ITEM 1. BUSINESS.
WHAT DO WE DO?
We are a leading designer, manufacturer and marketer of branded men's, women's and children's accessories, including belts and small leather goods such as wallets. Our product line also includes handbags, socks, scarves, gloves, hats, hair accessories, suspenders, cold weather accessories and sporting goods accessories. We market our merchandise under a broad portfolio of nationally recognized licensed and proprietary brand names, including DOCKERS(R), LEVI'S(R), JONES NEW YORK(R), PERRY ELLIS(R), ROLFS(R), HAGGAR(R), WOOLRICH(R), JORDACHE(R), INDIAN MOTORCYCLE(R), BUGLE BOY(R), CANTERBURY(R), PRINCE GARDNER(R), PRINCESS GARDNER(R), AMITY(R), DON LOPER(R), ACCESSORY DESIGN GROUP(R), TEX TAN(R) and TIGER(R), as well as private brands for major retail customers. We sell our products to a variety of retail outlets, including mass merchants, national chain stores, major department stores, men's and women's specialty stores, catalog retailers, grocery stores, drug stores, golf pro shops, sporting goods stores and the retail exchange operations of the United States military.
WHAT ARE OUR PRODUCT LINES?
To facilitate our internal operations as well as our customer relationships, our products are generally organized along men's and women's product lines. As a result, we have two reportable segments: men's accessories, and women's accessories. Men's accessories accounted for approximately 52.3% of net sales during fiscal 2002, and women's accessories accounted for approximately 47.7% of net sales during the same period. Financial information regarding operations and assets by segment appears on page 20 of our 2002 Annual Report to Stockholders, and this information is incorporated herein by reference.
Belts
We, along with our predecessors, have been manufacturing and marketing belts for over 70 years, and belts remain our largest single product category, representing approximately 55.2%, 49.7% and 48.9% of net sales in fiscal 2002, 2001 and 2000, respectively. We compete in all four categories of the belt market: casual, work, dress and fashion. In fiscal 2002, we manufactured approximately 34.6% of the men's belts we distributed and imported the balance, including all women's belts, from China, Guatemala and various other countries.
Small Leather Goods
Our small leather goods consist primarily of men's and women's wallets sold under licensed and proprietary brands. Our small leather goods are primarily obtained from manufacturers in foreign countries, such as China, due to the labor-intensive nature of manufacturing small leather goods and the relative low cost of labor in those countries. Sales of small leather goods accounted for approximately $43.3 million, or 21.0%, of our total net sales in fiscal 2002. Sales of small leather goods accounted for approximately 25.8% and 28.5% of our total net sales in fiscal 2001 and 2000, respectively.
Other Accessories
In addition to belts and small leather goods, we distribute accessories such as women's handbags, socks, scarves, gloves, hats, hair accessories, men's suspenders and sporting goods accessories. These products are marketed under certain of our proprietary brands, licensed brands and private brands. These other accessories complement our core belt and small leather goods products. We purchase all of our other accessory items, which are manufactured according to our design specifications, from foreign and domestic sources. In fiscal 2002, our sales of other accessories totaled $48.9 million, or 23.8%, of our total net sales. Sales of other accessories accounted for 24.5% and 22.6% of our total net sales in fiscal 2001 and 2000, respectively.
WHAT BRANDS DO WE SELL?
License Agreements
We have been awarded license agreements for several well recognized brands, including Dockers(R), Levi's(R), Jones New York(R), Perry Ellis(R), Bugle Boy(R), Haggar(R), Woolrich(R), Jordache(R), Indian Motorcycle(R) and Tex Tan(R). On March 4, 2002, we signed an exclusive licensing agreement with Levi Strauss & Co. to produce women's small leather goods and women's belts under the LEVI(R)name. We began shipping LEVI(R) products in July of 2002.
Generally, our license agreements cover specific products and require us to pay annual royalties, ranging from 2% to 8% of net sales, based on minimum sales quotas or sales. The terms of the agreements are typically four to ten years, with options to extend the terms, provided certain sales or royalty minimums are achieved. For fiscal 2002, sales of our licensed products accounted for approximately $20.3 million, or 9.9%, of our net sales, with sales from no individual license agreement accounting for more than 5% of total net sales.
Private Brand Products
In fiscal 2002, private brand products accounted for approximately $107.3 million, or 52.1%, of our total net sales. In a private brand program we are responsible for designing, manufacturing and delivering unique products for select customers according to the customer's individual requirements. These programs offer our customers exclusivity and pricing control over their products, both of which are important factors in the retail marketplace. We believe our flexible sourcing capabilities, advanced electronic inventory management and replenishment systems and design, product development and merchandising expertise provide retailers with a superior alternative to direct sourcing of their private brand products. Our principal private brand programs include those for leading retailers such as
- Wal-Mart; - JCPenney; - Sears; and - Target.
Our principal private brand programs also include nationally recognized private brand names such as
- Farah(R); - Faded Glory(R); - No Boundaries(R); - Arizona(R); - St. John's Bay(R); - Xhilaration(R); - Mossimo(R); and - Cherokee(R).
Proprietary Brands
In addition to our licensed and private brands, we produce and market products under our own registered trademarks and trade names. We own leading and well recognized trademarks such as Rolfs(R), Amity(R), Canterbury(R), Tiger(R), Accessory Design Group(R), Prince Gardner(R), Princess Gardner(R), Royalle by Prince Gardner(R), and Royalle by Princess Gardner(R). We intend to build on the success of our proprietary brand portfolio by pursuing additional ownership opportunities and expanding the assortment of products offered and the retail channels served by our proprietary brands. Net sales under our proprietary brands were approximately $78.2 million, or 38.0%, of our total net sales in fiscal 2002.
Distribution of our Key Brands
Our key brands and each brand's targeted distribution channels and products are as follows:
WHAT ARE OUR CHANNELS OF DISTRIBUTION?
We sell our products to a variety of retail outlets. These outlets include
- mass merchants; - national chain stores; - major department stores; - men's and women's specialty stores; - catalog retailers; - grocery stores; - drug stores; - golf pro shops; - sporting goods stores; and - the retail exchange operations of the United States military.
WHO ARE OUR CUSTOMERS?
We maintain strong relationships with major retailers in the United States and Canada, including
- Wal-Mart; - Target; - Meijer's; - Shopko; - AAFES; - Sears; - JCPenney; - Kohl's; - May Department Stores; - Dillard's; - Mervyn's; and - Federated Department Stores.
For fiscal 2002, Wal-Mart and Target represented 39.0% and 13.0% of our total net sales, respectively. In fiscal 2002, our top ten customers accounted for approximately 71.7% of net sales. A decision by Wal-Mart, Target or any other significant customer, whether motivated by competitive conditions, financial difficulties or otherwise, to decrease the amount of merchandise purchased from us or to change their manner of doing business with us could have a material adverse effect on our financial position and results of operations.
HOW DO WE MAINTAIN STRONG CUSTOMER RELATIONS?
We believe our success is due in large part to our strong customer relationships, strong sales and marketing organization and superior customer service. Factors which help facilitate these characteristics include our "quick response" distribution, vendor inventory management services, electronic data interchange, commonly referred to as EDI, capabilities and expertise in the communication of fashion and lifestyle concepts through product lines and innovative point-of-sale presentations. We develop and manage our accounts through the coordinated efforts of senior management, regional managers, account executives and an organization of salespeople and independent sales representatives. Members of our senior management or senior account executives manage our relationships with certain of our national accounts such as Wal-Mart, Target, Meijer's, Shopko, Sears, JCPenney, Kohl's and Dillard's.
We maintain in-store customer service relationships with various specialty stores, national chain stores and major department stores. We have a team of more than 130 sales associates in the United States and approximately 35 sales associates in Canada. These sales associates are organized on a regional basis and supervised by regional sales managers. Sales associates are responsible for overseeing accounts within a defined geographic territory, developing and maintaining business relationships with their respective customers, preparing and conducting line presentations and assisting customers in the implementation of programs at
the individual store level. In addition, sales associates may, depending on the needs of an individual customer, assist in the maintenance and presentation of merchandise on the selling floor. Our regional sales organization is supported by account executives. Sales personnel, other than senior managers, generally are compensated based on a combination of salary and commission.
DID WE HAVE FIRM BACKLOG ORDERS FOR FISCAL 2002?
We had firm backlog orders at June 30, 2002 and 2001 totaling $12,865,000 and $9,065,000, respectively. Our backlog orders are fairly consistent throughout the year with a seasonable increase during the second quarter. Generally, whether we can fill our backlog orders is dependent on product availability. Historically, the amount of unfilled backlog orders has been immaterial. We currently use EDI for electronic communications of invoices, shipping notices, purchase orders and other transactions. Due to the rapid fulfillment of EDI orders, the backlog at June 30, 2002 may not be indicative of future results.
HOW DO WE MERCHANDISE AND DEVELOP OUR PRODUCTS?
Senior managers are responsible for generating profitable performance results by developing, planning, selling and implementing merchandise programs for their accounts. Individual senior managers develop and maintain business relationships with customers' buyers and merchandise managers. Senior managers also develop and propose comprehensive programs relating to product mix, pricing and fixturing, and they assist customers' buyers and merchandise managers in the implementation of these programs. We coordinate the implementation of marketing programs through the efforts of senior and regional managers. Senior managers are compensated based on a combination of salary and bonus tied to various measures of profitability and sales performance.
Our product development and merchandising professionals work closely with customers, suppliers and our licensors to interpret market trends, develop new products and create and implement comprehensive merchandising programs, which consist of packaging and point-of-sale fixturing and presentation materials. We believe our ability to design all of our products internally represents a significant competitive advantage because retail customers have become increasingly reliant on the design and merchandising expertise of their suppliers.
WHAT IS OUR COMPETITIVE POSITION?
Competition in the fashion accessories industry is intense. The accessories market is highly fragmented, and management believes we are one of the largest competitors in the accessories industry. Based on our internal analysis, we believe the sectors of the accessories market we serve have grown at an average annual rate of 3-5% in recent years. In our opinion, this growth has resulted from
- the trend toward more casual attire, which has increased demand for accessories outside the traditional dress category;
- increased consumer awareness of branded accessories as a fashion and lifestyle statement; and
- a desire for new and different accessories styles.
As a result of recent consolidation in the retail industry, retailers have increasingly chosen to consolidate their supply bases to a core group of companies that have the resources and expertise to meet the retailers' increasing demands. Over the past several years, our net sales growth has exceeded that of the accessories industry, and we believe we are well positioned to continue to capitalize on these market trends.
Our ability to remain competitive depends largely on our ability to maintain our customer relationships, create new designs and products and offer high quality merchandise at popular prices. The following table summarizes our primary competitors.
We compete on the basis of customer service, brand recognition, product quality and price. We believe our ability to compete successfully is based on our strong customer relationships, superior customer service, strong national brand portfolio, national distribution capabilities, proprietary inventory management systems, flexible sourcing and product design and innovation.
HOW DO WE SEEK TO GROW OUR BUSINESS?
We seek increased sales and earnings through a variety of means, including increased sales through our current operating units, as well as growth through the acquisition of assets and similar businesses. To that end, on April 12, 2002, we acquired substantially all of the operating assets of AA&E Leathercraft, Inc., a manufacturer and distributor of leather sporting goods accessories. The purchase price for these assets was approximately $995,000 in cash, which was provided by drawing on our existing credit facility. The assets included, among other items, wholesale accounts receivable, wholesale inventory, certain machinery and equipment, and a 10,000 square foot building located in Yoakum, Texas.
Since we began operating as an independent company on November 1, 1990, we have acquired numerous businesses. Over the last three years, we made the following acquisitions.
WHERE AND HOW DO WE MANUFACTURE OUR PRODUCTS?
Our manufacturing facilities are located in Yoakum, Texas and Scarborough, Ontario. The Yoakum facility has the capacity to manufacture approximately 5.3 million belts per year. During fiscal 2002, our manufacturing facilities operated at approximately 74.8% of capacity. We continually seek to increase the automation of our manufacturing operations. We believe we are one of the lowest-cost domestic belt producers because of our automated equipment, large production volumes and economies of scale in raw materials and finished goods sourcing.
In fiscal 2002, we obtained certain finished products representing approximately 85% of our net sales from outside manufacturers, both domestic and foreign. We have strong relationships with a number of high quality, low-cost foreign manufacturers which provide particularly labor-intensive products, such as small leather goods, manufactured to our specifications.
WHAT ARE THE SOURCES AND AVAILABILITY OF OUR RAW MATERIALS?
Our raw materials requirements are limited to materials used in the manufacture of men's belts, which is the only product line we manufacture ourselves. These raw materials consist primarily of leather hides and
hardware, such as buckles, and are readily available from a variety of foreign and domestic sources. As a result, we have not experienced any significant disruption of product flow based on our raw materials needs.
ARE WE SUBJECT TO GOVERNMENTAL REGULATIONS?
Many of our products are manufactured in countries other than the United States. Accordingly, those countries and the United States may from time to time modify existing quotas, duties, tariffs, or import restrictions, or otherwise regulate or restrict imports in a manner which could be material and adverse to us. In addition, economic and political disruptions in Asia and other parts of the world from which we import goods could have an adverse effect on our ability to maintain an uninterrupted flow of products to our major customers.
Due to the fact that we sell our products to retail exchange operations of the United States military, and are therefore a supplier to the federal government, we must comply with all federal statutes applicable to federal government suppliers. Compliance with these federal statutes does not impose a significant burden on us.
HOW MANY EMPLOYEES DO WE HAVE?
We had approximately 1,156 employees as of June 30, 2002. We believe employee relations are generally good.
WHAT ROLE DOES INTELLECTUAL PROPERTY PLAY IN OUR BUSINESS?
We believe our trademarks, our patents, our licenses to use certain trademarks and our other proprietary rights in and to intellectual property are important to our success and our competitive position, and we guard our intellectual property rights against infringement. We devote considerable resources to the establishment and protection of our intellectual property on a nationwide basis and in selected foreign markets. Our trademarks remain valid and enforceable as long as the marks are used in connection with our products and services and the required documents and registration renewals are filed, and the related fees are paid. Our patents remain valid and enforceable until the end of the respective patent term, so long as maintenance fees are paid.
WHAT ARE OUR WORKING CAPITAL PRACTICES?
We do not enter into long-term agreements with any of our customers. Instead, we enter into a number of purchase order commitments with our customers for each of our lines every season. Due to the production time required by our foreign suppliers to produce and ship goods to our distribution centers, we attempt, based on internal estimates, to carry on hand inventory levels necessary for the timely shipment of initial shipment and replenishment orders of men's and women's accessories to our customers. A decision by the customer buyer of a group of stores or any significant customer, whether motivated by competitive conditions, financial difficulties or otherwise, to change the amount of merchandise purchased from us significantly, or to change their manner of doing business with us, may have a material effect on our financial condition and results of operations. However, this exposure is mitigated in that our products are sold to a variety of retail partners throughout the United States and Canada.
ITEM 2.
ITEM 2. PROPERTIES.
We own and lease numerous facilities throughout the United States and abroad. We currently lease our corporate offices which are located in Arlington, Texas. We believe our various properties are adequate and suitable for the particular uses involved. The following table summarizes our properties.
The total space we own and lease as of June 30, 2002, is as follows.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
We are not involved in any material pending legal proceedings, other than ordinary routine litigation incidental to our business. No material legal proceedings were terminated during the fourth quarter of the 2002 fiscal year.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of security holders during the fourth quarter of the 2002 fiscal year.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(a) The principal market for our common stock is the NASDAQ National Market System. The high and low bid information for our common stock for each full quarterly period within the two most recent fiscal years appears on page 28 of our 2002 Annual Report to Stockholders, and this information is incorporated herein by reference.
(b) The approximate number of record holders of common stock on September 6, 2002 was 925.
(c) We have never paid a cash dividend on our common stock. We currently intend to retain our earnings for the foreseeable future to provide funds for the expansion of our business. The payment of dividends in the future will be at the sole discretion of our board of directors and will depend on our profitability, financial condition, capital needs, future prospects, contractual restrictions and other factors deemed relevant by our board of directors. Our existing credit agreement currently contains covenants restricting the payment of dividends.
(d) Information regarding securities authorized for issuance under equity compensation plans is included in Part III, Item 12, of this report.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
The information required by this item appears on page 28 of our 2002 Annual Report to Stockholders, and this information is incorporated herein by reference.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The information required by this item appears on pages 23 through 27 of our 2002 Annual Report to Stockholders, and this information is incorporated herein by reference.
ITEM 7A.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK.
We are subject to interest rate risk on our long-term debt. We manage our exposure to changes in interest rates by the use of variable and fixed interest rate debt. In addition, we have hedged our exposure to changes in interest rates on a portion of our variable debt by entering into an interest rate swap agreement to lock in a fixed interest rate for a portion of these borrowings. On July 1, 2001, we entered into a three-year interest rate swap agreement with Wells Fargo Bank, N.A., which expires on June 27, 2004, converting $30,000,000 of outstanding indebtedness from a variable to a fixed interest rate. The average receive rate is based on a 90-day LIBOR rate. At June 30, 2002, the receive and pay rates related to the interest rate swap were 2.04% and 5.60%, respectively. Interest differentials paid or received under the swap agreement are reflected as an adjustment to interest expense when paid. The interest rate swap agreement represents a valid cash flow hedge investment under Statement No. 133. As such, during fiscal 2002, changes in the fair value of the interest rate swap were recognized as other comprehensive income with the fair value at June 30, 2002, approximating $1,700,000 ($1,041,000, net of tax of $659,000). The potential impact of market conditions on the fair value of our indebtedness is not expected to be material. Given that such lines of credit bear interest at floating market interest rates, the fair value of amounts borrowed thereunder approximates carrying value.
Theoretically, we are also exposed to market risk with respect to changes in the global price level of certain commodities used in the production of our products. We routinely purchase leather hides during the year for use in the manufacture of men's belts. We also purchase a substantial amount of leather items from third-party suppliers. An unanticipated material increase in the market price of leather could increase the cost of these products to us and therefore have a negative effect on our results of operations.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by this item appears on pages 7 through 28 of our 2002 Annual Report to Stockholders, and this information is incorporated herein by reference. Following is a cross reference for location of the required information.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
The information required by Items 10 through 13 is included in our definitive Proxy Statement relating to our 2002 Annual Meeting of Stockholders, and this information is incorporated herein by reference. Following is a cross reference for location of the required information.
PART IV
ITEM 14.
ITEM 14. CONTROLS AND PROCEDURES.
There were no significant changes in our internal controls or in other factors that could significantly affect these controls during the 2002 fiscal year.
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this report:
- The financial statements listed in response to Item 8 of this report have been incorporated herein by reference to pages 7 through 28 of our 2002 Annual Report to Stockholders.
- Financial Statement Schedule:
Report of Independent Auditors on Financial Statement Schedule for the three years in the period ended June 30, 2002; Schedule II -- Valuation and Qualifying Accounts.
The financial statement schedule should be read in conjunction with the consolidated financial statements in our 2002 Annual Report to Stockholders. Financial statement schedules not included in this report have been omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto.
- Exhibits:
A list of the exhibits filed as part of this report is set forth in the Exhibit Index, which immediately precedes such exhibits and is incorporated herein by reference.
(b) Reports on Form 8-K.
We filed a Form 8-K on August 16, 2002, to report the issuance of the press release announcing our financial results for the fourth quarter of fiscal 2002.
SIGNATURES
Pursuant to the requirements of Section l3 or l5(d) of the Securities Exchange Act of l934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
TANDY BRANDS ACCESSORIES, INC. (Registrant)
/s/ J.S.B. JENKINS -------------------------------------- J.S.B. Jenkins President and Chief Executive Officer Date: September 27, 2002
Pursuant to the requirements of the Securities and Exchange Act of l934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
CERTIFICATION BY CHIEF EXECUTIVE OFFICER
I, J.S.B. Jenkins, certify that:
1. I have reviewed this annual report on Form 10-K of Tandy Brands Accessories, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; and
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report.
[ITEMS 4, 5 AND 6 OMITTED PURSUANT TO THE TRANSITION PROVISIONS OF RELEASE NO. 34-46427.]
/s/ J.S.B. JENKINS -------------------------------------- J.S.B. Jenkins Chief Executive Officer
Date: September 27, 2002
CERTIFICATION BY CHIEF FINANCIAL OFFICER
I, Mark J. Flaherty, certify that:
1. I have reviewed this annual report on Form 10-K of Tandy Brands Accessories, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; and
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report.
[ITEMS 4, 5 AND 6 OMITTED PURSUANT TO THE TRANSITION PROVISIONS OF RELEASE NO. 34-46427.]
/s/ MARK J. FLAHERTY -------------------------------------- Mark J. Flaherty Chief Financial Officer
Date: September 27, 2002
REPORT OF INDEPENDENT AUDITORS ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of Tandy Brands Accessories, Inc.
We have audited the consolidated financial statements of Tandy Brands Accessories, Inc. and subsidiaries as of June 30, 2002 and 2001, and for each of the three years in the period ended June 30, 2002, and have issued our report thereon dated August 2, 2002, incorporated by reference in this Annual Report on Form 10-K. Our audits also included the financial statement schedule listed in Item 15(a) of this Annual Report on Form 10-K. The schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/S/ERNST & YOUNG LLP
Fort Worth, Texas August 2, 2002
TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS FOR THE YEAR ENDED JUNE 30,
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(1) Represents uncollectible accounts written off, net of recoveries and application of allowances to sales returns.
EXHIBIT INDEX
EXHIBIT INDEX -- (CONTINUED)
EXHIBIT INDEX -- (CONTINUED)
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* Management contract or compensatory plan
** Filed herewith