UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 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 _______________
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 August 3, 2005, the latest practicable date, there were 13,359,567 shares
of common stock, $.0001 par value, outstanding.
STEVEN MADDEN, LTD.
FORM 10-Q
QUARTERLY REPORT
June 30, 2005
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements (Unaudited):
Consolidated Balance Sheets...................................... 3
Consolidated Statements of Operations............................ 4
Consolidated Statements of Cash Flows............................ 5
Notes to Unaudited Condensed Consolidated Financial Statements... 6
ITEM 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations................. 11
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk....... 24
ITEM 4. Controls and Procedures.......................................... 24
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings................................................ 25
ITEM 2. Changes in Securities, Use of Proceeds and Issuer Purchases of
Equity Securities................................................ 26
ITEM 4. Submission of Matters to a Vote of Security Holders.............. 26
ITEM 6. Exhibits......................................................... 27
Signature........................................................ 28
2
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands)
June 30, December 31, June 30,
2005 2004 2004
------------ ------------ ------------
(unaudited) (unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 38,072 $ 30,853 $ 16,287
Accounts receivable, net of allowances of $632, $536 and $688 3,084 3,322 6,143
Due from factor, net of allowances of $4,386, $2,379 and $1,973 46,684 33,711 42,013
Inventories 31,051 34,384 29,251
Marketable securities - available for sale 12,652 12,784 10,486
Prepaid expenses and other current assets 1,626 1,287 3,050
Prepaid taxes -- 2,255 2,839
Deferred taxes 2,485 2,498 2,437
------------ ------------ ------------
Total current assets 135,654 121,094 112,506
Property and equipment, net 20,802 20,715 19,444
Deferred taxes 5,915 5,780 5,618
Deposits and other 434 435 431
Marketable securities - available for sale 33,078 36,340 40,508
Cost in excess of fair value of net assets acquired 1,547 2,066 2,066
------------ ------------ ------------
$ 197,430 $ 186,430 $ 180,573
============ ============ ============
LIABILITIES
Current liabilities:
Accounts payable $ 16,332 13,450 $ 7,538
Accrued expenses 12,281 6,227 4,642
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Total current liabilities 28,613 19,677 12,180
Deferred rent 2,421 2,088 1,996
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31,034 21,765 14,176
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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 - $.0001 par value, 60,000 shares authorized, 15,443,
14,608 and 14,582 shares issued, 13,209, 12,818 and
13,252 outstanding 2 1 1
Additional paid-in capital 83,364 80,631 79,896
Retained earnings 109,699 103,451 99,392
Unearned compensation (52) (703) (2,271)
Other comprehensive gain:
Unrealized gain (loss) on marketable securities (1,191) (1,024) (1,029)
Treasury stock - 2,234, 1,790 and 1,330 shares at cost (25,426) (17,691) (9,592)
------------ ------------ ------------
166,396 164,665 166,397
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$ 197,430 $ 186,430 $ 180,573
============ ============ ============
See accompanying notes to consolidated financial statements - unaudited
3
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited)
(in thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
2005 2004 2005 2004
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Net sales:
Wholesale $ 68,331 $ 59,804 $ 125,192 $ 114,871
Retail 32,627 26,430 59,102 50,131
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100,958 86,234 184,294 165,002
------------ ------------ ------------ ------------
Cost of sales:
Wholesale 46,078 41,175 86,553 76,843
Retail 16,370 12,347 30,913 24,175
------------ ------------ ------------ ------------
62,448 53,522 117,466 101,018
------------ ------------ ------------ ------------
Gross profit:
Wholesale 22,253 18,629 38,639 38,028
Retail 16,257 14,083 28,189 25,956
------------ ------------ ------------ ------------
38,510 32,712 66,828 63,984
Commission and licensing fee income 2,619 1,811 4,566 3,227
Operating expenses (31,953) (27,947) (60,997) (54,055)
Impairment of cost in excess of fair value of net assets acquired (519) -- (519) --
------------ ------------ ------------ ------------
Income from operations 8,657 6,576 9,878 13,156
Interest and other income, net 456 475 894 1,009
------------ ------------ ------------ ------------
Income before provision for income taxes 9,113 7,051 10,772 14,165
Provision for income taxes 3,827 2,961 4,524 5,949
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Net income $ 5,286 $ 4,090 $ 6,248 $ 8,216
============ ============ ============ ============
Basic income per share $ 0.40 $ 0.31 $ 0.47 $ 0.62
============ ============ ============ ============
Diluted income per share $ 0.39 $ 0.28 $ 0.46 $ 0.57
============ ============ ============ ============
Basic weighted average common shares outstanding 13,075 13,299 13,154 13,276
Effect of dilutive securities - options/warrants/restricted stock 401 1,092 486 1,106
------------ ------------ ------------ ------------
Diluted weighted average common shares outstanding 13,476 14,391 13,640 14,382
============ ============ ============ ============
See accompanying notes to consolidated financial statements - unaudited
4
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
Six Months Ended
June 30,
---------------------------
2005 2004
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Cash flows from operating activities:
Net income $ 6,248 $ 8,216
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization 2,692 2,451
Impairment of cost in excess of fair value of net assets acquired 519 --
Non-cash compensation 651 1,275
Provision for bad debts 2,103 284
Deferred rent expense 333 168
Realized loss (gain) on marketable securities 137 (14)
Changes in:
Accounts receivable 142 (2,099)
Due from factor (14,980) (13,312)
Inventories 3,333 (5,393)
Prepaid expenses, prepaid taxes, deposits and other assets 1,917 1,164
Accounts payable and other accrued expenses 8,936 (4,674)
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Net cash provided by (used in) operating activities 12,031 (11,934)
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Cash flows from investing activities:
Purchase of property and equipment (2,779) (3,504)
Purchase of marketable securities (839) (24,006)
Sale/redemption of marketable securities 3,807 4,038
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Net cash provided by (used in) investing activities 189 (23,472)
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Cash flows from financing activities:
Proceeds from options and warrants exercised 4,501 222
Cash in lieu of restricted stock (1,767) --
Common stock purchased for treasury (7,735) (1,601)
Repayment of lease obligations -- (1)
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Net cash (used in) financing activities (5,001) (1,380)
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Net increase (decrease) in cash and cash equivalents 7,219 (36,786)
Cash and cash equivalents - beginning of period 30,853 53,073
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Cash and cash equivalents - end of period $ 38,072 $ 16,287
============ ============
See accompanying notes to consolidated financial statements - unaudited
5
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Unaudited
June 30, 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
("GAAP") for interim financial information and pursuant to the rules and
regulations of the Securities and Exchange Commission (the "SEC"). Accordingly,
they do not include all of the information and footnotes required by GAAP for
complete financial statements. In the opinion of management, the accompanying
statements include all adjustments (consisting only of normal recurring items)
that are considered necessary for a fair presentation of the financial position
of Steven Madden, Ltd. and subsidiaries (the "Company") and the results of its
operations and cash flows for the periods presented. The results of its
operations for the three- and six-month periods ended June 30, 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 - CASH AND CASH EQUIVALENTS
On July 1, 2005, the Company terminated its factoring agreement with Capital
Factors, Inc. ("Capital") and entered into a new factoring agreement with GMAC
Commercial Finance LLC (See note M[4]). Pursuant to the termination, the Company
deposited funds in an escrow account with Capital as collateral against payments
of outstanding letters of credit facilitated by Capital. In anticipation of the
establishment of the escrow account, the Company allowed the collected funds
balance with Capital to accumulate, resulting in a collected funds balance as of
June 30 of $10,114. This balance, which was transferred to the escrow account on
July 1, was categorized as Cash and Cash Equivalents on the June 30, 2005
Balance Sheet. Management anticipates that these letters of credit will be
negotiated and the related escrow funds will be returned to the Company no later
than September 30 of this year.
NOTE C - MARKETABLE SECURITIES
Marketable securities consist primarily of corporate bonds, U.S. treasury notes
and government asset-backed securities with maturities greater than three months
and up to five years at the time of purchase, as well as marketable equity
securities. These securities, which are classified as available-for-sale, are
carried at fair value, with unrealized gains and losses, net of any tax effect,
reported in shareholders' equity as accumulated other comprehensive income
(loss). Amortization of premiums and discounts are included in interest income
and are not material. The values of these securities may fluctuate as a result
of changes in market interest rates and credit risk.
NOTE D - INVENTORIES
Inventories, which consist of finished goods and work-in-progress, are stated at
the lower of cost (first-in, first-out method) or market.
NOTE E - REVENUE RECOGNITION
The Company recognizes revenue on wholesale sales when products are shipped
pursuant to our standard terms which are freight on board (FOB) warehouse. Sales
reductions for anticipated discounts and allowances are recognized when sales
are recorded. Customers retain the right to product replacement or a discount
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 customers. Commission revenue
is recognized as earned when title of the product transfers from the
manufacturer to the customer and is recorded net basis.
6
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Unaudited
June 30, 2005
($ in thousands except per share data)
NOTE E - REVENUE RECOGNITION (CONTINUED)
The Company licenses its Steve Madden trademark for use in connection with the
manufacturing, marketing and sale of belts, sunglasses, eyewear and hosiery
products. 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.
NOTE F - SALES DEDUCTIONS
The Company supports retailers' initiatives to maximize the sales of its
products on the retail floor by subsidizing the co-op advertising programs of
such retailers, providing them with inventory markdown allowances and
participating in various other marketing initiatives of its major customers.
These expenses are reflected in the financial statements as deductions to sales.
For the three- and six-month periods ended June 30, 2005, the total deduction to
sales for these expenses was $9,223 and $17,739, respectively, as compared to
$6,839 and $14,624 for the comparable periods in 2004.
NOTE G - COST OF SALES
All costs incurred to bring finished products to the Company's distribution
center are included in the cost of sales line item on the Consolidated Statement
of Operations. These include purchase commissions, letter of credit fees,
brokerage fees, FOB 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 H - IMPAIRMENT OF COST IN EXCESS OF FAIR VALUE OF NET ASSETS ACQUIRED
On May 1, 1998, the Company purchased certain assets from and assumed certain
liabilities of Daniel Scott, Inc. which operated two retail outlet stores under
the name Shoe Biz. The acquisition was recorded at a total cost of approximately
$703, including related expenses, of which $635 was allocated to cost in excess
of fair value of the identifiable net assets acquired ("goodwill"). Prior to the
adoption of Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets" in 2002, the Company had amortized
approximately $116 of the goodwill, resulting in a net value of $519. During the
year ended December 31, 2004, the Company operated four stores under the Shoe
Biz name. In order to consolidate its resources to the Steve Madden brand, the
Company has decided to discontinue using the Shoe Biz name. As a result, as of
June 30, 2005, one Shoe Biz store has been converted to a Steve Madden store,
while two other Shoe Biz stores have been closed. The remaining store operating
under the Shoe Biz name has generated operating losses during the last two
fiscal years and the net present value of the future cash flows of this store is
negative. As a result, the entire balance of the goodwill of $519 is considered
impaired and is recognized as a reduction of income in the second quarter of
2005.
NOTE I - NET INCOME PER SHARE OF COMMON STOCK
Basic income per share is based on the weighted average number of common shares
outstanding during the period. Diluted income per share reflects the potential
dilution assuming common shares were issued upon the exercise of outstanding
options and the proceeds thereof were used to purchase outstanding common
shares. Diluted income per share also reflects the unvested and un-issued shares
promised to employees that have a dilutive effect. For the three- and six-month
periods ended June 30, 2005, approximately 1,281,000 and 1,242,000 stock
options, respectively, have been excluded from the calculation because inclusion
of such shares would be anti-dilutive, as compared to approximately 100,000
shares excluded for the three- and six-months ended June 30, 2004.
7
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Unaudited
June 30, 2005
($ in thousands except per share data)
NOTE J - STOCK-BASED COMPENSATION
SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123),
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" ("APB Opinion
25"), 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
of 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 Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
Reported net income $ 5,286 $ 4,090 $ 6,248 $ 8,216
Stock-based employee compensation included in
reported net income, net of tax 83 99 165 197
Stock-based employee compensation determined
under the fair value based method, net of tax (499) (705) (1,038) (1,518)
------------ ------------ ------------ ------------
Pro forma net income $ 4,870 $ 3,484 $ 5,375 $ 6,895
============ ============ ============ ============
Basic income per share:
As reported $ 0.40 $ 0.31 $ 0.47 $ 0.62
Pro forma $ 0.37 $ 0.26 $ 0.41 $ 0.52
Diluted income per share:
As reported $ 0.39 $ 0.28 $ 0.46 $ 0.57
Pro forma $ 0.36 $ 0.24 $ 0.39 $ 0.48
NOTE K - COMPREHENSIVE INCOME
Comprehensive income for the three- and six-month periods ended June 30, 2005,
after considering other comprehensive income including unrealized gain (loss) on
marketable securities of $163 and $(167) was $5,449 and $6,081, respectively.
For the comparable periods ended June 30, 2004, after considering other
comprehensive (losses) on marketable securities of $(886) and $(902),
comprehensive income was $3,204 and $7,314, respectively.
NOTE L - RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2004, the Financial Accounting Standards Board ("FASB") issued the
SFAS No. 123R, "Share-Based Payment" ("SFAS 123R"), which replaced SFAS No. 123,
"Accounting for Stock-Based Compensation," and superceded APB Opinion 25,
"Accounting for Stock Issued to Employees." SFAS 123R requires that all
share-based payments to employees be recognized in the financial statements
based on their fair values on the date of grant. The Company currently uses the
intrinsic value method to measure compensation expense for stock-based awards.
Note J above, entitled "Stock-Based Compensation", provides pro forma net income
and earnings per share as if the Company had used a fair-value based method
provided by SFAS 123R to measure stock-based compensation for the periods ending
June 30, 2005 and 2004. On April 14, 2005, the SEC amended the compliance dates
for SFAS 123R, which extended the Company's required adoption date of SFAS 123R
to the first quarter of 2006. The Company is evaluating the requirements of SFAS
123R and expects that its adoption will have a material impact on the Company's
results of operations and earnings per share.
8
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Unaudited
June 30, 2005
($ in thousands except per share data)
NOTE M - 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 not to 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.
[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 sought a
declaratory judgment that the Company properly terminated a
license agreement with LaRue and monetary damages for breach of
the license agreement and trademark infringement by LaRue. On
January 20, 2004, LaRue served an answer and counterclaim alleging
that the license agreement was improperly terminated by the
Company and seeking $9,900,000 in compensatory damages, as well as
additional punitive damages. The parties served cross-motions for
summary judgment which were submitted to the court on February 28,
2005. On August 1, 2005, the parties agreed to a settlement
pursuant to which the Company paid LaRue $1,500,000 in full
satisfaction of any and all claims relating to this action. A
Stipulation of Dismissal, with prejudice, has been filed with the
court and the parties have exchanged general releases. The Company
has reserved the full amount of the settlement on its June 30,
2005 financial statements.
9
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Unaudited
June 30, 2005
($ in thousands except per share data)
NOTE L - COMMITMENTS, CONTINGENCIES AND OTHER (CONTINUED)
[2] Other Actions (Continued):
(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
case was dismissed on May 10, 2005.
(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. 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.
[3] Employment agreements:
(a) Effective as of July 1, 2005, the Company amended its employment
agreement with Steven Madden, the Company's Creative and Design
Chief. The agreement provides for an annual salary of $600,000,
subject to certain specified adjustments, through June 30, 2015.
The agreement also provides for annual bonuses based on EBITDA and
on revenue for any new business, an annual option grant at
exercise prices equal to the market price on the date of grant and
a non-accountable expense allowance.
(b) Effective as of July 1, 2005, the Company entered into an
employment agreement with Awadhesh Sinha, pursuant to which Mr.
Sinha will serve as the Company's Chief Operating Officer. The
initial term of the agreement is three years through June 30,
2008, with successive one-year automatic renewal terms. The
agreement provides for an annual salary of $425,000 with annual
increases and an annual performance bonus. The agreement requires
the Company to accrue deferred cash compensation equal to 25% of
the annual salary, payable to Mr. Sinha at the end of the term of
the agreement.
(c) Effective as of May 23, 2005, the Company amended its employment
agreement with Richard Olicker, the Company's President. The
agreement provides for an annual salary of $453,747 through
December 31, 2005. The agreement also provides for an annual
performance bonus.
[4] Due From Factor:
On July 1, 2005, the Company entered into a factoring agreement with
GMAC Commercial Finance LLC ("GMAC"). Under the terms of the agreement,
the Company may request advances from GMAC of up to 80% of the
aggregate receivables purchased by GMAC at an interest rate of two and
one-half percent (2.5%) over the 30 day LIBOR. The Company will also
pay a fee of 0.325% of the gross invoice amount of each receivable
purchased. The Company assigns a substantial portion of its
receivables, principally without recourse, to its factor. The agreement
provides the Company with a $25 million credit facility with a $15
million sub-limit on direct borrowings. GMAC will maintain a lien on
all of the Company's receivables and assume the credit risk for all
assigned accounts approved by them with certain restrictions.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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The following discussion of the Company's financial condition and results of
operations should be read in conjunction with the unaudited Financial Statements
and Notes thereto appearing elsewhere in this document.
Statements in this "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and elsewhere in this document as well as statements
made in press releases and oral statements that may be made by the Company or by
officers, directors or employees of the Company acting on the Company's behalf
that are not statements of historical or current fact constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve known and
unknown risks, uncertainties and other unknown factors that could cause the
actual results of the Company to be materially different from the historical
results or from any future results expressed or implied by such forward-looking
statements. In addition to statements which explicitly describe such risks and
uncertainties, readers are urged to consider statements labeled with the terms
"believes", "belief", "expects", "intends", "anticipates" or "plans" to be
uncertain forward-looking statements. The forward-looking statements contained
herein are also subject generally to other risks and uncertainties that are
described from time to time in the Company's reports and registration statements
filed with the Securities and Exchange Commission.
Overview:
($ in thousands, except retail sales data per square foot and earnings per
share)
The Company's earnings per share increased 39% to $0.39 per share for the
quarter ended June 30, 2005 compared to $0.28 per share for the same quarter of
2004. Three of management's strategic initiatives contributed to the Company's
earnings growth in the quarter:
1. The Company continued to grow the Retail Division by opening 3 new
stores in the current quarter. As of June 30, 2005, the Company
has 95 stores in operation as compared to 83 stores last year.
This increase in the number of stores combined with an increase of
comparable store sales (sales in stores that were in operation
throughout all of the second quarters of 2005 and 2004) of 14%
resulted in an increase of net sales in the Retail Division of 23%
to $32,627 in the quarter ended June 30, 2005 compared to $26,430
for the same period of last year.
2. The Company's decision to broaden its product line paid dividends
this quarter. This is exemplified by the Madden Mens Wholesale
Division ("Madden Mens") which has diversified it offerings and
has developed a basic open stock business with departments stores.
Net sales in the Madden Mens increased 138% to $15,360 in the
second quarter of 2005 compared to $6,452 in the same period of
2004. Another example of the Company's success in expanding its
product line is the Company's entree into the young women and
girls market via the Candie's Wholesale Division ("Candie's"). Now
in its second year of operation, Candie's net sales increased 53%
to $5,711 in the second quarter of 2005 compared to $3,735 in the
same period last year.
3. Recently implemented "cut-to-order" inventory controls in the
l.e.i. Footwear Wholesale Division ("l.e.i.") and Stevies Inc.
("Stevies") have resulted in reduced inventory levels while
increasing gross profit percentages.
In the Retail Division, same store sales (sales in stores that were in operation
throughout all of the second quarters of 2005 and 2004) increased 14%. This
growth in comparable store sales came on top of a 15% comparable store sales
growth achieved last year. Store sales productivity remained high with sales per
square foot of $662 compared to $665 last year. The Company is planning to open
six to nine new stores during the balance of 2005.
The Company's annualized inventory turnover decreased to 7.7 times in the second
quarter of 2005 compared to 8.0 times in the first quarter of 2005, reflecting
an increase in Madden Mens inventory required for the open stock business. The
Company's accounts receivable average collection days remained at 65 days in
both the second quarters of 2005 and 2004.
As of June 30, 2005, the Company had $83,802 in cash, cash equivalents and
marketable securities, no short or long-term debt, and total stockholders equity
of $166,396. Working capital increased to $107,041 as of June 30, 2005 compared
to $101,417 on December 31, 2004. The Company repurchased 135,000 shares of
common stock this quarter at a cost of $2,241, reflecting management's continued
confidence in the Company's long-term prospects and its commitment to enhance
shareholder value.
11
The following tables set forth information on operations for the periods
indicated:
Selected Financial Information
Six Months Ended
June 30
($ in thousands)
2005 2004
-------------------- --------------------
Consolidated:
- -------------
Net Sales $ 184,294 100% $ 165,002 100%
Cost of Sales 117,466 64 101,018 61
Gross Profit 66,828 36 63,984 39
Other Operating Income 4,566 2 3,227 2
Operating Expenses 60,997 33 54,055 33
Impairment of cost in excess of fair value of net assets acquired 519 0 --
Income from Operations 9,878 5 13,156 8
Interest and Other Income Net 894 1 1,009 1
Income Before Income Taxes 10,772 6 14,165 9
Net Income 6,248 3 8,216 5
By Segment
WHOLESALE DIVISIONS:
- --------------------
Steven Madden, Ltd.
- -------------------
Madden Womens:
- --------------
Net Sales $ 59,446 100% $ 56,498 100%
Cost of Sales 42,583 72 38,083 67
Gross Profit 16,863 28 18,415 33
Other Operating Income 1,176 2 1,240 2
Operating Expenses 16,128 27 14,312 25
Income from Operations 1,911 3 5,343 10
l.e.i. Footwear:
- ----------------
Net Sales $ 15,894 100% $ 21,728 100%
Cost of sales 10,614 67 14,583 67
Gross Profit 5,280 33 7,145 33
Operating Expenses 4,058 25 5,989 28
Income from Operations 1,222 8 1,156 5
Madden Mens:
- ------------
Net Sales $ 26,464 100% $ 13,021 100%
Cost of sales 16,204 61 9,097 70
Gross Profit 10,260 39 3,924 30
Operating Expenses 6,147 23 3,590 28
Income from Operations 4,113 16 334 2
Candie's Footwear:
- ------------------
Net Sales $ 9,736 100% $ 6,951 100%
Cost of sales 6,874 71 4,717 68
Gross Profit 2,862 29 2,234 32
Operating Expenses 2,831 29 1,889 27
Income from Operations 31 0 345 5
12
Selected Financial Information
Six Months Ended
June 30
($ in thousands)
2005 2004
--------------------- ---------------------
By Segment (Continued)
WHOLESALE DIVISIONS (Continued)
- -------------------------------
Diva Acquisition Corp. (Steven):
- --------------------------------
Net Sales $ 9,064 100% $ 11,091 100%
Cost of sales 6,900 76 6,461 58
Gross Profit 2,164 24 4,630 42
Operating Expenses 2,564 28 2,463 22
Income (Loss) from Operations (400) (4) 2,167 20
Stevies Inc.:
- -------------
Net Sales $ 3,862 100% $ 5,488 100%
Cost of sales 2,852 74 3,751 68
Gross Profit 1,010 26 1,737 32
Operating Expenses 907 23 1,386 25
Income from Operations 103 3 351 7
Unionbay Men's Footwear:
- ------------------------
Net Sales $ 726 100% $ 94 100%
Cost of Sales 526 72 151 161
Gross Profit (Loss) 200 28 (57) (61)
Operating Expenses 163 23 338 359
Income (Loss) from Operations 37 5 (395) (420)
RETAIL DIVISION:
- ----------------
Steven Madden Retail Inc.:
- --------------------------
Net Sales $ 59,102 100% $ 50,131 100%
Cost of Sales 30,913 52 24,175 48
Gross Profit 28,189 48 25,956 52
Operating Expenses 26,657 45 22,911 46
Impairment of cost in excess of fair value of net assets acquired 519 1 --
Income from Operations 1,013 2 3,045 6
Number of Stores 95 83
ADESSO MADDEN INC.:
- -------------------
(FIRST COST)
Other Operating Revenue $ 3,390 100% $ 1,987 100%
Operating Expenses 1,542 45 1,177 59
Income from Operations 1,848 55 810 41
13
Selected Financial Information
Three Months Ended
June 30
($ in thousands)
2005 2004
--------------------- ---------------------
Consolidated:
- -------------
Net Sales $ 100,958 100% $ 86,234 100%
Cost of Sales 62,448 62 53,522 62
Gross Profit 38,510 38 32,712 38
Other Operating Income 2,619 3 1,811 2
Operating Expenses 31,953 31 27,947 32
Impairment of cost in excess of fair value of net assets acquired 519 1 --
Income from Operations 8,657 9 6,576 8
Interest and Other Income Net 456 0 475 0
Income Before Income Taxes 9,113 9 7,051 8
Net Income 5,286 5 4,090 5
By Segment
WHOLESALE DIVISIONS:
- --------------------
Steven Madden, Ltd.
- -------------------
Madden Womens:
- --------------
Net Sales $ 31,538 100% $ 30,964 100%
Cost of Sales 22,020 70 21,380 69
Gross Profit 9,518 30 9,584 31
Other Operating Income 596 2 720 2
Operating Expenses 8,415 27 7,488 24
Income from Operations 1,699 5 2,816 9
l.e.i. Footwear:
- ----------------
Net Sales $ 8,679 100% $ 10,603 100%
Cost of sales 5,678 65 7,263 68
Gross Profit 3,001 35 3,340 32
Operating Expenses 2,006 23 3,079 29
Income from Operations 995 12 261 3
Madden Mens:
- ------------
Net Sales $ 15,360 100% $ 6,452 100%
Cost of sales 9,077 59 4,689 73
Gross Profit 6,283 41 1,763 27
Operating Expenses 3,314 22 1,756 27
Income from Operations 2,969 19 7 0
Candie's Footwear:
- ------------------
Net Sales $ 5,711 100% $ 3,735 100%
Cost of sales 3,487 61 2,609 70
Gross Profit 2,224 39 1,126 30
Operating Expenses 1,356 24 930 25
Income from Operations 868 15 196 5
14
Selected Financial Information
Three Months Ended
June 30
($ in thousands)
2005 2004
--------------------- ---------------------
By Segment (Continued)
WHOLESALE DIVISIONS (Continued)
- -------------------------------
Diva Acquisition Corp. (Steven):
- --------------------------------
Net Sales $ 4,839 100% $ 5,842 100%
Cost of sales 4,147 86 3,541 61
Gross Profit 692 14 2,301 39
Operating Expenses 1,261 26 1,414 24
Income (Loss) from Operations (569) (12) 887 15
Stevies Inc.:
- -------------
Net Sales $ 1,890 100% $ 2,163 100%
Cost of sales 1,394 74 1,598 74
Gross Profit 496 26 565 26
Operating Expenses 442 23 703 32
Income (Loss) from Operations 54 3 (138) (6)
Unionbay Men's Footwear:
- ------------------------
Net Sales $ 314 100% $ 45 100%
Cost of Sales 275 88 95 211
Gross Profit (Loss) 39 12 (50) (111)
Operating Expenses 84 27 175 389
Loss from Operations (45) (15) (225) (500)
RETAIL DIVISION:
- ----------------
Steven Madden Retail Inc.:
- --------------------------
Net Sales $ 32,627 100% $ 26,430 100%
Cost of Sales 16,370 50 12,347 47
Gross Profit 16,257 50 14,083 53
Operating Expenses 14,255 44 11,807 45
Impairment of cost in excess of fair value of net assets acquired 519 1 --
Income from Operations 1,483 5 2,276 8
Number of Stores 95 83
ADESSO MADDEN INC.:
- -------------------
(FIRST COST)
Other Operating Revenue $ 2,023 100% $ 1,091 100%
Operating Expenses 820 41 595 55
Income from Operations 1,203 59 496 45
15
RESULTS OF OPERATIONS
($ in thousands)
Six Months Ended June 30, 2005 compared to Six Months Ended June 30, 2004
Consolidated:
- -------------
Total net sales for the six-month period ended June 30, 2005 increased by 12% to
$184,294 from $165,002 for the comparable period last year. Sales increases from
the Madden Mens, the Candie's, the Retail Division and Madden Womens Wholesale
Division were partially offset by declines in Diva Acquisition Corp. ("Steven"),
l.e.i. and Stevies.
Gross profit as a percentage of sales decreased to 36% in 2005 from 39% in 2004.
The decline in the gross profit occurred in the first quarter and was the result
of 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 first quarter negatively affected the
gross profit.
Operating expenses increased to $60,997 in 2005 from $54,055 in 2004. One reason
for this increase is the Company's recognition of a reserve for a pending legal
settlement of $1,500. Other contributing factors were an increase in direct
selling expenses, an increase of 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
increased payroll and occupancy expenses associated with the operation of an
additional twelve retail stores (net).
Income from operations was $9,878 in 2005 compared to $13,156 in 2004. Net
income decreased to $6,248 in 2005 from $8,216 in 2004, primarily because of the
erosion of the gross profit and the increase in operating expenses as described
above.
Wholesale Divisions:
- --------------------
Steven Madden, Ltd. (Madden Womens, l.e.i., Madden Mens and Candie's):
Sales from the Madden Womens Wholesale Division ("Madden Womens") accounted for
$59,446 or 32%, and $56,498 or 34%, of total sales in 2005 and 2004,
respectively. The increase resulted from higher sales to specialty footwear
retailers as well as Nordstrom, Dillards, May and Federated and because of
improved sell-throughs at retail floors. Gross profit as a percentage of sales
declined to 28% in 2005 from 33% in 2004, primarily due to the closeout of slow
moving inventory in the first quarter and an increase in markdowns and
allowances caused by higher promotional activities at retail. Operating expenses
increased to $16,128 in 2005 compared to $14,312 in 2004. The increase was due
to the provision of $1,500 for settlement of the LaRue litigation case as well
as an increase of professional and accounting 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 to other volume
related expenses. These expense increases were partially offset by a $700
reduction in advertising and marketing expenditures. Income from operations for
Madden Womens was $1,911 in 2005 compared to $5,343 in 2004.
Sales from l.e.i. accounted for $15,894 or 9%, and $21,728 or 13%, of total
sales in 2005 and 2004, respectively. This decrease in sales was primarily
caused by planned reductions and elimination of marginally profitable accounts.
Although gross profit as a percentage of sales remained at 33% in 2005 and 2004,
it increased 3% during the second quarter. Operating expenses decreased to
$4,058 in 2005 from $5,989 in 2004 due to decreases in payroll expense and
selling and related expenses. Income from operations for l.e.i. was $1,222 in
2005 compared to $1,156 in 2004.
Sales from Madden Mens accounted for $26,464 or 14%, and $13,021 or 8%, of total
sales in 2005 and 2004, respectively. This 103% increase in sales was driven by
an increase in the number of doors at Dillards and Nordstom, and the
introduction of new catalogue and online programs. The division continued its
success with "jean-friendly" products while dress offerings were also
successful, giving the division a broader and more balanced collection. Gross
profit as a percentage of sales increased to 39% in 2005 from 30% in 2004
reflecting the division's substantial reductions of markdown and allowances
expense and lower levels of close-out sales. Operating expenses increased to
$6,147 in 2005 from $3,590 in 2004, due to increases in payroll expenses,
selling and related expenses and advertising and marketing expenditures.
Operating expenses as a percentage of sales decreased to 23% in 2005 compared to
28% in 2004. Income from operations for Madden Mens was $4,113 in 2005 compared
to $334 in 2004.
16
Sales from Candie's accounted for $9,736 or 5%, and $6,951 or 4%, of total sales
in 2005 and 2004, respectively. Pursuant to a recent amendment to the licensing
agreement, Candie's products were launched at Kohl's stores in addition to its
normal channels of distribution. Beginning on January 1, 2007, the Company will
be permitted to sell Candie's 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 first quarter of 2005, 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. Despite a considerable increase in the gross profit in the second
quarter of 2005, the liquidation strategy in the first quarter caused the gross
profit as a percentage of sales to decrease to 29% in 2005 from 32% in 2004.
Operating expenses increased to $2,831 in 2005 from $1,889 in 2004 due to
increases in payroll expenses, licensing fees and selling and selling related
expenses in order to position the Company for the top line growth. Income from
operations for Candie's was $31 in 2005 compared to $345 in 2004.
Diva Acquisition Corp. ("Steven"):
Sales from Steven accounted for $9,064 or 5%, and $11,091 or 7%, of total sales
in 2005 and 2004, respectively. The decrease in sales was due to disappointing
sales of closed toe dress shoes in the first quarter, which was last year's
bestseller. Additionally, last Fall's disappointing boot season caused Steven's
customers to trim initial boot orders this year resulting in a decrease in full
price boot shipments in the month of June. Gross profit as a percentage of sales
decreased to 24% in 2005 from 42% 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 2005. Operating expenses
increased marginally to $2,564 in 2005 from $2,463 in 2004. Loss from operations
for Steven was $400 in 2005 compared to income from operation of $2,167 in 2004.
Stevies Inc. ("Stevies"):
Sales from Stevies accounted for $3,862 or 2%, and $5,488 or 3%, of total sales
in 2005 and 2004, respectively. The decrease was due to the poor performance of
Stevies products at retail. Gross profit as a percentage of sales decreased to
26% in 2005 from 32% in 2004, primarily due to an increase in returns and
allowances. Operating expenses decreased to $907 in 2005 from $1,386 in 2004 due
to decreases in payroll and selling related expenses. Income from operations for
Stevies was $103 in 2005 compared to $351 in 2004.
Unionbay Men's Footwear ("Unionbay"):
Unionbay, the Company's license for young men's footwear, generated net sales of
$726 in 2005 compared to $94 in 2004. This increase was the result of the
re-launch of Unionbay this spring in Kohl's stores. Income from operations for
Unionbay was $37 in 2005 compared to a loss from operations of $395 in 2004.
Retail Division:
- ----------------
Sales from the Retail Division accounted for $59,102 or 32% and $50,131 or 30%
of total sales in 2005 and 2004, respectively. As of June 30, 2005, there were
95 retail stores compared to 83 as of June 30, 2004. Comparable store sales
(sales of those stores that were open for all of 2005 and 2004) for the
six-month period ended June 30, 2005 increased 9% over the same period of 2004.
This growth in comparable store sales came on top of a 12% comparable store
sales growth achieved last year. This increase was achieved through the early
release and success of the opened up sandals in spring, higher average selling
prices in the core women's footwear category and a substantial growth in Men's
volume at the stores. Gross profit as a percentage of sales decreased to 48% in
2005 from 52% in 2004, primarily due to an increase in promotional activity and
the liquidation of slow moving inventory. Operating expenses for the Retail
Division were $26,657 in 2005 and $22,911 in 2004. This increase in operating
expense was primarily due to increased payroll and payroll related expenses and
an increase in occupancy and other variable costs associated with the operation
of an additional twelve stores (net) since last year. In addition, direct
selling and selling related expenses increased. Income from operations for the
Retail Division was $1,013 in 2005 compared to $3,045 in 2004.
Adesso-Madden Division:
- -----------------------
Adesso-Madden, Inc. generated commission revenues of $3,390 in 2005, compared to
$1,987 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. Income from operations
for Adesso-Madden was $1,848 in 2005 compared to $810 in 2004.
17
Three Months Ended June 30, 2005 compared to Three Months Ended June 30, 2004
Consolidated:
- -------------
Total net sales for the three-month period ended June 30, 2005 increased by 17%
to $100,958 from $86,234 for the comparable period of 2004. Sales increases from
the Retail Division, Madden Mens, Madden Womens and Candie's were offset by
declines in l.e.i., Steven and Stevies. Gross profit percentage remained
unchanged at 38% in 2005 and 2004.
Operating expenses increased to $31,953 in 2005 from $27,947 in 2004. One reason
for this increase was the Company's decision to record an additional reserve for
a pending legal settlement of $1,150. Other contributing factors were an
increase in direct selling expenses and increased payroll and occupancy expenses
associated with the operation of an additional twelve retail stores (net) and
volume related expenses resulting from the growth in revenues of Madden Mens.
Income from operations was $8,657 in 2005 compared to $6,576 in 2004. Net income
increased to $5,286 in 2005 compared to $4,090 in 2004. The increase in income
was primarily the result of the growth in sales.
Wholesale Divisions:
- --------------------
Steven Madden, Ltd. (Madden Womens, l.e.i., Madden Mens and Candie's):
Sales from Madden Womens accounted for $31,538 or 31%, and $30,964 or 36%, of
total sales in 2005 and 2004, respectively. This increase in sales was the
result of a broader product assortment. Gross profit as a percentage of sales
decreased to 30% in 2005 from 31% in 2004, primarily due to an increase in
returns and allowances. Operating expenses increased to $8,415 in 2005 compared
to $7,488 in 2004 due to the provision of $1,150 for settlement of the LaRue
litigation case. Income from operations for Madden Womens was $1,699 in 2005
compared to $2,816 in 2004.
Sales from l.e.i. accounted for $8,679 or 9%, and $10,603 or 12%, of total sales
in 2005 and 2004, respectively. This decrease in sales was primarily caused by
planned reduction and elimination of marginally profitable accounts. Gross
profit as a percentage of sales increased to 35% in 2005 from 32% in 2004
primarily due to a decrease in the level of close out sales in the quarter.
Operating expenses decreased to $2,006 in 2005 from $3,079 in 2004 due to
decreases in payroll and selling and related expenses. These expense decreases
resulted in a decrease in operating expenses as a percentage of sales to 23% in
2005 from 29% in 2004. Income from operations for l.e.i. was $995 in 2005
compared to $261 in 2004.
Sales from Madden Mens accounted for $15,360 or 15%, and $6,452 or 7%, of total
sales in 2005 and 2004, respectively. The sales increase was driven by an
increase in the number of doors at Dillards and Nordstom and the introduction of
new catalogue and online programs. The division continued its success with
"jean-friendly" product while dress offerings were also successful, giving the
Division a broader and more balanced collection. Gross profit as a percentage of
sales increased to 41% in 2005 from 27% in 2004 due to a substantial decrease in
markdowns and allowances. Operating expenses increased to $3,314 in 2005 from
$1,756 in 2004, due to increases in payroll expenses, advertising expense and
selling and related expenses. Income from operations for Madden Mens was $2,969
in 2005 compared to $7 in 2004.
Sales from Candie's accounted for $5,711 or 6%, and $3,735 or 4%, of total sales
in 2005 and 2004, respectively. The primary reason for the sales increase was
the initial shipment of product to Kohl's in both the children's and women's
footwear categories. Gross profit percentage increased to 39% in 2005 from 30%
in 2004 due to increased efficiency in inventory procurement resulting in lower
average inventory costs. Operating expenses increased to $1,356 in 2005 from
$930 in 2004, due to increases in payroll expenses and selling and related
expenses. Income from operations for Candie's was $868 in 2005 compared to $196
in 2004.
Diva Acquisition Corp. ("Steven"):
Sales from Steven accounted for $4,839 or 5%, and $5,842 or 7%, of total sales
in 2005 and 2004, respectively. The sales decrease was the result of last Fall's
disappointing boot season, which caused Steven's customers to trim initial boot
orders this year resulting in a decrease in full price boot shipments in the
month of June. Gross profit as a percentage of sales decreased to 14% in 2005
from 39% in 2004 due to the liquidation of slow moving inventory and an increase
in markdowns and allowances. Operating expenses decreased to $1,261 in 2005 from
$1,414 in 2004 due to a decrease in selling and related expenses. Loss from
operations for Steven was $569 in 2005 compared to income from operations of
$887 in 2004.
18
Stevies Inc. ("Stevies"):
Sales from Stevies accounted for $1,890 or 2%, and $2,163 or 3%, of total sales
in 2005 and 2004, respectively. The decrease in sales was due to the products
poor performance at retail. Gross profit as a percentage of sales remained at
26% in 2005 and 2004. Operating expenses decreased to $442 in 2005 from $703 in
2004 due to decreases in payroll and selling and related expenses. Income from
operations for Stevies was $54 in 2005 compared to loss from operations of $138
in 2004.
Unionbay Men's Footwear ("Unionbay"):
Unionbay generated net sales of $314 in 2005 compared to $45 in 2004. This
increase was the result of the re-launch of Unionbay this spring in Kohl's
stores. Loss from operations for Unionbay was $45 in 2005 compared to a loss of
$225 in 2004.
Retail Division:
- ----------------
Sales from the Retail Division accounted for $32,627 or 32% and $26,430 or 31%
of total sales in 2005 and 2004, respectively. As of June 30, 2005, there were
95 retail stores compared to 83 retail stores as of June 30, 2004. Comparable
store sales (sales of those stores that were open for all of the second quarters
of 2005 and 2004) for the three-month period ended June 30, 2005 increased 14%
over the same period of 2004. This increase follows a 15% comparable store
increase for the same period last year. This increase was achieved through a
combination of higher average selling prices in the core women's footwear
category and a substantial growth in Men's volume at the stores. In addition,
other product categories such as handbags and belts contributed to the sales
growth. Gross profit as a percentage of sales decreased to 50% in 2005 compared
to 53% in 2004 due to the liquidation of slow moving inventory. Operating
expenses for the Retail Division were $14,255 in 2005 compared to $11,807 in
2004. This increase in operating expense was primarily due to increased payroll
and payroll related expenses and increases in occupancy and other variable costs
associated with the operation of an additional twelve stores (net) since last
year. In addition, direct selling expenses and advertising expenditures
increased in 2005. Income from operations for the Retail Division was $1,483 in
2005 compared to $2,276 in 2004.
Adesso-Madden Division:
- -----------------------
Adesso-Madden, Inc. generated commission revenues of $2,023 in 2005, compared to
$1,091 in 2004. This increase is primarily the result of significant increases
in revenues from Target (Adesso-Madden's largest customer) as well as an
increased commission contribution from international sales. Income from
operations for Adesso-Madden was $1,203 in 2005 compared to $496 in 2004.
LICENSE AGREEMENTS
Revenue generated from licensing was $1,176 in the first six months of 2005
compared to $1,240 for the same period in 2004. As of June 30, 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 $107,041 at June 30, 2005 compared to
$101,417 at December 31, 2004. The Company's net income for the six months ended
June 30, 2005 was the primary contributor to the increase in working capital.
Under the terms of a factoring agreement with Capital, the Company was eligible
to draw down 80% of its invoiced receivables at an interest rate of two points
below the Prime Rate (as defined in said agreement). The agreement with Capital
was terminated on June 30, 2005. Capital maintained a lien on all of the
Company's receivables and assumed the credit risk for all assigned accounts
approved by them. Under the agreement, the Company had a credit line of $15
million. As of June 30, 2005 the Company had not used any portion of the credit
line.
On July 1, 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. GMAC will maintain a lien on all of the Company's receivables and assume
the credit risk for all assigned accounts approved by them.
As of June 30, 2005 the Company had invested $45,730 in marketable securities
consisting of corporate bonds, U.S. Treasury notes, government asset-backed
securities and equities.
19
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 six-month period ended June 30, 2005, net cash provided by operating
activities was $12,031. Sources of cash were provided primarily by the
following; net income; a decrease in inventories of $3,333; a decrease in
prepaid expenses, prepaid taxes, deposits and other assets of $1,917; an
increase in accounts payable and other accrued expenses of $8,936. The primary
use of cash was an increase in factored receivables of $14,980, which is the
result of an increase in sales during the months of May and June.
CONTRACTUAL OBLIGATIONS
The Company's contractual obligations as of June 30, 2005 were as follows:
Payment due by period (in thousands)
Remainder of 2011 and
Contractual Obligations Total 2005 2006-2008 2009-2010 after
- ------------------------- ------------ ------------ ------------ ------------ ------------
Operating Lease
Obligations $ 81,520 $ 5,966 $ 35,288 $ 17,916 $ 22,350
Purchase Obligations 4,096 4,096 0 0 0
Other Long-Term
Liabilities (future
minimum royalty
payments) 3,938 1,335 2,603 0 0
------------ ------------ ------------ ------------ ------------
Total $ 89,554 $ 11,397 $ 37,891 $ 17,916 $ 22,350
============ ============ ============ ============ ============
At June 30, 2005, the Company had un-negotiated open letters of credit for the
purchase of imported merchandise of approximately $4,096.
The Company has an employment agreement with Steven Madden, its Creative and
Design Chief, which provides for an annual base salary of $600,000 subject to
certain specified adjustments, through June 30, 2015. The agreement also
provides for annual bonuses based on EBITDA and on revenue of any new business,
an annual option grant at exercise prices equal to the market price on the date
of grant and a non-accountable expense allowance.
The Company has employment agreements with certain executives, which provide for
the payment of compensation aggregating approximately $1,964 in 2005, $1,391 in
2006 and $1,175 in 2007. In addition, such employment agreements provide for
incentive compensation based on various performance criteria as well as other
benefits. The Chief Operating Officer of the Company is entitled to deferred
compensation calculated as a percentage of his base salary.
Significant portions of the Company's products are produced at overseas
locations, the majority of which are located in Brazil, China, Italy and Spain.
The Company has not entered into any long-term manufacturing or supply contracts
with any of these foreign companies. The Company believes that a sufficient
number of alternative sources exist outside of the United States for the
manufacture of its products. In addition, the Company currently makes
approximately ninety-seven percent (97%) of its purchases in U.S. dollars.
INVESTING ACTIVITIES
During the six-month period ended June 30, 2005, the Company invested $839 in
marketable securities and received $3,807 from maturities and sales of
securities. In addition, the Company incurred capital expenditures of $2,779
principally for leasehold improvements for the six additional retail stores that
were opened during the period.
20
FINANCING ACTIVITIES
During the six-month period ended June 30, 2005, the Company repurchased 444,000
shares of the Company's common stock at a total cost of $7,735.
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.
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 assumed the credit risk related to approximately
95% of the Company's accounts receivables through June 30, 2005. As of July 1,
2005, GMAC assumed the credit risk for the Company's accounts receivables (see
Note M[4]). However, financial difficulties of a customer could cause the
Company to curtail business with such customer or require the Company to assume
more credit risk relating to such customer's account receivable.
21
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
six-month period ended June 30, 2005, approximately 91% of the Company's
products were purchased from sources outside the United States, primarily from
China, Brazil, Italy and Spain.
Risks inherent in foreign operations include work stoppages, transportation
delays and interruptions, changes in social, political and economic conditions
which could result in the disruption of trade from the countries in which the
Company's manufacturers or suppliers are located, the imposition of additional
regulations relating to imports, the imposition of additional duties, taxes and
other charges on imports, significant fluctuations of the value of the dollar
against foreign currencies, or restrictions on the transfer of funds, any one 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 one 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
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
22
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 the first six months of 2005 the Company
opened six Steve Madden retail stores and has plans to open approximately six to
nine 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 increased and will continue to increase demand 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 generally purchases its products in
U.S. dollars. However, the Company sources substantially all of its products
overseas and, as such, the cost of these products may be affected by changes in
the value of the relevant currencies. Changes in currency exchange rates may
also affect the relative prices at which the Company and foreign competitors
sell their products in the same market. There can be no assurance that foreign
currency fluctuations will not have a material adverse effect on the Company's
business, financial condition and results of operations.
23
Outstanding Options: As of August 3, 2005 there were outstanding options to
purchase an aggregate of approximately 1,850,253 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 its options are outstanding, they may adversely
affect the terms on which the Company could obtain additional capital, if
required.
Economic and Political Risks: The present economic condition in the United
States and concern about uncertainties could significantly reduce the disposable
income available to the Company's customers for the purchase of the Company's
products. In addition, current unstable political conditions, including the
potential or actual conflicts in Iraq, North Korea or elsewhere, or the
continuation or escalation of terrorism, could have an adverse effect on the
Company's business, financial condition and results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not engage in the trading of market risk sensitive instruments
in the normal course of business. Financing arrangements for the Company are
subject to variable interest rates primarily based on LIBOR. An analysis of the
Company's factoring agreements with Capital and GMAC can be found in the
Liquidity and Capital Resource section under Item 2 of this document. As of
December 31, 2004 and December 31, 2003, there were no direct borrowings
outstanding under the credit agreement.
As of June 30, 2005, the Company had investments in marketable securities valued
at $45,730,000, which consists principally of federal and state obligations.
These obligations have various maturities through December 2009. These
investments are subject to interest rate risk and will decrease in value if
market interest rates increase. The Company currently has the ability to hold
these investments until maturity. Should there be a significant increase in
interest rates, the value of these investments would be negatively affected
unless they were held to maturity. In addition, any further decline in interest
rates would reduce the Company's interest income.
ITEM 4. CONTROLS AND PROCEDURES
As required by Rule 13a-15(b) of the Securities Exchange Act of 1934 (the
"Exchange Act"), the Company's management, including the Company's Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of its disclosure controls and procedures as of the end of the fiscal quarter
covered by this quarterly report. Based on that evaluation, the Chief Executive
Officer and Chief Financial Officer have concluded that the Company's disclosure
controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act)
were effective as of the end of the fiscal quarter covered by this quarterly
report. As required by Rule 13a-15(d) under the Exchange Act, the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, has evaluated the Company's internal controls over financial reporting
to determine whether any changes occurred during the quarter covered by this
quarterly report that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.
Based on that evaluation, there has been no such change during the quarter
covered by this quarterly report.
24
Part II. OTHER INFORMATION
- ---------------------------
ITEM 1. LEGAL PROCEEDINGS
Certain legal proceedings in which the Company is involved are discussed in Note
M 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, 2004. 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.
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 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 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 December 15, 2003, the Company commenced an action against LaRue in the
United States District Court for the Southern District of New York. The Company
sought a declaratory Judgment that the Company properly terminated a license
agreement with LaRue and monetary damages for breach of the license agreement
and trademark infringement by LaRue. On January 20, 2004, LaRue served an answer
and counterclaim alleging that the license agreement was improperly terminated
by the Company and seeking $9,900,000 in compensatory damages, as well as
additional punitive damages. The parties served cross-motions for summary
judgment which were submitted to the court on February 28, 2005. On August 1,
2005, the parties agreed to a settlement pursuant to which the Company paid
LaRue $1,500,000 in full satisfaction of any and all claims relating to this
action. A Stipulation of Dismissal, with prejudice, has been filed with the
court and the parties have exchanged general releases.
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 case was
dismissed on May 10, 2005.
25
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 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
The following table provides information as of June 30, 2005 with respect to the
shares of common stock repurchased by the Company during the second quarter of
fiscal 2005:
-----------------------------------------------------------------------------------------------------
Period Total Number Average Total Number of Maximum dollar amount of
of Shares Price Paid Shares Purchased as Shares that May Yet Be
Purchased per Share Part of Publicly Purchased Under the Plans
Announced Plans or or Programs (1)
Programs (1)
-----------------------------------------------------------------------------------------------------
4/1/05 - 4/30/05 125,900 16.67 125,900 $27,707,146
-----------------------------------------------------------------------------------------------------
5/1/05 - 5/31/05 8,900 16.00 8,900 $27,564,748
-----------------------------------------------------------------------------------------------------
6/1/05 - 6/30/05 0 0 0 $27,564,748
-----------------------------------------------------------------------------------------------------
Total 134,800 $16.62 134,800 $27,564,748
-----------------------------------------------------------------------------------------------------
(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
dollars of its outstanding common stock at such prices and time as are
determined to be in the best interest of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of the Company held on May 27, 2005 (the "Annual
Meeting"), the stockholders of the Company ratified the appointment of Eisner
LLP and did not approve the issuance of 50,000 shares of the Company's common
stock to each of Robert Schmertz and Harry Chen. In addition, the stockholders
of the Company elected nine directors to serve until the next Annual Meeting of
Stockholders or until their successors are duly elected and qualified.
The affirmative vote of the holders of a majority of the total votes cast was
required to ratify the appointment of Eisner LLP and to approve the issuance of
50,000 shares of the Company's common stock and the affirmative vote of a
plurality of the votes cast by holders of shares of common stock was required to
elect the directors.
With respect to the approval of the appointment of Eisner LLP, set forth below
is information on the results of the votes cast at the Annual Meeting.
For Against Abstained
---------- ------- ---------
Appointment of Eisner LLP 12,597,548 26,989 359,344
26
With respect to the approval of the issuance of 50,000 shares of our Common
Stock to each of Robert Schmertz and Harry Chen, set forth below is the
information on the results of the votes cast at the Annual Meeting.
For Against Abstained
--------- --------- ---------
Robert Schmertz 4,710,730 6,119,373 390,535
Harry Chen 4,774,737 6,080,766 365,135
With respect to the election of directors, set forth below is information with
respect to the nominees elected as directors of the Company at the Annual
Meeting and the votes cast and/or withheld with respect to each such nominee.
Nominees For Withheld
------------------ -------------- --------------
Jamieson A. Karson 12,365,002 618,879
Jeffrey Birnbaum 12,296,493 687,388
Marc S. Cooper 12,296,493 687,388
Harold Kahn 12,408,097 575,784
John L. Madden 12,285,098 698,783
Peter Migliorini 12,313,834 670,047
Thomas H. Schwartz 12,314,334 669,547
Awadhesh Sinha 12,430,297 553,584
Walter Yetnikoff 12,427,297 556,584
ITEM 6. EXHIBITS.
(a) Exhibits
(10.1) Third Amended and Restated Employment Agreement between the
Company and Steven Madden, effective as of July 1, 2005 (incorporated by
reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed with
the Commission on July 20, 2005).
(10.2) Employment Agreement between the Company and Awadhesh Sinha,
dated as of June 15, 2005 (incorporated by reference to Exhibit 10.1 to the
Company's Current Report on Form 8-K filed with the Commission on June 21,
2005).
(10.3) Amendment Number 2 to Employment Agreement between the Company
and Richard Olicker, dated as of May 23, 2005 (incorporated by reference to
Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the
Commission on June 16, 2005).
(31.1) Certification of Chief Executive Officer pursuant to Rule
13a-14(a) or 15d-14(a) 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(a) or 15d-14(a) 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.
27
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report on Form 10-Q to be signed on its behalf
by the undersigned thereunto duly authorized.
DATE: August 8, 2005
STEVEN MADDEN, LTD.
/S/ JAMIESON A. KARSON
-----------------------------------------
Jamieson A. Karson
Chairman and Chief Executive Officer
/S/ ARVIND DHARIA
-----------------------------------------
Arvind Dharia
Chief Financial Officer
28
Exhibit No Description
- ---------- -----------
10.1 Third Amended and Restated Employment Agreement between the
Company and Steven Madden, effective as of July 1, 2005
(incorporated by reference to Exhibit 10.1 to the Company's
Current Report on Form 8-K filed with the Commission on July
20, 2005).
10.2 Employment Agreement between the Company and Awadhesh Sinha,
dated as of June 15, 2005 (incorporated by reference to
Exhibit 10.1 to the Company's Current Report on Form 8-K filed
with the Commission on June 21, 2005).
10.3 Amendment Number 2 to Employment Agreement between the Company
and Richard Olicker, dated as of May 23, 2005 (incorporated by
reference to Exhibit 10.1 to the Company's Current Report on
Form 8-K filed with the Commission on June 16, 2005).
31.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(a) or 15d-14(a) 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(a) or 15d-14(a) 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