-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MZR8MH+i0HNEAFLHzwMVVTSJoJbzA/NIr2p1b3BZD6NatRMqscJQVXmrI0d6WLpH oJnQLAkkqjQdoWU5fljcJA== 0000950134-02-011854.txt : 20020927 0000950134-02-011854.hdr.sgml : 20020927 20020927160232 ACCESSION NUMBER: 0000950134-02-011854 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020927 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TANDY BRANDS ACCESSORIES INC CENTRAL INDEX KEY: 0000869487 STANDARD INDUSTRIAL CLASSIFICATION: APPAREL & OTHER FINISHED PRODS OF FABRICS & SIMILAR MATERIAL [2300] IRS NUMBER: 752349915 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-18927 FILM NUMBER: 02774847 BUSINESS ADDRESS: STREET 1: 690 E LAMAR BLVD STE 200 CITY: ARLINGTON STATE: TX ZIP: 76011 BUSINESS PHONE: 8172654113 MAIL ADDRESS: STREET 1: 690 E LAMAR BLVD CITY: ARLINGTON STATE: TX ZIP: 76011 10-K 1 d99955e10vk.txt FORM 10-K FOR FISCAL YEAR END JUNE 30, 2002 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) of the Securities Exchange Act of l934 FOR THE FISCAL YEAR ENDED JUNE 30, COMMISSION FILE NUMBER 0-18927 2002
--------------------- TANDY BRANDS ACCESSORIES, INC. (Exact Name of Registrant as Specified in its Charter) A DELAWARE CORPORATION 75-2349915 (State or other jurisdiction of incorporation (I.R.S. Employer Identification Number) or organization)
690 E. LAMAR BLVD., SUITE 200 ARLINGTON, TEXAS 76011 (Address of Principal Executive Offices) (817) 548-0090 (Registrant's Telephone Number, Including Area Code) Securities registered pursuant to Section l2(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: TITLE OF CLASS COMMON STOCK, PAR VALUE $1.00 PER SHARE Indicate by check mark whether the registrant (l) has filed all reports required to be filed by Section l3 or l5(d) of the Securities Exchange Act of l934 during the preceding l2 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates of the registrant on September 6, 2002 (based on the closing price of such stock as reported on September 6, 2002 through the National Market System of the National Association of Securities Dealers Automated Quotation System) was approximately $33,128,597. There were 5,878,037 shares of common stock, $1.00 par value per share, outstanding on September 6, 2002. DOCUMENTS INCORPORATED BY REFERENCE: (a) Annual Report to Stockholders for Fiscal Year Ended June 30, 2002 (incorporated by reference in Parts I, II and IV). (b) Definitive Proxy Statement for the Annual Meeting of Stockholders to be held October 16, 2002 (incorporated by reference in Part III). - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART I ITEM 1. BUSINESS. WHAT DO WE DO? We are 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. Our product line also includes handbags, socks, scarves, gloves, hats, hair accessories, suspenders, cold weather accessories and sporting goods accessories. We market our merchandise under a broad portfolio of nationally recognized licensed and proprietary brand names, including DOCKERS(R), LEVI'S(R), JONES NEW YORK(R), PERRY ELLIS(R), ROLFS(R), HAGGAR(R), WOOLRICH(R), JORDACHE(R), INDIAN MOTORCYCLE(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. We sell our 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. WHAT ARE OUR PRODUCT LINES? Our primary products consist of belts and small leather goods, such as wallets, which accounted for approximately 55.2% and 21.0%, respectively, of our net sales for fiscal 2002. Our other products include Fiscal 2002 Product Line Sales women's handbags, socks, scarves, gloves, hats, hair accessories and men's neckwear, suspenders and other fashion accessories. Collectively, these other products accounted for the remaining 23.8% of our net sales in fiscal 2002.
To facilitate our internal operations as well as our customer relationships, our products are generally organized along men's and women's product lines. As a result, we have two reportable segments: men's accessories, and women's accessories. Men's accessories accounted for approximately 52.3% of net sales during fiscal 2002, and women's accessories accounted for approximately 47.7% of net sales during the same period. Financial information regarding operations and assets by segment appears on page 20 of our 2002 Annual Report to Stockholders, and this information is incorporated herein by reference. Belts We, along with our predecessors, have been manufacturing and marketing belts for over 70 years, and belts remain our largest single product category, representing approximately 55.2%, 49.7% and 48.9% of net sales in fiscal 2002, 2001 and 2000, respectively. We compete in all four categories of the belt market: casual, work, dress and fashion. In fiscal 2002, we manufactured approximately 34.6% of the men's belts we distributed and imported the balance, including all women's belts, from China, Guatemala and various other countries. 2 The continuing trend toward casual attire has created an increasing demand for belts other than those in the traditional dress category. Additionally, trends in women's fashion dress categories such as jeans have attributed to sales increases in certain categories of women's belts. Our belt sales were Fiscal 2002 Belt Sales $113.6 million in fiscal 2002, which represents an increase of 14.9% compared to fiscal 2001. In fiscal 2002, sales of men's and boys' belts represented $73.6 million, or 64.7% of total belt sales, and women's and girls' belts represented $40.0 million, or 35.3%, of total belt sales.
Small Leather Goods Our small leather goods consist primarily of men's and women's wallets sold under licensed and proprietary brands. Our small leather goods are primarily obtained from manufacturers in foreign countries, such as China, due to the labor-intensive nature of manufacturing small leather goods and the relative low cost of labor in those countries. Sales of small leather goods accounted for approximately $43.3 million, or 21.0%, of our total net sales in fiscal 2002. Sales of small leather goods accounted for approximately 25.8% and 28.5% of our total net sales in fiscal 2001 and 2000, respectively. In fiscal 2002, sales of men's and boys' small leather goods represented $21.4 million, or 49.5%, of Fiscal 2002 Small Leather Goods Sales total small leather goods sales, and women's and girls' small leather goods represented $21.9 million, or 50.5% of our total small leather goods sales.
Other Accessories In addition to belts and small leather goods, we distribute accessories such as women's handbags, socks, scarves, gloves, hats, hair accessories, men's suspenders and sporting goods accessories. These products are marketed under certain of our proprietary brands, licensed brands and private brands. These other accessories complement our core belt and small leather goods products. We purchase all of our other accessory items, which are manufactured according to our design specifications, from foreign and domestic sources. In fiscal 2002, our sales of other accessories totaled $48.9 million, or 23.8%, of our total net sales. Sales of other accessories accounted for 24.5% and 22.6% of our total net sales in fiscal 2001 and 2000, respectively. WHAT BRANDS DO WE SELL? Our brand sales consist of licensed brands, private brands and proprietary brands, which accounted for Fiscal 2002 Brand Sales approximately 9.9%, 52.1% and 38.0%, respectively, of our net sales for fiscal 2002.
3 License Agreements We have been awarded license agreements for several well recognized brands, including Dockers(R), Levi's(R), Jones New York(R), Perry Ellis(R), Bugle Boy(R), Haggar(R), Woolrich(R), Jordache(R), Indian Motorcycle(R) and Tex Tan(R). On March 4, 2002, we signed an exclusive licensing agreement with Levi Strauss & Co. to produce women's small leather goods and women's belts under the LEVI(R)name. We began shipping LEVI(R) products in July of 2002. Generally, our license agreements cover specific products and require us to pay annual royalties, ranging from 2% to 8% of net sales, based on minimum sales quotas or sales. The terms of the agreements are typically four to ten years, with options to extend the terms, provided certain sales or royalty minimums are achieved. For fiscal 2002, sales of our licensed products accounted for approximately $20.3 million, or 9.9%, of our net sales, with sales from no individual license agreement accounting for more than 5% of total net sales. Private Brand Products In fiscal 2002, private brand products accounted for approximately $107.3 million, or 52.1%, of our total net sales. In a private brand program we are responsible for designing, manufacturing and delivering unique products for select customers according to the customer's individual requirements. These programs offer our customers exclusivity and pricing control over their products, both of which are important factors in the retail marketplace. We believe our flexible sourcing capabilities, advanced electronic inventory management and replenishment systems and design, product development and merchandising expertise provide retailers with a superior alternative to direct sourcing of their private brand products. Our principal private brand programs include those for leading retailers such as - Wal-Mart; - JCPenney; - Sears; and - Target. Our principal private brand programs also include nationally recognized private brand names such as - Farah(R); - Faded Glory(R); - No Boundaries(R); - Arizona(R); - St. John's Bay(R); - Xhilaration(R); - Mossimo(R); and - Cherokee(R). Proprietary Brands In addition to our licensed and private brands, we produce and market products under our own registered trademarks and trade names. We own leading and well recognized trademarks such as Rolfs(R), Amity(R), Canterbury(R), Tiger(R), Accessory Design Group(R), Prince Gardner(R), Princess Gardner(R), Royalle by Prince Gardner(R), and Royalle by Princess Gardner(R). We intend to build on the success of our proprietary brand portfolio by pursuing additional ownership opportunities and expanding the assortment of products offered and the retail channels served by our proprietary brands. Net sales under our proprietary brands were approximately $78.2 million, or 38.0%, of our total net sales in fiscal 2002. 4 Distribution of our Key Brands Our key brands and each brand's targeted distribution channels and products are as follows:
BRAND DISTRIBUTION CHANNEL PRODUCTS - ----- -------------------- -------- Dockers(R) National chain stores Belts Department stores Handbags Specialty stores Small leather goods Levi's(R) National chain stores Belts Department stores Small leather goods Specialty stores Jones New York(R) Department stores Belts Specialty stores Small leather goods Perry Ellis(R) Department stores Belts Specialty stores Rolfs(R) Department stores Small leather goods Specialty stores Haggar(R) National chain stores Belts Department stores Small leather goods Catalogs Woolrich(R) Department stores Belts Specialty stores Small leather goods Jordache(R) National chain stores Belts Indian Motorcycle(R) National chain stores Belts Small leather goods Bugle Boy(R) National chain stores Belts Department stores Small leather goods Canterbury(R) Specialty stores Belts Golf pro shops Small leather goods Prince Gardner(R) National chain stores Small leather goods Specialty stores Princess Gardner(R) National chain stores Small leather goods Specialty stores Amity(R) Mass merchants Small leather goods National chain stores Coletta(R) Mass merchants Handbags National chain stores Accessory Design Group(R) Mass merchants Belts National chain stores Women's accessories Tiger(R) Mass merchants Belts National chain stores Stagg(R) Mass merchants Belts National chain stores Small leather goods
5 WHAT ARE OUR CHANNELS OF DISTRIBUTION? We sell our products to a variety of retail outlets. These outlets include - 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. WHO ARE OUR CUSTOMERS? We maintain strong relationships with major retailers in the United States and Canada, including - Wal-Mart; - Target; - Meijer's; - Shopko; - AAFES; - Sears; - JCPenney; - Kohl's; - May Department Stores; - Dillard's; - Mervyn's; and - Federated Department Stores. For fiscal 2002, Wal-Mart and Target represented 39.0% and 13.0% of our total net sales, respectively. In fiscal 2002, our top ten customers accounted for approximately 71.7% of net sales. A decision by Wal-Mart, Target or any other significant customer, whether motivated by competitive conditions, financial difficulties or otherwise, to decrease the amount of merchandise purchased from us or to change their manner of doing business with us could have a material adverse effect on our financial position and results of operations. HOW DO WE MAINTAIN STRONG CUSTOMER RELATIONS? We believe our success is due in large part to our strong customer relationships, strong sales and marketing organization and superior customer service. Factors which help facilitate these characteristics include our "quick response" distribution, vendor inventory management services, electronic data interchange, commonly referred to as EDI, capabilities and expertise in the communication of fashion and lifestyle concepts through product lines and innovative point-of-sale presentations. We develop and manage our accounts through the coordinated efforts of senior management, regional managers, account executives and an organization of salespeople and independent sales representatives. Members of our senior management or senior account executives manage our relationships with certain of our national accounts such as Wal-Mart, Target, Meijer's, Shopko, Sears, JCPenney, Kohl's and Dillard's. We maintain in-store customer service relationships with various specialty stores, national chain stores and major department stores. We have a team of more than 130 sales associates in the United States and approximately 35 sales associates in Canada. These sales associates are organized on a regional basis and supervised by regional sales managers. Sales associates are responsible for overseeing accounts within a defined geographic territory, developing and maintaining business relationships with their respective customers, preparing and conducting line presentations and assisting customers in the implementation of programs at 6 the individual store level. In addition, sales associates may, depending on the needs of an individual customer, assist in the maintenance and presentation of merchandise on the selling floor. Our regional sales organization is supported by account executives. Sales personnel, other than senior managers, generally are compensated based on a combination of salary and commission. DID WE HAVE FIRM BACKLOG ORDERS FOR FISCAL 2002? We had firm backlog orders at June 30, 2002 and 2001 totaling $12,865,000 and $9,065,000, respectively. Our backlog orders are fairly consistent throughout the year with a seasonable increase during the second quarter. Generally, whether we can fill our backlog orders is dependent on product availability. Historically, the amount of unfilled backlog orders has been immaterial. We currently use EDI for electronic communications of invoices, shipping notices, purchase orders and other transactions. Due to the rapid fulfillment of EDI orders, the backlog at June 30, 2002 may not be indicative of future results. HOW DO WE MERCHANDISE AND DEVELOP OUR PRODUCTS? Senior managers are responsible for generating profitable performance results by developing, planning, selling and implementing merchandise programs for their accounts. Individual senior managers develop and maintain business relationships with customers' buyers and merchandise managers. Senior managers also develop and propose comprehensive programs relating to product mix, pricing and fixturing, and they assist customers' buyers and merchandise managers in the implementation of these programs. We coordinate the implementation of marketing programs through the efforts of senior and regional managers. Senior managers are compensated based on a combination of salary and bonus tied to various measures of profitability and sales performance. Our product development and merchandising professionals work closely with customers, suppliers and our licensors to interpret market trends, develop new products and create and implement comprehensive merchandising programs, which consist of packaging and point-of-sale fixturing and presentation materials. We believe our ability to design all of our products internally represents a significant competitive advantage because retail customers have become increasingly reliant on the design and merchandising expertise of their suppliers. WHAT IS OUR COMPETITIVE POSITION? Competition in the fashion accessories industry is intense. The accessories market is highly fragmented, and management believes we are one of the largest competitors in the accessories industry. Based on our internal analysis, we believe the sectors of the accessories market we serve have grown at an average annual rate of 3-5% in recent years. In our opinion, this growth has resulted from - the trend toward more casual attire, which has increased demand for accessories outside the traditional dress category; - increased consumer awareness of branded accessories as a fashion and lifestyle statement; and - a desire for new and different accessories styles. As a result of recent consolidation in the retail industry, retailers have increasingly chosen to consolidate their supply bases to a core group of companies that have the resources and expertise to meet the retailers' increasing demands. Over the past several years, our net sales growth has exceeded that of the accessories industry, and we believe we are well positioned to continue to capitalize on these market trends. 7 Our ability to remain competitive depends largely on our ability to maintain our customer relationships, create new designs and products and offer high quality merchandise at popular prices. The following table summarizes our primary competitors.
PRODUCT SEGMENT PRIMARY COMPETITORS --------------- ------------------- Swank, Randa/Humphreys, Leegin, Max Leather and Men's and Boys' Belts..................... Salant Men's Wallets............................. Buxton, Randa/Humphreys, Mundi and Fossil Women's and Girls' Belts.................. Cipriani, Liz Claiborne, Circa and Fossil Nine West, Liz Claiborne, Kenneth Cole, Fossil and Women's Handbags.......................... Guess Women's Personal Leather Goods............ Buxton, Mundi, Fossil, Liz Claiborne and Nine West
We compete on the basis of customer service, brand recognition, product quality and price. We believe our ability to compete successfully is based on our strong customer relationships, superior customer service, strong national brand portfolio, national distribution capabilities, proprietary inventory management systems, flexible sourcing and product design and innovation. HOW DO WE SEEK TO GROW OUR BUSINESS? We seek increased sales and earnings through a variety of means, including increased sales through our current operating units, as well as growth through the acquisition of assets and similar businesses. To that end, on April 12, 2002, we acquired substantially all of the operating assets of AA&E Leathercraft, Inc., a manufacturer and distributor of leather sporting goods accessories. The purchase price for these assets was approximately $995,000 in cash, which was provided by drawing on our existing credit facility. The assets included, among other items, wholesale accounts receivable, wholesale inventory, certain machinery and equipment, and a 10,000 square foot building located in Yoakum, Texas. Since we began operating as an independent company on November 1, 1990, we have acquired numerous businesses. Over the last three years, we made the following acquisitions.
NAME OF BUSINESS OR ASSETS DATE ACQUIRED ACQUIRED PRODUCT LINES BRANDS ACQUIRED ------------- -------------------------- ------------- --------------- January 18, 2001............ Stagg Industries, Inc. Men's and children's Stagg(R) belts, wallets and neckwear April 17, 2001.............. Certain assets of Torel, Men's belts and Torel(R) Inc. sporting goods accessories April 12, 2002.............. Certain assets of AA&E Sporting goods AA&E(R) Leathercraft, Inc. accessories
WHERE AND HOW DO WE MANUFACTURE OUR PRODUCTS? Our manufacturing facilities are located in Yoakum, Texas and Scarborough, Ontario. The Yoakum facility has the capacity to manufacture approximately 5.3 million belts per year. During fiscal 2002, our manufacturing facilities operated at approximately 74.8% of capacity. We continually seek to increase the automation of our manufacturing operations. We believe we are one of the lowest-cost domestic belt producers because of our automated equipment, large production volumes and economies of scale in raw materials and finished goods sourcing. In fiscal 2002, we obtained certain finished products representing approximately 85% of our net sales from outside manufacturers, both domestic and foreign. We have strong relationships with a number of high quality, low-cost foreign manufacturers which provide particularly labor-intensive products, such as small leather goods, manufactured to our specifications. WHAT ARE THE SOURCES AND AVAILABILITY OF OUR RAW MATERIALS? Our raw materials requirements are limited to materials used in the manufacture of men's belts, which is the only product line we manufacture ourselves. These raw materials consist primarily of leather hides and 8 hardware, such as buckles, and are readily available from a variety of foreign and domestic sources. As a result, we have not experienced any significant disruption of product flow based on our raw materials needs. ARE WE SUBJECT TO GOVERNMENTAL REGULATIONS? Many of our products are manufactured in countries other than the United States. Accordingly, those countries and the United States may from time to time modify existing quotas, duties, tariffs, or import restrictions, or otherwise regulate or restrict imports in a manner which could be material and adverse to us. In addition, economic and political disruptions in Asia and other parts of the world from which we import goods could have an adverse effect on our ability to maintain an uninterrupted flow of products to our major customers. Due to the fact that we sell our products to retail exchange operations of the United States military, and are therefore a supplier to the federal government, we must comply with all federal statutes applicable to federal government suppliers. Compliance with these federal statutes does not impose a significant burden on us. HOW MANY EMPLOYEES DO WE HAVE? We had approximately 1,156 employees as of June 30, 2002. We believe employee relations are generally good. WHAT ROLE DOES INTELLECTUAL PROPERTY PLAY IN OUR BUSINESS? We believe our trademarks, our patents, our licenses to use certain trademarks and our other proprietary rights in and to intellectual property are important to our success and our competitive position, and we guard our intellectual property rights against infringement. We devote considerable resources to the establishment and protection of our intellectual property on a nationwide basis and in selected foreign markets. Our trademarks remain valid and enforceable as long as the marks are used in connection with our products and services and the required documents and registration renewals are filed, and the related fees are paid. Our patents remain valid and enforceable until the end of the respective patent term, so long as maintenance fees are paid. WHAT ARE OUR WORKING CAPITAL PRACTICES? We do not enter into long-term agreements with any of our customers. Instead, we enter into a number of purchase order commitments with our customers for each of our lines every season. Due to the production time required by our foreign suppliers to produce and ship goods to our distribution centers, we attempt, based on internal estimates, to carry on hand inventory levels necessary for the timely shipment of initial shipment and replenishment orders of men's and women's accessories to our customers. A decision by the customer buyer of a group of stores or any significant customer, whether motivated by competitive conditions, financial difficulties or otherwise, to change the amount of merchandise purchased from us significantly, or to change their manner of doing business with us, may have a material effect on our financial condition and results of operations. However, this exposure is mitigated in that our products are sold to a variety of retail partners throughout the United States and Canada. 9 ITEM 2. PROPERTIES. We own and lease numerous facilities throughout the United States and abroad. We currently lease our corporate offices which are located in Arlington, Texas. We believe our various properties are adequate and suitable for the particular uses involved. The following table summarizes our properties.
FORM OF FACILITY LOCATION USE OWNERSHIP ----------------- --- --------- Yoakum, Texas (4 facilities)......... Leather product manufacturing, product Own distribution and administrative offices West Bend, Wisconsin................. Distribution of small leather goods and Own handbags Scarborough, Ontario................. Manufacture and distribution of leather goods Lease Dallas, Texas........................ Warehouse Lease Arlington, Texas..................... Corporate offices Lease New York, New York................... Office space Lease San Francisco, California............ Office space Lease St. Louis, Missouri.................. Office space Lease Birmingham, Alabama.................. Office space Lease Hong Kong............................ Office space Lease
The total space we own and lease as of June 30, 2002, is as follows.
APPROXIMATE SQUARE FEET --------------------------- OWNED LEASED TOTAL ------- ------- ------- Warehouse and Office.................................... 506,000 254,000 760,000 Factory................................................. 63,000 27,000 90,000 ------- ------- ------- Total................................................... 569,000 281,000 850,000 ======= ======= =======
ITEM 3. LEGAL PROCEEDINGS. We are not involved in any material pending legal proceedings, other than ordinary routine litigation incidental to our business. No material legal proceedings were terminated during the fourth quarter of the 2002 fiscal year. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. There were no matters submitted to a vote of security holders during the fourth quarter of the 2002 fiscal year. 10 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. (a) The principal market for our common stock is the NASDAQ National Market System. The high and low bid information for our common stock for each full quarterly period within the two most recent fiscal years appears on page 28 of our 2002 Annual Report to Stockholders, and this information is incorporated herein by reference. (b) The approximate number of record holders of common stock on September 6, 2002 was 925. (c) We have never paid a cash dividend on our common stock. We currently intend to retain our earnings for the foreseeable future to provide funds for the expansion of our business. The payment of dividends in the future will be at the sole discretion of our board of directors and will depend on our profitability, financial condition, capital needs, future prospects, contractual restrictions and other factors deemed relevant by our board of directors. Our existing credit agreement currently contains covenants restricting the payment of dividends. (d) Information regarding securities authorized for issuance under equity compensation plans is included in Part III, Item 12, of this report. ITEM 6. SELECTED FINANCIAL DATA. The information required by this item appears on page 28 of our 2002 Annual Report to Stockholders, and this information is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The information required by this item appears on pages 23 through 27 of our 2002 Annual Report to Stockholders, and this information is incorporated herein by reference. ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK. We are subject to interest rate risk on our long-term debt. We manage our exposure to changes in interest rates by the use of variable and fixed interest rate debt. In addition, we have hedged our exposure to changes in interest rates on a portion of our variable debt by entering into an interest rate swap agreement to lock in a fixed interest rate for a portion of these borrowings. On July 1, 2001, we entered into a three-year interest rate swap agreement with Wells Fargo Bank, N.A., which expires on June 27, 2004, 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. At June 30, 2002, the receive and pay rates related to the interest rate swap were 2.04% and 5.60%, respectively. Interest differentials paid or received under the swap agreement are reflected as an adjustment to interest expense when paid. The interest rate swap agreement represents a valid cash flow hedge investment under Statement No. 133. As such, during fiscal 2002, changes in the fair value of the interest rate swap were recognized as other comprehensive income with the fair value at June 30, 2002, approximating $1,700,000 ($1,041,000, net of tax of $659,000). The potential impact of market conditions on the fair value of our 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. Theoretically, we are also exposed to market risk with respect to changes in the global price level of certain commodities used in the production of our products. We routinely purchase leather hides during the year for use in the manufacture of men's belts. We also purchase a substantial amount of leather items from third-party suppliers. An unanticipated material increase in the market price of leather could increase the cost of these products to us and therefore have a negative effect on our results of operations. 11 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The information required by this item appears on pages 7 through 28 of our 2002 Annual Report to Stockholders, and this information is incorporated herein by reference. Following is a cross reference for location of the required information.
PAGE NUMBER IN THE TANDY BRANDS ACCESSORIES, INC. 2002 ANNUAL FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT TO STOCKHOLDERS - ------------------------------------------- ------------------------------ Consolidated Statements of Income for the Years Ended June 30, 2002, 2001 and 2000................................... 7 Consolidated Balance Sheets at June 30, 2002 and 2001....... 8 Consolidated Statements of Cash Flows for the Years Ended June 30, 2002, 2001 and 2000.............................. 9 Consolidated Statements of Stockholders' Equity for the Years Ended June 30, 2002, 2001 and 2000.................. 10 Notes to Consolidated Financial Statements.................. 11-21 Selected Unaudited Quarterly Financial Data................. 21 Report of Independent Auditors.............................. 22 Selected Financial Data..................................... 28
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 12 PART III The information required by Items 10 through 13 is included in our definitive Proxy Statement relating to our 2002 Annual Meeting of Stockholders, and this information is incorporated herein by reference. Following is a cross reference for location of the required information.
CAPTION IN THE PAGE NUMBER IN THE TANDY BRANDS ACCESSORIES, INC. TANDY BRANDS ACCESSORIES, INC. ITEM 2002 PROXY STATEMENT 2002 PROXY STATEMENT ---- ------------------------------ ------------------------------ ITEM 10. DIRECTORS AND "Proposal One: Election of Directors" 5-7 EXECUTIVE OFFICERS OF THE "Other Information You Need to Make a Decision -- Who REGISTRANT are our executive officers?" 16-17 "Section 16(a) Beneficial Ownership Reporting Compliance" 16 ITEM 11. EXECUTIVE "Other Information You Need to Make a Decision -- How COMPENSATION do we compensate our executive officers?" 17-18 "Other Information You Need to Make a Decision -- How do we compensate our non-employee directors?" 19-21 "Other Information You Need to Make a Decision -- How did our common stock perform compared to certain indexes?" 19 "Other Information You Need to Make a Decision -- What are the board of directors' committees? What functions do they serve? -- Compensation Committee Interlocks and Insider Participation" 22 "Report of the Human Resources and Compensation Committee" 24 ITEM 12. SECURITY "Security Ownership of Certain Beneficial Owners" OWNERSHIP OF 14-16 CERTAIN "Proposal Two: Approval of the Tandy Brands BENEFICIAL Accessories, Inc. 2002 Omnibus Plan -- How many OWNERS AND shares of common stock are issuable under our current MANAGEMENT AND equity compensation plans?" RELATED 12-13 STOCKHOLDER MATTERS ITEM 13. CERTAIN "Other Information You Need to Make a Decision -- Did RELATIONSHIPS we have transactions with our officers, directors or AND RELATED 5% stockholders?" 19 TRANSACTIONS
13 PART IV ITEM 14. CONTROLS AND PROCEDURES. There were no significant changes in our internal controls or in other factors that could significantly affect these controls during the 2002 fiscal year. ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K. (a) The following documents are filed as a part of this report: - The financial statements listed in response to Item 8 of this report have been incorporated herein by reference to pages 7 through 28 of our 2002 Annual Report to Stockholders. - Financial Statement Schedule: Report of Independent Auditors on Financial Statement Schedule for the three years in the period ended June 30, 2002; Schedule II -- Valuation and Qualifying Accounts. The financial statement schedule should be read in conjunction with the consolidated financial statements in our 2002 Annual Report to Stockholders. Financial statement schedules not included in this report have been omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto. - Exhibits: A list of the exhibits filed as part of this report is set forth in the Exhibit Index, which immediately precedes such exhibits and is incorporated herein by reference. (b) Reports on Form 8-K. We filed a Form 8-K on August 16, 2002, to report the issuance of the press release announcing our financial results for the fourth quarter of fiscal 2002. 14 SIGNATURES Pursuant to the requirements of Section l3 or l5(d) of the Securities Exchange Act of l934, 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 Date: September 27, 2002 Pursuant to the requirements of the Securities and Exchange Act of l934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
NAME POSITION DATE ---- -------- ---- /s/ DR. JAMES GAERTNER Director and Chairman September 27, 2002 ------------------------------------------------ of the Board Dr. James Gaertner /s/ J.S.B. JENKINS Director, President and September 27, 2002 ------------------------------------------------ Chief Executive Officer J.S.B. Jenkins /s/ MARVIN J. GIROUARD Director September 27, 2002 ------------------------------------------------ Marvin J. Girouard /s/ C.A. RUNDELL, JR. Director September 27, 2002 ------------------------------------------------ C.A. Rundell, Jr. /s/ ROGER R. HEMMINGHAUS Director September 27, 2002 ------------------------------------------------ Roger R. Hemminghaus /s/ GENE STALLINGS Director September 27, 2002 ------------------------------------------------ Gene Stallings /s/ COLOMBE M. NICHOLAS Director September 27, 2002 ------------------------------------------------ Colombe M. Nicholas /s/ MARK J. FLAHERTY Chief Financial Officer September 27, 2002 ------------------------------------------------ (Principal Accounting Officer) Mark J. Flaherty
15 CERTIFICATION BY CHIEF EXECUTIVE OFFICER I, J.S.B. Jenkins, certify that: 1. I have reviewed this annual report on Form 10-K of Tandy Brands Accessories, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; and 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report. [ITEMS 4, 5 AND 6 OMITTED PURSUANT TO THE TRANSITION PROVISIONS OF RELEASE NO. 34-46427.] /s/ J.S.B. JENKINS -------------------------------------- J.S.B. Jenkins Chief Executive Officer Date: September 27, 2002 16 CERTIFICATION BY CHIEF FINANCIAL OFFICER I, Mark J. Flaherty, certify that: 1. I have reviewed this annual report on Form 10-K of Tandy Brands Accessories, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; and 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report. [ITEMS 4, 5 AND 6 OMITTED PURSUANT TO THE TRANSITION PROVISIONS OF RELEASE NO. 34-46427.] /s/ MARK J. FLAHERTY -------------------------------------- Mark J. Flaherty Chief Financial Officer Date: September 27, 2002 17 REPORT OF INDEPENDENT AUDITORS ON FINANCIAL STATEMENT SCHEDULE To the Board of Directors of Tandy Brands Accessories, Inc. We have audited the consolidated financial statements of Tandy Brands Accessories, Inc. and subsidiaries as of June 30, 2002 and 2001, and for each of the three years in the period ended June 30, 2002, and have issued our report thereon dated August 2, 2002, incorporated by reference in this Annual Report on Form 10-K. Our audits also included the financial statement schedule listed in Item 15(a) of this Annual Report on Form 10-K. The schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /S/ERNST & YOUNG LLP Fort Worth, Texas August 2, 2002 18 TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS FOR THE YEAR ENDED JUNE 30,
ADDITIONS ----------------------- BALANCE AT CHARGED TO CHARGED TO BALANCE AT BEGINNING OF COSTS AND OTHER END OF DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS(1) PERIOD - ----------- ------------ ---------- ---------- ------------- ---------- 2002 Allowance for Doubtful Accounts And Returns................... $1,671,000 $1,152,000 $ -0- $1,116,000 $1,707,000 2001 Allowance for Doubtful Accounts And Returns................... $1,101,000 $1,720,000 $ -0- $1,150,000 $1,671,000 2000 Allowance for Doubtful Accounts And Returns................... $1,180,000 $1,255,000 $ -0- $1,334,000 $1,101,000
- --------------- (1) Represents uncollectible accounts written off, net of recoveries and application of allowances to sales returns. 19 EXHIBIT INDEX
INCORPORATED BY REFERENCE (IF APPLICABLE) ----------------------------------------- EXHIBIT NUMBER AND DESCRIPTION FORM DATE FILE NO. EXHIBIT - ------------------------------ ----- --------- ---------- -------- (3) Articles of Incorporation and By-laws 3.1 Certificate of Incorporation of Tandy Brands Accessories, Inc. S-1 11/02/90 33-37588 3.1 3.2 By-laws of Tandy Brands Accessories, Inc. S-1 11/02/90 33-37588 3.2 3.3 Amendment No. 1 to By-laws of Tandy Brands Accessories, Inc. 10-Q 5/10/02 0-18927 3.3 (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 Form of Rights Certificate of Tandy Brands Accessories, Inc. 8-K 11/02/99 0-18927 4.5 4.5 Amended and Restated Rights Agreement dated October 19, 1999, between Tandy Brands Accessories, Inc. and Bank Boston, N.A. 8-K 11/02/99 0-18927 4.6 4.6 Amendment to Rights Agreement dated October 19, 1999, between Tandy Brands Accessories, Inc. and Fleet National Bank (f.k.a. Bank Boston, N.A.) 10-Q 05/10/02 0-18927 4.7 (10) Material Contracts 10.1 Tandy Brands Accessories, Inc. 1991 Stock Option Plan* S-1 11/02/90 33-37588 10.8 10.2 Form of Stock Option Agreement -- 1991 Stock Option Plan* S-1 11/02/90 33-37588 10.9 10.3 Tandy Brands Accessories, Inc. Benefit Restoration Plan and related Trust Agreement and Amendments No. 1 and 2 thereto* 10-K 09/25/97 0-18927 10.14 10.4 Form of Indemnification Agreement between Tandy Brands Accessories, Inc. and each of its Directors and Officers S-1 11/02/90 33-37588 10.15 10.5 Office Lease Agreement dated March 6, 1991, between John Hancock Mutual Life Insurance Co. and Tandy Brands Accessories, Inc. relating to the corporate offices S-1 11/02/90 33-37588 10.16 10.6 Tandy Brands Accessories, Inc. Non-Qualified Formula Stock Option Plan for Non-Employee Directors* S-8 02/10/94 33-75114 28.1
20 EXHIBIT INDEX -- (CONTINUED)
INCORPORATED BY REFERENCE (IF APPLICABLE) ----------------------------------------- EXHIBIT NUMBER AND DESCRIPTION FORM DATE FILE NO. EXHIBIT - ------------------------------ ----- --------- ---------- -------- 10.7 Tandy Brands Accessories, Inc. 1993 Employee Stock Option Plan and form of Stock Option Agreement thereunder* S-8 02/10/94 33-75114 28.2 10.8 Tandy Brands Accessories, Inc. Non-Qualified Stock Option Plan for Non-Employee Directors* S-8 02/10/94 33-75114 28.3 10.9 Tandy Brands Accessories, Inc. 1995 Stock Deferral Plan for Non-Employee Directors* S-8 06/03/96 33-08579 99.1 10.10 Tandy Brands Accessories, Inc. 1997 Employee Stock Option Plan* S-8 12/12/97 33-42211 99.2 10.11 Tandy Brands Accessories, Inc. Employees Investment Plan as Amended and Restated Effective June 1, 2000* 10-K 09/26/00 0-18927 10.39 10.12 Credit Agreement Among Tandy Brands Accessories, Inc. as the Borrower, Wells Fargo HSBC Trade Bank, N.A. as Administrative Agent and as Lender, and certain Financial Institutions, as Lenders and Wells Fargo Bank, N.A. as Arranger as of June 27, 2001 10-K 09/25/01 0-18927 10.42 10.13 ISDA Master Agreement between Tandy Brands Accessories, Inc. and Wells Fargo Bank, N.A., dated as of June 27, 2001 10-K 09/25/01 0-18927 10.42 10.14 Tandy Brands Accessories, Inc. Stock Purchase Program* S-8 02/12/02 33-55436 99.5 10.15 Limited Consent and Waiver dated November 5, 2001 between Tandy Brands Accessories, Inc. and Wells Fargo HSBC Trade Bank, N.A. as Administrative Agent under the Agreement 10-Q 11/13/01 0-18927 10.43 10.16 Amendment No. 2 to the Tandy Brands Accessories, Inc. 1997 Employee Stock Option Plan* 10-Q 5/10/02 0-18927 10.44 10.17 Amendment No. 4 to the Tandy Brands Accessories, Inc. Nonqualified Formula Stock Option Plan For Non-Employee Directors* 10-Q 5/10/02 0-18927 10.44 10.18 Nonqualified Stock Option Agreement for Non-Employee Directors, dated October 16, 2001, by and between Tandy Brands Accessories, Inc. and Dr. James F. Gaertner* S-8 5/15/02 33-88276 10.2 10.19 Nonqualified Stock Option Agreement for Non-Employee Directors, dated October 16, 2001, by and between Tandy Brands Accessories, Inc. and Marvin J. Girouard* S-8 5/15/02 33-88276 10.3 10.20 Nonqualified Stock Option Agreement for Non-Employee Directors, dated October 16, 2001, by and between Tandy Brands Accessories, Inc. and Gene Stallings* S-8 5/15/02 33-88276 10.4
21 EXHIBIT INDEX -- (CONTINUED)
INCORPORATED BY REFERENCE (IF APPLICABLE) ----------------------------------------- EXHIBIT NUMBER AND DESCRIPTION FORM DATE FILE NO. EXHIBIT - ------------------------------ ----- --------- ---------- -------- 10.21 Nonqualified Stock Option Agreement for Non-Employee Directors, dated October 16, 2001, by and between Tandy Brands Accessories, Inc. and Roger R. Hemminghaus* S-8 5/15/02 33-88276 10.5 10.22 Nonqualified Stock Option Agreement for Non-Employee Directors, dated October 16, 2001, by and between Tandy Brands Accessories, Inc. and Colombe M. Nicholas* S-8 5/15/02 33-88276 10.6 10.23 First Amendment to Credit Agreement between Tandy Brands Accessories, Inc. and Wells Fargo HSBC Trade Bank, NA, dated June 28, 2002** N/A N/A N/A N/A (13) Annual Report to security holders, Form 10-Q or quarterly report to security holders 13.1 Annual Report to Stockholders of Tandy Brands Accessories, Inc.** N/A N/A N/A N/A (21) Subsidiaries of the registrant 21.1 List of subsidiaries** N/A N/A N/A N/A (23) Consents of experts and counsel 23.1 Consent of Ernst & Young LLP** N/A N/A N/A N/A (99) Other Exhibits 99.1 Certification pursuant to Section 906 of Sarbanes-Oxley Act (Chief Executive Officer)** N/A N/A N/A N/A 99.2 Certification pursuant to Section 906 of Sarbanes-Oxley Act (Chief Financial Officer)** N/A N/A N/A N/A
- --------------- * Management contract or compensatory plan ** Filed herewith 22 EX-10.23 3 d99955exv10w23.txt FIRST AMENDMENT TO CREDIT AGREEMENT EXHIBIT 10.23 FIRST AMENDMENT TO CREDIT AGREEMENT THIS FIRST AMENDMENT TO CREDIT AGREEMENT (this "Amendment") made as of 28 day of June, 2002, by and among TANDY BRANDS ACCESSORIES, INC. (the "Borrower"), WELLS FARGO HSBC TRADE BANK, N. A. ("Agent"), and the lenders specified therein ("Lenders"). WHEREAS, Borrower, Agent and the Lenders entered into a Credit Agreement dated as of June 27, 2001, (the "Credit Agreement"); and WHEREAS, the Borrower has requested that Agent and the Lenders make certain amendments to the Credit Agreement, and the Agent and the Lenders are willing to do so subject to the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the premises herein contained and other good and valuable consideration, the sufficiency of which is hereby acknowledged, the parties hereto, intending to be legally bound, agree as follows: 1. DEFINED TERMS. All capitalized terms used but not otherwise defined in this Amendment shall have the meaning ascribed to them in the Credit Agreement. Unless otherwise specified, all section references herein refer to sections of the Credit Agreement. 2. AMENDMENTS TO CREDIT AGREEMENT. The Credit Agreement is hereby amended as follows: 2.1 Definitions (a) Add the following clause to the end of clause (e) in the definition of "EBITDA": ",plus (f) non-cash losses arising from the impairment of good will or intangibles under FASB 142, such additions to EBITDA not to exceed $1,500,000 during any four quarterly period." 1 (b) Permitted Acquisitions The definition of "Permitted Acquisitions" is revised to read as follows: "'Permitted Acquisition' means an acquisition of a business entity or assets (i) provided the aggregate amount of consideration for all such acquisitions during the Fiscal Year does not exceed $3,000,000 or (ii) for which the Borrower has received the prior consent of the Required Lenders." 2.2 Capital Expenditures (a) Section 10.13 is amended to read as follows: "10.13 Capital Expenditures. The Borrower shall not, and shall not permit any of its Subsidiaries to make Capital Expenditures in excess of $3,500,000 in the aggregate in any Fiscal Year." 3. EFFECTIVENESS OF AMENDMENT. This Amendment shall be effective upon receipt by the Agent of: (a) A copy or copies of this Amendment signed by each of the parties hereto; (b) A Confirmation of Guaranty executed by each Guarantor, and (c) A Compliance Certificate executed by Borrower. 4. RATIFICATIONS, REPRESENTATIONS AND WARRANTIES. (a) The terms and provisions set forth in this Amendment shall modify and supersede all inconsistent terms and provisions set forth in the Credit Agreement and, except as expressly modified and superseded by this Amendment, the terms and provisions of the Credit Agreement are ratified and confirmed and shall continue in full force and effect. The Borrower, Agent and the Lenders agree that the Credit Agreement 2 and the Loan Documents, as amended hereby, shall continue to be legal, valid, binding and enforceable in accordance with their respective terms. (b) To induce the Agent and the Lenders to enter into this Amendment, the Borrower ratifies and confirms each representation and warranty set forth in the Credit Agreement as if such representations and warranties were made on the even date herewith, (except to the extent that such representations and warranties related solely to an earlier date and except to the extent that the facts upon which such representations are based have been changed by the transactions contemplated in the Credit Agreement) and further represents and warrants (i) that there has occurred since the date of the last financial statements delivered to the Agent and the Lenders no event or circumstance that has resulted or could reasonably be expected to result in a Material Adverse Change, (ii) that no Event of Default exists on the date hereof, and (iii) that the Borrower is fully authorized to enter into this Amendment. 5. BENEFITS. This Amendment shall be binding upon and inure to the benefit and Borrower, Agent and the Lenders and their respective successors and assigns; provided, however, that Borrower may not, without the prior written consent of Agent and the Lenders, assign any rights, powers, duties or obligations under this Amendment, the Credit Agreement or any of the other Loan Documents. 6. CONSTRUCTION. This Amendment shall be governed by and construed in accordance with the laws of the State of Texas. 7. INVALID PROVISIONS. If any provision of this Amendment is held to be illegal, invalid or unenforceable under present or future laws, such provision shall be fully several and the remaining provisions of this Amendment shall remain in full force and effect and shall not be affected by the illegal, invalid or unenforceable provision or by its severance. 8. ENTIRE AGREEMENT. The Credit Agreement, as amended by this Amendment, contains the entire agreement among the parties regarding the subject matter hereof and supersedes all prior written and oral agreements and understandings among the parties hereto regarding same. 9. REFERENCE TO CREDIT AGREEMENT. The Credit Agreement and any and all other agreements, documents or instruments now or hereafter executed and delivered pursuant to the terms hereof or pursuant to the terms of the Credit Agreement, as amended hereby, are hereby amended so that any reference in the 3 Credit Agreement to the Credit Agreement shall mean a reference to the Credit Agreement as amended hereby. 10. COUNTERPARTS. This Amendment may be separately executed in any number of counterparts, each of which shall be an original, but all of which, taken together, shall be deemed to constitute one and the same agreement. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written. IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the day and year first above written. BORROWER: TANDY BRANDS ACCESSORIES, INC. By: /s/ STAN NINEMIRE ------------------------------- Name: Stan Ninemire ----------------------------- Title: CFO ---------------------------- AGENT: WELLS FARGO HSBC TRADE BANK, N.A. By: /s/ CONNOR J. DUFFY ------------------------------- Name: Connor J. Duffy ----------------------------- Title: Reg. Vice President ---------------------------- WELLS FARGO BANK, N. A. By: /s/ CONNOR J. DUFFY ------------------------------- Name: Connor J. Duffy ----------------------------- Title: Reg. Vice President ---------------------------- 4 LENDERS: WELLS FARGO HSBC TRADE BANK, N.A. By: /s/ CONNOR J. DUFFY --------------------------------- Name: Connor J. Duffy ------------------------------- Title: Reg. Vice President ------------------------------ Address: 1445 Ross Avenue, Suite 450 Dallas, TX 75202 Attention: -------------------------- Fax No.: 214-220-2166 5 COMERICA BANK - TEXAS, N.A. By: /s/ CHARLES R. MCELRATH --------------------------------- Name: Charles R. McElrath ------------------------------- Title: Vice President ------------------------------ Address: 8828 Stemmons, Suite 441 Dallas, TX 75247 Attention: -------------------------- Fax No.: 972-263-9837 6 U.S. BANK NATIONAL ASSOCIATION (formerly FIRSTAR BANK, N.A.) By: /s/ GREGORY L. DRYDEN --------------------------------- Name: Gregory L. Dryden ------------------------------- Title: Vice President ------------------------------ Address: One Firstar Plaza, 12th Floor St. Louis, MO 63101 Attention: -------------------------- Fax No.: 314-418-3859 7 COMPASS BANK, N.A. By: /s/ MICHAEL KEITH --------------------------------- Name: Michael Keith ------------------------------- Title: Vice President ------------------------------ Address: 8080 N. Central Expressway Suite 250 Dallas, TX 75206 Attention: Michael Keith -------------------------- Fax No.: 214-346-2746 8 CONFIRMATION OF GUARANTY Reference is made to the Credit Agreement dated as of June 27, 2001 (the "Credit Agreement") among Tandy Brands Accessories, Inc. ("Borrower"), Wells Fargo HSBC Trade Bank, N. A. ("Agent"), and the lenders specified therein ("Lenders"). The undersigned Guarantors hereby confirm that their guaranty under the Subsidiary Guaranty dated as of June 27, 2001 for the benefit of the Agent, the Lenders, and Wells Fargo Bank, N. A., continues in full force and effect notwithstanding the First Amendment to Credit Agreement dated as of June ___, 2002, which First Amendment is hereby accepted and consented to by each Guarantor. In accordance herewith, the aforesaid guaranty shall be deemed to cover and secure the Obligations at any time due from Borrower to Lenders pursuant to the Credit Agreement as the latter has been modified by the First Amendment. This Confirmation of Guaranty shall be governed by and construed in accordance with the laws of the State of Texas. Dated this 28 day of June, 2002. ACCESSORY DESIGN GROUP, INC. By: /s/ STAN NINEMIRE ---------------------------------------- Name: Stan Ninemire -------------------------------------- Title: CFO ------------------------------------- AMITY/ROLFS, INC By: /s/ STAN NINEMIRE ---------------------------------------- Name: Stan Ninemire -------------------------------------- Title: CFO ------------------------------------- TANDY BRANDS ACCESSORIES HANDBAGS, INC. By: /s/ STAN NINEMIRE ---------------------------------------- Name: Stan Ninemire -------------------------------------- Title: CFO ------------------------------------- H.A. SHELDON CANADA, LTD. By: /s/ STAN NINEMIRE ---------------------------------------- Name: Stan Ninemire -------------------------------------- Title: CFO VP ------------------------------------- TBAC INVESTMENTS, INC. By: /s/ STAN NINEMIRE ---------------------------------------- Name: Stan Ninemire -------------------------------------- Title: CFO VP ------------------------------------- TBAC GENERAL MANAGEMENT COMPANY By: /s/ STAN NINEMIRE ---------------------------------------- Name: Stan Ninemire -------------------------------------- Title: CFO VP ------------------------------------- TBAC MANAGEMENT COMPANY L.P. BY: TBAC GENERAL MANAGEMENT COMPANY, ITS GENERAL PARTNER By: /s/ STAN NINEMIRE --------------------------------- Name: Stan Ninemire ------------------------------- Title: CFO VP ------------------------------ TBAC PRINCE GARDNER, INC. By: /s/ STAN NINEMIRE ---------------------------------------- Name: Stan Ninemire -------------------------------------- Title: CFO VP ------------------------------------- STAGG INDUSTRIES, INC. By: /s/ STAN NINEMIRE ---------------------------------------- Name: Stan Ninemire -------------------------------------- Title: CFO VP ------------------------------------- TBAC-TOREL, INC. By: /s/ STAN NINEMIRE ---------------------------------------- Name: Stan Ninemire -------------------------------------- Title: CFO VP ------------------------------------- TBAC INVESTMENT TRUST, INC. By: /s/ STAN NINEMIRE ---------------------------------------- Name: Stan Ninemire -------------------------------------- Title: CFO VP ------------------------------------- ACCEPTED as of the date first written above. BORROWER TANDY BRANDS ACCESSORIES, INC. By: /s/ STAN NINEMIRE ---------------------------------------- Name: Stan Ninemire -------------------------------------- Title: CFO SVP ------------------------------------- COMPLIANCE CERTIFICATE June 28, 2002 Reference is made to that certain Credit Agreement dated as of June 27, 2001 among Tandy Brands Accessories, Inc. ("BORROWER"), Wells Fargo HSBC trade Bank, N. A. ("Agent"), and the lenders specified therein ("Lenders") (the "Credit Agreement"). Terms which are defined in the Credit Agreement and which are used but not defined herein shall have the meanings given them in the Credit Agreement. The undersigned, Stan Ninemire, Borrower's CEO, hereby certifies in the name, and on behalf, of Borrower that Borrower has made a thorough inquiry into all matters certified herein and based upon such inquiry; experience, and the advice of counsel, does hereby further certify that: 1. All representations and warranties made by the Borrower in any Loan Document delivered on or before the date hereof (including, without limitation, the representations and warranties contained in Section 4 of the Amendment) are true in all material respects on and as of the date hereof (except to the extent that such representations and warranties related solely to an earlier date and except to the extent that the facts upon which such representations are based have been changed by the transactions contemplated in the Credit Agreement) as if such representations and warranties had been made as of the date hereof. 2. No Event of Default exists on the date hereof. 3. Borrower has performed and complied with all agreements and conditions required in the Loan Documents to be performed or complied with by it on or prior to the date hereof. IN WITNESS WHEREOF, this instrument is executed by the undersigned as of the date first above written. TANDY BRANDS ACCESSORIES, INC. By: /s/ STAN NINEMIRE -------------------------------- Name: Stan Ninemire ------------------------------ Title: CFO SVP ----------------------------- EX-13.1 4 d99955exv13w1.txt ANNUAL REPORT TO STOCKHOLDERS EXHIBIT 13.1 [TANDY BRANDS ACCESSORIES, INC. LOGO] [PHOTO] PORTRAITS OF FASHION ANNUAL REPORT 2002 On the cover: Rolfs(R) Handbags and Personal Leather Goods LETTER TO SHAREHOLDERS DEAR SHAREHOLDERS: CONSISTENT PERFORMANCE IN A VERY DIFFICULT RETAIL ENVIRONMENT We are pleased to deliver to you the 2002 Annual Report for Tandy Brands Accessories, Inc. The company performed well in 2002, increasing sales and net income in a very difficult retail environment. As a result of the growth in sales in a variety of product categories, we were able to achieve consistent quarterly performance improvement. BRANDS REMAIN IMPORTANT TO RETAIL SUCCESS Our DOCKERS(R) branded women's accessories were successfully launched in 2002 with actual sales exceeding our original expectations. Due to this success, we were also able to license the LEVI'S(R) brand for women's belts and small leather goods, which will be launched in the first quarter of 2003. We have continued to develop and promote our ROLFS(R) and AMITY(R) brands, resulting in increased sales and consumer brand awareness. We are pleased with our expanding placement of these brands and our excellent rate of sale at retail for both our men's and women's products. EXCITING FASHION TRENDS AND INNOVATIVE PRODUCTS As we anticipated, women's belt trends exploded in 2002 and we were ready with exciting product for all channels of distribution. Belts were a key fashion accessory last year and we anticipate this trend will continue in 2003. Innovative design and packaging have been key selling points, not only for our belts, but also for our wallet and handbag accessories. We have designed new functional features for our small leather goods and handbags, allowing easier and more secure access to driver's licenses and other identification items which are increasingly important in our more security-conscious world. These design innovations make our products "best of class," selling faster than our competition at retail. GROWTH OPPORTUNITIES RESULTING FROM FINANCIAL STRENGTH We had a record year in 2002, generating over $26 million in cash flow from operations. This cash was used primarily to reduce debt, further improving our financial strength. Additionally, we acquired the assets of AA&E Leathercraft, Inc., a leading manufacturer and marketer of hunting and sporting goods accessories. We are very excited about Tandy Brands' growth opportunities as a result of the combined outdoor sporting goods product offerings of our Torel and AA&E businesses. Our financial strength allows the company to take advantage of acquisition opportunities such as Torel and AA&E for profitable, non-dilutive growth. POSITIVE OUTLOOK FOR 2003 Our strong performance in fiscal 2002, despite all the adversity and retail challenges the year brought, demonstrates the strength of our company, our product offerings and the advantages of our diverse customer base. This last fiscal year gives us a solid base on which to build even higher earnings for our shareholders. We are excited about the opportunities for the company in 2003. Thank you for your interest in the company and your continued support. /s/ JAMES F. GAERTNER /s/ J.S.B. JENKINS JAMES F. GAERTNER J.S.B. JENKINS Chairman of the Board President and Chief Executive Officer 1 [PHOTO] BRILLIANT STROKES Straw Accessories for Summertime Fun 2 [PHOTO] HANDSOME HARMONY Premier Leather Accessories Collection for Men 3 [PHOTO] CAPTIVATING COLOR Slippers and Socks in Novelty Themes, Prints and Stripes 4 [PHOTO] VIBRANT VIBES Levi's(R) Trendy Fashion Accessories for Women 5 [PHOTO] BEADED BRIGHTS Splashes of Beaded Art Accent Rolfs(R) Totes and Accessories 6 CONSOLIDATED STATEMENTS OF INCOME TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES (In thousands, except per share amounts)
YEAR ENDED JUNE 30, 2002 2001 2000 --------- --------- --------- Net sales ........................................................... $ 205,769 $ 195,793 $ 187,742 Cost of goods sold .................................................. 133,706 130,032 121,543 --------- --------- --------- Gross margin ..................................................... 72,063 65,761 66,199 Selling, general and administrative expenses ........................ 53,516 49,752 47,086 Depreciation and amortization ....................................... 5,381 5,224 3,856 --------- --------- --------- Total operating expenses ......................................... 58,897 54,976 50,942 --------- --------- --------- Operating income .................................................... 13,166 10,785 15,257 Interest expense .................................................... (2,933) (3,584) (3,236) Royalty and other income and early terminations of license agreements ......................................................... 70 63 1,717 --------- --------- --------- Income before provision for income taxes ............................ 10,303 7,264 13,738 Provision for income taxes .......................................... 4,010 2,824 5,089 --------- --------- --------- Net income ....................................................... $ 6,293 $ 4,440 $ 8,649 ========= ========= ========= Earnings per common share ........................................... $ 1.09 $ .79 $ 1.50 ========= ========= ========= Earnings per common share-assuming dilution ......................... $ 1.08 $ .79 $ 1.49 ========= ========= ========= Common shares outstanding ........................................... 5,779 5,605 5,760 ========= ========= ========= Common shares outstanding-assuming dilution ......................... 5,833 5,609 5,811 ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 7 CONSOLIDATED BALANCE SHEETS TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES (Dollars in thousands)
JUNE 30, 2002 2001 --------- --------- ASSETS Current assets: Cash and cash equivalents ................................................. $ 6,506 $ 79 Accounts receivable, net of allowances of $1,707 and $1,671 ............... 33,699 34,459 Inventories ............................................................... 52,818 62,335 Other current assets ...................................................... 4,806 3,829 --------- --------- Total current assets ..................................................... 97,829 100,702 --------- --------- Property, plant and equipment, at cost: Buildings ................................................................. 7,860 7,227 Leasehold improvements .................................................... 1,624 1,444 Machinery and equipment ................................................... 19,957 17,780 --------- --------- 29,441 26,451 Accumulated depreciation ................................................... (14,373) (11,963) --------- --------- Net property, plant and equipment ........................................ 15,068 14,488 --------- --------- Other assets: Goodwill, net of accumulated amortization of $7,143 and $6,121 ............ 12,467 13,215 Other intangibles, net of accumulated amortization of $3,371 and $2,854 ... 5,403 5,877 Other noncurrent assets ................................................... 2,670 2,702 --------- --------- Total other noncurrent assets ............................................ 20,540 21,794 --------- --------- $ 133,437 $ 136,984 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable .......................................................... $ 12,755 $ 9,408 Accrued payroll and bonuses ............................................... 3,049 1,812 Accrued expenses .......................................................... 3,808 3,099 --------- --------- Total current liabilities ................................................ 19,612 14,319 --------- --------- Other liabilities: Notes payable ............................................................. 30,000 47,400 Other noncurrent liabilities .............................................. 3,161 1,130 --------- --------- Total other liabilities .................................................. 33,161 48,530 --------- --------- Commitments (Note 7) Stockholders' equity: Preferred stock, $1 par value; 1,000,000 shares authorized; none issued ... -- -- Common stock, $1 par value; 10,000,000 shares authorized; 5,899,173 shares and 5,882,926 shares issued and outstanding as of June 30, 2002 and 2001, respectively ............................... 5,899 5,883 Additional paid in capital ................................................ 22,690 22,572 Retained earnings ......................................................... 54,293 48,000 Cumulative other comprehensive income ..................................... (1,706) (670) Treasury stock, at cost; 66,260 shares and 212,011 shares as of June 30, 2002 and 2001, respectively ............................... (512) (1,650) --------- --------- Total stockholders' equity ............................................... 80,664 74,135 --------- --------- $ 133,437 $ 136,984 ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 8 CONSOLIDATED STATEMENTS OF CASH FLOWS TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES (In thousands)
2002 2001 2000 --------- --------- --------- Cash flows from operating activities: Net income ........................................................... $ 6,293 $ 4,440 $ 8,649 Adjustments to reconcile net income to net cash provided by (used for) operating activities: Depreciation ....................................................... 3,993 3,842 2,259 Amortization ....................................................... 1,523 1,443 1,379 Deferred taxes ..................................................... (388) (360) (779) Other .............................................................. (674) (385) (63) Change in assets and liabilities, net of effects from acquisition: Accounts receivable ................................................ 996 (2,291) 2,970 Inventories ........................................................ 9,761 (3,737) 919 Other assets ....................................................... (548) (1,734) (1,607) Accounts payable ................................................... 3,347 1,962 712 Accrued expenses ................................................... 1,963 (156) 191 --------- --------- --------- Net cash provided by operating activities ............................ 26,266 3,024 14,630 --------- --------- --------- Cash flows from investing activities: Purchases of property and equipment .................................. (2,716) (3,484) (3,563) Purchase of assets of AA&E Leathercraft, Inc. ........................ (995) -- -- Acquisition of Stagg Industries, Inc ................................. -- (2,794) -- Purchase of assets of Torel, Inc ..................................... -- (558) -- Purchase of assets of Frank Spielberg Sales, LLC ..................... -- -- (3,367) --------- --------- --------- Net cash used for investing activities ............................... (3,711) (6,836) (6,930) --------- --------- --------- Cash flows from financing activities: Sale of stock to stock purchase program .............................. 1,131 1,222 1,441 Exercise of employee and director stock options ...................... 141 128 190 Purchase of treasury stock ........................................... -- (1,641) (2,500) Proceeds from borrowings ............................................. 65,432 128,971 94,670 Payments under borrowings ............................................ (82,832) (125,450) (101,020) --------- --------- --------- Net cash provided by (used for) financing activities ................. (16,128) 3,230 (7,219) --------- --------- --------- Net increase (decrease) in cash and cash equivalents .................. 6,427 (582) 481 Cash and cash equivalents at beginning of period ...................... 79 661 180 --------- --------- --------- Cash and cash equivalents at end of period ............................ $ 6,506 $ 79 $ 661 ========= ========= ========= Supplemental disclosures of cash flow information: Cash paid during the year for: Interest ........................................................... $ 2,720 $ 3,828 $ 3,425 Income taxes ....................................................... 3,602 3,304 5,824
The accompanying notes are an integral part of these consolidated financial statements. 9 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES (Dollars in thousands)
CUMULATIVE COMMON STOCK ADDITIONAL OTHER ----------------------- PAID IN RETAINED COMPREHENSIVE SHARES AMOUNT CAPITAL EARNINGS INCOME --------- --------- ---------- --------- -------------- Balance at June 30,1999 .............................. 5,761,952 5,762 21,900 34,911 (381) Comprehensive income: Net income ......................................... -- -- -- 8,649 -- Other comprehensive income, net of tax: Currency translation adjustments ................. -- -- -- -- (98) Comprehensive income ................................. Sale of stock to the Tandy Brands Accessories, Inc. Stock Purchase Program ........................ 34,620 35 348 -- -- Sale of unissued common stock to employees for exercise of stock options ...................... 12,396 12 178 -- -- Purchase of treasury stock ........................... -- -- -- -- -- --------- --------- --------- --------- --------- Balance at June 30,2000 .............................. 5,808,968 5,809 22,426 43,560 (479) Comprehensive income: Net income ......................................... -- -- -- 4.440 -- Other comprehensive income, net of tax: Currency translation adjustments ................. -- -- -- -- (182) Cumulative effect of change in accounting principle-fair value of interest rate swap ..... -- -- -- -- 308 Fair value of interest rate swap ................. -- -- -- -- (317) Comprehensive income ................................. Sale of stock to the Tandy Brands Accessories, Inc. Stock Purchase Program ........................ -- -- (211) -- -- Sale of unissued common stock to employees for exercise of stock options ...................... 19,791 20 108 -- -- Issuance of stock pursuant to the purchase of assets of Torel, Inc ................................ 54,167 54 249 -- -- Purchase of treasury stock ........................... -- -- -- -- -- --------- --------- --------- --------- --------- Balance at June 30, 2001 .............................. 5,882,926 5,883 22,572 48,000 (670) Comprehensive income: Net income ......................................... -- -- -- 6,293 -- Other comprehensive income, net of tax: Currency translation adjustments ................. -- -- -- -- 5 Fair value of interest rate swap ................. -- -- -- -- (1,041) Comprehensive income ................................. Sale of stock to the Tandy Brands Accessories, Inc. Stock Purchase Program ........................ -- -- (7) -- -- Sale of unissued common stock to employees for exercise of stock options ...................... 12,958 13 101 -- -- Sale of unissued common stock to directors for exercise of stock options ...................... 3,289 3 24 -- -- --------- --------- --------- --------- --------- Balance at June 30, 2002 ............................. 5,899,173 $ 5,899 $ 22,690 $ 54,293 $ (1,706) ========= ========= ========= ========= ========= TREASURY STOCK TOTAL ------------------------ STOCKHOLDERS' SHARES AMOUNT EQUITY --------- --------- ------------- Balance at June 30, 1999 ............................. -- -- 62,192 Comprehensive income: Net income ......................................... -- -- 8,649 Other comprehensive income, net of tax: Currency translation adjustments ................. -- -- (98) --------- Comprehensive income ................................. 8,551 --------- Sale of stock to the Tandy Brands Accessories, Inc. Stock Purchase Program ........................ 91,058 1,058 1,441 Sale of unissued common stock to employees for exercise of stock options ...................... -- -- 190 Purchase of treasury stock ........................... (247,150) (2,500) (2,500) --------- --------- --------- Balance at June 30, 2000 ............................. (156,092) (1,442) 69,874 Comprehensive income: Net income ......................................... -- -- 4,440 Other comprehensive income, net of tax: Currency translation adjustments ................. -- -- (182) Cumulative effect of change in accounting principle-fair value of interest rate swap ..... -- -- 308 Fair value of interest rate swap ................. -- -- (317) --------- Comprehensive income ................................. 4,249 --------- Sale of stock to the Tandy Brands Accessories, Inc. Stock Purchase Program ........................ 176,888 1,433 1,222 Sale of unissued common stock to employees for exercise of stock options ...................... -- -- 128 Issuance of stock pursuant to the purchase of assets of Torel, Inc ............................... -- -- 303 Purchase of treasury stock ........................... (232,807) (1,641) (1,641) --------- --------- --------- Balance at June 30, 2001 ............................. (212,011) (1,650) 74,135 Comprehensive income: Net income ......................................... -- -- 6,293 Other comprehensive income, net of tax: Currency translation adjustments ................. -- -- 5 Fair value of interest rate swap ................. -- -- (1,041) --------- Comprehensive income ................................. 5,257 --------- Sale of stock to the Tandy Brands Accessories, Inc. Stock Purchase Program ........................ 145,751 1,138 1,131 Sale of unissued common stock to employees for exercise of stock options ...................... -- -- 114 Sale of unissued common stock to directors for exercise of stock options ...................... -- -- 27 --------- --------- --------- Balance at June 30, 2002 ............................. (66,260) $ (512) $ 80,664 ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 10 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES THE COMPANY AND BASIS OF PRESENTATION Tandy Brands Accessories, Inc. (the "Company") designs, manufactures and markets fine leather goods, handbags and fashion accessories for men, women and children. The Company sells its products to a variety of retail outlets, including national chain stores, discount stores, major department stores, specialty stores, catalog retailers, grocery stores, drug stores and the retail exchange operations of the United States military. The preparation of the Company's consolidated financial statements in accordance with accounting principles generally accepted in the United States requires the use of estimates that affect the reported value of assets, liabilities, revenues and expenses. These estimates are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for the Company's conclusions. The Company continually evaluates the information used to make these estimates as the business and economic environment changes. Actual results may differ from these estimates under different assumptions or conditions. The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly owned. All significant intercompany accounts and transactions have been eliminated in consolidation. RECLASSIFICATIONS Certain prior year amounts have been reclassified to conform to the fiscal 2002 presentation. CASH AND CASH EQUIVALENTS The Company considers cash on hand, deposits in banks and short-term investments with original maturities of less than three months as cash and cash equivalents. INVENTORIES Inventories are stated at the lower of cost (principally standard cost which approximates actual cost on a first-in, first-out basis) or market. Cost includes materials, direct and indirect labor and factory overhead. Market, with respect to raw materials, is replacement cost; and for work-in-process and finished goods, it is net realizable value. Inventories consist of the following:
JUNE 30, 2002 2001 ----------- ----------- Raw materials.................................. $ 3,980,000 $ 4,325,000 Work-in-process................................ 977,000 752,000 Finished goods................................. 47,861,000 57,258,000 ----------- ----------- $52,818,000 $62,335,000 =========== ===========
PROPERTY AND EQUIPMENT Property and equipment are carried at cost less accumulated depreciation. Depreciation is calculated at the following rates using the straight-line method: Buildings 3% Leasehold improvements The lesser of the life of the lease or asset Machinery and equipment 10% to 33 1/3%
Maintenance and repairs are charged to expense as incurred. Renewals and betterments which materially prolong the useful lives of the assets are capitalized. The cost and the related accumulated depreciation of property retired or sold are removed from the accounts, and gains or losses from retirements and sales are recognized in the consolidated statements of income. IMPAIRMENT OF LONG-LIVED ASSETS The Company reviews long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset is impaired. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to its estimated fair value, based on future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. FAIR VALUES OF FINANCIAL INSTRUMENTS The Company's financial instruments consist primarily of cash, trade receivables, trade payables, debt instruments and interest rate swaps. The carrying values of cash, trade receivables and trade payables are considered to be representative of their respective fair values. 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. 11 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) GOODWILL AND OTHER INTANGIBLES Goodwill and other intangibles are amortized using the straight-line method over their estimated useful lives ranging from three to forty years. The weighted-average number of years over which goodwill and other intangibles are amortized is 19 years. Goodwill and other intangibles are reviewed for impairment based on estimated future undiscounted cash flows. REVENUES The Company recognizes revenue when merchandise is shipped to customers and title to the goods has passed from the Company to the customer. Sales returns and allowances are recorded at the time the amounts can be reasonably estimated by the Company. The Company performs periodic credit evaluations of its customers' financial conditions and generally does not require collateral. Credit losses have historically been within management's expectations. MAJOR CUSTOMERS Consolidated net sales to Wal-Mart accounted for approximately 39%, 38% and 38% of the Company's sales in fiscal 2002, 2001 and 2000, respectively. Both men's and women's accessories sales include revenues from Wal-Mart. Additionally, consolidated net sales to Target accounted for approximately 13%, 10% and 6% of the Company's sales in fiscal 2002, 2001 and 2000, respectively. Women's accessories sales include revenues from Target. (See Note 13.) No other customers accounted for 10% or more of total revenues. STOCK-BASED COMPENSATION The Company may, with the approval of its Board of Directors, grant stock options for a fixed number of shares to employees with an exercise price equal to the fair value of the shares at the date of grant. The Company accounts for stock option grants in accordance with APB Opinion No. 25, "Accounting For Stock Issued To Employees," and, accordingly, recognizes no compensation expense for the stock option grants. The Company has adopted the disclosure-only provisions as specified by Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting For Stock-Based Compensation." DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," and its amendments, SFAS Nos. 137 and 138, in June 1999 and June 2000, respectively. The Statement, as amended, 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 SFAS 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 investments is to mitigate, subject to market conditions, against interest rate risk. The Company does not enter into any derivative investments for the purpose of speculative investment. The Company's overall risk management philosophy is reevaluated as business conditions arise. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS 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. Upon adoption, the Company reduced both net sales and selling, general and administrative expenses by approximately $3,171,000 and $2,209,000 for fiscal years ended June 30, 2001 and 2000, respectively. These reclassifications have no impact on operating income. In June 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations," and No. 142, "Goodwill and Other Intangible Assets," effective for fiscal years beginning after December 15, 2001. The Company will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of fiscal 2003, except as provided for under SFAS No. 142, goodwill and indefinite lived intangible assets resulting from acquisitions completed after June 30, 2001, will not be amortized. 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 adoption of SFAS No. 142 requires that an initial impairment assessment be performed on all goodwill and indefinite lived intangible assets. To complete this assessment, the Company will compare the fair value to the current carrying value of goodwill and indefinite lived intangible assets. Fair values will be derived using discounted cash flow analysis. The assumptions used in this cash flow will be consistent with our internal planning. Any impairment charge resulting from this initial assessment will be recorded as a cumulative effect of a change in accounting principle. The Company estimates the range of the cumulative effect of adopting this standard will result in a non-cash charge in the first quarter of fiscal 2003 of approximately $900,000 to $1,200,000 on a pre-tax basis. The adoption of this new standard will also benefit pre-tax earnings beginning in fiscal 2003 by approximately $1,000,000 in reduced amortization expense. 12 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) In July 2001, the Financial Accounting Standards Board issued SFAS No. 143, "Accounting for Asset Retirement Obligations," effective for fiscal years beginning after June 15, 2002. This Statement addresses financial accounting and reporting for legal obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The Company does not expect the adoption of this Statement to have a material effect on the Company's consolidated financial position or statements of income, stock-holders' equity and cash flows. In August 2001, the Financial Accounting Standards Board issued SFAS No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets," effective for fiscal years beginning after December 15, 2001. This Statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The Company does not expect the adoption of this Statement to have a material effect on the Company's consolidated financial position or statements of income, stockholders' equity and cash flows. In July 2002, the Financial Accounting Standards Board issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities, such as restructurings, involuntarily terminating employees and consolidating facilities. SFAS No. 146 excludes from its scope exit and disposal activities conducted in connection with a business combination and those activities to which SFAS Nos. 143 and 144 are applicable. SFAS No. 146 is effective for exit and disposal activities that are initiated after December 31, 2002. The Company does not expect the adoption of this Statement to have a material effect on the Company's consolidated financial position or statements of income, stock-holders' equity and cash flows. NOTE 2 - ACQUISITIONS On July 16, 1999, the Company acquired certain assets of Frank Spielberg Sales, LLC ("Spielberg"), a handbag designer and marketer based in St. Louis, Missouri, for approximately $3.4 million. The cash purchase price was provided by drawing on existing bank lines. Spielberg supplies proprietary design, marketing and sourcing expertise for handbags under department store private labels and direct sales to retailers. The acquisition was accounted for under the purchase method of accounting and the resultant goodwill of approximately $2,089,000 is being amortized over 20 years. The pro forma effects of this acquisition are not material. 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 goods and other accessories to various department stores and specialty retailers. In conjunction with the purchase, the Company assumed certain liabilities of which $2,804,000 in bank indebtedness was immediately retired. The purchase method of accounting was used for this acquisition and the resultant goodwill of approximately $2,770,000 and other intangibles related to consideration given for non-compete agreements of approximately $250,000 are being amortized over 20 and 3 years, respectively. The pro forma effects of this acquisition are not material. On April 17, 2001, the Company acquired certain assets of Torel, Inc.("Torel") for an aggregate purchase price 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 and the resultant intangibles related to consideration given for non-compete agreements of approximately $100,000 are being amortized over 7 years. The pro forma effects of this acquisition are not material. On April 12, 2002, the Company acquired certain assets of AA&E Leathercraft, Inc.("AA&E") for approximately $995,000 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. AA&E was combined with existing product offerings in the Company's men's segment. (See Note 13.) The purchase method of accounting was used for this acquisition and the resultant goodwill of approximately $164,000 and other intangibles related to consideration given for non-compete agreements of approximately $75,000. The non-compete agreements are being amortized over 7 years, and the goodwill in accordance with SFAS No. 142 will not be amortized. The pro forma effects of this acquisition are not material. 13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES NOTE 3 - EARNINGS PER SHARE The following sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts):
YEAR ENDED JUNE 30, 2002 2001 2000 ------ ------ ------ Numerator for basic and diluted earnings per share: Net income ........................................................... $6,293 $4,440 $8,649 ====== ====== ====== Denominator: Weighted-average shares outstanding .................................. 5,765 5,592 5,745 Contingently issuable shares ......................................... 14 13 15 ------ ------ ------ Denominator for basic earnings per share-weighted-average shares .... 5,779 5,605 5,760 Effect of dilutive securities: Employee stock options ............................................... 46 3 42 Director stock options ............................................... 8 1 9 ------ ------ ------ Dilutive potential common shares .................................... 54 4 51 Denominator for earnings per share assuming dilution-adjusted weighted-average shares .............................................. 5,833 5,609 5,811 ====== ====== ====== Earnings per share ..................................................... $ 1.09 $ .79 $ 1.50 ====== ====== ====== Earnings per share-assuming dilution ................................... $ 1.08 $ .79 $ 1.49 ====== ====== ======
Options to purchase approximately 455,000 shares of common stock at prices ranging from $12.31-$19.75 per share were outstanding during fiscal year 2002 but were not included in the computation of earnings per share-assuming dilution because the options' exercise prices were greater than the average market price of the common shares and, therefore, the effect would be antidilutive. NOTE 4 - 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 on October 20, 1999, and extended on 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. No shares were repurchased during fiscal 2002. During fiscal 2001 and 2000, the Company repurchased 232,807 and 247,150 shares of treasury stock under the repurchase program at a cost of approximately $1,641,000 and $2,500,000, respectively. During fiscal 2002, 2001 and 2000, 145, 751, 176, 888 and 91,058 shares of treasury stock were reissued to the Company's employee stock purchase program, respectively. NOTE 5 - CREDIT ARRANGEMENTS The Company has a committed secured revolving credit facility ("credit facility") which expires on June 27, 2004, with certain financial institutions for $80,000,000. Of this amount, $10,000,000 is a sub-limit of the credit facility ("swing line") which may be used for same day advances to be provided solely by the administrative agent (a financial institution) of the credit facility. Both the credit facility and swing line bear interest at various rates with short-term durations. The credit facility may be used for 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 existing credit facility currently contains covenants that restrict the payment of dividends. The credit facility also includes a commitment fee based on certain financial performance objectives ranging from 25 to 37.5 basis points on the unused balance. Principal payments on the credit facility are due on the expiration date. At June 30, 2002 and 2001, the Company had borrowings under the credit facility of $30,000,000 and $44,000,000, bearing interest at 5.60% and 5.75%, respectively. At June 30, 2002, the Company had no borrowings under the swing line. At June 30, 2001, the Company had borrowings under the swing line of $3,400,000, bearing interest at 6.75%. 14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES NOTE 5 - CREDIT ARRANGEMENTS (continued) At June 30, 2002, the Company had letters of credit under the credit facility of $8,126,000 which were used in conjunction with merchandise procurement. At June 30, 2001, the Company had no letters of credit or bankers acceptances under the credit facility. However, at June 30, 2001, the Company had a $5,000,000 standby letter of credit outstanding as security for letters of credit of $4,942,000 issued by another bank which were used in conjunction with merchandise procurement. The Company also has a Canadian line of credit for approximately $659,000 secured by a letter of credit from a U.S. bank. At June 30, 2002 and 2001, there were no borrowings under this line of credit. 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. On July 1, 2001, the Company entered into a three-year interest rate swap agreement with the administrative agent, which expires on June 27, 2004, 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. At June 30, 2002, the receive and pay rates related to the interest rate swap were 2.04% and 5.60%, respectively. Interest differentials paid or received under the swap agreement are reflected as an adjustment to interest expense when paid. The interest rate swap agreement represents a valid cash flow hedge investment under Statement 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 June 30, 2002, approximating $1,700,000 ($1,041,000, net of tax of $659,000). 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. At June 30, 2002, the Company had borrowings under its credit lines of $30,000,000 bearing a weighted-average interest rate of 4.47%. At June 30, 2002, the Company had credit availability under its credit facility of approximately $41.9 million. Under the above credit facilities, future payments required for debt maturities will be $30,000,000 in fiscal year 2004. NOTE 6 - INCOME TAXES Significant components of the Company's deferred tax assets and liabilities as of June 30, 2002 and 2001, are as follows:
2002 2001 ----------- ----------- Deferred tax assets: Accounts receivable valuation ........ $ 539,000 $ 406,000 Inventory valuation .................. 2,256,000 1,785,000 Interest rate swap ................... 659,000 -- Other, net ........................... 752,000 654,000 ----------- ----------- Total deferred tax assets .......... 4,206,000 2,845,000 ----------- ----------- Deferred tax liabilities: Goodwill and other intangibles ....... (1,038,000) (846,000) Depreciation ......................... (269,000) (147,000) ----------- ----------- Total deferred tax liabilities ..... (1,307,000) (993,000) ----------- ----------- Net deferred tax asset ................. $ 2,899,000 $ 1,852,000 =========== ===========
15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES NOTE 6 - INCOME TAXES (continued) Significant components of the provision (benefit) for income taxes are as follows:
2002 2001 2000 ----------- ----------- ----------- Current: Federal .................... $ 4,215,000 $ 2,918,000 $ 5,483,000 Foreign .................... (88,000) 12,000 64,000 State and local ............ 271,000 254,000 321,000 ----------- ----------- ----------- 4,398,000 3,184,000 5,868,000 ----------- ----------- ----------- Deferred: Federal .................... (369,000) (333,000) (740,000) State and local ............ (19,000) (27,000) (39,000) ----------- ----------- ----------- (388,000) (360,000) (779,000) ----------- ----------- ----------- Income tax provision ..... $ 4,010,000 $ 2,824,000 $ 5,089,000 =========== =========== ===========
The following table reconciles the statutory federal income tax rate to the effective income tax rate:
2002 2001 2000 ------ ------ ------ Statutory rate ............................................. 34.0% 34.0% 34.0% State and local taxes, net of federal income tax benefit ... 2.5% 2.1% 1.4% Other,net .................................................. 2.4% 2.8% 1.6% ------ ------ ------ 38.9% 38.9% 37.0% ====== ====== ======
NOTE 7 - COMMITMENTS The Company leases property which includes office, manufacturing and warehouse facilities under operating leases, expiring through the year 2010 with varying renewal and escalation clauses. Rental expense for fiscal 2002, 2001 and 2000 totaled $2,251,000, $2,199,000 and $1,814,000, respectively. The Company has entered into licensing agreements with other companies for the purpose of using their trademarks on the Company's products. Royalty expense related thereto for fiscal 2002,2001 and 2000 totaled $1,960,000,$984,000 and $1,354,000,respectively. Future minimum rental and royalty commitments as of June 30,2002,are as follows:
FISCAL YEAR AMOUNT ----------- ------ 2003 ......................... $ 3,119,000 2004 ......................... 2,129,000 2005 ......................... 1,199,000 2006 ......................... 1,036,000 2007 ......................... 796,000 Thereafter ................... 1,735,000 ----------- $10,014,000 ===========
NOTE 8 - TERMINATIONS OF LICENSE AGREEMENTS On November 9, 1999, the Company and Jones Apparel Group amended their existing licensing agreement. Under the amended agreement the Company continued to design and market men's belts and personal leather goods as well as women's small leather goods under various JONES NEW YORK(R) brands but will no longer design and market women's handbags under any JONES NEW YORK(R) brands. As compensation for the early termination of women's handbag license rights, Jones Apparel Group paid the Company $1,500,000 in cash, of which a portion was used to wind down functions related to the license arrangements. Consequently, the results for fiscal 2000 include a one-time benefit, net of related costs, of $1,000,000 from the amendment of this licensing agreement. 16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES NOTE 8 - TERMINATIONS OF LICENSE AGREEMENTS (continued) On March 3, 2000, the Company and Jones Apparel Group amended their existing licensing agreement. Under the amended agreement the Company continues to design and market men's small leather goods and belts under various JONES NEW YORK(R) brands but will no longer design and market women's small leather goods under any JONES NEW YORK(R) brands. As compensation for the early termination of the small leather goods license rights, Jones Apparel Group paid the Company $800,000 in cash. Additionally, Jones Apparel Group reimbursed the Company for its on-hand small leather goods inventory of approximately $950,000. Consequently, the results for fiscal 2000 include a one-time benefit, net of related costs, of $600,000 from the termination of this licensing agreement. NOTE 9 - EMPLOYEE STOCK OPTIONS The Company has adopted various stock option incentive plans for officers and key management employees. All options will be granted at the market price as of the date of grant and have a contractual life of ten years. Options are generally exercisable annually at a rate of 33% per year beginning one year after the grant date. At June 30, 2002 and 2001, the number of shares available for grant were 645,117 and 325,264, respectively. The following table reflects the employee stock option transactions subsequent to June 30, 1999:
NUMBER WEIGHTED-AVERAGE OF SHARES EXERCISE PRICE --------- ---------------- Outstanding at June 30, 1999 ........ 495,354 $13.22 Options granted ..................... 149,500 $15.45 Options exercised ................... (8,200) $ 7.97 Options canceled or expired ......... (34,700) $16.07 ------- Outstanding at June 30, 2000 ........ 601,954 $13.96 Options granted ..................... 169,500 $ 8.38 Options exercised ................... (15,526) $ 2.74 Options canceled or expired ......... -- $ -- ------- Outstanding at June 30, 2001 ........ 755,928 $12.94 Options granted ..................... 180,000 $ 5.63 Options exercised ................... (12,958) $ 8.70 Options canceled or expired ......... (80,956) $11.13 ------- Outstanding at June 30, 2002 ........ 842,014 $11.62 ======= Exercisable at June 30, 2002 ........ 514,751 $13.91 =======
The following table, as of June 30, 2002, segregates outstanding options into groups based on price ranges of less than and more than $10 per share:
$5.63-$9.25 $12.31-$19.75 ----------- ------------- All outstanding options: Number of shares ................................................ 443,564 398,450 Weighted-average exercise price ................................. $7.16 $16.58 Weighted-average remaining contractual life ..................... 8.2 years 6.0 years Exercisable options: Number of shares ................................................ 159,311 355,440 Weighted-average exercise price ................................. $8.03 $16.55
Pro forma information regarding net income and earnings per share is required by SFAS No. 123, "Accounting for Stock-Based Compensation," and has been determined as if the Company had accounted for its stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions for fiscal 2002, 2001 and 2000: dividend yield of 0.0%; expected volatility of 0.334%, 0.356% and 0.375% for fiscal 2002, 2001 and 2000, respectively; a risk-free interest rate of 6.50%, 6.69% and 7.25% for fiscal 2002, 2001 and 17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES NOTE 9 - EMPLOYEE STOCK OPTIONS (continued) 2000, respectively; and an expected holding period of seven years. Using these assumptions for the options granted during fiscal 2002, 2001 and 2000, the weighted-average grant date fair value of such options was $2.76, $4.36 and $8.80, respectively. The Black-Scholes valuation models are used in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility and the average life of options. Because the Company's stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense on a straight-line basis over the options' vesting periods. The Company's pro forma information follows:
2002 2001 2000 --------- --------- --------- Net income: As reported ....................... $ 6,293 $ 4,440 $ 8,649 Pro forma ......................... $ 5,731 $ 3,715 $ 7,939 Earnings per share: As reported ....................... $ 1.09 $ 0.79 $ 1.50 Pro forma ......................... $ 0.99 $ 0.66 $ 1.38 Earnings per share-assuming dilution: As reported ....................... $ 1.08 $ 0.79 $ 1.49 Pro forma ......................... $ 0.98 $ 0.66 $ 1.37
NOTE 10 - NON-EMPLOYEE DIRECTOR STOCK PLANS In fiscal 1995, the stockholders of the Company adopted the Tandy Brands Accessories, Inc. 1995 Stock Deferral Plan for Non-Employee Directors (the "Deferral Plan"). The Deferral Plan was established to provide non-employee directors an equity interest in the Company in order to attract and retain well-qualified individuals to serve as non-employee directors and to enhance the identity of interests between the non-employee directors and the stockholders of the Company. The Deferral Plan provides the directors with an election to defer the receipt of their annual and committee chair retainer fees until a future date determined by each director. The payment of such fees will be in the form of shares of the Company's common stock. The shares are calculated by dividing the deferred cash amount by the average closing price of the stock for each day of the period during which such cash amount would have been paid but for the deferral election. The Company records compensation expense for the amount of the directors' retainer fees. The Company benefits from cash retained when directors elect to defer their retainer fees and receive stock. The Deferral Plan provides for the granting of up to 50,000 shares of the Company's common stock to non-employee directors. The Deferral Plan became active in May 1996. During fiscal 2002, 2001 and 2000, there were 4,030, 5,084 and 6,258 shares issued to directors, respectively. Amounts recorded as compensation expense related to the Deferral Plan for fiscal 2002, 2001 and 2000 were $31,470, $30,080 and $25,447, respectively. The Company offers other stock incentive plans for non-employee directors. In conjunction with these plans, 137,251 options were outstanding as of June 30, 2002. The options range in price from $6.09 to $19.00 and are generally exercisable beginning one year after the grant date. During fiscal 2002, 2001 and 2000, options totaling 3,289, 4,112 and 4,125 were exercised, respectively. NOTE 11 - EMPLOYEE BENEFIT PLANS The Tandy Brands Accessories, Inc. Employees Investment Plan (the "401(k) Plan") is open to substantially all full-time employees who have completed one year of service. Under the 401(k) Plan, an eligible employee may contribute up to 10% of their annual compensation to the 401(k) Plan on a pre-tax basis. The Company, at its discretion, matches 100% of employee contributions up to 5% of their compensation. The 401(k) Plan allows participant investment direction of both employee and matching employer contributions from a variety of investment alternatives, one of which is the Company's common stock. All contributions made to the Plan prior to July 1, 2000, are fully vested and are held in a fund invested primarily in Company common stock. 18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES NOTE 11 - EMPLOYEE BENEFIT PLANS (continued) The Tandy Brands Accessories, Inc. Stock Purchase Program (the "Program") is open to all full-time employees who are enrolled in the 401(k) Plan. Under the Program, participants may contribute 5% or 10% of their earnings, with the Company matching 25% or 50% of each participant's contribution depending on their length of employment. The Program purchases treasury stock, if available (see Note 4), or unissued common stock directly from the Company at monthly average market prices. The participant's shares are fully vested upon purchase, the employee may withdraw at any time and the shares purchased under the Program are distributed to participants annually. Total Company contributions to these plans were approximately $917,000, $921,000 and $1,406,000 in fiscal 2002, 2001 and 2000, respectively. NOTE 12 - PREFERRED STOCK AND PREFERRED SHARE PURCHASE RIGHTS PREFERRED STOCK The Company's Board of Directors is authorized to approve the issuance of preferred stock without further stockholder approval. The Board of Directors of the Company is also authorized to determine, without any further action by the holders of the Company's common stock, the dividend rights, dividend rate, conversion or exchange rights, voting rights, rights and terms of redemption, liquidation preferences and sinking fund terms of any series of preferred stock, the number of shares constituting any series of preferred stock and the designation thereof. No shares of preferred stock have been issued. In connection with the adoption of its Preferred Share Purchase Rights Plan (the "Rights Plan"), the Company has designated and reserved for issuance upon exercise of such rights 150,000 shares of Series A Junior Participating Cumulative Preferred Stock. Should the Board of Directors elect to exercise its authority to issue any additional series of preferred stock, the rights, preferences and privileges of holders of the Company's common stock would be made subject to the rights, preferences and privileges of such additional series. PREFERRED SHARE PURCHASE RIGHTS Prior to the spin-off of the Company, the Board of Directors authorized the Rights Plan. In conjunction with the spin-off, each share of the Company's common stock was distributed with one preferred share purchase right (collectively, the "Rights") which entitles the registered holder to purchase from the Company one one-hundredth (1/100) of a share of Series A Junior Participating Cumulative Preferred Stock at a price of $36 per one one-hundredth of a share, subject to adjustment. The Rights Plan is designed to deter coercive or unfair takeover tactics and to prevent an acquirer from gaining control of the Company without offering a fair price to all of the Company's stockholders. The Rights will cause substantial dilution to a person or group that attempts to acquire the Company on terms not approved by the Company's Board of Directors, except pursuant to an offer conditioned upon a substantial number of Rights being acquired. The description and terms of the Rights are set forth in a Rights Agreement between the Company and BankBoston N.A., as Rights Agent. On November 2, 1999, the Board of Directors renewed the Rights Plan. A new amended and restated plan was adopted in the normal course of updating and extending the predecessor stockholder Rights Plan, which was scheduled to expire on December 31, 2000, and not in response to any acquisition proposal. The expiration date of the Rights Plan has been extended to October 19, 2009. The amended plan was altered to reflect prevailing stockholder Rights Plan terms, such as lowering the share ownership level which triggers the exercise of the Rights and eliminating the continuing director provision. The amended Rights Plan provides for an increase in the exercise price of the Rights under the plan from $36.00 to $70.00. 19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES NOTE 13 - 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. No intersegment revenue is recorded. Information regarding operations and assets by segment are as follows:
YEAR ENDED JUNE 30, 2002 2001 2000 --------- --------- --------- Revenue from external customers: Men's accessories ......................... $ 107,525 $ 110,102 $ 110,003 Women's accessories ....................... 98,244 85,691 77,739 --------- --------- --------- $ 205,769 $ 195,793 $ 187,742 ========= ========= ========= Operating income/(loss)(1): Men's accessories ......................... $ 8,396 $ 11,336 $ 14,296 Women's accessories ....................... 4,770 (551) 961 --------- --------- --------- 13,166 10,785 15,257 Interest expense ............................ (2,933) (3,584) (3,236) Other income(2) ............................. 70 63 1,717 --------- --------- --------- Income before income taxes .................. $ 10,303 $ 7,264 $ 13,738 ========= ========= ========= Depreciation and amortization expense: Men's accessories ......................... $ 3,382 $ 3,170 $ 2,348 Women's accessories ....................... 1,999 2,054 1,508 --------- --------- --------- $ 5,381 $ 5,224 $ 3,856 ========= ========= ========= Capital expenditures: Men's accessories ......................... $ 274 $ 909 $ 266 Women's accessories ....................... 1,596 839 1,573 Corporate ................................. 1,120 2,386 1,945 --------- --------- --------- $ 2,990 $ 4,134 $ 3,784 ========= ========= ========= Total assets: Men's accessories ......................... $ 65,201 $ 70,464 $ 61,546 Women's accessories ....................... 46,157 50,388 45,948 Corporate ................................. 22,079 16,132 15,099 --------- --------- --------- $ 133,437 $ 136,984 $ 122,593 ========= ========= =========
(1) Operating income/(loss) 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, the early terminations of license agreements (see Note 8) and other income not specifically identifiable to a segment. 20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES NOTE 14 - RELATED PARTY TRANSACTIONS During fiscal 2002, 2001 and 2000, the Company purchased inventory of approximately $35,221,000, $47,798,000, and $41,775,000, respectively, from a supplier who is a principal shareholder of the Company. The merchandise is purchased at amounts which the Company believes approximate fair market value. Although the potential exposure for product flow interruption may be significant in the event of loss of such supplier, this exposure is mitigated in that the inventory may be purchased from various other sources. NOTE 15 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) The summarized quarterly financial data (in thousands, except per share amounts) for the two years ended June 30, 2002, is set forth below:
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER -------- -------- -------- -------- FISCAL 2002 Net sales ........................................... $ 54,106 $ 60,607 $ 46,629 $ 44,427 Gross profit ........................................ 19,033 21,216 16,275 15,539 Income before income taxes .......................... 3,567 5,224 984 528 Net income .......................................... 2,182 3,191 598 322 Earnings per common share ........................... $ .38 $ .55 $ .10 $ .06 Earnings per common share-assuming dilution ......... $ .38 $ .55 $ .10 $ .05 FISCAL 2001 Net sales ........................................... $ 53,469 $ 56,223 $ 41,540 $ 44,561 Gross profit ........................................ 18,181 19,656 13,965 13,959 Income before income taxes .......................... 3,328 4,636 633 (1,333) Net income/(loss) ................................... 2,035 2,848 388 (831) Earnings/(loss)per common share ..................... $ .36 $ .51 $ .07 $ (.15) Earnings/(loss)per common share-assuming dilution ... $ .36 $ .51 $ .07 $ (.15)
21 REPORT OF INDEPENDENT AUDITORS TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES To the Board of Directors of Tandy Brands Accessories, Inc. We have audited the accompanying consolidated balance sheets of Tandy Brands Accessories, Inc. and subsidiaries as of June 30, 2002 and 2001, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended June 30, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Tandy Brands Accessories, Inc. and subsidiaries at June 30, 2002 and 2001, and the consolidated results of their operations and their cash flows for each of the three years in the period ended June 30, 2002, in conformity with accounting principles generally accepted in the United States. /s/ ERNST & YOUNG Fort Worth, Texas August 2, 2002 22 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES GENERAL Tandy Brands Accessories, Inc. (the "Company") is a leading designer, manufacturer and marketer of branded men's, women's and children's accessories, including belts and small leather goods such as wallets. The Company's product line also includes handbags, socks, scarves, gloves, 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'S(R), JONES NEW YORK(R), PERRY ELLIS(R), ROLFS(R), HAGGAR(R), WOOLRICH(R), JORDACHE(R), INDIAN MOTORCYCLE(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 stores, 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. The Company seeks increased accessory sales and earnings through a variety of means, including increased sales through the Company's current operating units as well as growth through acquisitions of similar businesses. During the fourth quarter of fiscal 2002, the Company acquired certain assets of AA&E Leathercraft, Inc. ("AA&E"). See Note 2 to the consolidated financial statements. Sales and gross margin data from the Company's segments for fiscal 2002 compared to the previous two fiscal years were as follows:
YEAR ENDED JUNE 30, 2002 2001 2000 -------- -------- -------- (Dollars in thousands) Net sales: Men's accessories .................... $107,525 $110,102 $110,003 Women's accessories .................. 98,244 85,691 77,739 -------- -------- -------- Total net sales ........................ $205,769 $195,793 $187,742 ======== ======== ======== Gross margin: Men's accessories .................... $ 40,236 $ 41,915 $ 42,887 Women's accessories .................. 31,827 23,846 23,312 -------- -------- -------- Total gross margin ..................... $ 72,063 $ 65,761 $ 66,199 ======== ======== ======== Gross margin as percentage of sales: Men's accessories .................... 37.4% 38.1% 39.0% Women's accessories .................. 32.4% 27.8% 30.0% Total ................................ 35.0% 33.6% 35.3%
See Note 13 to the consolidated financial statements for certain other financial information with regard to the Company's men's and women's accessories segments. 23 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES FISCAL 2002 COMPARED TO FISCAL 2001 NET SALES Net sales increased $10.0 million, or 5.1%, in fiscal 2002 as compared to fiscal 2001. The overall increase was attributable to higher sales volume in existing women's product lines. Net sales of men's accessories decreased $2.6 million, or 2.3%, in fiscal 2002 compared to fiscal 2001. The decrease in men's sales was due to the difficult retail environment experienced during the first quarter of fiscal 2002, resulting in lower than anticipated mass merchant and department store orders. Although men's product sales decreased in fiscal 2002 as compared to fiscal 2001, the sales results were consistent with the Company's internal sales plan for fiscal 2002. Net sales of women's accessories increased $12.6 million, or 14.7%, in fiscal 2002 as compared to fiscal 2001. 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, the women's mass merchant accessory division accounted for $12.3 million of the $12.6 million overall increase in women's accessories net sales. GROSS MARGIN Gross margins increased $6.3 million, or 9.6%, in fiscal 2002 as compared to fiscal 2001. As a percentage of sales, gross margins increased 1.4% in fiscal 2002 compared to fiscal 2001. Men's gross margins decreased $1.7 million, or 4.0%, which was offset by an increase in women's gross margins of $8.0 million, or 33.5%, respectively, in fiscal 2002 as compared to fiscal 2001. As a percentage of sales, men's gross margins decreased 0.7%, in fiscal 2002 as compared to fiscal 2001. The decrease was the result of a greater sales mix of mass merchant sales and increased customer allowances. Women's gross margins as percentage of sales increased 4.6% in fiscal 2002 as compared to fiscal 2001. The increase was due to margin improvements in the Company's women's mass merchant product sales. OPERATING EXPENSES Selling, general and administrative expenses increased $3.8 million, or 7.6%, in fiscal 2002. As a percentage of sales, selling, general and administrative expenses increased 0.6%. The increase resulted primarily from the recording of $1.1 million of additional management bonuses as a result of improved financial performance as compared to the same period in the prior year. Interest expense for the fiscal year ended 2002 decreased $0.7 million, as compared to the same period for 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. Depreciation and amortization expenses were approximately $5.4 million in fiscal 2002, compared to approximately $5.2 million in fiscal 2001. The increase was primarily attributable to depreciation on capital expenditures related to leasehold improvements and equipment related to the Company's distribution facility in Dallas, Texas, for women's accessories as well as additional computer hardware and software applications. The effective tax rate for fiscal 2002 was 38.9%, which was consistent with the same period in the prior fiscal year. Net income for fiscal 2002 increased 41.7% to $6.3 million, or $1.08 per diluted share, compared to net income of $4.4 million, or $0.79 per diluted share, for fiscal 2001. The increase in fiscal 2002 net income was primarily due to the higher margin sales mix of women's accessories. 24 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES FISCAL 2001 COMPARED TO FISCAL 2000 NET SALES Net sales increased $8.1 million, or 4.3%, in fiscal 2001 as compared to fiscal 2000. The overall increase was attributable to higher sales volume in existing women's product lines and sales from Stagg Industries, Inc., acquired during fiscal 2001. Net sales of men's accessories increased 0.1% in fiscal 2001 compared to fiscal 2000. The increase was due to sales of $4.2 million contributed from the Company's acquisition of Stagg, which offset sales shortfalls experienced by the Company's core men's business due to the weak department store and chain retail environment as well as the discontinuation of business of several retail customers as a result of industry consolidation, store closures and bankruptcies. Net sales of women's accessories increased 10.2% in fiscal 2001 as compared to fiscal 2000. The increase was due to higher mass merchant accessories sales and $2.0 million in initial shipments of DOCKERS(R) women's belts, small leather goods and handbags. GROSS MARGIN Gross margins decreased $438,000, or 0.7%, in fiscal 2001 as compared to fiscal 2000. As a percentage of sales, gross margins decreased 1.7% in fiscal 2001 compared to fiscal 2000. Men's gross margins decreased $972,000, or 2.3%, which was partially offset by an increase in women's gross margins of $534,000, or 2.3%, respectively, in fiscal 2001 as compared to fiscal 2000. As a percentage of sales, men's and women's gross margins decreased 0.9% and 2.2%, respectively, in fiscal 2001 as compared to fiscal 2000. This overall decrease was the result of a greater sales mix of mass merchant sales and a 30.3% increase in customer allowances and discounts as compared to the prior fiscal year. The rise in customer allowances and discounts during fiscal 2001 was attributable to increased competition with substantial pricing pressure in the retail environment, especially in the sales of women's accessories to the Company's mass merchant customers. OPERATING EXPENSES Selling, general and administrative expenses increased $2.7 million, or 5.7%,in fiscal 2001. As a percentage of sales, selling, general and administrative expenses increased 0.3%. The increase resulted from the recording of $650,000 of additional bad debt expense related to the bankruptcy of a significant customer during the fourth quarter of fiscal 2001 as well as a $575,000 increase in advertising expense in fiscal 2001 as compared to the same period in the prior year. Interest expense for the fiscal year ended 2001 increased $0.3 million,as compared to the same period for the prior year. The increase is primarily related to higher average debt levels in fiscal 2001. Depreciation and amortization expenses were approximately $5.2 million in fiscal 2001, compared to approximately $3.9 million in fiscal 2000. The 35.5% increase was primarily 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. The effective tax rates for fiscal 2001 and fiscal 2000 were 38.9% and 37.0%, respectively. The effective tax rate in fiscal 2001 increased due primarily to higher effective tax rates on state and local taxes. Net income for fiscal 2001 decreased 48.7% to $4.4 million, or $0.79 per diluted share, compared to net income of $8.7 million, or $1.49 per diluted share, for fiscal 2000. On March 3, 2000, and November 9, 1999, the Company negotiated an early termination of its JONES NEW YORK(R) handbag and small leather goods licensing agreements, respectively. See Note 8 to the consolidated financial statements. Excluding the net benefit of the early license termination realized during the second and third quarter of fiscal 2000, net income for the twelve months ended fiscal 2000 was $7.6 million, or $1.32 per diluted share. The decrease in fiscal 2001 net income was primarily due to a lower margin sales mix of women's accessories and increased sales allowances and discounts. 25 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES LIQUIDITY AND CAPITAL RESOURCES During fiscal 2002, the Company's operating activities provided cash of $26.3 million compared to $3.0 million for fiscal 2001. The increase was attributable to higher net income and improved inventory control initiatives. The Company used cash for investing activities of $3.7 million in fiscal 2002 compared to $6.8 million in fiscal 2001. During the fourth quarter of fiscal 2002, the Company acquired certain assets of AA&E using cash of $995,000. See Note 2 to the consolidated financial statements. During fiscal 2002, the Company invested a total of $2.7 million in additional property and equipment. Capital expenditures for fiscal 2002 included additional equipment for the Company's distribution facility in Dallas, Texas, as well as additional hardware and software applications. The Company's primary sources of liquidity for its various expenditures have been cash flows from operations and borrowings under bank credit arrangements. The Company has an $80,000,000 committed secured revolving credit facility which can be used for general corporate purposes, including working capital requirements, acquisition activities and funding of letters of credit. The credit facility secured by essentially all of the assets of the Company and its subsidiaries requires the maintenance of certain financial covenants, which if not met, could adversely impact the liquidity of the Company. See Note 5 to the consolidated financial statements. The Company also has a Canadian line of credit for approximately $659,000 secured by a letter of credit from a U.S. bank. As of June 30, 2002, the Company had credit availability under its credit facilities of approximately $41.9 million. Under the above credit facilities, future payments required for debt maturities will be $30,000,000 in fiscal year 2004. 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 agreement currently contains covenants that restrict the payment of dividends. See Note 4 to the consolidated financial statements for a discussion of the Company's stock repurchase program. See Note 7 to the consolidated financial statements for a discussion of the Company's future minimum rental and royalty commitments. The Company believes it has adequate financial resources and access to sufficient credit facilities to satisfy its future working capital needs. OFF BALANCE SHEET ARRANGEMENTS The Company does not have transactions, arrangements or relationships with "special purpose" entities, and the Company does not have any off balance sheet debt. CRITICAL ACCOUNTING POLICIES The preparation of the Company's consolidated financial statements in accordance with accounting principles generally accepted in the United States requires the use of estimates that affect the reported value of assets, liabilities, revenues and expenses. These estimates are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for the Company's conclusions. The Company continually evaluates the information used to make these estimates as the business and economic environment changes. Actual results may differ from these estimates under different assumptions or conditions. The use of estimates is pervasive throughout the consolidated financial statements, but the accounting policies and estimates considered most critical are as follows: REVENUES The Company recognizes revenue when merchandise is shipped to customers and title to the goods has passed from the Company to the customer. Sales returns and allowances are recorded at the time the amounts can be reasonably estimated by the Company. The Company performs periodic credit evaluations of its customers' financial conditions and generally does not require collateral. Credit losses have historically been within management's expectations. 26 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES INVENTORIES Inventories are stated at the lower of cost (principally standard cost which approximates actual cost on a first-in, first-out basis) or market. Cost includes materials, direct and indirect labor and factory overhead. Market, with respect to raw materials, is replacement cost; and for work-in-process and finished goods, it is net realizable value. If circumstances arise in which the market value of items in inventory decline below cost, an inventory markdown would be estimated and charged to expense in the period identified. Management closely monitors fashion trend items and anticipates additional inventory markdowns if market indications in fashion trends justify further reserves. GOODWILL Goodwill and other intangibles are amortized using the straight-line method over their estimated useful lives ranging from three to forty years. The weighted-average number of years over which goodwill and other intangibles are amortized is 19 years. Goodwill and other intangibles are reviewed for impairment based on estimated future undiscounted cash flows. The Company examines the carrying value of its 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 undiscounted 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. DERIVATIVES The Company's risk management policy as it relates to derivative investments is to mitigate, subject to market conditions, against interest rate risk. The Company does not enter into any derivative investments for the purpose of speculative investment. The Company's overall risk management philosophy is reevaluated as business conditions arise. See Note 1 to the consolidated financial statements for a discussion of the impact of recently issued accounting standards. 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 operating results of the Company during the past three fiscal years. FORWARD-LOOKING STATEMENTS This Management's Discussion and Analysis of Financial Condition and Results of Operations and other sections of this annual report 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. 27 SELECTED FINANCIAL DATA TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES (In thousands, except per share amounts)
YEAR ENDED JUNE 30, 2002 2001 2000 1999 1998 -------- -------- -------- -------- -------- INCOME STATEMENT DATA: Net sales .................................. $205,769 $195,793 $187,742 $177,052 $133,889 Gross profit ............................... 72,063 65,761 66,199 64,347 47,769 Operating income ........................... 13,166 10,785 15,257 18,538 13,002 Interest expense ........................... 2,933 3,584 3,236 3,011 1,517 Net income ................................. $ 6,293 $ 4,440 $ 8,649 $ 9,717 $ 7,237 Net income per share: Earnings per share ....................... $ 1.09 $ 0.79 $ 1.50 $ 1.70 $ 1.30 Earnings per share-assuming dilution ..... $ 1.08 $ 0.79 $ 1.49 $ 1.67 $ 1.27
JUNE 30, 2002 2001 2000 1999 1998 -------- -------- -------- -------- -------- BALANCE SHEET DATA: Working capital ............................ $ 78,217 $ 86,383 $ 80,085 $ 80,847 $ 56,334 Total assets ............................... 133,437 136,984 122,593 120,138 108,020 Long-term debt ............................. 30,000 47,400 41,075 47,425 35,000 Stockholders' equity ....................... 80,664 74,135 69,874 62,192 50,841
Net income includes the net pre-tax benefit arising from the early terminations of licensing agreements of $1,600,000 in fiscal 2000. PRICE RANGE OF COMMON STOCK Quoted by quarter for the two fiscal years ended June 30, 2002
FISCAL 2002 HIGH LOW FISCAL 2001 HIGH LOW September ..................... $ 6.95 $5.55 September .............. $9.38 $6.69 December ...................... $ 8.05 $5.67 December ............... $7.63 $5.75 March ......................... $ 9.69 $7.05 March .................. $7.94 $6.00 June .......................... $12.69 $9.15 June ................... $6.42 $5.00
As of August 12, 2002, there were approximately 927 stockholders of record. 28 DIRECTORS C.A. Rundell, Jr. Marvin J. Girouard Private Investor Chairman and Chief Executive Dr. James F. Gaertner Officer Chairman of the Board Gene Stallings Pier 1 Imports, Inc. President Collegiate and Professional Football Sam Houston State University Coach, Rancher, Author and Private Roger R. Hemminghaus Investor Chairman Emeritus J.S.B. Jenkins Ultramar Diamond Shamrock President and Chief Executive Officer Colombe M. Nicholas Tandy Brands Accessories, Inc. Private Investor - ----------------------------------------------------------------------------------------------------------------------------------- OFFICERS CORPORATE DATA J.S.B. Jenkins Corporate Offices Common Stock Transfer Agent President and Chief Executive 690 East Lamar Boulevard and Registrar Officer Suite 200 EquiServe Arlington, Texas 76011 www.equiserve.com Stanley T. Ninemire 817-548-0090 781-575-3120 Executive Vice President www.tandybrands.com Corporate Counsel Mark J. Flaherty Annual Meeting Winstead Sechrest & Minick P.C Chief Financial Officer 10:00 a.m., October 16, 2002 Wyndham Arlington The Company's common stock W. Mike Baggett 1500 Convention Center Drive is traded on the NASDAQ Secretary Arlington, Texas 76011 National Market System under 817-261-8200 the trading symbol TBAC. The Company's Form 10-K Report for the year ended June 30, 2002, as filed with the Securities and Exchange Commission, is available without charge upon request to Mark J. Flaherty at the address of the Corporate Offices.
On the back cover: Men's All-Italian Architectural Dress Belts [TANDY BRANDS ACCESSORIES, INC. LOGO] [PHOTO] 690 East Lamar Boulevard Suite 200 Arlington,Texas 76011 817-548-0090 www.tandybrands.com 1420-AR-02 EX-21.1 5 d99955exv21w1.txt LIST OF SUBSIDIARIES EXHIBIT 21.1 LIST OF SUBSIDIARIES
Subsidiaries of State or Other Jurisdiction of Names Under Which Such the Registrant Incorporation or Organization Subsidiaries Do Business Accessory Design Group, Inc. A Delaware Corporation Accessory Design Group, Inc. Accessory Design Group TBAC-Prince Gardner, Inc. A Delaware Corporation TBAC-Prince Gardner, Inc. Prince Gardner H.A. Sheldon Canada Ltd. A Canadian Corporation 1088258 Ontario, Inc. H.A. Sheldon Canada Ltd. Amity/Rolfs, Inc. A Delaware Corporation Amity/Rolfs, Inc. TBAC General Management Co. A Nevada Corporation TBAC General Management Co. TBAC Investment, Inc. A Nevada Corporation TBAC Investment, Inc. TBAC Investment Trust A Pennsylvania Business Trust TBAC Investment Trust TBAC Management Co., L.P. A Delaware Limited Partnership TBAC Management Co., L.P. Tandy Brands Accessories Handbags, Inc. A Delaware Corporation Tandy Brands Accessories Handbags, Inc. Stagg Industries, Inc. An Alabama Corporation Stagg Industries, Inc. TBAC - Torel, Inc. A Delaware Corporation TBAC - Torel, Inc.
EX-23.1 6 d99955exv23w1.txt CONSENT OF ERNST & YOUNG LLP EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report on Form 10-K of Tandy Brands Accessories, Inc. of our report dated August 2, 2002, included in the 2002 Annual Report to Stockholders of Tandy Brands Accessories, Inc. We also consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 33-41262, 33-46814, 33-91996, 33-75114, 333-8579, 333-94251, 333-38526, 333-55436 and 333-88276 ) of (i) our report dated August 2, 2002, with respect to the consolidated financial statements of Tandy Brands Accessories, Inc. included in the 2002 Annual Report to Stockholders of Tandy Brands Accessories, Inc. and (ii) our report dated August 2, 2002, with respect to the financial statement schedule included in this Annual Report on Form 10-K for the year ended June 30, 2002. /s/ERNST & YOUNG LLP Fort Worth, Texas September 25, 2002 EX-99.1 7 d99955exv99w1.txt CERTIFICATION OF CHIEF EXECUTIVE OFFICER EXHIBIT 99.1 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT (CHIEF EXECUTIVE OFFICER) CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. SECTION 1350) Pursuant to 18 U.S.C. ss. 1350, the undersigned Chief Executive Officer of Tandy Brands Accessories, Inc. (the "Company") hereby certifies: (i) that the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2002 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (ii) that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: September 27, 2002 /s/ J.S.B. Jenkins --------------------------------- J.S.B. Jenkins Chief Executive Officer EX-99.2 8 d99955exv99w2.txt CERTIFICATION OF CHIEF FINANCIAL OFFICER EXHIBIT 99.2 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT (CHIEF FINANCIAL OFFICER) CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. SECTION 1350) Pursuant to 18 U.S.C. ss. 1350, the undersigned Chief Financial Officer of Tandy Brands Accessories, Inc. (the "Company") hereby certifies: (i) that the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2002 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (ii) that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: September 27, 2002 /s/ Mark J. Flaherty --------------------------------- Mark J. Flaherty Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----