TANDY BRANDS ACCESSORIES INC - 10-Q Quarterly Report

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 March 31, 2005

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 incorporation or organization)		(I.R.S. Employer 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 þ No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

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 May 10, 2005
Common stock, $1.00 par value		6,554,110

TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES

Form 10-Q
Quarter Ended March 31, 2005

TABLE OF CONTENTS


PART I — FINANCIAL INFORMATION

Item		Page No.

1.	Financial Statements		3 - 13

2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		14 - 19

3.	Quantitative and Qualitative Disclosures About Market Risk		20

4.	Controls and Procedures		20

PART II — OTHER INFORMATION

Item

2.	Unregistered Sales of Equity Securities and Use of Proceeds		21

6.	Exhibits		21

SIGNATURES			22

EXHIBIT INDEX			23-27

Certification Pursuant to Rule 13a-14(a)/15d-14(a) (Chief Executive Officer)

Certification Pursuant to Rule 13a-14(a)/15d-14(a) (Chief Financial Officer)

Section 1350 Certifications — CEO & CFO
Certification Pursuant to Rule 13a-14(a)/15d-14(a) - CEO
Certification Pursuant to Rule 13a-14(a)/15d-14(a) - CFO
Section 1350 Certifications - CEO & CFO

TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES
File Number 0 -18927
Form 10 — Q

Condensed Consolidated Statements of Operations

(Dollars in thousands, except per share amounts)

(Unaudited)


	Three Months						Nine Months
	Ended						Ended
	March 31						March 31
	2005			2004			2005			2004
Net sales	$	43,905		$	42,560		$	178,368		$	170,951
Cost of goods sold		27,839			27,177			112,211			111,857

Gross margin		16,066			15,383			66,157			59,094

Selling, general and administrative expenses		16,112			13,594			51,832			42,859
Depreciation and amortization		1,393			992			3,713			3,050

Total operating expenses		17,505			14,586			55,545			45,909


Operating income (loss)		(1,439	)		797			10,612			13,185

Interest expense		(313	)		(596	)		(971	)		(1,966	)
Royalty and other income		41			24			208			55


Income (loss) before provision for income taxes		(1,711	)		225			9,849			11,274
Provision (benefit) for income taxes		(714	)		93			3,741			4,388

Net income (loss)	$	(997	)	$	132		$	6,108		$	6,886


Earnings (loss) per common share	$	(0.16	)	$	0.02			0.97		$	1.11

Earnings (loss) per common share — assuming dilution	$	(0.16	)	$	0.02			0.93		$	1.08


Common shares outstanding		6,374			6,283			6,317			6,199


Common shares outstanding — assuming dilution		6,374			6,430			6,570			6,367


Cash dividends declared per common share	$	0.0275		$	0.0250		$	0.0825		$	0.0750

The accompanying notes are an integral part of these condensed financial statements.

TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES
File Number 0 -18927
Form 10 — Q

Condensed Consolidated Balance Sheets

(Dollars in thousands)

(Unaudited)


	March 31,			June 30,
	2005			2004
ASSETS

Current assets:
Cash and cash equivalents	$	2,196		$	6,086
Accounts receivable, net		39,067			33,427
Inventories:
Raw materials and work in process		5,502			4,980
Finished goods		58,022			52,106
Deferred income taxes		4,882			4,009
Other current assets		1,796			1,613

Total current assets		111,465			102,221


Property and equipment, at cost		37,213			34,581
Accumulated depreciation		(22,923	)		(20,206	)

Net property and equipment		14,290			14,375


Other assets:
Goodwill		18,148			11,655
Other intangibles, less accumulated amortization		6,590			4,534
Supplemental Executive Retirement Plan intangible asset		1,255			1,255
Other assets		1,396			1,534

Total other assets		27,389			18,978


	$	153,144		$	135,574


LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Accounts payable	$	11,462		$	14,224
Accrued expenses		6,488			6,362

Total current liabilities		17,950			20,586


Other liabilities:
Notes payable		20,571			10,000
Deferred income taxes		3,199			2,066
Supplemental Exective Retirement Plan liability		1,456			1,721
Other noncurrent liabilities		1,727			1,302

Total other liabilities		26,953			15,089


Stockholders’ equity:
Preferred stock, $1 par value, 1,000,000 shares authorized, none issued		—			—
Common stock, $1 par value, 10,000,000 shares authorized, 6,511,869 shares and 6,305,886 shares issued and outstanding as of March 31, 2005 and June 30, 2004, respectively		6,512			6,306
Additional paid-in capital		28,872			26,765
Cumulative other comprehensive income/(loss)		419			(121	)
Shares held by Benefit Restoration Plan Trust		(980	)		(894	)
Retained earnings		73,418			67,843

Total stockholders’ equity		108,241			99,899


	$	153,144		$	135,574

The accompanying notes are an integral part of these condensed financial statements.

TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES
File Number 0 -18927
Form 10 — Q

Condensed Consolidated Statements of Cash Flows

(Dollars in thousands)

(Unaudited)


	Nine Months Ended
	March 31,
	2005			2004
Cash flows from operating activities:
Net income	$	6,108		$	6,886
Adjustments to reconcile net income to net cash provided by (used for) operating activities:
Depreciation		3,288			2,907
Amortization		546			275
Amortization of debt origination costs		87			87
Income tax benefit of exercise of employee stock options		107			186
Deferred taxes		404			739
Other		(880	)		(119	)
Change in assets and liabilities:
Accounts receivable		(4,813	)		6,458
Inventories		(3,862	)		11,778
Other assets		(478	)		(41	)
Accounts payable		(2,805	)		(8,383	)
Accrued expenses		17			(1,221	)

Net cash provided by (used for) operating activities		(2,281	)		19,552


Cash flows from investing activities:
Purchases of property and equipment		(2,806	)		(2,549	)
Purchase of Superior Merchandise Company		(10,000	)		—

Net cash (used for) investing activities		(12,806	)		(2,549	)


Cash flows from financing activities:
Sale of stock to stock purchase program		1,219			1,390
Exercise of employee stock options		725			1,115
Payment of dividends		(512	)		(309	)
Proceeds from borrowings		73,773			36,627
Payments under borrowings		(64,008	)		(36,627	)

Net cash provided by financing activities		11,197			2,196

Net increase (decrease) in cash and cash equivalents		(3,890	)		19,199
Cash and cash equivalents at beginning of period		6,086			3,814

Cash and cash equivalents at end of period	$	2,196		$	23,013


Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	803		$	1,826
Income taxes		3,190			3,589

The accompanying notes are an integral part of these condensed financial statements.

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 and the accrual for the legal contingency as discussed in Note 11) considered necessary for a fair presentation have been included. Our first and second quarter sales and net income normally reflect a seasonal increase compared to the third and fourth quarters of our fiscal year. Consequently, operating results for the three-month period ended March 31, 2005, are not necessarily indicative of the results that may be expected for the year ended June 30, 2005. The consolidated balance sheet at June 30, 2004 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. These interim unaudited condensed consolidated financial statements should be read in conjunction with the financial statements and the notes thereto included in our 2004 Annual Report on Form 10-K filed with the Securities and Exchange Commission.

Certain prior year amounts have been reclassified to conform to the fiscal 2005 presentation.

Note 2 — Impact of New Accounting Standards

On December 16, 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 123R, “Share-Based Payment,” which will become effective for most publicly owned companies for annual periods beginning after June 15, 2005. This Statement requires companies to record compensation expense for all share-based payments, such as employee stock options, at fair value. We will be required to adopt this statement on July 1, 2005, for fiscal 2006. The statement permits adoption of its requirements using one of two methods. The “modified prospective” method requires compensation cost to be recognized for all share-based payments granted after the effective date and for all awards granted to employees prior to the effective date that remain unvested as of the effective date. The other method is the “modified retrospective” method, which includes the requirements of the “modified prospective” method, but also permits companies to restate prior years’ income based on amounts previously recognized in the pro forma disclosures under Statement 123 for all prior periods presented. The disclosures in Note 7 present the pro forma effects on our financial statements of the application of the fair value method to the stock options issued to our employees and our non-employee directors during fiscal 2005. We are currently evaluating the impact of the adoption of this statement and estimate the effect on our consolidated financial position and statements of operations, stockholders’ equity and cash flows will approximate the pro forma effects presented in Note 7 and previously disclosed in our consolidated financial statements for the year ended June 30, 2004.

In addition, Statement 123R requires the benefits of tax deductions in excess of recognized compensation cost to be reported in the Statement of Cash Flows as a financing cash flow rather than an operating cash flow as currently reported. This would result in reduced operating cash flows for any quarter in which employee stock options were exercised, beginning with our first quarter of fiscal 2006.

In November 2004 the FASB issued Statement 151, “Inventory Costs,” to clarify that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as current-period charges and require the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. The statement is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. We do not anticipate that our adoption of this statement in fiscal 2006 will have a material impact on our consolidated financial position or statements of operations, stockholders’ equity and cash flows.

TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements
(Unaudited)

Note 4 — Earnings (loss) Per Share

The following table sets forth the computation of basic and diluted earnings (loss) per share (in thousands, except per share amounts).


	Three Months					Nine Months
	Ended					Ended
	March 31,					March 31,
	2005			2004		2005		2004
Numerator for basic and diluted earnings (loss) per share:

Net income (loss)	$	(997	)	$	132	$	6,108	$	6,886


Denominator:
Weighted average shares outstanding		6,354			6,262		6,295		6,179
Contingently issuable shares		20			21		22		20

Denominator for basic earnings per share — weighted average shares		6,374			6,283		6,317		6,199

Effect of dilutive securities:
Employee stock options and other		—			120		225		139
Director stock options		—			27		28		29

Dilutive potential common shares		—			147		253		168

Denominator for diluted earnings (loss) per share — adjusted weighted average shares		6,374			6,430		6,570		6,367


Earnings (loss) per common share	$	(0.16	)	$	0.02	$	0.97	$	1.11


Earnings (loss) per common share — assuming dilution	$	(0.16	)	$	0.02	$	0.93	$	1.08

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. Our company and our corresponding customer relationships are organized along men’s and women’s product lines. As a result, we have two reportable segments: (1) men’s accessories, consisting of belts, wallets, suspenders, neckwear, other small leather goods, and gift accessories, and (2) women’s accessories, consisting of belts, wallets, handbags, socks, scarves, hats and hair accessories. Our men’s accessories segment includes the operating results of Superior Merchandise Company (ETON), which we acquired on July 1, 2004 (see Note 10). 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 our corporate accounting records are allocated to each segment as described above. Management measures profit or loss on each segment based upon income or loss before taxes utilizing the accounting policies consistent in all material respects with those described in Note 1 of our 2004 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						Nine Months Ended
	March 31,						March 31,
	2005			2004			2005			2004
Revenue from external customers:
Men’s accessories	$	25,910		$	24,305		$	106,271		$	85,866
Women’s accessories		17,995			18,255			72,097			85,085

	$	43,905		$	42,560		$	178,368		$	170,951


Operating income (loss) (1):
Men’s accessories	$	79		$	1,876		$	10,196		$	9,634
Women’s accessories		(1,518	)		(1,079	)		416			3,551

	$	(1,439	)	$	797		$	10,612		$	13,185


Interest expense		(313	)		(596	)		(971	)		(1,966	)
Other income (2)		41			24			208			55


Income (loss) before provision for income taxes	$	(1,711	)	$	225		$	9,849		$	11,274


Depreciation and amortization expense:
Men’s accessories	$	890		$	521		$	2,271		$	1,595
Women’s accessories		503			471			1,442			1,455

	$	1,393		$	992		$	3,713		$	3,050


Capital expenditures:

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