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, 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 May 4, 2007, the latest practicable date, there were 20,493,888 shares of
common stock, $.000067 par value, outstanding.
STEVEN MADDEN, LTD.
FORM 10-Q
QUARTERLY REPORT
March 31, 2007
TABLE OF CONTENTS
PART I- FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets ............................1
Condensed Consolidated Statements of Operations...................2
Condensed Consolidated Statements of Cash Flows ..................3
Notes to Unaudited Condensed Consolidated Financial Statements....4
ITEM 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations ................12
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk ......18
ITEM 4. Controls and Procedures .........................................18
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings ...............................................19
ITEM 1A. Risk Factors ....................................................19
ITEM 2. Unregistered Sale of Equity Securities and Use of Proceeds ......19
ITEM 6. Exhibits ........................................................20
Signatures ......................................................21
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(in thousands)
March 31, December 31, March 31,
2007 2006 2006
------------ ------------ ------------
(unaudited) (unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 11,467 $ 19,204 $ 24,121
Accounts receivable, net of allowances of $1,172, $1,009 and $1,864 7,112 7,317 5,034
Due from factor, net of allowances of $9,082, $11,499 and $10,151 43,608 40,208 54,687
Inventories 28,654 33,660 36,579
Marketable securities - available for sale 63,359 72,542 14,761
Prepaid expenses and other current assets 7,451 5,929 6,295
Prepaid taxes 3,437 1,084 --
Deferred taxes 8,110 8,099 5,526
------------ ------------ ------------
Total current assets 173,198 188,043 147,003
Property and equipment, net 23,128 22,842 20,495
Deferred taxes 6,707 6,794 5,478
Deposits and other 3,132 2,965 1,481
Marketable securities - available for sale 15,223 17,139 40,147
Goodwill - net 6,465 6,465 6,719
Intangibles - net 6,801 7,144 8,172
------------ ------------ ------------
Total Assets $ 234,654 $ 251,392 $ 229,495
============ ============ ============
LIABILITIES
Current liabilities:
Accounts payable $ 16,325 $ 12,784 $ 16,995
Accrued expenses 13,463 23,548 19,168
------------ ------------ ------------
Total current liabilities 29,788 36,332 36,163
Deferred rent 3,233 3,136 3,391
------------ ------------ ------------
33,021 39,468 39,554
------------ ------------ ------------
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 - $.000067 par value, 90,000 shares authorized, 24,846,
24,806 and 24,383 shares issued, 20,436, 21,106 and
20,811 outstanding 2 2 2
Additional paid-in capital 113,704 112,692 101,547
Retained earnings 143,094 133,561 119,698
Other comprehensive loss :
Unrealized loss on marketable securities (net of taxes) (536) (641) (1,073)
Treasury stock - 4,410, 3,700 and 3,572 shares at cost (54,631) (33,690) (30,233)
------------ ------------ ------------
201,633 211,924 189,941
------------ ------------ ------------
Total Liabilities and Stockholders' Equity $ 234,654 $ 251,392 $ 229,495
============ ============ ============
See accompanying notes to condensed consolidated
financial statements - unaudited 1
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(unaudited)
(in thousands, except per share data)
Three Months Ended
March 31,
----------------------------
2007 2006
------------ ------------
Net sales:
Wholesale $ 82,299 $ 82,982
Retail 24,355 25,333
------------ ------------
106,654 108,315
------------ ------------
Cost of sales:
Wholesale 52,502 48,857
Retail 11,958 13,175
------------ ------------
64,460 62,032
------------ ------------
Gross profit:
Wholesale 29,797 34,125
Retail 12,397 12,158
------------ ------------
42,194 46,283
Commission and licensing fee income - net 5,446 3,762
Operating expenses (31,971) (31,590)
------------ ------------
Income from operations 15,669 18,455
Interest and other income, net 910 271
------------ ------------
Income before provision for income taxes 16,579 18,726
Provision for income taxes 7,046 7,866
------------ ------------
Net income $ 9,533 $ 10,860
============ ============
Basic income per share $ 0.45 $ 0.52
============ ============
Diluted income per share $ 0.43 $ 0.50
============ ============
Basic weighted average common shares outstanding 20,960 20,875
Effect of dilutive securities - options/restricted stock 1,003 1,043
------------ ------------
Diluted weighted average common shares outstanding 21,963 21,918
============ ============
See accompanying notes to condensed
consolidated financial statements - unaudited 2
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
Three Months Ended
March 31,
----------------------------
2007 2006
------------ ------------
Cash flows from operating activities:
Net income $ 9,533 $ 10,860
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization 1,922 1,507
Loss on disposal of fixed assets 312 292
Non-cash compensation 1,012 60
Provision for doubtful accounts and chargebacks (2,254) 3,354
Deferred rent expense 97 124
Realized loss on sale of marketable securities 196 573
Changes in:
Accounts receivable 42 (1,007)
Due from factor (983) (23,907)
Inventories 5,006 (2,284)
Prepaid expenses, prepaid taxes, deposits and other assets (4,082) 195
Accounts payable and other accrued expenses (6,544) 279
------------ ------------
Net cash provided by (used in) operating activities 4,257 (9,954)
------------ ------------
Cash flows from investing activities:
Purchases of property and equipment (2,138) (1,508)
Purchases of marketable securities (7,671) (73)
Sale/redemption of marketable securities 18,756 11,232
Acquisition, net of cash acquired -- (15,148)
------------ ------------
Net cash provided by (used in) investing activities 8,947 (5,497)
------------ ------------
Cash flows from financing activities:
Proceeds from exercise of stock options -- 1,537
Common stock purchased for treasury (20,941) (4,807)
------------ ------------
Net cash used in financing activities (20,941) (3,270)
------------ ------------
Net decrease in cash and cash equivalents (7,737) (18,721)
Cash and cash equivalents - beginning of period 19,204 42,842
------------ ------------
Cash and cash equivalents - end of period $ 11,467 $ 24,121
============ ============
See accompanying notes to condensed
consolidated financial statements - unaudited 3
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements - Unaudited
March 31, 2007
($ in thousands except per share data)
Note A - Basis of Reporting
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the generally accepted accounting principles 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, 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, 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.
Stock Split
On April 27, 2006, the Board of Directors declared a 3-for-2 stock split of its
outstanding shares of common stock, to be effected in the form of a stock
dividend of one share of stock for every two shares outstanding. The dividend
was paid on May 26, 2006 to stockholders of record at the close of business on
May 11, 2006. All share and per share data provided herein gives effect to this
stock split, applied retroactively.
Note B - Use of Estimates
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
The significant areas of management estimation 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 - 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.
Note E - Inventories
Inventories, which consist of finished goods on hand and in transit, are stated
at the lower of cost (first-in, first-out method) or market.
4
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements - Unaudited
March 31, 2007
($ in thousands except per share data)
Note F - 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 from its suppliers. Commission
revenue and product and development cost recoveries are recognized as earned
when title of the product transfers from the manufacturer to the customer and is
reported on a net basis after deducting operating expenses.
The Company licenses its trademarks for use in connection with the
manufacturing, marketing and sale of 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.
Licensing revenue is recognized on the basis of net sales reported by the
licensees or minimum guaranteed royalties, if higher. In substantially all of
the Company's license agreements, the minimum guaranteed royalty is earned and
payable on a quarterly basis.
Note G - Sales Deductions
The Company supports retailers' initiatives to maximize the sales of its
products on the retail floor by subsidizing the co-op advertising programs of
such retailers, providing them with inventory markdown allowances and
participating in various other marketing initiatives of its major customers.
Such expenses are reflected in the Condensed Consolidated Statement of
Operations as deductions to net sales. For the three-month periods ended March
31, 2007 and 2006, the total deduction to net sales for these expenses was
$9,359 and $7,967, respectively.
Note H - Cost of Sales
All costs incurred to bring finished products to the Company's distribution
center and, in the retail division, the costs to bring products to the Company's
stores, are included in the cost of sales line on the Consolidated Statement of
Operations. These include the cost of finished products, purchase commissions,
letter of credit fees, brokerage fees, material and labor and related items,
sample expenses, custom duty, inbound freight, royalty payments on licensed
products, labels and product packaging. All warehouse and distribution costs and
freight to customers, if any, are included in the operating expenses line item
of the Company's Condensed Consolidated Statement of Operations. The Company's
gross margins may not be comparable to other companies in the industry because
some companies may include warehouse and distribution costs as a component of
cost of sales, while other companies report on the same basis as the Company and
include them in operating expenses.
Note I - Net Income Per Share of Common Stock
Basic income per share is based on the weighted average number of common shares
outstanding during the period. Diluted income per share reflects the potential
dilution assuming common shares were issued upon the exercise of outstanding
options and the proceeds thereof were used to purchase outstanding common
shares. Diluted income per share also reflects the unvested and unissued shares
promised to employees which have a dilutive effect. For the purposes of
calculating the diluted income per share for the three months ended March 31,
2007 and 2006, no stock options have been excluded because none of the shares
were anti-dilutive.
5
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements - Unaudited
March 31, 2007
($ in thousands except per share data)
Note J - Stock-Based Compensation
In March 2006, the Board of Directors approved the Steven Madden, Ltd. Stock
Incentive Plan (the "Plan") under which nonqualified stock options, stock
appreciation rights, performance shares, restricted stock, other stock-based
awards and performance-based cash awards may be granted to employees,
consultants and non-employee directors. The shareholders approved the Plan on
May 26, 2006. The number of shares that may be issued or used under the Plan
cannot exceed 1,200,000 shares. Management believes that the Plan will better
align the interests of its recipients with those of the Company's shareholders.
The following table summarizes the number of Common Stock shares authorized for
use in the Plan, the amount of Stock based awards issued (net of expired or
cancelled) and the amount of Common Stock available for the grant of Stock based
awards under the Plan:
Common Stock authorized 1,200,000
Stock based awards (restricted stock)
granted net of expired or cancelled 596,000
---------
Common Stock available for grant of stock
based awards as of March 31, 2007 604,000
=========
For the three months ended March 31, 2007, total equity-based compensation of
$1,012 was related to the vesting of restricted stock as compared to total
equity-based compensation of $60 that was related to stock options in the same
period of last year. Equity-based compensation is included in operating expenses
on the Company's Condensed Consolidated Statements of Operations. During the
three-month periods ended March 31, 2007 and 2006, the Company did not realize
any tax benefits from the exercise of stock options.
Stock Options
There were no options exercised during the three months ended March 31, 2007 and
there were 127,500 options exercised with a total proceeds of $1,537 and total
intrinsic value of $1,179 in the corresponding period of last year. No options
vested during the three months ended March 31, 2007, as compared to 15,000
options with a weighted average exercise price of $11.84 that vested during the
corresponding period last year. There were no unvested options as of March 31,
2007. As of March 31, 2006, there were 15,000 unvested options with a weighted
average exercise price of $11.84, which vested during the quarter ended June 30,
2006.
The Company estimates the fair value of options granted using the Black-Scholes
option-pricing model, which requires several assumptions. The expected term of
the options represents the estimated period of time until exercise and is based
on historical experience of similar awards. Expected volatility is based on the
historical volatility of the Company's stock. The risk free interest rate is
based on the U.S. Treasury yield curve in effect at the time of the grant. With
the exception of a special dividends paid in November of 2005 and 2006, the
Company historically has not paid dividends and thus the expected dividend rate
is assumed to be zero.
6
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements - Unaudited
March 31, 2007
($ in thousands except per share data)
Note J - Stock-Based Compensation (continued)
Activity relating to stock options granted under the Company's plans and outside
the plans during the three months ended March 31, 2007 is as follows:
Weighted
Weighted Average
Average Remaining Aggregate
Number Exercise Contractual Intrinsic
of Shares Price Term Value
------------ ------------ ------------ ------------
Outstanding at January 1, 2007 1,396,000 $ 8.75
Granted -- --
Exercised -- --
Cancelled/Forfeited -- --
------------ ------------
Outstanding at March 31, 2007 1,396,000 $ 8.75 4.1 $ 28,542
============ ============ ============ ============
Exercisable at March 31, 2007 1,396,000 $ 8.75 4.1 $ 28,542
============ ============ ============ ============
Restricted Stock
The following table summarizes restricted stock activity during the three months
ended March 31, 2007:
Weighted Average Fair
----------------------------
Number Value at
of Shares Grant Date
------------ ------------
Non-vested at January 1, 2007 421,000 $ 32.51
Granted 178,000 29.65
Vested (40,000) 33.83
Forfeited (3,000) 34.05
------------
Non-vested at March 31, 2007 556,000 $ 31.49
============
As of March 31, 2007, there was $14,851 of total unrecognized compensation cost
related to restricted stock awards granted under the Plan. This cost is expected
to be recognized over a weighted-average of 3.9 years. During the year ended
December 31, 2006, 165,000 restricted stock awards were granted to the Company's
Creative and Design Chief. The Company determines the fair value of its
restricted stock awards based on the market price of its common stock on the
date of grant. During the three-month periods ended March 31, 2007 and 2006, the
Company did not realize any tax benefits from the vesting of restricted stock.
7
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements - Unaudited
March 31, 2007
($ in thousands except per share data)
Note K - Acquisition
On February 7, 2006, the Company acquired all of the equity interest of
privately held Daniel M. Friedman and Associates, Inc. and D.M.F. International
(collectively, "Daniel M. Friedman"). Founded in 1995, Daniel M. Friedman
designs, sources, and markets name brand fashion handbags and accessories. The
acquisition was completed for consideration of $18,710, including transaction
costs. In addition, the purchase agreement included certain earn-out provisions
based on financial performance through 2010. On April 10, 2007, an amendment to
the agreement shortened the earn-out period through December 31, 2008 and
accordingly, advanced the earn out payments.
The Daniel M. Friedman acquisition was accounted for using the purchase method
of accounting as required by SFAS Statement No. 141, "Business Combinations."
Accordingly, the assets and liabilities of Daniel M. Friedman were adjusted to
their fair values, and the excess of the purchase price over the fair value of
the assets acquired, including identified intangible assets, was recorded as
goodwill. The fair values assigned to tangible and intangible assets acquired
and liabilities assumed are based on management's estimates and assumptions, as
well as third- party independent valuations. The total preliminary purchase
price has been allocated as follows:
Current assets $ 9,772
Property, plant and equipment 289
Deposits 62
Intangible assets 8,400
Goodwill 4,918
Liabilities assumed (4,731)
------------
Net assets acquired $ 18,710
============
The purchase price and related allocation may be revised as a result of
adjustments made to the purchase price pursuant to the earn-out provisions.
Pursuant to the acquisition, the Company has a note receivable from the former
owner and namesake of Daniel M. Friedman in the amount of $1,250. The note,
which has an interest rate of 5%, is due and payable on the same day that the
final earn-out payment is due. The note allows the maker to offset the principal
and interest due on the note against any earn-out monies that might be due to
him. The note is included in the "Deposits and other" category on the Company's
Consolidated Balance Sheets.
The results of operations of Daniel M. Friedman have been included in the
Company's Unaudited 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 quarter ended March 31, 2006:
Net sales $ 112,347
Operating income $ 19,150
Net income $ 11,241
Basic earnings per share $ 0.54
Diluted earnings per share $ 0.51
8
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements - Unaudited
March 31, 2007
($ in thousands except per share data)
Note L - Goodwill and Intangible Assets
The following is a summary of the carrying amount of goodwill by segment for the
three months ended March 31, 2007:
Steven by Daniel M.
Steve Madden Friedman Total
------------ ------------ ------------
Balance at January 1, 2007 $ 1,547 $ 4,918 $ 6,465
Adjustments to goodwill 0 0 0
------------ ------------ ------------
Balance at March 31, 2007 $ 1,547 $ 4,918 $ 6,465
------------ ------------ ------------
The following table details intangible assets acquired on February 7, 2006 in
the Daniel M. Friedman transaction as of March 31, 2007:
Accumulated Net carrying
Cost basis Amortization amount
------------ ------------ ------------
Trade name $ 200 $ 40 $ 160
Customer relationships 2,600 306 2,294
License agreements 5,600 1,253 4,347
------------ ------------ ------------
$ 8,400 $ 1,599 $ 6,801
------------ ------------ ------------
The estimated future amortization expense of purchased intangibles as of March
31, 2007 is as follows:
2007 (remaining nine months) $ 1,028
2008 1,370
2009 1,267
2010 1,267
2011 820
Thereafter 1,049
------------
$ 6,801
============
Note M - Comprehensive Income
Comprehensive income for the three-month periods ended March 31, 2007 and 2006,
after considering other comprehensive income including unrealized gain on
marketable securities of $105 and $226, was $9,638 and $11,086, respectively.
Note N - Recently Issued Accounting Standards
Effective January 1, 2007, the Company adopted the provisions of the Financial
Accounting Standards Board ("FASB") Interpretation No. 48, "Accounting for
Uncertainty In Income Taxes" ("FIN 48"), which addresses the accounting for
uncertainty in income taxes recognized in the financial statements in accordance
with FASB Statement No. 109, "Accounting for Income Taxes." FIN 48 provides
guidance on the financial statement recognition and measurement of a tax
position taken on the Company's tax return. Pursuant to FIN 48, the Company has
opted to classify interest and penalties that would accrue according to the
provisions of relevant tax law as income tax expense on the Condensed
Consolidated Statements of Operations. The Company determines the amount of
interest expense to be recognized by applying the applicable statutory rate of
interest to the difference
9
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements - Unaudited
March 31, 2007
($ in thousands except per share data)
Note N - Recently Issued Accounting Standards (continued)
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 2006 remain open to examination for most
taxing authorities.
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 O - 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
$1,500 during the year ended December 31, 2006. Such reserve
is subject to change to reflect the status of this matter.
(b) The Company has been named as a defendant in certain other
lawsuits in the normal course of business. In the opinion of
management, after consulting with legal counsel, the
liabilities, if any, resulting from these matters should not
have a material effect on the Company's financial position or
results of operations. It is the policy of management to
disclose the amount or range of reasonably possible losses in
excess of recorded amounts.
10
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements - Unaudited
March 31, 2007
($ in thousands except per share data)
Note P - Operating Segment Information
The Company's reportable segments are primarily based on methods used to
distribute its products. The Wholesale segment, through sales to department and
specialty stores, and the Retail segment, through the operation of retail stores
and the website, derive revenue from sales of branded women's, men's, girl's and
children's footwear and accessories. In addition, the Wholesale segment has a
licensing program that extends the Steve Madden and Stevies brands to
accessories and ready-to-wear apparel. The First Cost segment represents
activities of a subsidiary which earns commissions for serving as a buying agent
of footwear products to mass-market merchandisers, shoe chains and other
off-price retailers with respect to their purchase of private label shoes.
-----------Wholesale segments----------
Total
women's men's accessories Wholesale Retail First Cost Consolidated
---------- ---------- ----------- ---------- ---------- ----------- ------------
Quarter ended,
March 31, 2007:
Net sales to external customers $ 57,526 $ 9,857 $ 14,916 $ 82,299 $ 24,355 $ 106,654
Gross profit 22,001 3,696 4,100 29,797 12,397 42,194
Commissions and
licensing fees - net 1,099 -- -- 1,099 $ 4,347 5,446
Income (loss) from operations 11,409 715 1,144 13,268 (1,946) 4,347 15,669
Segment assets $ 127,480 $ 20,152 $ 21,052 $ 168,684 $ 44,820 $ 21,150 $ 234,654
Capital expenditures $ 1,016 $ 1,122 $ -- $ 2,138
March 31, 2006:
Net sales to external
customers $ 60,212 $ 14,475 $ 8,295 $ 82,982 $ 25,333 $ 108,315
Gross profit 24,990 6,030 3,105 34,125 12,158 46,283
Commissions and
licensing fees - net 805 -- -- 805 -- $ 2,957 3,762
Income (loss) from operations 12,408 2,507 1,714 16,629 (1,131) 2,957 18,455
Segment assets $ 128,767 $ 20,777 $ 20,934 $ 170,478 $ 41,736 $ 17,281 $ 229,495
Capital expenditures $ 493 $ 1,010 $ 5 $ 1,508
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
--------------------------------------------------------------------------------
The following discussion of the Company's financial condition and results of
operations should be read in conjunction with the unaudited 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 SEC .
Overview:
---------
(in thousands, except retail sales data per square foot, and earnings per
share)
Consolidated net sales for the quarter ended March 31, 2007 were $106,654 as
compared to $108,315 in the first quarter of the prior year. Continuing
businesses were virtually unchanged from a year ago, with the absence of sales
from discontinued brands Rule and l.e.i. only partially offset by the increase
from recording a full quarter of results for Daniel M. Friedman, acquired on
February 7 last year. Gross margin declined to 39.6% this year from 42.7% last
year, as a decline in the Wholesale Division was only partially offset by an
increase in the Retail Division. Operating expenses as a percentage of sales
increased 0.7% in the first quarter of this year to 29.9% from 29.2% in the
first quarter last year. Net income for the first quarter of this year was
$9,533, compared with $10,860 in the same period last year. Diluted EPS for the
first quarter was $0.43 per share on 21,963 diluted weighted average shares
outstanding compared to $0.50 per share on 21,918 diluted weighted average
shares outstanding in the first quarter of last year. Wholesale sales were
$82,299 in first quarter this year compared to $82,982 in the same period last
year. Last year's first quarter sales included $7,700 in net sales from Rule and
l.e.i., two brands that we did not go forward with in 2007. Overall wholesale
gross margin decreased to 36.2% in the first quarter of 2007 from 41.1% in the
first quarter of 2006, due primarily to margin pressure from the poor
performance of boots in Steve Madden Women's, sport fusion products in Steve
Madden Men's and Betsey Johnson handbags in the Daniel M. Friedman division.
In our retail division, sales for the first quarter of this year were $24,355
compared to $25,333 in the same period last year. Same store sales (sales in
stores that were in operation throughout the first quarter of 2007 and 2006)
decreased 1.7% in the first quarter of 2007, due primarily to a decline in the
boot category. Gross margin in the retail division improved to 50.9% in the
first quarter of this year from 48.0% in the same period last year, primarily
due to freight savings and fewer store-to-store transfers. As of the end of the
quarter, we had 96 stores in operation, and stores open for the full twelve
months ended March 31 generated $723 in sales per square foot.
As of March 31, 2007, the Company's total inventory was reduced to $28,654 from
$36,579 last year and the inventory turn (calculated on a trailing twelve month
average) decreased to 7.9 times compared to 8.1 times last year. The Company's
accounts receivable average collection days decreased to 53 days in the first
quarter of 2007 compared to 56 days in the comparable period of 2006. As of
March 31, 2007, the Company had $90,049 in cash, cash equivalents and marketable
securities, no short or long-term debt, and total stockholders equity of
$201,633. Working capital increased to $143,410 as of March 31, 2007, compared
to $110,840 on March 31, 2006.
The Company maintained a very strong financial position and effectively managed
its balance sheet. During the first quarter, management also demonstrated its
commitment to enhancing shareholder value as well as its confidence in the
Company's future by repurchasing 710 shares of the Company's common stock for an
aggregate of $20,941.
12
The following tables set forth information on operations for the periods
indicated:
Selected Financial Information
Three Months Ended
March 31
($ in thousands)
2007 2006
---------------------- ----------------------
CONSOLIDATED:
------------
Net sales $ 106,654 100% $ 108,315 100%
Cost of sales 64,460 60 62,032 57
Gross profit 42,194 40 46,283 43
Other operating income - net of expenses 5,446 5 3,762 3
Operating expenses 31,971 30 31,590 29
Income from operations 15,669 15 18,455 17
Interest and other income, net 910 1 271 0
Income before income taxes 16,579 16 18,726 17
Net income 9,533 9 10,860 10
By Segment:
WHOLESALE DIVISION:
------------------
Net sales $ 82,299 100% $ 82,982 100%
Cost of sales 52,502 64 48,857 59
Gross profit 29,797 36 34,125 41
Other operating income 1,099 1 805 1
Income from operations 13,268 16 16,629 20
RETAIL DIVISION:
---------------
Net sales $ 24,355 100% $ 25,333 100%
Cost of sales 11,958 49 13,175 52
Gross profit 12,397 51 12,158 48
Loss from operations (1,946) (8) (1,131) (4)
Number of stores 96 99
FIRST COST DIVISION:
-------------------
Other commission income- net of expenses $ 4,347 100% $ 2,957 100%
13
RESULTS OF OPERATIONS
($ in thousands)
Three Months Ended March 31, 2007 vs. Three Months Ended March 31, 2006
Consolidated:
------------
Total net sales for the three-month period ended March 31, 2007 decreased by
1.5% to $106,654 from $108,315 for the comparable period of 2006. Net sales in
the Retail Division decreased by 3.9% while net sales in the Wholesale Division
decreased by 0.8%. Overall gross profit margin decreased to 39.6% in the first
quarter of 2007 from 42.7% in the first quarter of 2006. A decrease in the
Wholesale gross profit margin to 36.2% in the first quarter of this year
compared to 41.1% in the same period last year was partially offset by an
increase in the Retail gross profit margin to 50.9% in the first quarter of this
year from 48% in the same period last year. Operating expenses as a percentage
of sales increased 0.8% in the first quarter this year to 30% from 29.2% in the
same period last year. The increase in operating expenses is primarily due to
the expensing of non-cash stock-based compensation.
Commission and licensing fee income was $5,446 in the first quarter of 2007
compared to $3,762 in the first quarter of 2006. Income from operations was
$15,669 in the first quarter of this year compared to $18,455 in the same period
last year. Net income decreased to $9,533 in the first quarter of this year
compared to $10,860 in the same period last year. The decrease in income was
primarily due to the lower gross profit margins from the Wholesale division.
Wholesale Division:
------------------
Net sales from the Wholesale Division accounted for $82,299 or 77%, and $82,982
or 77% of total Company net sales for the first quarters of 2007 and 2006,
respectively. Gross profit margin decreased to 36.2% in the first quarter of
this year from 41.1% in the same period last year, due primarily to margin
pressure from the poor performance of boots in Steve Madden Women's, sport
fusion product in Steve Madden Men's and Betsey Johnson handbags in the Daniel
M. Friedman division. Income from operations for the Wholesale Division
decreased to $13,268 for the three-month period ended March 31, 2007 compared to
$16,629 for the three-month period ended March 31, 2006.
Retail Division:
---------------
In the first quarter of 2007 net sales from the Retail Division accounted for
$24,355 or 23% of total Company net sales compared to $25,333 or 23% in the same
period last year. The Company opened three new stores and closed six
under-performing stores during the twelve months ended March 31, 2007. As a
result, the Company had 96 retail stores as of March 31, 2007 compared to 99
stores as of March 31, 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 quarters of 2007 and 2006) decreased 1.7% in
the first quarter of this year due to a decline in the boot category. Gross
margin in the Retail Division improved to 50.9% in the first quarter of this
year from 48.0% in the first quarter of last year, primarily due to freight
savings and fewer store-to-store transfers. Loss from operations for the Retail
Division was $1,946 compared to $1,131 for the same period in 2006.
First Cost Division:
-------------------
The First Cost Division generated net commission income and design fees of
$4,347 for the three-month period ended March 31, 2007, compared to $2,957 for
the comparable period of 2006. The increase was the result of the growth in the
Company's private label business.
14
LIQUIDITY AND CAPITAL RESOURCES
($ in thousands)
The Company had working capital of $143,410 at March 31, 2007 compared to
$151,711 at December 31, 2006. The decrease was primarily due to the repurchase
of 710,187 shares of the Company's common stock at a total cost of $20,941.
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 two
and one-half percent (2.5%) over the 30 day London Inter-Bank Offered Rate
("LIBOR"). The agreement, which has no specific expiration date and can be
terminated by either party with 60 days written notice after June 30, 2007,
provides the Company with a $25 million credit facility with a $15 million
sub-limit on direct borrowings. GMAC maintains a lien on all of the Company's
receivables and assumes the credit risk for all assigned accounts approved by
them. On April 30, 2007, an amendment to the agreement increased the borrowing
rate to 85% from 80% of its factored invoiced receivables and increased the
credit facility to $50 million with a $25 million sub-limit on the aggregate
face amount of Letters of Credit with some other stipulations. The amendment
reduced the interest rate to the lower of the prime rate less 0.875% or LIBOR
plus 1.375%. The amended agreement can be terminated by either party with 60
days written notice after June 30, 2009.
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 will expire on June 30, 2007 at which time Daniel M. Friedman will be
consolidated into the GMAC agreement.
As of March 31, 2007, the Company held marketable securities valued at $78,582,
consisting primarily of corporate and municipal bonds, U.S. Treasury notes,
government asset-backed securities, certificates of deposits and equities.
Management believes that based upon its current financial position and available
cash and marketable securities, the Company will meet all of its financial
commitments and operating needs for at least the next twelve months.
OPERATING ACTIVITIES
($ in thousands)
Net cash provided by operating activities for the quarter was $4,257. Sources of
cash were provided primarily by the net income of $9,533 and decrease in
inventories of $5,006. The primary uses of cash were decreases in accounts
payable and other accrued expenses of $6,544, an increase in prepaid expenses,
prepaid taxes, deposits and other assets of $4,082 and an increase in factored
receivables of $983.
CONTRACTUAL OBLIGATIONS
($ in thousands)
The Company's contractual obligations as of March 31, 2007 were as follows:
Payment due by period
Remainder of 2012 and
Contractual Obligations Total 2007 2008-2009 2010-2011 after
----------------------- ----------- ----------- ----------- ----------- -----------
Operating lease obligations $ 109,303 $ 11,097 $ 28,768 $ 26,220 $ 43,218
Purchase obligations 76,665 76,665
Other long-term liabilities (future
minimum royalty payments) 1,420 660 540 220
----------- ----------- ----------- ----------- -----------
Total $ 187,388 $ 88,422 $ 29,308 $ 26,440 $ 43,218
=========== =========== =========== =========== ===========
15
At March 31, 2007, the Company had un-negotiated open letters of credit for the
purchase of inventory of approximately $3,062.
The Company has an employment agreement with Steven Madden, its Creative and
Design Chief, which provides for an annual base salary of $600 subject to
certain specified adjustments through June 30, 2015. The agreement also provides
for annual bonuses based on EBITDA, revenue of any new business, and royalty
income over $2 million, plus an equity grant and a non-accountable expense
allowance.
On February 7, 2006, the Company acquired all of the equity interest of Daniel
M. Friedman. The acquisition was completed for consideration of $18,710,
including transaction costs. In addition, the purchase agreement includes
certain earn-out provisions based on financial performance through 2008.
The Company has employment agreements with certain executives, which provide for
the payment of compensation aggregating approximately $2,015 in 2007, $1,803 in
2008 and $1,080 in 2009. In addition, some of the employment agreements provide
for a discretionary bonus and some provide for incentive compensation based on
various performance criteria as well as other benefits. The Chief Operating
Officer of the Company is entitled to deferred compensation calculated as a
percentage of his base salary.
Ninety-nine percent (99%) of the Company's products are produced at overseas
locations, the majority of which are located in China, with a small percentage
located in Brazil, Italy and Spain. The Company has not entered into any
long-term manufacturing or supply contracts with any of these foreign companies.
The Company believes that a sufficient number of alternative sources exist
outside of the United States for the manufacture of its products. The Company
currently makes approximately 99% of its purchases in U.S. dollars.
INVESTING ACTIVITIES
($ in thousands)
During the three-month period ended March 31, 2007, the Company invested $7,671
in marketable securities and received $18,756 from the maturities and sales of
securities. Additionally, the Company made capital expenditures of $2,138,
principally for remodeling of three existing stores, additional office space and
upgrades to its computer systems.
FINANCING ACTIVITIES
($ in thousands)
During the three-month period ended March 31, 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.
INFLATION
The Company does not believe that the relatively low rates of inflation
experienced over the last few years in the United States, where it primarily
competes, have had a significant effect on sales, expenses or profitability.
CRITICAL ACCOUNTING POLICIES AND THE USE OF ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results of
Operations is based upon the Company's consolidated financial statements which
have been prepared in accordance with GAAP. The preparation of these financial
statements requires management to make estimates and judgments that affect the
reported amounts of assets, liabilities, sales and expenses, and related
disclosure of contingent assets and liabilities. Estimates by their nature are
based on judgments and available information. Estimates are made based upon
historical factors, current circumstances and the experience and judgment of
management. Assumptions and estimates are evaluated on an ongoing basis and the
Company may employ outside experts to assist in evaluations. Therefore, actual
results could materially differ from those estimates under different assumptions
and conditions. Management believes the following critical accounting estimates
are more significantly affected by judgments and estimates used in the
preparation of the Company's condensed consolidated financial statements:
allowance for bad debts, returns, and customer chargebacks; inventory reserves;
valuation of intangible assets; litigation reserves and cost of sales.
16
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", which was adopted by the Company on January 1, 2002, requires that
goodwill and intangible assets with indefinite lives no longer be amortized, but
rather be tested for impairment at least annually. This pronouncement also
requires that intangible assets with finite lives be amortized over their
respective lives to their estimated residual values, and reviewed for impairment
in accordance with SFAS No. 144 "Accounting for Impairment or Disposal of
Long-lived Assets." In accordance with SFAS No. 144, long-lived assets, such as
property, equipment, leasehold improvements and goodwill subject to
amortization, are reviewed for impairment annually or whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to the estimated undiscounted
future cash flows expected to be generated by the asset. If the carrying amount
of an asset exceeds its estimated future cash flows, an impairment charge is
recognized 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 the contingent liability could materially impact the
Company's results of operation and financial position.
Cost of sales. All costs incurred to bring finished products to the Company's
distribution center and, in the retail division, the costs to bring products to
the company's stores, are included in the cost of sales line item on the
Company's Consolidated Statement of Operations. These include the cost of
finished products, purchase commissions, letter of credit fees, brokerage fees,
material and labor and related items, sample expenses, custom duty, inbound
freight, royalty payments on licensed products, labels and product packaging.
All warehouse and distribution costs are included in the operating expenses line
item of the Company's Consolidated Statement of Operations. The Company
classifies shipping costs, if any, to customers as operating expenses. The
Company's gross profit margins may not be comparable to other companies in the
industry because some companies may include warehouse and distribution as a
component of cost of sales, while other companies report on the same basis as
the Company and include them in operating expenses.
17
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 March 31, 2007, the Company held marketable securities valued at $78,582,
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.
18
Part II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Certain legal proceedings in which the Company is involved are discussed in Note
L 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.
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 $1,051,000. Based on discussions with legal counsel, the Company
believes that the maximum liability in this case is not likely to exceed
$1,500,000. Accordingly, the Company recorded a reserve of $1,500,000 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:
The following table provides information as of March 31, 2007 with respect to
the shares of common stock repurchased by the Company during the first quarter
of 2007:
--------------------- ------------------- -------------------- -------------------------------- --------------------------
Total Number of Shares Maximum Dollar Amount of
Period Total Number of Average Price Paid Purchased as Part of Shares that May Yet Be
Shares Purchased per Share Publicly Announced Plans Purchased Under the Plans
or Programs (1) or Programs (1)
--------------------- ------------------- -------------------- -------------------------------- --------------------------
1/1/07 - 1/31/07 0 $0 0 $33,689,736
--------------------- ------------------- -------------------- -------------------------------- --------------------------
2/01/07 - 2/28/07 0 $0 0 $63,689,736
--------------------- ------------------- -------------------- -------------------------------- --------------------------
3/1/07 - 3/31/07 710,187 $29.49 710,187 $42,748,959
--------------------- ------------------- -------------------- -------------------------------- --------------------------
Total 710,187 $29.49 710,187 $42,748,959
--------------------- ------------------- -------------------- -------------------------------- --------------------------
(1) On February 27, 2007, the Board of Directors authorized the Company to
repurchase up to $30 million of the Company's common stock in addition to
the amount previously authorized.
19
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).
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14 or
15d-14 of the Securities Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14 or
15d-14 of the Securities Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
20
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report on Form 10-Q to be signed on its behalf
by the undersigned thereunto duly authorized.
DATE: May 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
21
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).
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.