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.
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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.
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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
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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.
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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).
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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
Exhibit 21.01
SUBSIDIARIES
NAME OF THE COMPANY STATE OF INCORPORATION
Daniel M. Friedman & Associates, Inc. New York
Diva Acquisition Corp. Delaware
Adesso-Madden, Inc. New York
Madden Direct, Inc. Delaware
Steven Madden Construction Corp. Delaware
Steven Madden Retail, Inc. Delaware
Shoe Biz, Inc. Delaware
Stevies, Inc. Delaware
Unionbay Men's Footwear, Inc. Delaware
Exhibit 23.01
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration
Statements of Steven Madden, Ltd. on Form S-8 (Nos. 333-117667, 333-117666,
333-106746, 333-98067, 333-68712, 333-40924, 333-86903, 333-59995, 333-39335,
333-16381, 333-05773 and 333-138584), Form S-3 (No. 333-91127) and Form S-3/A
(Nos. 333-46441 and 333-59295), of our report dated March 7, 2007, with respect
to our audits of the consolidated financial statements as of December 31, 2006,
and 2005 and for the years in the three-year period ended December 31, 2006, and
our report dated March 7, 2007 on our audit of Management's Annual Report on
Internal Control over Financial Reporting and the Effectiveness of Internal
Control over Financial Reporting of Steven Madden, Ltd. and subsidiaries, which
are included in the Annual Report on Form 10-K for the year ended December 31,
2006.
We also consent to the reference to our firm in the Registration Statements on
Form S-3 and Form S-3/A under the caption "Experts".
Eisner LLP
New York, New York
March 7, 2007
Exhibit 31.01
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 Annual Report on Form 10-K 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
March 9, 2007
Exhibit 31.02
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 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
March 9, 2007
Exhibit 32.01
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 Annual Report of Steven Madden, Ltd. (the "Company") on
Form 10-K for the year ended December 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
March 9, 2007
Exhibit 32.02
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 Annual Report of Steven Madden, Ltd. (the "Company") on
Form 10-K for the year ended December 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
March 9, 2007