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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
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For the Period Ended March 31, 2002 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 March 31, 2002
Common stock, $1 par value 5,882,926
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TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 2002
================================================================================
TABLE OF CONTENTS
PART I -- FINANCIAL INFORMATION
<Table>
<Caption>
Item Page No.
- ---- --------
1. Financial Statements 3 - 10
2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11 - 14
3. Qualitative and Quantitative Disclosures About Market Risk 15
PART II -- OTHER INFORMATION
Item
- ----
6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
INDEX TO EXHIBITS 18 - 19
</Table>
2
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)
<Table>
<Caption>
Three Months Nine Months
Ended Ended
March 31 March 31
--------------------------- ---------------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Net sales $ 46,629 $ 41,540 $ 161,342 $ 151,232
Cost of goods sold 30,354 27,575 104,818 99,430
--------- --------- --------- ---------
Gross margin 16,275 13,965 56,524 51,802
Selling, general and administrative expenses 13,304 11,202 40,417 36,636
Depreciation and amortization 1,295 1,379 4,017 3,831
--------- --------- --------- ---------
Total operating expenses 14,599 12,581 44,434 40,467
--------- --------- --------- ---------
Operating income 1,676 1,384 12,090 11,335
Interest expense (720) (779) (2,355) (2,800)
Royalty income and early termination of
license agreement 28 28 40 62
--------- --------- --------- ---------
Income before provision for income taxes 984 633 9,775 8,597
Provision for income taxes 386 245 3,804 3,326
--------- --------- --------- ---------
Net income $ 598 $ 388 $ 5,971 $ 5,271
========= ========= ========= =========
Earnings per common share $ 0.10 $ 0.07 $ 1.04 $ 0.94
========= ========= ========= =========
Earnings per common share - assuming dilution $ 0.10 $ 0.07 $ 1.03 $ 0.94
========= ========= ========= =========
Common shares outstanding 5,800 5,571 5,760 5,587
========= ========= ========= =========
Common shares outstanding - assuming dilution 5,853 5,572 5,790 5,594
========= ========= ========= =========
Cash dividends per common share None None None None
</Table>
The accompanying notes are an integral part of these
condensed financial statements.
3
TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES
FILE NUMBER 0-18927
FORM 10-Q
===============================================================================
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<Table>
<Caption>
March 31, June 30,
2002 2001
--------- ---------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 1,067 $ 79
Accounts receivable, net 35,263 34,459
Inventories:
Raw materials and work in process 5,583 5,077
Finished goods 48,125 57,258
Other current assets 4,097 3,829
--------- ---------
Total current assets 94,135 100,702
--------- ---------
Property and equipment, at cost 27,568 26,451
Accumulated depreciation (13,970) (11,963)
--------- ---------
Net property and equipment 13,598 14,488
--------- ---------
Other assets:
Goodwill, less amortization 12,505 13,215
Other assets, less amortization 8,188 8,579
--------- ---------
Total other assets 20,693 21,794
--------- ---------
$ 128,426 $ 136,984
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,920 $ 9,408
Accrued expenses 7,937 4,911
--------- ---------
Total current liabilities 11,857 14,319
--------- ---------
Other liabilities:
Notes payable 34,287 47,400
Other noncurrent liabilities 2,321 1,130
--------- ---------
Total other liabilities 36,608 48,530
--------- ---------
Stockholders' equity:
Preferred stock, $1 par value, 1,000,000 shares authorized, none issued -- --
Common stock, $1 par value, 10,000,000 shares authorized,
5,882,926 shares issued and outstanding as of March 31, 2002
and June 30, 2001. 5,883 5,883
Additional paid-in capital 22,463 22,572
Cumulative other comprehensive income (1,726) (670)
Retained earnings 53,971 48,000
Treasury stock, at cost (630) (1,650)
--------- ---------
Total stockholders' equity 79,961 74,135
--------- ---------
$ 128,426 $ 136,984
========= =========
</Table>
The accompanying notes are an integral part of these
condensed financial statements.
4
TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES
FILE NUMBER 0-18927
FORM 10-Q
===============================================================================
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<Table>
<Caption>
Nine Months Ended
March 31,
----------------------------
2002 2001
------------ ------------
Cash flows from operating activities:
Net income $ 5,971 $ 5,271
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Depreciation 2,969 2,859
Amortization 1,149 1,065
Other (562) (424)
Change in assets and liabilities:
Accounts receivable (804) (1,957)
Inventories 8,627 (5,065)
Other assets (580) (1,664)
Accounts payable (5,488) (1,990)
Accrued expenses 3,026 943
------------ ------------
Net cash provided by (used for) operating activities 14,308 (962)
------------ ------------
Cash flows from investing activities:
Purchases of property and equipment (1,117) (3,005)
Purchase of Stagg Industries, Inc. -- (2,750)
------------ ------------
Net cash used for investing activities (1,117) (5,755)
------------ ------------
Cash flows from financing activities:
Exercise of employee stock options -- 70
Sale of stock to stock purchase program 910 945
Purchase of treasury stock -- (1,584)
Proceeds from borrowings 61,006 67,995
Payments under borrowings (74,119) (61,025)
------------ ------------
Net cash provided by (used for) financing activities (12,203) 6,401
------------ ------------
Net increase (decrease) in cash and cash equivalents 988 (316)
Cash and cash equivalents at beginning of period 79 661
------------ ------------
Cash and cash equivalents at end of period $ 1,067 $ 345
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 2,086 $ 2,575
Income taxes 2,472 3,027
</Table>
The accompanying notes are an integral part of these
condensed financial statements.
5
TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES
===============================================================================
NOTES TO CONDENSED CONSOLIDATED 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 nine month periods ended
March 31, 2002, are not necessarily indicative of the results that may be
expected for the year ended June 30, 2002. 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, 2001.
Certain prior year amounts have been reclassified to conform to the fiscal 2002
presentation.
NOTE 2 - IMPACT OF NEW ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, "Business Combinations," and No. 142,
"Goodwill and Other Intangible Assets," effective for fiscal years beginning
after December 15, 2001. Under the new rules, goodwill will no longer be
amortized but will be subject to annual impairment tests in accordance with the
Statements. Other intangible assets will continue to be amortized over their
useful lives. The Company will apply the new rules on accounting for goodwill
and other intangible assets beginning in the first quarter of fiscal 2003.
Application of the nonamortization provisions of the Statement is expected to
result in an increase in net income of approximately $625,000 ($0.11 per share)
per year. During fiscal 2003, the Company will perform the first of the required
impairment tests of goodwill and indefinite lived intangible assets as of July
1, 2002, and has not yet determined what the effect of these tests will be on
the earnings and financial position of the Company.
In April 2001, the Emerging Issues Task Force ("EITF") issued a consensus EITF
No. 00-25, "Vendor Income Statement Characterization of Consideration from a
Vendor to a Retailer." EITF No. 00-25 stipulates that consideration from a
vendor to a reseller of the vendor's products is presumed to be a reduction of
the selling prices of the vendor's products and, therefore, should be
characterized as a reduction of revenue when recognized in the vendor's income
statement. The Company adopted the EITF in the first quarter of fiscal 2002 and
the effects thereof were not material to the Company's consolidated financial
position or statements of income, stockholders' equity and cash flows.
6
TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES
===============================================================================
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3 - COMPREHENSIVE INCOME
The components of comprehensive income, net of related tax, for the
three and nine months ended March 31, 2002 and 2001 are as follows (in
thousands):
<Table>
<Caption>
Three Months Nine Months
Ended Ended
March 31, March 31,
---------------------- ----------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Net income $ 598 $ 388 $ 5,971 $ 5,271
Foreign currency translation adjustments (23) (213) (329) (318)
Cumulative effect of change in accounting
principle - fair value of interest rate swap -- -- -- 308
Change in fair value of interest rate swap 199 (228) (727) (463)
--------- --------- --------- ---------
Comprehensive income $ 774 $ (53) $ 4,915 $ 4,798
========= ========= ========= =========
</Table>
7
TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES
===============================================================================
NOTES TO CONDENSED CONSOLIDATED 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):
<Table>
<Caption>
Three Months Nine Months
Ended Ended
March 31, March 31,
--------------------- ---------------------
2002 2001 2002 2001
-------- -------- -------- --------
Numerator for basic and diluted earnings per
share:
Net income $ 598 $ 388 $ 5,971 $ 5,271
======== ======== ======== ========
Denominator:
Weighted average shares outstanding 5,785 5,557 5,746 5,573
Contingently issuable shares 15 14 14 14
-------- -------- -------- --------
Denominator for basic earnings per
share - weighted average shares 5,800 5,571 5,760 5,587
-------- -------- -------- --------
Effect of dilutive securities:
Employee stock options 47 1 27 6
Director stock options 6 -- 3 1
-------- -------- -------- --------
Dilutive potential common shares 53 1 30 7
Denominator for diluted earnings per
share - adjusted weighted - average
shares 5,853 5,572 5,790 5,594
======== ======== ======== ========
Basic earnings per share $ 0.10 $ 0.07 $ 1.04 $ 0.94
======== ======== ======== ========
Diluted earnings per share $ 0.10 $ 0.07 $ 1.03 $ 0.94
======== ======== ======== ========
</Table>
8
TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES
================================================================================
NOTES TO CONDENSED CONSOLIDATED 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 mass
merchants, national chain stores, major department stores, men's and women's
specialty stores, catalog retailers, grocery stores, drug stores, golf pro
shops, sporting goods stores 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 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 2001 Annual Report. No intersegment revenue is recorded.
Information regarding operations and assets by segment are as follows (in
thousands):
<Table>
<Caption>
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------------ ------------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Revenue from external customers:
Men's accessories $ 24,585 $ 24,667 $ 81,870 $ 84,488
Women's accessories 22,044 16,873 79,472 66,744
------------ ------------ ------------ ------------
$ 46,629 $ 41,540 $ 161,342 $ 151,232
============ ============ ============ ============
Operating income(1):
Men's accessories 1,043 2,528 6,482 10,216
Women's accessories 633 (1,144) 5,608 1,119
------------ ------------ ------------ ------------
$ 1,676 $ 1,384 $ 12,090 $ 11,335
============ ============ ============ ============
Interest expense (720) (779) (2,355) (2,800)
Other income(2) 28 28 40 62
------------ ------------ ------------ ------------
Income before income taxes $ 984 $ 633 $ 9,775 $ 8,597
============ ============ ============ ============
Depreciation and amortization expense:
Men's accessories $ 812 $ 865 $ 2,527 $ 2,349
Women's accessories 483 514 1,490 1,482
------------ ------------ ------------ ------------
$ 1,295 $ 1,379 $ 4,017 $ 3,831
============ ============ ============ ============
Capital expenditures:
Men's accessories $ -- $ 598 $ -- $ 746
Women's accessories 259 326 710 826
Corporate 305 1,212 407 2,033
------------ ------------ ------------ ------------
$ 564 $ 2,136 $ 1,117 $ 3,605
============ ============ ============ ============
</Table>
(1) Operating income consists of net sales less cost of sales and specifically
identifiable selling, general and administrative expenses.
(2) Other income includes royalty income on corporate tradenames and other
income not specifically identifiable to a segment.
9
TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES
===============================================================================
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 6 - SUBSEQUENT EVENT
On April 17, 2002, the Company acquired certain assets of AA&E Leathercraft,
Inc. ("AA&E") for approximately $992,000 in cash. The cash purchase price was
provided by drawing on the Company's existing credit facility. The assets
included, but were not limited to, wholesale accounts receivable, wholesale
inventory, certain machinery and equipment, and a 10,000 square foot building
located in Yoakum, Texas. AA&E is a manufacturer and distributor of leather
sporting goods accessories. The pro-forma effects of this acquisition are not
material.
10
TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES
===============================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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,
cold weather accessories and sporting goods accessories. The Company's
merchandise is marketed under a broad portfolio of nationally recognized
licensed and proprietary brand names, including DOCKERS(R), LEVI(R), JONES NEW
YORK(R), FLORSHEIM(R), PERRY ELLIS(R), ROLFS(R), HAGGAR(R), WOOLRICH(R),
JORDACHE(R), INDIAN MOTORCYCLE(R), CANTERBURY(R), PRINCE GARDNER(R), PRINCESS
GARDNER(R), AMITY(R), DON LOPER(R), ACCESSORY DESIGN GROUP(R), TEX TAN(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, catalogs, grocery, drug
stores, golf pro shops and sporting goods stores.
On March 4, 2002, the Company signed an exclusive licensing agreement with Levi
Strauss & Co. to produce women's small leather goods and women's belts under the
Levi's(R) name. The Company expects to begin shipping Levi's(R) products in July
of 2002.
See Note 6 to the condensed consolidated financial statements for a discussion
of certain subsequent events.
RESULTS OF OPERATIONS
Sales and gross margin data from the Company's segments for the three
and nine months ended fiscal 2002 compared to the same period last year were as
follows (in thousands):
<Table>
<Caption>
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------------ ------------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Net sales:
Men's accessories $ 24,585 $ 24,667 $ 81,870 $ 84,488
Women's accessories 22,044 16,873 79,472 66,744
------------ ------------ ------------ ------------
Total net sales $ 46,629 $ 41,540 $ 161,342 $ 151,232
============ ============ ============ ============
Gross margin:
Men's accessories $ 8,914 $ 9,479 $ 30,618 $ 32,433
Women's accessories 7,361 4,486 25,906 19,369
------------ ------------ ------------ ------------
Total gross margin $ 16,275 $ 13,965 $ 56,524 $ 51,802
============ ============ ============ ============
Gross margin as a percentage of sales:
Men's accessories 36.3% 38.4% 37.4% 38.4%
Women's accessories 33.4% 26.6% 32.6% 29.0%
Total 34.9% 33.6% 35.0% 34.3%
</Table>
11
TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES
================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED MARCH 31, 2002 COMPARED TO THE THREE AND NINE MONTHS
ENDED MARCH 31, 2001
NET SALES
For the three-month period ended March 31, 2002, net sales increased 12.3% to
$46,629,000 as compared to net sales of $41,540,000 for the same period last
year. Net sales of men's accessories decreased 0.3% for the three-month period
ended March 31, 2002 as compared to the same period last year. The decrease in
men's sales was due to the difficult retail environment experienced during third
quarter of fiscal 2002, resulting in lower than anticipated mass merchant and
department store orders. Although men's product sales had decreased over the
same period in the prior fiscal year, the sales results were consistent with the
Company's internal sales plan. Net sales of women's accessories increased 30.7%
for the three-month period ended March 31, 2002 as compared to the same period
last year. The increase was attributable to higher sales volume of women's mass
merchant accessories, small leather goods and handbags. Due to the continued
fashion trend in women's belts sales, the women's mass merchant accessory
division accounted for $2,870,000 of the $5,089,000 overall increase in total
net sales for the Company. For the nine month period ended March 31, 2002, net
sales increased 6.7% to $161,342,000 as compared to net sales of $151,232,000
for the same period last year. The overall sales increase was attributable to
higher sales volume in women's accessories experienced during the first nine
months of fiscal 2002.
GROSS MARGINS
Gross margins increased for the three and nine months ended March 31, 2002,
$2,310,000 and $4,722,000, or 16.5% and 9.1%, respectively, as compared to the
same periods for the prior year. As a percentage of sales, gross margins for the
three and nine-month periods ended March 31, 2002, increased 1.3% and 0.7% as
compared to the same periods last year, respectively. The overall increase was
due to margin improvements in the Company's women's mass merchant product sales.
OPERATING EXPENSES
Selling, general and administrative expenses as a percentage of net sales for
the three and nine months ended March 31, 2002, increased 1.5% and 0.9%,
respectively as compared to the same periods of the prior year. The increase
resulted primarily from higher royalty and advertising expense which accounted
for $1,207,000 and $1,445,000 of the three and nine month increase,
respectively.
Depreciation and amortization expenses increased $186,000 for the nine months
ended March 31, 2002, respectively, as compared to the same period in the prior
year. The increase is attributable to capital expenditures related to the
leasehold improvements and equipment related to the Company's distribution
facility in Dallas, Texas, for women's accessories as well as additional
hardware and software applications.
Interest expense for the three and nine month periods ended March 31, 2002
decreased $59,000 and $445,000, respectively, as compared to the same periods in
the prior year. The decrease is primarily related to lower interest rates as
well as lower debt levels as compared to the same period of the prior year.
The effective tax rates for the three and nine months ended March 31, 2002 were
39.2% and 38.9%, respectively, which were consistent with the same periods in
the prior year.
Net income for the three-month period ended March 31, 2002 increased 54.1% to
$598,000, or $0.10 per diluted share, compared to net income of $388,000, or
$0.07 per diluted share, for the same period in the prior year. Net income for
the nine months ended March 31, 2002 increased 13.3% to $5,971,000, or $1.03 per
diluted share, compared to net income of $5,271,000, or $0.94 per diluted share,
for the same period in the prior year. The increase in net income was primarily
due to the higher margin sales mix of women's accessories.
12
TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES
================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
Generally, the Company's primary sources of liquidity are cash flows from
operations and the Company's line of credit. The Company has an $80,000,000
committed secured revolving credit facility (the "credit facility"), which can
be used for seasonal borrowings and letters of credit. The credit facility is
secured by essentially all of the assets of the Company and its subsidiaries and
requires the maintenance of certain financial covenants which if not met, could
adversely impact the liquidity of the Company. The Company's borrowings under
its credit lines were $34,287,000 and $50,849,000 as of March 31, 2002 and 2001,
respectively. At March 31, 2002, the Company had credit availability under its
credit facility of approximately $42,631,000.
For the nine months ended March 31, 2002, the Company's operating activities
provided cash of $14,308,000 compared to a use of cash of $962,000 for the same
period last year. The improvement in cash flows from operating activities was
attributable to the timing of cash receipts from accounts receivable and
inventory purchases.
Capital expenditures were $1,117,000 for the nine months ended March 31, 2002.
The decrease of $1,888,000 from the same prior year period is due to planned
decreased capital expenditures and the timing of capital investments during
fiscal 2002. Management anticipates that the Company's level of capital
investment for fiscal 2002 will approximate the prior year. Capital commitments
for fiscal 2002 include additional equipment for the Company's distribution
facility in Dallas, Texas, as well as additional hardware and software
applications.
The Company examines the carrying value of its excess of cost over net assets
acquired (Goodwill) and other intangible assets as current events and
circumstances warrant to determine whether there are any impairment losses. If
indicators of impairment were present in intangible assets used in operations,
and future cash flows were not expected to be sufficient to recover the assets'
carrying amount, an impairment loss would be charged to expense in the period
identified. No event has been identified that would indicate an impairment of
the value of material intangible assets recorded in the consolidated financial
statements.
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 and reduction of debt. The Company's
existing credit facility currently contains covenants that restrict the payment
of dividends.
See Note 2 for a discussion of the impact of recently issued accounting
standards.
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.
13
TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES
================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This Management's Discussion and Analysis of Consolidated 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.
14
TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES
===============================================================================
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's risk management policy as it relates to derivative instruments is
to mitigate, subject to market conditions, against interest rate risk. The
Company does not enter into any derivative instrument for the purposes of
speculative investment. The Company's overall risk management philosophy is
reevaluated as business conditions arise.
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 an
interest rate swap agreement to lock in a fixed interest rate for a portion of
these borrowings. At March 31, 2002 the Company had borrowings under its credit
facility of $34,287,000 bearing a weighted-average interest rate of 3.92%. The
Company entered into a three-year interest rate swap agreement converting
$30,000,000 of outstanding indebtedness from a variable to a fixed interest
rate. The average receive rate is based on a 90 day LIBOR rate. Interest
differentials to be paid or received because of the swap agreement are reflected
as an adjustment to interest expense over the related debt period. At March 31,
2002, the receive and pay rates related to the interest rate swap were 1.88% and
5.60%, respectively. The interest rate swap agreement represents a valid cash
flow hedge under Statement of Financial Accounting Standards No. 133. As such,
during fiscal 2002, changes in the fair value of the interest rate swap were
recognized to other comprehensive income with the fair value at March 31, 2002,
approximating ($1,189,000). The potential impact of market conditions on the
fair value of the Company's indebtedness is not expected to be material. Given
that such lines of credit bear interest at floating market interest rates, the
fair value of amounts borrowed thereunder approximates carrying value.
15
TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES
===============================================================================
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
None.
(b) Reports on Form 8-K.
The Company filed a Form 8-K on April 18, 2002 regarding the
press release announcing its financial results for the third
quarter of fiscal 2002.
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: May 10, 2002
17
TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES
===============================================================================
EXHIBIT INDEX
<Table>
<Caption>
Incorporated by Reference
(If applicable)
-------------------------------------------------------
Exhibit Number and Description Form Date File No. Exhibit
- ------------------------------ --------- ------------- ----------- ----------
(3) Articles of Incorporation
and by-laws
3.3 Amendment No. 1 to Bylaws
of Tandy Brands
Accessories, Inc.** N/A N/A N/A N/A
(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
4.3 Form of Preferred Share
Purchase Rights Certificate
Of Tandy Brands
Accessories, Inc. S-1 11/02/90 33-37588 4.3
4.4 Rights Agreement dated
November 7, 1990,
Between Tandy Brands
Accessories, Inc.
And First National
Bank of Boston S-1 11/02/90 33-37588 4.4
4.5 Form of Rights Certificate
of Tandy Brands Accessories,
Inc. 8-K 11/02/99 0-18927 4.5
4.6 Amended and Restated
Rights Agreement dated
October 19, 1999,
Between Tandy Brands
Accessories, Inc. 8-K 11/02/99 0-18927 4.6
and Bank Boston, N.A.
</Table>
* Management compensatory plan.
** Filed herewith.
18
TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES
================================================================================
EXHIBIT INDEX
<Table>
<Caption>
Incorporated by Reference
(If applicable)
-------------------------------------------------------
Exhibit Number and Description Form Date File No. Exhibit
- ------------------------------ --------- ------------- ----------- ----------
4.7 Amendment to Rights
Agreement dated
October 19, 1999,
Between Tandy Brands
Accessories, Inc.
and Fleet National Bank
(f.k.a Bank Boston, N.A).** N/A N/A N/A N/A
(10) Material Contracts
10.38 Amendment No. 2 to the
Tandy Brands Accessories,
Inc. 1997 Employee Stock
Option Plan */** N/A N/A N/A N/A
10.39 Amendment No. 4 to the
Tandy Brands Accessories,
Inc. Nonqualified Formula
Stock Option Plan For Non-
Employee Directors */** N/A N/A N/A N/A
</Table>
* Management compensatory plan.
** Filed herewith.
19