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EX-4.6 - EX-4.6 - TANDY BRANDS ACCESSORIES INC | d72985exv4w6.htm |
EX-32.1 - EX-32.1 - TANDY BRANDS ACCESSORIES INC | d72985exv32w1.htm |
EX-10.1 - EX-10.1 - TANDY BRANDS ACCESSORIES INC | d72985exv10w1.htm |
EX-10.2 - EX-10.2 - TANDY BRANDS ACCESSORIES INC | d72985exv10w2.htm |
EX-31.1 - EX-31.1 - TANDY BRANDS ACCESSORIES INC | d72985exv31w1.htm |
EX-10.3 - EX-10.3 - TANDY BRANDS ACCESSORIES INC | d72985exv10w3.htm |
EX-31.2 - EX-31.2 - TANDY BRANDS ACCESSORIES INC | d72985exv31w2.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 |
For the Quarterly Period Ended March 31, 2010
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.) |
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 12, 2010 | |
Common stock, $1.00 par value | 6,932,726 |
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 and involve risks, uncertainties and assumptions that are
difficult to predict. Our actual results may differ materially from those suggested by these
forward-looking statements for various reasons, including those identified under Risk Factors
included in our 2009 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 | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net sales |
$ | 27,687 | $ | 25,051 | $ | 113,235 | $ | 102,612 | ||||||||
Cost of goods sold |
17,030 | 15,876 | 71,035 | 65,666 | ||||||||||||
Inventory write-down |
| 7,504 | | 7,504 | ||||||||||||
17,030 | 23,380 | 71,035 | 73,170 | |||||||||||||
Gross margin |
10,657 | 1,671 | 42,200 | 29,442 | ||||||||||||
Selling, general and administrative expenses |
11,189 | 13,116 | 38,187 | 39,651 | ||||||||||||
Depreciation and amortization |
665 | 444 | 2,045 | 1,487 | ||||||||||||
Acquisition related costs |
619 | | 908 | | ||||||||||||
Restructuring charges |
1,187 | 844 | 1,417 | 844 | ||||||||||||
Total operating expenses |
13,660 | 14,404 | 42,557 | 41,982 | ||||||||||||
Operating loss |
(3,003 | ) | (12,733 | ) | (357 | ) | (12,540 | ) | ||||||||
Interest expense |
(178 | ) | (140 | ) | (864 | ) | (508 | ) | ||||||||
Other income |
73 | 74 | 456 | 266 | ||||||||||||
Acquisition bargain purchase gain |
| | 1,379 | | ||||||||||||
Income (loss) before income taxes |
(3,108 | ) | (12,799 | ) | 614 | (12,782 | ) | |||||||||
Income taxes (benefit) |
220 | (521 | ) | (3,970 | ) | (176 | ) | |||||||||
Net income (loss) |
$ | (3,328 | ) | $ | (12,278 | ) | $ | 4,584 | $ | (12,606 | ) | |||||
Income (loss) per common share |
$ | (0.48 | ) | $ | (1.78 | ) | $ | 0.66 | $ | (1.82 | ) | |||||
Income (loss) per common share assuming dilution |
$ | (0.48 | ) | $ | (1.78 | ) | $ | 0.65 | $ | (1.82 | ) | |||||
Common shares outstanding |
6,931 | 6,914 | 6,931 | 6,945 | ||||||||||||
Common shares outstanding assuming dilution |
6,931 | 6,914 | 7,097 | 6,945 | ||||||||||||
Cash dividends declared per common share |
$ | | $ | | $ | | $ | 0.04 |
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 | |||||||
2010 | 2009 | |||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 2,559 | $ | 3,670 | ||||
Accounts receivable |
16,280 | 19,566 | ||||||
Refundable income taxes |
4,439 | | ||||||
Inventories |
29,051 | 23,022 | ||||||
Other current assets |
4,738 | 8,282 | ||||||
Total current assets |
57,067 | 54,540 | ||||||
Property and equipment |
8,769 | 3,776 | ||||||
Other assets: |
||||||||
Intangibles |
6,105 | 2,742 | ||||||
Other assets |
866 | 908 | ||||||
Total other assets |
6,971 | 3,650 | ||||||
$ | 72,807 | $ | 61,966 | |||||
Liabilities And Stockholders Equity |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 8,724 | $ | 9,369 | ||||
Accrued expenses |
4,487 | 8,056 | ||||||
Acquisition earn-out |
1,836 | | ||||||
Note payable |
7,044 | | ||||||
Total current liabilities |
22,091 | 17,425 | ||||||
Other liabilities |
3,425 | 2,825 | ||||||
Stockholders equity: |
||||||||
Preferred stock, $1.00 par value, 1,000 shares authorized, none issued |
| | ||||||
Common stock, $1.00 par value, 10,000 shares authorized,
6,933 shares and 7,037 shares issued and outstanding |
6,933 | 7,037 | ||||||
Additional paid-in capital |
34,105 | 34,867 | ||||||
Retained earnings (deficit) |
4,528 | (56 | ) | |||||
Other comprehensive income |
1,725 | 984 | ||||||
Shares held by Benefit Restoration Plan Trust |
| (1,116 | ) | |||||
Total stockholders equity |
47,291 | 41,716 | ||||||
$ | 72,807 | $ | 61,966 | |||||
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 | ||||||||
2010 | 2009 | |||||||
Cash flows provided by operating activities: |
||||||||
Net income (loss) |
$ | 4,584 | $ | (12,606 | ) | |||
Adjustments to reconcile net income (loss)
to net cash provided by operating activities: |
||||||||
Inventory write-down |
| 7,504 | ||||||
Deferred income taxes |
(4,102 | ) | | |||||
Acquisition bargain purchase gain |
(1,379 | ) | | |||||
Contingent consideration revaluation |
619 | | ||||||
Depreciation and amortization |
2,073 | 1,509 | ||||||
Doubtful accounts receivable provision |
71 | 1,218 | ||||||
Stock compensation expense |
479 | 46 | ||||||
Amortization of debt costs |
241 | 166 | ||||||
Other |
413 | (1,588 | ) | |||||
Changes in assets and liabilities: |
||||||||
Accounts receivable |
3,215 | 3,825 | ||||||
Inventories |
(2,502 | ) | 2,533 | |||||
Other assets |
1,485 | 3,054 | ||||||
Accounts payable |
(1,076 | ) | (3,209 | ) | ||||
Accrued expenses |
(3,323 | ) | (1,225 | ) | ||||
Net cash provided by operating activities |
798 | 1,227 | ||||||
Cash flows used for investing activities: |
||||||||
Acquisition |
(3,921 | ) | | |||||
Purchases of property and equipment |
(4,759 | ) | (280 | ) | ||||
Sales of property and equipment |
790 | 425 | ||||||
Liquidation (funding) supplemental executive retirement plan trust |
1,812 | (1,060 | ) | |||||
Net cash used for investing activities |
(6,078 | ) | (915 | ) | ||||
Cash flows provided (used) by financing activities: |
||||||||
Stock purchase program withdrawals |
| (145 | ) | |||||
Dividends paid |
| (564 | ) | |||||
Change in cash overdrafts |
431 | (332 | ) | |||||
Acquisition earn-out payments |
(3,306 | ) | | |||||
Net note borrowings |
7,044 | 105 | ||||||
Net cash provided (used) by financing activities |
4,169 | (936 | ) | |||||
Net decrease in cash and cash equivalents |
(1,111 | ) | (624 | ) | ||||
Cash and cash equivalents beginning of year |
3,670 | 2,855 | ||||||
Cash and cash equivalents end of period |
$ | 2,559 | $ | 2,231 | ||||
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 2009 financial statements to conform to the fiscal 2010 presentation,
including restatement of business segment information as the result of restructuring our
organization. In addition, we recorded non-cash charges in fiscal 2009 ($7.5 million inventory
write-down; $1.2 million provision for doubtful accounts receivable). During the third quarter of
fiscal 2010, we corrected individually and in the aggregate immaterial errors from previous periods
that improved earnings for the three and nine month periods ended March 31, 2010 by $361,000 and
$264,000, respectively.
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 changes,
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, 2009 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 2009 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. Operating results for the first nine
months of fiscal 2010 are not necessarily indicative of the results that may be expected for the
year ending June 30, 2010.
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 assumptions about the assumptions market participants would use (Level 3
inputs). Our financial instruments consist primarily of cash, trade receivables and payables, our
credit facility, and earn-out contingent consideration. The carrying values of cash, trade
receivables, and payables are considered to be representative of their respective fair values. Our
credit facility 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 entered into the agreement. We measure the earn-out contingent
consideration based on estimated net sales and present value discount rates.
The following presents the assets and liabilities we measure at fair value each reporting period,
the measurement input level, and their classification in our financial statements (in thousands).
Fair | ||||||||||||
Value | March 31 | June 30 | ||||||||||
Level | 2010 | 2009 | ||||||||||
Supplemental executive retirement obligation trust
included in other current assets |
1 | $ | | $ | 1,705 | |||||||
Supplemental executive retirement obligation
included in accrued expenses |
1 | | 1,705 | |||||||||
Acquisition earn-out |
3 | 1,836 | |
7
Table of Contents
Changes in the fair value of our acquisition earn-out contingent consideration obligation were
(in thousands):
July 9, 2009 |
$ | 4,373 | ||
Contingent consideration revaluation |
619 | |||
Payments |
(3,306 | ) | ||
Expense |
150 | |||
March 31, 2010 |
$ | 1,836 | ||
Note 3 Recent Accounting Pronouncements
Effective July 1, 2009, we adopted the accounting and reporting requirements of Financial
Accounting Standards Board (FASB) Accounting Standards Codification (ASC), Business
Combinations (ASC 805-10), originally issued by the FASB in December 2007 as Statement of Financial
Accounting Standards No. 141 (revised 2007), Business Combinations, together with the guidance in
FASB Staff Position No. 142-3, Determination of the Useful Life of Intangible Assets (ASC
350-30-55) issued in April 2008. Together they require recognition of assets acquired and
liabilities assumed at their fair values at the acquisition date using the acquisition method,
including goodwill recognition as a residual or a gain from a bargain purchase. The new accounting
had no effect on previously acquired assets, liabilities, or goodwill, but the accounting for
acquisitions after June 2009 differs from accounting for acquisitions before July 2009.
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 $627,000; nine-months $763,000) and other costs (third quarter $560,000;
nine-months $654,000). As of March 31, 2010, $758,000 of such costs were included in accounts
payable and accrued expenses. We expect to incur an additional $451,000 in termination, closure
and relocation costs during the fourth quarter of fiscal 2010 and none thereafter.
Note 5 Acquisition
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. We also assumed its licenses with Wrangler
Apparel, Inc. to sell mens, womens, and boys belts and accessories in the mass merchants and
western markets (Wrangler Mass and Western/Specialty, respectively) and a manufacturing
contract between Chambers and Maquiliadora Chambers de Mexico, S.A. de C.V. (MCM). We have
employed certain of Chambers employees and leased its former facilities in Commerce, California.
In July 2009, we paid $3.9 million to Chambers and certain of its vendors. The earn-out provisions
of the purchase agreement require payment of 21.5% of our revised estimated $30.4 million of net
sales through July 9, 2010 of private label and Wrangler Mass products formerly sold by Chambers,
with a $2.0 million minimum guarantee. The Wrangler Mass and Western/Specialty licenses expire in
June 2010 and December 2010, respectively. Both licenses provided for royalty payments equal to 5%
of net sales through December 2009 and the Wrangler Mass license provides for a 4% royalty
thereafter. The licenses had minimum royalty guarantees of $497,000 through December 2009 and the
Western/Specialty license has a $210,000 annual guarantee thereafter. The Wrangler Mass royalties
are payable by Chambers from the earn-out, but are guaranteed by us. We received notice in
December 2009 that the Wrangler Mass license will not be renewed once it expires; however, because
a significant retail partner began ordering additional private label products from us under another
trade name in January 2010, we do not expect the license expiration to have a significant impact on
our operations.
Under the MCM contract, MCM manufactures products for us under the direction and supervision of our
employees utilizing machinery we purchased from Chambers and raw materials which we supply. There
is a minimum wage guarantee for any week we do not require MCM to manufacture products for us and
the contract may be terminated on sixty days notice.
8
Table of Contents
The following presents the July 9, 2009 estimated fair values of the net assets acquired (in
thousands):
Inventories |
$ | 3,527 | ||
Equipment |
1,550 | |||
Customer list |
3,016 | |||
Trade names |
1,150 | |||
Earn-out prepayment |
430 | |||
Total assets |
9,673 | |||
Earn-out consideration discounted at 8.625% |
(4,373 | ) | ||
Net assets |
$ | 5,300 | ||
We derived the estimated fair values from assumptions we believe unrelated market participants
would use based on both observable and unobservable marketplace factors. The earn-out contingent
consideration fair value is the present value of our obligation based on probability-weighted
estimates of the net sales of private label and Wrangler Mass products formerly sold by Chambers
that we may sell during the earn-out period, a Level 3 fair value estimate. Each reporting period,
the contingent consideration may be revalued as the result of changes in our estimates of net
sales, their timing, or the discount rate, with increases and decreases being recorded in our
statements of operations.
Our estimate of the net assets fair value exceeded the estimated fair value of the total
consideration we paid and will 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 of 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 of fiscal 2010 $565,000). The trade names have indefinite lives
and, therefore, are not being amortized.
For the nine months of fiscal 2010, net sales of $24.1 million, and $6.5 million of our accessories
segment income, were attributable to the acquisition. Sales of Chambers products in fiscal 2010
prior to the acquisition date would have been minimal. We are unable to provide financial
information as if the Chambers acquisition had occurred as of the beginning of fiscal 2009 as we do
not have what we believe to be reliable financial information for Chambers during that time period.
Note 6 Business Segment Information
We sell our products through 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 and small leather goods, eyewear,
neckwear, sporting goods, and products sold by our Canadian subsidiary 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 2009 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.
9
Table of Contents
The following presents operating information by segment and reconciliation of segment income to our
consolidated operating income (in thousands).
Three Months Ended | Nine Months Ended | |||||||||||||||
March 31 | March 31 | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net sales: |
||||||||||||||||
Accessories |
$ | 26,201 | $ | 23,758 | $ | 92,826 | $ | 82,100 | ||||||||
Gifts |
1,486 | 1,293 | 20,409 | 20,512 | ||||||||||||
$ | 27,687 | $ | 25,051 | $ | 113,235 | $ | 102,612 | |||||||||
Segment income (loss): |
||||||||||||||||
Accessories (1) |
$ | 7,119 | $ | (1,170 | ) | $ | 24,511 | $ | 12,603 | |||||||
Gifts
(2) |
270 | (1,643 | ) | 4,143 | (50 | ) | ||||||||||
7,389 | (2,813 | ) | 28,654 | 12,553 | ||||||||||||
Selling, general and administrative expenses |
(7,921 | ) | (8,632 | ) | (24,641 | ) | (22,762 | ) | ||||||||
Restructuring charges |
(1,187 | ) | (844 | ) | (1,417 | ) | (844 | ) | ||||||||
Depreciation and amortization |
(665 | ) | (444 | ) | (2,045 | ) | (1,487 | ) | ||||||||
Acquisition related costs |
(619 | ) | | (908 | ) | | ||||||||||
Operating loss |
$ | (3,003 | ) | $ | (12,733 | ) | $ | (357 | ) | $ | (12,540 | ) | ||||
(1) | Accessories segment income for the three- and nine-months of fiscal 2009 includes inventory write-downs of $5.9 million. | |
(2) | Gifts segment income for the three- and nine-months of fiscal 2009 includes inventory write-downs of $1.6 million. |
Note 7 Credit Arrangements
We have a $27.5 million credit facility for borrowings and letters of credit which was amended
effective October 6, 2009 to extend its term, reduce the interest rate, and adjust the tangible net
worth financial covenant. Effective May 10, 2010, the facility was amended to extend its term an
additional eighteen months, expand the Companys ability to acquire fixed assets and adjust the
tangible net worth financial covenant. At March 31, 2010, we had $7.0 million borrowing
availability based on our accounts receivable and inventory levels and outstanding borrowings of
$7.0 million bearing interest at 5.0% per annum and letters of credit totaling $837,000.
Borrowings, which are due on the amended facilitys expiration in October 2012, bear interest after
the October 2009 amendment date at the daily adjusting one-month LIBOR rate plus 4% (3.5% after
June 2010 under specified conditions) or, if such rate is not available under the terms of the
credit facility note, the lenders prime rate plus 2%.
The credit facility is secured by substantially all of our assets and those of our subsidiaries.
It requires the maintenance of a $32.5 million ($35.0 million as of June 30, 2010) tangible net
worth financial covenant, as adjusted quarterly for future earnings and issuance of equity
ownership interests, as of the end of each fiscal quarter 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 debt, and making certain property transfers.
Our Canadian subsidiary has a CAD $1.4 million credit facility (direct advances limited to US $1.1
million) secured by its cash, credit balances, and deposit instruments with interest at the
lenders prime or US base rates. There have been no borrowings under this line of credit.
Note 8 Long-Term Incentive Award
Performance units payable 50% in cash and 50% in shares of our common stock following the end of a
three-year performance cycle ending June 30, 2012 were awarded during the first quarter of fiscal
2010. Each unit has a $1.00 assigned value and the fair value of the Companys stock to be issued
is $2.4175 per share based on its grant-date market price and assuming no dividends during the
performance cycle. Based on a 200% achievement target for each
10
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year, 1,380,000 units were awarded. At March 31, 2010, 1,260,000 units are outstanding and
expected to vest, and would be payable in cash of $630,000 and 260,600 shares of common stock.
Note 9 Income Taxes
Pursuant to the Worker, Homeownership, and Business Assistance Act of 2009, which became law in
November 2009, the carryback of our fiscal 2008 net operating loss resulted in $4.4 million of
refundable income taxes paid for the fiscal 2003-2005 period. Repayment of the previous carryback
of a portion of the fiscal 2008 loss to fiscal 2007 is offset by carrying back a portion of the
fiscal 2009 net operating loss.
The following presents our income tax components (in thousands).
Three Months Ended | Nine Months Ended | |||||||||||||||
March 31 | March 31 | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Federal and state (benefit) |
$ | | $ | | $ | (4,439 | ) | $ | | |||||||
Deferred federal and state |
(1,175 | ) | (4,780 | ) | 245 | (4,980 | ) | |||||||||
Foreign |
99 | 23 | 92 | 212 | ||||||||||||
Uncertain tax positions |
36 | (544 | ) | 109 | (388 | ) | ||||||||||
Deferred tax valuation allowance |
1,260 | 4,780 | 23 | 4,980 | ||||||||||||
$ | 220 | $ | (521 | ) | $ | (3,970 | ) | $ | (176 | ) | ||||||
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 | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Statutory rate |
(34.0 | )% | (34.0 | )% | 34.0 | % | (34.0 | )% | ||||||||
State and foreign taxes net of
federal tax benefit |
(0.6 | ) | (3.2 | ) | 20.9 | (3.3 | ) | |||||||||
Uncertain tax positions |
1.2 | (3.8 | ) | 17.8 | (3.1 | ) | ||||||||||
Deferred tax valuation allowance |
40.5 | 36.9 | (719.0 | ) | 39.0 | |||||||||||
7.1 | % | (4.1 | )% | (646.3 | )% | (1.4 | )% | |||||||||
At March 31, 2010 we had federal income tax net operating loss carryovers of approximately $21
million expiring in 2029 and our deferred tax valuation allowance was approximately $17 million.
Note 10 Comprehensive Income
The following presents the components of comprehensive income (in thousands).
Three Months Ended | Nine Months Ended | |||||||||||||||
March 31 | March 31 | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net income (loss) |
$ | (3,328 | ) | $ | (12,278 | ) | $ | 4,584 | $ | (12,606 | ) | |||||
Currency translation adjustments |
242 | (93 | ) | 741 | (1,096 | ) | ||||||||||
Comprehensive income (loss) |
$ | (3,086 | ) | $ | (12,371 | ) | $ | 5,325 | $ | (13,702 | ) | |||||
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Note 11 Earnings Per Share
Our basic and diluted earnings per common share are computed as follows (in thousands except per
share amounts):
Three Months Ended | Nine Months Ended | |||||||||||||||
March 31 | March 31 | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Numerator for basic and diluted earnings per
share: |
||||||||||||||||
Net income (loss) |
$ | (3,328 | ) | $ | (12,278 | ) | $ | 4,584 | $ | (12,606 | ) | |||||
Denominator: |
||||||||||||||||
Weighted-average shares outstanding |
6,931 | 6,914 | 6,931 | 6,944 | ||||||||||||
Contingently issuable shares |
| | | 1 | ||||||||||||
Denominator for basic earnings per share |
6,931 | 6,914 | 6,931 | 6,945 | ||||||||||||
Effect of dilutive share-based compensation |
| | 166 | | ||||||||||||
Denominator for diluted earnings per share |
6,931 | 6,914 | 7,097 | 6,945 | ||||||||||||
Income (loss) per common share |
$ | (0.48 | ) | $ | (1.78 | ) | $ | 0.66 | $ | (1.82 | ) | |||||
Income (loss) per common share assuming dilution |
$ | (0.48 | ) | $ | (1.78 | ) | $ | 0.65 | $ | (1.82 | ) |
Potentially dilutive securities at March 31, 2010 and 2009 which could have had an
antidilutive effect on our per share results of operations were (in thousands except per share
amounts):
March 31 | ||||||||
2010 | 2009 | |||||||
Stock options (exercise prices per share: 2010 -
$5.31 to $15.60; 2009 - $5.31 to $16.81) |
379 | 512 | ||||||
Benefit Restoration Trust shares |
| 122 | ||||||
Nonvested restricted stock not contingently issuable |
| 3 |
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.
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 2009 Annual Report on
Form 10-K filed with the Securities and Exchange Commission and elsewhere in this Quarterly Report,
including our consolidated financial statements and accompanying notes in Item 1 of this Quarterly
Report.
BUSINESS
We are a leading designer and marketer of branded mens, womens and childrens accessories
(including belts, small leather goods, eyewear, neckwear, and sporting goods) and gifts. Our
merchandise is marketed under a broad portfolio of nationally recognized licensed and proprietary
brand names, including TOTES®,
WRANGLER®,
DOCKERS®,
DR. MARTENS®,
AMITY®,
ROLFS®,
CANTERBURY®,
PRINCE GARDNER®,
PRINCESS GARDNER®,
SURPLUS®,
as well as private brands for major retail customers. We sell our products through 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.
Significant Events
In July 2009, we purchased the intellectual property, customer relationships, manufacturing
equipment, and substantially all the inventory of the Chambers Belt Company (Chambers) and
assumed its licenses with Wrangler Apparel, Inc. to sell mens, womens, and boys belts and
accessories in the mass merchants and western markets (Wrangler Mass and Western/Specialty,
respectively). The sales and segment income from the acquisitions are included in our accessories
segment. The transaction and the resulting $1.4 million bargain purchase gain are described in
Note 5 of the notes to consolidated financial statements in Item 1 of this Quarterly Report
incorporated herein by reference. While the Wrangler Mass license will not be renewed when it
expires in June 2010, we do not expect the license expiration to have a significant impact on our
operations because a significant retail partner began ordering additional private label products
from us under another trade name in January 2010.
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The enactment of the Worker, Homeownership, and Business Assistance Act of 2009 in November 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 in the second quarter of fiscal 2010. We received refunds of $3.2 million in April 2010
and expect to receive the remaining $1.2 million early in fiscal 2011.
In connection with the consolidation of our operations in Yoakum, Texas into our Dallas, Texas
distribution facility and other organizational restructuring actions, we recorded charges for
termination payments (third quarter $627,000; nine-months $763,000) and other costs (third
quarter $560,000; nine-months $654,000). We expect to incur an additional $451,000 in
termination, closure and relocation costs during the fourth quarter of fiscal 2010. We believe
product distribution from one location will be more efficient and cost effective and, with the
December 2009 move of our corporate offices into the Dallas, Texas distribution facility, an
estimated $4 to $5 million in annual cost savings may be achieved.
As a result of restructuring our organization, we changed our reportable business segments in the
first quarter of fiscal 2010 to focus on product categories as described in Note 6 of the notes to
consolidated financial statements in Item 1 of this Quarterly Report incorporated herein by
reference. Our business segment information for fiscal 2009 has been restated to conform to the
fiscal 2010 presentation.
FISCAL 2010 COMPARED TO FISCAL 2009
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 | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net sales: |
||||||||||||||||
Accessories |
$ | 26,201 | $ | 23,758 | $ | 92,826 | $ | 82,100 | ||||||||
Gifts |
1,486 | 1,293 | 20,409 | 20,512 | ||||||||||||
$ | 27,687 | $ | 25,051 | $ | 113,235 | $ | 102,612 | |||||||||
Gross margin: |
||||||||||||||||
Accessories |
$ | 10,119 | $ | 2,573 | $ | 34,515 | $ | 24,198 | ||||||||
Gifts |
538 | (902 | ) | 7,685 | 5,244 | |||||||||||
$ | 10,657 | $ | 1,671 | $ | 42,200 | $ | 29,442 | |||||||||
Gross margin percent of sales: |
||||||||||||||||
Accessories |
38.6 | % | 10.8 | % | 37.2 | % | 29.5 | % | ||||||||
Gifts |
36.2 | (69.8 | ) | 37.7 | 25.6 | |||||||||||
Total |
38.5 | 6.7 | 37.3 | 28.7 | ||||||||||||
Operating expenses: |
||||||||||||||||
Accessories |
$ | 3,001 | $ | 3,743 | $ | 10,005 | $ | 11,595 | ||||||||
Gifts |
267 | 741 | 3,541 | 5,294 | ||||||||||||
$ | 3,268 | $ | 4,484 | $ | 13,546 | $ | 16,889 | |||||||||
Net sales for fiscal 2010 were greater (third quarter $2.6 million; nine months $10.6
million) than the same periods last year, the third consecutive year-over-year quarterly increase
since fiscal 2006. Net sales of belts and small leather goods in our accessories segment exceeded
the fiscal 2009 levels in each of the periods (third quarter $2.8 million; nine months $11.7
million). The increase was led by sales attributable to the Chambers acquisition (Chambers
Sales) (third quarter $7.7 million; nine months $24.1 million) and included sales of inventory
written down in prior periods (third quarter $791,000; nine months $5.2 million). The gifts
segment experienced a third quarter net sales increase of $193,000, compared to the third quarter
of fiscal 2009, due primarily to favorable holiday sell through rates which resulted in lower
customer deductions for returns. The decrease in gifts segment net sales of $103,000 for the first
nine months of fiscal 2010 compared to fiscal 2009 was due to slightly higher returns than in the
prior year.
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Contributing to the lower accessories segment net sales other than Chambers Sales in fiscal 2010
(third quarter $5.3 million; nine months $13.4 million) was our fiscal 2009 implementation of
an aggressive product life-cycle management program earlier in calendar 2009 which included moving
away from low margin products with either small shipping quantities or slow turnover rates. Also,
the first nine months of fiscal 2009 included sales to companies that have suffered severe
financial difficulties, including bankruptcy which reduced our customer base in fiscal 2010.
Chambers Sales contributed $2.8 million to our gross margin in the third quarter and $8.2 million
in the first nine months of fiscal 2010.
The accessories segment margin percentages in the third quarter of fiscal 2010 were above last
years level as a result of Chambers Sales and a $5.9 million inventory write-down in the prior
year quarter. For the nine months, the segments margin percentages benefited from the effects of
sales of previously written-down inventory (fiscal 2010 2.9%; fiscal 2009 1.8%) while fiscal
2010 selling price pressures from our retail partners in the soft economy and Chambers Sales
resulted in lower margins on other products. The margin on Chambers Sales was lower than the
margin on other belts and small leather goods as the fair value of the acquired inventory sold
during the first six months of fiscal 2010 was greater than Chambers carrying value, reflecting
the general, administrative, design, and procurement costs we did not have to incur.
The gifts segments improvement in its margin percentages in fiscal 2010 (nine months 2.5%),
other than margins on sales of previously written-down inventory and a $1.6 million inventory
write-down in the prior year third quarter, over fiscal 2009 was primarily the result of its sales
including improved assortments sourced from overseas suppliers at lower costs. The margin
percentage improvement compared to the prior year quarter was primarily attributable to a $1.6
million inventory write-down in the prior year quarter.
Total segment operating expenses in fiscal 2010 were more than $1.2 million lower than the prior
year third quarter, $3.3 million lower for the first nine months, and were smaller as percentages
of net sales. The primary contributors to these lower operating expenses were lower gifts segment
royalties, resulting from the sale of more products under proprietary licenses in fiscal 2010, and
a larger doubtful accounts receivable provision in fiscal 2009. Compared to fiscal 2009,
accessories and gifts segments achieved operating expense percentage of net sales reductions of 4.3
and 39.3 percentage points, respectively, in the third quarter of fiscal 2010. The large reduction
experienced by the gifts segment was due to lower distribution and returns processing costs
resulting from moving our distribution functions for the gifts segment to our Dallas, Texas
facility. For the nine months of fiscal 2010, the accessories and gifts segments achieved
operating expense percentage of net sales reductions of 3.3 and 8.5 percentage points,
respectively.
Expenses And Taxes
Selling, general and administrative expenses for the three- and nine-month periods of fiscal 2010
were $1.9 million and $1.5 million, respectively, less than those incurred in fiscal 2009 due to
decreases in expenses such as bad debt provisions, salaries and wages and professional services.
Acquisition related costs of $289,000 were incurred during first quarter fiscal 2010 in connection
with the Chambers transaction. As further described in Note 5 of the notes to the consolidated
financial statements in Item 1 of this Quarterly Report incorporated herein by reference, an
additional $619,000 of acquisition related costs was recognized in the third quarter fiscal 2010.
Depreciation and amortization increased in fiscal
2010 as the result of acquiring equipment in the
Chambers transaction and from capital expenditures relating to our
Dallas, Texas facility.
The increase in interest expense in fiscal 2010 over last year was primarily attributable to our
credit facility (higher debt cost amortization and interest rates on outstanding borrowings) and
the Chambers acquisition earn-out liability discount amortization (third quarter $21,000; nine
months $138,000).
Information about our income taxes described in Note 9 of the notes to consolidated financial
statements in Item 1 of this Quarterly Report and in the second paragraph under Significant
Events above is incorporated herein by reference.
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. Operating results for the first nine
months of fiscal 2010 are not necessarily indicative of the results that may be expected for the
year ending June 30, 2010.
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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 ($8.1 million aggregate borrowing availability at March 31, 2010). Information about
our credit facilities is incorporated herein by reference to Note 7 of the notes to consolidated
financial statements included in Item 1 of this Quarterly Report.
Operating cash flows for the first nine months of fiscal 2010 were $798,000, which is slightly
lower than the prior year. The fiscal 2010 net cash provided by operating activities was less than
last year primarily due to higher inventory levels to support the increased net sales driven by the
Chambers acquisition.
Investing activities related to the Chambers transaction 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 5 of the notes to consolidated financial
statements in Item 1 of this Quarterly Report incorporated herein by reference. Purchases of
property and equipment 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. As of March 31, 2010, we had committed to
additional equipment purchases approximating $329,000. 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. In fiscal 2009, $1.1 million was
contributed to the trust.
Financing activities included credit facility net borrowings of $7 million in fiscal 2010 compared
with $105,000 in fiscal 2009. The increase over the prior year was primarily due to borrowings
relating to the Chambers transaction and to fund our investing activities. Dividend payments were
suspended in December 2008 in light of the ongoing decline in economic conditions in order to
preserve capital and enhance our financial flexibility for investing in key growth initiatives.
The dividend suspension will be reassessed on an ongoing basis.
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, 2009.
ITEM 4T CONTROLS AND PROCEDURES
Disclosure Controls And Procedures
Under the supervision and with the participation of our management, including our Chief Executive
Officer and 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 Chief Financial Officer have concluded that our disclosure controls and procedures were
effective as of March 31, 2010.
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 2010 that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
PART II OTHER INFORMATION
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, 2009 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 2009 Annual Report on Form 10-K other than the updates set forth in our Quarterly
Report on Form 10-Q for the quarter ended September 30, 2009.
15
Table of Contents
ITEM 6 EXHIBITS
The Exhibit Index immediately preceding the exhibits required to be filed is incorporated herein by
reference.
16
Table of Contents
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 13, 2010 | /s/ N. Roderick McGeachy, III | |||
N. Roderick McGeachy, III | ||||
President and Chief Executive Officer (principal executive officer) |
||||
/s/ M.C. Mackey | ||||
M.C. Mackey | ||||
Chief Financial Officer (principal financial officer and principal accounting officer) |
||||
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Table of Contents
TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES
EXHIBIT INDEX
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 | 000-18927 | 3.1 | |||||||||||
3.3 | Amended and Restated Bylaws of Tandy Brands Accessories, Inc., effective July 2007 | 8-K | 7/13/07 | 000-18927 | 3.01 | |||||||||||
3.4 | Amendment No. 1 to Amended and Restated Bylaws of Tandy Brands Accessories, Inc. | 8-K | 11/02/07 | 000-18927 | 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 | 000-18927 | 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 | 000-18927 | 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 | 000-18927 | 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 | 000-18927 | 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** | N/A | N/A | N/A | N/A |
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TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES
EXHIBIT INDEX
EXHIBIT INDEX
Incorporated by Reference | ||||||||||||||||
(if applicable) | ||||||||||||||||
Exhibit Number and Description | Form | Date | File No. | Exhibit | ||||||||||||
(10) | Material Contracts | |||||||||||||||
10.1 | Agreement to Provide Severance Pay by and between Tandy Brands Accessories, Inc. and N. Roderick McGeachy, III dated as of April 22, 2010* ** | N/A | N/A | N/A | N/A | |||||||||||
10.2 | Change of Control Agreement by and between Tandy Brands Accessories, Inc. and N. Roderick McGeachy, III dated as of April 22, 2010* ** | N/A | N/A | N/A | N/A | |||||||||||
10.3 | 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** | 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) (Chief Financial Officer)** | N/A | N/A | N/A | N/A | |||||||||||
(32) | Section 1350 Certifications | |||||||||||||||
32.1 | Section 1350 Certifications (Chief Executive Officer and Chief Financial Officer)** | N/A | N/A | N/A | N/A |
* | Management contract or compensatory plan | |
** | Filed herewith |
2