Attached files
file | filename |
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EX-4.7 - EXHIBIT 4.7 - TANDY BRANDS ACCESSORIES INC | c17078exv4w7.htm |
EX-32.1 - EXHIBIT 32.1 - TANDY BRANDS ACCESSORIES INC | c17078exv32w1.htm |
EX-31.2 - EXHIBIT 31.2 - TANDY BRANDS ACCESSORIES INC | c17078exv31w2.htm |
EX-31.1 - EXHIBIT 31.1 - TANDY BRANDS ACCESSORIES INC | c17078exv31w1.htm |
EX-10.1 - EXHIBIT 10.1 - TANDY BRANDS ACCESSORIES INC | c17078exv10w1.htm |
Table of Contents
UNITED STATES 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
of the Securities Exchange Act of 1934
For the Quarterly Period Ended March 31, 2011
Commission File Number 0-18927
TANDY BRANDS ACCESSORIES, INC.
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) |
75-2349915 (I.R.S. Employer Identification No.) |
3631 West Davis, Suite A, Dallas, Texas 75211
(Address of principal executive offices and zip code)
(Address of principal executive offices and zip code)
214-519-5200
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
Former name, former address and former fiscal year, if changed since last report:
Not Applicable
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.
þ Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files).
o Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o | Smaller reporting company þ | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
o Yes þ No
Indicate the number of shares outstanding of each of the issuers classes of common stock as of the
latest practicable date.
Class | Number of shares outstanding at May 10, 2011 | |
Common stock, $1.00 par value | 6,971,618 |
TABLE OF CONTENTS
4-11 | ||||||||
11-14 | ||||||||
14 | ||||||||
15 | ||||||||
15 | ||||||||
15 | ||||||||
16 | ||||||||
Exhibit 4.7 | ||||||||
Exhibit 10.1 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 |
2
Table of Contents
References in this Quarterly Report on Form 10-Q to we, our, us, or the Company refer to
Tandy Brands Accessories, Inc. and its subsidiaries unless the context requires otherwise.
This Form 10-Q contains forward-looking statements regarding future events and our future results
that are subject to the safe harbors created under the Securities Act of 1933 and the Securities
Exchange Act of 1934. Words such as expects, anticipates, intends, plans, believes,
seeks, estimates, continues, may, variations of such words, and similar expressions are
intended to identify forward-looking statements. In addition, any statements that refer to
projections of our future financial performance, our anticipated growth and trends in our business,
and other characterizations of future events or circumstances are forward-looking statements. We
have based these forward-looking statements on our current expectations about future events,
estimates and projections about the industry in which we operate. These statements are not
guarantees of future performance. Our actual results may differ materially from those suggested by
these forward-looking statements as a result of a number of known and unknown risks and
uncertainties that are difficult to predict including, without limitation, general economic and
business conditions, competition in the accessories and gifts markets, acceptance of our product
offerings and designs, issues relating to distribution, the termination or non-renewal of our
material licenses, our ability to maintain proper inventory levels, a significant decrease in
business from or loss of any of our major customers or programs, and others identified under Risk
Factors included in our 2010 Annual Report on Form 10-K. Given these risks and uncertainties, you
are cautioned not to place undue reliance on forward-looking statements. The forward-looking
statements included in this report are made only as of the date hereof. Except as required under
federal securities laws and the rules and regulations of the United States Securities and Exchange
Commission, we do not undertake, and specifically decline, any obligation to update any of these
statements or to publicly announce the results of any revisions to any forward-looking statements
after the distribution of this report, whether as a result of new information, future events,
changes in assumptions, or otherwise.
3
Table of Contents
PART I FINANCIAL INFORMATION
ITEM 1 | FINANCIAL STATEMENTS |
Tandy Brands Accessories, Inc. And Subsidiaries
Unaudited Consolidated Statements Of Operations
(in thousands except per share amounts)
Unaudited Consolidated Statements Of Operations
(in thousands except per share amounts)
Three Months Ended | Nine Months Ended | |||||||||||||||
March 31 | March 31 | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net sales |
$ | 28,406 | $ | 27,687 | $ | 100,541 | $ | 113,235 | ||||||||
Cost of goods sold |
19,560 | 17,030 | 67,251 | 71,035 | ||||||||||||
Gross margin |
8,846 | 10,657 | 33,290 | 42,200 | ||||||||||||
Selling, general and administrative expenses |
10,912 | 11,189 | 35,369 | 38,187 | ||||||||||||
Depreciation and amortization |
646 | 665 | 1,937 | 2,045 | ||||||||||||
Acquisition related costs |
| 619 | 50 | 908 | ||||||||||||
Restructuring charges |
| 1,187 | | 1,417 | ||||||||||||
Total operating expenses |
11,558 | 13,660 | 37,356 | 42,557 | ||||||||||||
Operating loss |
(2,712 | ) | (3,003 | ) | (4,066 | ) | (357 | ) | ||||||||
Interest expense |
(209 | ) | (178 | ) | (680 | ) | (864 | ) | ||||||||
Other income |
1 | 73 | 156 | 456 | ||||||||||||
Acquisition bargain purchase gain |
| | | 1,379 | ||||||||||||
Income (loss) before income taxes |
(2,920 | ) | (3,108 | ) | (4,590 | ) | 614 | |||||||||
Income tax expense (benefit) |
155 | 220 | 452 | (3,970 | ) | |||||||||||
Net income (loss) |
$ | (3,075 | ) | $ | (3,328 | ) | $ | (5,042 | ) | $ | 4,584 | |||||
Income (loss) per common share |
$ | (0.44 | ) | $ | (0.48 | ) | $ | (0.72 | ) | $ | 0.66 | |||||
Income (loss) per common share assuming dilution |
$ | (0.44 | ) | $ | (0.48 | ) | $ | (0.72 | ) | $ | 0.65 | |||||
Common shares outstanding |
6,972 | 6,931 | 6,970 | 6,931 | ||||||||||||
Common shares outstanding assuming dilution |
6,972 | 6,931 | 6,970 | 7,097 |
The accompanying notes are an integral part of these consolidated financial statements.
4
Table of Contents
Tandy Brands Accessories, Inc. And Subsidiaries
Unaudited Consolidated Balance Sheets
(in thousands)
Unaudited Consolidated Balance Sheets
(in thousands)
March 31 | June 30 | |||||||
2011 | 2010 | |||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 283 | $ | 830 | ||||
Restricted cash |
1,443 | 1,333 | ||||||
Accounts receivable |
18,886 | 18,630 | ||||||
Inventories |
35,781 | 31,371 | ||||||
Other current assets |
3,596 | 8,114 | ||||||
Total current assets |
59,989 | 60,278 | ||||||
Property and equipment, net |
6,753 | 8,658 | ||||||
Other assets: |
||||||||
Intangible assets |
5,152 | 5,717 | ||||||
Other assets |
781 | 879 | ||||||
Total other assets |
5,933 | 6,596 | ||||||
$ | 72,675 | $ | 75,532 | |||||
Liabilities And Stockholders Equity |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 5,986 | $ | 13,497 | ||||
Accrued compensation |
1,697 | 3,202 | ||||||
Accrued expenses |
1,740 | 1,795 | ||||||
Note payable |
19,942 | 9,425 | ||||||
Total current liabilities |
29,365 | 27,919 | ||||||
Other liabilities |
4,084 | 3,793 | ||||||
Stockholders equity: |
||||||||
Preferred stock, $1.00 par value, 1,000 shares authorized, none issued |
| | ||||||
Common stock, $1.00 par value, 10,000 shares authorized,
6,972 shares and 6,933 shares issued and outstanding, respectively |
6,972 | 6,933 | ||||||
Additional paid-in capital |
34,193 | 34,172 | ||||||
Retained earnings (deficit) |
(3,884 | ) | 1,158 | |||||
Other comprehensive income |
1,945 | 1,557 | ||||||
Total stockholders equity |
39,226 | 43,820 | ||||||
$ | 72,675 | $ | 75,532 | |||||
The accompanying notes are an integral part of these consolidated financial statements.
5
Table of Contents
Tandy Brands Accessories, Inc. And Subsidiaries
Unaudited Consolidated Statements Of Cash Flows
(in thousands)
Unaudited Consolidated Statements Of Cash Flows
(in thousands)
Nine Months Ended | ||||||||
March 31 | ||||||||
2011 | 2010 | |||||||
Cash flows provided (used) by operating activities: |
||||||||
Net income (loss) |
$ | (5,042 | ) | $ | 4,584 | |||
Adjustments to reconcile net income (loss)
to net cash provided (used) by operating activities: |
||||||||
Acquisition bargain purchase gain |
| (1,379 | ) | |||||
Contingent consideration revaluation |
| 619 | ||||||
Deferred income taxes |
54 | (4,106 | ) | |||||
Doubtful accounts receivable provision |
324 | 71 | ||||||
Depreciation and amortization |
2,118 | 2,072 | ||||||
Stock compensation expense |
(68 | ) | 479 | |||||
Amortization of debt costs |
52 | 241 | ||||||
Other |
(208 | ) | (240 | ) | ||||
Changes in assets and liabilities: |
||||||||
Accounts receivable |
(525 | ) | 3,296 | |||||
Inventories |
(4,118 | ) | (2,114 | ) | ||||
Other assets |
3,166 | 1,500 | ||||||
Accounts payable |
(7,314 | ) | (1,114 | ) | ||||
Accrued expenses |
(1,083 | ) | (3,349 | ) | ||||
Net cash provided (used) by operating activities |
(12,644 | ) | 560 | |||||
Cash flows provided (used) by investing activities: |
||||||||
Acquisition |
(245 | ) | (3,921 | ) | ||||
Purchases of property and equipment |
(736 | ) | (4,757 | ) | ||||
Sales of property and equipment |
2,778 | 790 | ||||||
Liquidation of supplemental executive retirement plan trust |
| 1,812 | ||||||
Net cash provided (used) by investing activities |
1,797 | (6,076 | ) | |||||
Cash flows provided by financing activities: |
||||||||
Change in cash overdrafts |
(265 | ) | 431 | |||||
Acquisition earn-out payments |
| (3,306 | ) | |||||
Net note borrowings |
10,474 | 7,044 | ||||||
Net cash provided by financing activities |
10,209 | 4,169 | ||||||
Effect of exchange-rate changes on cash and cash equivalents |
91 | 73 | ||||||
Net decrease in cash and cash equivalents |
(547 | ) | (1,274 | ) | ||||
Cash and cash equivalents beginning of year |
830 | 2,454 | ||||||
Cash and cash equivalents end of period |
$ | 283 | $ | 1,180 | ||||
Noncash investing and financing activities: |
||||||||
Acquisition
and acquisition earn-out |
$ | | $ | 5,067 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
6
Table of Contents
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 Accounting Principles
The accompanying unaudited consolidated financial statements have been prepared in accordance with
U.S. generally accepted accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 8-03 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 our opinion, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Certain amounts have been
reclassified in the fiscal 2010 financial statements to conform to the fiscal 2011 presentation,
including reclassification of restricted cash.
The preparation of our consolidated financial statements 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 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 change,
including evaluation of events subsequent to the end of the quarter through the financial
statements issuance date. Actual results may differ from these estimates under different
assumptions or conditions. Such differences could have a material impact on our future financial
position, results of operations, and cash flows.
The consolidated balance sheet at June 30, 2010 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 consolidated financial statements should be read in conjunction with the
financial statements and the notes thereto included in our 2010 Annual Report on Form 10-K filed
with the Securities and Exchange Commission.
Historically, our first and second quarter sales and operating results reflect a seasonal increase
compared to the third and fourth quarters of our fiscal year. Sales and operating results for the
first nine months of fiscal 2011 are not necessarily indicative of the results that may be expected
for the year ending June 30, 2011.
Note 2 Fair Value Measurements
We measure fair values using unadjusted quoted prices in active markets (Level 1 inputs), quoted
prices for similar instruments in active or inactive markets, or other directly-observable factors
(Level 2 inputs), or our estimates based upon the assumptions market participants would use (Level
3 inputs). Our financial instruments consist primarily of cash, trade receivables and payables,
and our credit facility. The carrying values of cash and trade receivables and payables are
considered to be representative of their respective fair values. Our credit facility, which was
most recently amended effective March 31, 2011, bears interest at floating market interest rates;
therefore, we believe the fair value of amounts borrowed approximates the carrying value as our
credit rating is not materially different from when we last amended the agreement. At March 31,
2011 and June 30, 2010, no material assets or liabilities were measured at fair value.
Note 3 Acquisitions
On July 9, 2009, we purchased from Chambers Belt Company (Chambers), a wholly-owned subsidiary of
Phoenix Footwear Group, Inc., its intellectual property, customer relationships, manufacturing
equipment, and substantially all of its inventory. In July 2009, we paid $3.9 million to Chambers
and certain of its vendors. The earn-out provisions of the purchase agreement required payment of
21.5% of net sales through July 9, 2010 of private label and other products formerly sold by
Chambers.
Our estimate of the net assets fair value exceeded the estimated fair value of the total
consideration we paid and would pay over the earn-out period, which we believe resulted from
Chambers financial difficulties and uncertainties relating to extending the terms of certain
licenses. As a result, we recognized a $1.4 million bargain purchase gain in July 2009. Due to
sales outperforming our initial estimate, we revalued the contingent consideration during the third
quarter of fiscal 2010 resulting in a charge of $619,000, which was included in acquisition related
costs.
The equipment we acquired is being depreciated using the straight line method over periods of three
to five years (nine months fiscal 2011 and fiscal 2010 $251,000). The customer list is being
amortized over seven years in proportion to the estimated undiscounted cash flows which may be
derived from the acquired assets (nine months
fiscal 2011 $427,000; nine months fiscal 2010 $565,000). The trade names have indefinite lives
and, therefore, are not being amortized.
7
Table of Contents
On December 15, 2010, we acquired substantially all of the outstanding equity interests in
Maquiladora Chambers de Mexico, S.A. de C.V. (MCM) through a purchase agreement with the previous
equity interest holders for $245,000. Prior to the acquisition, MCM manufactured products for us
under the direction and supervision of our employees, utilizing machinery we purchased from
Chambers and raw materials which we supplied.
The following represents the estimated acquisition values of the net assets acquired as of December
15, 2010, the acquisition date:
Net working capital |
$ | (49 | ) | |
Land |
107 | |||
Buildings |
279 | |||
Equipment |
64 | |||
Customer relationship intangible |
107 | |||
Long-term employee retirement obligation assumed |
(263 | ) | ||
Net assets acquired |
$ | 245 | ||
All assets and liabilities were recorded at their estimated fair values on the acquisition
date. We derived the estimated fair values from assumptions we believe unrelated market
participants would use based on both observable and unobservable marketplace factors. Our estimate
of the net assets acquired value equaled the fair value of the total consideration paid. As a
result, no goodwill was recognized.
The acquired buildings are being depreciated using the straight line method over their remaining
economic lives, which range from 10 to 32 years. The acquired furniture, software and equipment
are being depreciated using the straight line method over periods of two to five years. The
customer relationship intangible is being amortized using the straight line method over three
years.
Note 4 Restructuring
During the third quarter of fiscal 2010, we announced a plan to consolidate our operations in
Yoakum, Texas into our Dallas, Texas distribution facility. In connection with the consolidation
plan and other organizational restructuring actions, we recorded charges for termination payments
(third quarter fiscal 2010 $627,000; nine-months fiscal 2010 $763,000) and other costs (third
quarter fiscal 2010 $560,000; nine-months fiscal 2010 $654,000).
Note 5 Business Segment Information
We sell our products through virtually all major retail distribution channels throughout North
America, including mass merchants, national chain stores, department stores, mens and womens
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 business segments
are based on product categories: (1) accessories, which includes belts, small leather goods,
eyewear, neckwear, and sporting goods and (2) gifts. Each segment is measured by management based
on income consisting of net sales less cost of goods sold, product distribution expenses, and
royalties utilizing accounting policies consistent in all material respects with those described in
Note 2 of the notes to consolidated financial statements included in our 2010 Annual Report on Form
10-K filed with the Securities and Exchange Commission. No inter-segment revenue is recorded.
Assets, related depreciation and amortization, and selling, general and administrative expenses are
not allocated to the segments.
8
Table of Contents
The following table presents operating information by segment and reconciliation of segment income
or loss to our consolidated operating loss (in thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||
March 31 | March 31 | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net sales: |
||||||||||||||||
Accessories |
$ | 26,828 | $ | 26,201 | $ | 79,409 | $ | 92,826 | ||||||||
Gifts |
1,578 | 1,486 | 21,132 | 20,409 | ||||||||||||
$ | 28,406 | $ | 27,687 | $ | 100,541 | $ | 113,235 | |||||||||
Segment income (loss): |
||||||||||||||||
Accessories |
$ | 6,794 | $ | 7,119 | $ | 19,807 | $ | 24,511 | ||||||||
Gifts |
(861 | ) | 270 | 2,432 | 4,143 | |||||||||||
5,933 | 7,389 | 22,239 | 28,654 | |||||||||||||
Selling, general and administrative expenses |
(7,999 | ) | (7,921 | ) | (24,318 | ) | (24,641 | ) | ||||||||
Restructuring charges |
| (1,187 | ) | | (1,417 | ) | ||||||||||
Depreciation and amortization |
(646 | ) | (665 | ) | (1,937 | ) | (2,045 | ) | ||||||||
Acquisition related costs |
| (619 | ) | (50 | ) | (908 | ) | |||||||||
Operating loss |
$ | (2,712 | ) | $ | (3,003 | ) | $ | (4,066 | ) | $ | (357 | ) | ||||
Note 6 Credit Arrangements
We have a $27.5 million credit facility that matures in October 2012 for borrowings and letters of
credit which bear interest at the daily adjusting one-month LIBOR rate plus 4.5% or, if such rate
is not available under the terms of the credit facility note, the lenders prime rate plus 2%. The
facility was amended effective March 31, 2011 in consideration for payment of a $104,000 fee
because, based on our projections, we were not expected to meet the tangible net worth covenant at
that date due to the net loss for the quarter. The facility was amended to, among other things,
adjust the tangible net worth covenant, modify the pricing and timing of payments, and increase the
borrowing base. At March 31, 2011, we had $2.1 million borrowing availability based on our
accounts receivable and inventory levels, outstanding letters of credit totaling $933,000, and
$19.2 million outstanding borrowings under the facility.
The credit facility is guaranteed by substantially all of our subsidiaries and is secured by
substantially all of our assets and those of our subsidiaries. It requires the maintenance of a
specified tangible net worth ($33.0 million as of March 31, 2011; $32.0 million as of June 30,
2011) defined as total net assets less intangible assets, which, if not met, could adversely impact
our liquidity. The facility contains customary representations and warranties and we have agreed
to certain affirmative covenants, including reporting requirements. The facility also limits our
ability to engage in certain actions without the lenders consent including, repurchasing our
common stock, entering into certain mergers or consolidations, guaranteeing or incurring certain
debt, engaging in certain stock or asset acquisitions, paying dividends, making certain investments
in other entities, prepaying other debts, and making certain property transfers.
Our Canadian subsidiary has a CAD $1.4 million credit facility (direct advances limited to U.S.
$1.1 million) with interest at the lenders prime or U.S. base rates. The facility is secured by
cash, credit balances, and/or deposit instruments of CAD $1.4 million (March 31, 2011 U.S. $1.4
million, June 30, 2010 U.S. $1.3 million). The credit facility does not have a specified
maturity date and can be cancelled without penalty by us or the lender at any time. We had
outstanding borrowings under the facility of $694,000 and $230,000 at March 31, 2011 and June 30,
2010, respectively.
Note 7 Long-Term Incentive Award
During the first quarter of fiscal 2011, we issued 770,000 performance units comprised 50% of cash
and 50% of phantom shares of our common stock, to certain employees. Each unit has a $1.00
assigned value and the number of phantom shares of common stock attributable to each award was
determined based on the fair market value of our common stock on the date of grant, which was
$3.765 per share. The units earned during the performance cycle (July 1, 2010 through June 30,
2013) vary from 0% to 200% of the units awarded based on our basic earnings per share for each of
the three fiscal years ending June 30, 2013, excluding the effects of accounting principles
changes, extraordinary items, recognized capital gains and losses and, as determined by our board
of directors, one-time, non-operating items. Assuming continued employment, if, at the end of the
three-year performance cycle, at least the threshold performance level has been achieved, the
performance units will cliff vest and, to the extent earned, will
generally be settled in cash (if shares are available under our benefit plans, the Board may, in
its discretion, settle the phantom shares attributable to an award in shares of our common stock).
Notwithstanding the foregoing, employees
vest in 100% of the units awarded if there is a change in control or in a fraction of units earned
based on the number of years employed during the performance cycle upon death, disability, or
normal (age 65) or early (age 55 and 15 years service) retirement. As of March 31, 2011, we expect
201,000 of the 770,000 units granted to vest, which, based on the market price of our common stock
on March 31, 2011, would be payable in cash equal to $177,000.
9
Table of Contents
Note 8 Income Taxes
The following presents components of our income tax provisions (in thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||
March 31 | March 31 | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Federal and state (benefit) |
$ | 12 | $ | | $ | 46 | $ | (4,439 | ) | |||||||
Deferred federal and state |
(1,216 | ) | (1,175 | ) | (1,944 | ) | 245 | |||||||||
Foreign |
80 | 99 | 194 | 92 | ||||||||||||
Uncertain tax positions |
35 | 36 | 99 | 109 | ||||||||||||
Deferred tax valuation allowance |
1,244 | 1,260 | 2,057 | 23 | ||||||||||||
$ | 155 | $ | 220 | $ | 452 | $ | (3,970 | ) | ||||||||
The federal statutory income tax rate reconciles to our effective income tax rate as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
March 31 | March 31 | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Statutory rate |
(34.0 | )% | (34.0 | )% | (34.0 | )% | 34.0 | % | ||||||||
State and foreign taxes net of federal tax benefit |
(0.4 | ) | (0.6 | ) | (0.4 | ) | 20.9 | |||||||||
Uncertain tax positions |
1.2 | 1.2 | 2.2 | 17.8 | ||||||||||||
Deferred tax valuation allowance |
38.5 | 40.5 | 42.1 | (719.0 | ) | |||||||||||
5.3 | % | 7.1 | % | 9.9 | % | (646.3 | )% | |||||||||
At March 31, 2011, we had federal income tax net operating loss carryovers of approximately
$39 million expiring in 2029 through 2031. Our deferred tax valuation allowance was approximately
$20 million.
The enactment in November 2009 of the Worker, Homeownership, and Business Assistance Act of 2009
changed the income tax rules for obtaining refunds of previously-paid federal income taxes by
carrying back net operating losses to the preceding five years, rather than two years.
Consequently, our deferred tax asset associated with approximately $13 million of our net operating
loss carryovers no longer required a valuation allowance and we recognized a $4.4 million tax
benefit for refunds received in fiscal 2010.
Note 9 Comprehensive Income
The following presents the components of comprehensive income (loss) (in thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||
March 31 | March 31 | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net income (loss) |
$ | (3,075 | ) | $ | (3,328 | ) | $ | (5,042 | ) | $ | 4,584 | |||||
Currency translation adjustments |
140 | 242 | 388 | 741 | ||||||||||||
Comprehensive income (loss) |
$ | (2,935 | ) | $ | (3,086 | ) | $ | (4,654 | ) | $ | 5,325 | |||||
10
Table of Contents
Note 10 Earnings Per Share
Our basic and diluted earnings (loss) per common share are computed as follows (in thousands except
per share amounts):
Three Months Ended | Nine Months Ended | |||||||||||||||
March 31 | March 31 | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Numerator for basic and diluted earnings per share: |
||||||||||||||||
Net income (loss) |
$ | (3,075 | ) | $ | (3,328 | ) | $ | (5,042 | ) | $ | 4,584 | |||||
Denominator: |
||||||||||||||||
Denominator for basic earnings per share |
6,972 | 6,931 | 6,970 | 6,931 | ||||||||||||
Effect of dilutive share-based compensation |
| | | 166 | ||||||||||||
Denominator for diluted earnings per share |
6,972 | 6,931 | 6,970 | 7,097 | ||||||||||||
Income (loss) per common share |
$ | (0.44 | ) | $ | (0.48 | ) | $ | (0.72 | ) | $ | 0.66 | |||||
Income (loss) per common share assuming dilution |
$ | (0.44 | ) | $ | (0.48 | ) | $ | (0.72 | ) | $ | 0.65 |
Potentially dilutive securities which could have had an antidilutive effect on our per share
results of operations were (in thousands except per share amounts):
March 31 | ||||||||
2011 | 2010 | |||||||
Stock options (exercise prices per share: 2011 and 2010 - $5.31 to $15.60) |
321 | 379 |
During the third quarter of fiscal 2010, we disbursed to retired executive officers the funds held
in the Supplemental Executive Retirement Plan rabbi trust ($1.8 million) and the market value of
our common stock ($386,000) held by the Benefit Restoration Plan Trust (BRP). The cancellation
of the 125,204 shares of our common stock held by the BRP reduced the number of common shares
issued and outstanding.
Note 11 Commitments and Contingencies
On February 14, 2011, the Belt Company (formerly known as Chambers Belt Company) filed suit against
us in the Superior Court of the State of Delaware. The suit alleges we underpaid Chambers
approximately $524,000 in earn-out royalties under the terms of the asset purchase agreement
between the parties dated July 9, 2009. We dispute this allegation and in fact contend we are
entitled to a refund under the royalty provision of the asset purchase agreement. We have filed a
proceeding in the Delaware Chancery Court seeking to compel arbitration pursuant to the terms of
the asset purchase agreement. The parties have agreed to stay the Superior Court action pending
resolution of our Petition to Compel Arbitration. At this time, we can make no estimate as to the
outcome of the suit or any arbitration proceeding.
During the third quarter of fiscal 2011, we implemented initiatives to simplify operations and
reduce operating expenses, which included, among other initiatives, headcount reductions (35
individuals). In connection with these initiatives, charges for severance costs of $411,000 were
included in selling, general and administrative expenses for the third quarter of fiscal 2011. As
of March 31, 2011, $196,000 of severance costs were included in accrued compensation.
ITEM 2 | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS |
This Item 2 should be read in the context of the information included in our 2010 Annual Report on
Form 10-K filed with the Securities and Exchange Commission and elsewhere in this Quarterly Report,
including our unaudited consolidated financial statements and accompanying notes in Item 1 of Part
I of this Quarterly Report.
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BUSINESS
We are a leading designer and marketer of branded mens, womens and childrens accessories,
including belts, small leather goods, eyewear, neckwear, sporting goods, and gifts. Our
merchandise is marketed under a broad portfolio of nationally recognized licensed and proprietary
brand names, including TOTES®, WOLVERINE®, HAGGAR®, BONE
COLLECTOR®, EDDIE BAUER®, LEVI STRAUSS SIGNATURE®,
AMITY®, ROLFS®, CANTERBURY®, PRINCE GARDNER®, PRINCESS
GARDNER®, CHAMBERS BELT COMPANY®, ABSOLUTELY FRESH®,
SURPLUS®, as well as private brands for major retail customers. We sell our products
through virtually all major retail distribution channels throughout North America, including mass
merchants, national chain stores, department stores, mens and womens specialty stores, catalog
retailers, grocery stores, drug stores, golf pro shops, sporting goods stores, and the retail
exchange operations of the United States military. We were incorporated as a Delaware corporation
on November 1, 1990.
Significant Events
During the third quarter of fiscal 2011, we implemented initiatives to simplify operations and
reduce operating expenses. These initiatives included headcount reductions, reducing low volume
stock keeping units (SKUs), and discontinuing non-core product lines. In connection with these
initiatives, we incurred severance costs in the amounts set forth in Note 11 of the notes to the
unaudited consolidated financial statements in Item 1 of Part I of this Quarterly Report and
incorporated herein by reference. In addition, in February 2011, our Chief Executive Officer
requested, and our Board of Directors approved, a 10% reduction in his current annual salary
through the end of fiscal 2011.
During the second quarter of fiscal 2011, we entered into an arrangement with a customer pursuant
to which we committed to procure additional retail space to sell our products in exchange for total
consideration of $959,000, which can be settled as credits against accounts receivable or in cash,
of which $608,000 will become payable during the fourth quarter of fiscal 2011. For the three and
nine-months of fiscal 2011, we recognized $189,000 and $351,000 as a reduction of net sales,
respectively, related to this arrangement.
FISCAL 2011 COMPARED TO FISCAL 2010
Business Segments
The following presents sales, gross margins, and operating expenses for our business segments (in
thousands of dollars):
Three Months Ended | Nine Months Ended | |||||||||||||||
March 31 | March 31 | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net sales: |
||||||||||||||||
Accessories |
$ | 26,828 | $ | 26,201 | $ | 79,409 | $ | 92,826 | ||||||||
Gifts |
1,578 | 1,486 | 21,132 | 20,409 | ||||||||||||
$ | 28,406 | $ | 27,687 | $ | 100,541 | $ | 113,235 | |||||||||
Gross margin: |
||||||||||||||||
Accessories |
$ | 8,755 | $ | 10,119 | $ | 26,046 | $ | 34,515 | ||||||||
Gifts |
91 | 538 | 7,244 | 7,685 | ||||||||||||
$ | 8,846 | $ | 10,657 | $ | 33,290 | $ | 42,200 | |||||||||
Gross margin percent of sales: |
||||||||||||||||
Accessories |
32.6 | % | 38.6 | % | 32.8 | % | 37.2 | % | ||||||||
Gifts |
5.8 | 36.2 | 34.3 | 37.7 | ||||||||||||
Total |
31.1 | % | 38.5 | % | 33.1 | % | 37.3 | % | ||||||||
Operating expenses: |
||||||||||||||||
Accessories |
$ | 1,961 | $ | 3,001 | $ | 6,239 | $ | 10,005 | ||||||||
Gifts |
952 | 267 | 4,812 | 3,541 | ||||||||||||
$ | 2,913 | $ | 3,268 | $ | 11,051 | $ | 13,546 | |||||||||
Our fiscal 2011 third quarter net sales were $28.4 million, which was $719,000, or 3%, higher
than the prior year. Net sales for our accessories segment were $26.8 million for the third
quarter of fiscal 2011, which was $627,000, or 2%, higher than in the third quarter of fiscal 2010
primarily due to new mens belt assortments shipped to a major customer as a result of additional
retail space procured during the current fiscal year. Gifts segment net sales of $1.6 million for
the third quarter of fiscal 2011 were $92,000, or 6%, greater than in the prior year primarily due
to higher sales to close-out customers and favorable holiday sell through rates, which resulted in
lower customer deductions for returns.
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Our net sales for the nine months of fiscal 2011 were $100.5 million, which was $12.7 million, or
11%, lower than the comparable prior year period. Accessories segment net sales of $79.4 million
for the nine months of fiscal 2011 were $13.4 million, or 14%, lower than net sales for the nine
months of fiscal 2010 primarily due to reduced belt
assortments and lower replenishment orders by one of our largest customers and higher returns and
sales concessions, offset partially by an increase in sales by our Canadian subsidiary. Gifts
segment net sales of $21.1 million for the nine months of fiscal 2011 were $723,000, or 4%, greater
than in the prior year primarily due to improved customer sell-through rates and a decrease in
holiday season returns.
Gross margins were 31.1% and 38.5% for the third quarters of fiscal 2011 and 2010, respectively.
Accessories segment margins decreased from 38.6% in the third quarter of fiscal 2010 to 32.6% in
the current fiscal year primarily because of lower sales of previously written-down inventory,
higher inventory write-offs, higher freight costs, and a higher mix of private label sales. The
gifts segment margin was 30.4 percentage points lower in the fiscal 2011 third quarter compared to
the same quarter last year primarily due to a higher mix of sales to close-out customers and higher
freight costs during the current fiscal year. Higher freight costs in both segments were driven by
recent increases in crude oil prices. The key drivers to the overall gross margin decline were
sales of previously written-down inventory and inventory write-offs, which reduced gross margin
percentage by 130 and 430 basis points, respectively, from the prior year period.
Gross margins were 33.1% and 37.3% for the nine months of fiscal 2011 and 2010, respectively.
Accessories segment margins decreased from 37.2% in the nine months of fiscal 2010 to 32.8% in the
current fiscal year primarily because of lower sales of previously written-down inventory, a higher
mix of private label sales, higher freight costs and higher write-offs associated with inventory
expected to be returned by certain customers. The gifts segment margin was 340 basis points lower
in the nine months of fiscal 2011 compared to the comparable period in the prior year due to higher
freight costs, which were offset slightly by improved assortments sourced from overseas suppliers
at lower costs. Higher freight costs in both segments were driven by decreased supply of shipping
containers and increased air freight expenses resulting from supplier production delays during the
first half of fiscal 2011. The key drivers to the overall gross margin decline were sales of
previously written-down inventory and inventory write-offs, which reduced gross margin percentage
by 220 and 90 basis points, respectively, from the prior year period.
Total segment operating expenses were lower in the third quarter and in the nine months of fiscal
2011 by $355,000 and $2.5 million, respectively, when compared to the prior year periods. The
primary contributors to our lower operating expenses in the current fiscal year were lower
compensation, facilities and advertising costs, offset partially by higher customer chargebacks.
The increase in the gifts segment operating expenses for the third quarter and nine months of
fiscal 2011 was due to higher royalties as a result of inventory returns being lower than expected.
Expenses And Taxes
Total selling, general and administrative expenses of $10.9 million for the third quarter of fiscal
2011 were $277,000, or 2%, lower than the third quarter of fiscal 2010 ($11.2 million). The
reductions were primarily due to decreases in compensation and facilities costs, offset partially
by increases in royalties, bad debt provisions, professional services and customer chargebacks.
Total selling, general and administrative expenses of $35.4 million for the nine months of fiscal
2011 were $2.8 million, or 7%, lower than the nine months of fiscal 2010 ($38.2 million). The
reductions were primarily due to decreases in compensation costs, facilities costs, advertising and
professional services, offset partially by increases in bad debt provisions and customer
chargebacks.
The increase in interest expense for the third quarter of fiscal 2011 over the prior year was
primarily attributable to higher outstanding borrowings during the current year quarter. The
decrease in interest expense for the nine months of fiscal 2011 was attributable to lower debt cost
amortization under our credit facility compared to the prior year and the Chambers acquisition
earn-out liability discount accretion (nine months fiscal 2010 $138,000), which we did not incur
in the first nine months of fiscal 2011. Partially offsetting the decrease for the nine month
period was higher outstanding borrowings during the current year.
Information about our income taxes is incorporated herein by reference to Note 8 of the notes to
the unaudited consolidated financial statements in Item 1 of Part I of this Quarterly Report.
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SEASONALITY
Historically, our first and second quarter sales and operating results reflect a seasonal increase
compared to the third and fourth quarters of our fiscal year. Sales and operating results for the
first nine months of fiscal 2011 are not necessarily indicative of the results that may be expected
for the year ending June 30, 2011.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity, which we believe will provide adequate financial resources for
our foreseeable working capital needs, are cash flows from operating activities and our credit
facilities ($2.8 million aggregate borrowing availability at March 31, 2011). Information about
our credit arrangements is incorporated herein by reference to Note 6 of the notes to unaudited
consolidated financial statements included in Item 1 of Part I of this Quarterly Report.
For the nine months of fiscal 2011, our operating activities resulted in net cash outflows of $12.6
million, which consisted of $4.1 million higher inventory purchasing to meet expected future
revenue growth and $8.4 million used to pay down accounts payable and accrued expenses. Net note
borrowings of $10.5 million and sales of property and equipment of $2.8 million were the primary
sources of cash used for operating activities in fiscal 2011. Fiscal 2011 net cash used by
operating activities was $13.2 million higher than in fiscal 2010, primarily driven by a $4.1
million tax refund in 2010 that did not occur in the current year, $3.9 million higher fiscal 2011
funding of accounts payable and accrued expenses, $3.8 million lower fiscal 2011 accounts
receivable due to lower net sales, and $2.0 million higher fiscal 2011 inventory purchases.
Investing activities for the nine months of fiscal 2011 primarily consisted of a $2.7 million
inflow from the sale of our idle distribution center located in West Bend, Wisconsin, offset by
purchases of additional racking and other various leasehold improvements for our distribution
facilities and the completion of our acquisition of MCM. Investing activities for the prior year
related to the Chambers transaction and consisted of the $5.1 million estimated present value of an
earn-out agreement, a noncash financing activity, and $3.9 million in cash from operating
activities paid for the assets listed in Note 3 of the notes to unaudited consolidated financial
statements in Item 1 of Part I of this Quarterly Report incorporated herein by reference.
Purchases of property and equipment of $4.8 million in the nine months of fiscal 2010 were
primarily related to the move of our corporate offices in December 2009 and the consolidation of
our distribution facilities into our lower-cost Dallas, Texas distribution facility. Property and
equipment sale proceeds of $790,000 in fiscal 2010 were primarily from the sale of a warehouse in
Yoakum, Texas which resulted in a $339,000 pretax gain included in other income. In January 2010,
$1.8 million of assets held in a trust for retired executive officers were liquidated and payment
of the proceeds to the retirees reduced other current assets and accrued expenses.
Financing activities included credit facility net borrowings of $10.5 million and $7.0 million for
the nine months of fiscal 2011 and 2010, respectively. Net borrowings for fiscal 2011 were
primarily used to fund our operating activities. Net borrowings for fiscal 2010 were primarily
used for the Chambers transaction and to fund our investing activities.
CRITICAL ACCOUNTING POLICIES
There have been no significant changes in the critical accounting policies disclosed in our Annual
Report on Form 10-K for the year ended June 30, 2010.
ITEM 4 | CONTROLS AND PROCEDURES |
Disclosure Controls And Procedures
Under the supervision and with the participation of our management, including our Chief Executive
Officer and Interim Chief Financial Officer, we have evaluated the effectiveness of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act
of 1934) as of the end of the period covered by this report. Based on that evaluation, our Chief
Executive Officer and Interim Chief Financial Officer have concluded that our disclosure controls
and procedures were effective as of March 31, 2011.
Changes In Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting during the third quarter
of fiscal 2011 that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
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Table of Contents
PART II OTHER INFORMATION
ITEM 1 | LEGAL PROCEEDINGS |
We are periodically involved in legal proceedings and litigation arising in the ordinary course of
business. On February 14, 2011, the Belt Company (formerly known as Chambers Belt Company) filed
suit against us in the Superior Court of the State of Delaware. The suit alleges we underpaid
Chambers approximately $524,000 in earn-out royalties under the terms of the asset purchase
agreement between the parties dated July 9, 2009. We dispute this allegation and in fact contend
we are entitled to a refund under the royalty provision of the asset purchase agreement. We have
filed a proceeding in the Delaware Chancery Court seeking to compel arbitration pursuant to the
terms of the asset purchase agreement. The parties have agreed to stay the Superior Court action
pending resolution of our Petition to Compel Arbitration. At this time, we can make no estimate as
to the outcome of the suit or any arbitration proceeding.
ITEM 1A | RISK FACTORS |
In addition to the information in this Quarterly Report on Form 10-Q, consideration should be given
to the risk factors in Part I, Item 1A Risk Factors in our Annual Report on Form 10-K for the
year ended June 30, 2010 which could materially and adversely affect our business, results of
operations, and financial condition. There have been no significant changes in the risk factors
disclosed in our 2010 Annual Report on Form 10-K.
ITEM 6 | EXHIBITS |
The Exhibit Index immediately preceding the exhibits required to be filed is incorporated herein by
reference.
15
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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) |
||||
May 12, 2011 | /s/ N. Roderick McGeachy, III | |||
N. Roderick McGeachy, III | ||||
President and Chief Executive Officer (principal executive officer) |
||||
/s/ Robert D. Martin | ||||
Robert D. Martin | ||||
Interim Chief Financial Officer
(principal financial officer) |
||||
/s/ Joseph C. Talley | ||||
Joseph C. Talley | ||||
Chief Accounting Officer
(principal accounting officer) |
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Table of Contents
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 Bylaws |
||||||||||||
3.1 Certificate of Incorporation
of Tandy Brands Accessories, Inc. |
S-1 | 11/02/90 | 33-37588 | 3.1 | ||||||||
3.2 Certificate of Amendment of the
Certificate of Incorporation of Tandy
Brands Accessories, Inc. |
8-K | 11/02/07 | 0-18927 | 3.1 | ||||||||
3.3 Amended and Restated Bylaws
of Tandy Brands Accessories, Inc.,
effective July 2007 |
8-K | 7/13/07 | 0-18927 | 3.01 | ||||||||
3.4 Amendment No. 1 to Amended and
Restated Bylaws of Tandy Brands
Accessories, Inc. |
8-K | 11/02/07 | 0-18927 | 3.2 | ||||||||
(4) Instruments Defining the Rights of
Security Holders, Including Indentures |
||||||||||||
4.1 Form of Common Stock
Certificate of Tandy Brands
Accessories, Inc. |
S-1 | 12/17/90 | 33-37588 | 4.2 | ||||||||
4.2 Certificate of Elimination of
Series A Junior Participating
Cumulative Preferred Stock of Tandy
Brands Accessories, Inc. |
8-K | 10/24/07 | 01-18927 | 3.1 | ||||||||
4.3 Credit Agreement by and between
Tandy Brands Accessories, Inc. and
Comerica Bank dated as of February 12,
2008 |
10-Q | 2/12/10 | 0-18927 | 4.3 | ||||||||
4.4 Amendment No. 1 to Credit
Agreement dated as of February 12,
2008 by and between Tandy Brands
Accessories, Inc. and Comerica Bank
effective as of March 31, 2009 |
10-Q | 2/12/10 | 0-18927 | 4.4 | ||||||||
4.5 Amendment No. 2 to Credit
Agreement dated as of February 12,
2008 by and between Tandy Brands
Accessories, Inc. and Comerica Bank
effective as of October 6, 2009 |
10-Q | 2/12/10 | 0-18927 | 4.5 | ||||||||
4.6 Amendment No. 3 to Credit
Agreement dated as of February 12,
2008 by and between Tandy Brands
Accessories, Inc. and Comerica Bank
effective as of May 10, 2010 |
10-Q | 5/13/10 | 0-18927 | 4.6 | ||||||||
4.7 Amendment No. 4 to Credit
Agreement dated as of February 12,
2008 by and between Tandy Brands
Accessories, Inc. and Comerica Bank
effective as of March 31, 2011** |
N/A | N/A | N/A | N/A |
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TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES
EXHIBIT INDEX
Incorporated by Reference | ||||||||||||
(if applicable) | ||||||||||||
Exhibit Number and Description | Form | Date | File No. | Exhibit | ||||||||
(10) Material Contracts |
||||||||||||
10.1 Amendment No. 4 to Credit Agreement
dated as of February 12, 2008 by and
between Tandy Brands Accessories, Inc.
and Comerica Bank effective as of March
31, 2011** |
N/A | N/A | N/A | N/A | ||||||||
(31) Rule 13a-14(a)/15d-14(a) Certifications |
||||||||||||
31.1 Certification Pursuant to Rule
13a-14(a)/15d-14(a) (Chief Executive
Officer) |
N/A | N/A | N/A | N/A | ||||||||
31.2 Certification Pursuant to Rule
13a-14(a)/15d-14(a) (Interim Chief
Financial Officer) |
N/A | N/A | N/A | N/A | ||||||||
(32) Section 1350 Certifications |
||||||||||||
32.1 Section 1350 Certifications (Chief
Executive Officer and Interim Chief
Financial Officer) |
N/A | N/A | N/A | N/A |
** | Filed herewith |
18