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SECURITIES AND EXCHANGE COMMISSION

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, 2003

Commission File Number 0-18927

TANDY BRANDS ACCESSORIES, INC.

690 East Lamar Boulevard, Suite 200, Arlington, TX 76011
(Address of principal executive offices and zip code)

(817) 548-0090
(Registrant’s telephone number, including area code)

Former name, former address and former fiscal year, if changed since last report:

Not Applicable

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes   X     No     

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

Yes        No   X  

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.

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TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES

Form 10-Q
Quarter Ended December 31, 2003

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

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

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

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

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

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

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TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES

Note 1 – Accounting Principles

     The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six-month periods ended December 31, 2003, are not necessarily indicative of the results that may be expected for the year ended June 30, 2004. For further information, refer to the consolidated financial statements and footnotes thereto included in our 2003 Annual Report.

Note 2 – Comprehensive Income

     The following table illustrates the components of comprehensive income, net of related tax, for the three and six months ended December 31, 2003 and 2002 (in thousands).

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TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES

Note 3 – Earnings Per Share

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

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TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements
(Unaudited)

Note 4 – Disclosures about Segments of an Enterprise and Related Information

     We sell our products to a variety of retail outlets, including mass merchants, national chain stores, major department stores, men’s and women’s specialty stores, catalog retailers, grocery stores, drug stores, golf pro shops, sporting goods stores and the retail exchange operations of the United States military. Our company and our corresponding customer relationships are organized along men’s and women’s product lines. As a result, we have two reportable segments: (1) men’s accessories, consisting of belts, wallets, suspenders and other small leather goods, and (2) women’s accessories, consisting of belts, wallets, handbags, socks, scarves, hats and hair accessories. General corporate expenses are allocated to each segment based on the respective segment’s asset base. Depreciation and amortization expense related to assets recorded on our corporate accounting records are allocated to each segment as described above. Management measures profit or loss on each segment based upon income or loss before taxes utilizing the accounting policies consistent in all material respects with those described in Note 1 of our 2003 Annual Report. No inter-segment revenue is recorded.

     The following table sets forth information regarding operations and assets by reportable segment (in thousands).

(1)

Operating income consists of net sales less cost of sales and specifically identifiable selling, general and administrative expenses.

(2)

Other income includes royalty income on corporate tradenames and other income not specifically identifiable to a segment.

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TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES

Note 5 – Goodwill and Other Intangible Assets

     Effective July 1, 2002, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets.” This statement changed the accounting for goodwill and indefinite-lived intangible assets from an amortization approach to an impairment-only approach. Using the SFAS No. 142 approach, we recorded a transitional goodwill impairment charge during the first quarter of fiscal 2003 of $950,000 ($581,000 net of tax), presented as a cumulative effect of accounting change. This charge related to our women’s accessories segment of products.

Note 6 – Stock-Based Compensation

     We may, with the approval of our board of directors, grant stock options for a fixed number of shares to employees with an exercise price equal to the fair value of the shares at the date of grant. We account for stock option grants using the intrinsic value method in accordance with the Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and, accordingly, we recognize no compensation expense for the stock option grants. The following table reflects the impact on net income if we had applied the fair value recognition provisions of SFAS No. 123, “Accounting for Stock Based Compensation,” to stock-based employee compensation for the three and six-month periods ended December 31, 2003 and 2002:

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Note 6 – Stock-Based Compensation (continued)

     Pro forma information regarding net income and earnings per share is required by SFAS No. 123, “Accounting for Stock-Based Compensation,” and has been determined as if we had accounted for our stock options under the fair value method of SFAS No. 123. The fair value for these options was estimated at the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions for fiscal 2004 and 2003: dividend yield of 1.0% for 2004 and 0.0% for 2003; expected volatility of .238% and .270% for 2004 and 2003, respectively; a risk-free interest rate of 5.25% for fiscal 2004 and 2003; and an expected holding period of seven years. Using these assumptions for the options granted during the first six months of fiscal 2004 and 2003, the weighted-average grant date fair value of such options ranged from $3.83 to $5.27 for each period.

     The Black-Scholes valuation models are used in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility and the average life of options. Because our stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of our stock options.

     On October 15, 2003, our directors were awarded a total of 3,720 shares of restricted stock. The shares will become fully vested on October 15, 2006, with one-third of the shares vesting on each anniversary of the date of grant. Generally, upon the death, disability, resignation, or termination of a director, that director’s shares become fully vested. These shares of stock, while not transferable, bear rights of ownership, including voting and dividend rights, during the vesting period. Unearned compensation in the amount of $58,000 was recorded during the quarter ended December 31, 2003. Compensation expense of approximately $19,000 was recorded during the second quarter of fiscal 2004.

Note 7 – Employee Benefit Plans

     On July 1, 2003, our executive officers were awarded a total of 22,800 shares of restricted stock. The shares will become fully vested on July 1, 2006. These shares of stock, while not transferable, bear rights of ownership, including voting and dividend rights, during the three year vesting period. There are no performance requirements related to vesting, only continued employment through the vesting date. Unearned compensation in the amount of $275,000 was recorded during the quarter ended September 30, 2003. Compensation expense of approximately $23,000 per quarter will be recorded through June 30, 2006.

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TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES

GENERAL

     Tandy Brands Accessories, Inc. is a leading designer, manufacturer and marketer of branded men’s, women’s and children’s accessories, including belts and small leather goods, such as wallets. Our product line also includes handbags, socks, scarves, gloves, hats, hair accessories, suspenders, cold weather accessories and sporting goods accessories. Our merchandise is marketed under a broad portfolio of nationally recognized licensed and proprietary brand names, including DOCKERS®, LEVI’S®, LEVI STRAUSS SIGNATURE™, JONES NEW YORK®, ROLFS®, HAGGAR®, WOOLRICH®, JORDACHE®, BUGLE BOY®, CANTERBURY®, PRINCE GARDNER®, PRINCESS GARDNER®, AMITY®, COLETTA®, STAGG®, ACCESSORY DESIGN GROUP®, and TIGER®, as well as private brands for major retail customers. We sell our products through all major retail distribution channels throughout the United States and Canada, including mass merchants, national chain stores, department stores, men’s and women’s specialty stores, catalogs, grocery stores, drug stores, golf pro shops, sporting goods stores and the retail exchange operations of the United States military.

RESULTS OF OPERATIONS

Three and Six Months Ended December 31, 2003 Compared to the Three and Six Months Ended December 31, 2002

Net Sales and Gross Margins

     The following table illustrates sales and gross margin data from our reportable segments for the three and six months ended December 31, 2003 compared to the same period last year.