10-Q 1 d00972e10vq.txt FORM 10-Q ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------- FORM 10-Q Quarterly Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934 ---------- FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002 COMMISSION FILE NUMBER 0-18927 TANDY BRANDS ACCESSORIES, INC. (Exact name of registrant as specified in its charter) DELAWARE 75-2349915 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 690 EAST LAMAR BOULEVARD, SUITE 200, ARLINGTON, TX 76011 (Address of principal executive offices and zip code) (817) 548-0090 (Registrant's telephone number, including area code) Former name, former address and former fiscal year, if changed since last report: NOT APPLICABLE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes No X --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date. Number of shares outstanding Class at November 11, 2002 COMMON STOCK, $1.00 PAR VALUE 5,903,640 ================================================================================ TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES FORM 10-Q QUARTER ENDED SEPTEMBER 30, 2002 ================================================================================ TABLE OF CONTENTS PART I -- FINANCIAL INFORMATION
Item Page No. ---- -------- 1. Financial Statements 3 - 12 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 - 16 3. Quantitative and Qualitative Disclosures About Market Risk 17 4. Controls and Procedures 17 PART II -- OTHER INFORMATION Item ---- 4. Submission of Matters to a Vote of Security Holders 18 6. Exhibits and Reports on Form 8-K 18 SIGNATURES 19 CERTIFICATIONS 20-21 EXHIBIT INDEX 22-25
2 TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES FILE NUMBER 0 -18927 FORM 10 - Q =============================================================================== CONDENSED CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
Three Months Ended September 30 ------------------------------- 2002 2001 ------------ ------------ Net sales $ 60,028 $ 54,106 Cost of goods sold 39,243 35,073 ------------ ------------ Gross margin 20,785 19,033 Selling, general and administrative expenses 15,126 13,310 Depreciation and amortization 1,080 1,387 ------------ ------------ Total operating expenses 16,206 14,697 ------------ ------------ Operating income 4,579 4,336 Interest expense (658) (778) Royalty and other income 1 9 ------------ ------------ Income before provision for income taxes and cumulative effect of accounting change 3,922 3,567 Provision for income taxes 1,527 1,385 ------------ ------------ Net income before cumulative effect of accounting change 2,395 2,182 Cumulative effect of accounting change for SFAS No. 142, net of income taxes of $369,000 (581) -- ------------ ------------ Net income $ 1,814 $ 2,182 ============ ============ Earnings per common share Before cumulative effect of accounting change $ 0.41 $ 0.38 Cumulative effect of accounting change (0.10) -- ------------ ------------ $ 0.31 $ 0.38 ============ ============ Earnings per common share - assuming dilution Before cumulative effect of accounting change $ 0.40 $ 0.38 Cumulative effect of accounting change (0.10) -- ------------ ------------ $ 0.30 $ 0.38 ============ ============ Common shares outstanding 5,888 5,718 ============ ============ Common shares outstanding - assuming dilution 5,984 5,725 ============ ============ Cash dividends per common share None None
The accompanying notes are an integral part of these condensed financial statements. 3 TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES FILE NUMBER 0 -18927 FORM 10 - Q ================================================================================ CONDENSED CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
September 30, June 30, 2002 2002 ------------- ------------ ASSETS (Unaudited) Current assets: Cash and cash equivalents $ 1,440 $ 6,506 Accounts receivable, net 45,437 33,699 Inventories: Raw materials and work in process 4,643 4,957 Finished goods 48,809 47,861 Other current assets 4,830 4,806 ------------ ------------ Total current assets 105,159 97,829 ------------ ------------ Property and equipment, at cost 30,132 29,441 Accumulated depreciation (15,146) (14,373) ------------ ------------ Net property and equipment 14,986 15,068 ------------ ------------ Other assets: Goodwill, less amortization 11,471 12,467 Intangible assets, less amortization 5,270 5,403 Other assets 2,609 2,670 ------------ ------------ Total other assets 19,350 20,540 ------------ ------------ $ 139,495 $ 133,437 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 7,174 $ 12,755 Accrued expenses 7,814 6,857 ------------ ------------ Total current liabilities 14,988 19,612 ------------ ------------ Other liabilities: Notes payable 38,352 30,000 Other noncurrent liabilities 3,650 3,161 ------------ ------------ Total other liabilities 42,002 33,161 ------------ ------------ Stockholders' equity: Preferred stock, $1 par value, 1,000,000 shares authorized, none issued -- -- Common stock, $1 par value, 10,000,000 shares authorized, 5,910,703 shares and 5,899,173 shares issued and outstanding as of September 30, 2002 and June 30, 2002, respectively 5,911 5,899 Additional paid-in capital 22,866 22,690 Cumulative other comprehensive income (2,272) (1,706) Retained earnings 56,107 54,293 Treasury stock, at cost (107) (512) ------------ ------------ Total stockholders' equity 82,505 80,664 ------------ ------------ $ 139,495 $ 133,437 ============ ============
The accompanying notes are an integral part of these condensed financial statements. 4 TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES FILE NUMBER 0 -18927 FORM 10 - Q ================================================================================ CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) (UNAUDITED)
Three Months Ended September 30, ------------------------------- 2002 2001 ------------ ------------ Cash flows from operating activities: Net income $ 1,814 $ 2,182 Adjustments to reconcile net income to net cash provided by (used for) operating activities: Depreciation 993 1,049 Amortization 133 383 Cumulative effect of accounting change, net 581 -- Other (243) (46) Change in assets and liabilities: Accounts receivable (11,738) (11,442) Inventories (634) 556 Other assets 393 (162) Accounts payable (5,581) (1,284) Accrued expenses 962 1,866 ------------ ------------ Net cash used for operating activities (13,320) (6,898) ------------ ------------ Cash flows from investing activities: Purchases of property and equipment (691) (149) ------------ ------------ Net cash used for investing activities (691) (149) ------------ ------------ Cash flows from financing activities: Exercise of employee stock options 92 -- Sale of stock to stock purchase program 501 347 Proceeds from borrowings 19,172 29,494 Payments under borrowings (10,820) (21,938) ------------ ------------ Net cash provided by financing activities 8,945 7,903 ------------ ------------ Net increase (decrease) in cash and cash equivalents (5,066) 856 Cash and cash equivalents at beginning of period 6,506 79 ------------ ------------ Cash and cash equivalents at end of period $ 1,440 $ 935 ============ ============ Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 603 $ 557 Income taxes 567 11 Noncash activities: None
The accompanying notes are an integral part of these condensed financial statements. 5 TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES ================================================================================ NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 - ACCOUNTING PRINCIPLES The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month period ended September 30, 2002 are not necessarily indicative of the results that may be expected for the year ended June 30, 2003. For further information, refer to the consolidated financial statements and footnotes thereto included in our 2002 Annual Report. NOTE 2 - IMPACT OF NEW ACCOUNTING STANDARDS Effective July 1, 2002, we adopted Statement of Financial Accounting Standards, commonly referred to as SFAS, No. 142, "Goodwill and Other Intangible Assets." Please refer to Note 6 for information regarding goodwill and other intangible assets and the impact the adoption of this statement had on our condensed consolidated financial statements. 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. We adopted SFAS No. 143 during the first quarter of fiscal 2003. The adoption of this statement did not have a material effect on our consolidated financial position or statements of income, stockholders' 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. We adopted SFAS No. 144 during the first quarter of fiscal 2003. The adoption of this statement did not have a material effect on our 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, terminating employees involuntarily and consolidating facilities. SFAS No. 146 is effective for exit and disposal activities that are initiated after December 31, 2002. We do no not expect the adoption of this statement to have a material effect on our consolidated financial position or statements of income, stockholders' equity and cash flows. 6 TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES ================================================================================ NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 3 - COMPREHENSIVE INCOME The following table illustrates the components of comprehensive income, net of related tax, for the three months ended September 30, 2002 and 2001 (in thousands).
Three Months Ended September 30, ------------------------------- 2002 2001 ------------ ------------ Net income $ 1,814 $ 2,182 Foreign currency translation adjustments (269) (61) Change in the fair value of interest rate swap (297) (1,015) ------------ ------------ Comprehensive income $ 1,248 $ 1,106 ============ ============
7 TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES ================================================================================ NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 4 - EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts).
Three Months Ended September 30, ------------------------------- 2002 2001 ------------ ------------ Numerator for basic and diluted earnings per share: Net income before cumulative effect of accounting change $ 2,395 $ 2,182 Cumulative effect of accounting change for SFAS No. 142, net of income taxes (581) -- ------------ ------------ Net income $ 1,814 $ 2,182 ============ ============ Denominator: Weighted average shares outstanding 5,872 5,705 Contingently issuable shares 16 13 ------------ ------------ Denominator for basic earnings per share - weighted average shares 5,888 5,718 Effect of dilutive securities: Employee stock options 80 7 Director stock options 16 -- ------------ ------------ Dilutive potential common shares 96 7 Denominator for diluted earnings per share - adjusted weighted - average shares 5,984 5,725 ============ ============ Basic earnings per share: Before cumulative effect of accounting change $ 0.41 $ 0.38 Cumulative effect of accounting change (0.10) 0.00 ------------ ------------ $ 0.31 $ 0.38 ============ ============ Diluted earnings per share: Before cumulative effect of accounting change $ 0.40 $ 0.38 Cumulative effect of accounting change (0.10) 0.00 ------------ ------------ $ 0.30 $ 0.38 ============ ============
8 TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES ================================================================================ NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 5 - DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION 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. To facilitate our internal operations as well as our customer relationships, we organize our products along men's and women's product lines. As a result, we have two reportable segments: men's accessories, consisting of belts, wallets, suspenders and other small leather goods and women's accessories, consisting of belts, wallets, handbags, socks, scarves, hats and hair accessories. We allocate general corporate expenses to each segment based on the respective segment's asset base. We allocate depreciation and amortization expense related to assets recorded on our corporate accounting records to each segment as described above. We measure profit or loss on each segment based on income or loss before taxes utilizing the accounting policies consistent in all material respects with those described in Note 1 of our 2002 Annual Report. No inter-segment revenue is recorded. The following table sets forth information regarding operations and assets by reportable segment (in thousands).
Three Months Ended September 30, ------------------------------- 2002 2001 ------------ ------------ Revenue from external customers: Men's accessories $ 30,243 $ 27,143 Women's accessories 29,785 26,963 ------------ ------------ $ 60,028 $ 54,106 ============ ============ Operating income (1): Men's accessories 2,404 2,266 Women's accessories 2,175 2,070 ------------ ------------ $ 4,579 $ 4,336 ============ ============ Interest expense (658) (778) Other income (2) 1 9 ------------ ------------ Income before income taxes and cumulative effect of accounting change $ 3,922 $ 3,567 ============ ============ Depreciation and amortization expense: Men's accessories $ 611 $ 846 Women's accessories 469 541 ------------ ------------ $ 1,080 $ 1,387 ============ ============ Capital expenditures: Men's accessories $ 156 $ -- Women's accessories 112 141 Corporate 423 8 ------------ ------------ $ 691 $ 149 ============ ============
(1) Operating income consists of net sales less cost of sales and specifically identifiable selling, general and administrative expenses. (2) Other income includes royalty income on corporate tradenames and other income not specifically identifiable to a segment. 9 TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES ================================================================================ NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 6 - GOODWILL AND OTHER INTANGIBLE ASSETS Effective July 1, 2002, we adopted SFAS No. 142, "Goodwill and Other Intangible Assets." This statement changed the accounting for goodwill and indefinite-lived intangible assets from an amortization approach to an impairment-only approach. The SFAS No. 142 goodwill impairment model is a two-step process. The first step compares the fair value of a reporting unit that has goodwill assigned to it, to its carrying value. We estimate the fair value of a reporting unit using discounted cash flow analysis. If the fair value of the reporting unit is determined to be less than its carrying value, a second step is performed to compute the amount of goodwill impairment, if any. Step two allocates the fair value of the reporting unit to the reporting unit's net assets other than goodwill. The excess of the fair value of the reporting unit over the amounts assigned to its net assets other than goodwill is considered the implied fair value of the reporting unit's goodwill. The implied fair value of the reporting unit's goodwill is then compared to the carrying value of its goodwill. Any shortfall represents the amount of goodwill impairment. Using the SFAS No. 142 approach described above, we recorded a transitional goodwill impairment charge during the first quarter of fiscal 2003 of $950,000 ($581,000 net of tax), presented as a cumulative effect of accounting change. This charge related to our women's segment of products. The transitional impairment charge resulted from application of the new impairment methodology introduced by SFAS No. 142. Previous accounting rules incorporated a comparison of carrying value to undiscounted cash flows, whereas new rules require a comparison of carrying value to fair value, which are lower. Under previous requirements, no goodwill impairment would have been recorded on July 1, 2002. Pursuant to SFAS No. 142, goodwill and indefinite-lived intangible assets must be tested for impairment annually at the same time every year, and in between annual testing dates if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying value. In conjunction with the adoption of SFAS No. 142, we reassessed the useful lives and the classification of our finite-lived acquired intangible assets and determined that no revisions were necessary. The following table illustrates the gross carrying amount and accumulated amortization of our acquired intangible assets as of September 30, 2002 and June 30, 2002 (in thousands).
September 30, June 30, 2002 2002 ------------ ------------ Amortized intangible assets (various, principally tradenames): Gross carrying amount $ 8,774 $ 8,774 ============ ============ Accumulated Amortization $ (3,504) $ (3,371) ============ ============ Net Amortized Intangible Assets $ 5,270 $ 5,403 ============ ============
10 TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES ================================================================================ NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 6 - GOODWILL AND OTHER INTANGIBLE ASSETS (CONTINUED) Amortization expense for acquired finite-lived intangible assets during the three months ended September 30, 2002 was $133,000. The following table illustrates our estimated amortization expense for the remainder of fiscal 2003 through June 30, 2007. Estimated amortization expense : Fiscal year ending 6/30/03 $ 372,000 Fiscal year ending 6/30/04 394,000 Fiscal year ending 6/30/05 361,000 Fiscal year ending 6/30/06 361,000 Fiscal year ending 6/30/07 361,000
The following table reconciles net income, earnings per common share and earnings per share, assuming dilution, adjusted to exclude amortization expense recognized in such periods related to goodwill (in thousands except per share amounts).
Three Months Ended September 30, ------------------------------ 2002 2001 ------------ ------------ Reported net income before cumulative effect of accounting change $ 2,395 $ 2,182 Add back after-tax amounts: Goodwill amortization -- 156 ------------ ------------ Adjusted net income before cumulative effect of accounting change $ 2,395 $ 2,338 ============ ============ Earnings per common share before accounting change: Reported net income $ 0.41 $ 0.38 Goodwill amortization -- 0.03 ------------ ------------ Adjusted basic earnings per common share before accounting change $ 0.41 $ 0.41 ============ ============ Earnings per share - assuming dilution before accounting change: Reported net income $ 0.40 $ 0.38 Goodwill amortization -- 0.03 ------------ ------------ Adjusted earnings per share -assuming dilution before accounting change $ 0.40 $ 0.41 ============ ============
11 TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES ================================================================================ NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 6 - GOODWILL AND OTHER INTANGIBLE ASSETS (CONTINUED) The following table illustrates the changes in the carrying amount of goodwill by reportable segment for the three months ended September 30, 2002.
June 30, Impairment September 30, 2002 Losses Other(1) 2002 ------------ ------------ ------------ ------------- Men's accessories $ 9,733 $ -- $ (46) $ 9,687 Women's accessories 2,734 (950) -- 1,784 ------------ ------------ ------------ ------------ Total $ 12,467 $ (950) $ (46) $ 11,471 ============ ============ ============ ============
(1) Difference due to foreign currency translation adjustments. 12 TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES ================================================================================ ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL 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. RESULTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2001 NET SALES AND GROSS MARGINS The following table illustrates sales and gross margin data from our reportable segments for the three months ended September 30, 2002 compared to the same period last year.
Three Months Ended September 30, ------------------------------- 2002 2001 ------------ ------------ Net sales: Men's accessories $ 30,243 $ 27,143 Women's accessories 29,785 26,963 ------------ ------------ Total net sales $ 60,028 $ 54,106 ============ ============ Gross margin: Men's accessories $ 11,079 $ 10,148 Women's accessories 9,706 8,885 ------------ ------------ Total gross margin $ 20,785 $ 19,033 ============ ============ Gross margin as a percentage of sales: Men's accessories 36.6% 37.4% Women's accessories 32.6% 33.0% Total 34.6% 35.2%
13 TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES ================================================================================ For the three month period ended September 30, 2002, net sales increased 10.9% to $60,028,000 compared to net sales of $54,106,000 for the same period last year. Net sales of men's accessories increased 11.4% for the three month period ended September 30, 2002 compared to the same period last year. We attribute the increase in net sales of men's accessories to a greater number of mass merchant store orders than originally expected. Similarly, the net sales of women's accessories increased 10.5% for the three month period ended September 30, 2002 compared to the same period last year. We attribute the increase in net sales of women's accessories to increased sales of our Rolfs(R) handbags, licensed small leather goods and belts such as LEVI'S(R) and DOCKERS(R) as well as increased sales of women's mass merchant accessories. Gross margins increased by $1,752,000 for the three month period ended September 30, 2002, or 9.2% compared to the same period last year. As a percentage of sales, gross margins decreased 0.6% for the three month period ended September 30, 2002 compared to the same period last year. The overall decrease was due to a greater sales mix weighted towards mass merchant accessories and an initial direct sales shipment of women's accessories to Payless Shoes. OPERATING EXPENSES Selling, general and administrative expenses as a percentage of net sales for the three months ended September 30, 2002 increased 0.6% compared to the same period last year. The increase resulted from higher salary expense due to nonrecurring costs associated with the implementation of distribution software in our Dallas, Texas distribution center totaling $290,000, as well as severance costs totaling $430,000. Depreciation and amortization expenses as a percentage of net sales for the three months ended September 30, 2002 decreased 0.8% to $1,080,000, compared to $1,387,000 in the same period of the prior year. We attribute this decrease primarily to the adoption of SFAS No. 142 "Goodwill and Other Intangible Assets," in which goodwill is no longer amortized (see note 6). Goodwill amortization expense for the same three month period in the prior year was approximately $256,000. Interest expense for the three month period ended September 30, 2002 decreased $120,000 compared to the same period last year. This decrease primarily relates to lower interest rates as well as lower debt levels compared to the same period last year. The effective tax rate for the three months ended September 30, 2002 was 38.9%, which is consistent with the same period last year. Net income, before the cumulative effect of accounting change resulting from the adoption of SFAS No. 142, for the three month period ended September 30, 2002 increased 9.8% to $2,395,000, or $.40 per diluted share, compared to net income of $2,182,000, or $.38 per diluted share, for the same period last year. In June 2001, the Financial Accounting Standards Board issued SFAS No. 142, "Goodwill and Other Intangible Assets." Under the new rules, goodwill and indefinite-lived intangible assets are no longer amortized but are reviewed annually for impairment. Separable intangible assets that do not have an indefinite life will continue to be amortized over their useful lives. As discussed in our 2002 Annual Report, the required adoption of SFAS No. 142 is considered a change in accounting principle and the cumulative effect of adopting this standard resulted in a non-cash after-tax charge in the first quarter of fiscal 2003 of $581,000, or $(0.10) per diluted share. This amount does not affect our on-going operations. The adoption of the new accounting standard will result in a reduction in amortization expense of approximately $1 million. Net income, after the cumulative effect of accounting change resulting from the adoption of SFAS No. 142, for the three month period ended September 30, 2002 was $1,814,000, or $.30 per diluted share, compared to net income of $2,182,000, or $.38 per diluted share, for the same period last year. 14 TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES ================================================================================ LIQUIDITY AND CAPITAL RESOURCES For the three months ended September 30, 2002, our operating activities used cash of $13,320,000 compared to $6,898,000 for the same period last year. We attribute this increase in the use of cash to the timing of disbursements related to fall season inventory procurement. Additionally, during fiscal 2002, improved inventory control measures were introduced which reduced our use of cash as compared to the same period in fiscal 2001. Capital expenditures totaled $691,000 for the three months ended September 30, 2002, an increase of $542,000 from the same period last year. We attribute this increase to the implementation of a distribution software application during the first quarter of fiscal 2003. We anticipate that our capital expenditures for fiscal 2003 will approximate our capital investments of property and equipment for fiscal 2002. Capital commitments for fiscal 2003 include additional equipment for our distribution facility in Dallas, Texas, as well as additional hardware and software applications. We expect to fund our fiscal 2003 capital commitments through cash flows from operations and drawing on our existing credit facility. Generally, our primary sources of liquidity are cash flows from operations and our line of credit. We have an $80,000,000 committed secured revolving credit facility, which can be used for seasonal borrowings and letters of credit. This credit facility is secured by substantially all of our assets along with our subsidiaries' assets and requires us to maintain certain financial covenants which, if not maintained, could adversely impact our liquidity position. Our borrowings under our credit facility were $38,352,000 as of September 30, 2002 and $54,956,000 as of September 30, 2001. As of September 30, 2002, we had approximately $33,816,000 of credit available to us under our credit facility. We have never paid a cash dividend on our common stock. We currently intend to retain earnings for the foreseeable future to provide funds for the expansion of our business and the reduction of debt. Our existing credit facility restricts our ability to pay dividends. We believe we have adequate financial resources and access to sufficient credit lines to satisfy our future working capital needs. OFF BALANCE SHEET ARRANGEMENTS We do not have transactions, arrangements or relationships with "special purpose" entities, nor do we have any off balance sheet debt. CRITICAL ACCOUNTING POLICIES The preparation of our 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 we believe to be reasonable under the circumstances, the results of which form the basis for our conclusions. We continually evaluate 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 We recognize revenue when merchandise is shipped to customers and title to the goods has passed to the customer. We record sales returns and allowances at the time we can reasonably estimate the amounts. We perform periodic credit evaluations of our customers' financial conditions and generally do not require collateral. Credit losses have historically been within our expectations. 15 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. We closely monitor fashion trend items and anticipate additional inventory markdowns if market indications in fashion trends justify further reserves. GOODWILL We adopted the provisions of SFAS No. 142, effective July 1, 2002. This statement changed the accounting for goodwill and indefinite-lived intangible assets from an amortization approach to an impairment-only approach. The SFAS No. 142 goodwill impairment model is a two-step process. The first step compares the fair value of a reporting unit that has goodwill assigned to it, to its carrying value. We estimate the fair value of a reporting unit using discounted cash flow analysis. If the fair value of the reporting unit is determined to be less than its carrying value, a second step is performed to compute the amount of goodwill impairment, if any. Step two allocates the fair value of the reporting unit to the reporting unit's net assets other than goodwill. The excess of the fair value of the reporting unit over the amounts assigned to its net assets other than goodwill is considered the implied fair value of the reporting unit's goodwill. The implied fair value of the reporting unit's goodwill is then compared to the carrying value of its goodwill. Any shortfall represents the amount of goodwill impairment. We continually evaluate whether events and circumstances have occurred that indicate the remaining balance of goodwill may not be recoverable. In evaluating impairment, we estimate the sum of the expected future cash flows derived from such goodwill. Such evaluations for impairment are significantly impacted by estimates of future revenues, costs and expenses and other factors. DERIVATIVES Our risk management policy as it relates to derivative investments is to mitigate, subject to market conditions, against interest rate risk. We do not enter into any derivative investments for the purpose of speculative investment. We reevaluate our overall risk management philosophy as business conditions arise. SEASONALITY Our quarterly sales, net income and use of cash results are fairly consistent throughout the fiscal year, with a seasonal increase during the second quarter. INFLATION Although our operations are affected by general economic trends, we do not believe inflation has had a material effect on our results of operations. FORWARD-LOOKING STATEMENTS This Form 10-Q contains forward looking statements that are based on current expectations, estimates and projections about the industry in which we operate, 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 our behalf. Words such as "expect," "anticipate," "intend," "plan," "believe," "seek," "estimate," or variations of such words and similar expressions are intended to identify 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 these forward-looking statements. We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. 16 TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES ================================================================================ ITEM 3. QUANTITATIVE AND QUALITATIVE 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. At September 30, 2002, our borrowings under our credit facility totaled $38,352,000, bearing a weighted-average interest rate of 4.46%. 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 September 30, 2002, the receive rates related to the interest rate swap were 1.86% and the pay rates related to interest rate swap were 5.60%. 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 SFAS No. 133. As such, during fiscal 2003 and 2002, changes in the fair value of the interest rate swap were recognized as other comprehensive income with the fair value at September 30, 2002, approximating ($2,184,000). 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. ITEM 4. CONTROLS AND PROCEDURES Within the 90-day period prior to the date of this report, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-14 of the Exchange Act. Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to us (including our consolidated subsidiaries) required to be included in our Exchange Act filings. There have been no significant changes in our internal controls or in other factors that could significantly affect internal controls subsequent to the date we carried out our evaluation. 17 TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES ================================================================================ PART II - OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS We held our 2002 Annual Meeting of Stockholders on October 16, 2002. The stockholders voted on the following matters at the meeting: 1. The re-election of J.S.B. Jenkins to our board of directors to serve as a Class III director for a three year term expiring at the 2005 annual meeting of stockholders, or until his successor is elected and qualified. The stockholders re-elected Mr. Jenkins to our board of directors. The following table indicates the number of votes cast for, the number of votes withheld and the number of broker non-votes with respect to the election of Mr. Jenkins.
For Withheld Broker Non-Votes --- -------- ---------------- 4,778,580 692,611 -0-
The following directors' terms continued after the 2002 Annual Meeting: Ms. Colombe M. Nicholas Dr. James F. Gaertner Mr. Gene Stallings Mr. Roger R. Hemminghaus Mr. C.A. Rundell, Jr. 2. To adopt and approve the Tandy Brands Accessories, Inc. 2002 Omnibus Plan. The stockholders approved this proposal. The following table indicates the number of votes cast for, the number of votes cast against, the number of abstentions and the number of broker non-votes with respect to this matter.
For Against Abstain Broker Non-Votes --- ------- ------- ---------------- 2,144,936 1,340,204 59,481 1,926,569
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. A list of 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 October 17, 2002 to report the issuance of the press release announcing our financial results for the first quarter of fiscal 2003. 18 TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES ================================================================================ SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TANDY BRANDS ACCESSORIES, INC. (Registrant) /s/ J.S.B. Jenkins ----------------------------------------- J.S.B. Jenkins President and Chief Executive Officer /s/ Mark J. Flaherty ----------------------------------------- Mark J. Flaherty Chief Financial Officer Date: November 11, 2002 19 TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES ================================================================================ CERTIFICATION BY CHIEF EXECUTIVE OFFICER I, J.S.B. Jenkins, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Tandy Brands Accessories, Inc.; 2. Based on my knowledge, this quarterly 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 quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 11, 2002 /s/ J.S.B. Jenkins -------------------------- J.S.B. Jenkins Chief Executive Officer 20 TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES ================================================================================ CERTIFICATION BY CHIEF FINANCIAL OFFICER I, Mark J. Flaherty, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Tandy Brands Accessories, Inc.; 2. Based on my knowledge, this quarterly 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 quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 11, 2002 /s/ Mark J. Flaherty -------------------------- Mark J. Flaherty Chief Financial Officer 21 TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES ================================================================================ EXHIBIT INDEX
Incorporated by Reference (if applicable) ---------------------------------------------------------------- Exhibit Number and Description Form Date File No. Exhibit ---------------------------------------------- ---- ---- -------- ------- (3) Articles of Incorporation and By-laws 3.1 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
22 TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES ================================================================================ EXHIBIT INDEX
Incorporated by Reference (if applicable) ---------------------------------------------------------------- Exhibit Number and Description Form Date File No. Exhibit ---------------------------------------------- ---- ---- -------- ------- 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 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
23 TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES ================================================================================ EXHIBIT INDEX
Incorporated by Reference (if applicable) ---------------------------------------------------------------- Exhibit Number and Description Form Date File No. Exhibit ---------------------------------------------- ---- ---- -------- ------- 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
24 TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES ================================================================================ EXHIBIT INDEX
Incorporated by Reference (if applicable) ---------------------------------------------------------------- Exhibit Number and Description Form Date File No. Exhibit ---------------------------------------------- ---- ---- -------- ------- 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 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 10-K 9/27/02 0-18927 10.23 10.24 Tandy Brands Accessories, Inc. 2002 Omnibus Plan*** 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 25