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EXCEL - IDEA: XBRL DOCUMENT - TANDY BRANDS ACCESSORIES INCFinancial_Report.xls
EX-4.9 - EXHIBIT 4.9 - TANDY BRANDS ACCESSORIES INCexh_49.htm
EX-31.1 - EXHIBIT 31.1 - TANDY BRANDS ACCESSORIES INCexh_311.htm
EX-31.2 - EXHIBIT 31.2 - TANDY BRANDS ACCESSORIES INCexh_312.htm
EX-32.1 - EXHIBIT 32.1 - TANDY BRANDS ACCESSORIES INCexh_321.htm
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 December 31, 2011
 
Commission File Number 0-18927
 
TANDY BRANDS ACCESSORIES, INC.
(Exact name of registrant as specified in its charter)
 
 
Delaware   75-2349915
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)


3631 West Davis, Suite A, Dallas, Texas  75211
(Address of principal executive offices and zip code)

214-519-5200
(Registrant's telephone number, including area code)

Former name, former address and former fiscal year, if changed since last report:
Not Applicable

 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
[ x ]  Yes          [   ]  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).
 
[ x ]  Yes          [   ]  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  [    ]   Accelerated filer                  [    ]  
Non-accelerated filer  [    ]   (Do not check if a smaller reporting company)   Small reporting company   [ x ] 
         
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
 [   ]  Yes          [ x ]  No
 
Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date.
 
Class
Number of shares outstanding at February 9, 2012
Common stock, $1.00 par value
7,075,142

 
 

 

TABLE OF CONTENTS
 
PART I - FINANCIAL INFORMATION
   
       
  4  - 10
       
Item 2   11 - 14
       
  14
       
       
PART II - OTHER INFORMATION
   
       
  14
       
  14
       
       
 
  15
       

 

 

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 2011 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.

 

 

PART I - FINANCIAL INFORMATION


Tandy Brands Accessories, Inc. And Subsidiaries
Unaudited Consolidated Statements Of Operations
(in thousands except per share amounts)
 
 
                         
   
Three Months Ended
December 31
   
Six Months Ended
December 31
 
   
2011
   
2010
   
2011
   
2010
 
Net sales
  $ 45,434     $ 42,887     $ 72,177     $ 72,135  
Cost of goods sold
    31,386       28,654       48,997       47,691  
Gross margin
    14,048       14,233       23,180       24,444  
Selling, general and administrative expenses
    10,297       12,592       19,417       24,457  
Depreciation and amortization
    567       646       1,150       1,291  
Acquisition related costs
    -       20       -       50  
Total operating expenses
    10,864       13,258       20,567       25,798  
Operating income (loss)
    3,184       975       2,613       (1,354 )
Interest expense
    (382 )     (285 )     (749 )     (471 )
Other income (expense)
    27       112       (11 )     155  
Income (loss) before income taxes
    2,829       802       1,853       (1,670 )
Income tax expense
    103       81       202       297  
Net income (loss)
  $ 2,726     $ 721     $ 1,651     $ (1,967 )
Income (loss) per common share
  $ 0.39     $ 0.10     $ 0.23     $ (0.28 )
Income (loss) per common share assuming dilution
  $ 0.39     $ 0.10     $ 0.23     $ (0.28 )
Common shares outstanding
    7,064       6,970       7,072       6,970  
Common shares outstanding assuming dilution
    7,076       7,095       7,087       6,970  
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.
 
4

 

Tandy Brands Accessories, Inc. And Subsidiaries
Unaudited Consolidated Balance Sheets
(in thousands)
 
 
   
December 31
2011
   
June 30
2011
   
December 31
2010
 
Assets
                 
Current assets:
                 
Cash and cash equivalents
  $ 994     $ 414     $ 330  
Restricted cash
    -       1,450       1,404  
Accounts receivable
    16,352       14,286       25,043  
Inventories
    32,715       28,945       38,381  
Other current assets
    3,992       8,073       3,132  
Total current assets
    54,053       53,168       68,290  
Property and equipment, net
    5,954       6,525       7,159  
Other assets:
                       
Intangibles
    4,519       4,936       5,384  
Other assets
    937       790       764  
Total other assets
    5,456       5,726       6,148  
    $ 65,463     $ 65,419     $ 81,597  
Liabilities And Stockholders' Equity
                       
Current liabilities:
                       
 Accounts payable
  $ 9,997     $ 8,145     $ 10,385  
 Accrued compensation
    1,448       1,900       1,448  
 Accrued expenses
    2,268       2,267       2,036  
 Credit facility
    15,290       17,935       21,520  
Total current liabilities
    29,003       30,247       35,389  
Other liabilities
    4,257       4,243       4,005  
Stockholders' equity:
                       
Preferred stock, $1.00 par value, 1,000 shares authorized, none issued
    -       -       -  
Common stock, $1.00 par value, 10,000 shares authorized, 7,067 shares, 7,075 shares and 6,972 shares issued and outstanding, respectively
    7,067       7,075       6,972  
 Additional paid-in capital
    34,129       34,119       34,235  
 Accumulated deficit
    (10,667 )     (12,318 )     (809 )
 Other comprehensive income
    1,674       2,053       1,805  
Total stockholders' equity
    32,203        30,929        42,203  
    $ 65,463     $ 65,419     $ 81,597  
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.

 
5

 

Tandy Brands Accessories, Inc. And Subsidiaries
Unaudited Consolidated Statements Of Cash Flows
(in thousands)
 
             
   
Six Months Ended
December 31
 
   
2011
   
2010
 
Cash flows provided (used) by operating activities:
           
Net income (loss)
  $ 1,651     $ (1,967 )
Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities:
               
Deferred income taxes
    71       16  
Doubtful accounts receivable provision
    17       28  
Depreciation and amortization
    1,275       1,405  
Stock compensation expense
    25       21  
Amortization of debt costs
    141       34  
Other
    -       (114 )
Changes in assets and liabilities:
               
Accounts receivable
    (2,115 )     (6,409 )
Inventories
    (3,969 )     (6,810 )
Other assets
    3,698       3,526  
Accounts payable
    2,474       (3,433 )
Accrued expenses
    (445 )     (1,146 )
Net cash provided (used) by operating activities
    2,823       (14,849 )
Cash flows provided (used) by investing activities:
               
Acquisition
    -       (245 )
Purchases of property and equipment
    (363 )     (521 )
Sales of property and equipment
    -       2,774  
Net cash provided (used) by investing activities
    (363 )     2,008  
Cash flows provided (used) by financing activities:
               
Change in cash overdrafts
    (592 )     258  
Change in restricted cash
    1,434       -  
Net note borrowings (repayments)
    (2,633 )     12,076  
Net cash provided (used) by financing activities
    (1,791 )     12,334  
Effect of exchange-rate changes on cash and cash equivalents
    (89 )     7  
Net increase (decrease) in cash and cash equivalents
    580       (500 )
Cash and cash equivalents beginning of year
    414       830  
Cash and cash equivalents end of period
  $ 994     $ 330  
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.
 
 
6

 
 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 2011 financial statements to conform to the fiscal 2012 presentation, including recasting business segment information to allocate certain distribution costs to each reportable segment.

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, 2011 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 2011 Annual Report on Form 10-K filed with the Securities and Exchange Commission on September 1, 2011.

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.  As a result, sales and operating results for the first six months of fiscal 2012 are not necessarily indicative of the results that may be expected for the year ending June 30, 2012.

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 inputs that are unobservable and significant to the fair value measurement (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 entered into effective August 25, 2011 (and amended January 20, 2012), bears interest at floating market interest rates; therefore, we believe the fair value of amounts borrowed approximates the carrying value.  At December 31, 2011 and June 30, 2011, no other material assets or liabilities were measured at fair value.

Note 3 - Acquisition

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.

The following represents the estimated acquisition values of the net assets acquired as of December 15, 2010, the acquisition date (in thousands):
 
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  
 
7

 
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 value of net assets’ acquired 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 - Business Segment Information

We sell our products through all major retail distribution channels throughout North America, including mass merchants, national chain stores, department stores, specialty stores, catalog retailers, 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 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 2011 Annual Report on Form 10-K filed with the Securities and Exchange Commission on September 1, 2011.  No inter-segment revenue is recorded.  Assets, related depreciation and amortization, and selling, general and administrative expenses are not allocated to the segments.

The following table presents operating information by segment and reconciliation of segment income to our consolidated operating income (loss) (in thousands):
 
   
Three Months Ended
December 31
   
Six Months Ended
December 31
 
   
2011
   
2010
   
2011
   
2010
 
Net sales:
                       
Accessories
  $ 22,732     $ 26,218     $ 44,244     $ 52,581  
Gifts
    22,702       16,669       27,933       19,554  
    $ 45,434     $ 42,887     $ 72,177     $ 72,135  
Segment income:
                               
Accessories
  $ 4,859     $ 3,964     $ 9,383     $ 8,227  
Gifts
    3,804       3,011       4,619       3,293  
      8,663       6,975       14,002       11,520  
Selling, general and administrative expenses
    (4,912 )     (5,334 )     (10,239 )     (11,533 )
Depreciation and amortization
    (567 )     (646 )     (1,150 )     (1,291 )
Acquisition related costs
    -       (20 )     -       (50 )
Operating income (loss)
  $ 3,184     $ 975     $ 2,613     $ (1,354 )

Note 5 – Credit Facility
 
We have a $35 million credit facility which expires in August 2015.  This facility was amended effective January 20, 2012 to extend the time period required to deliver certain post-close deliverables and title matters related to real property, and to modify certain definitions used in the credit agreement.  At December 31, 2011, we had $4.2 million borrowing availability based on our accounts receivable and inventory levels, outstanding letters of credit totaling $367,500, and $15.3 million outstanding borrowings under the facility.  Borrowings and letters of credit bear interest at either the daily three-month LIBOR rate plus 3.75% or a fixed LIBOR rate for three months plus 3.75%.

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 profitability, fixed charge coverage and minimum availability covenant, which, if not met, could adversely impact our liquidity.  We are in compliance with all covenants as of December 31, 2011.  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 lender’s 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.

 
8

 
The maximum line of credit under the credit facility, which includes the revolver and letters of credit, is $35 million.  The credit facility is asset-based and the available line of credit may be limited pursuant to certain borrowing base limitations, including (1) the amount of certain of our eligible accounts, (2) the amount of our eligible accounts with our largest customer, (3) the value of our eligible inventory, which is more specifically determined in part based on specific periods during our fiscal year, and (4) the amount of our borrowing base reserve.

Our Canadian subsidiary had a CAD $1.4 million credit facility (direct advances limited to U.S. $1.1 million) with interest at the lender’s prime or U.S. base rates.  The facility was secured by cash, credit balances, and/or deposit instruments of CAD $1.4 million.  In connection with our new $35 million credit facility, this facility was terminated in the first quarter of fiscal 2012 and all borrowings were paid and obligations were fulfilled.

Note 6 - Long-Term Incentive Award

During the first quarter of fiscal 2012, we issued 990,000 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 $1.975 per share.  The units earned during the performance cycle (July 1, 2011 through June 30, 2013) vary from 0% to 200% of the units awarded based on our basic earnings per share for each of the two 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 two-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 December 31, 2011, we expect 419,000 of the 990,000 units granted to vest (60,000 units were forfeited), which, based on the market price of our common stock on December 31, 2011, would be payable in cash equal to $315,000.

Note 7 - Income Taxes

The following presents components of our income tax provisions (in thousands):
 
   
Three Months Ended
December 31
   
Six Months Ended
December 31
 
   
2011
   
2010
   
2011
   
2010
 
Federal and state
  $ 8     $ 15     $ 73     $ 34  
Deferred federal and state
    1,073       244       724       (728 )
Foreign
    26       (1 )     102       114  
Uncertain tax positions
    64       36       16       64  
Deferred tax valuation allowance
    (1,068 )     (213 )     (713 )     813  
    $ 103     $ 81     $ 202     $ 297  

 
9

 
The federal statutory income tax rate reconciles to our effective income tax rate as follows:
 
     
Three Months Ended
December 31
     
Six Months Ended
December 31
   
      2011        2010       2011       2010  
Statutory rate
    34.0 %     34.0 %     34.0 %     (34.0 )%
State and foreign taxes net of federal tax benefit
    1.8        (1.7 )     9.4       (0.6 )  
Uncertain tax positions
    2.3        4.5       0.9       3.8    
Repatriation of foreign earnings
    3.3        -       5.0       -    
Deferred tax valuation allowance
    (37.8 )      (26.7 )     (38.4 )      48.5    
      3.6 %     10.1 %     10.9 %     17.7 %

At December 31, 2011 we had federal income tax net operating loss carryovers of approximately $40.8 million expiring in 2029 through 2031.  Our deferred tax valuation allowance was approximately $22.4 million.
 
Through June 30, 2011, we asserted that our foreign earnings were indefinitely reinvested outside the United States, and we were therefore not required to provide for U.S. income taxes on those earnings. In connection with our new credit facility, entered into effective August 2011, our Canadian subsidiary guaranteed the outstanding borrowings under the facility. This guarantee is deemed to be an investment by our subsidiary in U.S. real property, triggering the repatriation of the subsidiary's earnings in the form of a dividend. The dividend does not result in a current tax liability due to our net operating loss carryforwards; however, the net effect of the repatriation is captured in the tax rate reconciliation above.

Note 8 - Comprehensive Income

The following presents the components of comprehensive income (loss) (in thousands):
 
   
Three Months Ended
December 31
 
Six Months Ended
December 31
 
   
2011
 
2010
 
2011
 
2010
 
Net income (loss)
  $ 2,726     $ 721     $ 1,651     $ (1,967 )
Currency translation adjustments
    25       162       (379 )     248  
Comprehensive income (loss)
  $ 2,751     $ 883     $ 1,272     $ (1,719 )

Note 9 - 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
December 31
   
Six Months Ended
December 31
 
   
2011
   
2010
   
2011
   
2010
 
Numerator for basic and diluted earnings per share:
                       
Net income (loss)
  $ 2,726     $ 721     $ 1,651     $ (1,967 )
Denominator:
                               
Denominator for basic earnings per share:
    7,064       6,970       7,072       6,970  
Effect of dilutive share-based compensation
    12       125       15       -  
Denominator for diluted earnings per share:
    7,076       7,095       7,087       6,970  
Income (loss) per common share
  $ 0.39     $ 0.10     $ 0.23     $ (0.28 )
Income (loss) per common share assuming dilution
  $ 0.39     $ 0.10     $ 0.23     $ (0.28 )
 
Potentially dilutive securities which could have had an antidilutive effect on our per share results of operations were (in thousands except per share amounts):
   
December 31
 
   
2011
   
2010
 
Stock options (exercise prices per share: 2011 - $1.98 to $15.60; 2010 - $5.31 to $15.60)
    269       321  

 
10

 
 

This Item 2 should be read in the context of the information included in our 2011 Annual Report on Form 10-K filed with the Securities and Exchange Commission on September 1, 2011 and elsewhere in this Quarterly Report, including our unaudited consolidated financial statements and accompanying notes in Item 1 of this Quarterly Report.

BUSINESS

We are a leading designer and marketer of branded men’s, women’s and children’s accessories, including belts, gifts, and small leather goods.  Our merchandise is marketed under a broad portfolio of nationally recognized licensed and proprietary brand names, including TOTES®, WOLVERINE®, EDDIE BAUER®, THE SHARPER IMAGE®, ELIE TAHARI®, MISS ME®, HAGGAR®, EILEEN WEST®, BONE COLLECTOR®, ARNOLD PALMER®, KODIAK®, TERRA®, ROLFS®, AMITY®, 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 all major retail distribution channels throughout North America, including, without limitation, mass merchants, national chain stores, department stores, specialty stores, catalog retailers, 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 first half of fiscal 2012 net sales of our gifts segment increased $8.4 million, or 43%, primarily driven by strong performance of our totes® and Eddie Bauer® licenses.  During the second quarter we executed an amendment to extend our totes® license for an additional four years.

During the first half of fiscal 2012 our largest customer decreased inventory replenishment ordering levels which reduced our net sales by approximately $5.7 million.  Our share of space on the retail fixtures has not materially changed.  We believe lower consumer demand for apparel drove retail inventories higher at this customer and we expect inventory replenishment ordering levels to normalize late in the third quarter of fiscal 2012.

In the third quarter of fiscal 2012, we announced the execution of new licensing agreements with brands Sperry Top-Sider® and Arnold Palmer®.  Under the terms of the Sperry Top-Sider® agreement, we will distribute belts, bags and small leather goods for both men and women through department stores, specialty retail locations throughout the United States and Canada, Sperry Top-Sider’s own retail stores, and on sperrytopsider.com.  Under the terms of the Arnold Palmer® agreement, we will distribute belts through green grass shops, off-course golf specialty stores, department stores as well as in corporate and e-commerce shops.  Revenues from both of these new licenses are expected to benefit accessories segment results in the first half of calendar 2013.

In the first quarter of fiscal 2012, we announced the execution of new licensing agreements with brands Elie Tahari® (accessories segment),   Miss Me® (accessories segment), and The Sharper Image® (gifts segment).  Under the terms of the agreements, we will distribute belts or gifts among a wide array of channels, including but not limited to, national retail and department stores, clubs and specialty and boutique stores.  Revenues from these new licenses are expected to benefit results in the second half of fiscal 2012.

Effective August 25, 2011, we replaced our $27.5 million credit facility with a $35 million credit facility expiring August 2015.  The credit facility is guaranteed by substantially all of our and our subsidiaries assets, and requires a specified profitability and fixed charge coverage and a minimum availability.  We believe this facility will provide us with sufficient availability to fund our operations in the foreseeable future and give us the additional flexibility to purchase inventory required to meet our organic growth expectations.


 
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FISCAL 2012 COMPARED TO FISCAL 2011

Business Segments
The following presents sales, gross margins, and operating expenses for our business segments (in thousands of dollars):
 
   
Three Months Ended
December 31
   
Six Months Ended
December 31
 
   
2011
   
2010
   
2011
   
2010
 
Net sales:
                       
Accessories
  $ 22,732     $ 26,218     $ 44,244     $ 52,581  
Gifts
    22,702       16,669       27,933       19,554  
    $ 45,434     $ 42,887     $ 72,177     $ 72,135  
Gross margin:
                               
Accessories
  $ 7,673     $ 8,307     $ 14,956     $ 17,291  
Gifts
    6,375       5,926       8,224       7,153  
    $ 14,048     $ 14,233     $ 23,180     $ 24,444  
                                 
Gross margin percent of sales:
                               
Accessories
    33.8 %     31.7 %     33.8 %     32.9 %
Gifts
    28.1 %     35.6 %     29.4 %     36.6 %
      30.9 %     33.2 %     32.1 %     33.9 %
                                 
Operating expenses:
                               
Accessories
  $ 2,814     $ 4,342     $ 5,573     $ 9,063  
Gifts
    2,571       2,916       3,605       3,861  
    $ 5,385     $ 7,258     $ 9,178     $ 12,924  

Net Sales and Gross Margins
Our fiscal 2012 second quarter net sales were $45.4 million, which was $2.5 million, or 6%, higher than the prior year.  Net sales for our accessories segment were $22.7 million for the second quarter of fiscal 2012, which was $3.5 million, or 13%, lower than in the second quarter of fiscal 2011, primarily due to lower sales from exited product categories and lower levels of replenishment orders by our largest customer.  This decline was offset partially by non-recurring prior year belt returns.  Gifts segment net sales of $22.7 million for the second quarter of fiscal 2012 were $6.0 million, or 36% higher than in the prior year, primarily due to increased holiday shipments resulting from organic growth in our totes® license and new sales under our Eddie Bauer® license.

Our net sales for the first six months of fiscal 2012 were $72.2 million, which was $42,000 higher than the comparable prior year period.  Accessories segment net sales of $44.2 million for the first half of fiscal 2012 were $8.3 million, or 16%, lower than in the first half of fiscal 2011 primarily due to lower sales from exited product categories and lower levels of replenishment orders by our largest customer, partially offset by belt returns in the prior year that did not recur.  Gifts segment net sales of $27.9 million for the first half of fiscal 2012 were $8.4 million, or 43%, greater than in the prior year, primarily due to increased holiday shipments resulting from organic growth in our totes® license and new sales under our Eddie Bauer® license.

Gross margins were 30.9% and 33.2% for the second quarters of fiscal 2012 and 2011, respectively.  Accessories segment margins increased from 31.7% in the second quarter of fiscal 2011 to 33.8% in the current fiscal year primarily because of improvements in sales mix due to exiting unprofitable non-core product categories, higher sales of previously written-down inventory and lower write-offs associated with belt inventory returned by certain customers.  The gifts segment margin was 750 basis points lower in the fiscal 2012 second quarter compared to the same quarter last year, primarily due to a higher mix of customer-direct shipments in the current year period, higher freight and materials costs, increased sales to certain of our higher volume, lower margin customers, and higher sales concessions to certain customers.  Customer-direct shipments carry lower gross margins because these goods are shipped from our suppliers to our customers and are not handled in our distribution centers, reducing the associated selling, general and administrative costs.

 
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Gross margins were 32.1% and 33.9% for the first half of fiscal 2012 and 2011, respectively.  Accessories segment margins increased from 32.9% in the first half of fiscal 2011 to 33.8% in the current fiscal year, primarily because of improved sales mix, higher sales of previously written-down inventory and lower write-offs associated with belt inventory returned by certain customers.  The gifts segment margin was 720 basis points lower in the first half of 2012 compared to the comparable period in the prior year due to a higher mix of customer-direct shipments in the current year period, higher freight and materials costs and higher sales to our higher volume, lower margin customers.

Operating Expenses
Total segment operating expenses were lower in the second quarter and in the first six months of fiscal 2012 by $1.9 million and $3.7 million, respectively, when compared to comparable prior year periods, primarily due to decreases in variable distribution labor, compensation associated with exited non-core product categories, and facilities costs.

Total selling, general and administrative expenses of $10.3 million for the second quarter of fiscal 2012 were $2.3 million, or 18%, lower than the second quarter of fiscal 2011 ($12.6 million).  The reductions were primarily due to decreases in expenses such as variable distribution labor, compensation and facilities costs, and professional services.

Total selling, general and administrative expenses of $19.4 million for the first half of fiscal 2012 were $5.0 million, or 21%, lower than the first half of fiscal 2011 ($24.4 million).  The reductions were primarily due to decreases in expenses such as variable distribution labor, compensation and facilities costs, and professional services.

Interest and Taxes
Interest expense was higher in the second quarter and in the first six months of fiscal 2012 by $97,000 and $278,000, respectively, when compared to the prior year periods.  This increase was primarily due to a $98,000 write-off of costs capitalized in connection with our previous credit facility and interest incurred from an early payment program we entered into with our lender and our largest customer late in the first quarter of fiscal 2012.  The early payment program bears interest at the LIBOR rate plus 1.25%.

Information about our income taxes is incorporated herein by reference to Note 7 of the notes to unaudited consolidated financial statements in Item 1 of this Quarterly Report.

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.  As a result, sales and operating results for the first six months of fiscal 2012 are not necessarily indicative of the results that may be expected for the year ending June 30, 2012.

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 facility ($4.2 million borrowing availability at December 31, 2011).  Information about our credit facility is incorporated herein by reference to Note 5 of the notes to unaudited consolidated financial statements included in Item 1 of this Quarterly Report.

First half fiscal 2012 net cash from operating activities was $17.7 million higher than in the prior year, primarily driven by the following:  $4.3 million lower current year accounts receivable due to faster collections on receivables with our largest customer; $3.0 million lower current year inventory and other assets due to efforts to reduce our inventory levels; and $6.6 million lower funding of accounts payable and accrued expenses due to earlier payments for gift inventory in the fourth quarter of the prior fiscal year.
 
 
Investing activities for the first half of fiscal 2012 primarily consisted of purchases of operating equipment for our distribution facilities.  Investing activities for the prior year primarily consisted of the $2.7 million sale of our idle distribution center located in West Bend, Wisconsin and purchases of additional racking and other various leasehold improvements for our distribution facilities.

Financing activities included credit facility net repayments of $2.6 million in the first six months of fiscal 2012 and net borrowings of $12.1 million for the prior year period.  This $14.7 million improvement from the prior year was due to cash inflows generated from operations during the current year, the elimination of the requirement to maintain compensating balances with our Canadian subsidiary’s lender in connection with the termination of the Canadian subsidiary’s credit facility, and the use of previously restricted cash to pay down our outstanding debt balance.

 
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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, 2011.


Disclosure Controls And Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Accounting 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 Quarterly Report.  Based on that evaluation, our Chief Executive Officer and Chief Accounting Officer have concluded that our disclosure controls and procedures were effective as of December 31, 2011.

Changes In Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting during the second quarter of fiscal 2012 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, 2011 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 2011 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.

 
14

 


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)
 
     
 February 10, 2012      /s/ N. Roderick McGeachy, III  
 
N. Roderick McGeachy, III
 
 
President and Chief Executive Officer
 
  (Principal Executive Officer)  
     
     
  /s/ Joseph C. Talley     
  Joseph C. Talley  
 
Chief Accounting Officer
 
 
(Principal Financial and
 
  Accounting Officer)  
     
     
 

 
15

 
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
    0-18927       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, 2009
     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
    10-Q    
5/12/11
    0-18927        4.7  
 
1

 
TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES
EXHIBIT INDEX

 
 
             Incorporated by Reference
             (if applicable)
    Exhibit Number and Description  
Form
  Date  
File No.
  Exhibit 
                                   
    4.8   Credit Agreement by and between Tandy Brands Accessories, Inc. and Wells Fargo Bank dated as of August 25, 2011 (Confidential Treatment Requested)   10-K    
9/1/11
    0-18927       4.8  
                                   
    4.9   Amendment No. 1 to Credit Agreement dated as of August 25, 2011 by and between Tandy Brands Accessories, Inc. and Wells Fargo Bank dated as of January 20, 2012**   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 Accounting Officer)**   N/A     N/A     N/A       N/A  
                                   
(32) Section 1350 Certifications                          
                                   
    32.1  
Section 1350 Certifications (Chief Executive Officer and Chief Accounting Officer)**
   N/A     N/A     N/A       N/A  
                                   
(101)  Interactive Data Files***                          
                                   
    101.INS  
XBRL Instance**
                         
                                   
    101.SCH  
XBRL Taxonomy Extension Schema**
                         
                                   
    101.CAL  
XBRL Taxonomy Extension Calculation**
                         
                                   
    101.LAB  
XBRL Taxonomy Extension Labels**
                         
                                   
    101.PRE  
XBRL Taxonomy Extension Presentation**
                         
                                   
    101.DEF  
XBRL Taxonomy Extension Definition**
                         
 
__________________
**      Filed herewith
*** In accordance with Rule 406T of Regulation S-T, the information in these exhibits is furnished and deemed not filed or a part of registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections and shall not be incorporated by reference into any registration statement or document filed under the Securities Act of 1933, as amended, except as expressly set forth by specific reference in such filing
 
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