10-Q 1 d96766e10-q.txt FORM 10-Q FOR QUARTER ENDED MARCH 31, 2002 ================================================================================ 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, 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 ================================================================================ TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES FORM 10-Q QUARTER ENDED MARCH 31, 2002 ================================================================================ 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 16 SIGNATURES 17 INDEX TO EXHIBITS 18 - 19
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)
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
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)
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 ========= =========
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)
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
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):
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 ========= ========= ========= =========
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):
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 ======== ======== ======== ========
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):
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 ============ ============ ============ ============
(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):
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%
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
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.
* Management compensatory plan. ** Filed herewith. 18 TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES ================================================================================ EXHIBIT INDEX
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
* Management compensatory plan. ** Filed herewith. 19