UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2006
--------------------------------------------------------------------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from __________________ to ___________________
Commission File Number 0-23702
-------
STEVEN MADDEN, LTD.
--------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 13-3588231
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
52-16 Barnett Avenue, Long Island City, New York 11104
--------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (718) 446-1800
--------------------------------------------------------------------------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of August 3, 2006, the latest practicable date, there were 20,710,076 shares
of common stock, $.0001 par value, outstanding.
STEVEN MADDEN, LTD.
FORM 10-Q
QUARTERLY REPORT
June 30, 2006
TABLE OF CONTENTS
PART I- FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets........................... 1
Condensed Consolidated Statements of Operations................. 2
Condensed Consolidated Statements of Cash Flows................. 3
Notes to Unaudited Condensed Consolidated Financial Statements.. 4
ITEM 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations................ 13
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk...... 21
ITEM 4. Controls and Procedures......................................... 21
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings............................................... 22
ITEM 1A. Risk Factors.................................................... 22
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds..... 23
ITEM 4. Submission of Matters to a Vote of Security Holders............. 23
ITEM 6. Exhibits........................................................ 24
Signatures...................................................... 25
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(in thousands)
June 30, December 31, June 30,
2006 2005 2005
------------ ------------ ------------
(unaudited) (unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 34,463 $ 42,842 $ 38,072
Accounts receivable, net of allowances of $2,430, $813 and $632 7,171 3,294 3,084
Due from factor, net of allowances of $10,731, $7,587 and $4,386 50,997 31,785 46,684
Inventories 43,075 28,412 31,051
Marketable securities - available for sale 32,538 24,092 12,652
Prepaid expenses and other current assets 5,598 2,435 1,626
Prepaid taxes 3,565 2,512 --
Deferred taxes 5,550 5,600 2,485
------------ ------------ ------------
Total current assets 182,957 140,972 135,654
Property and equipment, net 21,290 20,898 20,802
Deferred taxes 5,526 5,568 5,915
Deposits and other 1,086 586 434
Marketable securities - available for sale 23,628 42,157 33,078
Goodwill - net 7,007 1,547 1,547
Intangibles - net 7,829 -- --
------------ ------------ ------------
Total Assets $ 249,323 $ 211,728 $ 197,430
============ ============ ============
LIABILITIES
Current liabilities:
Accounts payable $ 24,334 15,579 $ 16,332
Accrued expenses 20,737 11,327 12,281
------------ ------------ ------------
Total current liabilities 45,071 26,906 28,613
Deferred rent 3,438 2,757 2,421
------------ ------------ ------------
48,509 29,663 31,034
------------ ------------ ------------
Commitments, contingencies and other
STOCKHOLDERS' EQUITY
Preferred stock - $.0001 par value, 5,000 shares authorized;
none issued; Series A Junior Participating preferred stock -
$.0001 par value, 60 shares authorized; none issued
Common stock - $.0001 par value, 90,000 shares authorized, 24,410,
24,225 and 23,165 shares issued, 20,710, 20,874 and
19,814 outstanding 2 2 2
Additional paid-in capital 114,599 99,950 83,364
Retained earnings 132,394 108,838 109,699
Unearned compensation (11,318) -- (52)
Other comprehensive gain:
Unrealized gain (loss) on marketable securities (1,173) (1,299) (1,191)
Treasury stock - 3,700, 3,351 and 3,351 shares at cost (33,690) (25,426) (25,426)
------------ ------------ ------------
200,814 182,065 166,396
------------ ------------ ------------
Total Liabilities and Stockholders' Equity $ 249,323 $ 211,728 $ 197,430
============ ============ ============
See accompanying notes to condensed consolidated financial
statements - unaudited 1
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(unaudited)
(in thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
2006 2005 2006 2005
------------ ------------ ------------ ------------
Net sales:
Wholesale $ 96,194 $ 68,331 $ 179,176 $ 125,192
Retail 33,306 32,627 58,639 59,102
------------ ------------ ------------ ------------
129,500 100,958 237,815 184,294
------------ ------------ ------------ ------------
Cost of sales:
Wholesale 59,637 46,978 108,494 88,419
Retail 15,308 16,370 28,483 30,913
------------ ------------ ------------ ------------
74,945 63,348 136,977 119,332
------------ ------------ ------------ ------------
Gross profit:
Wholesale 36,557 21,353 70,682 36,773
Retail 17,998 16,257 30,156 28,189
------------ ------------ ------------ ------------
54,555 37,610 100,838 64,962
Commission and licensing fee income - net 2,825 1,799 6,587 3,024
Operating expenses (36,065) (30,233) (67,655) (57,589)
Impairment of goodwill -- (519) -- (519)
------------ ------------ ------------ ------------
Income from operations 21,315 8,657 39,770 9,878
Interest and other income, net 642 456 913 894
------------ ------------ ------------ ------------
Income before provision for income taxes 21,957 9,113 40,683 10,772
Provision for income taxes 9,261 3,827 17,127 4,524
------------ ------------ ------------ ------------
Net income $ 12,696 $ 5,286 $ 23,556 $ 6,248
============ ============ ============ ============
Basic income per share $ 0.61 $ 0.27 $ 1.13 $ 0.32
============ ============ ============ ============
Diluted income per share $ 0.58 $ 0.26 $ 1.07 $ 0.31
============ ============ ============ ============
Basic weighted average common shares outstanding 20,794 19,613 20,835 19,731
Effect of dilutive securities - options/warrants/restricted stock 1,236 601 1,139 729
------------ ------------ ------------ ------------
Diluted weighted average common shares outstanding 22,030 20,214 21,974 20,460
============ ============ ============ ============
See accompanying notes to condensed consolidated financial
statements - unaudited 2
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
Six Months Ended
June 30,
------------------------
2006 2005
---------- ----------
Cash flows from operating activities:
Net income $ 23,556 $ 6,248
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization 3,182 2,604
Loss on disposal of fixed assets 1,743 88
Impairment of goodwill -- 519
Non-cash compensation 708 651
Provision for bad debts 4,761 2,103
Deferred rent expense 171 333
Realized loss on marketable securities 628 137
Changes in:
Accounts receivable (3,971) 142
Due from factor (20,796) (14,980)
Inventories (8,780) 3,333
Prepaid expenses, prepaid taxes, deposits and other assets (2,915) 1,917
Accounts payable and other accrued expenses 9,187 8,936
---------- ----------
Net cash provided by operating activities 7,474 12,031
---------- ----------
Cash flows from investing activities:
Purchase of property and equipment (4,448) (2,779)
Purchase of marketable securities (2,858) (839)
Sale/redemption of marketable securities 12,530 3,807
Acquisition, net of cash acquired (15,436) --
---------- ----------
Net cash provided by (used in) investing activities (10,212) 189
---------- ----------
Cash flows from financing activities:
Proceeds from options exercised 1,882 4,501
Tax benefit from exercise of options 741
Cash in lieu of restricted stock -- (1,767)
Common stock purchased for treasury (8,264) (7,735)
---------- ----------
Net cash used in financing activities (5,641) (5,001)
---------- ----------
Net increase (decrease) in cash and cash equivalents (8,379) 7,219
Cash and cash equivalents - beginning of period 42,842 30,853
---------- ----------
Cash and cash equivalents - end of period $ 34,463 $ 38,072
========== ==========
See accompanying notes to condensed consolidated financial
statements - unaudited 3
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements - Unaudited
June 30, 2006
($ in thousands except per share data)
NOTE A - BASIS OF REPORTING
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America ("GAAP") for interim financial information and pursuant
to the rules and regulations of the Securities and Exchange Commission (the
"SEC"). Accordingly, they do not include all of the information and footnotes
required by GAAP for complete financial statements. In the opinion of
management, the accompanying statements include all adjustments (consisting only
of normal recurring items) that are considered necessary for a fair presentation
of the financial position of Steven Madden, Ltd. and subsidiaries (the
"Company") and the results of its operations and cash flows for the periods
presented. The results of its operations for the three- and six-month periods
ended June 30, 2006 are not necessarily indicative of the operating results for
the full year. It is suggested that these financial statements be read in
conjunction with the financial statements and related disclosures for the year
ended December 31, 2005 included in the Annual Report of Steven Madden, Ltd. on
Form 10-K filed with the SEC on March 14, 2006.
Stock Split
On April 27, 2006, the Board of Directors declared a 3-for-2 stock split of its
outstanding shares of common stock, to be effected in the form of a stock
dividend 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.
NOTE B - USE OF ESTIMATES
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
Allowances for bad debts, returns and customer chargebacks: The Company provides
reserves on trade accounts receivables for future customer chargebacks and
markdown allowances, discounts, returns and other miscellaneous compliance
related deductions that relate to the current period sales. As a result of a
reevaluation of the retail environment, the Company has revised its method for
evaluating its estimate of the allowance for customer chargebacks beginning in
the fourth quarter of 2005. In the past, the Company looked at historical
dilution levels of customers to determine the allowance amount. Under the new
method of estimation, the Company evaluates anticipated chargebacks by reviewing
several performance indicators of its major customers. These performance
indicators, which include retailers inventory levels, sell through rates and
gross margin levels, are analyzed by key account executives to estimate the
amount of the anticipated customer allowance.
NOTE C - MARKETABLE SECURITIES
Marketable securities consist primarily of corporate bonds, U.S. treasury notes
and government asset-backed securities with maturities greater than three months
and up to five years at the time of purchase, as well as marketable equity
securities. These securities, which are classified as available-for-sale, are
carried at fair value, with unrealized gains and losses, net of any tax effect,
reported in shareholders' equity as accumulated other comprehensive income
(loss). Amortization of premiums and discounts are included in interest income
and are not material. The values of these securities may fluctuate as a result
of changes in market interest rates and credit risk.
NOTE D - INVENTORIES
Inventories, which consist of finished goods on hand and in transit, are stated
at the lower of cost (first-in, first-out method) or market.
4
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements - Unaudited
June 30, 2006
($ in thousands except per share data)
NOTE E - REVENUE RECOGNITION
The Company recognizes revenue on wholesale sales when products are shipped
pursuant to our standard terms which are freight on board (FOB) warehouse or
when products are delivered to the consolidators as per the terms of the
customers purchase order. Sales reductions for anticipated discounts, allowances
and other deductions are recognized when sales are recorded. Customers retain
the right to replacement of the product for poor quality or improper or short
shipments, which have historically been immaterial. Retail sales are recognized
when the payment is received from customers and are recorded net of returns. The
Company earns commission income 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 from its suppliers.
Commission revenue and product and development cost recoveries are recognized as
earned when title of the product transfers from the manufacturer to the customer
and is reported on a net basis after deducting operating expenses.
The Company licenses its trademarks for use in connection with the
manufacturing, marketing and sale of sunglasses, eyewear, outerwear, watches,
children's apparel and hosiery products. Each license agreement requires the
licensee to pay to the Company a royalty and 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.
NOTE F - SALES DEDUCTIONS
The Company supports retailers' initiatives to maximize the sales of its
products on the retail floor by subsidizing the co-op advertising programs of
such retailers, providing them with inventory markdown allowances and
participating in various other marketing initiatives of its major customers.
Such expenses are reflected in the Condensed Consolidated Statement of
Operations as deductions to sales. For the three- and six-month periods ended
June 30, 2006, the total deduction to sales for these expenses was $7,338 and
$15,304, respectively, as compared to $9,223 and $17,739 for the comparable
periods in 2005.
NOTE G - COST OF SALES
All costs incurred to bring finished products to the Company's distribution
center are included in the cost of sales line item on the Condensed Consolidated
Statement of Operations. These include purchase commissions, letter of credit
fees, brokerage fees, material and labor and related items, sample expenses,
custom duty, inbound freight, royalty payments 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 Condensed Consolidated Statement of Operations. The Company's gross
margins may not be comparable to other companies in the industry because some
companies may include warehouse and distribution as a component of cost of
sales, while other companies report on the same basis as the Company and include
them in operating expenses.
NOTE H - RECLASSIFICATION
The Company has reclassified royalty payments on its Condensed Consolidated
Statement of Operations from operating expenses to cost of sales. This
reclassification resulted in an increase in the wholesale cost of sales for the
three- and six-months ended June 30, 2006 of $360 and $1,239 respectively, and
$900 and $1,866 for the comparable periods in 2005, 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,
$10,000 of these auction rate municipal bonds were classified as cash and cash
equivalents on the Company's Consolidated Balance Sheet.
5
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements - Unaudited
June 30, 2006
($ in thousands except per share data)
NOTE I - NET INCOME PER SHARE OF COMMON STOCK
Basic income per share is based on the weighted average number of common shares
outstanding during the period. Diluted income per share reflects the potential
dilution assuming common shares were issued upon the exercise of outstanding
options and the proceeds thereof were used to purchase outstanding common
shares. Diluted income per share also reflects the unvested and unissued shares
granted to employees that have a dilutive effect. For both the three- and
six-month periods ended June 30, 2006, no stock options have been excluded from
the calculation because inclusion of such shares would be anti-dilutive, as
compared to approximately 1,922,000 and 1,863,000 shares excluded respectively
for the three- and six-months ended June 30, 2005.
NOTE J - 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 its shareholders. In
addition, the Company has three stock option plans entitled The 1996 Stock Plan,
The 1997 Stock Plan and The 1999 Stock Plan. The option 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. As of June 30, 2006, 6,893,000 options have been
authorized under the three stock option plans and 6,885,000 have been granted,
net of expirations and cancellations.
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 three- and six-month periods ended June 30, 2006, total equity-based
compensation of $648 and $708, respectively, was included in operating expense.
As of June 30, 2006, unrecognized equity-based compensation was $11,318, which
is expected to be recognized over a weighted average period of 4 years.
SFAS No. 123R requires the Company to apply an estimated forfeiture rate in
calculating the period expense, 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 $741 during the six months ended June 30, 2006.
6
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements - Unaudited
June 30, 2006
($ in thousands except per share data)
NOTE J - STOCK-BASED COMPENSATION (CONTINUED)
Prior to adopting SFAS No. 123R, the Company's equity-based compensation expense
was accounted for under the provisions of APB Opinion No. 25, "Accounting for
Stock Issued to Employees", as permitted by SFAS No. 123. The following table
illustrates the effect on net income and earnings per share if the Company had
applied the fair value recognition provision of SFAS No. 123R to equity-based
employee compensation for the three- and six- month periods ended June 30, 2005:
Three Months Six Months
Ended June 30, Ended June 30,
2005 2005
-------------- --------------
Reported net income $ 5,286 $ 6,248
Stock-based employee compensation included in
reported net income, net of tax 83 165
Stock-based employee compensation determined
under the fair value based method, net of tax (499) (1,038)
-------------- --------------
Pro forma net income $ 4,870 $ 5,375
============== ==============
Basic income per share:
As reported $ 0.27 $ 0.32
Pro forma $ 0.26 $ 0.31
Diluted income per share:
As reported $ 0.25 $ 0.27
Pro forma $ 0.24 $ 0.26
Stock Options
During the three- and six-months ended June 30, 2006, there were 27,500 and
155,000 options exercised, respectively, with a total intrinsic value of $585
and $1,764 for the corresponding periods. During the three- and six-months ended
June 30, 2006, 15,000 and 30,000 options vested, respectively, all of which had
a weighted average exercise price of $11.84. As of June 30, 2006, there were no
unvested options. There were no options granted during the six months ended June
30, 2006.
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, the Company does
not pay dividends, and thus the expected dividend rate is assumed to be zero.
The weighted average fair value of options granted in 2005 was approximately
$4.07 using the Black-Scholes option-pricing model assuming a volatility of 43%,
a risk free interest rate of 3.86%, an expected life of 3 years and no dividend
yield.
7
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements - Unaudited
June 30, 2006
($ in thousands except per share data)
NOTE J - STOCK-BASED COMPENSATION (CONTINUED)
Activity relating to stock options granted under the Company's plans and outside
the plans during the six-months ended June 30, 2006 is as follows:
Weighted
Weighted Average
Average Remaining Aggregate
Number of Exercise Contractual Intrinsic
Shares Price Term Value
------------ ------------ ------------ -----------
Outstanding at January 1 1,950,000 $ 9.79
Granted -- --
Exercised (155,000) 12.14
Cancelled/Forfeited (3,000) 8.00
------------ ------------
Outstanding at June 30 1,792,000 $ 9.58 5.5 $ 35,906
============ ============ ============ ===========
Exercisable at June 30 1,792,000 $ 9.58 5.5 $ 35,906
============ ============ ============ ===========
Restricted Stock
During the six months ended June 30, 2006, pursuant to the Company's Board of
Directors approval of the Plan in March 2006, the Company granted 394,200
restricted stock shares to employees and directors (including 165,000 granted
to the Company's Creative and Design Chief), all of which were outstanding as of
June 30, 2006. The Company determines the fair value of its restricted stock
awards based on the market price of its common stock on the date of grant. The
weighted average grant date fair value of the restricted shares was $32.02 and
the average vesting period is 4.2 years. There were no shares that vested during
the quarter ended June 30, 2006.
NOTE K - ACQUISITION
On February 7, 2006, the Company acquired all of the equity interest of
privately held Daniel M. Friedman and Associates, Inc. and D.M.F. International
(collectively, "Daniel M. Friedman"). Founded in 1995, Daniel M. Friedman is a
manufacturer and distributor of name brand fashion handbags and accessories. The
acquisition was completed for consideration of $18,742 including transaction
costs subject to adjustment, including 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 assets acquired
and liabilities assumed are based on management's estimates and assumptions, as
well as third-party independent valuations. The total preliminary purchase price
has been allocated as follows:
Current assets $ 9,772
Property, plant and equipment 289
Deposits 62
Intangible assets 8,400
Goodwill 5,460
Liabilities assumed (5,241)
-------------
Net assets acquired $ 18,742
=============
8
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements - Unaudited
June 30, 2006
($ in thousands except per share data)
NOTE K - ACQUISITION (CONTINUED)
The purchase price and related allocation are preliminary and may be revised as
a result of adjustments made to the purchase price pursuant to the earn out
provisions.
The results of operations of Daniel M. Friedman have been included in the
Company's Condensed Consolidated Statements of Operations from the date of the
acquisition. The following pro forma information presents the results of the
Company's operations as though the Daniel M. Friedman acquisition had been
completed as of the first day of the three- and six-month periods below:
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
2006 2005 2006 2005
---------- ---------- ---------- ----------
Net sales $ 129,500 $ 110,743 $ 240,500 $ 201,730
Operating income $ 21,315 $ 9,986 $ 39,949 $ 12,433
Net income $ 12,696 $ 6,023 $ 23,660 $ 7,667
Basic earnings per share $ 0.61 $ 0.31 $ 1.14 $ 0.39
Diluted earnings per share $ 0.58 $ 0.30 $ 1.08 $ 0.37
NOTE L - GOODWILL AND INTANGIBLE ASSETS
The following is a summary of goodwill and the related accumulated amortization
for the six-months ended June 30, 2006:
Accumulated Net carrying
Cost basis Amortization amount
------------ ------------ ------------
Balance at December 31, 2005 $ 2,145 $ 598 $ 1,547
Acquisition of Daniel M. Friedman 5,460 0 5,460
------------ ------------ ------------
Balance at June 30, 2006
$ 7,605 $ 598 $ 7,007
------------ ------------ ------------
The following table details identifiable intangible assets acquired on February
7, 2006 in the Daniel M. Friedman transaction as of June 30, 2006:
Accumulated Net carrying
Cost basis Amortization amount
------------ ------------ ------------
Trade name $ 200 $ 14 $ 186
Customer relationships 2,600 109 2,491
License agreements 5,600 448 5,152
------------ ------------ ------------
$ 8,400 $ 571 $ 7,829
------------ ------------ ------------
9
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements - Unaudited
June 30, 2006
($ in thousands except per share data)
NOTE L - GOODWILL AND INTANGIBLE ASSETS (CONTINUED)
The estimated future amortization expense of purchased intangibles as of June
30, 2006 is as follows:
2006 (remaining six months) $ 685
2007 1,370
2008 1,370
2009 1,267
2010 1,267
Thereafter 1,870
--------
$ 7,829
========
NOTE M - COMPREHENSIVE INCOME
Comprehensive income for the three- and six-month periods ended June 30, 2006,
after considering other comprehensive income including unrealized gain (loss) on
marketable securities of $(100) and $126, was $12,596 and $23,682, respectively.
For the comparable periods ended June 30, 2005, after considering other
comprehensive gains (losses) on marketable securities of $163 and $(167),
comprehensive income was $5,449 and $6,081, respectively.
NOTE N - 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 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
NOTE O - COMMITMENTS, CONTINGENCIES AND OTHER
[1] Legal proceedings:
(a) On July 28, 2005, adidas America, Inc., and adidas-Salomon AG
(together, "adidas") filed a Demand for Arbitration (the
"Demand") against Steve Madden, Ltd., and Steve Madden Retail,
Inc. before the American Arbitration Association. In its Demand,
adidas alleged that the parties had previously been engaged in a
lawsuit over the Company's sale of sneakers that allegedly
infringed adidas' "three stripe" mark. The parties settled that
lawsuit by entering into a settlement agreement dated August 4,
2003 that prohibited the Company from selling shoes that
contained adidas' "three-stripe" mark either with one additional
stripe or with one less stripe. Adidas alleged in the Demand that
the Company was selling three shoes that adidas contends violate
the settlement agreement and infringe adidas' "three-stripe"
mark. The parties are actively engaged in settlement discussions
and have reached a tentative settlement. Settlement drafts have
been exchanged but are still being negotiated. The settlement
will not have a material affect on the Company's financial
position.
(b) On August 10, 2005, the U.S. Customs Department ("Customs")
issued a report that asserts that certain commissions which the
Company treated as buying agents' commissions (which are
non-dutiable), should be treated as "selling agents' commissions"
and hence are dutiable. In the report, Customs estimates that the
Company had underpaid duties during the calendar years of 1998
through 2004 in the amount of $1,051 plus interest and penalties.
Based on management's estimation at this point, a reserve of
$2,047 covering under-payments, interest and penalties, has been
recorded as of March 31, 2006 in the Condensed Consolidated
Financial Statements. Such reserve may in the future be modified
to reflect the status of this matter.
10
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements - Unaudited
June 30, 2006
($ in thousands except per share data)
NOTE O - COMMITMENTS, CONTINGENCIES AND OTHER (CONTINUED)
(c) On or about January 23, 2006, the Company and Steven Madden,
Jamieson Karson, Arvind Dharia and Amelia Newton Varela were
named as defendants in a lawsuit filed by Jojeli, Inc. ("Jojeli")
and Alan Rick Friedman in the United States District Court for
the Southern District of New York. In their complaint, Jojeli and
Mr. Friedman assert claims arising from the Company's decision to
terminate Jojeli's services on or about November 28, 2005. Mr.
Friedman, Jojeli's principal, served as a senior salesperson for
the Company, and provided his services to the Company pursuant to
an April 26, 2004 written agreement. In their complaint, Jojeli
and Mr. Friedman allege eight claims against the Company and/or
three of its executives and/or one of its managers, including
breach of contract, violation of the New York Labor Law, tortuous
interference with contract, civil conspiracy, defamation, and
prima facie tort. They seek damages on their various claims of
approximately $2,700 and they also seek a declaration that they
are not bound by the restrictive covenant in the parties'
contract. On or about March 1, 2006, the individual defendants
and the Company moved to dismiss the tort claims contained in the
complaint and to strike Mr. Friedman's claim for punitive damages
in connection with his contract claims. More specifically, the
defendants moved to dismiss the claims alleging defamation,
interference with contract, prima facie tort and civil
conspiracy. If the motion is granted in its entirety, the
individual defendants would be dismissed from the suit and Mr.
Friedman's remaining claims would consist of breach of contract
and alleged violations of the New York Labor Law. On or about
April 13, 2006, Mr. Friedman filed an amended complaint in the
action. In his amended complaint, Mr. Friedman (i) dropped his
defamation claim against the Company's Executive Vice President
of Wholesale Sales, Amelia Newton Varela, (ii) dropped all
claim(s) against the Company's Chief Financial Officer, Arvind
Dharia, and (iii) supplemented certain allegations concerning the
remaining defendants in an effort to strengthen or preserve his
remaining tort claims. On 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 it 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 consist 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.
Accordingly, the parties are currently engaged in discovery. The
Company believes that this action will not have a material effect
on the Company's financial position.
(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] License Agreements:
On May 11, 2006, the Company entered into an agreement to license the Stevies
brand for the design, manufacture and distribution of a line of girls' apparel,
which will be sold exclusively through J.C. Penney. On June 21, 2006, the
Company entered into an agreement to license the Steve Madden and Steven by
Steve Madden brands for the design, manufacture and distribution of watches.
Both of these agreements require the licensees to pay the Company a royalty
based on net sales and a minimum royalty in the event that specified net sales
targets are not achieved.
11
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements - Unaudited
June 30, 2006
($ in thousands except per share data)
NOTE P - OPERATING SEGMENT INFORMATION
The Company's reportable segments are primarily based on methods used to
distribute its products. The wholesale segment, through sales to department and
specialty stores, and the retail segment, through the operation of retail stores
and the website, derive revenue from sales of branded women's, men's, girls'
and children's footwear and accessories. In addition, the wholesale segment has
a licensing program that extends the Steve Madden and Stevies brands to
accessories and ready-to-wear apparel. The first cost segment represents
activities of a subsidiary which earns commissions for serving as a buying agent
to mass-market merchandisers, shoe chains and other off-price retailers with
respect to their purchase of footwear.
Wholesale Retail First Cost Consolidated
Quarter ended, ------------ ------------ ------------ ------------
June 30, 2006:
Net sales to external customers $ 96,194 $ 33,306 $ 129,500
Gross profit 36,557 17,998 54,555
Commissions and licensing fees - net 721 $ 2,104 2,825
Income from operations 17,109 2,102 2,104 21,315
Segment assets $ 190,920 $ 42,905 $ 15,498 $ 249,323
June 30, 2005:
Net sales to external customers $ 68,331 $ 32,627 $ 100,958
Gross profit 21,353 16,257 37,610
Commissions and licensing fees - net 596 $ 1,203 1,799
Income from operations 5,971 1,483 1,203 8,657
Segment assets $ 142,436 $ 43,070 $ 11,924 $ 197,430
Wholesale Retail First Cost Consolidated
Six months ended, ------------ ------------ ------------ ------------
June 30, 2006:
Net sales to external customers $ 179,176 $ 58,639 $ 237,815
Gross profit 70,682 30,156 100,838
Commissions and licensing fees - net 1,526 $ 5,061 6,587
Income from operations 33,738 971 5,061 39,770
Segment assets $ 190,920 $ 42,905 $ 15,498 $ 249,323
June 30, 2005:
Net sales to external customers $ 125,192 $ 59,102 $ 184,294
Gross profit 36,773 28,189 64,962
Commissions and licensing fees - net 1,176 $ 1,848 3,024
Income from operations 7,017 1,013 1,848 9,878
Segment assets $ 142,436 $ 43,070 $ 11,924 $ 197,430
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
--------------------------------------------------------------------------------
The following discussion of the Company's financial condition and results of
operations should be read in conjunction with the unaudited Financial Statements
and Notes thereto appearing elsewhere in this document.
Statements in this "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and elsewhere in this document as well as statements
made in press releases and oral statements that may be made by the Company or by
officers, directors or employees of the Company acting on the Company's behalf
that are not statements of historical or current fact constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve known and
unknown risks, uncertainties and other unknown factors that could cause the
actual results of the Company to be materially different from the historical
results or from any future results expressed or implied by such forward-looking
statements. In addition to statements which explicitly describe such risks and
uncertainties, readers are urged to consider statements labeled with the terms
"believes", "belief", "expects", "intends", "anticipates" or "plans" to be
uncertain forward-looking statements. The forward-looking statements contained
herein are also subject generally to other risks and uncertainties that are
described from time to time in the Company's reports and registration statements
filed with the Securities and Exchange Commission.
Overview:
($ in thousands, except retail sales data per square foot and earnings per
share)
For the quarter ended June 30, 2006, diluted earnings per share increased 123%
to $0.58 from $0.26 for the same period in 2005. Net income increased 140% in
the second quarter of 2006 to $12,696 as compared to $5,286 for the comparable
period of 2005. These increases represent the fifth consecutive quarter that the
Company has achieved a double-digit percentage increase in both earnings per
share and net income. The Company accomplished this earnings growth by executing
its two pronged strategy of expanding and strengthening its product offerings
while improving the overall operating efficiencies of the Company.
The Company is expanding its product offerings though acquisitions, the addition
of new brands and via 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
the second quarter of 2006, which was its first full quarter under the Company's
ownership, Daniel M. Friedman contributed net sales of approximately $17,300.
The Company has recently added, or is in the process of adding several new
brands. SMNY, which began shipping product in the fourth quarter of 2005,
contributed net sales of approximately $6,500, and is now in over 2,400 doors.
Rule, a new brand marketed exclusively through J.C. Penney, had total net sales
of approximately $3,300 in the second quarter. Two other new divisions, Natural
Comfort and Jump delivered initial shipments in the second quarter of 2006.
Natural Comfort is an owned brand of fashion-forward comfort footwear. Jump,
sold under a distribution agreement, is a fashion sneaker line. On the licensing
front, the Company signed two new licensing agreements in the quarter, one for
watches under the Steve Madden and Steven by Steven Madden brands, and one for
girls' apparel marketed through J.C. Penney under the Stevies brand.
The Company, through its better product offerings and improved operating
efficiencies and controls has reduced close out sales, chargebacks and inbound
freight costs. These initiatives have resulted in a significant increase in
gross margin for the second quarter to 42% this year compared to 37% in the same
quarter last year.
In the Retail Division, same store sales (sales in stores that were in operation
throughout all of the second quarters of 2006 and 2005) increased 3%. This
growth in comparable store sales came on top of a 13.6% comparable store sales
growth achieved last year. Store sales productivity remained high with sales per
square foot of $741 in the quarter. The Company's annualized inventory turnover
increased to 7.8 times in the second quarter of 2006 compared to 7.5 in the
second quarter of 2005. The Company's accounts receivable average collection
days, excluding the newly acquired Daniel M. Friedman, improved to 57 days in
the second quarter of 2006 compared to 60 days in the second quarter of the
previous year.
13
As of June 30, 2006, the Company had $90,629 in cash, cash equivalents and
marketable securities, no short or long-term debt, and total stockholders equity
of $200,814. Working capital increased to $137,886 as of June 30, 2006 compared
to $107,041 as of June 30, 2005. The Company repurchased 127,900 shares of
common stock this quarter at a cost of approximately $3,500, reflecting
management's continued confidence in the Company's long-term prospects and its
commitment to enhance shareholder value.
The following tables set forth information on operations for the periods
indicated:
Selected Financial Information
Six Months Ended
June 30
($ in thousands)
CONSOLIDATED: 2006 2005
------------ -------------------- --------------------
Net sales $ 237,815 100% $ 184,294 100%
Cost of sales 136,977 58 119,332 65
Gross profit 100,838 42 64,962 35
Other operating income - net of expenses 6,587 3 3,024 2
Operating expenses 67,655 28 57,589 31
Impairment of goodwill -- -- 519 0
Income from operations 39,770 17 9,878 6
Interest and other income, net 913 0 894 0
Income before income taxes 40,683 17 10,772 6
Net income 23,556 10 6,248 3
By Segment:
WHOLESALE DIVISION:
------------------
Net sales $ 179,176 100% $ 125,192 100%
Cost of sales 108,494 61 88,419 71
Gross profit 70,682 39 36,773 29
Other operating income 1,526 1 1,176 1
Operating expenses 38,470 21 30,932 25
Income from operations 33,738 19 7,017 5
RETAIL DIVISION:
---------------
Net sales $ 58,639 100% $ 59,102 100%
Cost of sales 28,483 49 30,913 52
Gross profit 30,156 51 28,189 48
Operating expenses 29,185 50 26,657 45
Impairment of goodwill -- -- 519 1
Income from operations 971 1 1,013 2
Number of stores 95 95
FIRST COST DIVISION:
-------------------
Other commission income- net of expenses $ 5,061 100% $ 1,848 100%
14
Selected Financial Information
Three Months Ended
June 30
($ in thousands)
CONSOLIDATED: 2006 2005
------------ -------------------- --------------------
Net sales $ 129,500 100% $ 100,958 100%
Cost of sales 74,945 58 63,348 63
Gross profit 54,555 42 37,610 37
Other operating income - net of expenses 2,825 2 1,799 2
Operating expenses 36,065 28 30,233 30
Impairment of goodwill -- -- 519 0
Income from operations 21,315 16 8,657 9
Interest and other income, net 642 1 456 0
Income before income taxes 21,957 17 9,113 9
Net income 12,696 10 5,286 5
By Segment:
WHOLESALE DIVISION:
------------------
Net sales $ 96,194 100% $ 68,331 100%
Cost of sales 59,637 62 46,978 69
Gross profit 36,557 38 21,353 31
Other operating income 721 1 596 1
Operating expenses 20,169 21 15,978 23
Income from operations 17,109 18 5,971 9
RETAIL DIVISION:
---------------
Net sales $ 33,306 100% $ 32,627 100%
Cost of sales 15,308 46 16,370 50
Gross profit 17,998 54 16,257 50
Operating expenses 15,896 48 14,255 44
Impairment of goodwill -- -- 519 1
Income from operations 2,102 6 1,483 5
Number of stores 95 95
FIRST COST DIVISION:
-------------------
Other commission income- net of expenses $ 2,104 100% $ 1,203 100%
15
RESULTS OF OPERATIONS
($ in thousands)
Six Months Ended June 30, 2006 vs. Six Months Ended June 30, 2005
Consolidated:
------------
Total net sales for the six-month period ended June 30, 2006 increased by 29% to
$237,815 from $184,294 for the comparable period of 2005. This increase resulted
from significantly higher sales contributed by the Wholesale Division including
Daniel M. Friedman from the acquisition date.
Gross profit as a percentage of sales increased to 42% for the six-month period
ended June 30, 2006 from 35% for the six-month period ended June 30, 2005. This
increase is the result of an increase in the gross profit as a percentage of
sales in the Wholesale Division to 39% for the six-month period ended June 30,
2006 from 29% for the comparable period of 2005, as well as an increase in the
Retail Division to 51% as compared to 48% for the comparable period of 2005.
Operating expenses increased to $67,655 in the first six months of 2006 from
$57,589 in the same period of 2005. The increase in dollars is primarily due to
an increase in direct selling expenses reflective of the 29% growth in sales,
incentive bonuses and incremental costs associated with the new brands and the
recently acquired Daniel M. Friedman. As a percentage of sales, operating
expenses decreased to 28% in the first six months of 2006 from 31% in the same
period of 2005, reflecting the Company's ability to control costs and leverage
its expense structure against the increase in sales.
Income from operations was $39,770 for the six-month period ended June 30, 2006
compared to $9,878 for the comparable period of 2005. Net income was $23,556 for
the six-month period ended June 30, 2006 compared to $6,248 for the six-month
period ended June 30, 2005. This increase in income was primarily due to the
increase in sales, the higher gross margin, a substantial increase in commission
income and the reduction of operating expenses as a percentage of sales.
Wholesale Division:
------------------
Sales from the Wholesale Division accounted for $179,176 or 75%, and $125,192 or
68% of total sales for the six-month periods ended June 30, 2006 and 2005,
respectively. This increase resulted from the incremental sales of the recently
acquired Daniel M. Friedman and higher sales from Madden Womens, Madden Mens and
Candie's as well as the contribution of the new brands, SMNY and Rule. Gross
profit as a percentage of sales increased to 39% for the six-month period ended
June 30, 2006 from 29% in the same period last year, primarily due to a
significant decrease in off-price sales and lower inventory markdowns and
allowances. Operating expenses increased to $38,470 for the six-month period
ended June 30, 2006 from $30,932 in the comparable period of 2005. This increase
is primarily due to an increase in direct selling expenses reflective of the 43%
growth in sales, incentive bonuses and the incremental costs associated with the
new brands SMNY, Rule, as well as the addition of Daniel M. Friedman. As a
percentage of sales, operating expenses decreased to 21% for the six-month
period ended June 30, 2006 from 25% for the same period last year, reflecting
the Company's ability to control costs and leverage the Company's expense
structure against top line growth. Income from operations for the Wholesale
Division increased to $33,738 for the six-month period ended June 30, 2006
compared to $7,017 for the six-month period ended June 30, 2005.
Retail Division:
---------------
Sales from the Retail Division accounted for $58,639 or 25% and $59,102 or 32%
of total sales for the six-month periods ended June 30, 2006 and 2005,
respectively. The Company opened eight new stores and closed eight
under-performing stores during the year ended June 30, 2006. As a result, the
Company had 95 stores as of June 30, 2006 and 2005. Comparable store sales
(sales of those stores that were open for the entire first six months of 2006
and 2005) for the six-month period ended June 30, 2006 decreased 2% over the
same period of 2005. This decrease was due to planned declines in the
accessories and men's categories as management repositioned the Company's
offerings in those areas during the first quarter of the year. Gross profit as a
percentage of sales increased to 51% for the six-month period ended June 30,
2006 from 48% in the comparable period of 2005, primarily due to a significant
decrease in inventory markdowns and an increase in inventory operating
efficiencies. Operating expenses for the Retail Division were $29,185 for the
six-month period ended June 30, 2006 and $26,657 in the comparable period of
2005. This increase was primarily due to the costs associated with the
16
remodeling of six stores and the closing of five stores in the current period.
Income from operations for the Retail Division was $971 for the six-month period
ended June 30, 2006 compared to $1,013 for the same period in 2005.
First Cost Division:
-------------------
The First Cost Division generated net commission income of $5,061 for the
six-month period ended June 30, 2006, compared to $1,848 in the comparable
period of 2005. The increase was the result of growth in the private label
business and in addition, the Company has leveraged the strength of its Steve
Madden brands and product designs resulting in a partial recovery of its design,
product and development costs from its suppliers.
Three Months Ended June 30, 2006 vs. Three Months Ended June 30, 2005
Consolidated:
------------
Total net sales for the three-month period ended June 30, 2006 increased by 28%
to $129,500 from $100,958 for the comparable period of 2005. This sales growth
was the result of the double-digit sales increases in the Steve Madden Womens,
Madden Mens, Candies and Steven divisions as well the incremental sales from the
new Daniel M. Friedman and SMNY divisions. These increases were partially offset
by declines in the l.e.i and Stevies divisions.
Gross profit as a percentage of sales increased to 42% for the three-month
period ended June 30, 2006 from 37% for the three-month period ended June 30,
2005. This increase is due to an increase in the Wholesale Division to 38% for
the three-month period ended June 30, 2006 from 31% for the comparable period of
2005, as well as an increase in the gross profit as a percentage of sales in the
Retail Division to 54% for the three-month period ended June 30, 2006 from 50%
for the three-month period ended June 30, 2005.
Operating expenses increased to $36,065 in the second quarter of 2006 from
$30,233 in the second quarter 2005. The increase in dollars is primarily due to
an increase in direct selling expenses reflective of the 28% growth in sales,
incentive bonuses and incremental costs associated with the new brands and the
recently acquired Daniel M. Friedman. As a percentage of sales, operating
expenses decreased to 28% in the second quarter of 2006 from 30% in the second
quarter of 2005, reflecting the Company's ability to control costs and leverage
its expense structure against the increase in sales.
Income from operations was $21,315 for the three-month period ended June 30,
2006 compared to $8,657 in the comparable period of 2005. Net income was $12,696
for the three-month period ended June 30, 2006 compared to $5,286 for the
three-month period ended June 30, 2005. This increase in income was primarily
due to the increase in sales, the higher gross margin, a substantial increase in
commission income and the reduction of operating expenses as a percentage of
sales.
Wholesale Division:
------------------
Sales from the Wholesale Division accounted for $96,194 or 74%, and $68,331 or
68% of total sales for the three-month periods ended June 30, 2006 and 2005,
respectively. This increase resulted from the incremental sales of the recently
acquired Daniel M. Friedman and higher sales from Madden Womens, Madden Mens and
Candie's as well as the contribution of the new brands, SMNY and Rule. Gross
profit as a percentage of sales in the Wholesale Division increased to 38% for
the three-month period ended June 30, 2006 from 31% for the three-month period
ended June 30 2005, primarily due to improved efficiencies in inventory
management resulting in a significant reduction of inventory markdowns and
allowances. Operating expenses increased to $20,169 for the three-month period
ended June 30, 2006 from $15,978 in the comparable period of 2005. This increase
is primarily due to an increase in direct selling expenses reflective of the 41%
growth in sales, incentive bonuses and the incremental costs associated with the
new brands SMNY and Rule and Daniel M. Friedman. As a percentage of sales,
operating expenses decreased to 21% for the three-month period ended June 30,
2006 from 23% for the three-month period ended June 30, 2005, reflecting the
Company's ability to control costs and leverage the Company's expense structure
against top line growth. Income from operations for the Wholesale Division
increased to $17,109 for the three-month period ended June 30, 2006 compared to
$5,971 for the same period last year.
17
Retail Division:
---------------
Sales from the Retail Division accounted for $33,306 or 26% and $32,627 or 32%
of total sales for the three-month periods ended June 30, 2006 and 2005,
respectively. Comparable store sales (sales of those stores that were open for
the second quarter of 2006 and 2005) for the three-month period ended June 30,
2006 increased 3% over the same period of 2005. Gross profit as a percentage of
sales increased to 54% for the three-month period ended June 30, 2006 from 50%
in the comparable period of 2005, primarily due to a significant decrease in
inventory markdowns and other promotional activities. Operating expenses for the
Retail Division were $15,896 for the three-month period ended June 30, 2006 and
$14,255 in the comparable period of 2005. This increase was primarily due to the
costs associated with the remodeling of three stores and the closing of five
stores in the current period. Income from operations for the Retail Division was
$2,102 for the three-month period ended June 30, 2006 compared to $1,483 for the
three-month period ended June 30, 2005.
First Cost Division:
-------------------
Adesso-Madden, Inc. generated net commission income of $2,104 for the
three-month period ended June 30, 2006, compared to $1,203 in the comparable
period of 2005. The increase was the result of growth in the private label
business and in addition, the Company has leveraged the strength of its Steve
Madden brands and product designs resulting in a partial recovery of its design,
product and development costs from its suppliers.
LIQUIDITY AND CAPITAL RESOURCES
($ in thousands)
The Company had working capital of $137,886 at June 30, 2006 compared to
$114,066 at December 31, 2005. The Company's net income for the six months ended
June 30, 2006 was the primary contributor to the increase in working capital.
Under the terms of a factoring agreement with GMAC, the Company is eligible to
draw down 80% of its invoiced receivables at an interest rate of two and
one-half percent (2.5%) over the 30 day LIBOR. The agreement, which has no
specific expiration date and can be terminated by either party with 60 days
written notice after June 30, 2007, provides the Company with a $25 million
credit facility with a $15 million sub-limit on direct borrowings. GMAC
maintains a lien on all of the Company's receivables and assumes the credit risk
for all assigned accounts approved by them.
As of June 30, 2006, the Company had invested $56,166 in marketable securities
consisting of corporate bonds, U.S. Treasury notes, government asset-backed
securities, certificates of deposits and equities.
The Company believes that based upon its current financial position and
available cash and marketable securities, it will meet all of its financial
commitments and operating needs for at least the next twelve months.
OPERATING ACTIVITIES
($ in thousands)
During the six-month period ended June 30, 2006, net cash provided in operating
activities was $7,474. Sources of cash were provided primarily by the net income
of $23,556 and increase in accounts payable and other accrued expenses of
$9,187. The primary uses of cash were an increase in factored receivables of
$20,796 caused by a substantial increase in sales in the second quarter of 2006,
as well as an increase in non-factored receivables of $3,971, an increase in
inventories of $8,780 and increase in prepaid expenses, prepaid taxes, deposits
and other assets.
18
CONTRACTUAL OBLIGATIONS
The Company's contractual obligations as of June 30, 2006 were as follows:
Payment due by period (in thousands)
Remainder of 2011 and
Contractual Obligations Total 2006 2007-2008 2009-2010 after
----------------------------- ------------ ------------ ------------ ------------ ------------
Operating lease
obligations $ 89,200 $ 6,505 $ 25,551 $ 21,972 $ 35,172
Purchase obligations 55,901 55,901 0 0 0
Other long-term liabilities
(future minimum
royalty payments) 2,132 1,497 635 0 0
------------ ------------ ------------ ------------ ------------
Total $ 147,233 $ 63,903 $ 26,186 $ 21,972 $ 35,172
============ ============ ============ ============ ============
At June 30, 2006, the Company had un-negotiated open letters of credit for the
purchase of imported merchandise of approximately $4,052.
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, 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 $18,742
including transaction costs subject to adjustment, including certain earn out
provisions, based on financial performance through 2010.
The Company has employment agreements with certain executives, which provide for
the payment of compensation aggregating approximately $2,149 in 2006, $1,643 in
2007, $1,192 in 2008 and $480 in 2009. In addition, some of the employment
agreements provide for incentive compensation based on various performance
criteria as well as other benefits. The Chief Operating Officer of the Company
is entitled to deferred compensation calculated as a percentage of his base
salary.
Significant portions of the Company's products are produced at overseas
locations, the majority of which are located in China as well as Brazil, Italy
and Spain. The Company has not entered into any long-term manufacturing or
supply contracts with any of these foreign companies. The Company believes that
a sufficient number of alternative sources exist outside of the United States
for the manufacture of its products. In addition, the Company currently makes
approximately 98% of its purchases in U.S. dollars.
INVESTING ACTIVITIES
($ in thousands)
During the six-month period ended June 30, 2006, the Company invested $2,858 in
marketable securities and received $12,530 from the maturities and sales of
securities. Also, the Company invested $15,436 in the acquisition of Daniel M.
Friedman. Additionally, the Company made capital expenditures of $4,448,
principally for leasehold improvements for two new stores, remodeling of six
existing stores, additional office space and upgrades to its computer systems.
FINANCING ACTIVITIES
($ in thousands)
During the six-month period ended June 30, 2006, the Company repurchased 349,000
shares of the Company's common stock at a total cost of $8,264. The Company
received $1,882 in cash and realized a tax benefit of $741 in connection with
the exercise of stock options.
19
INFLATION
The Company does not believe that the relatively low rates of inflation
experienced over the last few years in the United States, where it primarily
competes, have had a significant effect on sales, expenses or profitability.
CRITICAL ACCOUNTING POLICIES AND THE USE OF ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results of
Operations is based upon the Company's unaudited condensed consolidated
financial statements which have been prepared in accordance with GAAP. The
preparation of these financial statements requires management to make estimates
and judgments that affect the reported amounts of assets, liabilities, sales and
expenses, and related disclosure of contingent assets and liabilities. Estimates
by their nature are based on judgments and available information. Estimates are
made based upon historical factors, current circumstances and the experience and
judgment of management. Assumptions and estimates are evaluated on an ongoing
basis and the Company may employ outside experts to assist in evaluations.
Therefore, actual results could materially differ from those estimates under
different assumptions and conditions. Management believes the following critical
accounting estimates are more significantly affected by judgments and estimates
used in the preparation of the Company's condensed consolidated financial
statements: accounts receivable and inventory reserves, valuation of intangible
assets, and litigation reserves.
Allowances for bad debts, returns and customer chargebacks. The Company provides
reserves against its trade accounts receivables for future customer chargebacks,
co-op advertising allowances, discounts, returns and other miscellaneous
deductions that relate to the current period. The reserve against the Company's
non-factored trade receivables also includes estimated losses that may result
from customers' inability to pay. The amount of the reserve for bad debts,
returns, discounts and compliance chargebacks are determined by analyzing aged
receivables, current economic conditions, the prevailing retail environment and
historical dilution levels for customers. As a result of a reevaluation of the
retail environment, the Company has revised its method for evaluating its
allowance for customer markdowns and advertising chargebacks in the fourth
quarter of 2005. In the past, the Company would look at historical dilution
levels for customers to determine the allowance amount. Under the new
methodology, the Company evaluates anticipated chargebacks by reviewing several
performance indicators for its major customers. These performance indicators
(which include inventory levels at the retail floors, sell through rates and
gross margin levels) are analyzed by key account executives to estimate the
amount of the anticipated customer allowance. Failure to correctly estimate the
amount of the reserve could materially impact the Company's results of operation
and financial position.
Inventory reserves. Inventories are stated at lower of cost or market, on a
first-in, first-out basis. The Company reviews inventory on a regular basis for
excess and slow moving inventory. The review is based on an analysis of
inventory on hand, prior sales, and expected net realizable value through future
sales. The analysis includes a review of inventory quantities on hand at
period-end in relation to year-to-date sales and projections for sales in the
foreseeable future as well as subsequent sales. The Company considers quantities
on hand in excess of estimated future sales to be at risk for market impairment.
The net realizable value, or market value, is determined based on the estimate
of sales prices of such inventory through off-price or discount store channels.
The likelihood of any material inventory write-down is dependent primarily on
the expectation of future consumer demand for the Company's product. A
misinterpretation or misunderstanding of future consumer demand for the
Company's product, the economy, or other failure to estimate correctly, could
result in inventory valuation changes, either favorably or unfavorably, compared
to the valuation determined to be appropriate as of the balance sheet date.
Valuation of intangible assets. SFAS No. 142, "Goodwill and Other Intangible
Assets, which was adopted by the Company on January 1, 2002, requires that
goodwill and intangible assets with indefinite lives no longer be amortized, but
rather be tested for impairment at least annually. This pronouncement also
requires that intangible assets with finite lives be amortized over their
respective lives to their estimated residual values, and reviewed for impairment
in accordance with SFAS No. 144 "Accounting for Impairment or Disposal of
Long-lived Assets". In accordance with SFAS No. 144, long-lived assets, such as
property, equipment, leasehold improvements and goodwill subject to
amortization, are reviewed for impairment annually or whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to the estimated undiscounted
future cash flows expected to be generated by the asset. If the carrying amount
of an asset exceeds its estimated future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the asset exceeds the
fair value of the asset.
20
Litigation reserves. Estimated amounts for litigation claims that are probable
and can be reasonably estimated are recorded as liabilities in the Company's
consolidated financial statements. The likelihood of a material change in these
estimated reserves would be dependent on new claims as they may arise and the
favorable or unfavorable events of a particular litigation. As additional
information becomes available, management will assess the potential liability
related to the pending litigation and revise their estimates. Such revisions in
management's estimates of the contingent liability could materially impact the
Company's results of operation and financial position.
Cost of sales. All costs incurred to bring finished products to the Company's
distribution center are included in the cost of sales line item on the
Consolidated Statement of Operations. These include purchase commissions, letter
of credit fees, brokerage fees, material and labor and related items, sample
expenses, custom duty, inbound freight, royalty payments 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 all shipping costs to customers as operating
expenses. The Company's gross margins may not be comparable to other companies
in the industry because some companies may include warehouse and distribution as
a component of cost of sales, while other companies report on the same basis as
the Company and include them in operating expenses.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not engage in the trading of market risk sensitive instruments
in the normal course of business. Financing arrangements for the Company are
subject to variable interest rates primarily based on LIBOR. An analysis of the
Company's credit agreement with GMAC can be found in the Liquidity and Capital
Resources section under Item 2 of this report.
As of June 30, 2006, the Company had investments in marketable securities valued
at $56,166, which consist primarily of corporate bonds, U.S. treasury notes,
certificates of deposit and government asset-backed securities that have various
maturities through December 2009, as well as marketable equity securities. These
investments are subject to interest rate risk and will decrease in value if
market interest rates increase. The Company currently has the ability to hold
these investments until maturity. Should there be a significant increase in
interest rates, the value of these investments would be negatively affected
unless they were held to maturity. In addition, any further decline in interest
rates would reduce the Company's interest income.
ITEM 4. CONTROLS AND PROCEDURES
As required by Rule 13a-15(b) of the Securities Exchange Act of 1934 (the
"Exchange Act"), the Company's management, including the Company's Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of its disclosure controls and procedures as of the end of the fiscal quarter
covered by this quarterly report. Based on that evaluation, the Chief Executive
Officer and Chief Financial Officer have concluded that the Company's disclosure
controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act)
were effective as of the end of the fiscal quarter covered by this quarterly
report. As required by Rule 13a-15(d) under the Exchange Act, the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, has evaluated the Company's internal controls over financial reporting
to determine whether any changes occurred during the quarter covered by this
quarterly report that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.
Based on that evaluation, there has been no such change during the quarter
covered by this report.
21
Part II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Certain legal proceedings in which the Company is involved are discussed in Note
K and Part I, Item 3 to the consolidated financial statements included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2005. The
following discussion is limited to recent developments concerning certain of the
Company's legal proceedings and should be read in conjunction with the Company's
earlier SEC Reports. Unless otherwise indicated, all proceedings discussed in
those earlier Reports remain outstanding.
On or about January 23, 2006, the Company and Steven Madden, Jamieson Karson,
Arvind Dharia and Amelia Newton Varela were named as defendants in a lawsuit
filed by Jojeli, Inc. ("Jojeli") and Alan Rick Friedman in the United States
District Court for the Southern District of New York. In their complaint, Jojeli
and Mr. Friedman assert claims arising from the Company's decision to terminate
Jojeli's services on or about November 28, 2005. Mr. Friedman, Jojeli's
principal, served as a senior salesperson for the Company, and provided his
services to the Company pursuant to an April 26, 2004 written agreement. In
their complaint, Jojeli and Mr. Friedman allege eight claims against the Company
and/or three of its executives and/or one of its managers, including breach of
contract, violation of the New York Labor Law, tortuous interference with
contract, civil conspiracy, defamation, and prima facie tort. They seek damages
on their various claims of approximately $2,700 and they also seek a declaration
that they are not bound by the restrictive covenant in the parties' contract. On
or about March 1, 2006, the individual defendants and the Company moved to
dismiss the tort claims contained in the complaint and to strike Mr. Friedman's
claim for punitive damages in connection with his contract claims. More
specifically, the defendants moved to dismiss the claims alleging defamation,
interference with contract, prima facie tort and civil conspiracy. If the motion
is granted in its entirety, the individual defendants would be dismissed from
the suit and Mr. Friedman's remaining claims would consist of breach of contract
and alleged violations of the New York Labor Law. On or about April 13, 2006,
Mr. Friedman filed an amended complaint in the action. In his amended complaint,
Mr. Friedman (i) dropped his defamation claim against the Company's Executive
Vice President of Wholesale Sales, Amelia Newton Varela, (ii) dropped all
claim(s) against the Company's Chief Financial Officer, Arvind Dharia, and (iii)
supplemented certain allegations concerning the remaining defendants in an
effort to strengthen or preserve his remaining tort claims. On 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 it 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 consist 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. Accordingly, the parties are currently engaged in discovery. The
Company believes that this action will not have a material effect on the
Company's financial position.
The Company has been named as a defendant in certain other lawsuits in the
normal course of business. In the opinion of management, after consulting with
legal counsel, the liabilities, if any, resulting from these matters should not
have a material effect on the Company's financial position or results of
operations. It is the policy of management to disclose the amount or range of
reasonably possible losses in excess of recorded amounts.
ITEM 1A. RISK FACTORS
The risk factors included in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2005 have not materially changed.
22
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS:
The following table provides information as of June 30, 2006 with respect to the
shares of common stock repurchased by the Company during the second quarter of
fiscal 2006:
---------------------------------------------------------------------------------------------------
Period Total Average Total Number of Maximum Dollar Amount
Number of Price Paid Shares Purchased as of Shares that May Yet Be
Shares per Share Part of Publicly Purchased Under the Plans
Purchased Announced Plans or or Programs (1)
Programs (1)
---------------------------------------------------------------------------------------------------
4/1/06 - 4/30/06 0 $0 0 $18,943,810
---------------------------------------------------------------------------------------------------
5/01/06 - 5/31/06 0 $0 0 $18,943,810
---------------------------------------------------------------------------------------------------
6/1/06 - 6/30/06 127,900 $27.02 127,900 $15,487,460
---------------------------------------------------------------------------------------------------
Total 127,900 $27.02 127,900 $15,487,460
---------------------------------------------------------------------------------------------------
(1) Pursuant to an agreement reached on February 2, 2005, with a then 8%
shareholder, the Company agreed to commit $25 million during the twelve
months ended January 31, 2006 and $10 million during the twelve months
ended January 31, 2007 to a combination of share repurchases and/or
dividends, such programs to be implemented at such time and such manner
as the board of directors shall determine in its sole discretion.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of the Company held on May 26, 2006 (the "Annual
Meeting"), the stockholders of the Company ratified the appointment of Eisner
LLP and approved the adoption of the Company's 2006 Stock Incentive Plan. In
addition, the stockholders of the Company elected nine directors to serve until
the next Annual Meeting of Stockholders or until their successors are duly
elected and qualified.
The affirmative vote of the holders of a majority of the total votes cast was
required to ratify the appointment of Eisner LLP and to approve the adoption of
the Plan and the affirmative vote of a plurality of the votes cast by holders of
shares of common stock was required to elect the directors.
With respect to the approval of the appointment of Eisner LLP, set forth below
is information on the results of the votes cast at the Annual Meeting.
For Against Abstained
--- ------- ---------
Appointment of Eisner LLP 12,436,490 344,415 742
With respect to the approval of the adoption of the Company's 2006 Stock
Incentive Plan, set forth below is the information on the results of the votes
cast at the Annual Meeting.
For Against Abstained
--- ------- ---------
Adoption of the Plan 9,441,261 1,952,141 22,247
23
With respect to the election of directors, set forth below is information with
respect to the nominees elected as directors of the Company at the Annual
Meeting and the votes cast and/or withheld with respect to each such nominee.
Nominees For Withheld
---------------------------- ---------------- --------------
Jamieson A. Karson 12,109,235 672,412
Jeffrey Birnbaum 11,693,329 1,088,318
Marc S. Cooper 11,359,899 1,421,748
Harold Kahn 12,150,023 631,624
John L. Madden 11,698,749 1,082,898
Peter Migliorini 12,102,876 678,771
Richard P. Randall 12,149,673 631,974
Thomas H. Schwartz 12,102,776 678,871
Walter Yetnikoff 12,149,923 631,724
ITEM 6. EXHIBITS
10.1 Steven Madden, Ltd. 2006 Stock Incentive Plan (incorporated by
reference to Exhibit 10.1 to the Company's Current Report on Form
8-K filed with the Commission on July 3, 2006).
10.2 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).
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14
or 15d-14 of the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14
or 15d-14 of the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
24
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report on Form 10-Q to be signed on its behalf
by the undersigned thereunto duly authorized.
DATE: August 9, 2006
STEVEN MADDEN, LTD.
/s/ JAMIESON A. KARSON
------------------------------------
Jamieson A. Karson
Chairman and Chief Executive Officer
/s/ ARVIND DHARIA
------------------------------------
Arvind Dharia
Chief Financial Officer
25
Exhibit No Description
---------- -----------
10.1 Steven Madden, Ltd. 2006 Stock Incentive Plan
(incorporated by reference to Exhibit 10.1 to the
Company's Current Report on Form 8-K filed with the
Commission on July 3, 2006).
10.2 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).
31.1 Certification of Chief Executive Officer pursuant to
Rule 13a-14 or 15d-14 of the Securities Exchange Act
of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to
Rule 13a-14 or 15d-14 of the Securities Exchange Act
of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
26