1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------- FORM 10-Q Quarterly Report Pursuant To Section 13 or 15 (d) of the Securities Exchange Act of 1934 -------------------- For the Period Ended December 31, 1999 Commission File Number 0-18927 TANDY BRANDS ACCESSORIES, INC. (Exact name of registrant as specified in its charter) Delaware 75-2349915 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 690 East Lamar Boulevard, Suite 200, Arlington, TX 76011 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (817)-548-0090 Former name, former address and former fiscal year, if changed since last report: Not Applicable 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 the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date. Class Number of shares outstanding at December 31, 1999 Common stock, $1 par value 5,800,572 ================================================================================ 2 TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES Form 10-Q Quarter Ended December 31, 1999 TABLE OF CONTENTS PART I -- FINANCIAL INFORMATION Item Page No. - ---- -------- 1. Financial Statements 3 - 9 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 - 13 3. Qualitative and Quantitative Disclosures About Market Risk 14 PART II -- OTHER INFORMATION Item 4. Submission of Matter to a Vote of Security Holders 14 6. Exhibits and Reports on Form 8-K 15 SIGNATURES 16 INDEX TO EXHIBITS 17 2 3 TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES File Number 0-18927 Form 10-Q Condensed Consolidated Statements of Income (In thousands, except per share amounts) (Unaudited) Three Months Six Months Ended Ended December 31 December 31 ------------------------ ------------------------ 1999 1998 1999 1998 ---------- ---------- ---------- ---------- Net sales $ 57,566 $ 54,122 $ 110,822 $ 98,403 Cost of goods sold 35,901 34,053 70,273 61,854 ---------- ---------- ---------- ---------- Gross margin 21,665 20,069 40,549 36,549 Selling, general and administrative expenses 12,920 12,401 25,587 23,514 Depreciation and amortization 866 807 1,699 1,554 ---------- ---------- ---------- ---------- Total operating expenses 13,786 13,208 27,286 25,068 ---------- ---------- ---------- ---------- Operating income 7,879 6,861 13,263 11,481 Interest expense (922) (843) (1,815) (1,588) Royalty income and early termination of license agreement 1,043 24 1,074 44 ---------- ---------- ---------- ---------- Income before provision for income taxes 8,000 6,042 12,522 9,937 Provision for income taxes 3,107 2,364 4,861 3,875 ---------- ---------- ---------- ---------- Net income $ 4,893 $ 3,678 $ 7,661 $ 6,062 ========== ========== ========== ========== Earnings per common share $ 0.84 $ 0.64 $ 1.32 $ 1.07 ========== ========== ========== ========== Earnings per common share - assuming dilution $ 0.83 $ 0.63 $ 1.30 $ 1.05 ========== ========== ========== ========== Common shares outstanding 5,802 5,714 5,799 5,692 ========== ========== ========== ========== Common shares outstanding - assuming dilution 5,868 5,795 5,871 5,782 ========== ========== ========== ========== Cash dividends per common share None None None None The accompanying notes are an integral part of these condensed financial statements. 3 4 TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES File Number 0-18927 Form 10-Q Condensed Consolidated Balance Sheets (Dollars in thousands) December 31, June 30, 1999 1999 ------------ ------------ ASSETS (Unaudited) Current assets: Cash and cash equivalents $ 1,423 $ 180 Accounts receivable, net 41,556 33,514 Inventories: Raw materials and work in process 5,306 6,879 Finished goods 49,039 48,680 Other current assets 2,742 1,823 ------------ ------------ Total current assets 100,066 91,076 ------------ ------------ Property and equipment, at cost 17,975 17,187 Accumulated depreciation (7,276) (6,722) ------------ ------------ Net property and equipment 10,699 10,465 ------------ ------------ Other assets: Goodwill, less amortization 11,652 10,373 Other assets, less amortization 7,975 8,224 ------------ ------------ Total other assets 19,627 18,597 ------------ ------------ TOTAL ASSETS $ 130,392 $ 120,138 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 3,759 $ 5,835 Accrued expenses 8,557 4,394 ------------ ------------ Total current liabilities 12,316 10,229 ------------ ------------ Other liabilities: Notes payable 47,825 47,425 Other noncurrent liabilities 356 292 ------------ ------------ Total other liabilities 48,181 47,717 ------------ ------------ Stockholders' equity: Preferred stock, $1 par value, 1,000,000 shares authorized, none issued -- -- Common stock, $1 par value, 10,000,000 shares authorized, 5,800,572 shares and 5,761,952 shares issued and outstanding as of December 31, 1999, and June 30, 1999, respectively 5,801 5,762 Additional paid-in capital 22,398 21,900 Cumulative other comprehensive income (308) (381) Retained earnings 42,572 34,911 Treasury stock, at cost (568) -- ------------ ------------ Total stockholders' equity 69,895 62,192 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 130,392 $ 120,138 ============ ============ The accompanying notes are an integral part of these condensed financial statements. 4 5 TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES File Number 0-18927 Form 10-Q Condensed Consolidated Statements of Cash Flows (Dollars in thousands) (Unaudited) Six Months Ended December 31, ------------------------ 1999 1998 ---------- ---------- Cash flows from operating activities: Net income $ 7,661 $ 6,062 Adjustments to reconcile net income to net cash provided by (used for) operating activities: Depreciation 941 857 Amortization 821 765 Other 49 (112) Change in assets and liabilities: Accounts receivable (7,211) (9,310) Inventories 2,190 (6,029) Other assets (950) (374) Accounts payable (2,076) (1,126) Accrued expenses 4,007 (336) ---------- ---------- Net cash provided by (used for) operating activities 5,432 (9,603) ---------- ---------- Cash flows from investing activities: Purchases of property and equipment (997) (2,059) Purchase of Frank Spielberg, LLC (3,561) 0 ---------- ---------- Net cash used for investing activities (4,558) (2,059) ---------- ---------- Cash flows from financing activities: Exercise of employee stock options 37 171 Sale of stock to stock purchase program 791 871 Purchase of treasury stock (859) 0 Proceeds from borrowings 51,395 40,942 Payments under borrowings (50,995) (29,892) ---------- ---------- Net cash provided by financing activities 369 12,092 ---------- ---------- Net increase in cash and cash equivalents 1,243 430 Cash and cash equivalents at beginning of period 180 283 ---------- ---------- Cash and cash equivalents at end of period $ 1,423 $ 713 ========== ========== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 1,460 $ 1,139 Income taxes 2,530 2,113 The accompanying notes are an integral part of these condensed financial statements. 5 6 TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES Notes to Condensed Financial Statements (Unaudited) Note 1 - Accounting Principles. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six month periods ended December 31, 1999, are not necessarily indicative of the results that may be expected for the year ended June 30, 2000. For further information, refer to the consolidated financial statements and footnotes thereto included in the Tandy Brands Accessories, Inc. and Subsidiaries Annual Report on Form 10-K for the year ended June 30, 1999. Note 2 - Acquisitions On July 16, 1999, the Company purchased certain assets of Frank Spielberg Sales LLC ("Spielberg"), a handbag designer and marketer based in St. Louis, Missouri, for approximately $3.6 million. The cash purchase price was provided by drawing on existing bank lines. Spielberg supplies proprietary design, marketing and sourcing expertise for handbags under department store private labels and direct sales to retailers. Spielberg will continue to operate from its St. Louis, New York City and Hong Kong offices. The acquisition was accounted for under the purchase method of accounting and the resultant goodwill of approximately $1,675,000 is amortized over 20 years. The pro-forma effects of this acquisition are not material. Note 3 - Comprehensive Income. The components of comprehensive income, net of related tax, for the three and six months ended December 31, 1999 and 1998 are as follows (in thousands): Three Months Six Months Ended Ended December 31 December 31 ----------------------- ----------------------- 1999 1998 1999 1998 ---------- ---------- ---------- ---------- Net income $ 4,893 $ 3,678 $ 7,661 $ 6,062 Foreign currency translation adjustments 51 (19) 73 (207) ---------- ---------- ---------- ---------- Comprehensive income $ 4,944 $ 3,659 $ 7,734 $ 5,855 ========== ========== ========== ========== 6 7 TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES Notes to Condensed Financial Statements (Unaudited) Note 4 - Earnings Per Share. The following sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts): Three Months Six Months Ended Ended December 31 December 31 ----------------------- ----------------------- 1999 1998 1999 1998 ---------- ---------- ---------- ---------- Numerator for basic and diluted earnings per share: Net income $ 4,893 $ 3,678 $ 7,661 $ 6,062 ========== ========== ========== ========== Denominator: Weighted average shares outstanding 5,784 5,700 5,782 5,675 Contingently issuable shares 18 14 17 17 ---------- ---------- ---------- ---------- Denominator for basic earnings per share - weighted average shares 5,802 5,714 5,799 5,692 Effect of dilutive securities: Employee stock options 56 69 61 77 Director stock options 10 12 11 13 ---------- ---------- ---------- ---------- Dilutive potential common shares 66 81 72 90 Denominator for diluted earnings per share - adjusted weighted - average shares 5,868 5,795 5,871 5,782 ========== ========== ========== ========== Basic earnings per share $ 0.84 $ 0.64 $ 1.32 $ 1.07 ========== ========== ========== ========== Diluted earnings per share $ 0.83 $ 0.63 $ 1.30 $ 1.05 ========== ========== ========== ========== 7 8 TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES Notes to Condensed Financial Statements (Unaudited) Note 5 - Disclosures about Segments of an Enterprise and Related Information. The Company sells its products to a variety of retail outlets, including national chain stores, discount stores, major department stores, specialty stores, catalog retailers and the retail exchange operations of the United States military. The Company and its corresponding customer relationships are organized along Men's and Women's product lines. As a result, the Company has two reportable segments: (1) Men's Accessories consisting of belts, wallets, suspenders, neckwear and other small leather goods and (2) Women's Accessories consisting of belts, wallets, handbags, socks, scarves, hats and hair accessories. General corporate expenses are allocated to each segment based on the respective segment's asset base. Depreciation and amortization expense related to assets recorded on the Company's corporate accounting records are allocated to each segment as described above. Management measures profit or loss on each segment based upon income or loss before taxes utilizing the accounting policies consistent in all material respects with those described in Note 1 of the Company's 1999 Annual Report. No intersegment revenue is recorded. Information regarding operations and assets by segment are as follows (in thousands): Three Months Ended Six Months Ended December 31, December 31, ------------------------ ------------------------ 1999 1998 1999 1998 ---------- ---------- ---------- ---------- Revenue from external customers: Men's accessories $ 33,976 $ 34,010 $ 62,060 $ 59,153 Women's accessories 23,590 20,112 48,762 39,250 ---------- ---------- ---------- ---------- $ 57,566 $ 54,122 $ 110,822 $ 98,403 ========== ========== ========== ========== Operating income (loss) (1): Men's accessories 6,014 5,105 9,169 7,923 Women's accessories 1,865 1,756 4,094 3,558 ---------- ---------- ---------- ---------- $ 7,879 $ 6,861 $ 13,263 $ 11,481 ========== ========== ========== ========== Interest expense 922 843 1,815 1,588 Other (income) expense (2) (1,043) (24) (1,074) (44) ---------- ---------- ---------- ---------- Income before income taxes $ 8,000 $ 6,042 $ 12,522 $ 9,937 ========== ========== ========== ========== Depreciation and amortization expense: Men's accessories $ 570 $ 585 $ 1,123 $ 1,126 Women's accessories 296 222 576 428 ---------- ---------- ---------- ---------- $ 866 $ 807 $ 1,699 $ 1,554 ========== ========== ========== ========== Capital expenditures: Men's accessories $ 12 $ 738 $ 42 $ 936 Women's accessories 248 59 261 160 Corporate 427 629 915 963 ---------- ---------- ---------- ---------- $ 687 $ 1,426 $ 1,218 $ 2,059 ========== ========== ========== ========== (1) Operating income consists of net sales less cost of sales, specifically identifiable selling, general and administrative expenses. (2) Other (income) expense includes royalty income on corporate tradenames and the early termination of a license agreement (See Note 9.) not specifically identifiable to a segment. 8 9 TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES Notes to Condensed Financial Statements (Unaudited) Note 6 - Credit Arrangements On November 1, 1999, the Company amended its $45,000,000 unsecured line of credit with a bank expanding availability thereunder to $50,000,000. Of this amount, $25,000,000 is a committed facility which is comprised of a $15,000,000 term note and a $10,000,000 committed revolving credit facility both of which require the maintenance of certain financial covenants and the payment of a commitment fee of 1/4% on the unused balance. The $15,000,000 term note which expires on November 17, 2003, bears interest at LIBOR plus 1%. The $10,000,000 committed revolving credit facility which expires on May 18, 2001, bears interest at various rates with short-term durations. Principal payments on the term note and committed revolving credit facility are due on the expiration date. The $20,000,000 uncommitted facility thereunder was increased to $25,000,000. Each facility may be used for borrowings or letters of credit. The amendment increased the Company's total aggregate domestic bank credit lines to $90,000,000. Note 7 - Stock Repurchase Program On October 20, 1999, the Company's Board of Directors approved a plan to repurchase, from time to time in the open market or through negotiated transactions, shares of the Company's common stock at an aggregate purchase price of up to $2,000,000 (the "Repurchase Program"). Any open market purchases will be at prevailing market prices. The timing of any repurchases will depend on market conditions, market price, and management's assessment of the Company's liquidity and cash flow needs. Any repurchased shares will be added to the Company's treasury shares and may be used for the Company's stock plans and other corporate purposes. The funds required for the repurchases will be provided from the Company's current cash balances, operating cash flow, or the Company's credit facility. During the three months ended December 31, 1999, the Company repurchased 62,300 shares of treasury stock under the Repurchase Program at a cost of approximately $859,000. During the three months ended December 31, 1999, 21,079 shares of treasury stock were reissued to the Company's employee stock purchase program. Note 8 - Stockholder Rights Plan On November 2, 1999, the Company's Board of Directors renewed the Company's stockholder rights plan designed to protect its stockholders from unsolicited, coercive takeover proposals. A new amended and restated plan was adopted in the normal course of updating and extending the predecessor stockholder rights plan, which was scheduled to expire on December 31, 2000, and not in response to any acquisition proposal. The expiration date of the rights plan was extended to October 19, 2009. The amended plan has been altered to reflect prevailing stockholder rights plan terms, such as lowering the share ownership level which triggers the exercise of the rights and eliminating the continuing director provision. The amended plan provides for an increase in the exercise price of the rights under the plan from $36.00 to $70.00. In connection with the announcement, the Company filed the amended and restated plan on Form 8-K with the Securities and Exchange Commission on November 2, 1999. Note 9 - Termination of License Agreement On November 9, 1999, the Company and JONES APPAREL GROUP agreed to amend their existing licensing agreement. Under the amended agreement Tandy Brands Accessories will continue to design and market men's belts and personal leather goods as well as women's small leather goods under various JONES NEW YORK(R) brands, but will no longer design and market women's handbags under any JONES NEW YORK(R) brands. As compensation for the early termination of women's handbag license rights, Jones Apparel Group will paid the Company $1.5 million in cash, of which a portion will be used to wind down functions related to the license arrangements. Consequently, the results for the three and six month periods ended December 31, 1999 include a one-time benefit, net of related costs of $1.0 million from the termination of this licensing agreement. 9 10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES GENERAL Tandy Brands Accessories, Inc. ("the Company") is a leading designer, manufacturer and marketer of branded men's, women's and children's accessories, including belts and small leather goods such as wallets. The Company's product line also includes handbags, socks, scarves, hats, hair accessories, suspenders and neckwear. Tandy Brands' merchandise is marketed under a broad portfolio of nationally recognized licensed and proprietary brand names, including Jones New York(R), Florsheim(R), Rolfs(R), Haggar(R), Bugle Boy(R), Canterbury(R), Prince Gardner(R), Princess Gardner(R), Amity(R), Accessory Design Group(R) and Tiger(R), as well as private brands for major retail customers. The Company sells its products through all major retail distribution channels throughout the United States and Canada, including mass merchants, national chain stores, department stores, men's and women's specialty stores, golf pro shops and catalogs. On October 20, 1999, the Company announced the successful launch of a branded e-commerce web site that is available now at http://stores.yahoo.com/rolfs. Capturing strong consumer demand for this premier brand, the site will feature a full line of personal leather goods, belts, and other accessories in an easy to navigate and shop environment. The site was developed in coordination with Yahoo! Inc. Yahoo! Inc. is a global Internet media company, and represents the first test of a direct-to-consumer presence for the Company. On October 20, 1999, the Company also announced that the Board of Directors elected Colombe M. Nicholas, to the Board. Ms. Nicholas replaces Robert E. Runice, who retired from the Board. Ms. Nicholas' business experience spans more than 25 years, including her most recent post as President and Chief Executive Officer of Anne Klein Company. Prior to her tenure with Anne Klein, Ms. Nicholas was President and Chief Operating Officer of Giorgio Armani Fashion Corp., a subsidiary of G.F.T., and President and Chief Executive Officer of Christian Dior. Ms. Nicholas also serves on the Board of Directors of Ashford.com, a Internet retailer of luxury and premium products. She holds a J.D. from the University of Chicago College of Law, a B.A. from the University of Dayton, and was awarded an Honorary Doctorate in business from Bryant College of Rhode Island for her accomplishments as a business leader. 10 11 RESULTS OF OPERATIONS Sales and gross margin data from the Company's segments for the three and six months ended fiscal 2000 compared to the same periods last year were as follows (in thousands): Three Months Ended Six Months Ended December 31, December 31, ------------------------ ------------------------ 1999 1998 1999 1998 ---------- ---------- ---------- ---------- Net sales: Men's accessories $ 33,976 $ 34,010 $ 62,060 $ 59,153 Women's accessories 23,590 20,112 48,762 39,250 ---------- ---------- ---------- ---------- Total net sales $ 57,566 $ 54,122 $ 110,822 $ 98,403 ========== ========== ========== ========== Gross margin: Men's accessories $ 13,945 $ 13,330 $ 24,677 $ 23,365 Women's accessories 7,720 6,739 15,872 13,184 ---------- ---------- ---------- ---------- Total gross margin $ 21,665 $ 20,069 $ 40,549 $ 36,549 ========== ========== ========== ========== Gross margin as a percentage of sales: Men's accessories 41.0% 39.2% 39.8% 39.5% Women's accessories 32.7% 33.5% 32.5% 33.6% Total 37.6% 37.1% 36.6% 37.1% THREE AND SIX MONTHS ENDED DECEMBER 31, 1999 COMPARED TO THE THREE AND SIX MONTHS ENDED DECEMBER 31, 1998 NET SALES For the three month period ended December 31, 1999, net sales increased 6.4% to $57,566,000 as compared to net sales of $54,122,000 for the same period last year. The overall sales increase was attributable to increased women's accessories sales. The sales from the purchase of assets of Frank Spielberg Sales, LLC accounted for 61% of the women's accessories sales increase with the remaining increase attributable to the Company's existing women's product lines. The decrease in men's accessories sales for the three months ended December 31, 1999 was due to the timing of initial shipments of Amity/Rolfs men's small leather goods to certain mass merchants that occurred in the same period last year. For the six month period ended December 31, 1999, net sales increased 12.6% to $110,822,000 as compared to net sales of $98,403,000 for the same period last year. The sales increases were attributable to higher sales volume in men's small leather goods and handbag sales sold to various mass merchants. GROSS MARGINS Gross margins for the three-month period ended December 31, 1999 increased $1,596,000, or 8.0% as compared to the same period for the prior year. As a percentage of sales, men's gross margin increased 1.8% due to a higher sales mix of department store and specialty retail sales compared to the prior year and the first quarter of fiscal 2000. The women's gross margin percentage decreased .8% and 1.1%, respectively for the three and six month periods ended December 31, 1999 as compared to the same periods last year. The decrease is the result of the higher mass merchant sales as compared to the same periods in the prior year. 11 12 OPERATING EXPENSES Selling, general and administrative expenses as a percentage of net sales for the three and six months ended December 31, 1999 decreased .5% and .8%, respectively as compared to the same periods in the prior year. A portion of the decrease resulted from a larger mix of mass merchant product sales, which, on a percentage of sales basis, incur lower variable selling expenses than department store product sales as well as volume efficiencies from increased sales. Depreciation and amortization expenses increased $59,000 and $145,000 for the three and six months ended December 31, 1999, respectively, compared to the same periods in the prior year. The increase is attributable to capital expenditures related to the Company's management information and distribution software systems installed during fiscal 1999 and the amortization of goodwill recorded in connection with the Spielberg acquisition. Interest expense for the three and six month periods ended December 31, 1999 increased $79,000 and $227,000, respectively as compared to the same periods in the prior year. The increase is primarily related to higher debt levels as a result of higher sales levels and inventory requirements. The effective tax rate for the six months ended December 31, 1999 was 38.8% which is consistent with the same period in the prior year. Net income for the three-month period ended December 31,1999 increased 33% to $4,893,000, or $0.83 per diluted share, compared to net income of $3,678,000, or $0.63 per diluted share for the same period in the prior year. On November 2, 1999, the company negotiated an early termination of its handbag licensing agreement with Jones New York. (See Note 9.) Both the three and six month results include a one time benefit, including related costs, of $1,000,000 from the termination of this licensing agreement. Excluding the net benefit of the early license termination, net income for the three-month period ended December 31,1999 increased 16.4% to $4,281,000, or $0.73 per diluted share from the same period last year. Net income for the six months ended December 31, 1999 increased 26.4% to $7,661,000, or $1.30 per diluted share, compared to net income of $6,062,000, or $1.05 per diluted share, for the same period in the prior year. Excluding the net benefit of the early license termination, net income for the six months increased 16.3% to $7,049,000, or $1.20 per diluted share from the same period in the prior year. LIQUIDITY AND CAPITAL RESOURCES Generally, the Company's primary sources of liquidity are cash flows from operations and the Company's lines of credit. The Company has two unsecured domestic bank credit lines aggregating $90,000,000, which can be used for seasonal borrowings and letters of credit. The Company's borrowings under its credit lines were $47,825,000 and $53,650,000 as of December 31, 1999 and 1998, respectively. The decrease in borrowings under these lines of credit is consistent with the Company's increased sales. See Note 6 for a discussion of certain amendments to these credit lines. For the six months ended December 31, 1999, the Company's operating activities provided cash of $5,432,000 compared to a use of cash of $9,603,000 for the same period last year. The increase was attributable to timing of cash receipt collections related to increased sales and estimated tax payments during the six months ended December 31, 1999. Capital expenditures were $997,000 for the six months ended December 31, 1999. The decrease of $1,062,000 over the same prior year period is due to the timing of capital investments during fiscal 2000. Management anticipates that the Company's level of capital investment for fiscal 2000 will approximate the prior year. Capital commitments for fiscal 2000 include leasehold improvements for a new distribution facility in Dallas, Texas, for women's accessories as well as additional hardware and software applications. See Note 2 for a discussion of the purchase of Frank Spielberg, LLC. 12 13 The Company has never paid a cash dividend on its Common Stock. The Company currently intends to retain its earnings for the foreseeable future to provide funds for the expansion of its business. The Company's existing credit agreements currently contain covenants related to the maintenance of certain financial ratios, which could impose certain limitations on the payment of dividends. See Note 7 for a discussion of the Company's stock repurchase program. The Company believes it has adequate financial resources and access to sufficient credit facilities to satisfy its future working capital needs. SEASONALITY The Company's quarterly sales and net income results are fairly consistent throughout the fiscal year, with a seasonal increase during the second quarter. INFLATION Although the Company's operations are affected by general economic trends, the Company does not believe that inflation has had a material effect on the results of operations. FORWARD-LOOKING STATEMENTS This Management's Discussion and Analysis of financial condition and results of operations and other sections of this Form 10-Q contain forward looking statements that are based on current expectations, estimates and projections about the industry in which the Company operates, management's beliefs and assumptions made by management. In addition, other written or oral statements which constitute forward-looking statements may be made by or on behalf of the Company. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," or variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. The Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. 13 14 TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES ITEM 3. Qualitative and Quantitative Disclosures About Market Risk The Company is subject to interest rate risk on its long term debt. The Company manages its exposure to changes in interest rates by the use of variable and fixed interest rate debt. In addition the Company has hedged its exposure to changes in interest rates on a portion of its variable debt by entering into a interest rate swap agreement to lock in a fixed interest rate for a portion of these borrowings. At December 31, 1999 the Company had borrowings under its credit lines of $47,825,000 bearing a weighted-average interest rate of 6.37%. In fiscal 1999, the Company entered into a five-year interest rate swap agreement converting $15,000,000 of outstanding indebtedness from a variable to a fixed interest rate. The average receive rate is based on a 90 day LIBOR rate. At December 31, 1999, the receive and pay rates related to the interest rate swap were 7.07% and 6.52%, respectively. The potential impact of market conditions on the fair value of the Company's indebtedness is not expected to be material. PART II - OTHER INFORMATION ITEM 4. Submission of Matter to a Vote of Security Holders. (a) The annual meeting of stockholders was held on October 19, 1999. (b) The matters voted upon were as follows: (i) The election of two directors in Class III to serve for three-year terms expiring in 2002, or until their successors are elected and qualified. The number of votes cast for and against the election of each nominee, as well as the number of abstentions and broker non-votes with respect to the election of each nominee were as follows: Mr. J.S.B. Jenkins For 5,148,239 Against/Withheld 16,173 Abstain -0- Broker Non-votes -0- Mr. Marvin J. Girouard For 5,086,676 Against/Withheld 77,736 Abstain -0- Broker Non-votes -0- Directors whose terms continued after the annual meeting are as follows: Dr. James F. Gaertner Mr. C. A. Rundell, Jr. Ms. Maxine K. Clark Mr. Gene Stallings Mr. Robert E. Runice retired upon conclusion of the annual meeting. ii) The approval of the amendment to the Tandy Brands Accessories, Inc. Nonqualified Formula Stock Option Plan for Non-Employee Directors. The number of votes cast for and against the election of each nominee, as well as the number of abstentions and broker non-votes with respect to the election of each nominee were as follows: For 3,621,805 Against/Withheld 233,867 Abstain 20,311 Broker Non-votes 1,288,429 iii) The approval of the amendment to the Tandy Brands Accessories, Inc. 1997 Employee Stock Option Plan. The number of votes cast for and against the election of each nominee, as well as the number of abstentions and broker non-votes with respect to the election of each nominee were as follows: For 3,069,688 Against/Withheld 793,979 Abstain 12,316 Broker Non-votes 1,288,429 14 15 TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES ITEM 6. Exhibits and Reports on Form 8-K. The Company filed a report on Form 8-K during the quarter ended December 31, 1999 as listed below. The exhibits filed as a part of this report are listed below. (a) The following documents are filed as part of this report: Exhibit No. Description 27.1 Financial Data Schedule (b) Reports on Form 8-K. The Company filed a Form 8-K on November 2, 1999 regarding the Amended and Restated Rights Agreement dated October 19, 1999, between the Registrant and Bank Boston, N.A. , as rights agent, including Form of Certificate of Designation for the Preferred Stock, Form of Rights Certificate and the Summary of Rights to purchase Preferred Stock. 15 16 TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES SIGNATURES Pursuant to the requirements 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. TANDY BRANDS ACCESSORIES, INC. (Registrant) /s/ J.S.B. Jenkins ---------------------------------------------- J.S.B. Jenkins President and Chief Executive Officer /s/ Stanley T. Ninemire ---------------------------------------------- Stanley T. Ninemire Senior Vice President, Chief Financial Officer and Treasurer Date: February 10, 2000 16 17 TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES EXHIBIT INDEX Incorporated by Reference (If applicable) ------------------------------------------------------- Exhibit Number and Description Form Date File No. Exhibit - ------------------------------ --------- ------------- ----------- ---------- (4) Instruments defining the rights of security holders, including indentures 4.1 Certificate of Designations, Powers, Preferences and Rights of Series A Junior Participating Cumulative Preferred Stock of Tandy Brands Accessories, Inc. S-1 11/02/90 33-37588 4.1 4.2 Form of Common Stock Certificate of Tandy Brands Accessories, Inc. S-1 11/02/90 33-37588 4.2 4.5 Form of Rights Certificate of Tandy Brands Accessories, Inc. 8-K 11/02/99 0-18927 4.0 4.6 Amended and Restated Rights Agreement dated October 19, 1999, Between Tandy Brands Accessories, Inc. and Bank Boston, N.A. 8-K 11/02/99 0-18927 4.0 (27) Financial Data Schedule 27.1 Financial Data Schedule N/A N/A N/A N/A 17