XNAS:TBAC Annual Report 10-K Filing - 6/30/2012

Effective Date 6/30/2012

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
Form 10-K
 
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
 
For the fiscal year ended June 30, 2012                                                   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 Number)
 
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)
 
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, Par Value $1.00 Per Share
(Title of class)
The NASDAQ Global Market
(Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:
None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
[ ] Yes [x] No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
[ ] Yes [x] No
 
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
[ ]
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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. (Check one):
Large accelerated filer                                                                                                 Accelereated filer [ ]
Non-accelerated filer  [ ] (Do not check if a smaller reporting company)           Smaller 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
 
The aggregate market value of the voting common equity held by non-affiliates based upon the closing price of the common stock on the NASDAQ Global Market on December 31, 2011 was $6,430,800.  Shares of common stock held by executive officers and directors have been excluded.  This determination of affiliate status is not necessarily a conclusive determination for other purposes.
 
There were 7,133,970 shares of common stock, par value $1.00 per share, outstanding on August 31, 2012.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Portions of the definitive Proxy Statement to be delivered to stockholders in connection with the Annual Meeting of Stockholders to be held on October 16, 2012 are incorporated by reference into Part III of this Form 10-K.
 
 
 

 
TABLE OF CONTENTS
 
PART I
   
PART II
   
PART III
   
PART IV
   
     
 
 
2

 
References in this Annual Report on Form 10-K to “we,” “our,” “us,” or the “Company” refer to Tandy Brands Accessories, Inc. and its subsidiaries, unless the context requires otherwise.

FORWARD-LOOKING STATEMENTS

This Form 10-K 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 results of operations 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, and the overall economic environment.  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” on page 9.  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
ITEM 1 - BUSINESS

General

We are a leading designer and marketer of branded men’s, women’s and children’s accessories, including belts, gifts, small leather goods and bags.  Our merchandise is marketed under a broad portfolio of nationally recognized licensed and proprietary brand names, including SPERRY TOP-SIDER®, ELIE TAHARI®, EDDIE BAUER®, TOTES®, MISS ME®, THE SHARPER IMAGE®, WOLVERINE®, HAGGAR®, ARNOLD PALMER®, DOCKERS®, EILEEN WEST®, BONE COLLECTOR®, 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 Business Developments

Significant business developments in fiscal 2012 included:
 
·  
August 2011 - Entered into a new four-year, $35 million credit facility.
·  
September 2011 – Announced the execution of licensing agreements with national brands Miss Me® and Elie Tahari®.
·  
October 2011 – Announced the execution of a licensing agreement with national brand The Sharper Image®.
·  
November 2011 – Executed an amendment to extend our totes® license for an additional four years.
·  
January 2012 – Announced the execution of a licensing agreement with national brand Arnold Palmer®.
·  
February 2012 – Announced the execution of a licensing agreement with national brand Sperry Top-Sider®.
 
 
3

 
·  
February 2012 – Consolidated certain facilities, which was completed as of June 30, 2012, with anticipated annual savings of approximately $500,000, designed to simplify operations and reduce selling, general and administrative expenses.
·  
March 2012 – Recorded a $900,000 provision for doubtful accounts on past due balance from one close-out customer who experienced financial difficulties.

Information about the new license agreements, cost-savings initiatives, provision for doubtful accounts, and credit facility is incorporated herein by reference to Notes 3 and 5 of the notes to the consolidated financial statements included in Item 8 of this Annual Report.

Product Lines

Our primary products, which we sell under proprietary, licensed, and private brand names, consist of belts, gifts, and small leather goods, such as wallets.  For fiscal 2012, our product categories, expressed as a percentage of total net sales, were:
 
Belts
    60.2 %
Gifts
    26.7 %   
Small leather goods
    8.3 %   
Other products
    4.8 %   

We are organized along product categories and have two reportable segments: (1) accessories, which include belts, small leather goods and bags, and (2) gifts.  In fiscal 2012, accessories represented 73.3% of our net sales and gifts accounted for 26.7% of our net sales.

Belts
We, along with our predecessors, have manufactured and marketed belts for over 90 years, and belts remain our largest single product category.  In fiscal 2012, belt sales of $70.8 million accounted for 60.2% of our net sales.  We serve a variety of consumers in the men’s, women’s, juniors, young men’s and children’s belts markets across four categories:  casual, work, dress and golf.

Gifts
We distribute a broad range of gifts, including products such as flashlights, tabletop games, novelty gifts, auto accessories, digital coin banks and outdoor tools and gadgets.  Gift sales were $31.4 million, or 26.7%, of our net sales, in fiscal 2012.  In connection with our June 2011 restructuring plan, we exited development of sports beads products.  Sales of sports beads were $484,000 and $1.3 million in fiscal 2012 and 2011, respectively.  Sales for sports beads are expected to be immaterial in fiscal 2013.

Small Leather Goods
Our small leather goods consist primarily of men’s and women’s wallets.  Sales of small leather goods were $9.8 million, or 8.3% of our net sales, in fiscal 2012.  In connection with our June 2011 restructuring plan, we pared our assortments in certain women’s fashion wallets.  Sales of pared wallets were $2.8 million and $6.0 million in fiscal 2012 and 2011, respectively.  Sales for women’s fashion wallets are expected to be immaterial in fiscal 2013.

Other Products
Other products consist primarily of suspenders.  Sales of other products were $5.6 million, or 4.8% of our net sales, in fiscal 2012.  In connection with our June 2011 restructuring plan, we exited development of certain product categories such as neckwear, hunting accessories and certain eyewear assortments.  Sales of these exited product categories were $349,000 and $1.6 million in fiscal 2012 and 2011, respectively.  Sales for these products are expected to be immaterial in fiscal 2013.
 
 
4

 
Our Brands

We sell products under private brands, licensed brands and our own proprietary brands.  Our net sales by brand type in fiscal 2012 were (in millions):

Type
 
Net Sales
   
% of Total
 
Private brands
  $ 72.0       61.2 %
Licensed brands
    31.8       27.0  
Proprietary brands
    13.8       11.8  
    $ 117.6          

Private Brand Products
In fiscal 2012 private brand products accounted for $72.0 million, or 61.2% of our net sales.  In a private brand program we are responsible for designing and delivering products for select retailers according to their unique requirements.  These programs offer our customers exclusivity and pricing control over their products, both of which are important factors in the retail marketplace.  We believe our flexible sourcing capabilities, electronic inventory management and replenishment systems, and design, product development, and merchandising expertise provide retailers with a superior alternative to direct sourcing of their private brand products.

Licensed Brands
We have exclusive license agreements for several well recognized brands, including Sperry Top-Sider®, Elie Tahari®, Eddie Bauer®, totes®, Miss Me®, The Sharper Image®, Wolverine®, Haggar®, and Arnold Palmer®.

Generally, our license agreements cover specific products and require us to pay royalties ranging from 3% to 10% of net sales.  The terms of the agreements are typically three to five years, with options to extend the terms, provided certain sales or royalty minimums are achieved.  For fiscal 2012, sales of licensed products accounted for $31.8 million, or 27.0% of our net sales.  Sales of totes® gifts were $26.9 million, or 23.0% of our net sales.  No sales associated with any other individual license agreement accounted for more than 5% of our net sales in fiscal 2012.  We continually evaluate our portfolio of licensed brands and may discontinue or renew licenses when they expire, or acquire additional licenses to improve our portfolio.

Additional information about our license agreements is incorporated herein by reference to Note 3 of the notes to the consolidated financial statements included in Item 8 of this Annual Report.

Proprietary Brands
In addition to our licensed and private brands, we market products under our own registered trademarks and trade names.  We own leading and well recognized trademarks such as Rolfs®, Amity®, Canterbury®, Prince Gardner®, Princess Gardner®, Chambers Belt Company®, Absolutely Fresh®, and Surplus®.  Net sales under our proprietary brands were $13.8 million, or 11.8% of our net sales, in fiscal 2012.

Product Distribution
We sell our products to a variety of retail outlets, including:
 
Department stores
 
Office supply stores
Specialty stores
 
E-commerce websites
Mass merchants
 
National chain stores
United States military retail exchange operations
 
Outlet stores
Golf pro shops
 
Sporting goods stores
Supermarkets
 
Individual specialty stores
Uniform stores
 
Catalog retailers
TV shopping networks
 
Shoe stores
Drug stores
 
Wholesale clubs
 
 
5

 
Our key brands and each brand’s targeted distribution channels and primary products are:

Brand
 
Distribution Channel
 
Products
Sperry Top-Sider®
 
Department stores
 
Belts
   
National chain stores
Specialty stores
 
Shoulder bags
Small leather goods
         
Elie Tahari®
 
Department stores
 
Belts
   
National chain stores
Specialty stores
   
         
Eddie Bauer®
 
Department stores
 
Belts
   
National chain stores
Wholesale clubs
 
Gifts
Small leather goods
         
totes®
 
Mass merchants
 
Gifts
   
National chain stores
   
   
Department stores
   
   
Specialty stores
Wholesale clubs
   
         
         
Miss Me®
 
Department stores
 
Belts
   
National chain stores
Specialty stores
   
         
The Sharper Image®
 
Department stores
National chain stores
Specialty stores
 
Gifts
         
Wolverine®
 
National chain stores
 
Belts
   
Specialty stores
 
Small leather goods
   
Sporting goods stores
 
Gifts
         
Haggar®
 
Department stores
 
Belts
Small leather goods
         
Arnold Palmer®
 
Specialty stores
 
Belts
   
Golf pro shops
   
         
Dockers®
 
Department stores
 
Belts
   
National chain stores
   
         
Eileen West®
 
Department stores
 
Small leather goods
         
Bone Collector®
 
Specialty stores
 
Belts
Small leather goods
         
Kodiak®
 
Mass merchants
 
Belts
   
Specialty stores
   
         
Terra®
 
Specialty stores
 
Belts
         
Rolfs®
 
National chain stores
 
Belts
   
Department stores
 
Small leather goods
   
Specialty stores
   
 
 
6

 
Brand
 
Distribution Channel
 
Products
 
Amity®
 
 
Mass merchants
 
 
Small leather goods
   
Specialty stores
   
         
Canterbury®
 
Specialty stores
 
Belts
   
Golf pro shops
 
Small leather goods
         
Prince Gardner®
 
Mass merchants
 
Small leather goods
   
Specialty stores
   
         
Princess Gardner®
 
Mass merchants
 
Small leather goods
 
 
Chambers Belt Company®
 
Absolutely Fresh®
 
Specialty stores
 
Specialty stores
 
Specialty stores
 
 
 
Belts
 
Belts
         
Surplus®
 
National chain stores
 
Belts
       
Small leather goods

Our Rolfs® product line is also sold through our e-commerce web site at www.rolfs.net.

Customers and Customer Relations

We maintain strong relationships with various major retailers throughout North America, including:

Department Stores
 
National Chains
 
Mass Merchants
Belk
 
Kohl’s
 
Walmart (U.S. and Canada)
Bon-Ton/Carson’s
 
Tractor Supply
 
Target
Dillard’s
 
JCPenney
 
Fred Meyer
Stage Stores
 
Casual Male
 
Ross
Lord & Taylor
 
Sears (U.S. and Canada)
 
Stein Mart
 
Walmart accounted for 46% and 49% of our net sales in fiscal 2012 and 2011, respectively, and Kohl’s accounted for 13% and 11% in fiscal 2012 and 2011, respectively.  No other customer accounted for 10% or more of our total net sales in fiscal 2012 or fiscal 2011.  In fiscal 2012 and 2011 our top ten customers accounted for 77% of net sales.

We believe our success with our customers is due in large part to our design expertise, long-term customer relationships, strong sales and merchandising organization, and superior customer service.  Factors that facilitate these strengths include our quick response distribution, vendor inventory management services, electronic data interchange capabilities, and expertise in the communication of lifestyle concepts through product lines and innovative point-of-sale presentations.  We develop and manage our accounts through the coordinated efforts of senior management, account executives, and an organization of salespeople and independent sales representatives.

We maintain customer service relationships with various specialty stores, national chain stores, and major department stores.  Our sales account executives are responsible for overseeing accounts, developing and maintaining business relationships with their respective customers, preparing and conducting product line presentations, and assisting customers in the implementation of programs at the individual store level.

Product Development and Merchandising

Our product development and merchandising team works closely with our licensors, suppliers, and customers to understand the needs of our core consumer, interpret market trends, develop new products, and create comprehensive merchandising programs consisting of packaging, point-of-sale, fixturing, and presentation materials.  Our product life-cycle management program leverages cross-functional business planning, merchandising, and design teams focusing on product development, strategic planning, fashion trends and seasonal sales plans.  Our senior managers maintain business relationships with customers’ buyers and merchandise managers enabling us to plan, develop, and implement specific merchandising programs for key accounts.  We believe our internal design ability represents a significant competitive advantage because, in our opinion, retail customers have become increasingly reliant on the design and merchandising expertise of their suppliers for developing compelling assortments.

 
7

 
Competition

Competition in the fashion accessories and gifts industries is highly fragmented and intense.  We believe we are a major competitor that is well positioned to compete in both industries.  Our accessories and gifts businesses compete with numerous manufacturers, importers and distributors, such as: Randa/Swank, Cipriani, Fossil, Buxton, Mundi, E&B, Merchsource, JLR, and Excalibur.

We believe our ability to compete successfully is based on our long-term customer relationships, ability to respond to changing customer preferences, superior customer service, national distribution capabilities, proprietary inventory management systems, flexible sourcing, and product design, innovation, and quality.

Growth Strategy

We seek to increase our sales and earnings through a variety of means, including organic growth from increased sales of our current products, as well as growth through new products and license agreements and the acquisition of assets and similar businesses.  Since our incorporation in 1990, we have acquired numerous businesses and licenses, including the Sperry Top-Sider®, Elie Tahari®, Eddie Bauer®, Miss Me®, The Sharper Image®, Wolverine®, Haggar® and Arnold Palmer® licenses, which were acquired in the last two fiscal years.  In the future, we may make additional acquisitions that complement our business and are accretive to our earnings.

Product Sourcing and Production

We have strong relationships with a number of foreign manufacturers who provide products manufactured to our specifications.  Most of our products are manufactured by third-party suppliers in China, the Dominican Republic, India, Italy, and Taiwan, with only a small percentage manufactured in Canada and the U.S.  We own and operate manufacturing facilities in both Mexico and Canada.  In fiscal 2012 and 2011, our two largest suppliers were Xindao Hong Kong Ltd. and Best Development Company.  We do not believe we are exposed to any potentially significant disruption of product flow because a number of suppliers could manufacture our products.  However, any change in suppliers would require significant advance planning due to the two to five month lead times in our industry.

Seasonality of Business

Our quarterly sales and operating results have a seasonal increase in the fall (our first and second fiscal quarters) due primarily to holiday sales.  Quarterly net sales and pretax (loss) income, as percentages of the totals for fiscal 2012 and 2011, were:
 
   
First
   
Second
   
Third
   
Fourth
 
   
Quarter
   
Quarter
   
Quarter
   
Quarter
 
Net sales
                       
Fiscal 2012
    22.7 %     38.6 %     20.3 %     18.4 %
Fiscal 2011
    23.6 %     34.7 %     22.9 %     18.8 %
                                 
Pretax (loss) income
                               
Fiscal 2012
    (29.9 )%     86.6 %     (91.9 )%     (64.8 )%
Fiscal 2011
    (19.1 )%     6.2 %     (22.5 )%     (64.6 )%

Governmental Regulations

Most of our products are manufactured outside of the United States.  Accordingly, foreign countries and the United States may from time to time modify existing quotas, duties, tariffs, or import restrictions, or otherwise regulate or restrict imports in a manner which could be material and adverse to us.  In addition, economic and political disruptions in Asia and other parts of the world from which we import goods could have an adverse effect on our ability to maintain an uninterrupted flow of products to our customers.  Laws and regulations such as the Consumer Product Safety Improvement Act of 2008 and California's Safe Drinking Water and Toxic Enforcement Act of 1986, which is commonly known as “Proposition 65," also may adversely affect our profitability to the extent they require product modifications or increased product testing.
 
 
8

 
Due to the fact that we sell our products to the retail exchange operations of the United States military, and thus are a supplier to the federal government, we must comply with all applicable federal statutes.  Historically, governmental regulations have not necessitated us making any material modifications or accommodations.
 
Employees
 
As of June 30, 2012, we employed 539 people, of which 479 employees were full time and 60 were part time.  The following table summarizes the number of full time employees, by location for the last two years:

   
2012
   
2011
 
United States
    226       262  
Canada
    70       77  
Mexico
    183       177  
Total
    479       516  

Intellectual Property

We believe our trademarks, licenses to use certain trademarks, and our other proprietary rights in and to intellectual property are important to our success and our competitive position.  We seek to protect our designs and intellectual property rights against infringement and devote resources to the establishment and protection of our intellectual property on a nationwide basis and in select foreign markets.  Our trademarks remain valid and enforceable as long as the marks are used in connection with our products and services and the required registration renewals are filed.

Working Capital

We do not enter into long-term agreements with any of our suppliers or customers.  Instead we enter into a number of purchase order commitments for each of our lines every season.  Due to the time required by our foreign suppliers to produce and ship goods to our distribution centers, we attempt, based on internal estimates, to carry on-hand inventory levels necessary for the timely shipment of initial and replenishment orders.  A decision by a customer’s buyer for a group of stores or any significant customer, whether motivated by competitive conditions, financial difficulties, or otherwise, to significantly change the amount of merchandise they purchase from us, or to change the manner of doing business with us, could have a significant effect on our financial condition and results of operations.  We attempt to mitigate this exposure by selling our products to a variety of retail customers throughout North America.

Additional Information

Our website address is www.tandybrands.com.  Information about our corporate governance, including our Code of Business Conduct and Ethics, is available on our website at www.tandybrands.com.  Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, Forms 3, 4, and 5 filed by our officers, directors, and stockholders holding 10% or more of our common stock, and all amendments to those reports are available free of charge through our website as soon as reasonably practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission (“SEC”).  You also may read and copy any reports, proxy statements, or other information that we file with the SEC at the SEC’s Public Reference Room at 100 F Street N.E., Washington, D.C.  20549, on official business days during the hours of 10 a.m. to 3 p.m.  Please call the SEC at 1-800-SEC-0330 for further information about the operation and location of the Public Reference Room.  Our SEC filings also are available to the public free of charge at the SEC’s website at www.sec.gov.

ITEM 1A - RISK FACTORS

In evaluating our business you should carefully consider the risk factors discussed below in addition to the other information in this Annual Report.  Any of these factors could materially and adversely affect our business, results of operations, and financial condition.  It is not possible to identify or predict all such factors and, therefore, you should not consider these risks to be a complete statement of all the uncertainties we face.
 
 
9

 
Risks Relating To Our Business

A significant portion of our sales is attributable to a few major customers and we cannot control the amount of products they purchase from us.

Ten customers accounted for 77% of our fiscal 2012 net sales, including Walmart which accounted for 46% of our net sales.  A decision by Walmart or any other major customer, whether motivated by competitive conditions, financial difficulties or otherwise, to significantly change the amount of merchandise purchased from us, or to change the manner of doing business with us, could have a significant effect on our results of operations and financial position.  We attempt to mitigate this exposure by selling our products to a variety of retail customers throughout North America.

We do not maintain long-term contracts with our customers and are unable to control their purchasing decisions.

Like most companies in our industry, we do not enter into long-term contracts with our customers.  As a result, we have no contractual leverage over their purchasing decisions.  A determination by a major customer to decrease the amount of products it purchases or to discontinue carrying our products could have a material adverse effect on our operations.

Direct sales to customers by suppliers could negatively impact our sales.

Certain third-party manufacturers have increasingly marketed and sold products to retailers directly, instead of through companies such as ours, and certain retailers have shifted to direct sales programs.  We believe we provide significant value-added services through our design programs, warehousing and distribution flexibility, retail analytics and our ability to tailor products for specific customers and demographic groups.  However, if our customers decide to increase their level of purchases directly from third-party manufacturers, our sales could be negatively impacted.

We extend unsecured credit to our customers and are subject to potential financial difficulties they may face.

We extend credit to our department and retail store customers based on an evaluation of their financial condition and generally do not require collateral from our customers.  If a customer experiences financial difficulties, we may need to curtail our sales to that customer or be subject to increased risk of nonpayment.  This risk increases if distressed customers are forced to file for bankruptcy.  If we are unable to collect our accounts receivable from a distressed customer, our operating results would be negatively impacted.

The loss of certain of our license agreements could result in the loss of significant sales.

Our fiscal 2012 net sales included $31.8 million of licensed brand name sales, including $26.9 million of totes® gifts.  If we fail to comply with the terms of our license agreements, or to protect against infringement, such failure could have a material adverse effect on our business.  In addition, certain of our license agreements require minimum royalty payments, regardless of the level of sales of the licensed products.  In the event royalty commitments under these agreements exceed the revenues generated by sales of the licensed products, our operating results would be negatively impacted.  We believe we have good relations with each of our licensors.

Distribution problems could delay product shipments.

Our inventory management and product distribution processes are highly dependent on the computer hardware and software which support these functions.  We believe we have strong disaster recovery plans in place, however, extended electric power, telecommunication, or internet outages, or a catastrophic loss of the hardware or software, could preclude timely delivery of products to our customers and result in a loss of sales.

The loss of, or problems with, third-party manufacturers could adversely impact our operations.

Most of our products are manufactured by independent, third-party suppliers in China, the Dominican Republic, India, Italy, and Taiwan.  We have no long-term contracts with these manufacturers and conduct business on a purchase-order basis.  We compete with other companies for the production capacity and facilities of these manufacturers.  Our future success depends on our ability to maintain relationships with our current suppliers and to identify other suppliers and develop relationships with those who can meet our quality standards.  If our quality standards are compromised, our customer relationships could be negatively affected.

 
10

 
Our business is dependent on our ability to maintain proper inventory levels.

In order to meet the demands of our customers, we must maintain certain levels of inventory of our products.  If our inventory levels exceed customer demand, we may be required to write-down unsold inventory or sell the excess at discounted or close-out prices.  Such actions could significantly impact our operating results and financial condition, and could result in the diminution of the value of our brands.  Our inventory lead times require us to maintain accurate inventory levels, sales of which are driven by consumer purchases at retail.  If we underestimate consumer demand for our products or if we are not able to obtain products in a timely manner, we may experience inventory shortages.  If we are unable to fill customer orders, our relationships with our customers could be damaged and our business could be adversely affected.  See “Our industry is highly subject to consumer preferences” below.

Price increases by our suppliers could negatively affect our operating results.

Most of our products are purchased from third-party suppliers.  If our suppliers increase their prices, or we experience increased freight costs to obtain our products, and we are not able to increase our selling prices, our gross margin and operating results would be materially impacted.

Risks Relating To Our Industry

Our industry is highly subject to consumer preferences.

Our industry is driven largely by consumer preferences and our success is dependent on our ability to anticipate and respond to these factors.  While we devote considerable time and resources to gauging consumer and lifestyle trends which affect the accessories market, any failure on our part to identify and respond to relevant trends could adversely affect acceptance of our products and brands and adversely impact our sales.  If we fail to properly gauge consumer trends, we could be faced with a significant amount of inventory which might only be sold at distressed prices or we may be unable to fill customer orders due to our inventory lead times.  See “Our business is dependent on our ability to maintain proper inventory levels” above.

Our industry is highly competitive and subject to pricing pressures that could adversely affect our financial position.

The accessories industry is highly fragmented and very competitive.  We compete with numerous manufacturers, importers, and distributors who may have greater resources.  The majority of our net sales are attributable to our private brand programs and we could lose sales to competitors with stronger brands or lower private brand prices, which could adversely affect our market position and results of operations.  In addition, from time to time, we must adjust our prices to respond to industry-wide pricing pressures.  Our financial performance could be negatively impacted by these pricing pressures if we are forced to reduce prices and cannot also reduce procurement costs, or if our procurement costs increase and we cannot increase our prices.

Our industry is highly subject to economic cycles and retail industry conditions.

Our industry is highly subject to general economic cycles and retail industry conditions.  When general economic conditions are lower, consumers are often hesitant to use discretionary income to purchase fashion accessories.  Any significant declines in general economic conditions or uncertainties regarding future economic prospects that may affect consumer spending habits could adversely affect our business.

In the current economic environment, consumer confidence is low resulting in a reduction in discretionary consumer spending.  Continued uncertainties regarding future economic prospects could have a material adverse effect on our results of operations and an economic slowdown could have a negative impact on our business and could result in:

•  
reduced consumer spending and demand for our products;
•  
increased price competition for our products;
•  
increased risk of unsaleable inventories; and
•  
increased risk in the collectability of accounts receivable from our customers.
 
 
11

 
These potential effects are difficult to forecast and, when they occur, mitigate.  As a consequence, our operating results for a particular period are difficult to predict and, therefore, prior results are not necessarily indicative of results to be expected in future periods. The occurrence of any of the foregoing circumstances could have a material adverse effect on our business, results of operations, and financial condition and could adversely affect the market price of our common stock.

Consolidation in the retail industry may negatively impact our operations.

There has been a significant amount of consolidation in the retail industry in recent years, which has been accelerated by recent economic trends.  This consolidation may result in factors which could negatively impact our business, such as:
 
•  
store closures;
•  
increased customer leverage over suppliers, resulting in lower product prices or lower margins;
•  
tighter inventory management on the part of the customer, resulting in lower inventory levels and decreased orders; and
•  
a greater exposure to customer credit risk.

Risks Relating To International Operations

We source most of our products from foreign countries.

Our transactions with our foreign manufacturers and suppliers are subject to the risks of doing business abroad, including up to five month inventory lead times and potential political and economic disruptions.  Imports into the United States could be affected by, among other things, the cost of transportation and the possible imposition of import duties and restrictions.  The United States, China, the Dominican Republic, India, Italy, Taiwan and other countries in which our products are manufactured could impose new quotas, tariffs, or other restrictions, or adjust presently prevailing quotas, duty, or tariff levels, which could affect our operations and our ability to import products at current or increased levels.  In addition, our customers may impose standards that could impact our sourcing and product costs, such as environmental testing requirements or with respect to labor conditions in foreign factories, which could negatively impact our ability to import products at current or increased levels or deteriorate margins.

Fluctuations in foreign currencies could adversely impact our financial condition.

We generally purchase our products in transactions utilizing U.S. dollars.  Because we acquire most of our products from foreign countries, the cost of those products may be impacted by changes in the value of the currency of the source country.  Changes in the value of the Chinese Yuan, in particular, may have a material impact on our costs due to our reliance on Chinese manufacturing operations.  Changes in the currency exchange rates may also affect the relative prices at which we and our foreign competitors sell products in the same market.

Risks Relating To Our Company

Our Company depends on a limited number of key personnel.  The loss of any one of these individuals could disrupt our business.

Our continued success is highly dependent upon the personal efforts and abilities of our senior executives.  Except for the change of control and severance agreements with our chief executive officer, executive vice president – sales & merchandising/gifts and chief financial officer, we do not have employment or similar contracts with, or maintain key-person insurance on the lives of, any of our senior executives, and the loss of any one of them could disrupt our business.

We are dependent on the creative talent of our designers and the effectiveness of our sales personnel.

Sales of our products are highly dependent on their marketplace acceptance, which is driven by current styles and our marketing abilities.  If we were unable to hire and retain employees having exceptional creative talent and marketing skills, our sales could be adversely affected.
 
 
12

 
Our stock price is volatile, and investors may not be able to recover their investment if our stock price declines.
 
The price of our common stock is volatile and can be expected to be significantly affected by factors such as quarterly variations in our results of operations and any failure to meet market expectations, quarterly variations in our competitors’ results of operations, and the stock price performance of comparable companies.  In addition, any failure to meet market expectations could cause lenders, creditors and investors to lose confidence in us, which could negatively impact our liquidity position and cause our stock price to fall.  Further, the stock market as a whole has experienced extreme price and volume fluctuations that have affected the market price of many public companies in ways that may have been unrelated to these companies’ operating performance.

ITEM 1B - UNRESOLVED STAFF COMMENTS

None.

ITEM 2 - PROPERTIES

We own facilities in the United States and Mexico and lease facilities in the United States, Canada, and Hong Kong.  As of June 30, 2012 we owned and leased 224,354 and 520,361 square feet of warehouse and office space, respectively.  We believe our properties are adequate and suitable for the particular uses involved.  The following table summarizes our properties:
Facility Location
 
Use
Form of
Ownership
Yoakum, Texas – 3 facilities (1)
 
Office and warehouses
Own
Pitiquito, Sonora, Mexico
 
Manufacturing facilities
Own
Scarborough, Ontario, Canada
 
Manufacturing and distribution center
Lease
Dallas, Texas
 
Corporate office and distribution centers
Lease
Los Angeles, California
 
Office
Lease
Bentonville, Arkansas
 
Office
Lease
New York, New York
 
Office and showroom
Lease
Kowloon, Hong Kong
 
Office
Lease
 
(1)
All of the Yoakum, Texas facilities are vacant and were classified as held for sale as of June 2012.  One building was sold for an immaterial gain on July 6, 2012.

ITEM 3 - LEGAL PROCEEDINGS

We are periodically involved in legal proceedings and litigation arising in the ordinary course of business.  On February 14, 2011, The Belt Company (formerly known as Chambers Belt Company) filed suit against us in the Superior Court of the State of Delaware.  The suit alleges we underpaid Chambers approximately $524,000 in earn-out royalties under the terms of the asset purchase agreement between the parties dated July 9, 2009.  We dispute this allegation and, in fact, have asserted a counterclaim seeking a refund in the amount of $609,000 under the royalty provision of the asset purchase agreement.  At this time, we can make no estimate as to the outcome of the suit.

ITEM 4 – (Removed and Reserved)
 
 
13

 
PART II

ITEM 5 - MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Principal Market For Our Common Stock

The principal market for our common stock is The NASDAQ Global Market where it is listed under the symbol “TBAC.”  The high and low sales prices for our common stock for each quarterly period within the two most recent fiscal years as reported on NASDAQ were:
 
 
Fiscal 2012
 
Fiscal 2011
 
Quarter Ended
 
High
   
Low
   
High
   
Low
 
September 30
 
$
2.33
   
$
1.08
   
$
4.00
   
$
2.95
 
December 31
 
$
1.29
   
$
0.90
   
$
3.48
   
$
2.57
 
March 31
 
$
2.14
   
$
0.92
   
$
3.20
   
$
2.50
 
June 30
 
$
1.96
   
$
1.23
   
$
2.90
   
$
1.55
 
  
Stockholders of Record

As of August 31, 2012, we had approximately 475 stockholders of record.

Dividends

No dividends were declared in fiscal 2012 or fiscal 2011.

No dividends have been paid since October 2008 in order to preserve capital and enhance financial flexibility.  The payment of dividends in the future will be at the discretion of our board of directors and will depend on our profitability, financial condition, capital needs, future prospects, contractual restrictions, and other factors deemed relevant by our board of directors.  In addition, payment of any future dividends requires the approval of our lender, in its sole discretion, pursuant to the terms of our credit facility.

Stock Available Under Equity Compensation Plans

The following table provides information regarding the number of shares of our common stock that may be issued on exercise of outstanding stock options or vesting of performance units under our existing equity compensation plans as of June 30, 2012, which include:
 
·  
1997 Employee Stock Option Plan;
 
·  
2002 Omnibus Plan; and
 
·  
1995 Stock Deferral Plan for Non-Employee Directors.
 
   
(A)
   
(B)
   
(C)
 
Plan Category
 
Number of Securities
To Be Issued upon
Exercise Of
Outstanding Options,
Warrants And Rights
   
Weighted-Average
Exercise Price Of
Outstanding Options,
Warrants And Rights
   
Number Of Securities Remaining
Available For Future Issuance
Under Equity Compensation
Plans (Excluding Securities
Reflected In Column (A))
 
Equity Compensation Plans Approved by Stockholders
    269,316 (1)   $ 10.22 (2)     562,387 (3)
______________
 
(1)  
Includes options to purchase common stock under the following plans:
 
·  
1997 Employee Stock Option Plan – 46,500 shares; and
 
·  
2002 Omnibus Plan – 222,816 shares.
 
(2)  
Calculation of weighted-average exercise price does not include performance unit shares under the 2002 Omnibus Plan because they have no exercise price.
 
 
14

 
(3)  
Includes 28,375 shares of common stock issuable under the 1995 Stock Deferral Plan for Non-Employee Directors and 534,012 shares of common stock issuable under the 2002 Omnibus Plan.  Upon adoption of the 2002 Omnibus Plan, the number of shares authorized and reserved for issuance under our previously existing stock option plans were transferred to the 2002 Omnibus Plan and are presently authorized and reserved for issuance under that plan.  All shares of common stock authorized and reserved for issuance on the exercise of outstanding stock options under our previous stock option plans and the 2002 Omnibus Plan will, on the cancellation or expiration of any such stock options, automatically be authorized and reserved for issuance under the 2002 Omnibus Plan.

Stock Repurchases

We did not repurchase any shares of our common stock during the fourth quarter of fiscal 2012.

ITEM 6 - SELECTED FINANCIAL DATA

Not applicable.

ITEM 7 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Item 7 should be read in the context of the information included elsewhere in this Annual Report including our consolidated financial statements and accompanying notes in Item 8 of this Annual Report.

OVERVIEW

We are organized along product categories and have two reportable segments: (1) accessories, which include belts, small leather goods and bags, and (2) gifts.

During fiscal 2012 we focused on improving the bottom-line by replacing net sales from unprofitable product categories with net sales and profitable growth in our gifts business and through acquiring new licenses.  In fiscal 2012 we signed six new licenses: Sperry Top-Sider®, Elie Tahari®, Eddie Bauer® (expanded to include belts and small leather goods), Miss Me®, The Sharper Image® and Arnold Palmer®.  We expect our fiscal 2012 initiatives to provide meaningful growth in net sales and profitability in fiscal 2013.

Our operating results for fiscal 2012 were impacted by significant net sales growth in our gifts segment (up 40%), lower net sales in our accessories segment primarily as a result of our June 2011 restructuring plan in which we exited under-performing, non-core product categories, higher freight and material costs in our gifts segment, an unexpected bad debt provision, and significant improvements in our operating expenses as a result of the execution of our cost-savings initiatives which reduced SG&A expenses by 27% over the past two fiscal years.

For the year, we had a net loss of $3.7 million, or $0.52 per share, a $9.8 million improvement over the prior year.
 
 
15

 
The following table presents sales and gross margin data for our business segments (in thousands of dollars).  Other financial information about our segments is incorporated herein by reference to Note 6 of the notes to consolidated financial statements included in Item 8 of this Annual Report.
 
   
2012
   
2011
 
Net sales:
           
Accessories
  $ 86,188     $ 101,280  
Gifts
    31,413       22,487  
    $ 117,601     $ 123,767  
Gross margin:
               
Accessories
  $ 28,861     $ 29,174  
Gifts
    8,410       7,078  
    $ 37,271     $ 36,252  
                 
Gross margin percent of sales:
               
Accessories
    33.5 %     28.8 %
Gifts
    26.8 %     31.5 %
      31.7 %     29.3 %
                 
Operating expenses:
               
Accessories
  $ 11,151     $ 15,927  
Gifts
    5,400       5,547  
    $ 16,551     $ 21,474  

The following presents selling, general and administrative expenses (“SG&A”), depreciation and amortization, and our interest expenses which are not directly allocated to one of our segments (in thousands of dollars):
 
   
2012
   
2011
 
Selling, general and administrative expenses (unallocated)
  $ 20,579     $ 23,219  
Restructuring charges
    -       1,109  
Acquisition related costs
    -       50  
Depreciation and amortization
    2,205       2,565  
Interest  expense
    1,159       948  
 
Our sales are generally affected by changes in demand for our product categories (volume) as well as customer allowances and returns.  Sales volume also can impact our gross margins in terms of product channel mix between mass merchant retailers, which typically sell product at lower price points than department stores, and specialty retailers.  The components of our cost of goods sold and SG&A are described in Note 2 of the notes to consolidated financial statements included in Item 8 of this Annual Report and incorporated herein by reference.  We include the costs related to our distribution network in SG&A while others may include all or a portion of such costs in their cost of goods sold.  Consequently, our gross margins may not be comparable to others.

The following table presents net sales for each of our product categories (in thousands of dollars):
 
   
2012
   
2011
 
   
Net Sales
   
% of Total
   
Net Sales
   
% of Total
 
Belts
  $ 70,805       60.2 %   $ 81,255       65.7 %
Gifts
    31,413       26.7       22,487       18.2  
Small Leather Goods
    9,776       8.3       12,414       10.0  
Other
    5,607       4.8       7,611       6.1  
    $ 117,601             $ 123,767          
 
Operationally, our most significant accomplishments in fiscal 2012 were:
 
·  
organically grew our gifts product category 40%;
·  
reduced SG&A expenses 17% as net sales declined 5% from the prior year;
·  
consolidated certain facilities to simplify operations and reduce selling, general and administrative expenses;
 
 
16

 
·  
executed an amendment to extend our totes® license for an additional four years;
·  
executed six licensing agreements with national brands Sperry Top-Sider®, Elie Tahari®, Eddie Bauer®, Miss Me®, The Sharper Image® and Arnold Palmer®; and
·  
entered into a four-year, $35 million credit facility, which we believe will provide adequate liquidity for the foreseeable future.

2012 COMPARED TO 2011

Net Sales and Gross Margins
Our fiscal 2012 net sales were $117.6 million, which was $6.2 million, or 5% lower than the prior year.  Our fiscal 2012 gross margin of 31.7% increased 240 basis points from the prior year.

Net sales for the accessories segment were $86.2 million, which was $15.1 million, or 15%, lower than the prior year primarily due to lower sales from exiting certain product categories ($4.5 million), lower levels of replenishment orders by our largest customer in the first half of the fiscal year and non-repeat of new men’s belt assortments that shipped to a major customer in the prior period from additional retail space procured.  Gifts segment net sales of $31.4 million in fiscal 2012 were $8.9 million, or 40%, greater than in the prior year primarily due to increased holiday shipments resulting from organic growth of our totes® license and new sales under our Eddie Bauer® and The Sharper Image® licenses.

Accessories segment gross margins increased from 28.8% in fiscal 2011 to 33.5% in fiscal 2012 primarily because of the $3.7 million inventory write-off associated with our discontinued product lines in the prior year.  The remaining increase was driven by improvements in sales mix due to exiting product categories, lower inventory write-offs and lower customer deductions.  The gifts segment margin was 470 basis points lower in fiscal 2012 compared to 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 mix to our higher volume, lower margin 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.

Operating Expenses
Total segment operating expenses in fiscal 2012 of $16.6 million were $4.9 million lower than the prior year ($21.5 million) primarily due to decreases in variable distribution labor, facilities and advertising costs.

Total SG&A expenses of $37.1 million for fiscal 2012 were $7.6 million, or 17%, lower than fiscal 2011 ($44.7 million).  The reductions were primarily due to decreases in variable distribution labor and compensation costs, facilities costs, and advertising and professional services, offset partially by increases in bad debt provisions ($480,000), investment in new licenses ($597,000) and facilities consolidation charges ($222,000).

Depreciation and amortization for fiscal 2012 was $360,000 lower than in 2011 as a result of assets being fully depreciated during the current year.

Interest And Taxes
Interest expense for fiscal 2012 was $211,000 higher than that incurred in 2011.  The increase was primarily due to a $98,000 write-off of costs capitalized in connection with our previous credit facility and interest incurred from the early payment program with our lender and largest customer.  This increase was offset partially by savings from lower outstanding borrowings during the current year.

We have a federal income tax net loss carryover of $52.3 million that will expire beginning in 2029.

Our effective income tax rates were 11.8% and 3.8% in fiscal 2012 and fiscal 2011, respectively.  In both years, the benefits of the 34% federal statutory rate applied to our pretax losses were offset by deferred tax valuation allowances (fiscal 2012 – 40.9%; fiscal 2011 – 38.7%).  The valuation allowances are recorded on our federal and state deferred tax assets because we have experienced cumulative operating losses over the past few years.  Realization of the deferred tax assets and reversal of associated valuation allowances is dependent on the generation of future taxable income during the periods in which temporary differences become deductible.
 
 
17

 
LIQUIDITY AND CAPITAL RESOURCES

We generally expect that cash needs over the next twelve months will be substantially the same as they have been as reflected in our historical financial statements.  A summary of the effect of our operations on our cash flows is as follows:

Operating Activities
Fiscal 2012 net cash provided by operating activities was $15.3 million higher than in fiscal 2011, primarily driven by the following:  a decrease in our net loss; $2.1 million lower current year accounts receivable due to faster collections on receivables with our largest customer; $163,000 higher current year inventory and other assets due to higher gift inventory deposits; and $6.6 million higher accounts payable and accrued expenses as a result of higher gift inventory purchases in the fourth quarter of fiscal 2012 as a result of increased bookings for fiscal 2013.

Investing Activities
Investing activities for fiscal 2012 primarily consisted of purchases of operating equipment for our distribution facilities and the sale of one of our idle facilities located in Yoakum, Texas.  Investing activities for the prior year primarily consisted of the $2.7 million sale of our idle distribution center located in West Bend, Wisconsin, purchases of additional racking and other various leasehold improvements for our distribution facilities and completion of our acquisition of Maquiladora Chambers de Mexico, S.A. de C.V.

Financing Activities
Financing activities included credit facility net repayments of $6.1 million in 2012 and net borrowings of $8.4 million in fiscal 2011.  This $14.5 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.

Our primary sources of liquidity are cash flows from operating activities and borrowings under our credit facility.

Information about our credit facilities is incorporated herein by reference to Note 5 of the notes to the consolidated financial statements included in Item 8 of this Annual Report.  At June 30, 2012, we had $1.5 million borrowing availability and $11.8 million in outstanding borrowings under our credit facility, of which $7.1 million was used to fund inventory deposits for gifts inventory expected to ship in the first half of fiscal 2013.

Our credit facility contains certain restrictive covenants, including covenants related to specified profitability, fixed charge coverage and minimum availability.  As of March 31, 2012 and June 30, 2012, we were in violation of covenants in our credit facility related to specified profitability and fixed charge coverage and, absent waivers obtained from our lender, would have breached these covenants.  As of March 31, 2012 and June 30, 2012, the violations of these covenants were due to one-time events and changes in the timing of customer orders, respectively, which ultimately impacted our ability to meet the forecasts established under the credit facility.

For fiscal 2013, our credit facility has been amended to reduce the fixed charge coverage covenant for certain months in fiscal 2013.  We believe this amendment will reduce the likelihood we will encounter future covenant difficulties.  The credit facility was also previously amended to enable us to enter into a factoring program with our second largest customer whereby we expect to reduce receivable and debt balances faster and reduce our interest costs. 

We believe that cash flows generated by operating activities and the borrowings and availability under our credit facility will be sufficient to fund our working capital needs for the foreseeable future.
 
OFF-BALANCE SHEET ARRANGEMENTS

We do not have any off-balance sheet arrangements.
 
 
18

 
CRITICAL ACCOUNTING POLICIES

We use estimates throughout our consolidated financial statements.  We consider an accounting estimate to be critical if: (1) the estimate requires us to make assumptions about matters that are highly uncertain at the time the estimate is made or (2) changes in the estimate are reasonably likely to occur from period to period, or use of different estimates that we reasonably could have used in the current period, would have a material impact on our financial condition or results of operations.  We have discussed the development and selection of these critical accounting estimates with the Audit Committee of our board of directors.  In addition there are other items within our financial statements that require estimation, but are not deemed critical as defined above.  Changes in estimates could have a material impact on our operations and financial position.

The accounting policies and estimates we consider most critical are presented below.

Revenues and Accounts Receivable Allowances
Sales are recognized when merchandise is shipped and title to the goods has passed to the customer.  We record allowances, including cash discounts, in-store customer allowances, cooperative advertising allowances, and customer returns, as a reduction of sales based upon historical experience, current trends in the retail industry, and individual customer and product experience.  Actual returns and allowances may differ from our estimates and differences would affect the operating results of subsequent periods.

Sensitivity Analysis  The following table presents the estimated effect of the indicated increase (decrease) in our net sales, based on fiscal 2012 net sales of $117.6 million, on our customer allowance dollars (in thousands except per share amounts).  Changes in general economic conditions, trends and developments within our industry, or situations unique to specific customers could result in significant fluctuations in the actual effect of the estimate.
 
 
Sales
 
Allowances
 
 
 
Earnings
 
Change
 
Reserves
 
Expense
 
Per Share
Change in customer allowances and returns
+/- 0.5%
 
$588 / $(588)
 
$588 / $(588)
 
$(0.05) / $0.05

Inventories
Inventories are stated at the lower of cost (principally standard cost which approximates actual cost on a first-in, first-out basis) or market.  Cost includes the direct cost of purchased products and, for manufactured products, materials, direct and indirect labor, and factory overhead.  Market, with respect to raw materials, is replacement cost and, with respect to work-in-process and finished goods, is net realizable value.  In our assessment of the value of inventory, we monitor retailer sell-through rates, fashion trends, and the accumulation of excess inventory.  Our assessment is both a quantitative measurement (e.g., the use of metrics such as the number of months supply on hand) and qualitative measurement (e.g., the ability to utilize certain styles in current and future programs).  In general we have relationships with off-price store customers that will purchase excess inventory at discounted prices and we have been able to realize values at or above the lower of cost or market values at which we carry our inventories.  If circumstances arise in which the market value of items in inventory declines below cost, an inventory markdown is estimated and charged to cost of sales in the period identified.  If we incorrectly anticipate these trends or if unexpected events occur, our results of operations could be materially affected.

Sensitivity Analysis  The effect of a 1% write-down in the value of our inventory as of June 30, 2012 would be (dollars in thousands except per share amounts):
 
 
Percentage
 
     
Earnings
 
Of Inventory
 
Inventory
 
Expense
 
Per Share
Change in inventory write-down
-1%
 
$(287)
 
$287
 
$(0.03)

Uncertain Tax Positions
Tax liabilities, together with interest and applicable penalties, are recognized for the benefits of uncertain tax positions in the financial statements which more likely than not may not be realized.  We review the appropriateness of items of revenue or expense excluded or included in our tax returns and the requirements for filing returns with jurisdictions which may have laws requiring us to file tax returns.  Failure to recognize a tax liability for the benefits of an uncertain tax position which ultimately is not realized could materially affect our financial position and results of operations.
 
 
19

 
Share-Based Compensation
The fair values of restricted stock and performance unit grants payable in stock are estimated to be the market price of our common stock on the grant dates.  The fair values of performance units measured in phantom stock units, which are payable in cash, are estimated to be the market price of our common stock as of each reporting date.  The assumptions we use to estimate the fair value of our stock options are based on historical information and current economic conditions.  Estimated fair values increase if the expected dividend yield decreases and the other assumptions increase.  Neither the grant-date market values of our stock nor the resulting output of the Black-Scholes option-pricing model using our assumptions may be the value ultimately realized by our directors and employees or accurately measure the tax benefits we may realize.

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

The information in Note 2 of the notes to the consolidated financial statements included in Item 8 of this Annual Report is incorporated herein by reference.

ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.
 
 
20

 
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of Tandy Brands Accessories, Inc.

We have audited the accompanying consolidated balance sheets of Tandy Brands Accessories, Inc. and subsidiaries (the “Company”) as of June 30, 2012 and 2011, and the related consolidated statements of operations, cash flows, and stockholders’ equity for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Tandy Brands Accessories, Inc. and subsidiaries as of June 30, 2012 and 2011, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.


/s/ GRANT THORNTON LLP

Dallas, Texas
September 4, 2012
 
 
21

 
Tandy Brands Accessories, Inc. And Subsidiaries
Consolidated Balance Sheets
(in thousands)
 
   
June 30
 
   
2012
   
2011
 
Assets
           
Current assets:
           
Cash and cash equivalents
  $ 217     $ 414  
Restricted cash
    -       1,450  
Accounts receivable, net
    7,042       14,286  
Inventories, net
    28,743       28,945  
Inventory deposits
    7,107       4,201  
Other current assets
    2,824       3,872  
Total current assets
    45,933       53,168  
Property and equipment, net
    5,474       6,525  
Other assets:
               
Intangibles
    4,115       4,936  
Other assets
    934       790  
Total other assets
    5,049       5,726  
    $ 56,456     $ 65,419  
Liabilities And Stockholders' Equity
               
Current liabilities:
               
Accounts payable
  $ 10,548     $ 8,145  
Accrued compensation
    1,309       1,900  
Accrued expenses
    1,584       2,267  
Credit facility
    11,810       17,935  
Total current liabilities
    25,251       30,247  
Other liabilities
    4,290       4,243  
Commitments and contingencies (see Note 7)
               
Stockholders' equity:
               
Preferred stock, $1.00 par value, 1,000 shares authorized, none issued
    -       -  
Common stock, $1.00 par value, 10,000 shares authorized, 7,102 shares and 7,075 shares issued and outstanding, respectively
    7,102       7,075  
Additional paid-in capital
    34,129       34,119  
Accumulated deficit
    (15,970 )     (12,318 )
Other comprehensive income
    1,654       2,053  
Total stockholders' equity
    26,915       30,929  
    $ 56,456     $ 65,419  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
22

 
Tandy Brands Accessories, Inc. And Subsidiaries
Consolidated Statements Of Operations
(in thousands except per share amounts)
 
   
Year Ended June 30
 
   
2012
   
2011
 
Net sales
  $ 117,601     $ 123,767  
Cost of goods sold
    80,330       83,807  
Inventory write-down
    -       3,708  
      80,330       87,515  
Gross margin
    37,271       36,252  
Selling, general and administrative expenses
    37,130       44,693  
Depreciation and amortization
    2,205       2,565  
Acquisition related costs
    -       50  
Restructuring charges
    -       1,109  
Total operating expenses
    39,335       48,417  
Operating loss
    (2,064 )     (12,165 )
Interest expense
    (1,159 )     (948 )
Other (expense) income
    (44 )     136  
Loss before income taxes
    (3,267 )     (12,977 )
Income tax expense
    385       499  
Net loss
  $ (3,652 )   $ (13,476 )
Loss per common share
  $ (0.52 )   $ (1.93 )
Loss per common share assuming dilution
  $ (0.52 )   $ (1.93 )
Weighted average common shares outstanding
    7,075       6,971  
Weighted average common shares outstanding assuming dilution
    7,075       6,971  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
23

 
Tandy Brands Accessories, Inc. And Subsidiaries
Consolidated Statements Of Cash Flows
(in thousands)
 
   
Year Ended June 30
 
   
2012
   
2011
 
Cash flows provided (used) by operating activities:
           
Net loss
  $ (3,652 )   $ (13,476 )
Adjustments to reconcile net loss to net cash provided (used) by operating activities:
               
Inventory write-down
    -       3,708  
Deferred income taxes
    127       53  
Doubtful accounts receivable provision
    802       322  
Depreciation and amortization
    2,455       2,805  
Stock compensation expense
    82       (33 )
Amortization of debt costs
    196       87  
Other
    20       (112 )
Changes in assets and liabilities:
               
Accounts receivable
    6,375       4,246  
Inventories
    12       (988 )
Other assets
    (2,526 )     (1,363 )
Accounts payable
    2,289       (5,386 )
Accrued expenses
    (1,267 )     (207 )
Net cash provided (used) by operating activities
    4,913       (10,344 )
Cash flows (used) provided by investing activities:
               
Acquisition
    -       (245 )
Purchases of property and equipment
    (664 )     (958 )
Sales of property and equipment
    192       2,752  
Net cash (used) provided by investing activities
    (472 )     1,549  
Cash flows (used) provided by financing activities:
               
Change in cash overdrafts
    145       (182 )
Change in restricted cash
    1,405       -  
Net (repayments) borrowings under credit facility
    (6,091 )     8,441  
Net cash (used) provided by financing activities
    (4,541 )     8,259  
Effect of exchange-rate changes on cash and cash equivalents
    (97 )     120  
Net decrease in cash and cash equivalents
    (197 )     (416 )
Cash and cash equivalents beginning of year
    414       830  
Cash and cash equivalents end of period
  $ 217     $ 414  
Supplemental cash flow information:
               
Interest paid
  $ 1,146     $ 684  
Income taxes paid
  $ 144     $ 235  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
24

 
Tandy Brands Accessories, Inc. And Subsidiaries
Consolidated Statements Of Stockholders' Equity
(in thousands except per share amounts)
 
               
Additional
   
Retained
   
Other
   
Total
 
   
Common Stock
   
Paid-In
   
(Deficit)
   
Comprehensive
   
Stockholders'
 
   
Shares
   
Amount
   
Capital
   
Earnings
   
Income
   
Equity
 
Balance June 30, 2010
    6,933     $ 6,933     $ 34,172     $ 1,158     $ 1,557     $ 43,820  
Comprehensive loss:
                                               
Net loss
    -       -       -       (13,476 )     -       (13,476 )
Currency translation adjustments
    -       -       -       -       496        496  
                                              (12,980 )
Share-based compensation
    142       142       (53 )     -       -       89  
Balance June 30, 2011
    7,075     $ 7,075     $ 34,119     $ (12,318 )   $ 2,053     $ 30,929  
Comprehensive loss:
                                               
Net loss
    -       -       -       (3,652 )     -       (3,652 )
Currency translation adjustments
    -       -       -       -       (399 )      (399 )
                                              (4,051 )
Share-based compensation
    27       27       10       -       -       37  
Balance June 30, 2012
    7,102     $ 7,102     $ 34,129     $ (15,970 )   $ 1,654     $ 26,915  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
25

 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Note 1 - Overview

The Company
We are a leading designer and marketer of branded men’s, women’s and children’s accessories, including belts, gifts, small leather goods and bags.  Our merchandise is marketed under a broad portfolio of nationally recognized licensed and proprietary brand names, 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.

Basis Of Presentation
The preparation of our consolidated financial statements in accordance with U.S. generally accepted accounting principles 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 our fiscal year end 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 financial statements include the accounts of the Company and our subsidiaries, all of which are wholly owned.  Intercompany accounts and transactions have been eliminated in consolidation.

Foreign Currency Translation
For our Canadian operations, the functional currency is the Canadian dollar (“CAD”).  Its assets and liabilities are translated into U.S. dollars (“USD”) at the exchange rates in effect at each balance sheet date, and resulting translation gains or losses are accumulated in other comprehensive income as a separate component of stockholders’ equity.  Revenue and expenses are translated at monthly average exchange rates.  For our Mexican operations, the functional currency is the U.S. dollar.

Note 2 - Summary Of Significant Accounting Policies

Fair Values
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, May 11, 2012, June 5, 2012, August 9, 2012 and August 29, 2012), bears interest at floating market interest rates; therefore, we believe the fair value of amounts borrowed approximates the carrying value.  At June 30, 2012 and June 30, 2011, no other material assets or liabilities were measured at fair value.

Cash And Cash Equivalents
We consider cash on hand, deposits in banks, and short-term investments with original maturities of less than three months as cash and cash equivalents.

Restricted Cash
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 the consummation of our current $35 million credit facility in the first quarter of fiscal 2012, our Canadian subsidiary’s facility was terminated and all borrowings were paid and obligations were fulfilled.
 
 
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Accounts Receivable and Allowances
We perform periodic credit evaluations of our customers’ financial conditions and reserve against accounts deemed uncollectible based upon historical losses and customer specific events.  After all collection efforts are exhausted and an account is deemed uncollectible, it is written off against the allowance for doubtful accounts.  With the exception of a material customer account which ultimately resulted in an accounts receivable allowance of $900,000, credit losses have historically been within our expectations and we generally do not require collateral.

Accounts receivable are net of an allowance for doubtful accounts, discounts and returns of $3.9 million and $3.8 million for fiscal 2012 and 2011, respectively.

Inventories
Inventories are stated at the lower of cost (principally standard cost which approximates actual cost on a first-in, first-out basis) or market.  Cost includes the direct cost of purchased products and, for manufactured products, materials, direct and indirect labor, and factory overhead.  Market, with respect to raw materials, is replacement cost and, with respect to work-in-process and finished goods, is net realizable value.  Inventories consist of (in thousands):
 
   
2012
   
2011
 
Raw materials
  $ 3,416     $ 3,987  
Work-in-process
    412       436  
Finished goods
    24,915       24,522  
    $ 28,743     $ 28,945  

Inventory deposits of $7.1 million and $4.2 million are included in other current assets at June 30, 2012 and 2011, respectively.

Property And Equipment
Property and equipment are carried at cost less accumulated depreciation calculated using the straight-line method (in thousands):
 
   
2012
   
2011
   
Depreciation Rates
Buildings
  $ 278     $ 278     3%
Leasehold improvements
    3,490       3,430    
Lesser of lease term or asset life
Machinery and equipment
    27,766       27,388    
10% to 50%
      31,534       31,096          
Accumulated depreciation
    (26,060 )     (24,571 )        
    $ 5,474     $ 6,525          
 
Depreciation expense: 2012 - $1,634; 2011 - $1,918
 
The net book value of accessories segment property and equipment no longer used in our operations is included in other current assets (2012 - $1.5 million; 2011 - $1.7 million) and is held for sale without expectation of incurring a loss; however, amounts actually realized from the sale of such property and equipment may differ from our estimates.

As a result of the completion of the consolidation of our Yoakum, Texas accessories segment operations into our Dallas, Texas distribution facility, in fiscal 2011, $1.7 million of property and equipment located across four facilities in Yoakum, Texas was no longer being used in our operations and was reclassified from property and equipment and included in other current assets.  We sold one facility on January 17, 2012 and a second facility on July 6, 2012, both for immaterial gains.

Maintenance and repairs are charged to expense as incurred.  Renewals and betterments which materially prolong the useful lives of the assets are capitalized.  The cost and related accumulated depreciation of assets retired or sold are removed from the accounts and gains or losses are recognized in operations upon disposition.

Intangibles And Impairment Of Long-Lived Assets
Finite-lived intangibles are amortized either using the straight-line method over their estimated useful lives (e.g., trade names) or using an undiscounted cash flows model (e.g., Chambers customer list).
 
 
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We review long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate the carrying amount of an asset might be impaired.  Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to undiscounted future net cash flows they are expected to generate.  If the undiscounted cash flows are less than the carrying amount, the impairment recognized is measured by the amount the carrying value of the assets exceeds their fair value.

Indefinite-lived intangibles are assessed annually for impairment using a fair value method such as discounted cash flows.  We completed our annual impairment test for fiscal 2012 in the fourth quarter and no impairment was determined.  Future impairment tests will be performed annually in the fourth quarter, or sooner if a triggering event occurs.

Derivative Instruments
We did not have any significant derivative activities as of June 30, 2012 or 2011 and we do not enter into derivative investments for the purpose of speculative investment.  Our overall risk management philosophy is re-evaluated as business conditions change.

Sales
Sales are recognized when merchandise is shipped and title to the goods has passed to the customer.  We record allowances, including cash discounts, in-store customer allowances, cooperative advertising allowances, and customer returns, as a reduction of sales based upon historical experience, current trends in the retail industry, and individual customer and product experience.  Actual returns and allowances may differ from our estimates and differences would affect the operating results of subsequent periods.

Costs And Expenses
Cost of goods sold includes our costs associated with the procurement and manufacture of inventory, such as the cost of inventory and raw materials purchased from overseas, costs of shipping from our suppliers, ticketing and labeling of product and, where applicable, labor and overhead related to our product manufacturing facilities.  SG&A includes our costs related to activities incurred in the normal course of business which are not associated with the procurement or production of inventory.  They also include costs associated with our distribution centers (2012 - $7.8 million; 2011 - $12.6 million).  Those amounts include $1.3 million and $1.7 million of shipping and handling expenses in fiscal 2012 and 2011, respectively.

Advertising Costs
Advertising costs, consisting primarily of shows and conventions as well as display and print advertising, are expensed as they are incurred (2012 - $1.0 million; 2011 - $1.3 million).

Share-Based Compensation
Compensation expense for all share-based payments expected to vest is recognized on the straight-line basis over the requisite service period based on grant-date and reporting-date fair values.

Income Taxes
Deferred income taxes are recognized for the future income tax effects of differences in the carrying amounts of assets and liabilities for financial reporting and income tax return purposes using enacted tax laws and rates.  A valuation allowance is recognized if it is more likely than not that some or all of a deferred tax asset may not be realized.  Tax liabilities, together with interest and applicable penalties included in the income tax provision, are recognized for the benefits of uncertain tax positions in the financial statements which more likely than not may not be realized.

Recent Accounting Pronouncements
Accounting Standards Codification Topic 220, “Comprehensive Income,” was amended in June 2011 to require entities to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The amendment does not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income under current GAAP. This guidance is effective for us beginning July 1, 2012. The adoption of this guidance is not expected to have a material effect on our consolidated financial statements.
 
 
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Note 3 - Significant Events

Fiscal 2012 New Licenses
During 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).  The terms for each of the Elie Tahari®, Miss Me® and The Sharper Image® agreements are through December 31, 2014, December 31, 2014 and December 31, 2016, respectively.  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 benefited results in the fourth quarter of fiscal 2012.

During the third quarter of fiscal 2012, we announced the execution of new licensing agreements with brands Sperry Top-Sider® and Arnold Palmer®.  The terms for each of the Sperry Top-Sider® and Arnold Palmer® agreements are through January 31, 2016 and December 31, 2016, respectively.  Under the terms of the Sperry Top-Sider® agreement, we will distribute belts, shoulder 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 calendar 2013.

During the third quarter of fiscal 2012, we expanded our previously executed Eddie Bauer® license to also include the rights to license and market belts and small leather goods.

During the fiscal year, we made investments to procure and launch our new licenses and incurred costs of $597,000.  These costs include charges for personnel, travel, and samples, which are included in selling, general and administrative expenses.

Fiscal 2012 Facilities Consolidation
During the third quarter of fiscal 2012, we consolidated certain facilities to simplify operations and reduce operating expenses.  In connection with this consolidation, we incurred lease termination ($39,000), severance ($73,000) and other costs ($110,000) which were included in selling, general and administrative expenses.  We expect these consolidation initiatives will result in approximately $500,000 in annual cost savings.

Fiscal 2012 Bad Debt Provision
During the third quarter of fiscal 2012, we recognized a $900,000 provision for doubtful accounts for one close-out customer due to the customer’s financial difficulties raising doubts about the customer’s ability to make payment in the foreseeable future.

Fiscal 2012 Credit Facility
Effective August 25, 2011, we replaced our prior $27.5 million credit facility with our current $35 million credit facility, which expires August 2015.  Our current 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.

Fiscal 2011 Restructuring Charges
During the third quarter of fiscal 2011, we implemented initiatives to simplify operations and reduce operating expenses, which included, among other initiatives, headcount reductions.  In connection with these initiatives, charges for severance costs of $411,000 were included in selling, general and administrative expenses for the third quarter of fiscal 2011.

In July 2011, we announced a broad restructuring plan, which was completed as of June 30, 2011, pursuant to which we exited under-performing, non-core product categories that did not represent strategic components of our branded product portfolio, reduced salaried employee headcount and accelerated the recognition of future expenses under legacy infrastructure and contractual obligations.  As a result of the restructuring plan and the decision to exit certain non-core product categories, we recorded a noncash inventory write-off of $3.7 million to liquidate certain inventories associated with these discontinued product categories.
 
 
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In connection with the restructuring plan, we also recorded charges for one-time termination benefits ($222,000), charges associated with the cessation of services performed under certain contractual obligations ($776,000) and other costs ($111,000), which were included in the restructuring charges line on the consolidated statement of operations.

Fiscal 2011 Customer Arrangement
During the second quarter of fiscal 2011, we entered into an arrangement with a customer pursuant to which we agreed to pay $1.2 million to procure additional retail space to sell our products through March 2012.  This payment reduced net sales in proportion to the estimated undiscounted cash flows of the incremental sales generated from the additional space from March 2011 through March 2012.

Related Party Transaction
During fiscal 2012 and 2011, we purchased $4.3 million and $8.4 million, respectively of accessories inventory from an entity affiliated with Chiang Chih-Chiang, a passive shareholder of the Company.  At June 30, 2012 and 2011, the amount due to the passive shareholder for inventory purchases was $290,000 and $142,000, respectively.  These amounts were included in the accounts payable line on the consolidated balance sheets.  Although it is likely that we will continue our purchasing relationship with this existing shareholder, we believe there are numerous sources of products available at similar terms and conditions, and we do not believe the success of our operations is dependent on this or any one or more of our present suppliers.

Note 4 – 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.

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 net assets’ acquired value 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 5 - Credit Facility

We have a $35 million credit facility, which expires in August 2015.  This facility was amended various times in fiscal 2012 to extend the time period required to deliver certain post-close deliverables and title matters related to real property, to modify certain definitions used in the credit agreement, to adjust the capital expenditures cap for fiscal 2013, to provide consent to enter into a factoring facility with our second largest customer (LIBOR rate plus 2.10%), and to obtain a waiver from our lender for violation of the profitability covenant and fixed charge coverage covenant.  At June 30, 2012, we had $1.5 million borrowing availability based on our accounts receivable and inventory levels, outstanding letters of credit totaling $1.3 million, and $11.8 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.  The credit facility contains certain negative covenants and it requires the maintenance of a specified profitability (fiscal 2012 only), fixed charge coverage and minimum availability covenant, which, if not met, could adversely impact our liquidity.  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.  In addition, the facility contains customary representations and warranties and we have agreed to certain affirmative covenants, including reporting requirements.

 
30

 
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.

On August 29, 2012, we obtained a waiver from our lender for violation of the profitability and fixed charge coverage covenants under our credit facility.  These violations were due to changes in the timing of customer orders, which ultimately impacted our ability to meet forecasts as established under the credit facility.  Excluding these lender waived covenant violations, we were in compliance with all covenants as of June 30, 2012.

Our previous $27.5 million credit facility for borrowings and letters of credit was set to expire in October 2012 and bore interest at the daily adjusting one-month LIBOR rate plus 4.5% or, if such rate was not available under the terms of the credit facility note, the lender’s prime rate plus 2%. This facility was terminated on August 25, 2011 and all borrowings were paid and obligations were fulfilled.

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 the consummation of our current $35 million credit facility in the first quarter of fiscal 2012, our Canadian subsidiary’s facility was terminated and all borrowings were paid and obligations were fulfilled.

Interest expense includes interest incurred on our outstanding borrowings, amortization of costs incurred in connection with our credit facilities over the periods of the facilities (2012 - $196,000; 2011 - $87,000).  At June 30, 2012, the remaining debt costs to be amortized were $389,000.

Note 6 - Disclosures About Segments Of Our Business And Related Information

We are organized along product categories and have two reportable segments: (1) accessories, which include belts, small leather goods and bags, 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.  No inter-segment revenue is recorded. Assets, related depreciation and amortization, and certain SG&A expenses are not allocated to the segments.

The following table presents operating information by segment and a reconciliation of segment operating income to our consolidated operating loss (in thousands):
 
   
2012
   
2011
 
Net sales:
           
Accessories
  $ 86,188     $ 101,280  
Gifts
    31,413       22,487  
    $ 117,601     $ 123,767  
Segment operating income:
               
Accessories (1)
  $ 17,710     $ 13,247  
Gifts
    3,010       1,531  
    $ 20,720     $ 14,778  
Selling, general and administrative expenses
    (20,579 )     (23,219 )
Restructuring charges
    -       (1,109 )
Depreciation and amortization
    (2,205 )     (2,565 )
Acquisition related costs
    -       (50 )
Operating loss
  $ (2,064 )   $ (12,165 )

(1)  
Accessories’ segment income for fiscal 2011 includes inventory write-downs of $3.7 million.
 
Significant customers which accounted for 10% or more of our total net sales were Walmart (2012 - 46%; 2011 - 49%) and Kohl’s (2012 – 13%; 2011 – 11%).
 
 
31

 
Our net sales, property and equipment, and total assets by geographic location were (in thousands):
 
   
2012
   
2011
 
Net sales:
           
United States
  $ 107,108     $ 111,512  
Canada
    10,493       12,255  
    $ 117,601     $ 123,767  
Property and equipment:
               
United States
  $ 4,425     $ 5,457  
Canada
    97       119  
Mexico
    952       949  
    $ 5,474     $ 6,525  
Total assets:
               
United States
  $ 47,880     $ 55,354  
Canada
    5,157       7,116  
Mexico
    3,419       2,949  
    $ 56,456     $ 65,419  
 
Our Canadian subsidiary is part of our accessories segment.  Its sales and income are converted to U.S. dollars at monthly average exchange rates.  Property and equipment and total assets are converted at each fiscal year-end exchange rate.  Our Mexican subsidiary is part of our accessories segment.  Its functional currency is the U.S. dollar and all of the net sales are inter-company and are eliminated in consolidation.

Note 7 - Leases And Royalties

We lease office, warehouse, and manufacturing facilities under noncancellable operating leases expiring through 2020 with varying renewal and escalation clauses.  Our rental expense in fiscal 2012 and 2011 totaled $1.9 million and $2.0 million, respectively.

We have licensing agreements with third parties to use their trademarks on our products.  Royalty expense in fiscal 2012 and 2011 related to these agreements totaled $2.2 million and $2.0 million, respectively.

As of June 30, 2012, future payments under our leases, including additional rents under escalation clauses, and minimum royalty commitments were (in thousands):
 
Fiscal Year
 
Rent
   
Royalty
 
2013
  $ 1,870     $ 1,693  
2014
    1,101       1,801  
2015
    1,074       1,781  
2016
    1,035       468  
2017
    884       188  
Thereafter
    2,485       -  
    $ 8,449     $ 5,931  
 
 
32

 
Note 8 - Income Taxes

Significant components of our net deferred tax assets were (in thousands):
 
   
2012
   
2011
 
Net operating loss carryover
  $ 19,643     $ 17,161  
Inventory valuation
    1,688       3,479  
Uncertain tax positions
    1,147       1,085  
Compensation plans
    486       918  
Depreciation
    94       123  
Accounts receivable valuation
    932       534  
Other, net
    638       139  
      24,628       23,439  
Valuation allowance
    (24,486 )     (23,150 )
Net
  $ 142     $ 289  

Significant components of our income tax expense were (in thousands):
 
   
2012
   
2011
 
Current:
           
Federal
  $ -     $ -  
State
    79       63  
Foreign
    32       177  
      111       240  
Deferred:
               
Federal
    (938 )     (4,622 )
State
    (83 )     (408 )
Foreign
    (188 )     10  
Uncertain tax positions
    147       226  
Valuation allowance
    1,336       5,053  
       274        259  
    $ 385     $ 499  

The federal statutory income tax rate reconciles to our effective income tax rate as follows:
 
   
2012
   
2011
 
Statutory rate
    (34.0 )%     (34.0 )%
Deferred tax valuation allowance
    40.9       38.7  
State and foreign taxes net of federal tax benefit
    (5.1 )     (1.4 )
Uncertain tax positions
    4.5       1.7  
Repatriation of foreign earnings
    3.3       -  
Other, net
     2.2       (1.2 )
      11.8 %      3.8 %

Our $52.3 million federal income tax net operating loss carryover will expire beginning in 2029. While it is reasonably possible a current examination of state income tax returns for fiscal 1999 through fiscal 2003 involving uncertain tax positions could be resolved within the next twelve months through settlement or administrative proceedings, the potential impact cannot be estimated at this time. Otherwise, the majority of our state income tax returns are no longer subject to examination for years before 2006. U.S. federal income tax returns are no longer subject to examination for years before fiscal 2008 and Canadian income tax returns are no longer subject to examination for years before 2005.

Through June 30, 2011, we asserted that our foreign earnings were indefinitely reinvested outside the United States, and were therefore not required to provide for U.S. income taxes on those earnings. In August 2011, in connection with obtaining new financing, our Canadian subsidiary guaranteed our new credit 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 reflected in the tax rate reconciliation above.

 
33

 
The following presents information about our unrecognized tax benefits of uncertain tax positions (in thousands).
 
   
2012
   
2011
 
Unrecognized tax benefits:
           
Beginning of year
  $ 1,530     $ 1,526  
Increases (decreases) in prior years' tax positions
    (53 )     4  
End of year
    1,477       1,530  
Accrued interest and penalties
    1,819       1,619  
Uncertain tax positions liability
  $ 3,296     $ 3,149  
Unrecognized tax benefits affecting tax rate if recognized
  $ 975     $ 1,009  
Interest and penalty expense
  $ 200     $ 223  

Note 9 - Intangibles

The following tables present information about the costs we have allocated to finite and indefinite-lived intangible assets we acquired as part of business acquisitions (in thousands):
 
   
2012
   
2011
 
Gross carrying amount
  $ 10,665     $ 10,665  
Accumulated amortization
    (6,550 )     (5,729 )
    $ 4,115     $ 4,936  
 
   
2012
   
Weighted-Average Life
 
   
Net Balance
   
Expense
   
Total
   
Remaining
 
Finite
                       
Trade names
  $ 1,695     $ 298       20.0       6.0  
Chambers customer list
    1,220       487       8.0       5.0  
MCM customer list
    50       36       3.0       1.4  
    $ 2,965     $ 821       16.0       5.5  
Indefinite
                               
Chambers trade brand
    1,150       -                  
                                 
Total
  $ 4,115     $ 821                  

Amortization expense: 2012 - $821; 2011 - $887
Estimated annual amortization expense: 2013 - $716; 2014 - $614; 2015 - $560; 2016 - $524; 2017 - $286
 
Note 10 - Share-Based Compensation

Omnibus Plan
The Tandy Brands Accessories, Inc. 2002 Omnibus Plan (“Omnibus Plan”), approved by our stockholders in 2002, is designed to attract and retain the services of key management employees and members of our board of directors through the granting of incentive stock options (other than to directors), nonqualified stock options, performance units, stock appreciation rights, or restricted stock.  Restricted stock and stock option awards under the Omnibus Plan and prior stock option plans have a maximum contractual life of ten years and specific vesting terms and performance goals are addressed in each equity award grant.  All shares available for grant under our prior plans have been transferred to the Omnibus Plan and are authorized and reserved for issuance under the Omnibus Plan.  All shares of common stock presently authorized and reserved for issuance on the exercise of stock options or vesting of restricted stock will automatically be authorized and reserved for issuance under the Omnibus Plan on their cancellation, forfeiture, or expiration.  At June 30, 2012, there were 562,387 shares of common stock available for future grants.

The Omnibus Plan provides that, when a non-employee director is first elected or appointed to our board of directors, the director will be awarded 4,060 shares of restricted stock.  The Omnibus Plan also provides that on or about the beginning of each fiscal year, each continuing non-employee director will be awarded shares of restricted stock (Non-Employee Chairman of the Board - 4,200 shares; each other director - 3,000 shares).  If the board so elects, an alternative form of award with a substantially equivalent value, other than an incentive stock option, may be granted in lieu of restricted stock.  In fiscal 2012, each non-employee director was granted an additional restricted stock award to supplement the annual grant.

 
34

 
A committee of non-employee members of our board of directors may grant awards to directors and employees.  Shares issued to satisfy awards may be from authorized but unissued common stock, treasury stock, or shares purchased on the open market.  Currently, we issue new shares under the Omnibus Plan.

Awards Granted
Restricted Stock Restricted stock awards are not transferable, but bear rights of ownership including voting and dividend rights.  Awards to our non-employee directors vest annually at a rate of one-third per year, beginning one year after the grant date.  However, upon the death, disability, resignation, or termination of a non-employee director, that director’s shares generally become fully vested.  Consequently, there is no requisite service period and the fair value of the awards is expensed on the award date.  Restricted stock awarded to employees either cliff vests on the third anniversary of the award or vests at a rate of one-third per year.  The requisite service periods are either the vesting period or the total period over which multiple-tranche awards vest.  Although there are no performance requirements related to the vesting of restricted stock awarded to employees, participants must be continually employed through the vesting period.  We estimate the fair value of restricted stock awards to be the market price of our common stock on the award date.  As of June 30, 2012, no restricted stock awards granted to employees were outstanding.
 
         
Weighted-Average
 
   
Number
   
Grant-Date
 
   
Of Shares
   
Fair Value
 
Nonvested June 30, 2011
    59,892     $ 3.59  
Granted
    29,944       1.56  
Vested
    (54,618 )     3.33  
Nonvested June 30, 2012
    35,218       2.25  

Restricted stock fair values on the vesting dates in fiscal 2012 and 2011 were $78,000 and $84,000, respectively.

Stock Options Stock options granted to our non-employee directors are nonqualified and become fully vested six months after the grant date, the requisite service period.  Nonqualified options granted to employees vest annually at a rate of one-third per year, beginning one year after the grant date, and have a three-year requisite service period.

The exercise prices of our stock options are the grant-date market values of our common stock.  Their fair value is estimated using the Black-Scholes valuation model.  That model is used to estimate the fair value of traded options that have no vesting restrictions and are fully transferable.  Option valuation models require the input of highly subjective assumptions.  Because our stock options have characteristics significantly different from those of traded options, changes in the subjective input assumptions can materially affect fair value estimates.
 
         
Weighted-Average
 
Aggregate
               
Remaining
 
Intrinsic
   
Number
 
Exercise
 
Contractual
 
Value
   
Of Shares
 
Price
 
     Term
  $(000)
Outstanding June 30, 2011
    321,461     $ 10.11              
Granted
    35,000       1.85              
Forfeited and cancelled
    (87,145 )     6.43              
Outstanding June 30, 2012(1)
    269,316       10.22              
Vested and expected to vest
    269,316       10.22    
2.2 Years
  $ 2  
Exercisable
    239,316       11.27    
1.4 Years
    -  
 
(1)  As of July 1, 2012, the total outstanding stock options were 162,415 because on July 1, 2012, 141,901 stock options held by certain former executives expired and 35,000 stock options were granted.
 
35

 
Performance Units  Performance units outstanding as of June 30, 2012 were awarded to certain employees in fiscal 2011 and 2012.  For each award, the units earned during the applicable performance cycle vary from 0% to 200% of the units awarded based on our basic earnings per share for each year in the performance cycle, 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.  Performance units generally cliff vest at the end of the applicable performance cycle.  Assuming continued employment, if, at the end of the performance cycle, at least the threshold performance level has been achieved, the performance units will cliff vest.  Notwithstanding the foregoing, employees vest in a portion of units earned based on the number of fiscal years employed during the cycle upon death, disability, or normal (age 65) or early (age 55 and 15 years service) retirement and, upon a change of control, employees vest in 100% of the units awarded under the fiscal 2011 and 2012 awards.

Each performance unit has a $1.00 assigned value.  To the extent earned, performance units awarded in fiscal 2010 (all of which have vested and are no longer outstanding) will be settled 50% in cash and 50% in shares of our common stock following the end of the applicable three-year performance period.  The weighted-average fair value of the performance unit shares is based on the grant-date market price of our common stock assuming no dividend payments during the performance cycle.  Performance units awarded in fiscal 2011 and 2012 are comprised 50% of cash and 50% of phantom shares of our common stock and, to the extent earned following the end of the two or three-year performance period, 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).

The following table summarizes the status of performance units that will be settled 50% in cash and 50% in shares of our common stock as of June 30, 2012, and changes during the year then ended:
 
         
Shares
 
               
Weighted-Average
 
   
Performance
         
Grant-Date
 
   
Units
   
Number
   
Fair Value
 
Outstanding June 30, 2011
    940,000       194,416     $ 2.42  
Granted
    -       -       -  
Vested
    (111,383 )     (23,039 )     2.42  
Forfeited and Cancelled(1)
    (828,617 )     (171,377 )     2.42  
Outstanding June 30, 2012
    -       -       -  
Vested and expected to vest
    111,383       23,039     $ 2.42  
 
(1)  
Includes actual units forfeited and the difference between the estimated maximum payout included in the outstanding balance at June 30, 2011 and the actual units vested.

As of June 30, 2012, we expect none of the 770,000 units granted in fiscal 2011 to vest and be paid because performance measures for the three year period were either not met or are not expected to be met.

As of June 30, 2012, we expect 291,000 of the 1.0 million units granted in fiscal 2012 to vest (160,000 units were forfeited), which, based on a combination of (A) $1.00 value per performance unit (for the portion comprised in cash) and (B) the market price of our common stock on June 30, 2012 (for the portion comprised in phantom shares of our common stock), would be payable in cash equal to $249,000.

Expense  Share-based compensation expense of $169,000 and $61,000 was recognized in fiscal 2012 and 2011, respectively, together with income tax benefits of $62,000 and $22,000, respectively.  Estimated unrecognized expense of $153,000 remained at June 30, 2012 to be recognized over a weighted-average period of 1.2 years.  The number of stock options and performance units expected to vest in determining compensation expense to be recognized were estimated based on employment termination, forfeiture patterns, and actual and estimated earnings per share.
 
Note 11 - Employee Benefit Plans

401(k) Plan Our 401(k) Plan, also known as the Employees Investment Plan, is open to substantially all of our full-time employees.  Participants may contribute up to 35% of their eligible annual compensation as elective pretax and Roth contributions to the 401(k) Plan, subject to IRS limits.  For each participant who elects to make elective deferrals under the 401(k) Plan during the plan year, we make safe-harbor contributions to the plan equal to 100% of the first 3% of the participant’s eligible annual compensation contributed for the plan year plus 50% of the next 2% of the participant’s eligible annual compensation contributed for the plan year, for a maximum safe harbor matching contribution equal to 4% of the participant’s eligible annual compensation.  The 401(k) Plan allows participants to direct the investment of both employee and matching employer contributions from a variety of investment alternatives, one of which is our common stock.  Our total contributions to our 401(k) Plan were $347,000 and $359,000 in fiscal 2012 and 2011, respectively.

 
36

 
Note 12 - Director Stock Deferral Plan

The 1995 Stock Deferral Plan for Non-Employee Directors (“Deferral Plan”) provides non-employee directors with an opportunity to defer receipt of their fees until a future date determined by each director.  We record compensation expense for the amount of the deferred fees which are credited, together with dividend equivalents, to an account we maintain in phantom stock units equivalent in value to our common stock.  The payment of deferred fees will be settled in shares of our common stock or, at our option, in cash based on the then current market price of our stock.  No director is currently deferring fees and changes in the market value of our common stock affected the value of previously deferred amounts by ($15,000) and ($43,000) in fiscal 2012 and 2011, respectively.  At June 30, 2012, there were 28,375 shares of common stock available for settlement of future deferrals.

Note 13 - Preferred Stock

Without any further action by the holders of our common stock, our board of directors is authorized to approve and determine the issuance of preferred stock, as well as the dividend rights, dividend rate, conversion or exchange rights, voting rights, rights and terms of redemption, liquidation preferences and sinking fund terms of any series of preferred stock, the number of shares constituting any series of preferred stock and the designation thereof.  No shares of preferred stock have been issued.  Should preferred stock be issued, the rights, preferences, and privileges of holders of our common stock would be made subject to the rights, preferences, and privileges of the preferred stock.

Note 14 – Loss Per Share

Our basic and diluted losses per common share are computed as follows (in thousands except per share amounts):
 
   
2012
   
2011
 
Numerator for basic and diluted earnings per share:
           
Net loss
  $ (3,652 )   $ (13,476 )
Denominator for basic and diluted earnings per share
    7,075       6,971  
Loss per common share
  $ (0.52 )   $ (1.93 )
Loss per common share assuming dilution
  $ (0.52 )   $ (1.93 )
 
Potentially dilutive securities which could have had an antidilutive effect on our losses per share were (in thousands except per share amounts):
 
   
2012
   
2011
 
Stock options (exercise prices per share: 2012 - $1.98 to $15.60; 2011 - $5.31 to $15.60)
    277       326  
 
Note 15 – Subsequent Events

On August 29, 2012, we obtained a waiver from our lender for violation of the profitability and fixed charge coverage covenants under our credit facility.  These violations were due to changes in the timing of customer orders, which ultimately impacted our ability to meet forecasts as established under the credit facility.  Excluding these lender waived covenant violations, we were in compliance with all covenants as of June 30, 2012.

ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.
 
 
37

 
ITEM 9A - 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 June 30, 2012.

Management’s Report On Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting for our Company.  Our internal control over financial reporting is a process designed to provide reasonable assurance as to the reliability of our financial reporting and the preparation of our financial statements for external purposes in accordance with U.S. generally accepted accounting principles.  Our control environment is the foundation for our system of internal control over financial reporting and is an integral part of our Code of Business Conduct and Ethics which sets the tone for our directors, officers, and employees.  Our internal control over financial reporting includes policies and procedures: (1) pertaining to the maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions and dispositions of our assets; (2) providing reasonable assurance that transactions are recorded as necessary to permit preparation of our financial statements in accordance with U.S. generally accepted accounting principles and that our receipts and expenditures are being made only in accordance with authorizations of our directors and management; and (3) providing reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on our financial statements.

In order to assess the effectiveness of our internal control over financial reporting as of June 30, 2012 as required by Section 404 of the Sarbanes-Oxley Act of 2002, we conducted an evaluation of the effectiveness of our internal control over financial reporting under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, which included testing based on the criteria set forth in “Internal Control - Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO Framework”).  Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or the degree of compliance with the policies or procedures may deteriorate.  Based on that assessment, we determined that our internal control over financial reporting was effective as of June 30, 2012.

This Annual Report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting.  Management’s report was not subject to attestation by our independent registered public accounting firm in accordance with Section 404 of the Sarbanes-Oxley Act of 2002, as amended by Section 989G of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which permits us to provide only management’s report in this Annual Report.

Changes In Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting during the fourth quarter of fiscal 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B - OTHER INFORMATION

None.
 
 
38

 
PART III

The information required by Items 10 through 14 of this Annual Report on Form 10-K, and not otherwise disclosed in this Annual Report, is included in our definitive Proxy Statement relating to our 2012 Annual Meeting of Stockholders and is incorporated herein by reference.  Such information and its location in the Proxy Statement are as follows:
 
Item
 
Caption In The
Tandy Brands Accessories, Inc.
2012 Proxy Statement
     
ITEM 10 - DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
 
“Items of Business to be Acted on at the Meeting - Proposal One: Election of Directors
– Biographical and Other Information Regarding Our
Nominees for Re-Election to Our Board of Directors”
“Executive Officers”
“Items of Business to be Acted on at the Meeting - Proposal One: Election of Directors - Corporate Governance Information”
“Section 16(a) Beneficial Ownership Reporting Compliance”
     
ITEM 11 - EXECUTIVE COMPENSATION
 
“Executive Compensation”
“Items of Business to be Acted on at the Meeting - Proposal One: Election of Directors - Director Compensation”
“Items of Business to be Acted on at the Meeting – Proposal One: Election of Directors – Corporate Governance Information – Compensation Committee”
   
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
 
“Security Ownership of Certain Beneficial Owners”
 
     
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
 
“Items of Business to be Acted on at the Meeting - Proposal One: Election of Directors - Corporate Governance Information”
     
ITEM 14 - PRINCIPAL ACCOUNTING FEES AND SERVICES
 
“Items of Business to be Acted on at the Meeting - Proposal Two: Ratification of Independent Auditor – Background”
 
 
39

 
PART IV

ITEM 15 - EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

Financial Statements
The following financial statements are included in Item 8 of this Annual Report:
 
·  
Consolidated Balance Sheets as of June 30, 2012 and 2011
 
·  
Consolidated Statements of Operations for the years ended June 30, 2012 and 2011
 
·  
Consolidated Statements of Cash Flows for the years ended June 30, 2012 and 2011
 
·  
Consolidated Statements of Stockholders' Equity for the years ended June 30, 2012 and 2011

Financial Statement Schedules
Financial statement schedules have been omitted because they either are not applicable or the required information is included in the consolidated financial statements or notes thereto.

Exhibits
The Exhibit Index immediately preceding the exhibits required to be filed with this report is incorporated herein by reference.
 
 
40

 

Pursuant to the requirements of Section 13 or 15(d) 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)

/s/ N. Roderick McGeachy, III  
N. Roderick McGeachy, III
President and Chief Executive Officer
Date: September 4, 2012

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Name
 
Position
 
Date
 
/s/N. Roderick McGeachy, III
 
 
Director, Chairman of the Board,
 
 
September 4, 2012
N. Roderick McGeachy, III
 
President and
Chief Executive Officer (principal executive officer)
   
 
/s/Roger R. Hemminghaus
 
 
Lead Independent Director
 
 
September 4, 2012
Roger R. Hemminghaus
       
 
/s/Lisbeth R. McNabb
 
 
Director
 
 
September 4, 2012
Lisbeth R. McNabb
       
 
/s/Colombe M. Nicholas
 
 
Director
 
 
September 4, 2012
Colombe M. Nicholas
       
 
/s/William D. Summitt
 
 
Director
 
 
September 4, 2012
William D. Summitt
       
 
/s/Joseph C. Talley
 
 
Chief Financial Officer
 
 
September 4, 2012
Joseph C. Talley
 
(principal financial and accounting officer )
   
 
 
41

 
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