10-Q 1 d87024e10-q.txt FORM 10-Q FOR QUARTER ENDED MARCH 31, 2001 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 March 31, 2001 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, 2001 Common stock, $1 par value 5,828,606 ================================================================================ 2 TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES FORM 10-Q QUARTER ENDED MARCH 31, 2001 ================================================================================ TABLE OF CONTENTS PART I -- FINANCIAL INFORMATION
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 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 Nine Months Ended Ended March 31 March 31 ------------------------ ------------------------ 2001 2000 2001 2000 --------- --------- --------- --------- Net sales $ 42,444 $ 39,686 $ 153,385 $ 150,508 Cost of goods sold 27,575 25,665 99,430 95,938 --------- --------- --------- --------- Gross margin 14,869 14,021 53,955 54,570 Selling, general and administrative expenses 12,035 11,887 38,789 37,335 Depreciation and amortization 1,450 958 3,831 2,796 --------- --------- --------- --------- Total operating expenses 13,485 12,845 42,620 40,131 --------- --------- --------- --------- Operating income 1,384 1,176 11,335 14,439 Interest expense (779) (726) (2,800) (2,541) Royalty income and early termination of license agreement 28 646 62 1,720 --------- --------- --------- --------- Income before provision for income taxes 633 1,096 8,597 13,618 Provision for income taxes 245 425 3,326 5,286 --------- --------- --------- --------- Net income $ 388 $ 671 $ 5,271 $ 8,332 ========= ========= ========= ========= Earnings per common share $ 0.07 $ 0.12 $ 0.94 $ 1.44 ========= ========= ========= ========= Earnings per common share - assuming dilution $ 0.07 $ 0.12 $ 0.94 $ 1.42 ========= ========= ========= ========= Common shares outstanding 5,571 5,763 5,587 5,786 ========= ========= ========= ========= Common shares outstanding - assuming dilution 5,572 5,808 5,594 5,849 ========= ========= ========= ========= 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)
March 31, June 30, 2001 2000 --------- --------- ASSETS (Unaudited) Current assets: Cash and cash equivalents $ 345 $ 661 Accounts receivable, net 33,946 31,105 Inventories: Raw materials and work in process 5,184 4,759 Finished goods 58,357 50,581 Other current assets 2,614 2,371 --------- --------- Total current assets 100,446 89,477 --------- --------- Property and equipment, at cost 25,922 22,317 Accumulated depreciation (11,376) (9,305) --------- --------- Net property and equipment 14,546 13,012 --------- --------- Other assets: Goodwill, less amortization 13,089 11,410 Other assets, less amortization 8,188 7,785 --------- --------- Total other assets 21,277 19,195 --------- --------- $ 136,269 $ 121,684 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable $ 849 $ -- Accounts payable 5,456 6,547 Accrued expenses 5,514 4,004 --------- --------- Total current liabilities 11,819 10,551 --------- --------- Other liabilities: Notes payable 50,000 41,075 Other noncurrent liabilities 347 184 --------- --------- Total other liabilities 50,347 41,259 --------- --------- Stockholders' equity: Preferred stock, $1 par value, 1,000,000 shares authorized, none issued -- -- Common stock, $1 par value, 10,000,000 shares authorized, 5,828,606 shares and 5,808,968 shares issued and outstanding as of March 31, 2001, and June 30, 2000, respectively 5,829 5,809 Additional paid-in capital 22,343 22,426 Cumulative other comprehensive income (952) (479) Retained earnings 48,831 43,560 Treasury stock, at cost (1,948) (1,442) --------- --------- Total stockholders' equity 74,103 69,874 --------- --------- $ 136,269 $ 121,684 ========= =========
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)
Nine Months Ended March 31, ---------------------- 2001 2000 -------- -------- Cash flows from operating activities: Net income $ 5,271 $ 8,332 Adjustments to reconcile net income to net cash provided by (used for) operating activities: Depreciation 2,859 1,519 Amortization 1,065 1,229 Other (424) (130) Change in assets and liabilities: Accounts receivable (1,957) 741 Inventories (5,065) 3,536 Other assets (1,664) (656) Accounts payable (1,990) (2,900) Accrued expenses 943 474 -------- -------- Net cash (used for) provided by operating activities (962) 12,145 -------- -------- Cash flows from investing activities: Purchases of property and equipment (3,005) (1,551) Purchase of Stagg Industries, Inc. (2,750) -- Purchase of Frank Spielberg, LLC -- (3,561) -------- -------- Net cash used for investing activities (5,755) (5,112) -------- -------- Cash flows from financing activities: Exercise of employee stock options 70 114 Sale of stock to stock purchase program 945 1,129 Purchase of treasury stock (1,584) (1,659) Proceeds from borrowings 67,995 68,320 Payments under borrowings (61,025) (73,720) -------- -------- Net cash provided by financing activities 6,401 (5,816) -------- -------- Net increase (decrease) in cash and cash equivalents (316) 1,217 Cash and cash equivalents at beginning of period 661 180 -------- -------- Cash and cash equivalents at end of period $ 345 $ 1,397 ======== ======== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 2,575 $ 2,909 Income taxes 3,027 4,855 Noncash activities: None
The accompanying notes are an integral part of these condensed financial statements. 5 6 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, 2001, are not necessarily indicative of the results that may be expected for the year ended June 30, 2001. 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, 2000. NOTE 2 - RECLASSIFICATIONS Certain prior year amounts have been reclassified to conform to the fiscal 2001 presentation. NOTE 3 - IMPACT OF NEW ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities," and its amendments Statements 137 and 138, in June 1999 and June 2000, respectively. The Statement requires the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives are either offset against the change in fair value of assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. The adoption of Statement No. 133, as amended on July 1, 2000, resulted in the cumulative effect of an accounting change, net of tax, of approximately $308,000 in other comprehensive income. 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. As a result, the Company has 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. The interest rate swap agreement as a derivative represents a valid cash flow hedge instrument under Statement No. 133. At March 31, 2001, the receive and pay rates related to the interest rate swap were 6.41% and 6.52%, respectively. 6 7 TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES ================================================================================ NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 4 - COMPREHENSIVE INCOME The components of comprehensive income, net of related tax, for the three and nine months ended March 31, 2001 and 2000 are as follows (in thousands):
Three Months Nine Months Ended Ended March 31, March 31, -------------------- -------------------- 2001 2000 2001 2000 ------- ------- ------- ------- Net income $ 388 $ 671 $ 5,271 $ 8,332 Foreign currency translation adjustments (213) (12) (318) $ 61 Cumulative effect of change in accounting principle - fair value of interest rate swap 308 Fair Value of interest rate swap (228) -- (463) ------- ------- ------- ------- Comprehensive income $ (53) $ 659 $ 4,798 $ 8,393 ======= ======= ======= =======
7 8 TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES ================================================================================ NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 5 - EARNINGS PER SHARE The following sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts):
Three Months Nine Months Ended Ended March 31, March 31, ----------------- ----------------- 2001 2000 2001 2000 ------ ------ ------ ------ Numerator for basic and diluted earnings per share: Net income $ 388 $ 671 $5,271 $8,332 ====== ====== ====== ====== Denominator: Weighted average shares outstanding 5,557 5,750 5,573 5,770 Contingently issuable shares 14 13 14 16 ------ ------ ------ ------ Denominator for basic earnings per share - weighted average shares 5,571 5,763 5,587 5,786 Effect of dilutive securities: Employee stock options 1 37 6 53 Director stock options -- 8 1 10 ------ ------ ------ ------ Dilutive potential common shares 1 45 7 63 Denominator for diluted earnings per share - adjusted weighted - average shares 5,572 5,808 5,594 5,849 ====== ====== ====== ====== Basic earnings per share $ 0.07 $ 0.12 $ 0.94 $ 1.44 ====== ====== ====== ====== Diluted earnings per share $ 0.07 $ 0.12 $ 0.94 $ 1.42 ====== ====== ====== ======
8 9 TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES ================================================================================ NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 6 - 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 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 2000 Annual Report. No intersegment revenue is recorded. Information regarding operations and assets by segment are as follows (in thousands):
Three Months Ended Nine Months Ended March 31, March 31, ------------------------ ------------------------ 2001 2000 2001 2000 --------- --------- --------- --------- Revenue from external customers: Men's accessories $ 24,997 $ 24,323 $ 85,688 $ 86,383 Women's accessories 17,447 15,363 67,697 64,125 --------- --------- --------- --------- $ 42,444 $ 39,686 $ 153,385 $ 150,508 ========= ========= ========= ========= Operating income(1): Men's accessories 2,528 2,290 10,216 11,458 Women's accessories (1,144) (1,114) 1,119 2,981 --------- --------- --------- --------- $ 1,384 $ 1,176 $ 11,335 $ 14,439 ========= ========= ========= ========= Interest expense (779) (726) (2,800) (2,541) Other income(2) 28 646 62 1,720 --------- --------- --------- --------- Income before income taxes $ 633 $ 1,096 $ 8,597 $ 13,618 ========= ========= ========= ========= Depreciation and amortization expense: Men's accessories $ 967 $ 577 $ 2,524 $ 1,700 Women's accessories 483 381 1,307 1,096 --------- --------- --------- --------- $ 1,450 $ 958 $ 3,831 $ 2,796 ========= ========= ========= ========= Capital expenditures: Men's accessories $ 598 $ 94 $ 746 $ 136 Women's accessories 326 232 826 493 Corporate 1,212 228 2,033 1,143 --------- --------- --------- --------- $ 2,136 $ 554 $ 3,605 $ 1,772 ========= ========= ========= =========
(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 during fiscal 2000, the early terminations of license agreements not specifically identifiable to a segment. 9 10 TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES ================================================================================ NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 7 - STOCK REPURCHASE PROGRAM On October 17, 2000, 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"). This program is an extension of the $4,000,000 stock repurchase plan the Company initiated in October 20, 1999 and extended in April 26, 2000. 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 nine-months ended March 31, 2001, the Company repurchased 222,807 shares of treasury stock under the repurchase program at a cost of approximately $1,584,000. During the nine months ended March 31, 2001, 131,503 shares of treasury stock were issued to the Company's employee stock purchase program. NOTE 8 - ACQUISITION On January 18, 2001, the Company acquired all of the outstanding common stock of Stagg Industries, Inc. ("Stagg") for approximately $2,750,000 in cash plus contingent consideration of up to $250,000. The cash purchase price was provided by drawing on existing bank lines. Stagg is a distributor and marketer of men's and children's belts, neckwear, small leather and other accessories to various department stores and specialty retailers. In conjunction with the purchase, the Company assumed certain liabilities of which $2,794,000 in bank indebtedness was immediately retired. The purchase method of accounting was used for this acquisition. The pro-forma effects of this acquisition are not material. NOTE 9 - SUBSEQUENT EVENT On April 17, 2001, the Company acquired certain assets of Torel, Inc. ("Torel") for an aggregate purchase of $861,000 including acquisition-related costs. The assets included, but were not limited to, wholesale accounts receivable, wholesale inventory, certain machinery and equipment, and a 76,000 square foot building located in Yoakum, Texas. The purchase price was comprised of $558,000 in cash and 54,167 shares of Company issued common stock valued at $303,000. Torel is a manufacturer and distributor of men's belts and sporting goods accessories. The purchase method of accounting was used for this acquisition. The pro-forma effects of this acquisition are not material. 10 11 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 and suspenders. The Company's merchandise is marketed under a broad portfolio of nationally recognized licensed and proprietary brand names, including DOCKERS(R), JONES NEW YORK(R), FLORSHEIM(R), PERRY ELLIS(R), ROLFS(R), HAGGAR(R), BUGLE BOY(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 and drug stores. See Note 9 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 2001 compared to the same period last year were as follows (in thousands):
Three Months Ended Nine Months Ended March 31, March 31, ---------------------- ---------------------- 2001 2000 2001 2000 -------- -------- -------- -------- Net sales: Men's accessories $ 24,997 $ 24,323 $ 85,688 $ 86,383 Women's accessories 17,447 15,363 67,697 64,125 -------- -------- -------- -------- Total net sales $ 42,444 $ 39,686 $153,385 $150,508 ======== ======== ======== ======== Gross margin: Men's accessories $ 9,810 $ 9,484 $ 33,633 $ 34,161 Women's accessories 5,059 4,537 20,322 20,409 -------- -------- -------- -------- Total gross margin $ 14,869 $ 14,021 $ 53,955 $ 54,570 ======== ======== ======== ======== Gross margin as a percentage of sales: Men's accessories 39.2% 39.0% 39.3% 39.5% Women's accessories 29.0% 29.5% 30.0% 31.8% Total 35.0% 35.3% 35.2% 36.3%
11 12 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, 2001 COMPARED TO THE THREE AND NINE MONTHS ENDED MARCH 31, 2000 NET SALES For the three-month period ended March 31, 2001, net sales increased 7.0% to $42,444,000 as compared to net sales of $39,686,000 for the same period last year. Net sales of men's accessories increased 2.8% for the three-month period ended March 31, 2001 as compared to the same period last year. The increase was due to sales of $2.3 million contributed from the Company's acquisition of Stagg, (See Note 8.) which offset sales shortfalls experienced by the Company's core men's business due to the weak retail environment. Net sales of women's accessories increased 13.6% for the three-month period ended March 31, 2001 as compared to the same period last year. The increase was attributable to higher sales volume of women's fashion trend items to certain mass merchants. For the nine month period ended March 31, 2001, net sales increased 1.9% to $153,385,000 as compared to net sales of $150,508,000 for the same period last year. The sales increases were attributable to higher sales volume in women's accessories experienced during the second and third quarters of fiscal 2001. GROSS MARGINS Gross margins increased for the three months ended, March 31, 2001, $848,000 or 6.1% as compared to the same period for the prior year. For the nine months ended, March 31, 2001, gross margins decreased $615,000 or 1.1% as compared to the same period for the prior year. As a percentage of sales, gross margins decreased 0.3% and 1.1% for the three and nine months ended March 31, 2001, respectively, as compared to the same periods last year. The overall decrease was due to higher women's mass merchant sales at lower than historical gross margins due to initial spring and summer merchandise rollouts. Additionally, close out sales of women's fashion trend accessories resulted in the recognition of additional inventory markdowns during the nine-month period ended March 31, 2001 of approximately $515,000, as compared to the same period in the prior year. OPERATING EXPENSES Selling, general and administrative expenses as a percentage of net sales for the three months ended March 31, 2001 decreased 1.6% as compared to the same period of the prior year. The decrease was attributable to non-recurring expenditures incurred during the three month period March 31, 2000, resulting from the timing of the wind down of the Jones New York handbag line. For the nine months ended March 31, 2001, selling, general and administrative expenses as a percentage of net sales increased 0.5% as compared to the same period of the prior year. The increase resulted from higher wages, advertising and rent expenses. Depreciation and amortization expenses increased $492,000 and $1,035,000 for the three and nine months ended March 31, 2001, respectively, as compared to the same periods in the prior year. The increase is attributable to depreciation on capital expenditures related to leasehold improvements and equipment for the new distribution facility in Dallas, Texas, for women's accessories as well as additional computer hardware and software applications. Interest expense for the three and nine-month periods ended March 31, 2001 increased $53,000 and $259,000 as compared to the same periods in the prior year. The increase is primarily related to higher average debt levels in fiscal 2001. The effective tax rate for the three and nine months ended March 31, 2001 was 38.7%, which is consistent with the same periods in the prior year. 12 13 TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES ================================================================================ MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS Net income for the three-month period ended March 31, 2001 decreased 42.2% to $388,000, or $0.07 per diluted share, compared to net income of $671,000, or $0.12 per diluted share, for the same period in the prior year. On March 3, 2000, the Company negotiated an early termination of its small leather goods licensing agreement with Jones New York. Both the three and nine month results during fiscal 2000 include a one time benefit, including related costs, of $600,000 from the termination of this licensing agreement. Excluding the net benefit of the early license termination, net income for the three-month period ended March 31, 2000 was $304,000, or $0.05 per diluted share. The increase in net income was primarily due to higher women's accessories sales volume. Net income for the nine months ended March 31, 2001 decreased 36.7% to $5,271,000, or $0.94 per diluted share, compared to net income of $8,332,000, or $1.42 per diluted share, for the same period in the prior year. On March 3, 2000 and November 9, 1999, the Company negotiated an early termination of its Jones New York handbag and small leather goods licensing agreements, respectively resulting in a one time benefit, including related costs, of $1,600,000. Excluding the net benefit of the early license termination realized during the second and third quarter of fiscal 2000, net income in the prior year nine-month period was $7,353,000, or $1.26 per diluted share. The decrease in net income was primarily due to a lower margin sales mix of women's accessories and increased selling, general and administrative expenses. 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 $50,849,000 and $42,025,000 as of March 31, 2001 and 2000, respectively. For the nine months ended March 31, 2001, the Company's operating activities used cash of $962,000 compared to providing cash of $12,145,000 for the same period last year. The increase in the use of cash was attributable to lower net income and higher inventory and customer display fixture purchases. Capital expenditures were $3,005,000 for the nine months ended March 31, 2001. The increase of $1,454,000 over the same prior year period is due to the timing of capital investments during fiscal 2001. Management anticipates that the Company's level of capital investment for fiscal 2001 will approximate the prior year. Capital commitments for fiscal 2001 include additional equipment for the Company's distribution facility in Dallas, Texas, as well as additional computer 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. 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 of the condensed consolidated financial statements for a discussion of the Company's stock repurchase program. 13 14 TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES ================================================================================ MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS See Note 8 and 9 of the condensed consolidated financial statements for a discussion of acquisitions consummated by the Company. 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 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 15 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 an interest rate swap agreement to lock in a fixed interest rate for a portion of these borrowings. At March 31, 2001, the Company had borrowings under its credit lines of $50,849,000 bearing a weighted-average interest rate of 6.74%. The Company has 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 March 31, 2001, the receive and pay rates related to the interest rate swap were 6.41% and 6.52%, respectively. At March 31, 2001, the fair value of the interest rate swap agreement was approximately ($235,000). 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. 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. 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 January 18, 2001 regarding the press release announcing its financial results for the second quarter of fiscal 2001. The Company filed a Form 8-K on April 12, 2001 regarding the press release announcing updated guidance on its financial results for the third quarter of fiscal 2001 and the launch of the Company's new line of women's handbags, small leather goods and belts produced under the Dockers(R) name. The Company filed a Form 8-K on April 25, 2001 regarding the press release announcing its financial results for the third quarter of fiscal 2001. 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: May 10, 2001 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 4.3 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 10.5
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