UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2005
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
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Commission File Number 0-23702
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STEVEN MADDEN, LTD.
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(Exact name of Registrant as specified in its charter)
Delaware 13-3588231
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
52-16 Barnett Avenue, Long Island City, New York 11104
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (718) 446-1800
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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 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 an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ].
As of May 5, 2005, there were 12,995,317 shares of the registrant's common
stock, $.0001 par value, outstanding.
STEVEN MADDEN, LTD.
FORM 10-Q
QUARTERLY REPORT
March 31, 2005
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements (Unaudited):
Consolidated Balance Sheets..................................... 1
Consolidated Statements of Operations........................... 2
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................ 8
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk...... 19
ITEM 4. Controls and Procedures......................................... 19
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings............................................... 20
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds..... 21
ITEM 6. Exhibits........................................................ 21
Signature....................................................... 22
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands)
March 31, December 31, March 31,
2005 2004 2004
------------ ------------ ------------
(unaudited) (unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 30,186 $ 30,853 $ 22,302
Accounts receivable, net of allowances of $640, $536 and $688 2,817 3,322 7,790
Due from factor, net of allowances of $3,164, $2,379 and $1,973 40,139 33,711 39,565
Inventories 28,684 34,384 26,063
Marketable securities - available for sale 14,011 12,784 8,043
Prepaid expenses and other current assets 2,142 1,287 3,192
Prepaid taxes 1,959 2,255 2,588
Deferred taxes 3,030 2,498 1,796
------------ ------------ ------------
Total current assets 122,968 121,094 111,339
Property and equipment, net 20,754 20,715 19,303
Deferred taxes 5,488 5,780 5,618
Deposits and other 433 435 434
Marketable securities - available for sale 33,925 36,340 42,253
Cost in excess of fair value of net assets acquired 2,066 2,066 2,066
------------ ------------ ------------
$ 185,634 $ 186,430 $ 181,013
============ ============ ============
LIABILITIES
Current liabilities:
Accounts payable $ 14,900 13,450 $ 11,291
Accrued expenses 6,436 6,227 3,852
------------ ------------ ------------
Total current liabilities 21,336 19,677 15,143
Deferred rent 2,118 2,088 1,917
------------ ------------ ------------
23,454 21,765 17,060
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Commitments, contingencies and other
STOCKHOLDERS' EQUITY
Preferred stock - $.0001 par value, 5,000 shares authorized;
none issued; Series A Junior Participating preferred stock -
$.0001 par value, 60 shares authorized; none issued
Common stock - $.0001 par value, 60,000 shares authorized, 15,228,
14,608 and 14,569 shares issued, 13,129, 12,818 and
13,324 outstanding 2 1 1
Additional paid-in capital 82,681 80,631 79,407
Retained earnings 104,413 103,451 95,302
Stock subscription receivable -- -- (175)
Unearned compensation (377) (703) (2,448)
Other comprehensive gain:
Unrealized gain on marketable securities (net of taxes) (1,354) (1,024) (143)
Treasury stock - 2,099, 1,790 and 1,245 shares at cost (23,185) (17,691) (7,991)
------------ ------------ ------------
162,180 164,665 163,953
------------ ------------ ------------
$ 185,634 $ 186,430 $ 181,013
============ ============ ============
See accompanying notes to consolidated financial statements - unaudited
1
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited)
(in thousands, except per share data)
Three Months Ended
March 31,
------------------------
2005 2004
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Net sales:
Wholesale $ 56,861 $ 55,067
Retail 26,475 23,701
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83,336 78,768
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Cost of sales:
Wholesale 40,475 35,668
Retail 14,543 11,828
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55,018 47,496
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Gross profit:
Wholesale 16,386 19,399
Retail 11,932 11,873
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28,318 31,272
Commission and licensing fee income 1,947 1,416
Operating expenses (29,044) (26,108)
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Income from operations 1,221 6,580
Interest and other income, net 438 534
---------- ----------
Income before provision for income taxes 1,659 7,114
Provision for income taxes 697 2,988
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Net income $ 962 $ 4,126
========== ==========
Basic income per share $ 0.07 $ 0.31
========== ==========
Diluted income per share $ 0.07 $ 0.29
========== ==========
Basic weighted average common shares outstanding 13,235 13,254
Effect of dilutive securities - options/warrants/restricted stock 569 1,120
---------- ----------
Diluted weighted average common shares outstanding 13,804 14,374
========== ==========
See accompanying notes to consolidated financial statements - unaudited
2
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
Three Months Ended
March 31,
------------------------
2005 2004
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Cash flows from operating activities:
Net income $ 962 $ 4,126
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization 1,314 1,106
Non-cash compensation 327 656
Provision for bad debts 889 283
Deferred rent expense 30 89
Realized loss on marketable securities 41 3
Deferred taxes -- (104)
Changes in:
Accounts receivable 401 (3,745)
Due from factor (7,213) (10,864)
Inventories 5,700 (2,205)
Prepaid expenses, prepaid taxes, deposits and other assets (557) 1,270
Accounts payable and other accrued expenses 1,659 (1,711)
---------- ----------
Net cash provided by (used in) operating activities 3,553 (11,096)
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Cash flows from investing activities:
Purchase of property and equipment (1,353) (2,017)
Purchase of marketable securities (426) (20,707)
Sale/redemption of marketable securities 1,003 3,050
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Net cash used in investing activities (776) (19,674)
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Cash flows from financing activities:
Proceeds from options and warrants exercised 2,050
Common stock purchased for treasury (5,494)
Repayment of lease obligations -- (1)
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Net cash used in financing activities (3,444) (1)
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Net decrease in cash and cash equivalents (667) (30,771)
Cash and cash equivalents - beginning of period 30,853 53,073
---------- ----------
Cash and cash equivalents - end of period $ 30,186 $ 22,302
========== ==========
See accompanying notes to consolidated financial statements - unaudited
3
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Unaudited
March 31, 2005
($ in thousands except per share data)
NOTE A - BASIS OF REPORTING
The accompanying unaudited financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
for interim financial information and pursuant to the rules and regulations of
the Securities and Exchange Commission (the "SEC"). Accordingly, they do not
include all of the information and footnotes required by accounting principles
generally accepted in the United States of America for complete financial
statements. In the opinion of management, such statements include all
adjustments (consisting only of normal recurring items) which are considered
necessary for a fair presentation of the financial position of Steven Madden,
Ltd. and subsidiaries (the "Company") and the results of its operations and cash
flows for the periods presented. The results of its operations for the
three-month period ended March 31, 2005 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, 2004 included in the Annual Report
of Steven Madden, Ltd. on Form 10-K filed with the SEC on March 16, 2005, as
amended on April 11, 2005.
NOTE B - 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 C - INVENTORIES
Inventories, which consist of finished goods, are stated at the lower of cost
(first-in, first-out method) or market.
NOTE D - 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. Sales
reductions for anticipated discounts and allowances are recognized when sales
are recorded. Customers retain the right to product replacement for poor quality
or improper or short shipments, which have historically been immaterial. Retail
sales are recognized when the payment is received from customers and are
recorded net of returns. The Company earns commission income as a buying agent
through its Adesso-Madden Division by arranging to produce private label shoes
to the specifications of its clients. Commission revenue is recognized as earned
when title of the product transfers from the manufacturer to the customer and is
recorded on a net basis.
The Company licenses its Steve Madden trademark for use in connection with the
manufacturing, marketing and sale of belts, sunglasses, eyewear and hosiery.
Each license agreement requires the licensee to pay to the Company a royalty and
advertising fee based on net sales. A minimum royalty and advertising fee is due
the Company in the event that specified net sales targets are not achieved.
Licensing revenue is recognized on the basis of net sales reported by the
licensees or, if greater, minimum guaranteed royalties when received and earned.
In substantially all of the Company's license agreements, the minimum guaranteed
royalty is earned and payable on a quarterly basis (due in advance on the first
day of the quarter).
NOTE E - 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.
These expenses are reflected in the financial statements as deductions to net
sales. For the three-month periods ended March 31, 2005 and 2004, the total
deduction to net sales for these expenses was $8,516 and $7,785 respectively.
4
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Unaudited
March 31, 2005
($ in thousands except per share data)
NOTE F - 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, F.O.B.
costs, sample expenses, custom duty, inbound freight, 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 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 G - NET INCOME PER SHARE OF COMMON STOCK
Basic income per share is based on the weighted average number of common shares
outstanding during the period. Diluted income per share reflects the potential
dilution assuming common shares were issued upon the exercise of outstanding
options and the proceeds thereof were used to purchase outstanding common
shares. Diluted income per share also reflects the unvested and unissued shares
promised to employees which have a dilutive effect. For the purposes of
calculating the diluted income per share for the three months ended March 31,
2005 and 2004, stock options representing approximately 1,202,000 and 100,000
shares, respectively, have been excluded because including the shares would be
anti-dilutive.
NOTE H - STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation", encourages the use of the fair value based method of
accounting for stock-based employee compensation. Alternatively, SFAS No. 123
allows entities to continue to apply the intrinsic value method prescribed by
Accounting Principles Board ("APB") Opinion 25, "Accounting for Stock Issued to
Employees", and related interpretations and provide pro forma disclosures of net
income and earnings per share as if the fair value based method of accounting
had been applied to employee awards. The Company has elected to continue to
apply the provisions of APB Opinion 25 and provide the disclosures required by
SFAS No. 123 and SFAS No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure", which was released in December 2003 as an amendment
to SFAS No. 123. The following table illustrates the effect on net income and
earnings per share if the fair value based method had been applied to all
awards.
Three Months Ended March 31,
----------------------------
2005 2004
------------ ------------
Reported net income $ 962 $ 4,126
Stock-based employee compensation included in
reported net income, net of tax 82
Stock-based employee compensation determined
under the fair value based method, net of tax (538) (820)
------------ ------------
Pro forma net income $ 506 $ 3,306
============ ============
Basic income per share:
As reported $ 0.07 $ 0.31
Pro forma $ 0.04 $ 0.25
Diluted income per share:
As reported $ 0.07 $ 0.29
Pro forma $ 0.04 $ 0.23
5
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Unaudited
March 31, 2005
($ in thousands except per share data)
NOTE I - COMPREHENSIVE INCOME
Comprehensive income for the three month periods ended March 31, 2005 and 2004,
after considering other comprehensive income including unrealized loss on
marketable securities of $330 and $16, was $632 and $4,110, respectively.
NOTE J - RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2004, the Financial Accounting Standards Board ("FASB") issued the
Statement of Financial Accounting Standards No. 123R, "Share-Based Payment"
("SFAS 123R"), which replaces SFAS No. 123, "Accounting for Stock-Based
Compensation," and supercedes APB Opinion No. 25, "Accounting for Stock Issued
to Employees." This statement requires that all share-based payments to
employees be recognized in the financial statements based on their fair values
on the date of grant. The Company currently uses the intrinsic value method to
measure compensation expense for stock-based awards. Note H, entitled
Stock-Based Compensation, provides a pro forma net income and earnings per share
as if the Company had used a fair-value based method provided by SFAS 123R to
measure stock-based compensation for the periods ending March 31, 2005 and 2004.
On April 14, 2005, the SEC amended the compliance dates for SFAS 123R, which
extended the Company's required adoption date of SFAS 123R to the first quarter
of 2006. The Company is evaluating the requirements of SFAS 123R and expects
that its adoption will have a material impact on the Company's results of
operations and earnings per share.
NOTE K - COMMITMENTS, CONTINGENCIES AND OTHER
[1] Indictment:
On June 20, 2000, Steven Madden, the Company's former Chairman and Chief
Executive Officer, was indicted in the United States District Courts for
the Southern District and Eastern District of New York. The indictments
alleged that Mr. Madden engaged in securities fraud and money laundering
activities. In addition, the Securities and Exchange Commission filed a
complaint in the United States District Court for the Eastern District of
New York alleging that Mr. Madden violated Section 17(a) of the
Securities Exchange Act of 1934, as amended. On May 21, 2001, Steven
Madden entered into a plea agreement with the U.S. Attorney's Office,
pursuant to which he pled guilty to four of the federal charges filed
against him. In addition, Mr. Madden reached a separate settlement
agreement with the Securities and Exchange Commission regarding the
allegations contained in its complaint. As a result, Mr. Madden resigned
as the Company's Chief Executive Officer and as a member of the Company's
Board of Directors effective July 1, 2001. Mr. Madden agreed to serve as
the Company's Creative and Design Chief, a non-executive position. On
April 4, 2002, Mr. Madden was sentenced in the United States District
Court for the Southern District of New York to forty-one (41) months'
imprisonment in connection with two of the federal charges to which he
pled guilty.
On May 3, 2002, Mr. Madden was sentenced in the United States District
Court for the Eastern District of New York to forty-one (41) months'
imprisonment in connection with the remaining two charges to which he
pled guilty. The sentences ran concurrently. Under the settlement
agreement with the Securities and Exchange Commission, Mr. Madden agreed
to not serve as an officer or director of a publicly traded company for 7
years. Neither the indictments nor the Securities and Exchange Commission
complaint allege any wrongdoing by the Company or its other officers and
directors. Mr. Madden began serving his sentence in September of 2002. On
April 14, 2005, Mr. Madden was released from federal prison and has
returned to work at the Company as its Creative and Design Chief, a
non-executive position.
In December 2001, the Company purchased a loss mitigation policy to cover
costs arising out of lawsuits related to the June 2000 federal indictment
of Steven Madden described above. The policy covers the Company's
anticipated damages and legal costs in connection with such lawsuits. The
Company is obligated to pay for damages and costs in excess of the policy
limits. The cost of the policy was $6.9 million. On June 1, 2004, the
aforementioned lawsuits were settled for damages and costs that were
below the policy limits.
6
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Unaudited
March 31, 2005
($ in thousands except per share data)
NOTE K - COMMITMENTS, CONTINGENCIES AND OTHER (CONTINUED)
[2] Other Actions:
(a) On December 15, 2003, the Company commenced an action against
LaRue Distributors, Inc. ("LaRue") in the United States
District Court for the Southern District of New York. The
Company seeks a declaratory judgment that the Company properly
terminated a license agreement with LaRue and seeks monetary
damages for breaches of the license agreement and trademark
infringement by LaRue. Subsequently, LaRue served an answer
and counterclaim alleging that the license agreement was
improperly terminated by the Company and is seeking $9.9
million compensatory and punitive damages. The Company filed
an answer denying any liability with respect to the
counterclaim. The parties submitted cross-motions for summary
judgment on February 28, 2005. If neither motion is granted, a
trial will be scheduled for later in 2005. The Company
believes that it has substantial defenses to the counterclaims
asserted by LaRue. Notwithstanding the Company's assertion of
its substantial defenses, the Company has retained an expert
who has calculated the damages to LaRue, assuming LaRue
prevails on its claim of improper termination of the license
agreement, to be less than $1 million.
(b) On or about July 9, 2004, an action was filed in the United
States District Court for the Southern District of New York
against the Company by Robert Marc for trademark infringement,
captioned Robert Marc v. Steven Madden, Ltd. Case No. 04 CV
5354 (JGK). In the action, Robert Marc claimed trademark
infringement in connection with a "bar and dot" design on the
sides of certain eyewear. The alleged infringing eyeglasses
are manufactured and sold by the Company's licensee for
eyewear, Colors in Optics, which is also a defendant in the
action. Colors in Optics has assumed responsibility for the
defense of this action. The matter was settled with no payment
of money by Steven Madden, Ltd. The Company signed the
settlement papers on or about February 10th, 2005 and a
dismissal will be filed shortly.
(c) On or about December 20, 2004, an action was filed in the
United States District Court for the Central District of
California against the Company by Global Brand Marketing, Inc.
(GBMI) for patent infringement, captioned Global Brand
Marketing, Inc. v. Steven Madden, Ltd., Case No. CV 04-10339
(RJK-AJW (RZx)). In the action, GBMI claims infringement of a
design patent in connection with a shoe sold by Steven Madden,
Ltd. referred to as the "Ronan." The parties settled the
matter on or about April 5, 2005 and a dismissal was filed on
April 27, 2005. Steven Madden, Ltd. will be selling off its
remaining inventory of the Ronan shoe over the next few
months. The settlement did 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.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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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 quarterly report on Form 10-Q.
Statements in this "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and elsewhere in this quarterly report on Form 10-Q
as well as statements made in press releases and oral statements that may be
made by the Company or by its officers, directors or employees acting on the
Company's behalf that are not statements of historical or current fact
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve known and unknown risks, uncertainties and other unknown factors that
could cause the actual results of the Company to be materially different from
historical results or from any future results expressed or implied by such
forward-looking statements. In addition to statements which explicitly describe
such risks and uncertainties, readers are urged to consider statements labeled
with the terms "believes", "belief", "expects", "intends", "anticipates",
"projects" or "plans" to be uncertain, forward-looking statements. The
forward-looking statements contained herein are also subject generally to other
risks and uncertainties that are described from time to time in the Company's
reports and registration statements filed with the Securities and Exchange
Commission.
Overview:
($ in thousands, except retail sales data per square foot)
As forecasted, the first quarter of 2005 proved to be very challenging for the
Company. Net Income decreased from $4,126 in 2004 to $962 in 2005. Reasons for
the decrease include an increase in operating expenses due to an increase in
accounting and professional fees incurred by the Company in connection with
management's assessment and the audit of internal controls pursuant to Section
404 of the Sarbanes-Oxley Act of 2002 and additional occupancy and personnel
expense to support the growth in the retail division. Additionally, the net
sales increase of 6% was offset by a decrease of 6% in gross profit. The
reduction of gross profit is attributable to several factors including:
1. The closeout of slow moving inventory at both wholesale and retail.
2. Increased markdown and allowance costs, particularly in the Candies,
l.e.i., and Steven Wholesale Divisions.
3. Increased promotional activities at retail.
4. The continuation of competitive pricing pressures in newer product
categories.
The Company anticipates gross margin pressure to continue throughout 2005 in
both the Wholesale and Retail Divisions.
The Company continued its strategy of growing the Retail Division by opening
three new stores while closing two under-performing stores in the first quarter
of 2005. Net sales in the retail division increased 12% to $26,475 in the first
quarter of 2005 from $23,701 for the same period of 2004. Same store sales
(sales in stores that were in operation throughout all of the first quarters of
2004 and 2005) increased 6% following an 8% same store sales growth last year.
Store sales productivity remained high with sales per square foot of $690
compared to $682 last year. The Company is planning to open nine to twelve
(9-12) new stores during the balance of 2005.
The Company's annualized inventory turnover increased to 8.0 times in first
quarter of 2005 compared to 7.6 times in the fourth quarter of 2004, reflecting
the above mentioned decrease in inventory levels. The Company's accounts
receivable average collection days increased to 67 days in the first quarter of
2005 from 64 days for the same period of 2004. The increase in days outstanding
is attributable to an increase in sales with mass merchant retailers who
typically are allowed extended payment terms.
8
As of March 31, 2005, the Company had $78,122 in cash, cash equivalents and
marketable securities, no short or long term debt, and total stockholders equity
of $162,180. Working capital increased to $101,632 as of March 31, 2005 compared
to $101,417 on December 31, 2004. The Company repurchased 309,000 shares of
common stock this quarter at a cost of $5,494, reflecting management's continued
confidence in the Company's long-term prospects and its commitment to enhance
shareholder value.
The following tables set forth information on operations for the periods
indicated:
Selected Financial Information
Three Months Ended
March 31
($ in thousands)
2005 2004
----------------- -----------------
CONSOLIDATED:
- ------------
Net Sales $ 83,336 100% $ 78,768 100%
Cost of Sales 55,018 66 47,496 60
Gross Profit 28,318 34 31,272 40
Other Operating Income 1,947 2 1,416 2
Operating Expenses 29,044 35 26,108 34
Income from Operations 1,221 1 6,580 8
Interest and Other Income, net 438 1 534 1
Income Before Income Taxes 1,659 2 7,114 9
Net Income 962 1 4,126 5
By Segment:
WHOLESALE DIVISIONS:
- -------------------
Steven Madden, Ltd. (Madden Womens):
- ------------------------------------
Net Sales $ 27,908 100% $ 25,534 100%
Cost of Sales 20,563 74 16,703 65
Gross Profit 7,345 26 8,831 35
Other Operating Income 580 2 520 2
Operating Expenses 7,713 27 6,824 27
Income from Operations 212 1 2,527 10
l.e.i. Footwear:
- ----------------
Net Sales $ 7,215 100% $ 11,125 100%
Cost of Sales 4,936 68 7,320 66
Gross Profit 2,279 32 3,805 34
Operating Expenses 2,052 29 2,910 26
Income from Operations 227 3 895 8
Madden Mens:
- ------------
Net Sales $ 11,104 100% $ 6,569 100%
Cost of Sales 7,127 64 4,408 67
Gross Profit 3,977 36 2,161 33
Operating Expenses 2,833 26 1,834 28
Income from Operations 1,144 10 327 5
Candie's Footwear:
- ------------------
Net Sales $ 4,025 100% $ 3,216 100%
Cost of Sales 3,387 84 2,108 66
Gross Profit 638 16 1,108 34
Operating Expenses 1,475 37 959 30
Income (Loss) from Operations (837) (21) 149 4
9
Selected Financial Information
Three Months Ended
March 31
($ in thousands)
By Segment (Continued): 2005 2004
------------------ ------------------
WHOLESALE DIVISIONS (Continued):
Diva Acquisition Corp. (Steven):
- -------------------------------
Net Sales $ 4,225 100% $ 5,249 100%
Cost of Sales 2,753 65 2,920 56
Gross Profit 1,472 35 2,329 44
Operating Expenses 1,303 31 1,049 20
Income from Operations 169 4 1,280 24
Stevies Inc.:
- ------------
Net Sales $ 1,972 100% $ 3,325 100%
Cost of Sales 1,458 74 2,153 65
Gross Profit 514 26 1,172 35
Operating Expenses 465 24 683 21
Income from Operations 49 2 489 14
Unionbay Men's Footwear:
- -----------------------
Net Sales $ 412 100% $ 49 100%
Cost of Sales 251 61 56 114
Gross Profit 161 39 (7) (14)
Operating Expenses 79 19 163 333
Income (Loss) from Operations 82 20 (170) (347)
RETAIL DIVISION:
- ---------------
Steven Madden Retail Inc.:
- -------------------------
Net Sales $ 26,475 100% $ 23,701 100%
Cost of Sales 14,543 55 11,828 50
Gross Profit 11,932 45 11,873 50
Operating Expenses 12,402 47 11,104 47
Income (Loss) from Operations (470) (2) 769 3
Number of Stores 92 83
ADESSO MADDEN INC.:
- ------------------
(FIRST COST)
Other Operating Revenue $ 1,367 100% $ 896 100%
Operating Expenses 722 53 582 65
Income from Operations 645 47 314 35
10
RESULTS OF OPERATIONS
($ in thousands)
Three Months Ended March 31, 2005 vs. Three Months Ended March 31, 2004
Consolidated:
- ------------
Total net sales for the three month period ended March 31, 2005 increased by 6%
to $83,336 from $78,768 for the comparable period of 2004. Sales increases from
the Retail Division, the Madden Mens Wholesale Division, the Madden Womens
Wholesale Division and the Candie's Wholesale Division were partially offset by
declines in the l.e.i., Stevies and Steven Wholesale Divisions.
Gross profit as a percentage of sales decreased to 34% in 2005 from 40% in 2004.
This decrease was primarily due to the Company's decision to closeout slow
moving inventory. Additionally, the weaker than anticipated performance of the
l.e.i., Candie's and Steven Wholesale Divisions at retail necessitated high
levels of inventory markdowns which resulted in lower than expected margins.
Finally, the heavy and persistent promotional activities throughout the quarter
negatively affected the gross margin.
Operating expenses increased to $29,044 in 2005 from $26,108 in 2004. This
increase resulted from higher sales commissions and selling related expenses due
to the increase in sales, increased professional and accounting fees incurred by
the Company in connection with managements assessment and the audit of internal
controls pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, and
occupancy expenses associated with the operation of an additional nine retail
stores (net).
Commission and licensing fee income was $1,947 in 2005 compared to $1,416 in
2004. Income from operations was $1,221 in 2005 compared to $6,580 in 2004. Net
income was $962 in 2005 compared to $4,126 in 2004. The decrease in income was
primarily due to the lower margins and increased expenses described directly
above.
Wholesale Divisions:
- -------------------
Steven Madden, Ltd. (Madden Womens, l.e.i. Footwear, Madden Mens and Candie's
Footwear):
Sales from the Madden Womens Wholesale Division ("Madden Womens") accounted for
$27,908 or 33%, and $25,534 or 32%, of total sales in 2005 and 2004,
respectively. The increase in sales resulted from sales to specialty footwear
retailers as well as Nordstrom, Dillards, May and Federated. Gross profit as a
percentage of sales decreased to 26% in 2005 from 35% in 2004, primarily due to
the closeouts of slow moving inventory and an increase in markdowns and
allowances caused by higher promotional activities at retail in the first
quarter of 2005. Operating expenses increased to $7,713 in 2005 from $6,824 in
2004, primarily due to increased professional and accounting fees incurred in
connection with managements assessment and the audit of internal controls
pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, and increases in
selling and related expenses. Income from operations for Madden Womens was $212
in 2005 compared to $2,527 in 2004.
Sales from the l.e.i. Footwear Wholesale Division ("l.e.i.") accounted for
$7,215 or 9%, and $11,125 or 14%, of total sales in 2005 and 2004, respectively.
This decrease in sales was projected based on the decision to shrink or exit
accounts with little potential for future profitability. Gross profit as a
percentage of sales decreased to 32% in 2005 from 34% in 2004, primarily due to
the liquidation of slow moving inventory and higher inventory markdowns and
clearance at retail. Operating expenses decreased to $2,052 in 2005 from $2,910
in 2004 due to decreases in payroll and payroll related expenses and selling and
selling related expenses. Income from operations for l.e.i. was $227 in 2005
compared to $895 in 2004.
Sales from the Madden Mens Wholesale Division ("Madden Mens") accounted for
$11,104 or 13%, and $6,569 or 8%, of total sales in 2005 and 2004, respectively.
This 69% increase in sales was primarily due to the success of key styles
including "denim-friendly" low profile casual shoes and core dress styles. Gross
profit as a percentage of sales increased to 36% in 2005 from 33% in 2004,
reflecting the Mens division's substantial reductions of markdowns and
allowances. Operating expenses increased to $2,833 in 2005 from $1,834 in 2004
due to increased selling and selling related expenses. Income from operations
for Madden Mens was $1,144 in 2005 compared to $327 in 2004.
Sales from the Candie's Wholesale Division ("Candie's") accounted for $4,025 or
5%, and $3,216 or 4%, of total sales in 2005 and 2004, respectively. Under the
Company's amended license agreement, management will continue, through the end
11
of 2006, to design, manufacture and distribute Candie's footwear in a variety of
specialty and department stores, including Kohl's, all in conjunction with the
launch of Candie's apparel at Kohl's this coming Fall. Beginning on January 1,
2007, the Company will be permitted to sell Candies branded footwear only to
Kohl's. Due to the timing of the announcement of the Kohl's arrangement at the
front end of the Spring 2005 season and the reluctance of some customers to
invest longer term in Candie's, during the quarter the Company embarked on an
aggressive liquidation strategy which severely affected the gross profit,
positioning the Company for a clean launch with Kohl's for the upcoming fall
season. As a result, gross profit as a percentage of sales decreased to 16% in
2005 from 34% in 2004. Operating expenses increased to $1,475 in 2005 from $959
in 2004 due to increases in licensing fees and selling and selling related
expenses in order to accommodate top line growth. Loss from operations for
Candie's was $837 in 2005 compared to income from operations of $149 in 2004.
Diva Acquisition Corp. ("Steven"):
Sales from Steven accounted for $4,225 or 5%, and $5,249 or 7%, of total sales
in 2005 and 2004, respectively. The Steven division maintained a substantial
portion of the sales and market share growth that it achieved last year, when
revenue grew 114% over 2003. The decrease in sales was due to disappointing
sales of closed toe dress shoes which were last year's best performers. Gross
profit as a percentage of sales decreased to 35% in 2005 from 44% in 2004,
primarily due to the liquidation of slow moving inventory and an increase in
markdowns and allowances caused by higher levels of promotional activities at
retail in the first quarter of 2005. Operating expenses increased to $1,303 in
2005 from $1,049 in 2004, due to increases in payroll and payroll related
expenses and marketing and advertising expenses. Income from operations for
Steven was $169 in 2005, compared to $1,280 in 2004.
Stevies Inc. ("Stevies"):
Sales from Stevies accounted for $1,972 or 2%, and $3,325 or 4%, of total sales
in 2005 and 2004, respectively. The decrease was due to management's decision to
eliminate customers with little potential for future profitability. Gross profit
as a percentage of sales decreased to 26% in 2005 from 35% in 2004, primarily
due to pricing pressures and the liquidation of slow moving inventory. Operating
expenses decreased to $465 in 2005 from $683 in 2004 due to decreases in selling
and selling related expenses and marketing and advertising expenses. Income from
operations for Stevies was $49 in 2005 compared to $489 in 2004.
Unionbay Men's Footwear ("Unionbay"):
Unionbay, the Company's license for young men's footwear, generated net sales of
$412 in 2005 compared to $49 in 2004. This increase was the result of the
re-launch of Unionbay this spring in select, mid-tier department stores.
Management is closely monitoring the retail performance of these new shoes and,
while remaining cautious in the Company's outlook for contribution from Unionbay
because of private label competition, management believes that with a better
product assortment and pricing model, Unionbay will increase profitability.
Retail Division:
- ---------------
Sales from the Retail Division accounted for $26,475 or 32% and $23,701 or 30%
of total sales in 2005 and 2004, respectively. As of March 31, 2005, there were
92 retail stores compared to 83 retail stores as of March 31, 2004. Comparable
store sales (sales of those stores that were open for all of 2005 and 2004) for
the three-month period ended March 31, 2005 increased 6% over the same period of
2004. This growth in comparable store sales came on top of an 8% comparable
store sales growth achieved last year. This increase was achieved through the
early release and success of the opened up sandals, continued success of key
styles such as dress shoes with details and ornaments and a greater contribution
from the Mens division. Gross profit as a percentage of sales decreased to 45%
in 2005 from 50% in 2004, primarily due to an increase in promotional activity
and the liquidation of slow moving inventory. Operating expenses for the Retail
Division were $12,402 in 2005 and $11,104 in 2004. This increase in dollars was
primarily due to increased payroll and payroll related expenses and higher
occupancy expenses associated with the operation of an additional nine stores
(net) since last year. Loss from operations for the Retail Division was $470 in
2005 compared to income from operations of $769 in 2004, due to the lower
margins and the higher operating expenses related to additional new stores.
Management anticipates the retail division to return to profitability in the
near future.
12
Adesso-Madden Division:
- ----------------------
Adesso-Madden, Inc. generated commission revenues of $1,367 in 2005, compared to
$896 in 2004. This increase was the result of increases in commission revenue
from certain private label customers, expansion of the Company's private label
business in Men's, the addition of several new specialty retailers to the
private label agency list and the cumulative contribution of commissions on
international sales made on a direct-from-factory basis. Operating expenses
increased to $722 in 2005 from $582 in 2004, due to increases in licensing fees
paid. Income from operations for Adesso-Madden was $645 in 2005 compared to $314
in 2004.
LICENSE AGREEMENTS
Revenue generated from licensing was $580 in 2005 compared to $520 in 2004. This
increase reflects the success of the Company's license products at retail. As of
March 31, 2005, the Company had four license partners covering four product
categories of its Steve Madden brand. The product categories include hosiery,
sunglasses, eyewear and belts.
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $101,632 at March 31, 2005 compared to
$101,417 at December 31, 2004.
Under the terms of a factoring agreement with Capital Factors, Inc. (Capital),
the Company is eligible to draw down 80% of its invoiced receivables at an
interest rate of one point below the Prime Rate as defined in the agreement. The
agreement with Capital will continue in full force until terminated by either
party upon sixty days notice. Capital maintains a lien on all of the Company's
receivables and assumes the credit risk for all assigned accounts approved by
them. Under the agreement, the Company has a credit line of $15 million. As of
March 31, 2005 the Company had not used any portion of the credit line.
On April 29, 2005, the Company entered into a factoring agreement with GMAC
Commercial Finance LLC (GMAC). The agreement provides the Company with a $25
million credit facility with a $15 million sub-limit on direct borrowings. The
interest rate on borrowings is two and one-half percent (2.5%) over the 30 day
LIBOR Rate. GMAC will maintain a lien on all of the Company's receivables and
assume the credit risk for all assigned accounts approved by them. The Company
anticipates that it will transition from Capital to GMAC on or about July 1,
2005.
As of March 31, 2005 the Company had invested $47,936 in marketable securities
consisting of corporate bonds, U.S. Treasury notes, government asset-backed
securities 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
During the three month period ended March 31, 2005, net cash provided by
operating activities was $3,553. Sources of cash were provided principally by a
decrease in inventory of $5,700, an increase in accounts payable and other
accrued expenses of $1,659 and by net income of $962. The primary uses of cash
were an increase in factored accounts receivable of $7,213, caused by sales to
mid-tier customers who typically have longer payment terms and an increase in
prepaid expenses, deposits and other assets of $557.
13
CONTRACTUAL OBLIGATIONS
The Company's contractual obligations as of March 31, 2005 were as follows:
Payment due by period (in thousands)
Remainder of 2011 and
Contractual Obligations Total 2005 2006-2008 2009-2010 after
- --------------------------- ------------ ------------ ------------ ------------ ------------
Long-Term Debt
Obligations $ 0 $ 0 $ 0 $ 0 $ 0
Capital Lease Obligations 0 0 0 0 0
Operating Lease
Obligations 74,656 8,567 33,196 15,793 17,100
Purchase Obligations 16,021 16,021 0 0 0
Other Long-Term
Liabilities (future
minimum royalty
payments) 4,606 2,003 2,603 0 0
------------ ------------ ------------ ------------ ------------
Total $ 95,283 $ 26,591 $ 35,799 $ 15,793 $ 17,100
============ ============ ============ ============ ============
At March 31, 2005, the Company had un-negotiated open letters of credit for the
purchase of imported merchandise of approximately $16,021.
The Company has employment agreements with certain executives, which provide for
the payment of compensation aggregating approximately $1,298 in 2005, $956 in
2006 and $718 in 2007. In addition, such employment agreements provide for
incentive compensation based on various performance criteria as well as other
benefits.
Significant portions of the Company's products are produced at overseas
locations, the majority of which are located in Brazil and China. The Company
has not entered into any long-term manufacturing or supply contracts with any of
these overseas manufacturers. 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 98% of its purchases in
U.S. dollars.
INVESTING ACTIVITIES
During the three month period ended March 31, 2005, the Company invested $426 in
marketable securities and received $1,003 from maturities and sales of
securities. In addition, the Company incurred capital expenditures of $1,353
principally for leasehold improvements for the three additional retail stores
that were opened during the period and computer systems upgrades.
FINANCING ACTIVITIES
During the three month period ended March 31, 2005, the Company repurchased
308,657 shares of the Company's common stock at a total cost of $5,494.
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 impact on sales, expenses or profitability.
14
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 consolidated financial
statements which have been prepared in accordance with accounting principles
generally accepted in the United States for interim financial statements. 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 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 is
determined by analyzing aged receivables, current economic conditions, the
prevailing retail environment and historical dilution levels for customers.
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. 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, 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. In
accordance with SFAS No. 144, long-lived assets, such as property, equipment,
leasehold improvements and goodwill subject to amortization, are reviewed for
impairment annually or whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Recoverability of assets
to be held and used is measured by a comparison of the carrying amount of an
asset to the estimated undiscounted future cash flows expected to be generated
by the asset. If the carrying amount of an asset exceeds its estimated future
cash flows, an impairment charge is recognized by the amount by which the
carrying amount of the asset exceeds the fair value of the asset.
Litigation reserves. Estimated amounts for litigation claims that are probable
and can be reasonably estimated are recorded as liabilities in the Company's
consolidated balance sheet. 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.
All costs incurred to bring finished products to the warehouse are included in
the cost of sales line item of the Company's Consolidated Statement of
Operations. These include purchase commissions, letter of credit fees, FOB
costs, sample expenses, custom duty, inbound freight, labels and product
packaging. All warehouse and distribution costs are included in the operating
15
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 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.
OTHER CONSIDERATIONS
Fashion Industry Risks. The success of the Company will depend in significant
part upon its ability to anticipate and respond to product and fashion trends as
well as to anticipate, gauge and react to changing consumer demands in a timely
manner. There can be no assurance that the Company's products will correspond to
the changes in taste and demand or that the Company will be able to successfully
market products that respond to such trends. If the Company misjudges the market
for its products, it may be faced with significant excess inventories for some
products and missed opportunities with others. In addition, misjudgments in
merchandise selection could adversely affect the Company's image with its
customers resulting in lower sales and increased markdown allowances for
customers which could have a material adverse effect on the Company's business,
financial condition and results of operations.
The industry in which the Company operates is cyclical, with purchases tending
to decline during recessionary periods when disposable income is low. Purchases
of contemporary shoes and accessories tend to decline during recessionary
periods and also may decline at other times. While the Company has fared well in
recent years in a difficult retail environment, there can be no assurance that
the Company will be able to return to its historical rate of growth in revenues
and earnings, or remain profitable in the future. A recession in the national or
regional economies or uncertainties regarding future economic prospects, among
other things, could affect consumer-spending habits and have a material adverse
effect on the Company's business, financial condition and results of operations.
In recent years, the retail industry has experienced consolidation and other
ownership changes. In the future, retailers in the United States and in foreign
markets may consolidate, undergo restructurings or reorganizations, or realign
their affiliations, any of which could decrease the number of stores that carry
the Company's products or increase the ownership concentration within the retail
industry. While such changes in the retail industry to date have not had a
material adverse effect on the Company's business or financial condition, there
can be no assurance as to the future effect of any such changes.
Inventory Management. The fashion-oriented nature of the Company's products and
the rapid changes in customer preferences leave the Company vulnerable to an
increased risk of inventory obsolescence. Thus, the Company's ability to manage
its inventories properly is an important factor in its operations. Inventory
shortages can adversely affect the timing of shipments to customers and diminish
sales and brand loyalty. Conversely, excess inventories can result in lower
gross margins due to the excessive discounts and markdowns that might be
necessary to reduce inventory levels. The inability of the Company to
effectively manage its inventory would have a material adverse effect on the
Company's business, financial condition and results of operations.
Dependence Upon Customers and Risks Related to Extending Credit to Customers.
The Company's customers consist principally of department stores and specialty
stores, including shoe boutiques. Certain of the Company's department store
customers, including some under common ownership, account for significant
portions of the Company's wholesale business.
The Company generally enters into a number of purchase order commitments with
its customers for each of its lines every season and does not enter into
long-term agreements with any of its customers. Therefore, a decision by a
significant customer of the Company, whether motivated by competitive
conditions, financial difficulties or otherwise, to decrease the amount of
merchandise purchased from the Company, or to change its manner of doing
business, could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company sells its products
primarily to retail stores across the United States and extends credit based on
an evaluation of each customer's financial condition, usually without
collateral. While various retailers, including some of the Company's customers,
have experienced financial difficulties in the past few years which increased
the risk of extending credit to such retailers, the Company's losses due to bad
debts have been limited. Pursuant to the Factoring Agreement between Capital
Factors and the Company, Capital Factors currently assumes the credit risk
related to approximately 95% of the Company's accounts receivables. However,
16
financial difficulties of a customer could cause the Company to curtail business
with such customer or require the Company to assume more credit risk relating to
such customer's account receivable.
Impact of Foreign Manufacturers. Substantial portions of the Company's products
are currently sourced outside the United States through arrangements with a
number of foreign manufacturers in four different countries. During the
three-month period ended March 31, 2005, approximately 92% of the Company's
products were purchased from sources outside the United States, primarily from
China and Brazil.
Risks inherent in foreign operations include work stoppages, transportation
delays and interruptions, changes in social, political and economic conditions
which could result in the disruption of trade from the countries in which the
Company's manufacturers or suppliers are located. Other risks include, the
imposition of additional regulations relating to imports, the imposition of
additional duties, taxes and other charges on imports, significant fluctuations
of the value of the dollar against foreign currencies, or restrictions on the
transfer of funds, any of which could have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
does not believe that any such economic or political condition will materially
affect the Company's ability to purchase products, since a variety of materials
and alternative sources are available. The Company cannot be certain, however,
that it will be able to identify such alternative sources without delay (if
ever) or without greater cost to the Company. The Company's inability to
identify and secure alternative sources of supply in this situation would have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company's imported products are also subject to United States customs
duties. The United States and the countries in which the Company's products are
produced or sold, from time to time, impose new quotas, duties, tariffs, or
other restrictions, or may adversely adjust prevailing quota, duty or tariff
levels, any of which could have a material adverse effect on the Company's
business, financial condition and results of operations.
Possible Adverse Impact of Unaffiliated Manufacturers' Inability to Manufacture
in a Timely Manner, Meet Quality Standards or to Use Acceptable Labor Practices.
As is common in the footwear industry, the Company contracts for the manufacture
of a majority of its products to its specifications through foreign
manufacturers. The Company does not own or operate any manufacturing facilities
and is therefore dependent upon independent third parties for the manufacture of
all of its products. The Company's products are manufactured to its
specifications by both domestic and international manufacturers. The inability
of a manufacturer to ship orders of the Company's products in a timely manner or
to meet the Company's quality standards could cause the Company to miss the
delivery date requirements of its customers for those items, which could result
in cancellation of orders, refusal to accept deliveries or a reduction in
purchase prices, any of which could have a material adverse effect on the
Company's business, financial condition and results of operations.
Although the Company enters into a number of purchase order commitments each
season specifying a time frame for delivery, method of payment, design and
quality specifications and other standard industry provisions, the Company does
not have long-term contracts with any manufacturer. As a consequence, any of
these manufacturing relationships may be terminated, by either party, at any
time. Although the Company believes that other facilities are available for the
manufacture of the Company's products, both within and outside of the United
States, there can be no assurance that such facilities would be available to the
Company on an immediate basis, if at all, or that the costs charged to the
Company by such manufacturers will not be greater than those presently paid.
The Company requires its licensing partners and independent manufacturers to
operate in compliance with applicable laws and regulations. While the Company
promotes ethical business practices and the Company's staff periodically visits
and monitors the operations of its independent manufacturers, the Company does
not control such manufacturers or their labor practices. The violation of labor
or other laws by an independent manufacturer of the Company or by one of the
Company's licensing partners, or the divergence of an independent manufacturer's
or licensing partner's labor practices from those generally accepted as ethical
in the United States, could have a material adverse effect on the Company's
business, financial condition and results of operations.
Intense Industry Competition. The fashion footwear industry is highly
competitive and barriers to entry are low. The Company's competitors include
specialty companies as well as companies with diversified product lines. The
recent market growth in the sales of fashionable footwear has encouraged the
entry of many new competitors and increased competition from established
companies. Most of these competitors, including Diesel, Kenneth Cole, Nine West,
DKNY, Skechers, Nike and Guess, may have significantly greater financial and
other resources than the Company and there can be no assurance that the Company
will be able to compete successfully with other fashion footwear companies.
Increased competition could result in pricing pressures, increased marketing
17
expenditures and loss of market share, and could have a material adverse effect
on the Company's business, financial condition and results of operations. The
Company believes effective advertising and marketing, branding of the Steve
Madden name, fashionable styling, high quality and value are the most important
competitive factors and plans to continually employ these elements as it
develops its products. The Company's inability to effectively advertise and
market its products could have a material adverse effect on the Company's
business, financial condition and results of operations.
Expansion of Retail Business. The Company's continued growth depends to a
significant degree on further developing the Steve Madden(R), Stevies, Steven,
Steve Madden Mens, l.e.i.(R) , Unionbay(R) and Candie's(R) brands, creating new
product categories and businesses and operating Company-owned stores on a
profitable basis. During the first quarter of 2005, the Company opened three (3)
Steve Madden retail stores and has plans to open approximately nine to twelve
(9-12) additional stores during the remainder of 2005. The Company's recent and
planned expansion includes the opening of stores in new geographic markets as
well as strengthening existing markets. New markets have in the past presented,
and will continue to present, competitive and merchandising challenges that are
different from those faced by the Company in its existing markets. There can be
no assurance that the Company will be able to open new stores, and if opened,
that such new stores will be able to achieve sales and profitability levels
consistent with management's expectations. The Company's retail expansion is
dependent on a number of factors, including the Company's ability to locate and
obtain favorable store sites, the performance of the Company's wholesale and
retail operations, and the ability of the Company to manage such expansion and
hire and train personnel. Past comparable store sales results may not be
indicative of future results, and there can be no assurance that the Company's
comparable store sales results can be maintained or will increase in the future.
In addition, there can be no assurance that the Company's strategies to increase
other sources of revenue, which may include expansion of its licensing
activities, will be successful or that the Company's overall sales or
profitability will increase or not be adversely affected as a result of the
implementation of such retail strategies.
The Company's operations have expanded and will continue to place additional
demands on the Company's managerial, operational and administrative resources.
The Company has recently invested significant resources in, among other things,
its management information systems and hiring and training new personnel.
However, in order to manage currently anticipated levels of future demand, the
Company may be required to, among other things, expand its distribution
facilities, establish relationships with new manufacturers to produce its
products, and continue to expand and improve its financial, management and
operating systems. There can be no assurance that the Company will be able to
manage future growth effectively and a failure to do so could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Seasonal and Quarterly Fluctuations. The Company's results may fluctuate quarter
to quarter as a result of the timing of holidays, weather, the timing of larger
shipments of footwear, market acceptance of the Company's products, the mix,
pricing and presentation of the products offered and sold, the hiring and
training of additional personnel, inventory write downs, the cost of materials,
the product mix between wholesale and licensing businesses, the incurrence of
other operating costs and factors beyond the Company's control, such as general
economic conditions and actions of competitors. In addition, the Company expects
that its sales and operating results may be significantly impacted by the
opening of new retail stores and the introduction of new products. Accordingly,
the results of operations in any quarter will not necessarily be indicative of
the results that may be achieved for a full fiscal year or any future quarter.
Trademark and Service Mark Protection. The Company believes that its trademarks
and service marks and other proprietary rights are important to its success and
its competitive position. Accordingly, the Company devotes substantial resources
to the establishment and protection of its trademarks on a worldwide basis.
Nevertheless, there can be no assurance that the actions taken by the Company to
establish and protect its trademarks and other proprietary rights will be
adequate to prevent imitation of its products by others or to prevent others
from seeking to block sales of the Company's products on the basis that they
violate the trademarks and proprietary rights of others. Moreover, no assurance
can be given that others will not assert rights in, or ownership of, trademarks
and other proprietary rights of the Company or that the Company will be able to
successfully resolve such conflicts. In addition, the laws of certain foreign
countries may not protect proprietary rights to the same extent as do the laws
of the United States. The failure of the Company to establish and then protect
such proprietary rights from unlawful and improper utilization could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Foreign Currency Fluctuations. The Company makes approximately ninety-eight
percent (98%) of its purchases in U.S. dollars. However, the Company sources
substantially all of its products overseas and, as such, the cost of these
18
products may be affected by changes in the value of the relevant currencies.
Changes in currency exchange rates may also affect the relative prices at which
the Company and foreign competitors sell their products in the same market.
There can be no assurance that foreign currency fluctuations will not have a
material adverse effect on the Company's business, financial condition and
results of operations.
Outstanding Options. As of May 5, 2005 there were outstanding options to
purchase an aggregate of approximately 2,012,003 shares of Common Stock. Holders
of such options are likely to exercise them when, in all likelihood, the market
price of the Company's stock is significantly higher than the exercise price of
the options. Further, while options are outstanding, they may adversely affect
the terms on which the Company could obtain additional capital, if required.
Economic and Political Risks. The present economic condition in the United
States and concern about uncertainties could significantly reduce the disposable
income available to the Company's customers for the purchase of it's products.
In addition, current unstable political conditions, including the potential or
actual conflicts in Iraq, North Korea or elsewhere, or the continuation or
escalation of terrorism, could have an adverse effect on the Company's business,
financial condition and results of operations.
ITEM 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 based on the prime rate. An analysis of the
Company's credit agreement with Capital Factors, Inc. can be found in Note C,
"Due From Factor" to the Consolidated Financial Statements included in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
2004. On December 31, 2004 and December 31, 2003, there were no direct
borrowings outstanding under the credit agreement.
As of March 31, 2005, the Company had investments in marketable securities
valued at $47,936,000 which consist principally of federal and state
obligations, corporate bonds that have various maturities through December 2009
and marketable equity securities. The debt 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.
19
Part II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Certain legal proceedings in which the Company is involved are discussed in Note
J to the consolidated financial statements included in the Company's Annual
Report on Form 10-K for the year ended December 31, 2004; Part I, Item 3, of the
Company's Annual Report on Form 10-K for the year ended December 31, 2004. The
following discussion is limited to recent developments concerning certain of the
Company's legal proceedings and should be read in conjunction with those earlier
Reports. Unless otherwise indicated, all proceedings discussed in those earlier
Reports remain outstanding.
Indictment:
On June 20, 2000, Steven Madden, the Company's former Chairman and Chief
Executive Officer, was indicted in the United States District Courts for the
Southern District and Eastern District of New York. The indictments alleged that
Mr. Madden engaged in securities fraud and money laundering activities. In
addition, the Securities and Exchange Commission filed a complaint in the United
States District Court for the Eastern District of New York alleging that Mr.
Madden violated Section 17(a) of the Securities Exchange Act of 1934, as
amended. On May 21, 2001, Steven Madden entered into a plea agreement with the
U.S. Attorney's Office, pursuant to which he pled guilty to four of the federal
charges filed against him. In addition, Mr. Madden reached a separate settlement
agreement with the Securities and Exchange Commission regarding the allegations
contained in its complaint. As a result, Mr. Madden resigned as the Company's
Chief Executive Officer and as a member of the Company's Board of Directors
effective July 1, 2001. Mr. Madden agreed to serve as the Company's Creative and
Design Chief, a non-executive position. On April 4, 2002, Mr. Madden was
sentenced in the United States District Court for the Southern District of New
York to forty-one (41) months' imprisonment in connection with two of the
federal charges to which he pled guilty.
On May 3, 2002, Mr. Madden was sentenced in the United States District Court for
the Eastern District of New York to forty-one (41) months' imprisonment in
connection with the remaining two charges to which he pled guilty. The sentences
ran concurrently. Under the settlement agreement with the Securities and
Exchange Commission, Mr. Madden agreed to not serve as an officer or director of
a publicly traded company for 7 years. Neither the indictments nor the
Securities and Exchange Commission complaint allege any wrongdoing by the
Company or its other officers and directors. Mr. Madden began serving his
sentence in September of 2002. On April 14, 2005, Mr. Madden was released from
federal prison and has returned to work at the Company as its Creative and
Design Chief, a non-executive position.
In December 2001, the Company purchased a loss mitigation policy to cover costs
arising out of lawsuits related to the June 2000 federal indictment of Steven
Madden described above. The policy covers the Company's anticipated damages and
legal costs in connection with such lawsuits. The Company is obligated to pay
for damages and costs in excess of the policy limits. The cost of the policy was
$6.9 million. On June 1, 2004, the aforementioned lawsuits were settled for
damages and costs that were below the policy limits.
Other Actions:
On or about December 20, 2004, an action was filed in the United States District
Court for the Central District of California against the Company by Global Brand
Marketing, Inc. (GBMI) for patent infringement, captioned Global Brand
Marketing, Inc. v. Steven Madden, Ltd., Case No. CV 04-10339 (RJK-AJW (RZx)). In
the action, GBMI claims infringement of a design patent in connection with a
shoe sold by the Company referred to as the "Ronan." The parties settled the
matter on or about April 5, 2005 and a dismissal was filed on April 27, 2005.
Steven Madden, Ltd. will be selling off its remaining inventory of the Ronan
shoe over the next few months. The settlement did 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.
20
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS:
The following table provides information as of March 31, 2005 with respect to
the shares of common stock repurchased by the Company during the first quarter
of fiscal 2005:
------------------------------------------------------------------------------------------
Period Total Average Total Number of Maximum Dollar Amount
Number of Price Paid Shares Purchased as of Shares that May Yet Be
Shares per Share Part of Publicly Purchased Under the Plans
Purchased Announced Plans or or Programs (1)
Programs (1)
------------------------------------------------------------------------------------------
1/1/05 - 70,000 $18.83 70,000 $ 8,981,428
1/31/05
------------------------------------------------------------------------------------------
2/1/05 - 107,460 18.59 107,460 $31,983,393
2/28/05
------------------------------------------------------------------------------------------
3/1/05 - 131,197 16.60 131,197 $29,805,626
3/31/05
------------------------------------------------------------------------------------------
Total 308,657 17.80 308,657 $29,805,626
------------------------------------------------------------------------------------------
(1) The Company's share repurchase program, which became effective as of
January 1, 2004, provides for share repurchases in the aggregate amount
of $20 million and has no set expiration or termination date.
Subsequently, on February 28, 2005, the Board of Directors of the
Company authorized and directed that the Company repurchase up to an
additional $25 million of its outstanding common stock at such prices
and times as are determined to be in the best interest of the Company.
ITEM 6. EXHIBITS
(10.1) Employment Agreement with Robert Schmertz dated March 11, 2005.
(10.2) Employment Agreement with Andrew Shames dated March 8, 2004.
(10.3) Commission Agreement between the Company and Hev Sales, Inc.
dated March 8, 2004.
(10.4) Employment Agreement between the Company, Adesso Madden, Inc.
and Joseph Masella and T.J.M. Sales Corporation dated May 7, 2002.
(10.5) Amendment No. 1 to Employment Agreement between the Company,
Adesso Madden, Inc. and Joseph Masella and T.J.M. Sales Corporation dated
September 2, 2002.
(10.6) Amendment No. 2 to Employment Agreement between the Company,
Adesso Madden, Inc. and Joseph Masella and T.J.M. Sales Corporation dated
September 27, 2002.
(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.
21
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report on Form 10-Q to be signed on its behalf
by the undersigned thereunto duly authorized.
DATE: May 10, 2005
STEVEN MADDEN, LTD.
/s/ JAMIESON A. KARSON
------------------------------------
Jamieson A. Karson
Chairman and Chief Executive Officer
/s/ ARVIND DHARIA
------------------------------------
Arvind Dharia
Chief Financial Officer
22
Exhibit No Description
---------- -----------
10.1 Employment Agreement with Robert Schmertz dated March
11, 2005.
10.2 Employment Agreement with Andrew Shames dated March
8, 2005.
10.3 Commission Agreement between the Company and Hev
Sales, Inc. dated March 8, 2004.
10.4 Employment Agreement between the Company, Adesso
Madden, Inc. and Joseph Masella and T.J.M. Sales
Corporation dated May 7, 2002.
10.5 Amendment No. 1 to Employment Agreement between the
Company, Adesso Madden, Inc. and Joseph Masella and
T.J.M. Sales Corporation dated September 2, 2002.
10.6 Amendment No. 2 to Employment Agreement between the
Company, Adesso Madden, Inc. and Joseph Masella and
T.J.M. Sales Corporation dated September 27, 2002.
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.