 2006, the Board of Directors declared a 3-for-2 stock split
of its outstanding shares of common stock, to be effected in the form of a
stock dividend on the Company's issued and outstanding common stock.
Stockholders of record at the close of business on May 11, 2006 will
receive one additional share of Steven Madden Ltd. common stock for every
two shares of common stock owned on this date. The additional shares are
expected to be distributed on or about May 25, 2006. Stockholders will
receive cash in lieu of any fractional shares of common stock they
otherwise would have received in connection with the dividend.
10
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements - Unaudited
March 31, 2006
($ in thousands except per share data)
Note P - Operating Segment Information
The Company's reportable segments are primarily based on methods used to
distribute its products. The wholesale segment, through sales to department and
specialty stores, and the retail segment, through the operation of retail stores
and the website, derive revenue from sales of branded women's, men's, girl's and
children's footwear and accessories. 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 private label 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.
Wholesale Retail Private label Consolidated
------------ ------------ ------------ ------------
Quarter ended March 31, 2006:
Net sales to external customers $ 82,982 $ 25,333 $ 108,315
Gross profit 34,125 12,158 46,283
Commissions and licensing fees - net 805 $ 2,957 3,762
Income (loss) from operations 16,629 (1,131) 2,957 18,455
Segment assets 170,478 41,736 17,281 229,495
Quarter ended March 31, 2005:
Net sales to external customers $ 56,861 $ 26,475 $ 83,336
Gross profit 15,806 11,932 27,738
Commissions and licensing fees - net 580 $ 645 1,225
Income (loss) from operations 1,046 (470) 645 1,221
Segment assets 136,881 38,986 9,767 185,634
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
- --------------------------------------------------------------------------------
The following discussion of the Company's financial condition and results of
operations should be read in conjunction with the unaudited Condensed
Consolidated Financial Statements and Notes thereto appearing elsewhere in this
quarterly report on Form 10-Q.
Statements in this "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and elsewhere in this quarterly report on Form 10-Q
as well as statements made in press releases and oral statements that may be
made by the Company or by its officers, directors or employees 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
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",
"projects" 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.
Overview:
($ in thousands, except retail sales data per square foot and earnings per share
data)
The momentum established by the Company during the second half of 2005 continued
in the first quarter of 2006. Net sales increased 30% to $108,315 in the quarter
ended March 31, 2006 from $83,336 in the comparable period of 2005, while net
commission and licensing fee income increased 207% to $3,762 from $1,225 during
the same period. Net income increased to $10,860 in the first quarter of 2006
compared to $962 for the same period of 2005. The Company's diluted earnings per
share increased to $0.74 per share for the quarter ended March 31, 2006 compared
to $0.07 per share in the comparable period of 2005.
The sales growth was driven by a very strong performance from the Company's
existing brands in addition to the contribution of the recently acquired Daniel
M. Friedman. It is also the result of the Company's continued efforts to
diversify its brand portfolio and expand its product offerings. SM New York,
which was introduced in the fourth quarter of last year, performed better than
expected. In addition, the Company introduced the Rule product line in this
quarter, which also added to the Company's sales growth.
The Company's new inventory controls and other operating initiatives implemented
last year continued to pay dividends. Gross margin for the quarter increased
significantly to 43% from 33% in the comparable period last year.
In the Retail Division, first quarter of 2006 sales decreased 4% to $25,333 from
$26,475 in the same period last year. Same store sales (sales in stores that
were in operation throughout the first quarter of 2006 and 2005) decreased 8%.
The sales decrease was due primarily to planned declines in the accessories and
men's categories as the Company repositions its offerings in those areas, as
well as a reduction in promotional sales. Store sales productivity remained high
with sales per square foot of stores opened for twelve months of $741.
The Company's annualized inventory turnover increased to 8 times in quarter
ended March 31, 2006 compared to 7 times in the comparable period of 2005,
reflecting the inventory controls mentioned above. The Company's accounts
receivable average collection days (excluding the newly acquired Daniel M.
Friedman division) improved to 56 days in the first quarter of 2006 compared to
63 days in the comparable period of 2005. As of March 31, 2006, the Company had
$79,029 in cash, cash equivalents and marketable securities, no short or
long-term debt, and total stockholders equity of $189,941. Working capital
increased to $110,840 as of March 31, 2006, compared to $101,632 on March 31,
2005.
The Company continued to prove its commitment to return capital to the
shareholders and its confidence in the Company's future by repurchasing 147,000
shares of the Company's common stock for approximately $4,800.
On April 27, 2006, the Board of Directors declared a 3-for-2 stock split of its
outstanding shares of common stock, to be effected in the form of a stock
dividend on the Company's issued and outstanding common stock. Stockholders of
record at the close of business on May 11, 2006 will receive one additional
share of Steven Madden Ltd. common stock for every two shares of common stock
12
owned on this date. The additional shares are expected to be distributed on or
about May 25, 2006. Stockholders will receive cash in lieu of any fractional
share of common stock they otherwise would have received in connection with the
dividend.
The following tables set forth information on operations for the periods
indicated:
Selected Financial Information
Three Months Ended
March 31
($ in thousands)
2006 2005
------------------ ------------------
CONSOLIDATED:
- ------------
Net sales $ 108,315 100% $ 83,336 100%
Cost of sales 62,032 57 55,984 67
Gross profit 46,283 43 27,352 33
Other operating income - net of expenses 3,762 3 1,225 1
Operating expenses 31,590 29 27,356 33
Income from operations 18,455 17 1,221 1
Interest and other income, net 271 0 438 1
Income before income taxes 18,726 17 1,659 2
Net income 10,860 10 962 1
By Segment:
WHOLESALE DIVISION:
- ------------------
Net sales $ 82,982 100% $ 56,861 100%
Cost of sales 48,857 59 41,441 73
Gross profit 34,125 41 15,420 27
Other operating income 805 1 580 1
Operating expenses 18,301 22 14,954 26
Income from operations 16,629 20 1,046 2
RETAIL DIVISION:
- ---------------
Steven Madden Retail Inc.:
- -------------------------
Net sales $ 25,333 100% $ 26,475 100%
Cost of sales 13,175 52 14,543 55
Gross profit 12,158 48 11,932 45
Operating expenses 13,289 52 12,402 47
Loss from operations (1,131) (4) (470) (2)
Number of stores 99 92
ADESSO MADDEN INC.:
- ------------------
(FIRST COST)
Other commission income- net of expenses $ 2,957 100% $ 645 100%
13
RESULTS OF OPERATIONS
($ in thousands)
Three Months Ended March 31, 2006 vs. Three Months Ended March 31, 2005
Consolidated:
- ------------
Total net sales for the three-month period ended March 31, 2006 increased by 30%
to $108,315 from $83,336 for the comparable period of 2005. This increase
resulted from higher sales contributed by the Wholesale Division including the
February 7, 2006 acquisition of Daniel M. Friedman, which was partially offset
by a sales decline in the Retail Division.
Gross profit as a percentage of sales increased to 43% in 2006 from 33% in 2005.
Gross profit as a percentage of sales in the Wholesale Division increased to 41%
in 2006 from 27% in 2005, while the gross profit as a percentage of sales in the
Retail Division increased to 48% in 2006 from 45% in 2005.
Operating expenses increased to $31,590 in 2006 from $27,356 in 2005. The
increase in dollars is primarily due to an increase in direct selling expenses
reflective of the 30% growth in sales and the incremental payroll and occupancy
costs associated with the operation of an additional seven retail stores (net)
and the incremental costs associated with the new brands, SMNY and Rule and
recently acquired Daniel M. Friedman. As a percentage of sales, operating
expenses decreased to 29% in 2006 from 33% in 2005, reflecting the Company's
ability to control costs and leverage its expense structure against the increase
in sales.
Income from operations was $18,455 in 2006 compared to $1,221 in 2005. Net
income was $10,860 in 2006 compared to $962 in 2005. This increase in income was
primarily due to the increase in sales, the higher gross profit and the
substantial increase in commission income.
Wholesale Division:
- -------------------
Sales from the Wholesale Division accounted for $82,982 or 77%, and $56,861 or
68%, of total sales in 2006 and 2005, respectively. This increase resulted from
the incremental sales of the recently acquired Daniel M. Friedman and higher
sales from Candie's, Madden Womens and Madden Mens as well as the contribution
of the new brands, SMNY and Rule. Gross profit as a percentage of sales in the
Wholesale Division increased to 41% in 2006 from 27% in 2005, primarily due to a
significant decrease in off-price sales and improved efficiencies in inventory
management resulting in lower inventory markdowns and allowances. Operating
expenses increased to $18,301 in 2006 from $14,954 in 2005. This increase is
primarily due to an increase in direct selling expenses reflective of the 46%
growth in sales and the incremental costs associated with the launch of the new
brands SMNY and Rule and Daniel M. Friedman. As a percentage of sales, operating
expenses decreased to 22% in 2006 from 26% in 2005, reflecting the Company's
ability to control costs and leverage the Company's expense structure against
top line growth. Income from operations for the Wholesale Division increased to
$16,629 in 2006 compared to $1,046 in 2005.
Retail Division:
- ----------------
Sales from the Retail Division accounted for $25,333 or 23% and $26,475 or 32%
of total sales in 2006 and 2005, respectively. As of March 31, 2006, there were
99 retail stores compared to 92 retail stores as of March 31, 2005. Comparable
store sales (sales of those stores that were open for the entire first quarters
of 2006 and 2005) for the three-month period ended March 31, 2006 decreased 8%
over the same period of 2005. This decrease was due primarily to planned
declines in the accessories and men's categories as management repositions the
Company's offerings in those areas. Gross profit as a percentage of sales
increased to 48% in 2006 from 45% in 2005, primarily due to a significant
decrease in inventory markdowns and other promotional activities. Operating
expenses for the Retail Division were $13,289 in 2006 and $12,402 in 2005. 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 the current period. Loss from operations for the Retail Division was
$1,131 in 2006 compared to $470 in 2005.
14
Adesso-Madden Division:
- -----------------------
Adesso-Madden, Inc. generated net commission income of $2,957 in 2006, compared
to $645 in 2005. The increase was the result of growth in the private label
business and in addition, the Company has leveraged the strength of its Steve
Madden brands and product designs resulting in a partial recovery of its design,
product and development costs from its suppliers.
LIQUIDITY AND CAPITAL RESOURCES
($ in thousands)
The Company had working capital of $110,840 at March 31, 2006 compared to
$114,066 at December 31, 2005. The decrease was primarily due to the Company's
acquisition of Daniel M. Friedman for $15,148 on February 7, 2006 and to the
repurchase of 147,000 shares of the Company's common stock at a total cost of
$4,807.
Under the terms of a factoring agreement with GMAC, the Company is eligible to
draw down 80% of its invoiced receivables at an interest rate of two and
one-half percent (2.5%) over the 30 day 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. As of March 31, 2006, the Company
had not used any portion of the credit line.
As of March 31, 2006, the Company had invested $54,908 in marketable securities
consisting of corporate bonds, U.S. Treasury notes, government asset-backed
securities, certificates of deposits and equities.
The Company believes that based upon its current financial position and
available cash and marketable securities, it will meet all of its financial
commitments and operating needs for at least the next twelve months.
OPERATING ACTIVITIES
($ in thousands)
During the three-month period ended March 31, 2006, net cash used in operating
activities was $9,954. Sources of cash were provided primarily by the net income
of $10,860. The primary uses of cash were an increase in factored receivables of
$23,907 caused by a substantial increase in sales in the first quarter of 2006,
as well as an increase in non-factored receivables of $1,007 and an increase in
inventories of $2,284.
CONTRACTUAL OBLIGATIONS
The Company's contractual obligations as of March 31, 2006 were as follows:
Payment due by period (in thousands)
Remainder of 2011 and
Contractual Obligations Total 2006 2007-2008 2009-2010 after
- ---------------------------- ------------ ------------ ------------ ------------ ------------
Operating lease
obligations $ 88,877 $ 9,550 $ 25,802 $ 21,182 $ 32,343
Purchase obligations 63,097 63,097 0 0 0
Other long-term liabilities
(future minimum
royalty payments) 2,934 2,299 635 0 0
------------ ------------ ------------ ------------ ------------
Total $ 154,908 $ 74,946 $ 26,437 $ 21,182 $ 32,343
============ ============ ============ ============ ============
At March 31, 2006, the Company had un-negotiated open letters of credit for the
purchase of imported merchandise of approximately $2,842.
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
15
provides for annual bonuses based on EBITDA, on revenue of any new business, and
royalty income over $2 million, an annual option grant at exercise prices equal
to the market price on the date of grant and a non-accountable expense
allowance.
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"). The acquisition was completed for
consideration of $18,500 including transaction costs subject to adjustment,
including 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 $2,149 in 2006, $1,643 in
2007, $1,192 in 2008 and $480 in 2009. In addition, such employment agreements
provide for incentive compensation based on various performance criteria as well
as other benefits. The Chief Operating Officer and Executive V.P. of Wholesale
Sales of the Company are entitled to deferred compensation calculated as a
percentage of their base salary.
Significant portions of the Company's products are produced at overseas
locations, the majority of which are located in China as well as Brazil, Italy
and Spain. The Company has not entered into any long-term manufacturing or
supply contracts with any of these foreign companies. The Company believes that
a sufficient number of alternative sources exist outside of the United States
for the manufacture of its products. In addition, the Company currently makes
approximately 97% of its purchases in U.S. dollars.
INVESTING ACTIVITIES
($ in thousands)
During the three-month period ended March 31, 2006, the Company invested $73 in
marketable securities and received $11,232 from the maturities and sales of
securities. Also, the Company recently invested $15,148 in order to acquire
Daniel M. Friedman. Additionally, the Company made capital expenditures of
$1,508, principally for leasehold improvements for one new store and remodeling
of three existing stores, as well as for additional office space and upgrades to
its computer systems.
FINANCING ACTIVITIES
($ in thousands)
During the three-month period ended March 31, 2006, the Company repurchased
147,000 shares of the Company's common stock at a total cost of $4,807. The
Company received $1,537 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 unaudited condensed consolidated
financial statements which have been prepared in accordance with accounting
principles generally accepted 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 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: accounts receivable and inventory reserves, valuation of intangible
assets, and litigation reserves.
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
16
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 has 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 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 operation
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
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, 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 are included in the cost of sales line item on the
Consolidated Statement of Operations. These include purchase commissions, letter
of credit fees, brokerage fees, material and labor and related items, sample
expenses, custom duty, inbound freight, royalty payments, 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 all shipping costs to customers as operating expenses. The
Company's gross 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 3. 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 LIBOR. An analysis of the
17
Company's credit agreement with GMAC can be found in Liquidity and Capital
Resources section under Item 2 of this document. As of March 31, 2006 and 2005,
there were no direct borrowings outstanding under the credit agreement.
As of March 31, 2006, the Company had investments in marketable securities
valued at $54,908, which consist primarily of corporate 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. Should there be a
significant increase in interest rates, the value of these investments would be
negatively affected unless they were held to maturity. In addition, any further
decline in interest rates would reduce the Company's interest income.
ITEM 4. CONTROLS AND PROCEDURES
As required by Rule 13a-15(b) of the Securities Exchange Act of 1934 (the
"Exchange Act"), the Company's management, including the Company's Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of its disclosure controls and procedures as of the end of the fiscal quarter
covered by this quarterly 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 quarter covered by this quarterly
report. As required by Rule 13a-15(d) under the Exchange Act, the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, has evaluated the Company's internal controls over financial reporting
to determine whether any changes occurred during the quarter covered by this
quarterly report that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.
Based on that evaluation, there has been no such change during the quarter
covered by this report.
Part II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Certain legal proceedings in which the Company is involved are discussed in Note
K and Part I, Item 3 to the consolidated financial statements included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2005. The
following discussion is limited to recent developments concerning certain of the
Company's legal proceedings and should be read in conjunction with the Company's
earlier SEC Reports. Unless otherwise indicated, all proceedings discussed in
those earlier Reports remain outstanding.
On July 28, 2005, adidas America, Inc., and adidas-Salomon AG (together,
"adidas") filed a Demand for Arbitration (the "Demand") against Steve Madden,
Ltd., and Steve 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 (the Finnley, the Troyy, and the Soccet) that
adidas contends violate the settlement agreement and infringe adidas'
"three-stripe" mark. The parties are actively engaged in settlement discussions
and have reached a tentative settlement. Settlement drafts have been exchanged
but are still being negotiated. The settlement will not have a material affect
on the Company's financial position.
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 is non-dutiable), should be treated as "selling agents
commissions" and hence is 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 plus interest and penalties. Based on management's
estimation at this point, a reserve of $2,051 covering under-payments, interest
and penalties, has been recorded as of the March 31, 2006 Condensed Consolidated
Financial Statements. Such reserve may in the future be modified to reflect the
status of this matter.
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
18
and Mr. Friedman assert 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 allege 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 seek damages
on their various claims in differing amounts, ranging from $500 to $5,000 and
they also seek a declaration that they are 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 is granted in its entirety, the individual defendants
would be dismissed from the suit and Mr. Friedman's remaining claims would
consist 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 April 13th, 2006 Mr. Friedman also filed his opposition to the motion
to dismiss previously filed by the Company and the individual defendants. The
Company and the individual defendants responded to Mr. Friedman's opposition to
the motion to dismiss on May 3, 2006 and Mr. Friedman has until May 11, 2006 to
respond. Based on management's estimation at this point, a reserve of $364 has
been recorded as of the March 31, 2006 Condensed Consolidated Financial
Statements. 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 1A RISK FACTORS
The risk factors included in our Annual Report on Form 10-K for the fiscal year
ended December 31, 2005 have not materially changed.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS:
The following table provides information as of March 31, 2006 with respect to
the shares of common stock repurchased by the Company during the first quarter
of fiscal 2006:
--------------------------------------------------------------------------------------
Period Total Average Total Number of Maximum Dollar Amount
Number of Price Paid Shares Purchased as of Shares that May Yet Be
Shares per Share Part of Publicly Purchased Under the Plans
Purchased Announced Plans or or Programs (1)
Programs (1)
--------------------------------------------------------------------------------------
1/1/06 - 0 $ 0 0 $23,751,178
1/31/06
--------------------------------------------------------------------------------------
2/1/06 - 90,500 $32.02 90,500 $20,853,587
2/28/06
--------------------------------------------------------------------------------------
3/1/06 - 56,900 $33.56 56,900 $18,943,810
3/31/06
--------------------------------------------------------------------------------------
Total 147,400 $32.61 147,400 $18,943,810
--------------------------------------------------------------------------------------
19
(1) Pursuant to an agreement reached on February 2, 2005, with a then 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 the board of directors shall determine in its sole discretion.
ITEM 6. EXHIBITS
10.1 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).
10.2 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).
10.3 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).
10.4 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).
31.1 Certification of 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.
31.2 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.
32.1 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.
20
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report on Form 10-Q to be signed on its behalf
by the undersigned thereunto duly authorized.
DATE: May 10, 2006
STEVEN MADDEN, LTD.
/s/ JAMIESON A. KARSON
------------------------------------
Jamieson A. Karson
Chairman and Chief Executive Officer
/s/ ARVIND DHARIA
------------------------------------
Arvind Dharia
Chief Financial Officer
21
Exhibit No Description
---------- -----------
10.1 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).
10.2 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).
10.3 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).
10.4 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).
31.1 Certification of 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.
31.2 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.
32.1 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.
22
Exhibit 31.1
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 A. Karson, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Steven
Madden, Ltd.;
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other
financial information included in this 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 report;
4. The registrant's other certifying officer(s) and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) and internal controls over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be
designed under our supervision, 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 report is being prepared;
(b) Designed such internal control over financial reporting,
or caused such internal control over financial reporting
to be designed under our supervision, 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;
(c) Evaluated the effectiveness of the registrant's
disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation;
and
(d) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the
registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's
internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have
disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant's auditors
and the audit committee of the registrant's board of directors
(or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in
the design or operation of internal control over
financial reporting which are reasonably likely to
adversely affect the registrant's ability to record,
process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal control over financial
reporting.
/s/ JAMIESON A. KARSON
- ------------------------------------
Jamieson A. Karson
Chairman and Chief Executive Officer
May 10, 2006
Exhibit 31.2
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 Quarterly Report on Form 10-Q of Steven
Madden, Ltd.;
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other
financial information included in this 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 report;
4. The registrant's other certifying officer(s) and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) and internal controls over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be
designed under our supervision, 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 report is being prepared;
(b) Designed such internal control over financial reporting,
or caused such internal control over financial reporting
to be designed under our supervision, 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;
(c) Evaluated the effectiveness of the registrant's
disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation;
and
(d) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the
registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's
internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have
disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant's auditors
and the audit committee of the registrant's board of directors
(or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in
the design or operation of internal control over
financial reporting which are reasonably likely to
adversely affect the registrant's ability to record,
process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal control over financial
reporting.
/s/ ARVIND DHARIA
- -----------------------
Arvind Dharia
Chief Financial Officer
May 10, 2006
Exhibit 32.1
STEVEN MADDEN, LTD.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Steven Madden, Ltd. (the "Company")
on Form 10-Q for the quarter ended March 31, 2006, as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), I, Jamieson A.
Karson, Chairman and Chief Executive Officer of the Company, certify, pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that to my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
/s/ JAMIESON A. KARSON
- ------------------------------------
Jamieson A. Karson
Chairman and Chief Executive Officer
May 10, 2006
Exhibit 32.2
STEVEN MADDEN, LTD.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Steven Madden, Ltd. (the "Company")
on Form 10-Q for the quarter ended March 31, 2006, as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), I, Arvind Dharia,
Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that
to my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
/s/ ARVIND DHARIA
- -----------------------
Arvind Dharia
Chief Financial Officer
May 10, 2006