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, 2007
[ ] 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 (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 6, 2007, the latest practicable date, there were 21,322,038 shares
of common stock, $.0001 par value, outstanding.
STEVEN MADDEN, LTD.
FORM 10-Q
QUARTERLY REPORT
JUNE 30, 2007
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................................................ 21
ITEM 1A. Risk Factors..................................................... 22
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds...... 22
ITEM 4. Submission of Matters to a Vote of Security Holders.............. 22
ITEM 6. Exhibits......................................................... 23
Signatures....................................................... 24
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,
2007 2006 2006
------------- ------------- -------------
(unaudited) (unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 23,933 $ 19,204 $ 34,463
Accounts receivable, net of allowances of $1,956, $1,009 and $2,430 7,506 7,317 7,171
Due from factor, net of allowances of $10,504, $11,499 and $10,731 44,295 40,208 50,997
Note receivable - related party 3,000 - -
Inventories 35,153 33,660 43,075
Marketable securities - available for sale 54,873 72,542 32,538
Prepaid expenses and other current assets 7,812 5,929 5,598
Prepaid taxes 11,411 1,084 3,565
Deferred taxes 7,892 8,099 5,550
------------- ------------- -------------
Total current assets 195,875 188,043 182,957
Property and equipment, net 23,946 22,842 20,690
Deferred taxes 6,723 6,794 5,526
Deposits and other 2,995 2,965 1,686
Marketable securities - available for sale 15,100 17,139 23,628
Goodwill - net 10,902 6,465 7,007
Intangibles - net 11,129 7,144 7,829
------------- ------------- -------------
Total Assets $ 266,670 $ 251,392 $ 249,323
============= ============= =============
LIABILITIES
Current liabilities:
Accounts payable $ 19,353 $ 12,784 $ 24,334
Accrued expenses 17,171 23,548 20,737
------------- ------------- -------------
Total current liabilities 36,524 36,332 45,071
Deferred rent 3,307 3,136 3,438
------------- ------------- -------------
39,831 39,468 48,509
------------- ------------- -------------
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, 25,700,
24,806 and 24,410 shares issued, 21,290, 21,106 and
20,710 outstanding 3 2 2
Additional paid-in capital 128,112 112,692 103,281
Retained earnings 153,612 133,561 132,394
Other comprehensive gain:
Unrealized gain (loss) on marketable securities (257) (641) (1,173)
Treasury stock - 4,410, 3,700 and 3,700 shares at cost (54,631) (33,690) (33,690)
------------- ------------- -------------
226,839 211,924 200,814
------------- ------------- -------------
Total Liabilities and Stockholders' Equity $ 266,670 $ 251,392 $ 249,323
============= ============= =============
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,
----------------------- -----------------------
2007 2006 2007 2006
---------- ---------- ---------- ----------
Net sales:
Wholesale $ 78,616 $ 96,194 $ 160,915 $ 179,176
Retail 29,640 33,306 53,995 58,639
---------- ---------- ---------- ----------
108,256 129,500 214,910 237,815
---------- ---------- ---------- ----------
Cost of sales:
Wholesale 51,696 59,637 104,198 108,494
Retail 11,140 15,308 23,098 28,483
---------- ---------- ---------- ----------
62,836 74,945 127,296 136,977
---------- ---------- ---------- ----------
Gross profit:
Wholesale 26,920 36,557 56,717 70,682
Retail 18,500 17,998 30,897 30,156
---------- ---------- ---------- ----------
45,420 54,555 87,614 100,838
Commission and licensing fee income - net 5,669 2,825 11,115 6,587
Operating expenses (33,599) (36,065) (65,570) (67,655)
---------- ---------- ---------- ----------
Income from operations 17,490 21,315 33,159 39,770
Interest and other income, net 803 642 1,713 913
---------- ---------- ---------- ----------
Income before provision for income taxes 18,293 21,957 34,872 40,683
Provision for income taxes 7,775 9,261 14,821 17,127
---------- ---------- ---------- ----------
Net income $ 10,518 $ 12,696 $ 20,051 $ 23,556
========== ========== ========== ==========
Basic income per share $ 0.51 $ 0.61 $ 0.96 $ 1.13
========== ========== ========== ==========
Diluted income per share $ 0.49 $ 0.58 $ 0.92 $ 1.07
========== ========== ========== ==========
Basic weighted average common shares outstanding 20,659 20,794 20,809 20,835
Effect of dilutive securities - options/warrants/restricted stock 967 1,236 984 1,139
---------- ---------- ---------- ----------
Diluted weighted average common shares outstanding 21,626 22,030 21,793 21,974
========== ========== ========== ==========
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,
-----------------------
2007 2006
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 20,051 $ 23,556
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization 3,886 3,182
Loss on disposal of fixed assets 474 1,743
Non-cash compensation 2,289 708
Provision for bad debts (89) 4,761
Deferred rent expense 171 171
Realized loss on marketable securities 363 628
Changes in:
Accounts receivable (345) (3,971)
Due from factor (3,842) (20,796)
Note receivable - related party (3,000) -
Inventories (1,493) (8,780)
Prepaid expenses, prepaid taxes, deposits and other assets (11,836) (2,915)
Accounts payable and other accrued expenses (565) 9,187
---------- ----------
Net cash provided by operating activities 6,064 7,474
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (4,550) (4,448)
Purchase of marketable securities (17,807) (2,858)
Sale/redemption of marketable securities 37,814 12,530
Acquisitions, net of cash acquired (8,982) (15,436)
---------- ----------
Net cash provided by (used in) investing activities 6,475 (10,212)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from options exercised 5,044 1,882
Tax benefit from exercise of options 8,087 741
Common stock purchased for treasury (20,941) (8,264)
---------- ----------
Net cash used in financing activities (7,810) (5,641)
---------- ----------
Net increase (decrease) in cash and cash equivalents 4,729 (8,379)
Cash and cash equivalents - beginning of period 19,204 42,842
---------- ----------
Cash and cash equivalents - end of period $ 23,933 $ 34,463
========== ==========
See accompanying notes to condensed consolidated financial statements -
unaudited
3
STEVEN MADDEN, LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
JUNE 30, 2007
($ in thousands except share and 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 its 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, 2007 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, 2006 included in the Annual Report of Steven Madden, Ltd. on
Form 10-K filed with the SEC on March 9, 2007.
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.
The significant areas involving management estimates include 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. The Company evaluates anticipated
chargebacks by reviewing several performance indicators of its major customers.
These performance indicators, which include retailers' inventory levels, sell
through rates and gross margin levels, are analyzed by key account executives
and the Vice President of Wholesale Sales to estimate the amount of the
anticipated customer allowance.
NOTE C - RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to the current
period presentation.
NOTE D - NOTE RECEIVABLE - RELATED PARTY
On June 25, 2007, the Company made a loan to Steve Madden, its Creative and
Design Chief and a principal shareholder of the Company, in the amount of
$3,000, in order for Mr. Madden to exercise options and hold the underlying
Company stock. Mr. Madden executed a secured promissory note in favor of the
Company that bears interest at an annual rate of 8% and is due on the earlier of
the date Mr. Madden ceases to be employed by the Company or December 31, 2007.
Pursuant to a pledge agreement between the company and Mr. Madden, the note is
secured by 510,000 shares of the Company's common stock.
NOTE E - MARKETABLE SECURITIES
Marketable securities consist primarily of corporate and municipal bonds, U.S.
treasury notes and government asset-backed securities with maturities greater
than three months and up to five years at the time of purchase as well as
marketable equity securities. These securities, which are classified as
available-for-sale, are carried at fair value with unrealized gains and losses,
net of any tax effect, reported in shareholders' equity as accumulated other
comprehensive income (loss). Amortization of premiums and discounts is included
in interest income and is not material. The values of these securities may
fluctuate as a result of changes in market interest rates and credit risk.
4
STEVEN MADDEN, LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
JUNE 30, 2007
($ in thousands except share and per share data)
NOTE F - 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.
NOTE G - REVENUE RECOGNITION
The Company recognizes revenue on wholesale sales when products are shipped
pursuant to its standard terms which are freight on board (FOB) warehouse or
when products are delivered to the consolidators as per the terms of the
customers' purchase order. Sales reductions for anticipated discounts,
allowances and other deductions are recognized when sales are recorded.
Customers retain the right to replacement of the product for poor quality or
improper or short shipments, which have historically been immaterial. Retail
sales are recognized when the payment is received from customers and are
recorded net of returns. The Company also generates commission income acting as
a buying agent by arranging to manufacture private label shoes to the
specifications of its clients. The Company's revenue includes partial recovery
of its design, product and development costs for the services provided to
certain suppliers in connection with the Company's private label business.
Commission revenue and product and development cost recoveries are recognized as
earned when title of the product transfers from the manufacturer to the customer
and is reported on a net basis after deducting 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, dresses and children's apparel. The license
agreements require the licensee to pay the Company a royalty and, in
substantially all of the agreements, an advertising fee based on the higher of a
minimum or a net sales percentage as defined in the various agreements. In
addition, under the terms of retail selling agreements, most of the Company's
international distributors are required to pay the Company a royalty based on a
percentage of net sales, in addition to a commission on the purchases of the
Company's products. Licensing revenue is recognized on the basis of net sales
reported by the licensees and/or international distributors 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 H - TAXES COLLECTED FROM CUSTOMERS
In June of 2006, the FASB issued Emerging Issues Task Force 06-03, "How Taxes
Collected from Customers and Remitted to Governmental Authorities Should Be
Presented in the Income Statement" ("EITF 06-03"). The consensus reached in EITF
06-03 allows companies to adopt a policy of presenting taxes in the income
statement on either a gross basis (included in revenues and costs) or net basis
(excluded from revenues). Taxes within the scope of EITF 06-03 would include
taxes that are imposed on a revenue transaction between a seller and a customer,
for example, sales taxes, use taxes, value-added taxes and some types of excise
taxes. The Company has consistently recorded all taxes within the scope of EITF
06-03 on a net basis.
NOTE I - 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, 2007, the total deduction to sales for these expenses was $10,322 and
$19,681, respectively, as compared to $7,338 and $15,304 for the comparable
periods in 2006.
5
STEVEN MADDEN, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
JUNE 30, 2007
($ in thousands except share and per share data)
NOTE J - COST OF SALES
All costs incurred to bring finished products to the Company's distribution
center and, in the Retail Division, the costs to bring products to the Company's
stores, are included in the cost of sales line on the Consolidated Statement of
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 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 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.
NOTE K - 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. In addition, diluted earnings
per share includes amount of unrecognized share based compensation costs
attributed to future services and amount of tax benefits if any that would be
credited to APIC assuming exercise of options. For both the three- and six-month
periods ended June 30, 2007, 300,000 stock options have been excluded from the
calculation because inclusion of such shares would be anti-dilutive. No stock
options have been excluded from the calculation for the three and six months
ended June 30, 2006.
NOTE L - 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. On May 25, 2007, the stockholders approved an
amendment to the Plan to increase the maximum number of shares to be issued
under the Plan to 1,550,000. 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 1,550,000
Stock based awards granted net of expired or
cancelled 782,462
---------
Common Stock available for grant of stock based
awards as of June 30, 2007 767,538
=========
6
STEVEN MADDEN, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
JUNE 30, 2007
($ in thousands except share and per share data)
NOTE L - STOCK-BASED COMPENSATION (CONTINUED)
Total equity-based compensation for the three and six months ended June 30 is as
follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
2007 2006 2007 2006
---------- ---------- ---------- ----------
Stock options $ 63 $ 60 $ 63 $ 120
Restricted stock 1,214 588 2,226 588
---------- ---------- ---------- ----------
Total $ 1,277 $ 648 $ 2,289 $ 708
========== ========== ========== ==========
Equity-based compensation is included in operating expenses on the Company's
Condensed Consolidated Statements of Operations. The Company realized a tax
benefit form the exercise of stock options of $8,087 and $741 during the six
months ended June 30, 2007 and 2006, respectively.
Stock Options
During both the three- and six-month periods ended June 30, 2007, there were
795,200 options exercised with a total intrinsic value of $19,906 compared to
27,500 and 155,000 options exercised with a total intrinsic value of $585 and
$1,764 for the corresponding periods of last year. No options vested during the
three and six months ended June 30, 2007, as compared to 15,000 and 30,000
options, all of which had a weighted average exercise price of $11.84, that
vested during the comparable periods of last year. As of June 30, 2007, there
were 300,000 unvested options with a weighted average exercise price of $47.50
and an average vesting period of 1.5 years. There were no unvested options as of
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 the 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 dividends paid in November of 2005 and 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 during
the six months ended June 30, 2007 was approximately $5.01 using the
Black-Scholes option-pricing model assuming a volatility of 37%, a risk free
interest rate of 4.73%, an expected life of 3.13 years and no dividend yield.
Activity relating to stock options granted under the Company's plans and outside
the plans during the six months ended June 30, 2007 is as follows:
WEIGHTED
WEIGHTED AVERAGE
AVERAGE REMAINING AGGREGATE
NUMBER OF EXERCISE CONTRACTUAL INTRINSIC
SHARES PRICE TERM VALUE
------------ ------------ ------------ ------------
Outstanding at January 1, 2007
Granted 1,396,000 $ 8.75
Exercised 300,000 47.50
Cancelled/Forfeited (795,000) 6.34
------------ ------------
Outstanding at June 30, 2007 901,000 $ 23.79 7.5 $ 8,084
============ ============ ============ ============
Exercisable at June 30, 2007 601,000 $ 11.94 6.3 $ 12,506
============ ============ ============ ============
7
STEVEN MADDEN, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
JUNE 30, 2007
($ in thousands except share and per share data)
NOTE L - STOCK-BASED COMPENSATION (CONTINUED)
Restricted Stock
The following table summarizes restricted stock activity during the six months
ended June 30, 2007:
Weighted
Average Fair
Number of Value at
Shares Grant Date
------------ ------------
Non-vested at January 1, 2007 421,000 $ 32.51
Granted 215,000 29.90
Vested (98,000) 32.35
Forfeited (4,000) 34.05
------------
Non-vested at June 30, 2007 534,000 $ 31.47
============
As of June 30, 2007, there was $14,700 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 3.4 years. During the year ended
December 31, 2006, 165,000 restricted stock awards were granted to the Company's
Creative and Design Chief. The Company determines the fair value of its
restricted stock awards based on the market price of its common stock on the
date of grant.
NOTE M - ACQUISITIONS
Compo Enhancements
On May 16, 2007, the Company acquired all of the outstanding membership
interests of Compo Enhancements, LLC ("Compo"). Compo was founded in late 2005
as a third party provider of e-commerce solutions for the Company. Management
believes that the acquisition enables the Company to fully integrate its
e-commerce business into the Company's Retail Division and operate its online
business internally. The acquisition was completed for a consideration of
$8,982, subject to adjustments which include certain earn out provisions based
on the Company's financial performance through 2012. 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. On a preliminary basis, the Company allocated $3,800 to the value of
customer relationships, $930 to the value of a non-compete agreement and $4,437
to goodwill. The value of customer relationships is being amortized over ten
years and the non-compete agreement is being amortized over the five-year life
of the agreement. The results of operations of Compo have been included in the
Company's Condensed Consolidated Statements of Operations from the date of the
acquisition. Unaudited pro forma information related to this acquisition is not
included, as the impact of this transaction is not material to our consolidated
results. In connection with the acquisition, Jeffrey Silverman, founder, CEO and
42% owner of Compo, has been appointed President of the Company. Mr. Silverman's
contract which expires on December 31, 2009, provides for an annual salary of
$600 and an annual bonus based on EBIT. In addition, Mr. Silverman was granted
150,000 stock options with an exercise price of $45 and an additional 150,000
stock options with an exercise price of $50, all of which vest over three years.
8
STEVEN MADDEN, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
JUNE 30, 2007
($ in thousands except share and per share data)
NOTE M - ACQUISITIONS (CONTINUED)
Daniel M. Friedman
On February 7, 2006, the Company acquired all of the equity interest of
privately held Daniel M. Friedman and Associates, Inc. and D.M.F. International
(collectively, "Daniel M. Friedman"). Founded in 1995, Daniel M. Friedman is a
manufacturer and distributor of name brand fashion handbags and accessories. The
acquisition was completed for consideration of $18,710 including transaction
costs plus certain earn out provisions based on financial performance beginning
2008 through 2010. On April 10, 2007, an amendment to the agreement shortened
the earn-out period through December 31, 2008 and advanced the earn-out payments
beginning with 2007. The resulting future earn out payments will be charged to
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 4,918
Liabilities assumed (4,731)
------------
Net assets acquired $ 18,710
------------
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 six months ended June 30, 2006 below:
Net sales $ 241,847
Operating income 40,465
Net income 23,937
Basic earnings per share $ 1.15
Diluted earnings per share $ 1.09
NOTE N- GOODWILL AND INTANGIBLE ASSETS
The following is a summary of the carrying amount of goodwill by segment for the
six months ended June 30, 2007:
Wholesale
--------------------------- Net carrying
women's accessories Retail amount
------------ ------------ ------------ ------------
Balance at January 1, 2007 $ 1,547 $ 4,918 $ 0 $ 6,465
Acquisition of Compo 0 0 4,437 4,437
------------ ------------ ------------ ------------
Balance at June 30, 2007 $ 1,547 $ 4,918 $ 4,437 $ 10,902
------------ ------------ ------------ ------------
9
STEVEN MADDEN, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
JUNE 30, 2007
($ in thousands except share and per share data)
NOTE N- GOODWILL AND INTANGIBLE ASSETS (CONTINUED)
The following table details identifiable intangible assets as of June 30, 2007:
Estimated Accumulated Net carrying
lives Cost basis Amortization amount
------------ ------------ ------------ ------------
Trade name 6 years $ 200 $ 48 $ 152
Customer relationships 10 years 6,400 419 5,981
License agreements 3-6 years 5,600 1,522 4,078
Non-compete agreement 5 years 930 25 905
Other 3 years 14 1 13
------------ ------------ ------------
$ 13,144 $ 2,015 $ 11,129
------------ ------------ ------------
The estimated future amortization expense of purchased intangibles as of June
30, 2007 is as follows:
2007 (remaining six months) $ 981
2008 1,962
2009 1,859
2010 1,856
2011 1,381
Thereafter 3,090
------------
$ 11,129
============
NOTE O - COMPREHENSIVE INCOME
Comprehensive income for the three- and six-month periods ended June 30, 2007,
after considering other comprehensive income including unrealized gain on
marketable securities of $279 and $384, was $10,797 and $20,435, respectively.
For the comparable periods ended June 30, 2006, after considering other
comprehensive gains (losses) on marketable securities of $(100) and $126,
comprehensive income was $12,596 and $23,682, respectively.
NOTE P - RECENTLY ISSUED ACCOUNTING STANDARDS
Effective January 1, 2007, the Company adopted the provisions of the Financial
Accounting Standards Board ("FASB") Interpretation No. 48, "Accounting for
Uncertainty In Income Taxes" ("FIN 48"), which addresses the accounting for
uncertainty in income taxes recognized in the financial statements in accordance
with FASB Statement No. 109, "Accounting for Income Taxes." FIN 48 provides
guidance on the financial statement recognition and measurement of a tax
position taken on the Company's tax return. Pursuant to FIN 48, the Company has
opted to classify interest and penalties that would accrue according to the
provisions of relevant tax law as income tax expense on the Condensed
Consolidated Statements of Operations. The Company determines the amount of
interest expense to be recognized by applying the applicable statutory rate of
interest to the difference between the tax position recognized in accordance
with FIN 48 and the amount previously taken or expected to be taken on a tax
return. As required by FIN 48, the Company applied the "more-likely-than-not"
recognition threshold to all tax positions at the adoption date, which resulted
in no required adjustment to the opening balance of retained earnings. The
adoption of FIN 48 did not have a material impact on the Company's results of
operations and earnings per share. The Company's tax years 2002 through 2005
remain open to examination for most taxing authorities.
10
STEVEN MADDEN, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
JUNE 30, 2007
($ in thousands except share and per share data)
NOTE P - RECENTLY ISSUED ACCOUNTING STANDARDS (CONTINUED)
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. The Company
has not yet determined the impact, if any, that the implementation of SFAS No.
157 will have on its results of operations or financial condition.
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. The Company has not yet
determined the impact, if any, that the implementation of SFAS No. 159 will have
on its results of operations or financial condition.
NOTE Q - COMMITMENTS, CONTINGENCIES AND OTHER
LEGAL PROCEEDINGS:
(a) 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. Based on discussions with legal counsel, the
Company believes that the maximum liability in this case is not
likely to exceed $1,500. Accordingly, the Company recorded a reserve
of $1,500 during the year ended December 31, 2006. Such reserve is
subject to change to reflect the status of this matter.
(b) The Company has been named as a defendant in certain other lawsuits
in the normal course of business. In the opinion of management,
after consulting with legal counsel, the liabilities, if any,
resulting from these matters should not have a material effect on
the Company's financial position or results of operations. It is the
policy of management to disclose the amount or range of reasonably
possible losses in excess of recorded amounts.
NOTE R - OPERATING SEGMENT INFORMATION
The Company's reportable segments are primarily based on methods used to
distribute its products. The wholesale segment, through sales to department and
specialty stores, and the retail segment, through the operation of retail stores
and the website, derive revenue from sales of branded women's, men's and kid's
footwear and accessories. In addition, the wholesale segment has a licensing
program that extends the Steve Madden, Steven by Steve Madden and Stevies brands
to accessories and ready-to-wear apparel. The first cost segment represents
activities of a subsidiary which earns commissions for serving as a buying agent
to mass-market merchandisers, shoe chains and other off-price retailers with
respect to their procurement of private label shoes.
11
STEVEN MADDEN, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
JUNE 30, 2007
($ in thousands except share and per share data)
NOTE R - OPERATING SEGMENT INFORMATION (CONTINUED)
WHOLESALE SEGMENTS
------------------------------------------ TOTAL
WOMEN'S MEN'S ACCESSORIES WHOLESALE RETAIL FIRST COST CONSOLIDATED
------------ ------------ ------------ ------------ ------------ ------------ ------------
QUARTER ENDED,
JUNE 30, 2007:
Net sales to external
customers $ 52,571 $ 14,200 $ 11,845 $ 78,616 $ 29,640 $ 108,256
Gross profit 17,222 5,957 3,741 26,920 18,500 45,420
Commissions and
licensing fees - net 1,002 - - 1,002 - $ 4,667 5,669
Income from operations 6,521 2,426 879 9,826 2,997 4,667 17,490
Segment assets $ 147,700 $ 23,295 $ 22,172 $ 193,167 $ 49,520 $ 23,983 $ 266,670
Capital expenditures $ 210 $ 2,086 $ - $ 2,296
JUNE 30, 2006:
Net sales to external
customers $ 60,099 $ 18,811 $ 17,284 $ 96,194 $ 33,306 $ 129,500
Gross profit 22,576 7,758 6,223 36,557 17,998 54,555
Commissions and
licensing fees - net 721 - - 721 - $ 2,104 2,825
Income from operations 10,602 3,545 2,962 17,109 2,102 2,104 21,315
Segment assets $ 149,533 $ 17,584 $ 23,803 $ 190,920 $ 42,905 $ 15,498 $ 249,323
Capital expenditures $ 1,033 $ 1,462 $ - $ 2,495
WHOLESALE SEGMENTS
------------------------------------------ TOTAL
WOMEN'S MEN'S ACCESSORIES WHOLESALE RETAIL FIRST COST CONSOLIDATED
------------ ------------ ------------ ------------ ------------ ------------ ------------
SIX MONTHS ENDED,
JUNE 30, 2007:
Net sales to external
customers $ 110,097 $ 24,057 $ 26,761 $ 160,915 $ 53,995 $ 214,910
Gross profit 39,223 9,653 7,841 56,717 30,897 87,614
Commissions and
licensing fees - net 2,101 - - 2,101 - $ 9,014 11,115
Income from operations 17,930 3,141 2,023 23,094 1,051 9,014 33,159
Segment assets $ 147,700 $ 23,295 $ 22,172 $ 193,167 $ 49,520 $ 23,983 $ 266,670
Capital expenditures $ 1,226 $ 3,324 $ - $ 4,550
JUNE 30, 2006:
Net sales to external
customers $ 120,311 $ 33,286 $ 25,579 $ 179,176 $ 58,639 $ 237,815
Gross profit 47,566 13,788 9,328 70,682 30,156 100,838
Commissions and
licensing fees - net 1,526 - - 1,526 - $ 5,061 6,587
Income from operations 23,010 6,052 4,676 33,738 971 5,061 39,770
Segment assets $ 149,533 $ 17,584 $ 23,803 $ 190,920 $ 42,905 $ 15,498 $ 249,323
Capital expenditures $ 1,526 $ 2,917 $ 5 $ 4,448
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)
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 Asia. 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.
Consolidated net sales for the quarter ended June 30, 2007 were $108,256 as
compared to $129,500 in the same quarter of the prior year. Gross margin in the
second quarter of 2007 remained unchanged from the second quarter of 2006 at
42%. Net income for the second quarter of this year was $10,518, compared with
$12,696 in the same period last year. Diluted EPS for the second quarter was
$0.49 per share on 21,626 diluted weighted average shares outstanding compared
to $0.58 per share on 22,030 diluted weighted average shares outstanding in the
second quarter of last year.
The expansion of the Company's international business as well as the continued
growth in private label business resulted in substantial increase in the First
Cost Division income. For the quarter ended June 30, 2007, income from
operations more than doubled in the First Cost Division to $4,667 from $2,104 in
the same period of last year.
The Company has pursued a number of initiatives to enhance gross margins such as
reducing freight costs, job outs, store to store transfers and inventory
shrinkage. As a result, the gross margin in the Retail Division has increased to
62% in the second quarter of 2007 from 54% in the second quarter of 2006. This
significant increase in gross margin occurred despite the disappointing sales
results. Same store sales (sales in stores that were in operation throughout all
of the second quarters of 2007 and 2006) decreased 13%. Store sales productivity
decreased to sales per square foot of $696 in the second quarter of 2007 from
$741 sales per square foot in the same quarter of last year.
The Company's annualized inventory turnover increased to 8 times in the second
quarter of 2007 compared to 7.8 in the second quarter of 2006. The Company's
accounts receivable average collection days also improved to 52 days in the
second quarter of 2007 compared to 54 days in the second quarter of the previous
year.
As of June 30, 2007, the Company had $93,906 in cash, cash equivalents and
marketable securities, no short or long-term debt, and total stockholders equity
of $226,839. Working capital increased to $159,351 as of June 30, 2007 compared
to $137,886 as of June 30, 2006.
13
On May 16, 2007, the Company acquired all of the outstanding membership
interests of Compo Enhancements, LLC ("Compo"), the Company's outsourced
e-commerce solution provider, and appointed its founder and CEO, Jeffrey
Silverman, President of the Company. This acquisition will enable the Company to
fully integrate its e-commerce business into the Company's Retail Division and
operate its online business internally.
The following tables set forth information on operations for the periods
indicated:
SELECTED FINANCIAL INFORMATION
THREE MONTHS ENDED
JUNE 30
($ in thousands)
2007 2006
--------------------- ---------------------
CONSOLIDATED:
Net sales $ 108,256 100% $ 129,500 100%
Cost of sales 62,836 58 74,945 58
Gross profit 45,420 42 54,555 42
Other operating income - net of expenses 5,669 5 2,825 2
Operating expenses 33,599 31 36,065 28
Income from operations 17,490 16 21,315 16
Interest and other income, net 803 1 642 1
Income before income taxes 18,293 17 21,957 17
Net income 10,518 10 12,696 10
By Segment:
WHOLESALE DIVISION:
Net sales $ 78,616 100% $ 96,194 100%
Cost of sales 51,696 66 59,637 62
Gross profit 26,920 34 36,557 38
Other operating income 1,002 1 721 1
Income from operations 9,826 12 17,109 18
RETAIL DIVISION:
Net sales $ 29,640 100% $ 33,306 100%
Cost of sales 11,140 38 15,308 46
Gross profit 18,500 62 17,998 54
Income from operations 2,997 10 2,102 6
Number of stores 96 95
FIRST COST DIVISION:
Other commission income- net of expenses $ 4,667 100% $ 2,104 100%
14
SELECTED FINANCIAL INFORMATION
SIX MONTHS ENDED
JUNE 30
($ in thousands)
2007 2006
--------------------- ---------------------
CONSOLIDATED:
Net sales $ 214,910 100% $ 237,815 100%
Cost of sales 127,296 59 136,977 58
Gross profit 87,614 41 100,838 42
Other operating income - net of expenses 11,115 5 6,587 3
Operating expenses 65,570 31 67,655 28
Income from operations 33,159 15 39,770 17
Interest and other income, net 1,713 1 913 0
Income before income taxes 34,872 16 40,683 17
Net income 20,051 9 23,556 10
By Segment:
WHOLESALE DIVISION:
Net sales $ 160,915 100% $ 179,176 100%
Cost of sales 104,198 65 108,494 61
Gross profit 56,717 35 70,682 39
Other operating income 2,101 1 1,526 1
Income from operations 23,094 14 33,738 19
RETAIL DIVISION:
Net sales $ 53,995 100% $ 58,639 100%
Cost of sales 23,098 43 28,483 49
Gross profit 30,897 57 30,156 51
Income from operations 1,051 2 971 1
Number of stores 96 95
FIRST COST DIVISION:
Other commission income- net of expenses $ 9,014 100% $ 5,061 100%
RESULTS OF OPERATIONS
($ in thousands)
THREE MONTHS ENDED JUNE 30, 2007 VS. THREE MONTHS ENDED JUNE 30, 2006
CONSOLIDATED:
Total net sales for the three-month period ended June 30, 2007 decreased by 16%
to $108,256 from $129,500 for the comparable period of 2006. Net sales in the
Retail Division decreased by 11% and net sales in the Wholesale Division
decreased by 18%. Gross margin in the second quarter of 2007 remained unchanged
from the second quarter of 2006 at 42% as a significant increase in the Retail
Division's gross margin was offset by a decrease in the Wholesale Division.
Operating expenses decreased in the second quarter of this year to $33,599 or
31% from
15
$36,065 or 28% in the same period last year. Commission and licensing fee income
was $5,669 in the second quarter of 2007 compared to $2,825 in the second
quarter of 2006. Income from operations was $17,490 in the second quarter of
this year compared to $21,315 in the same period last year. Net income decreased
to $10,518 in the second quarter of this year compared to $12,696 in the same
period last year. The decrease in income was primarily due to the lower
consolidated net sales.
WHOLESALE DIVISION:
Net sales from the Wholesale Division accounted for $78,616 or 73%, and $96,194
or 74% of total Company net sales for the second quarter of 2007 and 2006,
respectively. Disappointing sales of four of the Company's brands contributed to
the decrease in net sales. The absence of a trend right product as significant
as the peep toe trend that drove sales last year caused net sales to decrease in
Steve Madden Womens Division. The weak performance of sport casual business
resulted in a decrease of net sales in Steve Madden Mens Division. In the
Candies Division, net sales decreased because the product assortment skewed too
much towards dress products, which did not perform well during the second
quarter of 2007. Net sales decreased in the Daniel Friedman Division due to the
expected lower sales of belts and Betsey Johnson handbags. In addition, net
sales for the second quarter of 2006 included $4,000 in net sales from Rule,
l.e.i. and Jump, three brands that were discontinued in the second half of 2006.
Gross profit margin decreased to 34% in the second quarter of this year from 38%
in the same period last year, due primarily to a significant increase in
markdowns to Kohl's in the Candies Division required to clear retail
inventories. In addition, the aforementioned decrease in net sales in the Womens
Division resulted in an increase in the amount of promotional activity in the
second quarter of 2007 when compared to last year. Finally, a significant shift
in the mix of product sales towards lower-margin private label merchandise
resulted in lower profit margins in the Daniel M. Friedman Division. In the
second quarter of 2007, operating expenses decreased to $18,096 from $20,169 in
the second quarter last year due to a planned reduction in advertising expense
as well as a decrease in variable costs reflective of the decrease in sales.
Income from operations for the Wholesale Division decreased to $9,826 for the
three-month period ended June 30, 2007 compared to $17,109 for the three-month
period ended June 30, 2006.
RETAIL DIVISION:
In the second quarter of 2007 net sales from the Retail Division accounted for
$29,640 or 27% of total Company net sales compared to $33,306 or 26% in the same
period last year. The Company opened one new store during the twelve months
ended June 30, 2007. As a result, the Company had 96 retail stores as of June
30, 2007 compared to 95 stores as of June 30, 2006. The 96 stores currently in
operation include 93 under the Steve Madden brand, two under the Steven brand
and one internet store. Comparable store sales (sales of those stores, including
the internet store, that were open throughout the second quarters of 2007 and
2006) decreased 13% in the second quarter of this year due to the absence of
significant trend right products. The Company has pursued a number of
initiatives to enhance gross margins such as reducing freight costs, job outs,
store to store transfers and inventory shrinkage. As a result, the gross margin
in the Retail Division has increased to 62% in the second quarter of 2007 from
54% in the second quarter of 2006. Income from operations for the Retail
Division was $2,997 in the second quarter of this year compared to $2,102 for
the same period in 2006.
FIRST COST DIVISION:
The First Cost Division generated net commission income and design fees of
$4,667 for the three-month period ended June 30, 2007, compared to $2,104 for
the comparable period of 2006. The substantial increase was the result of the
expansion of the Company's international business as well as the continued
growth in private label business.
SIX MONTHS ENDED JUNE 30, 2007 VS. SIX MONTHS ENDED JUNE 30, 2006
CONSOLIDATED:
Total net sales for the six-month period ended June 30, 2007 decreased by 10% to
$214,910 from $237,815 for the comparable period of 2006. Net sales in the
Retail Division decreased by 8% and net sales in the Wholesale Division
decreased by 10%. Overall gross profit margin decreased to 41% in the first six
months of 2007 from 42%
16
in the first six months of 2006. A decrease in the Wholesale gross profit margin
to 35% in the first six months of this year compared to 39% in the same period
last year was partially offset by an increase in the Retail gross profit margin
to 57% in the first six months of this year from 51% in the same period last
year. Operating expenses decreased in the first six months of this year to
$65,570 or 31% of net sales from $67,655 or 28% of net sales in the same period
last year. Commission and licensing fee income was $11,115 in the first six
months of 2007 compared to $6,587 in the first six months of 2006. Income from
operations was $33,159 in the first six months of this year compared to $39,770
in the same period last year. Net income decreased to $20,051 in the first six
months of this year compared to $23,556 in the same period last year. The
decrease in income was primarily due to the decrease in net sales and lower
gross profit margins for the Wholesale Division.
WHOLESALE DIVISION:
Net sales from the Wholesale Division accounted for $160,915 or 75%, and
$179,176 or 75% of total Company net sales for the first six month of 2007 and
2006, respectively. The decrease in sales was concentrated primarily in three of
the Company's wholesale brands. In the Steve Madden Womens Division, the
decrease in sales was due to the poor performance of boots early in the year and
the absence of significant trend right products such as the peep toe trend that
drove sales last year. The continued weakness in the sport casual business
resulted in disappointing sales in Steve Madden Mens Division while in the
Candies Division, the poor performance of dress shoes which resulted in an
abnormally high level of allowances combined with an unbalanced product mix
resulted in lower sales. In addition, net sales for the six-month period ended
June 30, 2006 include $11,700 in net sales from Rule, l.e.i. and Jump, three
brands that were discontinued in the second half of 2006. These decreases were
partially offset by the double-digit net sales increases achieved in both the
Madden Girl and the Stevies Divisions.
Gross profit margin decreased to 35% in the first six months of this year from
39% in the same period last year, due primarily to margin pressure from the poor
performance of boots in Steve Madden Women's, and a significant increase in
markdowns required to clear retail inventories in the Candies Division. In
addition, an increase in the proportion of the sales of lower margin private
label products resulted in lower profit margins in the Daniel M. Friedman
Division. In the first six months of 2007, operating expenses decreased to
$35,724 or 22% of net sales from $38,470 or 21% of net sales in the same period
of 2006. The decrease is due to a planned reduction in advertising costs and a
decline of variable cost driven by the decrease in sales. Income from operations
for the Wholesale Division decreased to $23,094 for the six-month period ended
June 30, 2007 compared to $33,738 for the six-month period ended June 30, 2006.
RETAIL DIVISION:
In the first six months of 2007 net sales from the Retail Division accounted for
$53,995 or 25% of total Company net sales compared to $58,639 or 25% in the same
period last year. The Company opened one new store during the twelve months
ended June 30, 2007. As a result, the Company had 96 retail stores as of June
30, 2007 compared to 95 stores as of June 30, 2006. The 96 stores currently in
operation include 93 under the Steve Madden brand, two under the Steven brand
and one internet store. Comparable store sales (sales of those stores, including
the internet store, that were open throughout the first six months of 2007 and
2006) decreased 8.2% in the first six months of this year due to the lack of any
significant fashion trends. The Company has pursued a number of initiatives to
enhance gross margins such as reducing freight costs, job outs, store to store
transfers and inventory shrinkage. As a result, the gross margin in the Retail
Division has increased to 57% in the first six months of 2007 from 51% in the
first six months of 2006. Income from operations for the Retail Division was
$1,051 in the first six months of this year compared to $971 for the same period
in 2006.
FIRST COST DIVISION:
The First Cost Division generated net commission income and design fees of
$9,014 for the six-month period ended June 30, 2007, compared to $5,061 for the
comparable period of 2006. The substantial increase was the result of the
expansion of the Company's international business as well as the continued
growth in private label business.
17
LIQUIDITY AND CAPITAL RESOURCES
($ in thousands)
The Company had working capital of $159,351 at June 30, 2007 compared to
$151,711 at December 31, 2006. The Company's net income for the six months ended
June 30, 2007 was the primary contributor to the increase in working capital.
The Company has a factoring agreement with GMAC under which the Company is
eligible to borrow against its invoiced receivables at an interest rate of the
lower of the prime rate less 0.875% or the 30 day London Inter Bank Offered Rate
("LIBOR") plus 1.375. The agreement, which has no specific expiration date and
can be terminated by either party with 60 days written notice after June 30,
2009, provides the Company with a $50 million credit facility with a $25 million
sub-limit on the aggregate face amount of Letters of Credit with some other
stipulations.
The 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. The
agreement expired on June 30, 2007 at which time Daniel M. Friedman was
incorporated into the GMAC agreement.
As of June 30, 2007, the Company held marketable securities valued at $69,973,
consisting primarily of corporate and municipal bonds, U.S. Treasury notes,
government asset-backed securities, certificates of deposits and equities.
Management believes that based upon its current financial position and available
cash and marketable securities, the Company will meet all of its financial
commitments and operating needs for at least the next twelve months.
OPERATING ACTIVITIES
($ in thousands)
During the six-month period ended June 30, 2007, net cash provided by operating
activities was $6,064. Sources of cash were provided primarily by the net income
of $20,051. The primary uses of cash were increases in prepaid expenses, prepaid
taxes, deposits and other assets of $11,836, an increase in factored receivables
of $3,842, an increase in note receivable of $3,000, an increase in inventories
of $1,493 and a decrease in accounts payable and other accrued expenses of $565.
INVESTING ACTIVITIES
($ in thousands)
During the six-month period ended June 30, 2007, the Company invested $17,807 in
marketable securities and received $37,814 from the maturities and sales of
securities. The Company also invested $8,982 in the acquisition of Compo.
Additionally, the Company made capital expenditures of $4,550, principally for
remodeling of six existing stores, additional office space and upgrades to its
computer systems.
FINANCING ACTIVITIES
($ in thousands)
During the six-month period ended June 30, 2007, the Company repurchased 710,187
shares of the Company's common stock at an average price of $29.49 for a total
cost of $20,941. The Company received $5,044 in cash and realized a tax benefit
of $8,087 in connection with the exercise of stock options.
18
CONTRACTUAL OBLIGATIONS
($ in thousands)
The Company's contractual obligations as of June 30, 2007 were as follows:
PAYMENT DUE BY PERIOD
---------------------------------------------------------
REMAINDER
OF 2012 AND
CONTRACTUAL OBLIGATIONS TOTAL 2007 2008-2009 2010-2011 AFTER
---------------------------- --------- --------- --------- --------- ---------
Operating lease obligations $ 123,148 $ 8,074 $ 31,323 $ 29,306 $ 54,445
Purchase obligations 52,688 52,688 0 0 0
Other long-term liabilities
(future minimum royalty
payments) 860 100 540 220 0
--------- --------- --------- --------- ---------
Total $ 176,696 $ 60,862 $ 31,863 $ 29,526 $ 54,445
========= ========= ========= ========= =========
At June 30, 2007, the Company had un-negotiated open letters of credit for the
purchase of inventory of approximately $2,939.
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 May 16, 2007, the Company acquired all of the outstanding membership
interests of Compo. The acquisition was completed for consideration of $8,982,
including transaction costs. In addition, the purchase agreement includes
certain earn-out provisions based on financial performance through 2012.
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 2008.
The Company has employment agreements with certain executive officers, which
provide for the payment of compensation aggregating approximately $2,477 in
2007, $2,415 in 2008 and $1,680 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
including stock options. 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, India 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. The Company
currently makes approximately 99% of its purchases in U.S. dollars.
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.
19
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 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 for the Company 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. The Company evaluates anticipated
customer markdowns and advertising 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
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", 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 in the amount by which the carrying amount of
the asset exceeds the fair value of the asset.
Litigation reserves. Estimated amounts for litigation claims that are probable
and can be reasonably estimated are recorded as liabilities in 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 a contingent liability could materially impact the
Company's results of operation and financial position.
20
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 3. 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 agreements with GMAC and Wells Fargo Century can be found in
Liquidity and Capital Resources section under Item 2 of this document.
As of June 30, 2007, the Company held marketable securities valued at $69,973,
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.
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, as of the end of the fiscal quarter covered by this quarterly report,
effective to ensure that information required to be disclosed by the Company in
reports that it files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and
forms and is accumulated and communicated to the Company's management, including
the Chief Executive Officer and Chief Financial Officer, to allow timely
decisions regarding required disclosure.
As required by Rule 13a-15(d) under the Exchange Act, the Company's management,
including the Company's Chief Executive Officer and Chief Financial Officer, has
evaluated the Company's internal controls over financial reporting to determine
whether any changes occurred during the quarter covered by this quarterly report
that have materially affected, or are reasonably likely to materially affect,
the Company's internal control over financial reporting. Based on that
evaluation, there has been no such change during the quarter covered by this
report.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
($ in thousands)
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, 2006. 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.
21
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. Based on discussions with legal counsel, the Company
believes that the maximum liability in this case is not likely to exceed $1,500.
Accordingly, the Company recorded a reserve of $1,500 during the year ended
December 31, 2006. Such reserve is subject to change to reflect the status of
this matter.
The Company has been named as a defendant in certain other lawsuits in the
normal course of business. In the opinion of management, after consulting with
legal counsel, the liabilities, if any, resulting from these matters should not
have a material effect on the Company's financial position or results of
operations. It is the policy of management to disclose the amount or range of
reasonably possible losses in excess of recorded amounts.
ITEM 1A. RISK FACTORS
The risk factors included in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2006 have not materially changed.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS:
There were no unregistered sales of equity securities and the Company did not
repurchase any of its common stock during the quarter ended June 30, 2007.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of the Company held on May 25, 2007 (the "Annual
Meeting"), the stockholders of the Company ratified the appointment of Eisner
LLP and approved an amendment to 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 amendment 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 18,657,472 239,441 9,036
With respect to the approval of the amendment to 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 12,202,118 2,934,642 167,968
22
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 18,500,503 405,445
Jeffrey Birnbaum 16,893,871 2,012,077
Marc S. Cooper 18,565,626 340,322
Harold Kahn 18,735,391 170,557
John L. Madden 16,892,626 2,013,322
Peter Migliorini 18,565,482 340,466
Richard P. Randall 18,735,496 170,452
Thomas H. Schwartz 18,672,405 233,543
Walter Yetnikoff 18,729,346 176,602
ITEM 6. EXHIBITS
10.1 Employment Agreement with Robert Schmertz dated March 9, 2007
(incorporated by reference to Exhibit 10.1 to the Company's Current
Report on Form 8-K filed with the SEC on March 13, 2007).
10.2 Amendment to the Earn-Out Agreement, dated as of April 10, 2007, by
and among the Company, Daniel M. Friedman, Daniel M. Friedman &
Associates, Inc. and DMF International, Ltd. (incorporated by
reference to Exhibit 10.1 to the Company's Current Report on Form 8-K
filed with the SEC on April 16, 2007).
10.3 Membership Interest Purchase Agreement, dated May 16, 2007, by and
among the Company, Jeffrey Silverman, James Randel, Ron Offir, Godfrey
Baker, Alyse Nathan and Andrew Rosca (incorporated by reference to
Exhibit 10.1 to the Company's Current Report on Form 8-K filed with
the SEC on May 18, 2007).Employment Agreement with Robert Schmertz
dated March 9, 2007 (incorporated by reference to Exhibit 10.1 to the
Company's Current Report on Form 8-K filed with the SEC on March 13,
2007).
10.4 Earn-Out Agreement, dated May 16, 2007, by and among the Company,
Jeffrey Silverman, James Randel, Ron Offir, Godfrey Baker, Alyse
Nathan and Andrew Rosca (incorporated by reference to Exhibit 10.2 to
the Company's Current Report on Form 8-K filed with the SEC on May 18,
2007).
10.5 Employment Agreement, dated May 16, 2007, by and among the Company and
Jeffrey Silverman (incorporated by reference to Exhibit 10.3 to the
Company's Current Report on Form 8-K filed with the SEC on May 18,
2007).
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.
23
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, 2007
STEVEN MADDEN, LTD.
/s/ JAMIESON A. KARSON
------------------------------------
Jamieson A. Karson
Chairman and Chief Executive Officer
/s/ ARVIND DHARIA
------------------------------------
Arvind Dharia
Chief Financial Officer
24
EXHIBIT NO. DESCRIPTION
----------- -----------
10.1 Employment Agreement with Robert Schmertz dated March 9, 2007
(incorporated by reference to Exhibit 10.1 to the Company's Current
Report on Form 8-K filed with the SEC on March 13, 2007).
10.2 Amendment to the Earn-Out Agreement, dated as of April 10, 2007, by
and among the Company, Daniel M. Friedman, Daniel M. Friedman &
Associates, Inc. and DMF International, Ltd. (incorporated by
reference to Exhibit 10.1 to the Company's Current Report on Form 8-K
filed with the SEC on April 16, 2007).
10.3 Membership Interest Purchase Agreement, dated May 16, 2007, by and
among the Company, Jeffrey Silverman, James Randel, Ron Offir, Godfrey
Baker, Alyse Nathan and Andrew Rosca (incorporated by reference to
Exhibit 10.1 to the Company's Current Report on Form 8-K filed with
the SEC on May 18, 2007).
10.4 Earn-Out Agreement, dated May 16, 2007, by and among the Company,
Jeffrey Silverman, James Randel, Ron Offir, Godfrey Baker, Alyse
Nathan and Andrew Rosca (incorporated by reference to Exhibit 10.2 to
the Company's Current Report on Form 8-K filed with the SEC on May 18,
2007).
10.5 Employment Agreement, dated May 16, 2007, by and among the Company and
Jeffrey Silverman (incorporated by reference to Exhibit 10.3 to the
Company's Current Report on Form 8-K filed with the SEC on May 18,
2007).
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.