operating costs associated with the net addition of four
retail stores. Loss from operations
for the Retail Division was $6,283 for the three-month period ended March 31,
2008 compared to $1,946 for the same period of 2007.
First
Cost Division:
The First Cost Division generated net commission
income and design fees of $2,340 for the three-month period ended March 31,
2008, compared to $4,347 for the comparable period of 2007. A decrease caused
by our large private label customers scaling back their orders in response to
the soft retail environment was partially offset by an increase in our
international business.
LIQUIDITY AND CAPITAL RESOURCES
($ in thousands)
We had working capital of $91,138 at March 31, 2008 compared
to $121,138 at December 31, 2007. The decrease was primarily due to the
completion of our tender offer in which we repurchased of 2,600,000 shares of
our common stock at a total cost of $44,200. The decrease was partially offset
by a $13,536 increase in the amount due from factor.
Under the terms of a factoring agreement with GMAC, we
are eligible to borrow 80% against our receivables at an interest rate equal to
the lower of the prime rate less 0.875% or the 30-day London Interbank Offered
Rate plus 1.375%. This agreement, which has no specific expiration date and can
be terminated by either party with 60 days written notice after June 30, 2009,
provides us with a $50 million credit facility with a $25 million sub-limit on
the aggregate face amount of Letters of Credit with some other stipulations. We
had no outstanding borrowings as of March 31, 2008.
As of March 31, 2008, we held marketable securities
valued at $32,660, consisting primarily of corporate and municipal bonds, U.S.
Treasury notes, government asset-backed securities, certificates of deposits
and equities.
As of March 31, 2008,
$16,070 of our marketable securities were invested in auction rate securities.
The contractual maturities of the investments underlying, the auction rate
securities mature at various dates through 2046, however, all of our auction
rate securities, or ARS, have a reset period of less than 30 days. Through May
7, 2008, all of our ARS have failed at auction multiple times, resulting in our
continuing to hold these securities. Based on current market conditions, it is
likely that auctions related to these securities will continue to be
unsuccessful in the near term. Unsuccessful auctions could result in our
holding securities beyond their next scheduled auction reset dates if a
secondary market does not develop, therefore limiting the short-term liquidity
of these investments. Accordingly, the auction rate securities are classified
as long term as of March 31, 2008. While these failures in the auction process
have affected our ability to access these funds in the near term, we do not
believe that the underlying securities or collateral have been affected. As a
result of the lack of liquidity in the ARS market and not as a result of the
quality of the underlying collateral, for the three months ended March 31,
2008, the Company recorded unrealized loss on its ARSs of $230. The valuation
may be revised in future periods as market conditions evolve.
We believe that based upon our current financial
position and available cash, cash equivalents and marketable securities, we
will meet all of our financial commitments and operating needs for at least the
next twelve months.
OPERATING
ACTIVITIES
($ in thousands)
During the three-month period ended March 31, 2008,
net cash used by operating activities was $2,040. The primary sources of cash
were net income of $2,052, increases in accounts payable and other accrued
expenses of $2,572, a decrease in accounts receivable of $2,335 and a decrease
in inventory of $790. The primary uses of cash were increases in due from
factor of $10,523, an increase in prepaid expenses, prepaid taxes, deposits and
other assets of $2,239.
19
INVESTING
ACTIVITIES
($ in thousands)
During the three-month period ended March 31, 2008, we
invested $282 in marketable securities and received $47,207 from the maturities
and sales of securities. We also paid $4,923 for the 2007 provision of the
earn-out agreement pertaining to the acquisition of Daniel M. Friedman.
Additionally, we made capital expenditures of $2,286, principally for the one
new store opened in the current period, the construction of two new stores
scheduled to open in the second quarter of 2008, the remodeling of two existing
stores, leasehold improvements to corporate office space and for upgrades to
our computer systems.
FINANCING
ACTIVITIES
($ in thousands)
During the three-month period ended March 31, 2008, we
completed a Tender Offer to purchase 2,600,000 shares of the Companys common
stock for treasury at a total cost of $44,200 or $17.00 per share. We also
received $14 in cash and realized a tax benefit of $15 in connection with the
exercise of stock options.
CONTRACTUAL
OBLIGATIONS
($ in thousands)
Our contractual obligations
as of March 31, 2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment due by period
|
|
|
|
|
|
Contractual Obligations
|
|
Total
|
|
Remainder of
2008
|
|
2009-2010
|
|
2011-2012
|
|
2013 and after
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease
obligations
|
|
$
|
124,154
|
|
$
|
12,691
|
|
$
|
33,189
|
|
$
|
30,418
|
|
$
|
47,856
|
|
|
Purchase
obligations
|
|
|
73,090
|
|
|
73,090
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
Other long-term
liabilities (future minimum royalty payments)
|
|
|
1,805
|
|
|
391
|
|
|
1,414
|
|
|
0
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
199,049
|
|
$
|
86,172
|
|
$
|
34,603
|
|
$
|
30,418
|
|
$
|
47,856
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2008, we had un-negotiated open letters
of credit for the purchase of inventory of approximately $3,570.
We have an employment agreement with Steven Madden,
our founder and Creative and Design Chief, which provides for an annual base
salary of $600 subject to certain specified adjustments through June 30,
2015. The agreement also provides for annual bonuses based on EBITDA, revenue
of any new business and royalty income over $2 million, plus an equity grant
and a non-accountable expense allowance.
On February 7, 2006, we acquired
all of the equity interest of Daniel M. Friedman. The acquisition was completed
for consideration of $23,686, including transaction costs. In addition, the
purchase agreement includes certain earn-out provisions based on financial
performance through 2008.
We have employment agreements with certain executive
officers, which provide for the payment of compensation aggregating
approximately $2,222 in 2008, $1,880 in 2009 and $400 in 2010. In addition,
some of the employment agreements provide for a discretionary bonus and some
provide for incentive compensation based on various performance criteria as
well as other benefits including stock options. The Chief Operating Officer of
the Company is entitled to deferred compensation calculated as a percentage of
his base salary.
Ninety-nine percent (99%) of the Companys products
are produced at overseas locations, the majority of which are located in China,
with a small percentage located in Brazil, Italy, India, Spain and Mexico. We
have not entered into any long-term manufacturing or supply contracts with any
of these foreign companies. We believe that a sufficient number of alternative
sources exist outside of the United States for the manufacture of its products.
We currently make approximately 99% of our purchases in U.S. dollars.
20
INFLATION
The Company does not believe that the relatively low
rates of inflation experienced over the last few years in the United States,
where it primarily competes, have had a significant effect on sales, expenses
or profitability.
CRITICAL
ACCOUNTING POLICIES AND THE USE OF ESTIMATES
Managements Discussion and Analysis of Financial
Condition and Results of Operations is based upon the Companys consolidated
financial statements which have been prepared in accordance with GAAP. The
preparation of these financial statements requires management to make estimates
and judgments that affect the reported amounts of assets, liabilities, sales
and expenses and related disclosure of contingent assets and liabilities.
Estimates by their nature are based on judgments and available information.
Estimates are made based upon historical factors, current circumstances and the
experience and judgment of management. Assumptions and estimates are evaluated
on an ongoing basis and we 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 our condensed consolidated financial
statements: allowance for bad debts, returns and customer chargebacks;
inventory reserves; valuation of intangible assets; litigation reserves and
cost of sales.
Allowances for bad debts, returns and customer
chargebacks
. We provide 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 our 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. We evaluate anticipated customer markdowns and advertising
chargebacks by reviewing several performance indicators for our major
customers. These performance indicators (which include inventory levels at the
retail floors, sell through rates and gross margin levels) are analyzed by key
account executives and the Vice President of Wholesale Sales to estimate the
amount of the anticipated customer allowance. Failure to correctly estimate the
amount of the reserve could materially impact our results of operations and financial
position.
Inventory reserves
. Inventories are
stated at lower of cost or market, on a first-in, first-out basis. We review
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.
We consider 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 our product. A misinterpretation or misunderstanding of future consumer
demand for the our product, the economy or other failure to estimate correctly,
in addition to abnormal weather patterns, could result in inventory valuation
changes, either favorably or unfavorably, compared to the valuation determined
to be appropriate as of the balance sheet date.
Valuation of intangible assets
. SFAS
No. 142, Goodwill and Other Intangible Assets, which we adopted on January 1,
2002, requires that goodwill and intangible assets with indefinite lives no
longer be amortized, but rather be tested for impairment at least annually.
This pronouncement also requires that intangible assets with finite lives be
amortized over their respective lives to their estimated residual values, and
reviewed for impairment in accordance with SFAS No. 144 Accounting for
Impairment or Disposal of Long-lived Assets. In accordance with SFAS No. 144,
long-lived assets, such as property, equipment, leasehold improvements and
goodwill subject to amortization, are reviewed for impairment annually or
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. Recoverability of assets to be held and
used is measured by a comparison of the carrying amount of an asset to the
estimated undiscounted future cash flows expected to be generated by the asset.
If the carrying amount of an asset exceeds its estimated future cash flows, an
impairment charge is recognized in the amount by which the carrying amount of
the asset exceeds the fair value of the asset.
Litigation reserves
. Estimated
amounts for litigation claims that are probable and can be reasonably estimated
are recorded as liabilities in our 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
21
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
managements estimates of the contingent liability could materially impact our
results of operation and financial position.
Cost
of sales.
All costs incurred to bring finished products to
our distribution center and, in the retail division, the costs to bring
products to our stores, are included in the cost of sales line item on our
Consolidated Statement of Operations. These include the cost of finished
products, purchase commissions, letter of credit fees, brokerage fees, material
and labor and related items, sample expenses, custom duty, inbound freight,
royalty payments on licensed products, labels and product packaging. All
warehouse and distribution costs are included in the operating expenses line
item of our Condensed Consolidated Statement of Operations. We classify
shipping costs, if any, to customers as operating expenses. Our gross profit
margins may not be comparable to other companies in the industry because some
companies may include warehouse and distribution as a component of cost of
sales, while other companies report on the same basis as we do and include them
in operating expenses.
ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
($ in thousands)
We do 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 the
prime rate and LIBOR. An analysis of our credit agreements with GMAC can be
found in Liquidity and Capital Resources section under Item 2 of this document.
As of March 31, 2008, we held marketable securities
valued at $32,660, which consist primarily of corporate and municipal bonds,
U.S. treasury notes, certificates of deposit and government asset-backed
securities that have various maturities through 2046, as well as marketable
equity securities. These investments are subject to interest rate risk and will
decrease in value if market interest rates increase. We have the ability to
hold these investments until maturity. In addition, any decline in interest
rates would be expected to reduce our interest income.
As of March 31, 2008,
$16,070 our marketable securities were invested in auction rate securities. The
contractual maturities of the investments underlying the auction rate
securities mature at various dates through 2046, however, all of our auction
rate securities, or ARS, have a reset period of less than 30 days. Through May
7, 2008, all of our ARS have failed at auction multiple times, resulting in our
continuing to hold these securities. Based on current market conditions, it is
likely that auctions related to these securities will continue to be
unsuccessful in the near term. Unsuccessful auctions could result in our
holding securities beyond their next scheduled auction reset dates if a
secondary market does not develop, therefore limiting the short-term liquidity
of these investments. Accordingly, the auction rate securities are classified
as long term as of March 31, 2008. While these failures in the auction process
have affected our ability to access these funds in the near term, we do not
believe that the underlying securities or collateral have been affected. As a
result of the lack of liquidity in the ARS market and not as a result of the
quality of the underlying collateral, for the three months ended March 31,
2008, the Company recorded unrealized loss on its ARSs of $230. The valuation
may be revised in future periods as market conditions evolve.
ITEM 4. CONTROLS
AND PROCEDURES
As required by Rule 13a-15(b) of the Securities
Exchange Act of 1934 (the Exchange Act), the Companys management, including
the Companys Chief Executive Officer and Chief Financial Officer, has
evaluated the effectiveness of its disclosure controls and procedures as of the
end of the fiscal quarter covered by this quarterly report. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that the Companys disclosure controls and procedures (as defined in
Rule 13a-15(e) under the Exchange Act) were, as of the end of the fiscal
quarter covered by this quarterly report, effective to ensure that information
required to be disclosed by the Company in reports that it files or submits
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the SECs rules and forms and is accumulated and
communicated to the Companys management, including the Chief Executive Officer
and Chief Financial Officer, to allow timely decisions regarding required
disclosure.
As required by Rule 13a-15(d) under the Exchange Act,
the Companys management, including the Companys Chief Executive Officer and
Chief Financial Officer, has evaluated the Companys internal controls over
financial reporting to determine whether any changes occurred during the
quarter covered by this quarterly report that have
22
materially affected, or are reasonably likely to
materially affect, the Companys internal control over financial reporting.
Based on that evaluation, there has been no such change during the quarter
covered by this report.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Certain legal proceedings in
which we are involved are discussed in Note K and Part I, Item 3 to the
consolidated financial statements included in our Annual Report on Form 10-K
for the year ended December 31, 2007. Unless otherwise indicated, all proceedings discussed in those
earlier reports remain outstanding.
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 Companys financial
position or results of operations. It is the policy of management to disclose
the amount or range of reasonably possible losses in excess of recorded
amounts.
ITEM 1A.
RISK FACTORS
The risk factors included in the Companys Annual
Report on Form 10-K for the fiscal year ended December 31, 2007 have not
materially changed.
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS:
The following table provides
information as of March 31, 2008 with respect to the shares of common stock
repurchased by the Company during the first quarter of 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
|
|
Total Number of
Shares Purchased
|
|
Average Price
Paid per Share
|
|
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
|
|
Maximum Dollar
Amount of
Shares that
May Yet Be
Purchased Under
the Plans or
Programs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1/01/08 1/31/08
|
|
0
|
|
|
$
|
0
|
|
0
|
|
|
$
|
46,206,993
|
|
|
2/01/08 2/28/08
|
|
0
|
|
|
$
|
0
|
|
0
|
|
|
$
|
46,206,993
|
|
|
3/01/08 3/31/08
|
|
2,600,000
|
|
|
$
|
17.00
|
|
2,600,000
|
|
|
$
|
2,006,993
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
2,600,000
|
|
|
$
|
17.00
|
|
2,600,000
|
|
|
$
|
2,006,993
|
|
|
|
|
|
|
|
|
|
|
|
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5.
OTHER INFORMATION
None.
23
ITEM 6.
EXHIBITS
|
|
|
3.1
|
|
Certificate of Incorporation of Steven Madden, Ltd.
(incorporated by reference to Exhibit 1 to Steven Madden, Ltd.s Current
Report on Form 8-K , dated November 23, 1998, Securities and Exchange
Commission File Number 000-23702, Film Number 98757800).
|
|
|
|
3.2
|
|
Amended & Restated By-Laws of Steven Madden,
Ltd. (incorporated by reference to Exhibit 99.1 to Steven Madden, Ltd.s
Current Report on Form 8-K, dated March 28, 2008).
|
|
|
|
4.1
|
|
Specimen Certificate for shares of Common Stock
(incorporated by reference to Exhibit 4.01 to Steven Madden, Ltd.s Registration
Statement on Form SB-2/A, dated September 29, 1993).
|
|
|
|
4.2
|
|
Rights Agreement between Steven Madden, Ltd. and
American Stock Transfer and Trust Company (incorporated by reference to
Exhibit 4.1 to Steven Madden, Ltd.s Current Report on Form 8-K dated
November 16, 2001, SEC File Number 000-23702, Film Number 1794721).
|
|
|
|
10.1
|
|
Employment Agreement, entered into on April 7, 2008,
but effective as of March 24, 2008, by and between Steven Madden, Ltd. and
Edward Rosenfeld (incorporated by reference to Exhibit 10.1 to Steven
Madden, Ltd.s Current Report on Form 8-K, dated April 11, 2008).
|
|
|
|
10.2
|
|
Letter Agreement, entered into on March 27, 2008,
but effective as of March 24, 2008, by and between Steven Madden, Ltd. and
Walter Yetnikoff.
|
|
|
|
31.1
|
|
Certification of Chief Executive Officer pursuant to
Rule 13a-14 or 15d-14 of the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
31.2
|
|
Certification of Chief Financial Officer pursuant to
Rule 13a-14 or 15d-14 of the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
32.1
|
|
Certification of Chief Executive Officer pursuant to
18 U.S.C. Section 1350 Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
|
|
|
|
32.2
|
|
Certification of Chief Financial Officer pursuant to
18 U.S.C. Section 1350 Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
|
24
Pursuant to the requirements of the Securities
Exchange Act of 1934, the Registrant has duly caused this report on Form 10-Q
to be signed on its behalf by the undersigned thereunto duly authorized.
DATE: May 12, 2008
|
|
|
|
STEVEN MADDEN, LTD.
|
|
|
|
|
|
/s/ EDWARD R. ROSENFELD
|
|
|
|
|
|
Edward R. Rosenfeld
|
|
|
Chief Executive Officer
|
|
|
|
|
|
/s/ ARVIND DHARIA
|
|
|
|
|
|
Arvind Dharia
|
|
|
Chief Financial Officer
|
|
25
|
|
|
Exhibit No.
|
|
Description
|
|
|
|
|
|
|
3.1
|
|
Certificate of Incorporation of Steven Madden, Ltd.
(incorporated by reference to Exhibit 1 to Steven Madden, Ltd.s Current
Report on Form 8-K, dated November 23, 1998, Securities and Exchange
Commission File Number 000-23702, Film Number 98757800).
|
|
|
|
3.2
|
|
Amended & Restated By-Laws of Steven Madden,
Ltd. (incorporated by reference to Exhibit 99.1 to Steven Madden, Ltd.s
Current Report on Form 8-K, dated March 28, 2008).
|
|
|
|
4.1
|
|
Specimen Certificate for shares of Common Stock
(incorporated by reference to Exhibit 4.01 to Steven Madden, Ltd.s
Registration Statement on Form SB-2/A, dated September 29, 1993).
|
|
|
|
4.2
|
|
Rights Agreement between Steven Madden, Ltd. and
American Stock Transfer and Trust Company (incorporated by reference to
Exhibit 4.1 to Steven Madden, Ltd.s Current Report on Form 8-K dated
November 16, 2001, SEC File Number 000-23702, Film Number 1794721).
|
|
|
|
10.1
|
|
Employment Agreement, entered into on April 7, 2008,
but effective as of March 24, 2008, by and between Steven Madden, Ltd. and
Edward Rosenfeld (incorporated by reference to Exhibit 10.1 to Steven
Madden, Ltd.s Current Report on Form 8-K, dated April 11, 2008).
|
|
|
|
10.2
|
|
Letter Agreement, entered into on March 27, 2008,
but effective as of March 24, 2008, by and between Steven Madden, Ltd. and
Walter Yetnikoff.
|
|
|
|
31.1
|
|
Certification of Chief Executive Officer pursuant to
Rule 13a-14 or 15d-14 of the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
31.2
|
|
Certification of Chief Financial Officer pursuant to
Rule 13a-14 or 15d-14 of the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
32.1
|
|
Certification of Chief Executive Officer pursuant to
18 U.S.C. Section 1350 Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
|
|
|
|
32.2
|
|
Certification of Chief Financial Officer pursuant to
18 U.S.C. Section 1350 Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
|
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