UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2005 Commission File Number 0-23702
STEVEN MADDEN, LTD.
(Exact name of registrant as specified in its charter)
Delaware 13-3588231
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
52-16 Barnett Avenue, Long Island City, New York 11104
(Address of principal executive offices) (Zip Code)
(718) 446-1800
(Registrant's Telephone Number, Including Area Code)
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.0001 per share
Preferred Stock Purchase Rights
Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The aggregate market value of the common equity held by non-affiliates of
the registrant (assuming for these purposes, but without conceding, that all
executive officers and Directors are "affiliates" of the registrant) as of June
30, 2005, the last business day of the registrant's most recently completed
second fiscal quarter, was approximately $233,359,000 (based on the closing sale
price of the registrant's common stock on that date as reported on The NASDAQ
National Market).
The number of outstanding shares of the registrant's common stock as of
March 9, 2006 was 13,846,168 shares.
DOCUMENTS INCORPORATED BY REFERENCE:
PART III INCORPORATES CERTAIN INFORMATION BY REFERENCE FROM THE
REGISTRANT'S DEFINITIVE PROXY STATEMENT FOR THE ANNUAL MEETING OF STOCKHOLDERS
SCHEDULED TO BE HELD ON OR ABOUT MAY 26, 2006.
TABLE OF CONTENTS
PART I
ITEM 1 BUSINESS............................................................1
ITEM 1A RISK FACTORS.......................................................10
ITEM 1B UNRESOLVED STAFF COMMENTS..........................................13
ITEM 2 PROPERTIES.........................................................13
ITEM 3 LEGAL PROCEEDINGS..................................................14
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................15
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES................15
ITEM 6 SELECTED FINANCIAL DATA............................................16
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS............................................17
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.........28
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................29
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.........................................29
ITEM 9A CONTROLS AND PROCEDURES............................................29
ITEM 9B OTHER INFORMATION..................................................31
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.................31
ITEM 11 EXECUTIVE COMPENSATION.............................................31
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS...................................31
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.....................31
ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES.............................31
PART IV
ITEM 15 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.........................31
PART I
ITEM 1 BUSINESS
Steven Madden, Ltd. (together with its subsidiaries, the "Company")
designs, sources, markets and sells fashion-forward footwear for women, men and
children. The Company distributes products through its retail stores, its
e-commerce website, department and specialty stores throughout the United States
and Canada and through special distribution arrangements in Europe, Central and
South America, Australia and Indonesia. The Company's product line includes core
products, which are sold year-round, complemented by a broad range of updated
styles which are designed to establish or capitalize on market trends.
The Company's business is comprised of three (3) distinct segments
(wholesale, retail and private label). The wholesale division includes eight (8)
brands: Steve Madden(R), Steven(R), l.e.i.(R), Candie's(R), Stevies(R),
SMNY(TM), Unionbay(R) and Steve Madden Mens. Steven Madden Retail, Inc., the
Company's wholly-owned retail subsidiary, operates Steve Madden, Steven and Shoe
Biz retail stores as well as the Company's outlet stores and e-commerce website.
The Company is planning on closing the Shoe Biz store in July of 2006. The
Company's wholly-owned private label subsidiary, Adesso-Madden, Inc., designs
and sources footwear products under private labels for many of the country's
large mass merchandisers. The Company also licenses its Steve Madden(R)
trademark for several accessory and apparel categories.
Steven Madden, Ltd. was incorporated as a New York corporation on July
9, 1990 and reincorporated under the same name in Delaware in November 1998. The
Company has established a reputation for its creative designs, popular styles
and quality products at accessible price points. The Company completed its
initial public offering in December 1993 and its shares of Common Stock
currently trade on The NASDAQ National Market under the symbol "SHOO".
The Company maintains its principal executive offices at 52-16 Barnett
Avenue, Long Island City, NY 11104, telephone number (718) 446-1800.
The Company's website is http://www.stevemadden.com. The Company makes
available free of charge on its website its Annual Reports on Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, any amendments to
such reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") and our Proxy
Statement for our Annual Meeting as soon as reasonably practicable after such
material is electronically filed with, or furnished to, the Securities and
Exchange Commission (the "Commission"). The Company will provide paper copies of
such filings free of charge upon request.
Wholesale Divisions
Madden Women's Wholesale Division
The Steve Madden(R) Women's Wholesale Division ("Madden Women's")
designs, produces, sources, sells and markets the Company's Steve Madden(R)
brand to major department stores, better specialty stores and shoe stores
throughout the United States. The Steve Madden(R) product line has become a
leading footwear brand in the fashion conscious junior marketplace. To serve its
customers (primarily women ages 16 to 25), Madden Women's creates and markets
fashion forward footwear designed to appeal to customers seeking exciting, new
footwear designs at affordable prices.
As the Company's largest division, Madden Women's accounted for
$120,333,000 of net sales in the year ended December 31, 2005, or approximately
32% of the Company's total net sales. Many newly created styles for Madden
Women's are test marketed at the Company's retail stores. Within a few days, the
Company can determine if the test product appeals to customers. This enables the
Company to use its flexible sourcing model to rapidly respond to changing
preferences which the Company believes is essential for success in the fashion
footwear marketplace.
l.e.i.(R) - Wholesale Division
Pursuant to the Company's license agreement with Jones Investment
Company, Inc., the Company has the right to use the l.e.i.(R) trademark in
connection with the sale and marketing of footwear through September 30, 2006.
The l.e.i.(R) trademark is well known in the junior marketplace for jeans wear
and is sold nationally through department and specialty stores. The Company's
l.e.i.(R) footwear products are targeted to attract girls and young women ages 6
to 20 years old, a majority of which are younger than the typical Steve
Madden(R) brand customer. The l.e.i. Wholesale Division ("l.e.i.") generated net
sales of $30,286,000 for the year ended December 31, 2005, or approximately 8%
of the Company's total net sales.
Madden Mens Wholesale Division
The Steve Madden Mens Wholesale Division ("Madden Mens ") designs,
produces, sources, sells and markets a full collection of directional young
men's shoes through major department stores, better specialty stores and
independent shoe stores throughout the United States. Price points range from
$70 to $100 at retail, targeted at men ages 18 to 44 years old. Madden Mens
accounted for $54,611,000 of net sales in the year ended December 31, 2005, or
approximately 15% of the Company's total net sales. Madden Mens, which is
primarily produced in China, maintains open stock inventory positions in select
patterns to serve the replenishment programs of its wholesale customers.
Candie's Wholesale Division
Pursuant to the Company's license agreement with Candie's, Inc.
("Candie's"), the Company designs, produces, sources, sells and markets
Candie's(R) branded footwear for women and children worldwide through the
Company's Candie's Wholesale Division ("Candie's"). Candie's(R) generated net
sales of $22,404,000 for the year ended December 31, 2005, or approximately 6%
of the Company's total net sales.
On December 6, 2004, the license agreement with Candie's was amended to
reflect Candie's decision to name Kohl's Corporation ("Kohl's") as the exclusive
provider of a new line of Candie's apparel. Pursuant to the amendment,
commencing on January 1, 2007, the Company will no longer have the exclusive
right to market Candie's branded footwear and will be permitted to sell Candie's
branded footwear only to Kohl's. Under the terms of the amendment, Candie's has
guaranteed that the Company will achieve minimum sales levels with Kohl's during
the term of the agreement, which runs through December 31, 2010. In the event
such minimum sales levels are not achieved, Candie's is required to compensate
the Company in an amount based on a percentage of the sales shortfall.
SM New York - Wholesale Division
The Company's SM New York Wholesale Division ("SMNY") began shipping
for the first time in the fourth quarter of 2005 and generated sales of
$1,576,000. SMNY(TM) is geared for young women ages 13 to 20 and is an "opening
price point" brand that is currently being sold at Federated Department Stores
and mid-tier department stores.
Diva Acquisition Corp. - Steven(R) Wholesale Division
Diva Acquisition Corp. ("Steven(R)") designs and markets women's
fashion footwear under the Steven(R) trademark through major department and
better footwear specialty stores and two (2) Company-owned retail shoe stores
located in New York City and Miami. Priced a tier above the Steve Madden(R)
brand, Steven(R) products are designed to appeal principally to fashion
conscious women, ages 26 to 45, who shop at department stores and footwear
boutiques. Steven(R) generated net sales of $16,453,000 for the year ended
December 31, 2005, or approximately 4% of the Company's total net sales.
Stevies Inc. - Wholesale Division
The Company's Stevies(R) Wholesale Division ("Stevies(R)") designs,
produces, sources, sells and markets footwear for girls to major department
stores, better specialty stores and shoe stores throughout the United States.
2
Stevies(R) generated net sales of $7,886,000 for the year ended December 31,
2005, or approximately 2% of the Company's total net sales. Stevies(R) products
are marketed through department stores, such as Federated Department Stores,
Belk and Limited Too, as well as independent children's stores throughout the
country.
Unionbay Men's Footwear Wholesale Division
Pursuant to the Company's license agreement with Seattle Pacific
Industries, Inc., the Company has the right to use the Unionbay(R) trademark in
connection with the sale and marketing of footwear for men and boys. Unionbay(R)
is known for casual apparel in the young men's, junior's and children's
marketplace and is distributed nationally through department and specialty
stores. The Company's Unionbay(R) Wholesale Division ("Unionbay") generated net
sales of $726,000 for the year ended December 31, 2005, or under 1% of the
Company's total net sales.
Steven Madden Retail, Inc. - Retail Division
As of December 31, 2005, the Company owned and operated 94 retail shoe
stores under the Steve Madden(R) name, two (2) under the Steven(R) name, one (1)
outlet store under the Shoe Biz name and one (1) Internet store (through the
www.stevemadden.com website). In 2005, the Company opened twelve (12) new stores
and closed five (5) under-performing stores. Most of the Steve Madden stores are
located in major shopping malls in Alabama, Arizona, California, Colorado,
Connecticut, Delaware, Florida, Georgia, Illinois, Kansas, Louisiana, Maryland,
Massachusetts, Michigan, Minnesota, Missouri, Nevada, New Jersey, New York,
North Carolina, Ohio, Pennsylvania, Puerto Rico, Rhode Island, Texas, Virginia,
Wisconsin and the District of Columbia. The retail stores generated annual sales
in excess of $771 per square foot. Sales are primarily from the sale of the
Company's Steve Madden(R) product line. Comparative store sales (sales of those
stores that were open for all of 2005 and 2004) increased 5% in 2005 compared to
2004. Net sales for the retail division were $121,511,000 for 2005. Net sales
from the Retail Division for the year ended December 31, 2005 were approximately
32% of the Company's total net sales.
The Company believes that the retail division will continue to enhance
overall sales and profits of the Company while building equity in the Steve
Madden brand. The Company plans to add eight to ten (8 - 10) new retail stores
during 2006. The expansion of the retail division enables the Company to test
and react to new products and classifications which, in turn, strengthens the
product development efforts of the Steve Madden wholesale division.
The Adesso-Madden, Inc. - Private Label Division
In September 1995, the Company incorporated Adesso-Madden, Inc. as a
wholly owned subsidiary ("A-M"). A-M was formed to serve as a buying agent to
mass market merchandisers, shoe store chains and other value-priced retailers in
connection with their procurement of private label shoes. As a buying agent, A-M
arranges for shoe manufacturers to produce private label shoes to the
specifications of its clients. The Company believes that by operating in the
private label, mass merchandising market, the Company is able to maximize
additional non-branded sales opportunities. This leverages the Company's overall
sourcing and design capabilities. Currently, this division serves as a buying
agent for the procurement of women's, men's and children's footwear for large
retailers including Target, Wal-Mart, Mervyns, J.C. Penney, Sears and Payless.
A-M receives buying agent's commissions from its clients. The private label
division generated net commission income of $4,833,000 for the year ended
December 31, 2005.
Licensing
As of December 31, 2005, the Company licensed its Steve Madden
trademark for use in connection with the manufacturing, marketing and sale of
outerwear including leather outerwear, belts, handbags, sunglasses, eyewear and
hosiery. Each license agreement requires the licensee to pay to the Company a
royalty based on net sales, a minimum royalty in the event that specified net
sales targets are not achieved and a percentage of sales for advertising of the
Steve Madden(R) brand. Licensing income was $2,286,000 for the year ended
December 31, 2005.
3
Daniel M. Friedman
On February 7, 2006, the Company acquired all of the equity interest of
privately held Daniel M. Friedman and Associates, Inc. Founded in 1995, Daniel
M. Friedman is a manufacturer and distributor of name fashion handbags and
accessories. The acquisition was completed for $18,000,000 in cash and includes
certain earn out provisions based on financial performance through 2010. In
October of 1998, the Company entered into a license agreement with Daniel M.
Friedman for the design, manufacture and distribution of women's belts in the
United States and Canada. This agreement expired on June 30, 2005. On July 14,
2005, the Company entered into a new license agreement with Daniel M. Friedman
for the design, manufacture and distribution of handbags, women's belts, wallets
and other small leather goods.
Design
The Company has established a reputation for its creative designs,
popular styles and quality products at affordable price points. The Company
believes that its future success will depend in substantial part on its ability
to continue to anticipate and react to changing consumer demands in a timely
manner. To meet this objective, the Company has developed a unique design
process that allows it to recognize and act quickly to changing consumer
demands. The Company's design team strives to create designs which it believes
fit the Company's image, reflect current or future trends and can be
manufactured in a timely and cost-effective manner. Once the initial design is
complete, a prototype is developed, which is reviewed and refined prior to the
commencement of limited production. Most new designs are then tested in the
Steve Madden(R) retail stores. Designs that prove popular are then offered to
wholesale and retail distribution nationwide. The Company believes that its
unique design and testing process and flexible sourcing model is a significant
competitive advantage allowing the Company to mitigate the risk of the costly
production and distribution of unpopular designs.
Product Sourcing and Distribution
The Company sources each of its product lines separately based on the
individual design, styling and quality specifications of the products in such
product lines. The Company does not own or operate manufacturing facilities;
rather, it sources its branded products through independently owned
manufacturers in China, Brazil, Italy, Mexico, Spain, Portugal and the United
States. The Company has established relationships with a number of manufacturers
in each of these countries. Although the Company has not entered into any
long-term manufacturing or supply contracts, the Company believes that a
sufficient number of alternative sources exist for the manufacture of its
products. The principal materials used in the Company's footwear are available
from a number of sources, both within the United States and in foreign
countries.
The Company's design and distribution processes are intended to be
flexible, allowing the Company to respond to and accommodate changing consumer
demand. The Company's production staff tracks warehouse inventory on a regular
basis, monitors sell-through data and incorporates input on product demand from
wholesale customers. The Company can use product feedback to adjust production
or manufacture new products in as little as five weeks.
The Company distributes its products from two (2) third-party
distribution warehouse centers located in California and New Jersey. By
utilizing distribution facilities that specialize in distributing products to
certain customer wholesale accounts, Steve Madden retail stores and Internet
fulfillment, the Company believes that its customers are better served.
Customers
The Company's wholesale customers consist principally of department
stores and specialty stores, including shoe boutiques. Presently, the Company
sells approximately 72% of its products at wholesale to department and specialty
stores, including Federated Department Stores (Macy's, Bloomingdale's, Bon
Marche, Filene's, Hecht's, Famous Barr, Foley's, Lord and Taylor, Robinsons May
and Marshall Fields'), Dillard's, Nordstrom, Journeys, Limited Too and Mandees;
and catalog retailers, including Victoria's Secret and Fingerhut. For the year
ended December 31, 2005, Federated Department Stores accounted for approximately
$80,290,000 (28%) of the Company's wholesale gross sales.
4
Distribution Channels
The Company sells its products principally through its Company-owned
retail stores and through department stores, specialty shoe stores and discount
stores in the United States and abroad. For the year ended December 31, 2005,
net sales from the Company's Retail Division and the Company's Wholesale
Division accounted for approximately $121,511,000 (32%) and $254,275,000 (68%)
of the Company's total net sales, respectively. The following paragraphs
describe each of these distribution channels.
Steve Madden and Steven Retail Stores
As of December 31, 2005, the Company operated 95 Company-owned retail
stores (including one Internet store) under the Steve Madden(R) name and two (2)
under the Steven(R) name. The Company believes that its retail stores will
continue to enhance overall sales, profitability, and its ability to react to
changing consumer trends. The stores are also a marketing tool that allows the
Company to strengthen brand recognition and to showcase selected items from its
full line of branded and licensed products. Furthermore, the retail stores
provide the Company with a venue to test and introduce new products and
merchandising strategies. Specifically, the Company often tests new designs at
its Steve Madden(R) retail stores before scheduling them for mass production and
wholesale distribution. In addition to these test marketing benefits, the
Company has been able to leverage sales information gathered at Steve Madden(R)
retail stores to assist its wholesale accounts in order placement and inventory
management.
A typical Steve Madden(R) store is approximately 1,400 to 1,600 square
feet and is located in a mall or street location that the Company expects will
attract the highest concentration of the Company's core demographic,
style-conscious young women ages 16 to 25 years old. The Steven(R) stores have a
more sophisticated design and format styled to appeal to their more mature
target audience. In addition to carefully analyzing mall demographics and
location, the Company also sets profitability guidelines for each potential
store site. Specifically, the Company targets well trafficked sites at which the
demographics fit the Company's consumer profile and seeks new locations where
the projected fixed annual rent expense does not exceed a specified percentage
of projected sales over the life of the lease. By setting these standards, the
Company seeks to identify stores that will contribute to the Company's overall
profits both in the near- and longer-terms.
Outlet Stores
Shoe Biz, Inc., a wholly owned subsidiary of the Company ("Shoe Biz"),
operates one (1) outlet store in New York which operates under the Shoe Biz
name. Shoe Biz sells many product lines, including Steve Madden, Steven, Stevies
and l.e.i.(R) footwear, at a price lower than typically charged by other full
price retailers. The Company is planning to close the Shoe Biz store in July of
2006.
Department Stores
The Company currently sells to over 6,500 doors of 22 department stores
throughout the United States and Canada. The Company's major accounts include
Federated Department Stores (Macy's, Bloomingdale's, Bon Marche, Filene's,
Hecht's, Famous Barr, Foley's, Lord and Taylor, Robinsons May and Marshall
Fields'), Nordstrom and Dillard's.
The Company provides merchandising support to its department store
customers which includes in-store fixtures and signage, supervision of displays
and merchandising of the Company's various product lines. The Company's
wholesale merchandising effort includes the creation of in-store concept shops,
where a broader collection of the Company's branded products are showcased.
These in-store concept shops create an environment that is consistent with the
Company's image and enable the retailer to display and stock a greater volume of
the Company's products per square foot of retail space. In addition, these
in-store concept shops encourage longer term commitment by the retailer to the
Company's products and enhance consumer brand awareness.
In addition to merchandising support, the Company's key account
executives maintain weekly communications with their accounts to guide them in
placing orders and to assist them in managing inventory, assortment and retail
sales. The Company leverages its sell-through data gathered at its retail stores
5
to assist department stores in allocating their open-to-buy dollars to the most
popular styles in the product line and to phase out styles with weaker
sell-throughs.
Specialty Stores/Catalog Sales
The Company currently sells to specialty store locations throughout the
United States and Canada. The Company's major specialty store accounts include
Journeys, Mandees, Famous Footwear and DSW. The Company offers its specialty
store accounts the same merchandising, sell-through and inventory tracking
support offered to its department store accounts. Sales of the Company's
products are also made through various catalogs, such as Victoria's Secret.
Internet Sales
The Company operates one (1) Internet website: www.stevemadden.com.
Customers can purchase numerous styles of the Company's Steve Madden(R), Steven
and Steve Madden Mens footwear, accessory and clothing products. Sales derived
from the Company's Internet website were $5,281,000 in 2005.
Distribution Agreements
Steve Madden products are available in many countries and territories
worldwide via several retail selling and distribution agreements. Under the
terms of the retail selling agreements, the licensee is required to open a
minimum number of stores each year and is required to pay the Company a royalty
for each pair of footwear sold. Under the terms of the distribution agreements,
the distributor is required to purchase certain minimum amounts of Steve Madden
shoes. These agreements, which expire at various times through December 31,
2009, are exclusive in their specific territories which include Canada,
Australia, New Zealand, Israel, UAE, Bahrain, Qatar, Oman, Indonesia, Mexico and
several countries in Central and South America.
Competition
The fashion footwear industry is highly competitive. The Company's
competitors include specialty shoe companies as well as companies with
diversified footwear product lines. Many of these competitors, including Diesel,
Kenneth Cole, Nine West, DKNY, Skechers, Nike and Guess, may have greater
financial and other resources than the Company. The Company believes effective
advertising and marketing, fashionable styling, high quality and value are the
most important competitive factors and intends to continue to employ these
elements as it develops its products.
Marketing and Sales
The Company has focused on creating an integrated brand building
program to establish Steve Madden as the leading designer of fashion footwear
for style-conscious young women and men. As a result, the Company developed a
national advertising campaign for lifestyle and fashion magazines which was also
used in regional marketing programs such as radio advertisements, television
commercials, outdoor media, college event sponsorship and live online chat
forums. The Company also continues to promote its website (www.stevemadden.com)
where customers can purchase Steve Madden(R), Steven(R) and Steve Madden Mens
products and interact with both the Company and other customers.
In order to service its wholesale accounts, the Company retains a sales
force of 22 independent sales representatives as of March 1, 2006. These sales
representatives work on a commission basis and are responsible for placing the
Company's products with its principal customers, including department and
specialty stores. The sales representatives are supported by the Company's
senior executives and, as of March 1, 2006, a staff of 13 account executives, 14
merchandise coordinators and 28 customer service representatives who continually
cultivate relationships with wholesale customers. This group of professionals
assist accounts in merchandising and assessing customer preferences and
inventory requirements, which ultimately serves to increase sales and
profitability.
6
Management Information Systems (MIS) Operations
Sophisticated information systems are essential to the Company's
ability to maintain its competitive position and to support continued growth.
The Company operates on a dual AS/400 system which provides system support for
all aspects of its business including manufacturing purchase orders; customer
purchase orders; order allocations; invoicing; accounts receivable management;
real time inventory management; quick response replenishment; point-of-sale
support; and financial and management reporting functions. The Company has a
PKMS bar coded warehousing system that is integrated with the wholesale system
in order to provide accurate inventory positions and quick response size
replenishment for its customers. In addition, the Company has installed an EDI
system which provides a computer link between the Company and certain wholesale
customers that enables both the customer and the Company to monitor purchases,
shipments and invoicing. The EDI system also improves the Company's ability to
respond to customer inventory requirements on a weekly basis.
Receivables Financing; Line of Credit
Under the terms of a factoring agreement with GMAC Commercial Finance
LLC ("GMAC"), the Company is permitted to draw down 80% of its invoiced
receivables at an interest rate of two and one-half percent (2.5%) over the 30
day LIBOR (as defined in such agreement). The agreement, which has no specific
expiration date and can be terminated by either party with sixty (60) days
written notice after June 30, 2007, provides the Company with a $25 million
credit facility with a $15 million sub-limit on direct borrowings. GMAC
maintains a lien on all of the Company's receivables and assumes the credit risk
for all assigned accounts approved by them. As of December 31, 2005, the Company
had not used any portion of the credit line.
Trademarks and Service Marks
The STEVE MADDEN and/or STEVE MADDEN plus Design trademarks and service
marks have been registered in numerous International Classes in the United
States (Int'l Cl. 25 for clothing and footwear; Int'l Cl. 18 for leather goods,
such as handbags and wallets; Int'l Cl. 9 for eyewear; Int'l Cl. 14 for jewelry;
Int'l Cl. 3 for cosmetics and fragrances; Int'l Cl. 20 for picture frames and
furniture; Int'l Cl. 16 for paper goods; Int'l Cl. 24 for bedding; and Int'l Cl.
35 for retail store services). The Company also has pending trademark
applications in the United States for the mark STEVE MADDEN and/or STEVE MADDEN
(design) in numerous international classes (Class 2 for paints, Class 4 for
candles, Class 6 for key chains and id bracelets, Class 11 for lamps, Class 21
for housewares, Class 26 for hair accessories, Class 27 for rugs and carpets,
Class 28 for sporting goods, and Class 32 for light beverages).
The Company also has trademark registrations in the United States for
the marks EYESHADOWS BY STEVE MADDEN (Int'l Cl. 9 for eyewear), ICE TEE (Int'l
Cl. 25 for clothing and footwear), SHOE BIZ BY STEVE MADDEN (Int'l Cl. 25 for
clothing and footwear; and Int'l Cl. 35 for retail store services) STEVEN M.
(Int'l Class 25 for clothing and footwear); and STEVEN (Int'l Cl. 25 for
clothing and footwear, Class 3 for cosmetics and fragrances, Class 14 for
jewelry, Class 18 for leather goods, Class 26 for hair accessories, Class 35 for
retail store services, and Class 9 for eyewear). The Company also has pending
applications for STEVEN in various international classes (Class 2 for paints,
Class 4 for candles, Class 6 for key chains and id bracelets, Class 11 for
lamps, Class 16 for printed matter, Class 20 for furniture, Class 21 for
housewares, Class 24 for fabrics and bedding, Class 26 for hair accessories,
Class 27 for rugs and carpets, Class 28 for sporting goods, and Class 32 for
light beverages). The Company also owns a registration for the mark SOHO COBBLER
and SOHO COBBLER (design) in the U.S. in Class 25 for footwear.
The Company also has several pending applications in the U.S. for
MADDEN in a variety of international classes (Class 3 for cosmetics and
fragrances, Class 18 for bags, , Class 14 for jewelry, and Class 25 for clothing
and footwear). The Company also has pending applications in the U.S. for STEVEN
BY STEVE MADDEN in Classes 18 (bags) and 24 (bedding), and for MADDEN BY STEVE
MADDEN in Class 2 for paints, Class 3 for perfume and cosmetics, Class 4 for
candles, Class 6 for key rings and key chains, Class 9 for eyewear and CDs,
Class 11 for lamps, Class 14 for jewelry, Class 16 for stationery and notebooks,
Class 18 for bags, Class 20 for furniture, Class 21 for housewares, Class 24 for
bedding, Class 25 for clothing and footwear, Class 26 for hair accessories,
Class 27 for carpets and rugs, Class 28 for toys and games, Class 32 for light
beverages, and Class 35 for retail store services.
7
Additionally, the Company has several pending trademark and service
mark applications in the United States for various marks, including a stylized
"H" Design (Int'l Cl. 25 for clothing and footwear). STEVE MADDEN LUXE in Class
25 for clothing and footwear, and FINA FIRENZE in Classes 18 (bags), 25
(clothing and footwear), and 35 (retail stores). RULE STEVE MADDEN (in Class 2
for paints, Class 3 for perfume and cosmetics, Class 4 for candles, Class 6 for
key rings and key chains, Class 9 for eyewear and CDs, Class 11 for lamps, Class
14 for jewelry, Class 16 for stationery and notebooks, Class 18 for bags, Class
20 for furniture, Class 21 for housewares, Class 24 for bedding, Class 25 for
clothing and footwear, Class 26 for hair accessories, Class 27 for carpets and
rugs, Class 28 for toys and games, Class 32 for light beverages, and Class 35
for retail store services), SM NEW YORK (in Class 3 for perfume and cosmetics,
Class 14 for jewelry, Class 18 for bags, Class 20 for furniture, Class 21 for
housewares, and Class 25 for clothing and footwear); and SMNY (in Class 3 for
perfume and cosmetics, Class 14 for jewelry, Class 18 for bags, Class 20 for
furniture, Class 21 for housewares, and Class 25 for clothing and footwear).
The Company further owns registrations for the STEVE MADDEN and/or
STEVE MADDEN plus Design trademarks and service marks in various International
Classes in Argentina, Australia, Bahrain, Belize, Brazil, Canada, Chile, China,
Colombia, El Salvador, Guatemala, Hong Kong, Israel, Italy, Japan, Korea,
Lebanon, Mexico, Nicaragua, the Netherlands, Panama, Saudi Arabia, Singapore,
South Africa, Taiwan, the United Arab Emirates, Venezuela, the European Union,
and the Benelux countries and has pending applications for registration of the
STEVE MADDEN and/or STEVE MADDEN plus Design trademarks and service marks in
Bahrain, Costa Rica, Guatemala, Honduras, Indonesia, Korea, Kuwait, Lebanon, New
Zealand, Oman, Peru, Philippines, Qatar, Russia, Saudi Arabia, Singapore,
Turkey, and the United Arab Emirates . Additionally, the Company owns
registrations for the STEVEN trademark and service mark in various International
Classes in China, Hong Kong, Lebanon, Japan, Thailand, Taiwan, and the United
Arab Emirates and has pending applications for registration of the STEVEN
trademark and service mark in Australia, Bahrain, China, Indonesia, Israel,
Italy, Korea, Malaysia, New Zealand, Oman, Philippines, Qatar, Russia, South
Africa, Saudi Arabia, Taiwan, Thailand, Turkey, and Taiwan.
The Company further owns registrations for the "torch stripe" design in
Class 25 in the European Union and Panama, and has a pending application for the
"torch stripe" design in Class 25 in China.
The Company further owns registrations for the mark STEVEN BY STEVE
MADDEN in various international classes in the European Union, and has pending
applications for the mark STEVEN BY STEVE MADDEN in various international
classes in Canada, China, Israel, and Korea,
The Company further owns registrations for the mark SCOOP in various
international classes in the European Union.
The Company further has pending applications for the mark SCOOP
(design) in Classes 25 and/or 35 in Australia, Canada, China, Hong Kong, Kuwait,
Mexico, Russia, and Switzerland,
The Company further owns a registration for the mark WHAT'S THE SCOOP
in Class 25 in Hong Kong, and has pending applications for the mark WHAT'S THE
SCOOP in Class 25 in China, Japan, and Taiwan.
The Company further owns registrations for the mark SCOOP STREET in
Class 25 in Hong Kong, Japan, and has pending applications for the mark SCOOP
STREET in Class 25 in China and Taiwan.
The Company further has a pending application for the mark SCOOP NYC in
Class 3 in Japan.
The Company further owns a registration for the mark SCOOPKIDS in Class
25 in Japan.
Additionally, the Company, through its Diva Acquisition Corp.
subsidiary, owns registrations for the DAVID AARON trademark and service mark in
various International Classes in the United States (Int'l Cl. 25 for clothing
and footwear; Int'l Cl. 18 for leather goods, such as handbags and wallets; and
Int'l Cl. 35 for retail store services), and in Australia, Canada, the European
Union, Hong Kong, Japan, Korea, Panama, and South Africa in some or all of
Classes 3, 18, and 25, and for its D. AARON trademark in Class 25 Spain. Also,
the Company own registrations for the DAVID AARON trademark in the United States
in International Class 3 for perfume and cosmetics; International Class 9 for
8
eyewear; International Class 14 for jewelry; International Class 16 for paper
goods; International Class 18 for bags; International Class 24 for bed and bath
products; International Class 25 for clothing and footwear and International
Class 26 hair accessories in Korea.
The Company, through its Stevies, Inc. subsidiary, also owns various
registrations for the STEVIES and /or STEVIES plus Design trademark and service
mark in a number of International Classes in the United States (Int'l Cl. 18 for
leather goods, such as handbags and wallets; Int'l Cl. 9 for eyewear;
International Class 35 for retail store services; International Class 14 for
jewelry; International Class 28 for toys; International Class 16 for paper
goods; International Class 3 for perfume and cosmetics, International Class 9
for CDs and eyewear, and International Class 26 for hair accessories), and for
STEVIES BY STEVE MADDEN in Class 14 for jewelry, Class 9 for eyewear, Class 3
for perfume and cosmetics, Class 28 for toys and games, Class 35 for retail
services, Class 16 for stationery and notebooks, Class 18 for bags). The
Company, through its Stevies, Inc. subsidiary, also owns registrations for its
STEVIES and/or STEVIES plus Design mark for various goods in Argentina, Bahrain,
Canada, China, Columbia, the European Union, Hong Kong, Israel, Japan, Korea,
Lebanon, Malaysia, Mexico, Panama, Singapore, Taiwan and the United Arab
Emirates. Additionally Stevies, Inc. has several pending trademark and service
mark applications for registration of the STEVIES and STEVIES plus Design marks
in various International Classes in Brazil, Indonesia, Korea, Kuwait, Mexico,
New Zealand, Oman, Peru, Qatar, Saudi Arabia, Singapore, South Africa, Thailand,
Turkey, the United Arab Emirates and Venezuela. Finally, Stevies, Inc. also owns
several trademark and service mark registrations of the STEVIES BY STEVE MADDEN
mark in various International Classes in the United States (Int'l Cl. 25 for
clothing and footwear; Int'l Cl. 14 for jewelry; Int'l Cl. 18 for leather goods,
such as handbags and wallets; Int'l Cl. 16 for paper goods; Int'l Cl. 3 for
cosmetics and fragrances; Int'l Cl. 9 for eyewear; Int'l Cl. 28 for toys; and
Int'l Cl. 35 for retail store services).
The Company believes that its trademarks have a significant value and
are important to the marketing of the Company's products. There can be no
assurance, however, that the Company will be able to effectively obtain rights
to its marks throughout all of the countries of the world. 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. The failure of the Company to
protect such rights from unlawful and improper appropriation may have a material
adverse effect on the Company's business and financial condition.
Employees
On March 3, 2006, the Company employed approximately 1,414 employees,
of whom approximately 586 work on a full-time basis and approximately 828 work
on a part-time basis. The management of the Company considers relations with its
employees to be good.
Seasonality
Historically, the Company's merchandising businesses have experienced
holiday retail seasonality. In addition to seasonal fluctuations, the Company's
operating results 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 for obsolescence, the cost of materials, the product mix between
wholesale, retail 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.
Backlog
The Company had unfilled wholesale customer orders of $90 million and
$82 million, as of March 1, 2006 and 2005, respectively. The Company's backlog
at a particular time is affected by a number of factors, including seasonality,
timing of market weeks, and wholesale customer purchases of its core basic
products through the Company's open stock program. Accordingly, a comparison of
backlog from period to period may not be indicative of eventual shipments.
9
ITEM 1A RISK FACTORS
You should carefully consider the risks and uncertainties we describe
below and the other information in this Annual Report or incorporated by
reference herein before deciding to invest in, or retain, shares of our common
stock. These are not the only risks and uncertainties that we face. Additional
risks and uncertainties that we do not currently know about or that we currently
believe are immaterial, or that we have not predicted, may also harm our
business operations or adversely affect us. If any of these risks or
uncertainties actually occurs, our business, financial condition, operating
results or liquidity could be materially harmed.
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 for 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
10
extending credit to such retailers, the Company's losses due to bad debts have
been limited. Pursuant to the Factoring Agreement between GMAC and the Company,
GMAC currently assumes the credit risk related to approximately 93% of the
Company's accounts receivables. 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.
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
twelve-month period ended December 31, 2005, approximately 99% 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 of which could have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
does not believe that any such economic or political condition will materially
affect the Company's ability to purchase products, since a variety of materials
and alternative sources are available. The Company cannot be certain, however,
that it will be able to identify such alternative sources without delay (if
ever) or without greater cost to the Company. The Company's inability to
identify and secure alternative sources of supply in this situation would have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company's imported products are also subject to United States
customs duties. The United States and the countries in which the Company's
products are produced or sold, from time to time, impose new quotas, duties,
tariffs, or other restrictions, or may adversely adjust prevailing quota, duty
or tariff levels, any of which could have a material adverse effect on the
Company's business, financial condition and results of operations.
Possible Adverse Impact of Unaffiliated Manufacturers' Inability to
Manufacture in a Timely Manner, Meet Quality Standards or to Use Acceptable
Labor Practices. As is common in the footwear industry, the Company contracts
for the manufacture of a majority of its products to its specifications through
foreign manufacturers. The Company does not own or operate any manufacturing
facilities and is therefore dependent upon independent third parties for the
manufacture of all of its products. The Company's products are manufactured to
its specifications by both domestic and international manufacturers. The
inability of a manufacturer to ship orders of the Company's products in a timely
manner or to meet the Company's quality standards could cause the Company to
miss the delivery date requirements of its customers for those items, which
could result in cancellation of orders, refusal to accept deliveries or a
reduction in purchase prices, any of which could have a material adverse effect
on the Company's business, financial condition and results of operations.
Although the Company enters into a number of purchase order commitments
each season specifying a time frame for delivery, method of payment, design and
quality specifications and other standard industry provisions, the Company does
not have long-term contracts with any manufacturer. As a consequence, any of
these manufacturing relationships may be terminated, by either party, at any
time. Although the Company believes that other facilities are available for the
manufacture of the Company's products, both within and outside of the United
States, there can be no assurance that such facilities would be available to the
Company on an immediate basis, if at all, or that the costs charged to the
Company by such manufacturers will not be greater than those presently paid.
The Company does not control its licensing partners or independent
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 fashion footwear has encouraged the entry
of many new competitors and increased competition from established companies.
11
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 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(R),
Steven(R), SMNY, Steve Madden Mens, l.e.i.(R), Unionbay(R) and Candie's(R)
brands, creating new product categories and businesses and operating
Company-owned Steve Madden and Steven stores on a profitable basis. During the
year ended December 31, 2005, the Company opened 12 Steve Madden retail stores
and has plans to open eight to ten (8 - 10) additional stores in the year 2006.
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.
Management of Growth. 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 for
obsolescence, the cost of materials, the product mix between wholesale, retail
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
12
ownership of, trademarks and other proprietary rights of the Company or that the
Company will be able to successfully resolve such conflicts. In addition, the
laws of certain foreign countries may not protect proprietary rights to the same
extent as do the laws of the United States. The failure of the Company to
establish and then protect such proprietary rights from unlawful and improper
utilization could have a material adverse effect on the Company's business,
financial condition and results of operations.
Foreign Currency Fluctuations. The Company makes approximately 97% of
its purchases 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.
Outstanding Options. As of March 9, 2006, there were outstanding
options to purchase an aggregate of approximately 1,262,602 shares of Common
Stock. Holders of such options are likely to exercise them when, in all
likelihood, the market price of the Company's stock is significantly higher than
the exercise price of the options. Further, while options are outstanding, they
may adversely affect the terms on which the Company could obtain additional
capital, if required.
Economic and Political Risks. The present economic condition in the
United States and concern about uncertainties could significantly reduce the
disposable income available to the Company's customers for the purchase of 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 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2 PROPERTIES
The Company maintains approximately 33,000 square feet for its
executive offices and sample production facilities at 52-16 Barnett Avenue, Long
Island City, NY 11104. The lease for the Company's headquarters expires on June
30, 2008 and can be extended, at the option of the Company, through June 30,
2013.
The Company's showroom is located at 1370 Avenue of the Americas, New
York, NY. All of the Company's brands are displayed for sale from this 9,917
square foot space. The lease for the Company's showroom expires on February 28,
2013.
The Company maintains approximately 7,200 square feet as a storage
facility at 25-15 Borough Place, Woodside, NY. The lease for this space expires
October 31, 2010.
The Company also maintains an 807 square foot showroom located at
Fashion Center Dallas in the World Trade Center, Dallas, Texas. The lease for
this showroom expires on April 30, 2007.
The Company also currently engages two independent distributors to
warehouse and distribute its products.
The Company's private label division, Adesso Madden, maintains
approximately 3,120 square feet of office and showroom space at 99 Seaview
Boulevard, Port Washington, N. Y. The lease for Adesso Madden expires on May 31,
2006.
All of the Company's retail stores are leased pursuant to leases that,
under their original term, extend for an average of ten years in length. A
majority of the leases include clauses that provide for contingent rental
payments if gross sales exceed certain targets. In addition, a majority of the
leases enable the Company and/or the landlord to terminate the lease in the
13
event that the Company's gross sales do not achieve certain minimum levels
during a prescribed period. Many of the leases contain rent escalation clauses
to compensate for increases in operating costs and real estate taxes.
The current terms of the Company's retail store leases expire as
follows:
Years Lease Terms Expire Number of Stores
------------------------------- ----------------------------
2006 1
2007 6
2008 12
2009 11
2010 11
2011 14
2012 9
2013 11
2014 11
ITEM 3 LEGAL PROCEEDINGS
Except as set forth below, no material legal proceedings are pending to
which the Company or any of its property is subject.
On July 28, 2005, adidas America, Inc., and adidas-Salomon AG
(together, "adidas") filed a Demand for Arbitration (the "Demand") against Steve
Madden, Ltd. and Steve Madden Retail, Inc. before the American Arbitration
Association. In its Demand, adidas alleged that the parties had previously been
engaged in a lawsuit over the Company's sale of sneakers that allegedly
infringed adidas' "three stripe" mark. The parties settled that lawsuit by
entering into a settlement agreement dated August 4, 2003 that prohibited the
Company from selling shoes that contained adidas' "three-stripe" mark either
with one additional stripe or with one less stripe. adidas alleged in the Demand
that the Company was selling three shoes (the Finnley, the Troyy and the Soccet)
that adidas contends violate the settlement agreement and infringe adidas'
"three-stripe" mark. The parties were engaged in settlement discussions for
several months, but so far have been unable to settle and the Company filed its
answer to the Demand for Arbitration on January 20th. The parties will be
jointly selecting a panel of arbitrators over the next few weeks, while
settlement discussions continue. No discovery demands have been exchanged. The
Company believes it has substantial defenses to the claims asserted in the
Demand for Arbitration.
On August 10, 2005, the U.S. Customs Department issued a report that
asserts that certain commissions that the Company treated as buying agents
commissions (which are not subject to duty) should be treated as "selling agents
commissions" (which are subject to duty). In the report, Customs estimates that
the Company had underpaid duties during the calendar years of 1998 through 2004
in the amount of $1,051,000. Based on management's estimation at this point, a
reserve of $1,051,000 has been recorded as of the December 31, 2005. Such
reserve may in the future be modified to reflect the status of this matter.
On or about January 23, 2006, the Company and certain of its executives
were named as defendants in a lawsuit filed by Jojeli, Inc. ("Jojeli") and Alan
Rick Friedman in the United States District Court for the Southern District of
New York. In their complaint, Jojeli and Mr. Friedman assert claims arising from
the Company's decision to terminate Jojeli's services on or about November 28,
2005. Mr. Friedman, Jojeli's principal, served as a senior salesperson for the
Company, and provided his services to the Company pursuant to an April 26, 2004
written agreement. In their complaint, Jojeli and Mr. Friedman allege eight
claims against the Company and/or four of its executives, including breach of
contract, violation of the New York Labor Law, tortuous interference with
contract, civil conspiracy, defamation, and prima facie tort. They seek damages
on their various claims in differing amounts, ranging from $500,000 to $5.0
million and they also seek a declaration that they are not bound by the
restrictive covenant in the parties' contract. The Company is still
14
investigating the allegations of the complaint and has not yet filed an answer
or any relief from the Court. The Company believes the claims to be without
merit and it intends to vigorously defend the lawsuit.
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 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the holders of the Company's
Common Stock during the last quarter of its fiscal year ended December 31, 2005.
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The Company's shares of common stock trade on The Nasdaq National
Market. The following table sets forth the range of high and low closing sales
prices for the Company's Common Stock during each fiscal quarter during the
two-year period ended December 31, 2005 as reported by The Nasdaq National
Market. The quotes represent inter-dealer prices without adjustment or mark-ups,
mark-downs or commissions and may not necessarily represent actual transactions.
The trading volume of the Company's securities fluctuates and may be limited
during certain periods. As a result, the liquidity of an investment in the
Company's securities may be adversely affected.
Common Stock
High Low High Low
--------- ---------- ---------- ----------
2005 2004
Quarter ended Quarter ended
March 31, March 31,
2005 19.40 16.22 2004 21.61 17.75
Quarter ended Quarter ended
June 30, June 30,
2005 18.86 15.61 2004 20.70 17.66
Quarter ended Quarter ended
September 30, September 30,
2005 24.65 17.77 2004 20.24 15.59
Quarter ended Quarter ended
December December
31, 2005 30.32 22.70 31, 2004 19.79 15.79
On March 9, 2006, the final quoted price as reported by The Nasdaq
National Market was $31.84 for each share of common stock. As of March 9, 2006,
there were 13,846,168 shares of Common Stock outstanding and 67 record holders.
Dividends. On November 3, 2005, the Board of Directors declared a
special dividend of $1 per share payable to Steven Madden, Ltd. shareholders of
record at the close of business on November 14, 2005. The dividend was paid on
November 23, 2005.
Equity Compensation Plans. Information regarding our equity
compensation plans as of December 31, 2005 is disclosed in Item 12. "Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters."
15
Issuer Repurchases of Equity Securities. There were no shares of common
stock repurchased by the Company during the fourth quarter of fiscal 2005. The
Company's previously announced share repurchase program, 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.
Pursuant to an agreement reached on February 2, 2005 with an 8%
shareholder, the Company has agreed to commit $25 million in the year ended
January 31, 2006 and $10 million in the year ended January 31, 2007 to a
combination of share repurchases and/or dividends, such programs to be
implemented at such time and in such manner as the board of directors shall
determine in its sole discretion.
ITEM 6 SELECTED FINANCIAL DATA
The following selected financial data has been derived from the
Company's audited financial statements. The Income Statement Data relating to
2005, 2004 and 2003, and the Balance Sheet Data as of December 31, 2005 and 2004
should be read in conjunction with the Company's audited consolidated financial
statements and notes thereto appearing elsewhere herein.
Year Ended December 31,
---------------------------------------------------------------------------------
2005 2004 2003 2002 2001
------------- ------------- ------------- ------------- -------------
INCOME STATEMENT DATA:
Net sales $ 375,786,000 $ 338,144,000 $ 324,204,000 $ 326,136,000 $ 243,391,000
Cost of sales 233,286,000 215,475,000 198,185,000 199,453,000 143,518,000
Gross profit 142,500,000 122,669,000 126,019,000 126,683,000 99,873,000
Commissions and licensing fee - net 7,119,000 4,588,000 5,742,000 4,381,000 3,955,000
Operating expenses (117,530,000) (108,276,000) (98,135,000) (97,852,000) (77,516,000)
Cost of loss mitigation coverage (6,950,000)
Impairment of cost in excess of
fair value of net assets acquired (519,000) -- -- -- --
Income from operations 31,570,000 18,981,000 33,626,000 33,212,000 19,362,000
Interest income 2,554,000 2,009,000 1,611,000 1,166,000 1,344,000
Interest expense (164,000) (68,000) (54,000) (16,000) (66,000)
Gain (loss) on sale of marketable
securities (500,000) 32,000 136,000 66,000 71,000
Income before provision for income
taxes 33,460,000 20,954,000 35,319,000 34,428,000 20,711,000
Provision for income taxes 14,260,000 8,679,000 14,865,000 14,587,000 8,595,000
Net Income 19,200,000 12,275,000 20,454,000 19,841,000 12,116,000
Basic income per share $ 1.43 $ 0.93 $ 1.58 $ 1.58 $ 1.04
Diluted income per share $ 1.38 $ 0.86 $ 1.45 $ 1.45 $ 0.94
Basic weighted average common
shares outstanding 13,407,717 13,148,869 12,985,265 12,594,861 11,617,862
Effect of potential common shares
from exercise of options and
warrants 537,658 1,074,080 1,153,246 1,115,018 1,330,002
Diluted weighted average common
shares outstanding 13,945,375 14,222,949 14,138,511 13,709,879 12,947,864
BALANCE SHEET DATA
Total assets 211,728,000 186,430,000 177,870,000 150,500,000 121,862,000
Working capital 114,066,000 101,417,000 105,140,000 86,461,000 82,633,000
Noncurrent liabilities 2,757,000 2,088,000 1,828,000 1,532,000 1,313,000
Stockholders' equity 182,065,000 164,665,000 159,187,000 130,075,000 102,360,000
16
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion of the Company's financial condition and
results of operations should be read in conjunction with the audited 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,"
"projects" or "plans" and statements in the future tense to be uncertain
forward-looking statements. The forward-looking statements contained herein are
also subject generally to risks set forth herein under the caption "Risk
Factors" and 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)
2005 was a turn around year for Steven Madden, Ltd. Net sales increased
11% to a record $375,786 in 2005 from $338,144 in 2004 while net commission and
licensing fee income increased 55% to $7,119 in 2005 from $4,588 in 2004. Net
income increased 56% to $19,200 in 2005, compared to $12,275 in 2004. The
Company's diluted earnings per share increased 60% to $1.38 per share for the
year ended December 31, 2005 compared to $0.86 per share in 2004. One reason for
the top line growth was Steve Madden's return to the Company on April 14 of this
year in the capacity of its Creative and Design Chief (a non-executive
position). The Company's impressive sales growth is a testament to Mr. Madden's
creative abilities. Additionally, the sales growth of the Company is the result
of the double-digit growth realized in the following divisions:
1. Madden Mens has evolved into a "collection" brand offering a full
assortment of dress, casual and sport footwear. The expanded
product line has helped Madden Mens establish open stock programs
with several customers and increase the number of doors with
Dillards and Nordstrom, all of which contributed to a net sales
increase of 74% to $54,611 in 2005 from $31,301 in 2004.
2. The Candie's product line gave the Company entree into the young
women and girls market. In just its second year of operation and
propelled by its success at Kohl's, Candie's net sales increased
44% to $22,404 in 2005 from $15,584 in 2004.
3. The Company continued to expand the Retail Division by opening 12
stores and closing 5 under-performing stores in 2005. Net sales
in the Retail Division increased 13% to $121,511 in 2005 from
$107,797 in 2004.
Several factors accounted for the increase in profitability, including the
following:
1. Management has implemented new inventory controls and procedures
in an attempt to reduce inventory levels. For example,
"cut-to-order" inventory controls in l.e.i., Candie's, and
Stevies have resulted in reduced inventory levels in those
divisions. The new inventory controls have resulted in a
significant reduction of close-out sales in the second half of
2005 causing the Company's gross profit to increase by 2% to 38%
this year compared to 36% last year.
2. Net commission and licensing fee income increased 55% to $7,119
in 2005 from $4,588 in 2004, primarily due to the growth of the
Adesso-Madden Division. The increase was the result of the
overall growth in first cost business, the expansion of the
division's private label business in men's footwear and the
transition of Unionbay to a first cost commission based model.
17
3. The Company has initiated several cost control measures that have
resulted in a reduction of operating expenses as a percentage of
net sales to 31% in 2005 from 32% in 2004.
In the Retail Division, same store sales (sales in stores that were in
operation throughout all of 2005 and 2004) increased 5%. Store sales
productivity remained high with sales per square foot of $771. The Company is
planning to open eight to ten new stores in 2006.
The Company's annualized inventory turnover increased to 7.9 times in
2005 compared to 7.4 times in 2004, reflecting the inventory reductions
described above. The Company's accounts receivable average collection days
improved to 57 days this year compared to 64 days last year. As of December 31,
2005, the Company had $109,091 in cash, cash equivalents and marketable
securities, no short or long-term debt, and total stockholders equity of
$182,065. Working capital increased to $114,066 as of December 31, 2005,
compared to $101,417 on December 31, 2004. During the year ended December 31,
2005, net cash provided by operating activities increased to $42,742 as compared
to $12,863 in the same period last year.
On November 1, 2005, the Board of Directors declared a special dividend
of $1 per share payable to Steven Madden, Ltd. shareholders of record at the
close of business on November 14, 2005. The dividend was paid on November 23,
2005.
On February 7, 2006, management continued its strategy to diversify and
expand the demographics and the retail channels of its product lines by
acquiring Daniel M. Friedman and Associates, Inc. Daniel M. Friedman is an
importer and distributor of name fashion and private label handbags, belts and
accessories. This acquisition will enable the Company to further augment and
complement its core category and continue to expand its reach into the branded
lifestyle concept.
18
The following tables set forth information on operations for the
periods indicated:
Selected Financial Information
Years Ended
December 31
($ in thousands)
2005 2004 2003
----------------------- ------------------------ ------------------------
Consolidated:
- ------------
Net sales $ 375,786 100% $ 338,144 100% $ 324,204 100%
Cost of sales 233,286 62 215,475 64 198,185 61
Gross Profit 142,500 38 122,669 36 126,019 39
Other operating income - net of
expenses 7,119 2 4,588 1 5,742 1
Operating expenses 117,530 31 108,276 32 98,135 30
Impairment of cost in excess of
Fair value of net assets acquired 519 0 -- -- -- --
Income from operations 31,570 8 18,981 5 33,626 10
Interest and other income net 1,890 1 1,973 1 1,693 1
Income before income taxes 33,460 9 20,954 6 35,319 11
Net income 19,200 5 12,275 4 20,454 6
By Segment:
- ----------
WHOLESALE DIVISIONS:
- -------------------
Madden Womens Wholesale:
- -----------------------
Net sales $ 120,333 100% $ 113,879 100% $ 109,285 100%
Cost of sales 86,556 72 82,414 72 77,313 71
Gross profit 33,777 28 31,465 28 31,972 29
Other operating income 2,286 2 2,310 2 2,827 3
Operating expenses 29,402 24 28,828 25 27,630 25
Income from operations 6,661 6 4,947 5 7,169 7
l.e.i. Footwear Wholesale:
- -------------------------
Net sales $ 30,286 100% $ 38,391 100% $ 60,623 100%
Cost of sales 20,122 66 27,575 72 38,016 63
Gross profit 10,164 34 10,816 28 22,607 37
Operating expenses 8,109 27 10,236 27 13,658 22
Income from operations 2,055 7 580 1 8,949 15
Madden Mens Wholesale:
- ---------------------
Net sales $ 54,611 100% $ 31,301 100% $ 34,881 100%
Cost of sales 32,550 60 21,525 69 22,803 65
Gross profit 22,061 40 9,776 31 12,078 35
Operating expenses 12,961 24 8,742 28 8,277 24
Income from operations 9,100 16 1,034 3 3,801 11
Candie's Footwear Wholesale:
- ---------------------------
Net sales $ 22,404 100% $ 15,584 100% $ 938 100%
Cost of sales 13,641 61 11,535 74 532 57
Gross profit 8,763 39 4,049 26 406 43
Operating expenses 5,716 25 4,357 28 748 80
Income (loss) from operations 3,047 14 (308) (2) (342) (37)
19
Selected Financial Information
Years Ended
December 31
($ in thousands)
2005 2004 2003
------------------------ ------------------------ ------------------------
By Segment (Continued)
WHOLESALE DIVISIONS (Continued):
- -------------------------------
SMNY:
- ----
Net sales $ 1,576 100% -- -- -- --
Cost of sales 808 51 -- -- -- --
Gross profit 768 49 -- -- -- --
Operating expenses 417 27 -- -- -- --
Income from operations 351 22 -- -- -- --
Diva Acquisition Corp.
- ----------------------
(Steven Wholesale):
- ------------------
Net sales $ 16,453 100% $ 21,039 100% $ 12,519 100%
Cost of sales 12,311 75 13,398 64 8,031 64
Gross profit 4,142 25 7,641 36 4,488 36
Operating expenses 4,704 28 5,274 25 3,360 27
Income (loss) from operations (562) (3) 2,367 11 1,128 9
Stevies Inc.:
- ------------
Net sales $ 7,886 100% $ 9,575 100% $ 10,120 100%
Cost of sales 5,433 69 6,623 69 6,611 65
Gross profit 2,453 31 2,952 31 3,509 35
Other operating income -- -- -- -- 11 0
Operating expenses 1,831 23 2,746 29 2,262 22
Income from operations 622 8 206 2 1,258 13
Unionbay Wholesale:
- ------------------
Net sales $ 726 100% $ 578 100% $ 320 100%
Cost of sales 526 72 528 91 213 67
Gross profit 200 28 50 9 107 33
Operating expenses 163 23 604 105 481 150
Income (loss) from operations 37 5 (554) (96) (374) (117)
RETAIL DIVISION:
- ---------------
Steven Madden Retail Inc.:
- -------------------------
Net sales $ 121,511 100% $ 107,797 100% $ 95,518 100%
Cost of sales 61,339 50 51,877 48 44,666 47
Gross profit 60,172 50 55,920 52 50,852 53
Operating expenses 54,227 45 47,489 44 41,719 44
Impairment of cost in excess of
fair value of net assets acquired 519 0 -- -- -- --
Income from operations 5,426 5 8,431 8 9,133 9
Number of stores 98 91 83
20
Selected Financial Information
Years Ended
December 31
($ in thousands)
2005 2004 2003
------------------------ ------------------------ ------------------------
By Segment (Continued)
ADESSO MADDEN INC.:
- -------------------
(FIRST COST)
Other commission income - net
of expenses $4,833 $2,278 $2,904
RESULTS OF OPERATIONS
($ in thousands)
Year Ended December 31, 2005 vs. Year Ended December 31, 2004
Consolidated:
- ------------
Total net sales for the year ended December 31, 2005 increased by 11%
to $375,786 from $338,144 for the comparable period last year. Significant sales
increases from Madden Mens, Candie's, and the Retail Division and a modest
increase from Madden Womens as well as net sales of $1,576 generated by the
Company's new division, SMNY were partially offset by declines in Steven, l.e.i.
and Stevies.
Gross profit as a percentage of sales increased to 38% in 2005 from 36%
in 2004. Gross profit as a percentage of sales in the Wholesale Divisions
increased to 32% in 2005 from 29% in 2004, primarily due to a significant
decrease in off-price sales and improved efficiencies in inventory management
resulting in lower inventory costs. This was partially offset by a decline in
gross margin in the Retail Division attributed to the liquidation of slow moving
inventory combined with the liquidation of inventory at four outlet stores
(three of which were temporary locations) that were closed during the third
quarter.
Operating expenses increased to $117,530 in 2005 from $108,276 in 2004.
As a percentage of sales, operating expenses decreased to 31% in 2005 from 32%
in 2004. The increase in dollars is primarily due to an increase in direct
selling expenses reflective of the 11% growth in sales and the incremental
payroll and occupancy costs associated with the operation of an additional seven
retail stores (net). Other contributing factors were an increase of accounting
fees incurred by the Company in connection with management's assessment and the
external audit of internal controls pursuant to Section 404 of the
Sarbanes-Oxley Act of 2002, and the settlement of the LaRue lawsuit in the
amount of $1,500.
Income from operations was $31,570 in 2005 compared to $18,981 in 2004.
Net income was $19,200 in 2005 compared to $12,275 in 2004. This increase in
income was primarily due to the increase in sales, the higher gross profit and
the substantial increase in commission income.
Wholesale Divisions:
- --------------------
Steven Madden, Ltd. (Madden Womens, l.e.i., Madden Mens, Candie's and SMNY):
Sales from Madden Womens accounted for $120,333 or 32%, and $113,879 or
34%, of total sales in 2005 and 2004, respectively. This increase resulted from
higher sales to specialty footwear retailers. Gross profit as a percentage of
sales remained the same as last year at 28%. Operating expenses increased to
$29,402 in 2005 from $28,828 in 2004 primarily due to an increase of 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
21
2002, the aforementioned legal settlement of $1,500 as well as variable selling
and related expenses. As a percentage of sales, operating expenses decreased to
24% in 2005 from 25% in 2004. Income from operations for Madden Womens was
$6,661 in 2005 compared to $4,947 in 2004.
Sales from l.e.i. accounted for $30,286 or 8%, and $38,391 or 11%, of
total sales in 2005 and 2004, respectively. This decrease in sales was primarily
caused by planned reductions and a substantial reduction in closeout sales.
Gross profit as a percentage of sales increased to 34% in 2005 from 28% in 2004
due to a significant decrease in the liquidation of inventory. Operating
expenses decreased to $8,109 in 2005 from $10,236 in 2004 due to a decrease in
payroll expenses reflective of management's initiative to reduce the workforce
in l.e.i. and due to a decrease in variable selling and related expenses. Income
from operations for l.e.i. was $2,055 in 2005 compared to $580 in 2004.
Sales from Madden Mens accounted for $54,611 or 15%, and $31,301 or 9%,
of total sales in 2005 and 2004, respectively. This 74% increase in sales was
driven by an increase in the number of doors at Dillards and Nordstrom, as well
as the introduction of a replenishment program. The division continued its
success with sport casual 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 40% in 2005 from 31% in 2004 primarily due to a
substantial decrease in markdowns and sales allowances. Operating expenses
increased to $12,961 in 2005 from $8,742 in 2004. This increase is attributed to
increases in direct selling expenses, advertising and marketing expenses and an
increase in payroll expense required to support the Madden Mens' rapid sales
growth. Operating expenses as a percentage of sales decreased to 24% in 2005
compared to 28% in 2004. Income from operations for Madden Mens increased to
$9,100 in 2005 compared to $1,034 in 2004.
Sales from Candie's accounted for $22,404 or 6%, and $15,584 or 5% of
total sales in 2005 and 2004, respectively. This 44% increase in sales is the
result of the growth in the Kohl's business and the success of several products,
including sandals with embellished heels and embellished flats. Gross profit as
a percentage of sales increased to 39% in 2005 from 26% in 2004 primarily due to
improved inventory management resulting in lower inventory markdowns. Operating
expenses increased to $5,716 in 2005 from $4,357 in 2004 due to increases in
payroll expenses, licensing fees and selling and related expenses in order to
position the Division for top line growth. As a percentage of sales, operating
expenses decreased to 25% in 2005 from 28% in 2004. Income from operations for
Candie's was $3,047 in 2005 compared to a loss from operations of $308 in 2004.
SMNY, which began shipping for the first time in the fourth quarter of
2005, generated net sales of $1,576.
Diva Acquisition Corp. (Steven):
Sales from Steven accounted for $16,453 or 4%, and $21,039 or 6%, 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 half of the year,
which was last year's bestseller. Additionally, last Fall's disappointing boot
season caused Steven's customers to push initial boot orders to the end of the
third quarter, eliminating the opportunity for any third quarter reorder
business. Gross profit as a percentage of sales decreased to 25% in 2005 from
36% in 2004 due to a substantial increase in markdowns and allowances as well as
a significant increase in off-price sales. Operating expenses decreased to
$4,704 in 2005 from $5,274 in 2004 due to a decrease in direct selling expenses.
Loss from operations for Steven was $562 in 2005 compared to income from
operations of $2,367 in 2004.
Stevies Inc. (Stevies):
Sales from Stevies accounted for $7,886 or 2%, and $9,575 or 3%, of
total sales in 2005 and 2004, respectively. The decrease was due to the decision
by May Company to discontinue offering kids products in its stores. In addition,
some of Stevies other customers were transferred to a "first cost" model and
thus its revenues were included in the Adesso-Madden division. Gross profit as a
percentage of sales remained the same as last year at 31%. Operating expenses
decreased to $1,831 in 2005 from $2,746 in 2004 due to a 29% reduction in
payroll expenses and a decrease in advertising and marketing expenses. Stevies
was able to offset the loss in sales by reducing overhead expenses resulting in
an increase of income from operations to $622 in 2005 compared to $206 in 2004.
22
Unionbay Men's Footwear, Inc. (Unionbay):
Unionbay, the Company's license for the right to use the Unionbay
trademark(R) in connection with young men's footwear, generated net sales of
$726 in 2005 compared to $578 in 2004. During the third quarter of this year,
Unionbay migrated to a commission-based "first-cost" business and thus its
commission income is now included in the Adesso-Madden Division. Income from
operations for Unionbay was $37 in 2005 compared to a loss from operations of
$554 in 2004.
Retail Division:
- ----------------
Sales from the Retail Division accounted for $121,511 or 32% and
$107,797 or 32% of total sales in 2005 and 2004, respectively. As of December
31, 2005, there were 98 retail stores compared to 91 retail stores as of
December 31, 2004. Comparable store sales (sales of those stores that were open
for all of 2005 and 2004) for the year ended December 31, 2005 increased 5% over
the same period of 2004. This increase was achieved through the early release
and success of opened up sandals in spring, strong boot sales in the fall, and a
substantial growth in Men's volume at the stores. Gross profit as a percentage
of sales decreased to 50% in 2005 from 52% in 2004, primarily due to an increase
in the liquidation of slow moving inventory combined with the liquidation of
inventory at five stores that were closed during the year 2005. Operating
expenses for the Retail Division were $54,227 in 2005 and $47,489 in 2004. This
increase was primarily due to increased payroll and payroll related expenses and
higher occupancy expenses associated with the operation of seven additional
stores in the current period and an increase in direct selling expenses. Income
from operations for the Retail Division decreased to $5,426 in 2005 compared to
$8,431 in 2004.
Adesso-Madden Division:
- -----------------------
Adesso-Madden, Inc. generated net commission income of $4,833 in 2005,
compared to $2,278 in 2004. The increase was the result of the growth in first
cost business with existing, as well as new customers, the expansion of the
Company's private label business in men's footwear, the transition of Unionbay
to a first cost commission based model and the cumulative contribution of
commissions on international sales made on a direct-from-factory basis.
Year Ended December 31, 2004 vs. Year Ended December 31, 2003
Consolidated:
- ------------
Total net sales for the year ended December 31, 2004 increased by 4% to
$338,144 in 2004 from $324,404 for the comparable period of 2003. Sales
increases from the Retail Division, the new Candie's Division, Steven and Madden
were offset by declines in the l.e.i., Madden Mens and Stevies.
Gross profit as a percentage of sales decreased to 36% in 2004 from 39%
in 2003. This was primarily due to an increase in cost of sales due to higher
inventory costs associated with the utilization of product sourcing that
provided shorter delivery times combined with pricing pressure from our
wholesale customers. Additionally, the poor performance of the l.e.i. and
Candie's at retail necessitated high level inventory markdowns which resulted in
lower than expected margins. Finally, the liquidation of slow moving inventory
combined with heavy and persistent promotional activity throughout the year
negatively affected the Company's gross profit.
Operating expenses increased to $108,276 in 2004 from $98,135 in 2003.
This increase resulted from increased professional fees incurred by the Company
in complying with the rules and regulations adopted pursuant to the
Sarbanes-Oxley Act of 2002, higher payroll and payroll related expenses and
occupancy expenses associated with the operation of an additional eight retail
stores (net), an increase in advertising expenditures in support of the brand, a
reclassification of warehouse expenses and the costs associated with the launch
of Candie's and Unionbay.
Net commission and licensing fee income was $2,278 in 2004 compared to
$2,904 in 2003. Income from operations was $18,981 in 2004 compared to $33,626
in 2003. Net income was $12,275 in 2004 compared to $20,454 in 2003. The
decrease in income was primarily due to the lower margins and increased expenses
described directly above.
23
Wholesale Divisions:
- -------------------
Steven Madden, Ltd. (Madden Womens, l.e.i., Madden Mens and Candie's):
Sales from the Madden Womens accounted for $113,879 or 34%, and
$109,285 or 34%, of total sales in 2004 and 2003, respectively. Gross profit as
a percentage of sales decreased to 28% in 2004 from 29% in 2003, primarily due
to the liquidation of slow moving inventory and an increase in markdowns and
allowances caused by higher levels of promotional activities at retail in the
third and fourth quarters of 2004. Operating expenses increased to $28,828 in
2004 from $27,630 in 2003, due to an increase in advertising expenditures in
support of the brand and increases in selling and related expenses. Income from
operations for Madden Womens was $4,947 in 2004 compared to $7,169 in 2003.
Sales from the l.e.i. accounted for $38,391 or 11%, and $60,623 or 19%,
of total sales in 2004 and 2003, respectively. This decrease in sales resulted
from a reduction in consumer demand for casual classifications combined with a
disappointing performance at retail. Gross profit as a percentage of sales
decreased to 28% in 2004 from 37% in 2003, primarily due to the liquidation of
slow moving inventory and higher inventory markdowns and clearance at retail.
Operating expenses decreased to $10,236 in 2004 from $13,658 in 2003 due to
decreases in payroll and payroll related expenses and selling and marketing
expenses. Income from operations for l.e.i. was $580 in 2004 compared to $8,949
in 2003.
Sales from the Madden Mens accounted for $31,301 or 9%, and $34,881 or
11%, of total sales in 2004 and 2003, respectively. This sales decrease was the
result of a downturn in the Madden Men's casual fashion footwear segment during
the first half of the year. The Company broadened and repositioned the fall line
resulting in an increase in sales in the fourth quarter of 2004 of 61% to
$10,951 compared to $6,816 in the same period of 2003. Gross profit as a
percentage of sales decreased to 31% in 2004 from 35% in 2003, 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.
Operating expenses increased to $8,742 in 2004 from $8,277 in 2003. Income from
operations for Madden Mens was $1,034 in 2004 compared to $3,801 in 2003.
Sales from Candie's which was launched in the fourth quarter of 2003,
generated net sales of $15,584 in 2004. Heavy promotional activity combined with
several challenges in product design resulted in a lower than anticipated gross
profit as a percentage of sales of 26%. Operating expenses were $4,357 or 28% of
net sales in 2004. Loss from operations for Candie's was $308 in 2004 compared
to $342 in 2003.
Diva Acquisition Corp. (Steven):
Sales from Steven accounted for $21,039 or 6%, and $12,519 or 4%, of
total sales in 2004 and 2003, respectively. This 68% increase in sales was
principally due to the success of key styles including woods, jeweled sandals
and dress mocs. Also, Steven added new retail doors, including Dillards, Macy's
West and Parisians, and initiated a replenishment program during the first
quarter of 2004, enabling retailers to generate weekly reorders with improved
turn and profitability. Gross profit as a percentage of sales remained the same
as last year at 36%. Operating expenses increased to $5,274 in 2004 from $3,360
in 2003, due to increases in selling, designing, marketing and advertising
expenses. Income from operations for Steven was $2,367 in 2004, compared to
$1,128 in 2003.
Stevies Inc. ("Stevies"):
Sales from Stevies accounted for $9,575 or 3%, and $10,120 or 3%, of
total sales in 2004 and 2003, respectively. The decrease in sales was due to the
disappointing performance in boot, slipper and athletic classification in the
fourth quarter of 2004. Gross profit as a percentage of sales decreased to 31%
in 2004 from 35% in 2003, primarily due to pricing pressures and the liquidation
of slow moving inventory. Operating expenses increased to $2,746 in 2004 from
$2,262 in 2003 due to increases in payroll and payroll related expenses and
marketing and advertising expenses. Income from operations for Stevies was $206
in 2004 compared to $1,258 in 2003.
24
Unionbay Men's Footwear, Inc. (Unionbay):
Unionbay, which launched in the fall of 2003, generated net sales of
$578 for the year 2004. The consumer acceptance of the fall 2003 line was less
than anticipated. As a result, the Company changed product direction, which
caused the Company to forgo shipments of spring 2004 Unionbay products.
Retail Division:
- ---------------
Sales from the Retail Division accounted for $107,797 or 32% and
$95,518 or 29% of total sales in 2004 and 2003, respectively. As of December 31,
2004, there were 91 retail stores compared to 83 retail stores as of December
31, 2003. Comparable store sales (sales of those stores that were open for all
of 2003 and 2004) for the year ended December 31, 2004 increased 8% over the
same period of 2003. This increase was achieved through management's immediate
reaction to at-once demand for boots early in the first quarter of 2004. Gross
profit as a percentage of sales decreased to 52% in 2004 from 53% in 2003,
primarily due to an increase in promotional activity in 2004. Operating expenses
for the Retail Division were $47,489 in 2004 and $41,719 in 2003. This increase
was primarily due to increased payroll and payroll related expenses and higher
occupancy expenses associated with the operation of an additional eight stores
(net) in the current period and higher advertising expenditures in support of
the brand. Despite increases in sales, income from operations for the Retail
Division decreased to $8,431 in 2004 compared to $9,133 in 2003, due to the
lower margins and the Company's investment in the brand through higher
advertising costs.
Adesso-Madden Division:
- ----------------------
Adesso-Madden, Inc. generated net commission revenues of $2,278 in
2004, compared to $2,904 in 2003. This decrease was the result of a major
customer sharply reducing its purchases in order to reduce inventory levels in
its stores.
LICENSE AGREEMENTS
($ in thousands)
Revenues from licensing were virtually unchanged at $2,286 in 2005 from
$2,310 in 2004. As of December 31, 2005, the Company had four license partners
covering five product categories of its Steve Madden brand. The product
categories include hosiery, handbags, sunglasses, eyewear and belts. On February
7, 2006, the Company acquired Daniel M. Friedman and Associates, Inc., which had
a license agreement with the Company to manufacture and distribute handbags and
belts.
LIQUIDITY AND CAPITAL RESOURCES
($ in thousands)
The Company had working capital of $114,066 at December 31, 2005
compared to $101,417 at December 31, 2004. The Company's net income for the year
ended December 31, 2005 was the primary reason for the increase in working
capital.
Under the terms of a factoring agreement with GMAC, the Company is
eligible to draw down 80% of its invoiced receivables at an interest rate of two
and one-half percent (2.5%) over the 30 day LIBOR. The agreement, which has no
specific expiration date and can be terminated by either party with 60 days
written notice after June 30, 2007, provides the Company with a $25 million
credit facility with a $15 million sub-limit on direct borrowings. GMAC
maintains a lien on all of the Company's receivables and assumes the credit risk
for all assigned accounts approved by them. As of December 31, 2005 the Company
had not used any portion of the credit line.
As of December 31, 2005 the Company had invested $56,249 in marketable
securities consisting of corporate bonds, U.S. Treasury notes, government
asset-backed securities, certificates of deposits and equities.
The Company believes that based upon its current financial position and
available cash and marketable securities, it will meet all of its financial
commitments and operating needs for at least the next twelve months.
25
OPERATING ACTIVITIES
($ in thousands)
During the year ended December 31, 2005, net cash provided by operating
activities was $42,742. Sources of cash were provided primarily by the
following: net income of $19,200, a decrease in inventories of $5,972, an
increase in accounts payable and other accrued expenses of $4,320 and an
increase in accrued incentive compensation of $2,909. The primary uses of cash
were an increase in factored receivables of $3,282, an increase in non-factored
receivables of $1,197 and an increase in prepaid expenses, prepaid taxes,
deposits and other assets of $624.
At December 31, 2005, the Company had un-negotiated open letters of
credit for the purchase of imported merchandise of approximately $3,302.
The Company has an employment agreement with Steven Madden, its
Creative and Design Chief, which provides for an annual base salary of $600
subject to certain specified adjustments, through June 30, 2015. The agreement
also provides for annual bonuses based on EBITDA, on revenue of any new
business, and royalty income over $2 million, 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 $1,849 in
2006, $1,643 in 2007, $1,192 in 2008 and $480 in 2009. In addition, such
employment agreements provide for incentive compensation based on various
performance criteria as well as other benefits. The Chief Operating Officer of
the Company is entitled to deferred compensation calculated as a percentage of
his base salary.
Significant portions of the Company's products are produced at overseas
locations, the majority of which are located in China as well as Brazil, Italy
and Spain. The Company has not entered into any long-term manufacturing or
supply contracts with any of these foreign companies. The Company believes that
a sufficient number of alternative sources exist outside of the United States
for the manufacture of its products. In addition, the Company currently makes
approximately 97% of its purchases in U.S. dollars.
INVESTING ACTIVITIES
($ in thousands)
During the year ended December 31, 2005, the Company invested $17,252
in marketable securities and received $9,153 from the maturities and sales of
securities. The Company made capital expenditures of $5,822, principally for
leasehold improvements for the twelve additional retail stores that were opened
during the period, as well as for additional showroom space and upgrades to the
computer systems.
FINANCING ACTIVITIES
($ in thousands)
During the year ended December 31, 2005, the Company paid dividends of
$13,813 and repurchased 444,000 shares of the Company's common stock at a total
cost of $7,735. The Company received $16,483 in connection with the exercise of
stock options.
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.
26
CONTRACTUAL OBLIGATIONS
The Company's contractual obligations as of December 31, 2005 were as follows:
Payment due by period (in thousands)
Contractual Obligations Total 2006 2007-2008 2009-2010 2011 and after
- ----------------------------- ----------- ----------- ----------- ----------- --------------
Operating lease obligations $ 84,311 $ 12,540 $ 24,111 $ 19,194 $ 28,466
Purchase obligations 46,994 46,994 0 0 0
Other long-term liabilities
(future minimum royalty
payments) 2,603 2,228 375 0 0
Total $ 133,908 $ 61,762 $ 24,486 $ 19,194 $ 28,466
CRITICAL ACCOUNTING POLICIES AND THE USE OF ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results
of Operations is based upon the Company's audited consolidated financial
statements which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial
statements requires management to make estimates and judgments that affect the
reported amounts of assets, liabilities, sales and expenses, and related
disclosure of contingent assets and liabilities. Estimates by their nature are
based on judgments and available information. Estimates are made based upon
historical factors, current circumstances and the experience and judgment of
management. Assumptions and estimates are evaluated on an ongoing basis and the
Company may employ outside experts to assist in evaluations. Therefore, actual
results could materially differ from those estimates under different assumptions
and conditions. Management believes the following critical accounting estimates
are more significantly affected by judgments and estimates used in the
preparation of the Company's consolidated financial statements: accounts
receivable and inventory reserves, valuation of intangible assets, and
litigation reserves.
Allowances for bad debts, returns and customer chargebacks. The Company
provides reserves against its trade accounts receivables for future customer
chargebacks, co-op advertising allowances, discounts, returns and other
miscellaneous deductions that relate to the current period. The reserve against
the Company's non-factored trade receivables also includes estimated losses that
may result from customers' inability to pay. The amount of the reserve for bad
debts, returns, discounts and compliance chargebacks are determined by analyzing
aged receivables, current economic conditions, the prevailing retail environment
and historical dilution levels for customers. As a result of a reevaluation of
the retail environment, the Company has revised its method for evaluating its
allowance for customer markdowns and advertising chargebacks. In the past, the
Company would look at historical dilution levels for customers to determine the
allowance amount. Under the new methodology, the Company evaluates anticipated
chargebacks by reviewing several performance indicators for its major customers.
These performance indicators (which include inventory levels at the retail
floors, sell through rates and gross margin levels) are analyzed by key account
executives to estimate the amount of the anticipated customer allowance. Failure
to correctly estimate the amount of the reserve could materially impact the
Company's results of operation and financial position.
27
Inventory reserves. Inventories are stated at lower of cost or market,
on a first-in, first-out basis. The Company reviews inventory on a regular basis
for excess and slow moving inventory. The review is based on an analysis of
inventory on hand, prior sales, and expected net realizable value through future
sales. The analysis includes a review of inventory quantities on hand at
period-end in relation to year-to-date sales and projections for sales in the
foreseeable future as well as subsequent sales. The Company considers quantities
on hand in excess of estimated future sales to be at risk for market impairment.
The net realizable value, or market value, is determined based on the estimate
of sales prices of such inventory through off-price or discount store channels.
The likelihood of any material inventory write-down is dependent primarily on
the expectation of future consumer demand for the Company's product. A
misinterpretation or misunderstanding of future consumer demand for the
Company's product, the economy, or other failure to estimate correctly, could
result in inventory valuation changes, either favorably or unfavorably, compared
to the valuation determined to be appropriate as of the balance sheet date.
Valuation of intangible assets. SFAS No. 142, which was adopted by the
Company on January 1, 2002, requires that goodwill and intangible assets with
indefinite lives no longer be amortized, but rather be tested for impairment at
least annually. This pronouncement also requires that intangible assets with
finite lives be amortized over their respective lives to their estimated
residual values, and reviewed for impairment in accordance with SFAS No. 144. In
accordance with SFAS No. 144, long-lived assets, such as property, equipment,
leasehold improvements and goodwill subject to amortization, are reviewed for
impairment annually or whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Recoverability of assets
to be held and used is measured by a comparison of the carrying amount of an
asset to the estimated undiscounted future cash flows expected to be generated
by the asset. If the carrying amount of an asset exceeds its estimated future
cash flows, an impairment charge is recognized by the amount by which the
carrying amount of the asset exceeds the fair value of the asset.
Litigation reserves. Estimated amounts for litigation claims that are
probable and can be reasonably estimated are recorded as liabilities in the
Company's consolidated financial statements. The likelihood of a material change
in these estimated reserves would be dependent on new claims as they may arise
and the favorable or unfavorable events of a particular litigation. As
additional information becomes available, management will assess the potential
liability related to the pending litigation and revise their estimates. Such
revisions in management's estimates of the contingent liability could materially
impact the Company's results of operation and financial position.
Cost of Goods Sold. All costs incurred to bring finished products to
the warehouse or our retail stores are included in the cost of sales line item
of the Company's Consolidated Statement of Operations. These include purchase
commissions, letter of credit fees, FOB costs, sample expenses, custom duty,
inbound freight, labels and product packaging. All warehouse and distribution
costs are included in the operating 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.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
($ in thousands)
The Company does not engage in the trading of market risk sensitive
instruments in the normal course of business. Financing arrangements for the
Company are subject to variable interest rates primarily based on LIBOR. An
analysis of the Company's credit agreement with GMAC can be found in Note C,
"Due From Factor" to the Consolidated Financial Statements included in this
Annual Report on Form 10-K. As of December 31, 2005 and December 31, 2004, there
were no direct borrowings outstanding under the credit agreement.
As of December 31, 2005, the Company had investments in marketable
securities valued at $56,249, which consist primarily of corporate bonds, U.S.
treasury notes, certificates of deposit and government asset-backed securities
that have various maturities through December 2034, as well as marketable equity
securities. These investments are subject to interest rate risk and will
decrease in value if market interest rates increase. The Company currently has
the ability to hold these investments until maturity. Should there be a
28
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 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the financial statements following Item 15 of this Annual Report on
Form 10-K.
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
ITEM 9A CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As required by Rule 13a-15(b) of 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 year covered by this annual 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 year covered by this annual report.
Changes in Internal Control Over Financial Reporting
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 fourth quarter of 2005 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 material change during the fourth quarter of 2005.
Management's Annual Report on Internal Control Over Financial Reporting
The management of the Company is responsible for establishing and
maintaining adequate internal control over financial reporting. Internal control
over financial reporting is defined in Rule 13a-15(f) promulgated under the
Securities Exchange Act of 1934 as a process designed by, or under the
supervision of, the Company's principal executive and principal financial
officers and effected by the Company's board of directors, management and other
personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles and
includes those policies and procedures that:
o Pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions of the
assets of the Company;
o Provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and
expenditures of the Company are being made only in accordance with
authorizations of management and directors of the Company; and
o Provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use or disposition of the Company's
assets that could have a material effect on the financial statements.
29
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
Management of the Company assessed the effectiveness of the Company's
internal control over financial reporting as of December 31, 2005. In making
this assessment, management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in Internal
Control-Integrated Framework. Based on its assessment and those criteria,
management believes that the Company maintained effective internal control over
financial reporting as of December 31, 2005.
The Company's Independent Registered Public Accounting Firm, Eisner
LLP, has audited and issued a report on management's assessment of the Company's
internal control over financial reporting. The report of Eisner LLP appears
below.
To the Board of Directors and Shareholders of
Steven Madden, Ltd.
We have audited management's assessment, included in the accompanying
Management's Annual Report on Internal Control Over Financial Reporting, that
Steven Madden, Ltd. and subsidiaries (the "Company") maintained effective
internal control over financial reporting as of December 31, 2005, based on
criteria established in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission ("COSO").
Steven Madden, Ltd.'s management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility
is to express an opinion on management's assessment and an opinion on the
effectiveness of the Company's internal control over financial reporting based
on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company's internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that (i)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(ii) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
In our opinion, management's assessment that Steven Madden, Ltd.
maintained effective internal control over financial reporting as of December
31, 2005, is fairly stated, in all material respects, based on criteria
established in Internal Control-Integrated Framework issued by the COSO. Also,
in our opinion, Steven Madden, Ltd. and subsidiaries maintained, in all material
30
respects, effective internal control over financial reporting as of December 31,
2005, based on criteria established in Internal Control-Integrated Framework
issued by COSO.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance
sheets of Steven Madden, Ltd. and subsidiaries as of December 31, 2005 and 2004,
and the related consolidated statements of operations, changes in stockholders'
equity, and cash flows for the years in the three-year period ended December 31,
2005, and our report dated March 6, 2006 expressed an unqualified opinion on
those consolidated financial statements.
Eisner LLP
New York, New York
March 6, 2006
ITEM 9B OTHER INFORMATION
None.
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required to be furnished pursuant to this item will be
set forth in the Company's proxy statement for the 2006 Annual Meeting of
Stockholders, and is incorporated herein by reference.
ITEM 11 EXECUTIVE COMPENSATION
The information required to be furnished pursuant to this item will be
set forth in the Company's proxy statement for the 2006 Annual Meeting of
Stockholders, and is incorporated herein by reference.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
The information required to be furnished pursuant to this item will be
set forth in the Company's proxy statement for the 2006 Annual Meeting of
Stockholders, and is incorporated herein by reference.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required to be furnished pursuant to this item will be
set forth in the Company's proxy statement for the 2006 Annual Meeting of
Stockholders, and is incorporated herein by reference.
ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required to be furnished pursuant to this item will be
set forth in the Company's proxy statement for the 2006 Annual Meeting of
Stockholders, and is incorporated herein by reference.
PART IV
ITEM 15 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) Financial Statements
The following consolidated financial statements of Steven Madden, Ltd. and
subsidiaries are included in Item 8:
31
STEVE MADDEN, LTD. AND SUBSIDIARIES
Contents
Page
----
Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm F-2
Balance sheets as of December 31, 2005 and 2004 F-3
Statements of income for the years ended December 31, 2005,
2004 and 2003 F-4
Statements of changes in stockholders' equity for the years
ended December 31, 2005, 2004 and 2003 F-5
Statements of cash flows for the years ended December 31,
2005, 2004 and 2003 F-7
Notes to financial statements F-8
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Steven Madden, Ltd.
We have audited the accompanying consolidated balance sheets of Steven Madden,
Ltd. and subsidiaries (the "Company") as of December 31, 2005 and 2004, and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for the years in the three-year period ended December 31, 2005.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Steven Madden,
Ltd. and subsidiaries as of December 31, 2005 and 2004, and the consolidated
results of their operations and their consolidated cash flows for each of the
years in the three-year period ended December 31, 2005 in conformity with U.S.
generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of Steven Madden,
Ltd.'s internal control over financial reporting as of December 31, 2005, based
on criteria established in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our
report dated March 6, 2006 expressed an unqualified opinion on management's
assessment of, and the effective operation of, internal control over financial
reporting.
Eisner LLP
New York, New York
March 6, 2006
F-2
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands) December 31,
----------------------------
2005 2004
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 52,842 $ 30,853
Accounts receivable - net of allowances of $813 and $536 3,294 2,374
Due from factor - net of allowances of $7,587 and $2,379 31,785 33,711
Inventories 28,412 34,384
Marketable securities - available for sale 14,092 12,784
Prepaid expenses and other current assets 2,435 2,235
Prepaid taxes 2,512 2,255
Deferred taxes 5,600 2,498
------------ ------------
Total current assets 140,972 121,094
Property and equipment, net 20,898 20,715
Deferred taxes 5,568 5,780
Deposits and other 586 435
Marketable securities - available for sale 42,157 36,340
Cost in excess of fair value of net assets acquired - net of accumulated
amortization of $599 and $714 1,547 2,066
------------ ------------
$ 211,728 $ 186,430
============ ============
LIABILITIES
Current liabilities:
Accounts payable $ 15,579 $ 13,450
Accrued expenses 7,998 5,807
Accrued incentive compensation 3,329 420
------------ ------------
Total current liabilities 26,906 19,677
Deferred rent 2,757 2,088
------------ ------------
29,663 21,765
------------ ------------
Commitments, contingencies and other - see notes I & K
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, 16,150 and
14,608 shares issued, 13,916 and 12,818 shares outstanding at
December 31, 2005 and 2004, respectively 2 1
Additional paid-in capital 99,950 80,631
Retained earnings 108,838 103,451
Unearned compensation -- (703)
Other comprehensive loss:
Unrealized loss on marketable securities (net of taxes) (1,299) (1,024)
Treasury stock - 2,234 and 1,790 shares at cost at December 31, 2005 and
2004, respectively (25,426) (17,691)
------------ ------------
182,065 164,665
------------ ------------
$ 211,728 $ 186,430
============ ============
See notes to financial statements
F-3
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Consolidated Statements of Income
(in thousands, except per share data) Year Ended December 31,
--------------------------------------
2005 2004 2003
---------- ---------- ----------
Net sales:
Wholesale $ 254,275 $ 230,347 $ 228,686
Retail 121,511 107,797 95,518
---------- ---------- ----------
375,786 338,144 324,204
---------- ---------- ----------
Cost of sales:
Wholesale 171,947 163,598 153,519
Retail 61,339 51,877 44,666
---------- ---------- ----------
233,286 215,475 198,185
---------- ---------- ----------
Gross profit 142,500 122,669 126,019
Commission and licensing fee income - net 7,119 4,588 5,742
Operating expenses (117,530) (108,276) (98,135)
Impairment of cost in excess of fair value of net assets acquired (519) -- --
---------- ---------- ----------
Income before other income (expenses) and provision for
income taxes 31,570 18,981 33,626
Other income (expenses):
Interest income 2,554 2,009 1,611
Interest expense (164) (68) (54)
Gain (loss) on sale of marketable securities (500) 32 136
---------- ---------- ----------
Income before provision for income taxes 33,460 20,954 35,319
Provision for income taxes 14,260 8,679 14,865
---------- ---------- ----------
Net income $ 19,200 $ 12,275 $ 20,454
========== ========== ==========
Basic income per share $ 1.43 $ 0.93 $ 1.58
========== ========== ==========
Diluted income per share $ 1.38 $ 0.86 $ 1.45
========== ========== ==========
Basic weighted average common shares outstanding 13,408 13,149 12,985
Effect of dilutive securities - options 537 1,074 1,153
---------- ---------- ----------
Diluted weighted average common shares outstanding 13,945 14,223 14,138
========== ========== ==========
Dividends paid per common share $ 1.00 $ 0.00 $ 0.00
========== ========== ==========
See notes to financial statements
F-4
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
(in thousands)
Common Stock
------------------------------- Additional Unearned
Shares Amount Paid-in Capital Retained Earnings Compensation
-------------- -------------- --------------- ----------------- --------------
Balance - December 31, 2002 14,016 1 70,683 70,722 (3,476)
Exercise of stock options 443 4,805
Tax benefit from exercise of options 1,239
Deferred compensation in connection with
issuance of stock options and
restricted stock 2,409 (2,409)
Amortization of unearned compensation 2,877
Unrealized holding loss on marketable
securities (net of taxes of $190)
Net income 20,454
Comprehensive income
-------------- -------------- -------------- -------------- --------------
Balance - December 31, 2003 14,459 1 79,136 91,176 (3,008)
Exercise of stock options 129 454
Tax benefit from exercise of options 1,004
Issuance of fully vested restricted stock 20
Forfeiture of restricted stock (183) 121
Cash in lieu of restricted stock (378)
Deferred compensation in connection with
issuance of stock options and
restricted stock 598 (598)
Amortization of unearned
compensation 2,782
Unrealized holding loss on marketable
securities (net of taxes of $741)
Net income 12,275
Comprehensive income
Common stock purchased for treasury
-------------- -------------- -------------- -------------- --------------
Balance - December 31, 2004 14,608 1 80,631 103,451 (703)
Exercise of stock options 1,422 1 16,482
Tax benefit from exercise of options 4,604
Issuance of fully vested restricted
stock 120
Cash in lieu of restricted stock (1,767)
Amortization of unearned compensation 703
Unrealized holding loss on marketable
securities (net of taxes of $199)
Net income 19,200
Comprehensive income
Cash dividend paid (13,813)
Common stock purchased for treasury
-------------- -------------- -------------- -------------- --------------
Balance - December 31, 2005 16,150 $ 2 $ 99,950 $ 108,838 $ --
============== ============== ============== ============== ==============
See notes to financial statements
F-5
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity (Continued)
(in thousands)
Accumulated
Other Treasury Stock Total
Comprehensive --------------------------- Stockholders' Comprehensive
Gain (Loss) Shares Amount Equity Income
------------ ------------ ------------ ------------ ------------
Balance - December 31, 2002 136 1,245 (7,991) 130,075
Exercise of stock options 4,805
Tax benefit from exercise of options 1,239
Deferred compensation in connection with
issuance of stock options and
restricted stock 0
Amortization of unearned compensation 2,877
Unrealized holding loss on marketable
securities (net of taxes of $190,000) (263) (263) $ (263)
Net income 20,454 20,454
------------
Comprehensive income $ 20,191
------------ ------------ ------------ ------------ ============
Balance - December 31, 2003 (127) 1,245 (7,991) 159,187
Exercise of stock options 454
Tax benefit from exercise of options 1,004
Issuance of fully vested restricted stock
Forfeiture of restricted stock (62)
Cash in lieu of restricted stock (378)
Deferred compensation in connection with
issuance of stock options and
restricted stock
Amortization of unearned compensation 2,782
Unrealized holding loss on marketable
securities (net of taxes of $741) (897) (897) (897)
Net income 12,275 12,275
------------
Comprehensive income $ 11,378
============
Common stock purchased for treasury 545 (9,700) (9,700)
------------ ------------ ------------ ------------
Balance - December 31, 2004 (1,024) 1,790 (17,691) 164,665
Exercise of stock options 16,483
Tax benefit from exercise of options 4,604
Issuance of fully vested restricted stock
Cash in lieu of restricted stock (1,767)
Amortization of unearned compensation 703
Unrealized holding loss on marketable
securities (net of taxes of $199) (275) (275) (275)
Net income 19,200 19,200
------------
Comprehensive income $ 18,925
============
Cash dividend paid (13,813)
Common stock purchased for treasury 444 (7,735) (7,735)
------------ ------------ ------------ ------------
Balance - December 31, 2005 $ (1,299) 2,234 $ (25,426) $ 182,065
============ ============ ============ ============
See notes to financial statements
F-6
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands) Year Ended December 31,
--------------------------------------
2005 2004 2003
---------- ---------- ----------
Cash flows from operating activities:
Net income $ 19,200 $ 12,275 $ 20,454
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity-based compensation 703 2,719 2,877
Depreciation and amortization 5,120 4,865 4,743
Loss on disposal of fixed assets 535 198 --
Impairment of cost in excess of fair value of net asset
acquired 519 -- --
Deferred taxes (2,691) (227) (1,978)
Tax benefit from exercise of options 4,604 1,004 1,239
Provision for doubtful accounts and chargebacks 5,485 537 163
Deferred rent expense 669 260 296
Realized (gain) loss on sale of marketable securities 500 (32) (136)
Changes in:
Accounts receivable (1,197) 1,824 (1,196)
Due from factor (3,282) (5,416) (6,583)
Inventories 5,972 (10,526) (4,413)
Prepaid expenses, prepaid taxes, deposits and other
assets (624) 2,559 (5,535)
Accounts payable and accrued expenses 4,320 2,870 206
Accrued incentive compensation 2,909 (47) (2,234)
---------- ---------- ----------
Net cash provided by operating activities 42,742 12,863 7,903
---------- ---------- ----------
Cash flows from investing activities:
Purchase of property and equipment (5,822) (7,387) (6,061)
Purchases of marketable securities (17,252) (27,779) (47,059)
Maturity/sale of marketable securities 9,153 9,708 36,785
---------- ---------- ----------
Net cash used in investing activities (13,921) (25,458) (16,335)
---------- ---------- ----------
Cash flows from financing activities:
Proceeds from exercise of stock options 16,483 454 4,805
Cash dividend paid (13,813) -- --
Cash in lieu of restricted stock (1,767) (378) --
Common stock purchased for treasury (7,735) (9,700) --
Payments of lease obligations -- (1) (13)
---------- ---------- ----------
Net cash provided by (used in) financing
activities (6,832) (9,625) 4,792
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents 21,989 (22,220) (3,640)
Cash and cash equivalents - beginning of year 30,853 53,073 56,713
---------- ---------- ----------
Cash and cash equivalents - end of year $ 52,842 $ 30,853 $ 53,073
========== ========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 164 $ 68 $ 54
Income taxes $ 12,536 $ 5,855 $ 18,700
See notes to financial statements
F-7
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Financial Statements
December 31, 2005 and 2004
($ in thousands except per share data)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
[1] Organization:
Steven Madden, Ltd., a Delaware corporation, designs and sources
women's, girl's and men's shoes, for sale through its wholesale and
retail channels under the Steve Madden, Steven, Stevies, SMNY, Madden
Mens, l.e.i. (under license), Candie's (under license) and Unionbay
(under license) brand names. Revenue is generated predominately through
the sale of the Company's brand name merchandise and certain licensed
products. At December 31, 2005 and 2004, the Company operated 98 and 91
retail stores (including its website as a store), respectively. Such
revenue is subject to seasonal fluctuations. See Note M for operating
segment information.
[2] Principles of consolidation:
The consolidated financial statements include the accounts of Steven
Madden, Ltd. and its wholly owned subsidiaries Steven Madden Retail,
Inc., Diva Acquisition Corp., Adesso-Madden, Inc., Unionbay Men's
Footwear, Inc. and Stevies, Inc. (collectively referred to as the
"Company"). All significant intercompany balances and transactions have
been eliminated.
[3] Use of estimates:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
Allowances for bad debts, returns and customer chargebacks: The Company
provides reserves on trade accounts receivables for future customer
chargebacks and markdown allowances, discounts, returns and other
miscellaneous compliance related deductions that relate to the current
period sales. As a result of a reevaluation of the retail environment,
the Company has revised its method for evaluating its estimate of the
allowance for customer chargebacks. In the past, the Company would look
at historical dilution levels for customers to determine the allowance
amount. Under the new method of estimation, the Company evaluates
anticipated chargebacks by reviewing several performance indicators at
its major customers. These performance indicators, which include
inventory levels, sell through rates and gross margin levels, are
analyzed by key account executives to estimate the amount of the
anticipated customer allowance. This change in accounting estimate
resulted in an increase of our reserve by approximately $1,700 in the
fourth quarter of 2005.
[4] Cash equivalents:
Cash equivalents at December 31, 2005 and 2004, amounted to
approximately $43,290 and $16,428, respectively, and consist of money
market accounts and commercial paper. The Company considers all highly
liquid instruments with an original maturity of three months or less
when purchased to be cash equivalents.
F-8
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Financial Statements
December 31, 2005 and 2004
($ in thousands except per share data)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[5] Marketable securities:
Marketable securities consist primarily of corporate bonds, U.S.
treasury notes, certificates of deposit 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, are reported in stockholders' equity as accumulated other
comprehensive income, and are held at an investment bank with the
schedule of maturities at December 31, 2005 as follows:
Maturities
-------------------------------
1 Year or Less 1 to 5 Years
-------------- --------------
Schedule of maturities:
Municipal bonds $ 4,948 $ 27,698
US Government and Federal
agency bonds 1,392 5,126
Corporate bonds 2,986 7,290
Certificates of deposit -- 2,043
-------------- --------------
9,326 42,157
Marketable equity securities 4,766 --
-------------- --------------
$ 14,092 $ 42,157
============== ==============
[6] Inventories:
Inventories, which consist of finished goods on hand and in transit,
are stated at the lower of cost (first-in, first-out method) or market.
[7] Property and equipment:
Property and equipment are stated at cost less accumulated depreciation
and amortization. Depreciation is computed utilizing the straight-line
method based on estimated useful lives ranging from three to ten years.
Leasehold improvements are amortized utilizing the straight-line method
over the shorter of their estimated useful lives or the remaining lease
term. Depreciation and amortization include amounts relating to
property and equipment under capital leases.
Impairment losses are recognized for long-lived assets, including
certain intangibles, used in operations when indicators of impairment
are present and the undiscounted cash flows estimated to be generated
by those assets are not sufficient to recover the assets' carrying
amount. Impairment losses are measured by comparing the fair value of
the assets to their carrying amount. No impairment losses have been
incurred for the years presented other than the impairment in the cost
in excess of fair value acquired as described in Note A[8].
[8] Cost in excess of fair value of net assets acquired:
Cost in excess of fair value of net assets acquired relates to the
acquisition of Diva Acquisition Corp in 1996, and through December 31,
2001 was being amortized over 20 years. During 2002, the Company
adopted SFAS No. 142, "Goodwill and Other Intangible Assets" ("FAS
142"). Amortization of indefinite lived intangible assets was no longer
allowed under FAS 142, however these identified assets are subject to
impairment tests at least annually or whenever an event occurs.
F-9
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Financial Statements
December 31, 2005 and 2004
($ in thousands except per share data)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
FAS No. 142, 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 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 was
recognized as a reduction of income in the second quarter of 2005.
[9] Net income per share:
Basic income per share is based on the weighted average number of
common shares outstanding during the year. Diluted income per share
reflects the potential dilution assuming common shares were issued upon
the exercise of outstanding in-the-money options and the proceeds
(including the amount of compensation cost, if any, attributed to
future services and not yet recognized and the amount of tax benefits,
if any, that would be credited to additional paid-in capital assuming
exercise of the options) thereof were used to purchase treasury stock
at the average market price during the period. For the years ended
December 31, 2005 and 2004, options exercisable into approximately none
and 1,252 shares of common stock, respectively, have not been included
in the calculation of diluted income per share as the result would have
been antidilutive.
[10] Advertising costs:
The Company expenses costs of print, radio and billboard advertisements
as of the first date the advertisements take place. Advertising expense
included in operating expenses amounted to approximately $8,354 in
2005, $8,993 in 2004 and $7,666 in 2003.
[11] Fair value of financial instruments:
The carrying value of the Company's financial instruments approximates
fair value due to their short-term nature or their underlying terms.
Marketable securities are carried at quoted market prices which
represent fair value.
[12] Stock-based compensation:
At December 31, 2005, the Company had various stock option plans, which
are described more fully in Note D. The Company has elected to continue
to follow the intrinsic value method in accounting for its stock-based
employee compensation arrangements. The following table illustrates the
effect on net income and earnings per share if the company had applied
the fair value recognition provisions of SFAS No. 123 to stock-based
employee compensation.
F-10
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Financial Statements
December 31, 2005 and 2004
($ in thousands except per share data)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Year Ended December 31,
--------------------------------------
2005 2004 2003
---------- ---------- ----------
Reported net income $ 19,200 $ 12,275 $ 20,454
Stock-based employee compensation
included in reported net income, net
of tax 165 623 412
Stock-based employee compensation
determined under the fair value
based method, net of tax (2,004) (3,861) (2,838)
---------- ---------- ----------
Pro forma net income $ 17,361 $ 9,037 $ 18,028
========== ========== ==========
Basic income per share:
As reported $ 1.43 $ 0.93 $ 1.58
Pro forma $ 1.29 $ 0.69 $ 1.39
Diluted income per share:
As reported $ 1.38 $ 0.86 $ 1.45
Pro forma $ 1.24 $ 0.64 $ 1.28
The weighted average fair value of options granted in 2005, 2004 and
2003 was approximately $6.11, $9.77 and $10.62, respectively, using the
Black-Scholes option-pricing model with the following assumptions:
2005 2004 2003
------------ ------------ ------------
Volatility 43% 65% 71%
Risk free interest rate 3.86% 3.32% - 3.51% 2.18% - 3.0%
Expected life in years 3 5 4
Dividend yield 0 0 0
[13] Revenue recognition:
The Company recognizes revenue on wholesale sales when products are
shipped pursuant to our standard terms which are freight on board (FOB)
warehouse or when products are delivered to the consolidators as per
the terms of the customers purchase order. Sales reductions for
anticipated discounts, allowances and other deductions are recognized
when sales are recorded. Customers retain the right to replacement of
the product for poor quality or improper or short shipments, which have
historically been immaterial. Retail sales are recognized when the
payment is received from customers and are recorded net of returns. The
Company earns commission income as a buying agent through its
Adesso-Madden Division by arranging to produce private label shoes to
the specifications of its clients. Commission revenue is recognized as
earned subsequent to when title of the product transfers from the
manufacturer to the customer and is on a net basis after deducting
operating expenses.
F-11
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Financial Statements
December 31, 2005 and 2004
($ in thousands except per share data)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company licenses its Steve Madden trademark for use in connection
with the manufacturing, marketing and sale of belts, handbags,
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 as defined in the various agreements. 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 earned. In substantially all
of the Company's license agreements, the minimum guaranteed royalty is
earned and payable on a quarterly basis.
[14] Sales deductions:
The Company supports retailers' initiatives to maximize sales of the
Company's products on the retail floor by subsidizing the co-op
advertising programs of such retailers, providing them with inventory
markdown allowances and participating in various other marketing
initiatives of its major customers. Such expenses are reflected in the
financial statements as deductions to net sales. For the years ended
December 31, 2005, 2004 and 2003 the total deductions to net sales for
these expenses were $36,356, $30,027 and $27,859 respectively.
[15] 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, distribution, and royalty expenses as a component of cost of
sales, while other companies report on the same basis as the Company
and include them in operating expenses.
[16] Warehouse and shipping costs:
The Company includes all warehouse and distribution costs, including
internal transfer costs, in the Operating Expenses line on the
Consolidated Statements of Income. For the years ended December 31,
2005, 2004 and 2003, the total Warehouse and Distribution Costs
included in Operating Expenses was $6,229, $5,819 and $3,510
respectively. The Company's standard terms of sales are "FOB Steve
Madden warehouse" and thus the Company's wholesale customers absorb
most shipping costs. Shipping costs to wholesale customers incurred by
the Company are not considered significant and are included in the
Operating Expense line in the Consolidated Statements of Income.
[17] Impairment of long-lived assets:
During fiscal 2002, the Company adopted SFAS No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets" ("FAS 144"). If facts
and circumstances indicate that the Company's long-lived assets might
be impaired, the estimated future undiscounted cash flows associated
with the long-lived asset would be compared to its carrying amounts to
determine if a write-down to fair value is necessary. If a write-down
is required, the amount is determined by estimation of the present
value of net discounted cash flows in accordance with FAS 144.
F-12
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Financial Statements
December 31, 2005 and 2004
($ in thousands except per share data)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[18] 401(k) Plan:
The Company maintains a tax-qualified, 401(k) plan which is available
to each of the Company's eligible employees who elect to participate
after meeting certain length-of-service requirements. The Company makes
discretionary matching contributions of 25% of employees' contributions
up to a maximum of 6% of employees' compensation, which vest to the
employees over a period of time. Total matching contributions to the
plan for 2005, 2004 and 2003 were approximately $176, $187 and $162,
respectively.
[19] Prior years' reclassification:
Certain reclassifications were made to prior year amounts to conform to
the 2005 presentation.
[20] Recently issued accounting standards:
In December 2004, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 123R,
"Share-Based Payment" ("SFAS 123R"), which replaces SFAS No. 123,
"Accounting for Stock-Based Compensation," and supercedes APB Opinion
No. 25, "Accounting for Stock Issued to Employees." This statement
requires that all share-based payments to employees be recognized in
the financial statements based on their fair values on the date of
grant. The Company currently uses the intrinsic value method to measure
compensation expense for stock-based awards. Note A(12) entitled
Stock-based compensation provides a pro forma net income and earnings
per share as if the Company had used a fair-value based method provided
by SFAS 123R to measure stock-based compensation for 2005, 2004 and
2003. The Company is required to adopt SFAS 123R in the first quarter
of fiscal 2006 and intends to use the "modified prospective method".
Under this transition method, compensation cost will be recognized for
all unvested options granted prior to the adoption date and for all
share-based payments issued after the effective date. The Company has
not yet determined the effect that the adoption of SFAS 123R will have
on the Company's consolidated statements of income in 2006.
In November of 2004, the FASB issued SFAS No. 151, "Inventory Costs,"
which amends the guidance in ARB No. 43, Chapter 4, "Inventory
Pricing," to clarify the accounting for abnormal amounts of idle
facility expense, freight, handling costs and wasted material
(spoilage). This statement requires that those items be recognized as
current-period charges regardless of whether they meet the criterion of
"so abnormal" as stated in ARB No. 43. Additionally, SFAS 151 requires
that allocation of fixed production overheads to the costs of
conversion be based on the normal capacity of the production
facilities. The Company is required to adopt the provision of SFAS No.
151 in the first quarter of 2006. The Company does not expect SFAS 151
to have a material impact on its consolidated results of operation or
financial condition.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and
Error Corrections - A Replacement of APB Opinion No. 20 and FASB
Statement No. 3" ("SFAS 154"). SFAS 154 applies to all voluntary
changes in accounting principle and to changes required by an
accounting pronouncement that does not include a specific transition
provision. This statement requires retrospective application to prior
periods' financial statements of changes in accounting principle,
unless it is impracticable to determine ether the period-specific
effects or the cumulative effect of the change. This statement is
effective for accounting changes and corrections of errors made in
fiscal years beginning after December 15, 2005.
F-13
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Financial Statements
December 31, 2005 and 2004
($ in thousands except per share data)
NOTE B - PROPERTY AND EQUIPMENT
The major classes of assets and accumulated depreciation and
amortization are as follows:
December 31,
----------------------------
2005 2004
------------ ------------
Leasehold improvements $ 31,690 $ 27,754
Machinery and equipment 1,001 799
Furniture and fixtures 4,823 4,673
Computer equipment 5,458 5,043
------------ ------------
42,972 38,269
Less accumulated depreciation and amortization (22,074) (17,554)
------------ ------------
Property and equipment - net $ 20,898 $ 20,715
============ ============
NOTE C - 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 the factor up to 80% of aggregate receivables
purchased by the factor at an interest rate of two and one-half percent (2.5%)
over the 30 day LIBOR. The Company also pays a fee equal to 0.325% of the gross
invoice amount of each receivable purchased. Prior to July 1, 2005, the Company
had a factoring agreement with Capital Factors, Inc. The Company sells and
assigns a substantial portion of its receivables, principally without recourse,
to the factor. As of December 31, 2005 and 2004, $555 and $295 of factored
receivables, respectively, were sold by the Company with recourse. 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.
A "factored" sale (whether "with" or "without" recourse) is substantially the
same as a non-factored sale and the Company accounts for its factored
sales/receivables in the same manner as its non-factored sales/receivables. The
factor services the collection of the Company's accounts receivable. Funds
collected by the factor are applied against advances owed to the factor (if
any), and the balance is due and payable to the Company, net of any fees. The
allowance against "due from factor" is an estimated provision for markdowns,
allowances, discounts, advertising and other deductions that customers may
deduct against their payments.
NOTE D - STOCK OPTIONS
The Company has established various stock option plans under which options to
purchase shares of common stock may be granted to employees, directors,
officers, agents, consultants and independent contractors. The plans provide
that the option price shall not be less than the fair market value of the common
stock on the date of grant and that no portion of the option may be exercised
beyond ten years from that date. No incentive stock option can be granted and
exercised beyond five years to a stockholder owning 10% or more of the Company's
outstanding common stock. Options granted under the plans during the three years
ended December 31, 2005 vest between three months and two years from the date of
grant.
The Company has several stock option plans. The 1993 Incentive Stock Option
Plan, The 1995 Stock Plan, The 1996 Stock Plan and The 1997 Stock Plan provide
for options to be granted to employees and directors.
The 1993 Incentive Stock Option Plan and the 1995 Stock Plan expired in 2003 and
2005, respectively.
In June 1999, the Company adopted The 1999 Stock Plan which authorized the
issuance of up to 400,000 shares. In May 2000, the stockholders approved an
amendment to this Plan to increase the maximum number of shares to be issued
under the Plan to 975,000 shares. In July 2001, the stockholders approved an
amendment to this Plan to increase the maximum number of shares to be issued
under the Plan to 1,600,000 shares. In May 2002, the
F-14
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Financial Statements
December 31, 2005 and 2004
($ in thousands except per share data)
NOTE D - STOCK OPTIONS (CONTINUED)
stockholders approved a further amendment to this Plan to increase the maximum
number of shares to be issued under the Plan to 2,280,000. In 2003, the
stockholders approved a further amendment to this Plan to increase the maximum
number of shares to be issued under the Plan to 2,920,000. In May of 2004, the
stockholders approved a further amendment to this Plan to increase the maximum
number of shares to be issued under the plan to 3,220,000. Terms of the 1999
Stock Plan are not materially different from the various existing stock option
plans.
Through December 31, 2005, 3,219,000 options had been granted under The 1999
Stock Plan, as amended, and as of such date, 1,000 shares were available for
grant.
In connection with the amended employment agreement of the former Chief
Executive Officer ("CEO"), who is now the Company's Creative and Design Chief,
the Company issued options to purchase 500,000 shares of its common stock. The
options, which vested in August 1998, had an exercise price of $3.31 and were
exercisable over 10 years expiring in March 2005. The last of these options were
exercised in January of 2005. Unearned compensation was recorded in the amount
of $1,345, which represented the difference between the exercise price and the
fair value of the stock on the date of grant, and was classified as a component
of stockholders' equity. Through December 31, 2003, the unearned compensation
was being amortized over the ten-year term of the amended agreement. During the
year ended December 31, 2004, the Company reevaluated its policy on amortizing
unearned compensation relating to the issuance of stock options. The Company
concluded that deferred compensation was to be amortized over the shorter of the
vesting period of the option or the term of the employment agreement.
Accordingly, the balance in unearned compensation was expensed, resulting in a
charge to operations of $512 in 2004. $128 was charged to operations for the
year ended December 31, 2003.
In connection with an amendment to the Chief Operating Officer's employment
agreement (the "COO Agreement") dated July 1, 2002, the Company issued 20,000
restricted shares of its common stock, which vest quarterly through January 1,
2005. The market value of the stock on the date of grant was $18.74 per share.
Unearned compensation was recorded in the amount of $375 and is classified as a
component of stockholders' equity. The unearned compensation was amortized over
the vesting period of the stock. Accordingly, $150 and $225 were charged to
operations in 2004 and 2003, respectively.
Activity relating to stock options granted under the Company's plans and outside
the plans during the three years ended December 31, 2005 is as follows:
2005 2004 2003
---------------------------- ---------------------------- ----------------------------
Weighted Weighted Weighted
Average Average Average
Number of Exercise Number of Exercise Number of Exercise
Shares Price Shares Price Shares Price
------------ ------------ ------------ ------------ ------------ ------------
Outstanding at January 1 2,513,000 $ 12.71 2,274,000 $ 11.35 2,345,000 $ 10.14
Granted 319,000 17.89 380,000 17.84 403,000 17.81
Exercised (1,422,000) 11.59 (129,000) 3.25 (443,000) 10.79
Cancelled/Forfeited (110,000) 18.82 (12,000) 19.00 (31,000) 11.87
------------ ------------ ------------
Outstanding at December 31 1,300,000 14.68 2,513,000 12.71 2,274,000 11.35
============ ============ ============
Exercisable at December 31 1,280,000 14.63 2,272,000 12.93 1,885,000 10.33
============ ============ ============
F-15
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Financial Statements
December 31, 2005 and 2004
($ in thousands except per share data)
NOTE D - STOCK OPTIONS (CONTINUED)
The following table summarizes information about stock options at December 31,
2005:
Options Outstanding Options Exercisable
--------------------------------------------------- ------------------------
Weighted Average Weighted
Remaining Weighted Average
Number Contractual Life Average Number Exercise
Range of Exercise Price Outstanding (in Years) Exercise Price Exercisable Price
- ----------------------------- ------------- ------------------- -------------- ----------- --------
under $3.35 320,000 1.5 $ 3.31 320,000 $ 3.31
$5.50 to $12.00 37,000 3.1 7.07 37,000 7.07
$17.42 to $18.75 354,000 8.9 17.96 334,000 17.98
$18.98 to $20.98 589,000 7.0 19.35 589,000 19.35
------------ ----------
1,300,000 6.1 14.68 1,280,000 14.63
============ ==========
The following table summarizes the amount of options authorized, the amount of
options granted (net of expired or cancelled options) and the amount of options
available for grant for each of the 1996 Plan, 1997 Plan and 1999 Plan:
1996 Plan 1997 Plan 1999 Plan
--------- --------- ---------
Options authorized 375,000 1,000,000 3,220,000
Options granted net of
expired or cancelled 373,700 997,200 3,219,000
--------- --------- ---------
Available for grant as of
December 31, 2005 1,300 2,800 1,000
========= ========= =========
In May 2003, the Company granted 100,000 options to Charles Koppelman, a
director, exercisable at $13.50 per share which vest over one year on a
quarterly basis. The difference between the market price of $19.00 per share and
the option exercise price was reflected as unearned compensation and was
amortized over the one-year vesting period. In May of 2004, pursuant to a
consulting agreement with this former director, the Company granted 100,000
options exercisable at $13.50 per share which vest over one year on a quarterly
basis. The difference between the market price of $19.09 per share and the
option exercise price has been reflected as unearned compensation and was
amortized over the one-year vesting period. See note K(6) for a description of
the consulting agreement.
F-16
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Financial Statements
December 31, 2005 and 2004
($ in thousands except per share data)
NOTE E - RESTRICTED STOCK AWARDS
Restricted stock awards have been granted to certain key executives in
management. These awards vested on various dates between January 2004 and
January 2006. Awards of 101,000 shares and 190,000 shares were granted in 2003
and 2002, respectively. The average market price on the date of grant for awards
granted in 2003 and 2002 was $18.41 and $17.15, respectively. Restricted stock
compensation charged to expense was $418, $1,715 and $842 for 2005, 2004 and
2003, respectively.
In July 2004, the Company and several of its salesmen mutually agreed to replace
restricted stock awards due to vest in January 2006 with cash awards to be paid
on the vesting date. No shares had been issued under the original award. These
cash rewards retained the same characteristics as the original restricted stock
awards. The vesting date (i.e. the payment date) of the cash awards was the same
as the vesting date of the restricted stock, and the payment was contingent upon
the recipient still being employed with the Company on the vesting date. The
cash awards, which totaled $183, were charged to operations through December 31,
2005. The transaction resulted in a reduction of Paid in Capital equal to the
vested award.
In April of 2004, an employee of the Company received shares of the Company's
common stock pursuant to the vesting of his restricted stock award. These shares
were unregistered, and in August 2004 the Company agreed to purchase the shares
back from the employee for $378, which was equal to the value of the restricted
stock when originally issued. The transaction resulted in a reduction of Paid in
Capital equal to the vested award.
In April and October of 2002, two executives of the Company were granted
restricted stock awards pursuant to their employment agreements. The awards
vested on June 30, 2005 and were contingent on the employee's continuous
employment through the vesting date. Under the terms of the agreements, the
issuance of the shares of common stock required shareholder approval. At the
annual meeting of stockholders held on May 27 of 2005, the shareholders did not
approve the issuance of the shares. As stated in the Company's proxy statement,
the executives were paid $1,776 equal to the fair value of the restricted stock
when first granted. The transaction resulted in a reduction of Paid in Capital
equal to the vested award.
NOTE F - PREFERRED STOCK
The Company has authorized 5,000,000 shares of preferred stock. The Board of
Directors has designated 60,000 shares of such preferred stock as Series A
Junior Participating Preferred Stock ("Series A Preferred"). Holders of the
shares of Series A Preferred are entitled to dividends equal to 1,000 times
dividends declared or paid on the Company's common stock. Each share of Series A
preferred entitles the holder to 1,000 votes on all matters submitted to the
holders of common stock. The Series A Preferred has a liquidation preference of
$1,000 per share, and is not redeemable by the Company. No preferred shares have
been issued.
NOTE G - RIGHTS AGREEMENT
On October 30, 2001, the Company declared a dividend distribution of one
preferred stock purchase right (a "Right") for each outstanding share of common
stock. Each Right entitles the holder to purchase from the Company one
one-thousandth (1/1,000) of a share of Series A Preferred at a price of $75 per
one one-thousandth (1/1,000) of a share. Initially, the Rights will not be
exercisable and will automatically trade with the common stock. The Rights
become exercisable, in general, ten days following the announcement of a person
or group acquiring beneficial ownership of at least 15% of the outstanding
voting stock of the Company.
NOTE H - COMMON STOCK DIVIDEND
On November 1, 2005, the Board of Directors declared a special dividend of $1
per share payable to Steven Madden, Ltd. shareholders of record at the close of
business on November 14, 2005. The dividend was paid on November 23, 2005.
F-17
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Financial Statements
December 31, 2005 and 2004
($ in thousands except per share data)
NOTE I - OPERATING LEASES
The Company leases office, showroom and retail facilities under noncancelable
operating leases with terms expiring at various times through 2021. Future
minimum annual lease payments under noncancelable operating leases consist of
the following at December 31:
2006 $ 12,540
2007 12,633
2008 11,478
2009 10,149
2010 9,045
Thereafter 28,466
--------
$ 84,311
========
A majority of the retail store leases provide for contingent rental payments if
gross sales exceed certain targets. In addition, many of the leases contain rent
escalation clauses to compensate for increases in operating costs and real
estate taxes.
Rent expense for the years ended December 31, 2005, 2004 and 2003 was
approximately $15,592, $13,520 and $12,340, respectively. Included in such
amounts are contingent rents of $182, $105 and $99 in 2005, 2004 and 2003,
respectively.
Rent expense is calculated by amortizing total rental payments (net of any
rental abatements, construction allowances and other rental concessions), on a
straight-line basis, over the lease term. Accordingly, rent expense charge to
operations differs from rent paid resulting in the Company recording deferred
rent.
NOTE J - INCOME TAXES
The income tax provision (benefit) consists of the following:
2005 2004 2003
---------- ---------- ----------
Current:
Federal $ 12,690 $ 6,422 $ 12,183
State and local 4,260 2,484 4,660
---------- ---------- ----------
16,950 8,906 16,843
---------- ---------- ----------
Deferred:
Federal (2,241) (189) (1,648)
State and local (449) (38) (330)
---------- ---------- ----------
(2,690) (227) (1,978)
---------- ---------- ----------
$ 14,260 $ 8,679 $ 14,865
========== ========== ==========
F-18
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Financial Statements
December 31, 2005 and 2004
($ in thousands except per share data)
NOTE J - INCOME TAXES (CONTINUED)
A reconciliation between taxes computed at the federal statutory rate and the
effective tax rate is as follows:
December 31,
----------------------------------
2005 2004 2003
-------- -------- --------
Income taxes at federal statutory rate 35.0% 35.0% 35.0%
State income taxes - net of federal income
tax benefit 7.4 7.6 8.3
Nondeductible impairment charges 0.5 -- --
Nondeductible items 0.3 0.1 0.1
Other (0.6) (1.3) (1.3)
-------- -------- --------
Effective rate 42.6% 41.4% 42.1%
======== ======== ========
The Company applies the liability method of accounting for income taxes. Under
this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that are expected to be in
effect when the differences are expected to reverse.
Realization of deferred tax assets depends on generating sufficient future
taxable income. Although realization is not assured, management believes it is
more likely than not that all of the deferred tax assets will be realized. The
amount of deferred tax assets considered realizable, however, could be reduced
in the near term if estimates of future taxable income are reduced.
The components of deferred tax assets and liabilities are as follows:
December 31,
-----------------------
2005 2004
---------- ----------
Current deferred tax assets:
Receivable allowances $ 3,537 $ 1,232
Inventory 1,321 918
Unrealized loss 316 286
Other 426 62
---------- ----------
5,600 2,498
---------- ----------
Non-current deferred tax assets:
Depreciation 3,364 2,195
Deferred compensation 609 2,253
Deferred rent 971 878
Unrealized loss 624 454
---------- ----------
5,568 5,780
---------- ----------
Deferred tax assets $ 11,168 $ 8,278
========== ==========
F-19
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Financial Statements
December 31, 2005 and 2004
($ in thousands except per share data)
NOTE K - COMMITMENTS, CONTINGENCIES AND OTHER
[1] Indictment:
On June 20, 2000, Steven Madden, the Company's former Chairman and
Chief Executive Officer, was indicted in the United States District
Courts for the Southern District and Eastern District of New York. The
indictments alleged that Mr. Madden engaged in securities fraud and
money laundering activities. In addition, the Securities and Exchange
Commission filed a complaint in the United States District Court for
the Eastern District of New York alleging that Mr. Madden violated
Section 17(a) of the Securities Exchange Act of 1934, as amended. On
May 21, 2001, Steven Madden entered into a plea agreement with the U.S.
Attorney's Office, pursuant to which he pled guilty to four of the
federal charges filed against him. In addition, Mr. Madden reached a
separate settlement agreement with the Securities and Exchange
Commission regarding the allegations contained in its complaint. As a
result, Mr. Madden resigned as the Company's Chief Executive Officer
and as a member of the Company's Board of Directors effective July 1,
2001. Mr. Madden has 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 has
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 covered the
Company's anticipated damages and legal costs in connection with such
lawsuits. The Company was obligated to pay for damages and costs in
excess of the policy limits. The cost of the policy was $6,950. 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 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 $1,500 in full satisfaction of
any and all claims relating to this action. A Stipulation of
Dismissal, with prejudice, has been filed with the court and
the parties have exchanged general releases.
F-20
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Financial Statements
December 31, 2005 and 2004
($ in thousands except per share data)
NOTE K - COMMITMENTS, CONTINGENCIES AND OTHER (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 was also a defendant in the
action. Colors in Optics 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 claimed 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) On July 28, 2005, adidas America, Inc., and adidas-Salomon AG
(together, "adidas") filed a Demand for Arbitration (the
"Demand") against Steve Madden, Ltd., and Steve Madden Retail,
Inc. before the American Arbitration Association. In its
Demand, adidas alleged that the parties had previously been
engaged in a lawsuit over the Company's sale of sneakers that
allegedly infringed adidas' "three stripe" mark. The parties
settled that lawsuit by entering into a settlement agreement
dated August 4, 2003 that prohibited the Company from selling
shoes that contained adidas' "three-stripe" mark either with
one additional stripe or with one less stripe. adidas alleged
in the Demand that the Company was selling three shoes (the
Finnley, the Troyy, and the Soccet) that adidas contends
violate the settlement agreement and infringe adidas'
"three-stripe" mark. The parties were engaged in settlement
discussions for several months, but so far have been unable to
settle and the Company filed its answer to the Demand for
Arbitration on January 20th, 2006. The parties will be jointly
selecting a panel of arbitrators over the next few weeks,
while settlement discussions continue. No discovery demands
have been exchanged. The Company believes it has substantial
defenses to the claims asserted in the Demand for Arbitration.
(e) On August 10, 2005, the U.S. Customs Department ("Customs")
issued a report that asserts that certain commissions which
the Company treated as buying agents commissions (which is
non-dutiable), should be treated as "selling agents
commissions" and hence is dutiable. In the report, Customs
estimates that the Company had underpaid duties during the
calendar years of 1998 through 2004 in the amount of $1,051.
Based on management's estimation at this point, a reserve of
$1,051 has been recorded as of the December 31, 2005 Financial
Statements. Such reserve may in the future be modified to
reflect the status of this matter.
(f) On or about January 23, 2006, the Company and certain of its
executives were named as defendants in a lawsuit filed by
Jojeli, Inc. ("Jojeli") and Alan Rick Friedman in the United
States District Court for the Southern District of New York.
In their complaint, Jojeli and Mr. Friedman assert claims
arising from the Company's decision to terminate Jojeli's
services on or about November 28, 2005. Mr. Friedman, Jojeli's
principal, served as a senior salesperson for the Company, and
provided his services to the Company pursuant to an April 26,
2004 written agreement. In their complaint, Jojeli and Mr.
Friedman allege eight claims against the Company and/or four
of its executives, including breach of contract, violation of
the New York Labor Law, tortuous interference with contract,
civil conspiracy, defamation, and prima facie tort. They seek
damages on their various claims in differing amounts, ranging
from $500 to $5,000, and they also seek a declaration that
they are not bound by the restrictive covenant in the parties'
contract. The Company is still investigating the allegations
of the complaint and has not yet filed an answer or
F-21
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Financial Statements
December 31, 2005 and 2004
($ in thousands except per share data)
NOTE K - COMMITMENTS, CONTINGENCIES AND OTHER (CONTINUED)
any relief from the Court. The Company believes the claims to
be without merit and it intends to vigorously defend the
lawsuit.
(g) 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:
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, 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.
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 with annual increases and performance bonuses. 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.
Effective as of May 23, 2005, the Company amended its employment
agreement with Richard Olicker, the Company's President. The agreement
provided for an annual salary of $454 through December 31, 2005. The
agreement also provides for an annual performance bonus. Mr. Olicker
left the Company in conjunction with the expiration of his employment
agreement on December 31, 2005.
Effective January 1, 2006, the Company amended its employment agreement
with Jamieson Karson, the Company's Chief Executive Officer and
Chairman of the Board. The agreement provides for an annual salary of
$500,000 through December 31, 2008. The agreement also provides for an
annual bonus at the discretion of the Board of Directors.
Effective February 1, 2006, the Company amended its employment
agreement with Arvind Dharia, the Company's Chief Financial Officer.
The agreement provides for an annual salary of $425, with annual
increases through December 31, 2009. The agreement also provides for an
annual bonus at the discretion of the Board of Directors.
The Company has employment agreements with other executives (the
"executives") which expire between June 30, 2007 and December 31, 2009.
These agreements provide for cash bonuses based upon a percentage of
year-to-year increases in earnings before interest, taxes, depreciation
and amortization, option grants and non-accountable expense allowances
as defined. Base salary commitments for these executives are as
follows:
2006 $ 1,849
2007 1,643
2008 1,192
2009 480
-------
$ 5,164
=======
F-22
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Financial Statements
December 31, 2005 and 2004
($ in thousands except per share data)
NOTE K - COMMITMENTS, CONTINGENCIES AND OTHER (CONTINUED)
In connection with their employment agreements, two executives received
an aggregate of 40,000 shares of restricted common stock from the
Company in 2002. The restricted shares vested equally each quarter over
the period of their employment agreements through December 2005.
Accordingly, the Company has recorded a charge to operations in the
amount of $104 and $254 for the 20,000 and 20,000 shares that vested
during the years ended December 31, 2005 and 2004, respectively.
Further, one executive received 100,000 stock options exercisable at
$19.00 per share, the market price on the date of grant. 20,000 of
these options vested on June 30, 2003 and the balance vested equally,
each quarter, through June 30, 2005.
In addition, the Company accrued aggregate cash obligations of
approximately $1,669 for bonuses under these agreements for the year
ended December 31, 2005.
[4] Letters of credit:
At December 31, 2005 and 2004, the Company had open letters of credit
for the purchase of imported merchandise of approximately $3,302 and
$9,808, respectively.
[5] Royalty agreements:
Pursuant to the Company's license agreement with Jones Investment
Company, Inc., the Company has the right to use the l.e.i. trademark in
connection with the sale and marketing of footwear. The agreement,
which expires on September 30, 2006, requires the Company to pay a
royalty equal to a percentage of net sales and a minimum royalty in the
event that specified net sales targets are not achieved.
On January 7, 2003, the Company entered into a long-term license
agreement with Seattle Pacific Industries, Inc., under which the
Company has the right to use the Unionbay trademark in connection with
the sale and marketing of footwear for men and boys. The initial term
of the agreement expires on December 31, 2006, with four 3-year renewal
terms, the last of which will expire on December 31, 2018. The
agreement requires the Company to make royalty and advertising payments
equal to a percentage of net sales and a minimum royalty and
advertising payment in the event that specified net sales targets are
not achieved.
On May 12, 2003, the Company entered into a long-term license agreement
with Candie's, Inc. to design, manufacture, and distribute Candie's
branded footwear for women and children worldwide. The initial term of
the agreement expires on December 31, 2009, with four 3-year renewal
terms, the last of which expires on December 31, 2021. The agreement
required the Company to make royalty and advertising payments equal to
a percentage of net sales of licensed products and a minimum royalty
and advertising payment in the event that specified net sales targets
are not achieved. On December 6, 2004, the agreement was amended to
reflect Candie's decision to name Kohl's Corporation the exclusive
provider of a new line of Candie's apparel. The amendment extended the
initial term of the agreement to December 31, 2010, and eliminated the
renewal term options. Pursuant to the amendment, commencing on January
1, 2007, the Company will no longer have the exclusive right to market
Candie's branded footwear and will be permitted to sell Candie's
branded footwear only to Kohl's. Under the terms of the amendment,
Candie's guarantees that the Company will achieve minimum sales levels
with Kohl's during the term of the agreement. In the event such minimum
sales levels are not achieved, Candie's is required to compensate the
Company in an amount based on a percentage of the sales shortfall.
Effective January 1, 2005, all royalty and advertising payments were
eliminated. As an inducement to execute the amendment, the Company is
required to pay Candie's a total of $3,000 payable in eight equal
quarterly installments beginning in February of 2005.
F-23
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Financial Statements
December 31, 2005 and 2004
($ in thousands except per share data)
NOTE K - COMMITMENTS, CONTINGENCIES AND OTHER (CONTINUED)
Royalty expenses are included in the "operating expenses" section of
the Company's Consolidated Statements of Income. Aggregate minimum
future royalties under these agreements are as follows:
Year Ending
December 31,
-----------------
2006 $ 2,318
2007 375
-----------
$ 2,693
===========
[6] Related Party Transactions:
In January 2004, the Company entered into an agreement with JLM
Consultants, a company wholly-owned by John Madden, one of the
Company's directors. Under this agreement, Mr. Madden provided
consulting services with respect to the development of international
sales of the Company. Pursuant to this agreement, JLM Consultants
received a fee and expenses of $352 and $252 in 2005 and 2004
respectively, in addition to fees Mr. Madden received for service to
the Company as a director.
In July 2001, the Company entered into a consulting agreement with
Peter J. Solomon & Company, a financial advisory firm of which Marc
Cooper, one of the Company's directors, is a managing director. Under
this agreement, the firm provided financial advisory and investment
banking services to the Company. This agreement was amended in March
2004. Pursuant to this agreement, the Company paid fees and expenses to
Peter J. Solomon & Company of $66, $161 and $33 for 2005, 2004 and 2003
respectively.
In July 2004, the Company entered into a consulting agreement with
Charles Koppelman, who served as a director of the Company from June
1998 through May 2004 and as Chairman of the Board from July 2001
through May 2004. Under this agreement, Mr. Koppelman provided
consulting services that included enhancing and promoting the Company's
brands and seeking licensing and acquisition opportunities. Pursuant to
this agreement, Mr. Koppelman received 100,000 options and a fee of $90
and $105 in 2005 and 2004 respectively. See Note D for a description of
the options. This agreement expired on June 30, 2005.
In October 2002, the Company entered into an arrangement with Jeff
Birnbaum, one of the Company's directors. Under this arrangement, Mr.
Birnbaum provided consulting services with respect to the designing and
manufacturing of shoes and general consulting services to the Company.
Pursuant to this arrangement, Mr. Birnbaum received a fee of $200 and
$250 in 2005 and 2004 respectively, in addition to fees received for
service to the Company as a director. Mr. Birnbaum has been a one-third
stockholder and the Product Development Manager of Dolphin Shoe Company
since August 1982. Dolphin Shoe Company is one of the Company's
domestic suppliers. In addition, Jeff Birnbaum's brother, Steven
Birnbaum owned a trading company, Bulls Eye Trading ("Bullseye") that
acted as a selling agent for the Company. Dolphin Shoe acquired
Bullseye in 2005. Jeff Birnbaum did not own an interest in Bullseye nor
was he a director of Bullseye nor did Bullseye pay him any
compensation.
The Madden Mens division of the Company purchases a significant amount
of shoes from La Tandem International, Inc. Mr. James Chen, the brother
of Harry Chen, is the President of La Tandem International, Inc., and
La Tandem International, Inc. is owned or controlled by members of the
Chen family. Harry Chen was the chairman and lead designer of the
Madden Mens Division of the Company until June 30, 2005.
F-24
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Financial Statements
December 31, 2005 and 2004
($ in thousands except per share data)
NOTE K - COMMITMENTS, CONTINGENCIES AND OTHER (CONTINUED)
[7] Concentrations:
The Company maintains cash and cash equivalents with various major
financial institutions which at times are in excess of the amount
insured. In addition, the Company's marketable securities and a money
account are principally held at one brokerage company.
During the year ended December 31, 2005, the Company purchased
approximately 21% and 12% of its merchandise from two suppliers in
China, respectively. Total inventory purchases for the year ended
December 31, 2005 from China was approximately 82%.
During the year ended December 31, 2004, the Company purchased
approximately 25% of its merchandise from a supplier in Brazil and 17%
and 10% of its merchandise from two suppliers in China, respectively.
Total inventory purchases for the year ended December 31, 2004 from
Brazil and China were approximately 26% and 41%, respectively.
During the year ended December 31, 2003, the Company purchased
approximately 13% of its merchandise from a supplier in Brazil. Total
inventory purchases for the year ended December 31, 2003 from Brazil
were approximately 19%. The Company also purchased inventory during the
year ended December 31, 2003 from two vendors in China totaling
approximately 32%.
Sales to one customer accounted for 19% of total net sales for the year
ended December 31, 2005. This customer represented 24% of accounts
receivable at December 31, 2005.
Sales to two customers accounted for 10% and 9% of total net sales for
the year ended December 31, 2004. These customers each represented 13%
of accounts receivable at December 31, 2004.
Sales to two customers accounted for 10% and 11% of total net sales for
the year ended December 31, 2003. These customers each represented 17%
of accounts receivable at December 31, 2003.
Sales to such customers are included in the wholesale segment (see Note
M). Purchases are made primarily in United States dollars.
[8] Valuation and qualifying accounts:
The following is a summary of the allowance for doubtful accounts
related to accounts receivable and the allowance for chargebacks
related to the amount Due from Factor for the years ended December 31:
2005 2004 2003
---------- ---------- ----------
Balance at beginning of year $ 2,915 $ 2,378 $ 2,215
Charged to expense 5,485 537 163
Uncollectible accounts written off, net of recoveries -- -- --
---------- ---------- ----------
Balance at end of year $ 8,400 $ 2,915 $ 2,378
========== ========== ==========
The following is a summary of the reserve for slow moving inventory for
the years ended December 31:
2005 2004 2003
---------- ---------- ----------
Balance at beginning of year $ 608 $ 663 $ 877
Charged to reserve -- 55 214
Increase to the reserve 535 -- --
---------- ---------- ----------
Balance at end of year $ 1,143 $ 608 $ 663
========== ========== ==========
F-25
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Financial Statements
December 31, 2005 and 2004
($ in thousands except per share data)
NOTE K - COMMITMENTS, CONTINGENCIES AND OTHER (CONTINUED)
The following is a summary of cost in excess of fair value of net
assets acquired and the related accumulated amortization for the years
ended December 31:
2005 2004 2003
---------- ---------- ----------
Cost basis
Balance at beginning and end of year $ 2,780 $ 2,780 $ 2,780
Write-off of impaired assets (635) 0 0
---------- ---------- ----------
Balance at end of year 2,145 2,780 2,780
---------- ---------- ----------
Accumulated amortization
Balance at beginning of year 714 714 714
Write-off of impaired assets (116) 0 0
---------- ---------- ----------
Balance at end of year 598 714 714
---------- ---------- ----------
Cost in excess of fair value of net assets acquired $ 1,547 $ 2,066 $ 2,066
========== ========== ==========
[9] Other:
Pursuant to an agreement reached on February 2, 2005 with an 8%
shareholder, the Company has agreed to commit $25 million during the
twelve months ended January 31, 2006 and $10 million during the twelve
months ended January 31, 2007 to a combination of share repurchases
and/or dividends, such programs to be implemented at such time and such
manner as the board of directors shall determine in its sole
discretion. As of March 6, 2006, the Company has repurchased 501 shares
for $10,503 and has paid dividends of $13,814.
NOTE L - SUBSEQUENT EVENT
On February 7, 2006, the Company acquired all of the equity interest of
privately held Daniel M. Friedman and Associates, Inc. Founded in 1995, Daniel
M. Friedman is a manufacturer and distributor of name fashion handbags and
accessories. The acquisition was completed for $18,000 in cash and includes
certain earn out provisions based on financial performance through 2010. In
October of 1998, the Company entered into a license agreement with Daniel M.
Friedman for the design, manufacture and distribution of women's belts in the
United States and Canada. This agreement expired on June 30, 2005. On July 14,
2005, the Company entered into a new license agreement with Daniel M. Friedman
for the design, manufacture and distribution of handbags, women's belts, wallets
and other small leather goods.
NOTE M - OPERATING SEGMENT INFORMATION
The Company's reportable segments are primarily based on methods used to
distribute its products. The wholesale and retail segments derive revenue from
sales of women's, men's, girl's and children's footwear. The wholesale segment,
through sales to department and specialty stores, and the retail segment,
through our operation of retail stores and our website, derive revenue from
sales of branded women's, men's, girl's and children's footwear. In addition,
the wholesale segment has a licensing program that extends the Steve Madden and
Stevies brands to accessories and ready-to-wear apparel. The other segment
represents activities of a subsidiary which earns commissions for serving as a
buying agent to mass-market merchandisers, shoe chains and other off-price
retailers with respect to their purchase of private label shoes.
F-26
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Financial Statements
December 31, 2005 and 2004
($ in thousands except per share data)
NOTE M - OPERATING SEGMENT INFORMATION (CONTINUED)
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The Company evaluates performance
based on profit or loss from operations before other income (expense) and the
provision for income taxes. The following is information for the Company's
reportable segments:
Wholesale Retail Private label Consolidated
-------------- -------------- -------------- --------------
Year ended December 31, 2005:
Net sales to external customers (a) $ 254,275 $ 121,511 $ 375,786
Gross profit 82,328 60,172 142,500
Commissions and licensing fees - net 2,286 $ 4,833 7,119
Income from operations 21,311 5,426 4,833 31,570
Depreciation and amortization 1,361 3,750 9 5,120
Loss on disposal of fixed assets 535 535
Other significant items:
Deferred compensation 703 703
Deferred rent expense 281 391 (3) 669
Provision for doubtful accounts 5,485 5,485
Segment assets (b) 171,316 38,576 1,836 211,728
Capital expenditures 1,011 4,366 5,377
Year ended December 31, 2004:
Net sales to external customers (a) $ 230,347 $ 107,797 $ 338,144
Gross profit 66,749 55,920 122,669
Commissions and licensing fees - net 2,310 $ 2,278 4,588
Income from operations 8,272 8,431 2,278 18,981
Depreciation and amortization 1,442 3,416 7 4,865
Loss on disposal of fixed assets 198 198
Other significant items:
Deferred compensation 2,782 2,782
Deferred rent expense (reversal) 192 68 260
Provision for doubtful accounts 537 537
Segment assets (b) 135,362 44,048 891 180,301
Capital expenditures 1,965 5,414 8 7,387
Year ended December 31, 2003:
Net sales to external customers (a) $ 228,686 $ 95,518 $ 324,204
Gross profit 75,167 50,852 126,019
Commissions and licensing fees - net 2,838 $ 2,904 5,742
Income from operations 21,589 9,133 2,904 33,626
Depreciation and amortization 1,136 3,604 3 4,743
Other significant items:
Deferred compensation 2,877 2,877
Deferred rent expense (reversal) 33 262 1 296
Provision for doubtful accounts 163 163
Segment assets (b) 139,625 37,828 417 177,870
Capital expenditures 2,667 3,394 6,061
(a) Attributed to the United States, based on the location in which the sale
originated.
(b) All long-lived assets, consisting of property and equipment and cost in
excess of fair value of net assets acquired, are located in the United
States.
F-27
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Financial Statements
December 31, 2005 and 2004
($ in thousands except per share data)
NOTE N - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly results of operations for the years
ended December 31, 2005 and 2004:
March 31, June 30, September 30, December 31,
-------------- -------------- -------------- --------------
2005:
Wholesale, net $ 56,861 $ 68,331 $ 71,018 $ 58,065
Retail, net 26,475 32,627 29,049 33,360
-------------- -------------- -------------- --------------
Net sales 83,336 100,958 100,067 91,425
Cost of sales 55,018 62,448 63,836 51,984
-------------- -------------- -------------- --------------
Gross profit 28,318 38,510 36,231 39,441
Commissions and licensing fee income - net 1,225 1,799 2,217 1,878
Net income 962 5,286 5,513 7,439
Net income per share:
Basic 0.07 0.40 0.41 0.54
Diluted 0.07 0.39 0.39 0.51
2004:
Wholesale, net $ 55,067 $ 59,804 $ 64,851 $ 50,625
Retail, net 23,701 26,430 23,759 33,907
-------------- -------------- -------------- --------------
Net sales 78,768 86,234 88,610 84,532
Cost of sales 47,496 53,522 57,160 57,297
-------------- -------------- -------------- --------------
Gross profit 31,272 32,712 31,450 27,235
Commissions and licensing fee income - net 834 1,215 1,175 1,364
Net income 4,126 4,090 3,686 373
Net income per share:
Basic 0.31 0.31 0.28 0.03
Diluted 0.29 0.28 0.26 0.03
F-28
(b) Exhibits.
3.01 Certificate of Incorporation of the Company (incorporated by reference
to Exhibit 1 to the Company's Current Report on Form 8-K filed with the
Commission on November 23, 1998).
3.02 Amended & Restated By-Laws of the Company (incorporated by reference to
Exhibit 3.02 to the Company's Annual Report on Form 10-K for its fiscal
year ended December 31. 2001).
4.01 Specimen Certificate for shares of Common Stock (incorporated by
reference to Exhibit 4.01 to the Company's Registration Statement on
Form SB-2/A filed with the Commission on September 29, 1993 (File No.
033-67162)).
4.02 Rights Agreement between the Company and American Stock Transfer and
Trust Company (incorporated by reference to Exhibit 4.1 to the
Company's Current Report on Form 8-K filed with the Commission on
November 16, 2001).
10.01 Third Amended Employment Agreement between the Company and Steven
Madden (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).
10.02 Employment Agreement of Jamieson Karson (incorporated by reference to
Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the
Commission on January 6, 2006).
10.03 Employment Agreement of Arvind Dharia (incorporated by reference to
Exhibit 10.07 to the Company's Annual Report on Form 10-K for its
fiscal year ending December 31, 2000).
10.04 Amendment No. 1 to Employment Agreement of Arvind Dharia (incorporated
by reference to Exhibit 99.4 to the Company's Quarterly Report on Form
10-Q for its fiscal quarter ending June 30, 2001).
10.05 Amendment No. 2 to Employment Agreement of Arvind Dharia (incorporated
by reference to Exhibit 10.16 to the Company's Quarterly Report on Form
10-Q for its fiscal quarter ending September 30, 2002).
10.06 Amendment No. 3 to Employment Agreement of Arvind Dharia (incorporated
by reference to Exhibit 10.1 to the Company's Current Report on Form
8-K filed with the Commission on February 3, 2006).
10.07 Amendment No. 2 to Employment Agreement of Richard Olicker
(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).
10.08 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).
10.09 Consulting Agreement, effective as of August 1, 2004, between the
Company, John Madden and J.L.M. Consultants Inc.
10.10 Amendment No. 1 to Consulting Agreement, dated as of March 10, 2005,
between the Company, John Madden and J.L.M. Consultants Inc.
10.11 Amendment No. 2 to Consulting Agreement, dated as of April 14, 2005,
between the Company, John Madden and J.L.M. Consultants Inc.
10.12 Employment Agreement with Robert Schmertz dated March 11, 2005
(incorporated by reference to Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for its fiscal quarter ending March 31, 2005).
10.13 Employment Agreement with Andrew Shames dated March 8, 2004
(incorporated by reference to Exhibit 10.2 to the Company's Quarterly
Report on Form 10-Q for its fiscal quarter ending March 31, 2005).
10.14 Commission Agreement between the Company and Hev Sales, Inc. dated
March 8, 2004 (incorporated by reference to Exhibit 10.3 to the
Company's Quarterly Report on Form 10-Q for its fiscal quarter ending
March 31, 2005).
10.15 Employment Agreement between the Company, Adesso Madden, Inc. and
Joseph Masella and T.J.M. Sales Corporation dated May 7, 2002
(incorporated by reference to Exhibit 10.4 to the Company's Quarterly
Report on Form 10-Q for its fiscal quarter ending March 31, 2005).
10.16 Amendment No. 1 to Employment Agreement between the Company, Adesso
Madden, Inc. and Joseph Masella and T.J.M. Sales Corporation dated
September 2, 2002 (incorporated by reference to Exhibit 10.5 to the
Company's Quarterly Report on Form 10-Q for its fiscal quarter ending
March 31, 2005).
10.17 Amendment No. 2 to Employment Agreement between the Company, Adesso
Madden, Inc. and Joseph Masella and T.J.M. Sales Corporation dated
September 27, 2002 (incorporated by reference to Exhibit 10.6 to the
Company's Quarterly Report on Form 10-Q for its fiscal quarter ending
March 31, 2005).
10.18 Employment Agreement between Adesso-Madden, Inc. and Gerald Mongeluzo
(incorporated by reference to Exhibit 99.5 to the Company's Quarterly
Report on Form 10-Q for its fiscal quarter ending June 30, 2001).
10.19 Employment Agreement between Steven Madden Retail, Inc. and Mark
Jankowski (incorporated by reference to Exhibit 99.6 to the Company's
Quarterly Report on Form 10-Q for its fiscal quarter ending June 30,
2001).
10.20 Settlement Agreement, dated February 2, 2005, among Barington Companies
Equity Partners, L.P., Barington Companies Investors, LLC, James
Mitarotonda, Barington Companies Offshore Fund, Ltd., Barington
Companies Advisors, LLC, Barington Capital Group, L.P., LNA Capital
Corp., Parche, LLC, Starboard Value & Opportunity Fund, LLC, Admiral
Advisors, LLC, Ramius Capital Group, LC, C4S & Co., LLC, Peter A.
Cohen, Morgan B. Stark, Jeffrey M. Solomon, Thomas W. Strauss, RJG
Capital Partners, LP, RJG Capital Management, LLC, Ronald Gross and
Steven Madden, Ltd. (incorporated by reference to Exhibit 99.1 to the
Company's Current Report on Form 8-K filed with the Commission on
February 2, 2005).
10.21 Stock Purchase Agreement, dated as of February 7, 2006, by and between
the Company and Daniel M. Friedman (incorporated by reference to
Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the
Commission on February 13, 2006).
10.22 Earn-Out Agreement, dated as of February 7, 2006, by and among the
Company, Daniel M. Friedman, Daniel M. Friedman & Associates, Inc. and
DMF International, Ltd. (incorporated by reference to Exhibit 10.2 to
the Company's Current Report on Form 8-K filed with the Commission on
February 13, 2006).
10.24 1996 Stock Plan, approved and adopted on March 6, 1996 (incorporated by
reference to Exhibit 10.27 to the Company's Registration Statement on
Form S-8 filed with the Commission on November 3, 1997).
10.25 The 1997 Stock Plan, approved and adopted on May 10, 1997 (incorporated
by reference to Exhibit 10.28 to the Company's Registration Statement
on Form S-8 filed with the Commission on November 3, 1997).
10.27 The 1998 Stock Plan, approved and adopted on January 16, 1998
(incorporated by reference to Exhibit 10.2 to the Company's
Registration Statement on Form S-8 filed with the Commission on July
28, 1998).
10.28 The 1999 Stock Plan, approved and adopted on March 15, 1999, amended as
of March 20, 2000 and March 30, 2001 (incorporated by reference to
Exhibit 10.A to the Company's Registration Statement on Form S-8 filed
with the Commission on July 26, 2004).
21.01 Subsidiaries of Registrant
23.01 Consent of Eisner LLP
24.01 Power of Attorney (included on signature page hereto).
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: New York, New York
March 14, 2006
STEVEN MADDEN, LTD.
By: /s/ JAMIESON A. KARSON
------------------------------------
Jamieson Karson
Chairman and Chief Executive Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Jamieson A. Karson and Arvind Dharia, and each of
them, as his true and lawful attorneys-in-fact and agents, with full power of
substitution and re-substitution, for him in any and all capacities, to sign any
and all amendments to this Annual Report on Form 10-K and to file the same, with
all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission hereby ratifying and confirming that each of
said attorneys-in-fact and agents, or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities and on the dates indicated.
Signature Title Date
- ---------------------------- ---------------------------- -------------
/s/ JAMIESON A. KARSON Chairman and Chief Executive March 8, 2006
- ---------------------------- Officer
Jamieson Karson
/s/ ARVIND DHARIA Chief Financial Officer March 8, 2006
- ----------------------------
Arvind Dharia
/s/ JEFFREY BIRNBAUM Director March 8, 2006
- ----------------------------
Jeffrey Birnbaum
/s/ MARC COOPER Director March 8, 2006
- ----------------------------
Marc Cooper
/s/ JOHN L. MADDEN Director March 8, 2006
- ----------------------------
John L. Madden
/s/ HAROLD KAHN Director March 8, 2006
- ----------------------------
Harold Kahn
/s/ PETER MIGLIORINI Director March 8, 2006
- ----------------------------
Peter Migliorini
/s/ THOMAS H. SCHWARTZ Director March 8, 2006
- ----------------------------
Thomas H. Schwartz
/s/ WALTER YETNIKOFF Director March 8, 2006
- ----------------------------
Walter Yetnikoff
STEVEN MADDEN, LTD.
FORM 10-K
EXHIBIT INDEX
3.01 Certificate of Incorporation of the Company (incorporated by reference
to Exhibit 1 to the Company's Current Report on Form 8-K filed with the
Commission on November 23, 1998).
3.02 Amended & Restated By-Laws of the Company (incorporated by reference to
Exhibit 3.02 to the Company's Annual Report on Form 10-K for its fiscal
year ended December 31. 2001).
4.01 Specimen Certificate for shares of Common Stock (incorporated by
reference to Exhibit 4.01 to the Company's Registration Statement on
Form SB-2/A filed with the Commission on September 29, 1993 (File No.
033-67162)).
4.02 Rights Agreement between the Company and American Stock Transfer and
Trust Company (incorporated by reference to Exhibit 4.1 to the
Company's Current Report on Form 8-K filed with the Commission on
November 16, 2001).
10.01 Third Amended Employment Agreement between the Company and Steven
Madden (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).
10.02 Employment Agreement of Jamieson Karson (incorporated by reference to
Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the
Commission on January 6, 2006).
10.03 Employment Agreement of Arvind Dharia (incorporated by reference to
Exhibit 10.07 to the Company's Annual Report on Form 10-K for its
fiscal year ending December 31, 2000).
10.04 Amendment No. 1 to Employment Agreement of Arvind Dharia (incorporated
by reference to Exhibit 99.4 to the Company's Quarterly Report on Form
10-Q for its fiscal quarter ending June 30, 2001).
10.05 Amendment No. 2 to Employment Agreement of Arvind Dharia (incorporated
by reference to Exhibit 10.16 to the Company's Quarterly Report on Form
10-Q for its fiscal quarter ending September 30, 2002).
10.06 Amendment No. 3 to Employment Agreement of Arvind Dharia (incorporated
by reference to Exhibit 10.1 to the Company's Current Report on Form
8-K filed with the Commission on February 3, 2006).
10.07 Amendment No. 2 to Employment Agreement of Richard Olicker
(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).
10.08 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).
10.09 Consulting Agreement, effective as of August 1, 2004, between the
Company, John Madden and J.L.M. Consultants Inc.
10.10 Amendment No. 1 to Consulting Agreement, dated as of March 10, 2005,
between the Company, John Madden and J.L.M. Consultants Inc.
10.11 Amendment No. 2 to Consulting Agreement, dated as of April 14, 2005,
between the Company, John Madden and J.L.M. Consultants Inc.
10.12 Employment Agreement with Robert Schmertz dated March 11, 2005
(incorporated by reference to Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for its fiscal quarter ending March 31, 2005).
10.13 Employment Agreement with Andrew Shames dated March 8, 2004
(incorporated by reference to Exhibit 10.2 to the Company's Quarterly
Report on Form 10-Q for its fiscal quarter ending March 31, 2005).
10.14 Commission Agreement between the Company and Hev Sales, Inc. dated
March 8, 2004 (incorporated by reference to Exhibit 10.3 to the
Company's Quarterly Report on Form 10-Q for its fiscal quarter ending
March 31, 2005).
10.15 Employment Agreement between the Company, Adesso Madden, Inc. and
Joseph Masella and T.J.M. Sales Corporation dated May 7, 2002
(incorporated by reference to Exhibit 10.4 to the Company's Quarterly
Report on Form 10-Q for its fiscal quarter ending March 31, 2005).
10.16 Amendment No. 1 to Employment Agreement between the Company, Adesso
Madden, Inc. and Joseph Masella and T.J.M. Sales Corporation dated
September 2, 2002 (incorporated by reference to Exhibit 10.5 to the
Company's Quarterly Report on Form 10-Q for its fiscal quarter ending
March 31, 2005).
10.17 Amendment No. 2 to Employment Agreement between the Company, Adesso
Madden, Inc. and Joseph Masella and T.J.M. Sales Corporation dated
September 27, 2002 (incorporated by reference to Exhibit 10.6 to the
Company's Quarterly Report on Form 10-Q for its fiscal quarter ending
March 31, 2005).
10.18 Employment Agreement between Adesso-Madden, Inc. and Gerald Mongeluzo
(incorporated by reference to Exhibit 99.5 to the Company's Quarterly
Report on Form 10-Q for its fiscal quarter ending June 30, 2001).
10.19 Employment Agreement between Steven Madden Retail, Inc. and Mark
Jankowski (incorporated by reference to Exhibit 99.6 to the Company's
Quarterly Report on Form 10-Q for its fiscal quarter ending June 30,
2001).
10.20 Settlement Agreement, dated February 2, 2005, among Barington Companies
Equity Partners, L.P., Barington Companies Investors, LLC, James
Mitarotonda, Barington Companies Offshore Fund, Ltd., Barington
Companies Advisors, LLC, Barington Capital Group, L.P., LNA Capital
Corp., Parche, LLC, Starboard Value & Opportunity Fund, LLC, Admiral
Advisors, LLC, Ramius Capital Group, LC, C4S & Co., LLC, Peter A.
Cohen, Morgan B. Stark, Jeffrey M. Solomon, Thomas W. Strauss, RJG
Capital Partners, LP, RJG Capital Management, LLC, Ronald Gross and
Steven Madden, Ltd. (incorporated by reference to Exhibit 99.1 to the
Company's Current Report on Form 8-K filed with the Commission on
February 2, 2005).
10.21 Stock Purchase Agreement, dated as of February 7, 2006, by and between
the Company and Daniel M. Friedman (incorporated by reference to
Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the
Commission on February 13, 2006).
10.22 Earn-Out Agreement, dated as of February 7, 2006, by and among the
Company, Daniel M. Friedman, Daniel M. Friedman & Associates, Inc. and
DMF International, Ltd. (incorporated by reference to Exhibit 10.2 to
the Company's Current Report on Form 8-K filed with the Commission on
February 13, 2006).
10.24 1996 Stock Plan, approved and adopted on March 6, 1996 (incorporated by
reference to Exhibit 10.27 to the Company's Registration Statement on
Form S-8 filed with the Commission on November 3, 1997).
10.25 The 1997 Stock Plan, approved and adopted on May 10, 1997 (incorporated
by reference to Exhibit 10.28 to the Company's Registration Statement
on Form S-8 filed with the Commission on November 3, 1997).
10.27 The 1998 Stock Plan, approved and adopted on January 16, 1998
(incorporated by reference to Exhibit 10.2 to the Company's
Registration Statement on Form S-8 filed with the Commission on July
28, 1998).
10.28 The 1999 Stock Plan, approved and adopted on March 15, 1999, amended as
of March 20, 2000 and March 30, 2001 (incorporated by reference to
Exhibit 10.A to the Company's Registration Statement on Form S-8 filed
with the Commission on July 26, 2004).
21.01 Subsidiaries of Registrant
23.01 Consent of Eisner LLP
24.01 Power of Attorney (included on signature page hereto).