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EX-4.6 - EX-4.6 - TANDY BRANDS ACCESSORIES INCd72985exv4w6.htm
EX-32.1 - EX-32.1 - TANDY BRANDS ACCESSORIES INCd72985exv32w1.htm
EX-10.1 - EX-10.1 - TANDY BRANDS ACCESSORIES INCd72985exv10w1.htm
EX-10.2 - EX-10.2 - TANDY BRANDS ACCESSORIES INCd72985exv10w2.htm
EX-31.1 - EX-31.1 - TANDY BRANDS ACCESSORIES INCd72985exv31w1.htm
EX-10.3 - EX-10.3 - TANDY BRANDS ACCESSORIES INCd72985exv10w3.htm
EX-31.2 - EX-31.2 - TANDY BRANDS ACCESSORIES INCd72985exv31w2.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)
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.
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 issuer’s 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
         
       
 
       
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 EX-4.6
 EX-10.1
 EX-10.2
 EX-10.3
 EX-31.1
 EX-31.2
 EX-32.1


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.


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)
                                 
    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.


Table of Contents

Tandy Brands Accessories, Inc. And Subsidiaries
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.

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Tandy Brands Accessories, Inc. And Subsidiaries
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.


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        

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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 men’s, women’s, and boy’s 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.

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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, 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 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.

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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 Company’s 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 facility’s 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 lender’s 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 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.
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 lender’s 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 Company’s 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

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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 — MANAGEMENT’S 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 men’s, women’s and children’s 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, 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.
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 men’s, women’s, and boy’s 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 year’s 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 segment’s 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 segment’s 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.

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ITEM 6 — EXHIBITS
The Exhibit Index immediately preceding the exhibits required to be filed is incorporated herein by reference.

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
         
  TANDY BRANDS ACCESSORIES, INC.
(Registrant)
 
 
May 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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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   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
                                 
                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

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