Tandy Brands Accessories (TBACQ) 10-Q 2007 Q2 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

Quarterly Report Pursuant To Section 13 or 15(d)
of the Securities Exchange Act of 1934

For the Quarterly Period Ended December 31, 2006

Commission File Number 0-18927

TANDY BRANDS ACCESSORIES, INC.

(Exact name of registrant as specified in its charter)

Delaware	75-2349915
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

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

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

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

Not Applicable

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

þ Yes               o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filero     Accelerated filero     Non-accelerated filerþ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o Yes               þ No

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

Class

Common stock, $1.00 par value Number of shares outstanding
at February 14, 2007
6,862,518

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION
Item 1 Financial Statements	4 - 10
Item 2 Management’s Discussion And Analysis Of Financial Condition And Results Of Operations	11 - 13
Item 3 Quantitative And Qualitative Disclosures About Market Risk	13
Item 4 Controls And Procedures	14
PART II — OTHER INFORMATION
Item 1A Risk Factors	14
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds	14
Item 4 Submission Of Matters To A Vote Of Security Holders	14 - 15
Item 6 Exhibits	15
SIGNATURES	15
EXHIBIT INDEX
Form of 2006 Performance Unit Award Agreement
Employees Investment Plan Amendment
Certification Pursuant to Rule 13a-14(a)/15d-14(a) (Chief Executive Officer)
Certification Pursuant to Rule 13a-14(a)/15d-14(a) (Chief Financial Officer)
Section 1350 Certifications — CEO & CFO
Form of 2006 Performance Unit Award Agreement
Amendment to Employees Investment Plan
Certification of CEO Pursuant to Rule 13a-14(a)/15d-14(a)
Certification of CFO Pursuant to Rule 13a-14(a)/15d-14(a)
Certification of CEO and CFO Pursuant to Section 1350

2

This Form 10-Q contains forward-looking statements regarding future events and our future results that are subject to the safe harbors created under the Securities Act of 1933 and the Securities Exchange Act of 1934. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “continue,” “may,” variations of such words, and similar expressions are intended to identify forward-looking statements. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our business, and other characterizations of future events or circumstances are forward-looking statements. We have based these forward-looking statements on our current expectations about future events and estimates and projections about the industry in which we operate. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Our actual results may differ materially from those suggested by these forward-looking statements for various reasons, including those identified under “Risk Factors” included in our 2006 Annual Report on Form 10-K. Given these risks and uncertainties, you are cautioned not to place undue reliance on forward-looking statements. The forward-looking statements included in this report are made only as of the date hereof. Except as required under federal securities laws and the rules and regulations of the United States Securities and Exchange Commission, we do not undertake, and specifically decline, any obligation to update any of these statements or to publicly announce the results of any revisions to any forward-looking statements after the distribution of this report, whether as a result of new information, future events, changes in assumptions, or otherwise.

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PART I — FINANCIAL INFORMATION

ITEM 1 — FINANCIAL STATEMENTS

Tandy Brands Accessories, Inc. And Subsidiaries
Condensed Consolidated Statements Of Operations
(in thousands except per share amounts)
(unaudited)

	Three Months Ended						Six Months Ended
	December 31						December 31
	2006			2005			2006			2005
Net sales	$	64,340		$	73,866		$	121,539		$	134,814
Cost of goods sold		40,150			48,911			76,322			89,579
Gross margin		24,190			24,955			45,217			45,235
Selling, general and administrative expenses		16,975			18,223			31,770			34,374
Depreciation and amortization		1,210			1,237			2,431			2,529
Goodwill impairment		—			938			—			938
Total operating expenses		18,185			20,398			34,201			37,841
Operating income		6,005			4,557			11,016			7,394
Interest expense		(456	)		(706	)		(892	)		(1,114	)
Royalty and other income		26			87			81			97
Income before income taxes		5,575			3,938			10,205			6,377
Income taxes		2,169			1,902			3,970			2,874
Net income	$	3,406		$	2,036		$	6,235		$	3,503
Earnings per common share	$	0.51		$	0.31		$	0.93		$	0.53
Earnings per common share assuming dilution	$	0.50		$	0.30		$	0.91		$	0.52
Cash dividends declared per common share	$	0.0275		$	0.0275		$	0.055		$	0.055
Common shares outstanding		6,709			6,593			6,692			6,570
Common shares outstanding assuming dilution		6,882			6,743			6,860			6,713

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

4

Tandy Brands Accessories, Inc. And Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands of dollars)
(unaudited)

	December 31			June 30
	2006			2006
Assets
Current assets:
Cash and cash equivalents	$	7,068		$	4,182
Accounts receivable		34,565			27,322
Inventories:
Raw materials and work in process		4,353			5,320
Finished goods		54,667			56,450
Deferred income taxes		4,032			3,792
Other current assets		2,781			5,784
Total current assets		107,466			102,850
Property and equipment		38,645			37,119
Accumulated depreciation		(26,590	)		(24,689	)
Net property and equipment		12,055			12,430
Other assets:
Goodwill		16,230			16,292
Other intangibles		5,296			5,653
Other assets		1,800			1,719
Total other assets		23,326			23,664
	$	142,847		$	138,944
Liabilities And Stockholders’ Equity
Current liabilities:
Accounts payable	$	12,608		$	10,106
Accrued expenses		8,517			6,214
Notes payable		7,000			—
Total current liabilities		28,125			16,320
Other liabilities:
Notes payable		—			14,000
Supplemental executive retirement obligation		1,369			1,133
Deferred income taxes		960			1,640
Other liabilities		1,251			1,012
Total other liabilities		3,580			17,785
Stockholders’ equity:
Preferred stock, $1 par value, 1,000,000 shares authorized, none issued		—			—
Common stock, $1 par value, 10,000,000 shares authorized, 6,848,892 shares and 6,795,183 shares issued and outstanding		6,849			6,795
Additional paid-in capital		32,691			31,911
Retained earnings		71,819			65,960
Other comprehensive income		664			988
Shares held by Benefit Restoration Plan Trust		(881	)		(815	)
Total stockholders’ equity		111,142			104,839
	$	142,847		$	138,944

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

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Tandy Brands Accessories, Inc. And Subsidiaries
Condensed Consolidated Statements Of Cash Flows
(in thousands)
(unaudited)

	Six Months Ended
	December 31
	2006			2005
Cash flows provided (used) by operating activities:
Net income	$	6,235		$	3,503
Adjustments to reconcile net income to net cash provided (used) by operating activities:
Depreciation and amortization		2,508			2,619
Goodwill impairment		—			938
Share-based compensation expense		252			505
Amortization of debt origination costs		99			70
Excess income tax benefit from stock option exercises		(18	)		(67	)
Deferred income taxes		(920	)		(1,577	)
Other		(52	)		(295	)
Changes in assets and liabilities:
Accounts receivable		(7,243	)		(15,093	)
Inventories		2,750			(3,942	)
Other assets		2,754			1,746
Accounts payable		2,567			1,063
Accrued expenses		2,521			1,491
Net cash provided (used) by operating activities		11,453			(9,039	)
Cash flows used for investing activities:
Purchases of property and equipment		(1,748	)		(1,910	)
Cash flows (used) provided by financing activities:
Stock sold to stock purchase program		533			668
Stock options exercised		88			424
Dividends paid		(375	)		(366	)
Change in cash overdrafts		(65	)		(1,045	)
Note net (repayments) borrowings		(7,000	)		12,445
Net cash (used) provided by financing activities		(6,819	)		12,126
Net increase in cash and cash equivalents		2,886			1,177
Cash and cash equivalents beginning of year		4,182			3,429
Cash and cash equivalents end of period	$	7,068		$	4,606
Supplemental cash flow information:
Interest paid	$	815		$	902
Income taxes paid	$	47		$	1,539

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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 — Accounting Principles

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In our opinion, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Certain fiscal 2006 amounts have been reclassified to conform to the fiscal 2007 presentation.

The preparation of our financial statements requires the use of estimates that affect the reported value of assets, liabilities, revenues, and expenses. These estimates are based on historical experience and various other factors that are believed 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. 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 condensed consolidated balance sheet at June 30, 2006 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. These interim unaudited condensed consolidated financial statements should be read in conjunction with the financial statements and the notes thereto included in our 2006 Annual Report on Form 10-K filed with the Securities and Exchange Commission.

Our first and second quarter sales and net income normally reflect a seasonal increase compared to the third and fourth quarters of our fiscal year. Consequently, operating results for the three- and six-month periods ended December 31, 2006 are not necessarily indicative of the results that may be expected for the year ended June 30, 2007.

Note 2 — Impact Of Recently Issued Accounting Standards

In May 2005 the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 154, “Accounting Changes and Error Corrections,” which becomes effective for annual periods beginning after December 15, 2005, our fiscal 2007. This Statement requires that a voluntary change in accounting principle be retrospectively applied to prior period’s financial statements unless it is impractible to do so. Our financial statements will be affected by SFAS No. 154 only if we voluntarily change an accounting principle or correct an error in previously issued statements.

In June 2006 the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” (“FIN No. 48”) which becomes effective for fiscal years beginning after December 15, 2006. While we have not fully assessed the potential impact on our financial statements of adopting the interpretation in fiscal 2008, we do not believe the impact will be material. FIN No. 48 clarifies the accounting in accordance with SFAS No. 109, “Accounting for Income Taxes,” by prescribing a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or to be taken in a tax return. It also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.

In September 2006 the FASB issued SFAS No. 157, “Fair Value Measurements,” which becomes effective for fiscal years beginning after November 15, 2007, our fiscal 2009. This Statement defines fair value, establishes a measuring framework, and expands disclosures about fair value measurements. It does not require any new fair value measurements, but may change current practice for some entities. We do not anticipate our adoption of the Statement will have a material impact on our financial statements.

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Note 3 — Credit Arrangements

Our $75 million unsecured revolving credit facility with certain financial institutions entered into on September 7, 2006 expires June 30, 2009. A $10 million sub-limit of the facility (“swing line”) may be used for same day advances provided by the facility’s administrative agent, a financial institution of the credit facility. The facility bears interest at LIBOR plus 0.75% to 1.75% based on various debt to equity ratios. It also requires us to pay commitment fees based on certain financial performance objectives ranging from 20 to 37.5 basis points on the unused balance. The facility contains an accordion feature allowing us to increase it by up to an additional $25 million including, if necessary, by adding an additional financial institution in the future.

At December 31, 2006 we had outstanding borrowings under the credit facility of $7 million bearing interest at 7.1% and outstanding letters of credit used in conjunction with merchandise procurement totaling $2.1 million. Principal payments are due on the facility’s expiration date; however, the outstanding borrowings were repaid in January 2007 and, therefore, have been classified as a current liability.

The credit facility is guaranteed by all of our subsidiaries, except our Canadian subsidiary, and requires the maintenance of certain financial covenants, which, if not met, could adversely impact our liquidity. It permits the payment of dividends and does not require us to enter into an interest rate swap agreement against our borrowings under the credit facility.

We also have a Canadian line of credit for $858,000 secured by a letter of credit from a U.S. bank. At June 30 and December 31, 2006 there were no borrowings under this line of credit. At December 31, 2006 we had credit availability under our credit facility and our Canadian line of credit as follows (in thousands):

Total credit facilities	$	75,858
Less:
Debt outstanding		7,000
Letters of credit outstanding		2,104
Canadian standby letter of credit		858
Credit available	$	65,896

Note 4 — Comprehensive Income

The following table presents the components of comprehensive income, net of related tax, for the three- and six-month periods ended December 31, 2006 and 2005 (in thousands).

	Three Months Ended					Six Months Ended
	December 31					December 31
	2006			2005		2006			2005
Net income	$	3,406		$	2,036	$	6,235		$	3,503
Currency translation adjustments		(301	)		9		(324	)		334
SERP minimum liability decrease		—			—		—			269
Comprehensive income	$	3,105		$	2,045	$	5,911		$	4,106

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Note 5 — Share-Based Compensation Award

Performance units payable in shares of our common stock following the end of the performance cycle were awarded to employees during the quarter ended December 31, 2006. The units earned during the July 1, 2006 to June 30, 2009 performance cycle based on the Company’s return on noncash assets may vary from 0% to 150% of the target payout. Employees vest in the portion of units earned equal to the months employed during the cycle upon death, disability, or normal (age 65) or early retirement (age 55 and 15 years service); otherwise, units cliff vest at the end of the cycle.

Unit fair values are based on the market price of the Company’s stock on the grant date reduced by the present value of estimated future dividends. Compensation expense initially recognized (December 2006 quarter — $38,000) assumes achievement of the target payout level and is subsequently adjusted for changes in the number of units expected to vest. The estimated future expense ($563,000 at December 31, 2006 for awards granted) is amortized using the straight-line method to the end of the performance cycle. The $10.99 estimated fair value per unit granted assumes quarterly dividends of $0.0275 per share discounted at a risk-free interest rate of 4.62%.

The following table presents units awarded and granted during the quarter and outstanding at December 31, 2006 based on 150% of target payout.

Total awarded	140,634
To be granted	58,560
Granted	82,074
Granted units expected to vest at December 31, 2006	54,716

Note 6 — Earnings Per Share

The following table presents the computation of basic and diluted earnings per share for the three- and six-month periods ended December 31, 2006 and 2005 (in thousands except per share amounts).

	Three Months Ended				Six Months Ended
	December 31				December 31
	2006		2005		2006		2005
Numerator for basic and diluted earnings per share:
Net income	$	3,406	$	2,036	$	6,235	$	3,503
Denominator:
Weighted-average shares outstanding		6,705		6,570		6,688		6,548
Contingently issuable shares		4		23		4		22
Denominator for basic earnings per share		6,709		6,593		6,692		6,570
Effect of dilutive share-based compensation		173		150		168		143
Denominator for diluted earnings per share		6,882		6,743		6,860		6,713
Earnings per common share	$	0.51	$	0.31	$	0.93	$	0.53
Earnings per common share assuming dilution	$	0.50	$	0.30	$	0.91	$	0.52

Note 7 — Disclosures About Segments Of Our Business And Related Information

We sell our products through all major retail distribution channels throughout the United States and Canada, including mass merchants, national chain stores, department stores, men’s and women’s specialty stores, catalog retailers, grocery stores, drug stores, golf pro shops, sporting goods stores, and the retail exchange operations of the United States military. We and our corresponding customer relationships are organized along men’s and women’s product lines. As a result we have two reportable segments: (1) men’s accessories, consisting of belts, wallets and other small leather goods, neckwear, gifts, and sporting goods; and (2) women’s accessories, consisting of belts, small leather goods, handbags, and gift accessories. General corporate expenses and depreciation are allocated to each segment based on the respective segment’s asset base. Management measures each segment based upon income before income taxes utilizing accounting policies consistent in all material respects with those described in Note 2 of our 2006 Annual Report on Form 10-K. No inter-segment revenue is recorded.

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Note 7 — Disclosures About Segments Of Our Business And Related Information(continued)

The following table presents operating and asset information by reportable segment for the three- and six-month periods ended December 31, 2006 and 2005 (in thousands).

	Three Months Ended						Six Months Ended
	December 31						December 31
	2006			2005			2006			2005
Net sales to external customers:
Men’s accessories	$	47,050		$	46,358		$	84,411		$	80,996
Women’s accessories		17,290			27,508			37,128			53,818
	$	64,340		$	73,866		$	121,539		$	134,814
Operating income (loss):(1)
Men’s accessories	$	5,094		$	5,796		$	8,405		$	8,209
Women’s accessories(2)		911			(1,239	)		2,611			(815	)
		6,005			4,557			11,016			7,394
Interest expense		(456	)		(706	)		(892	)		(1,114	)
Other income(3)		26			87			81			97
Income before income taxes	$	5,575		$	3,938		$	10,205		$	6,377
Depreciation and amortization:
Men’s accessories	$	835		$	786		$	1,676		$	1,604
Women’s accessories		375			451			755			925
	$	1,210		$	1,237		$	2,431		$	2,529
Capital expenditures:
Men’s accessories	$	365		$	101		$	639		$	249
Women’s accessories		43			59			67			184
Corporate		376			906			1,042			1,477
	$	784		$	1,066		$	1,748		$	1,910

(1)	Operating income (loss) consists of net sales less cost of goods sold and specifically identifiable and allocated selling, general and administrative expenses.
(2)	Women’s accessories 2005 operating loss includes a $938,000 charge for goodwill impairment.
(3)	Other income includes royalty income from corporate trade names and other income not specifically identifiable with a segment.

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ITEM 2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

This Item 2 should be read in the context of the information included in our 2006 Annual Report on Form 10-K filed with the Securities and Exchange Commission and elsewhere in this Quarterly Report including our condensed consolidated financial statements and accompanying notes in Item 1 of this Quarterly Report.

OVERVIEW

We are a leading designer, manufacturer and marketer of branded men’s, women’s and children’s accessories, including belts and small leather goods, such as wallets. Our product line also includes handbags, sporting goods, neckwear, and gift accessories. Our merchandise is marketed under a broad portfolio of nationally recognized licensed and proprietary brand names including DOCKERS^®, LEVI’S^®, LEVI STRAUSS SIGNATURE™, JONES NEW YORK^®, TOTES^®, ROLFS^®, HAGGAR^®, WOOLRICH^®, JORDACHE^®, CANTERBURY^®, PRINCE GARDNER^®, PRINCESS GARDNER^®, AMITY^®, COLETTA^®, STAGG^®, ACCESSORY DESIGN GROUP^®, TIGER^®, ETON^®, SURPLUS^® and EILEEN WEST™ as well as private brands for major retail customers. We sell our products through all major retail distribution channels throughout the United States and Canada, including mass merchants, national chain stores, department stores, men’s and women’s specialty stores, catalog retailers, grocery stores, drug stores, golf pro shops, sporting goods stores and the retail exchange operations of the United States military.

Net income for the fiscal 2007 second quarter of $3.4 million and first half of $6.2 million was 67.3% and 78.0%, respectively, ahead of last year. Total sales were less as the quarter and first half of fiscal 2006 included $9.6 and $19.7 million, respectively, in sales of products by our women’s accessories segment which have been discontinued. Gross margins improved without the negative effect of sales of lower margin discontinued products and selling, general and administrative expenses were less from consolidating our women’s accessories segment operations.

2006 COMPARED TO 2005

Net Sales And Gross Margins

The following table presents sales and gross margin data for our reportable segments for the three- and six-month periods ended December 31, 2006 and 2005 (in thousands of dollars).

	Three Months Ended						Six Months Ended
	December 31						December 31
	2006			2005			2006			2005
Net sales:
Men’s accessories	$	47,050		$	46,358		$	84,411		$	80,996
Women’s accessories		17,290			27,508			37,128			53,818
	$	64,340		$	73,866		$	121,539		$	134,814
Gross margin:
Men’s accessories	$	17,744		$	17,927		$	32,025		$	31,036
Women’s accessories		6,446			7,028			13,192			14,199
	$	24,190		$	24,955		$	45,217		$	45,235
Gross margin percent of sales:
Men’s accessories		37.7	%		38.7	%		37.9	%		38.3	%
Women’s accessories		37.3			25.5			35.5			26.4
Total		37.6			33.8			37.2			33.6

Overall net sales for the three- and six-month periods ended December 31, 2006 were $9.5 and $13.3 million, respectively, less than the same periods in the prior year as the result of the decision last year to exit several of the women’s accessories segment product lines. Increased second quarter sales of ETON gift accessories by our men’s ($1.8 million) and women’s ($0.7 million) accessories segments were all but offset by lower sales of other products in both segments, excluding those which have been discontinued, as a greater share of their sales for the six months were shipped in the first quarter. As expected the men’s accessories segment also experienced softer holiday season sales of belts and small leather goods. For the fiscal 2007 six-month period compared to fiscal 2006, sales of ETON gift accessories increased $4.2 million (men’s — $3.4 million; women’s — $0.8 million) and sales of belts increased $4.7 million (men’s — $1.0 million; women’s — $3.7 million).

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2006 COMPARED TO 2005(continued)

Gross margins of 37.6% and 37.2% for the three- and six-month periods ended December 31, 2006 were almost four percentage points greater than the same periods last year primarily due to the women’s accessories segment margins increasing from 25.5% to 37.3% for the quarter and from 26.4% to 35.5% for the six months. The increases for the women’s accessories segment were primarily a result of discontinuing low margin product lines. The men’s accessories segment gross margins were slightly lower as belt sales to mass merchants experienced price pressure even though direct shipment sales and margins increased. In the fiscal 2006 second quarter the men’s accessories segment gift business incurred approximately $900,000 in air freight due to manufacturing and weather-related delays and longer factory inspection times.

Direct shipments have lower gross margins because these goods are shipped from our suppliers to our customers and are not handled in our distribution centers, thereby reducing the general and administrative costs related to the sales. Any material changes in sales mix, such as higher mass merchant accessory sales or direct shipments, could lower our gross margin percentages during a particular season.

Operating Expenses

The following table presents expense data for our reportable segments for the three- and six-month periods ended December 31, 2006 and 2005 (in thousands).

	Three Months Ended				Six Months Ended
	December 31				December 31
	2006		2005		2006		2005
Selling, general and administrative expense:
Men’s accessories	$	11,815	$	11,347	$	21,944	$	21,195
Women’s accessories		5,160		6,876		9,826		13,179
	$	16,975	$	18,223	$	31,770	$	34,374
Depreciation and amortization:
Men’s accessories	$	835	$	786	$	1,676	$	1,604
Women’s accessories		375		451		755		925
	$	1,210	$	1,237	$	2,431	$	2,529
Interest expense	$	456	$	706	$	892	$	1,114

Selling, general and administrative expenses (“SG&A”) for the second quarter and first half of fiscal 2007 were $1.2 and $2.6 million, respectively, less than the prior year primarily due to consolidation of the women’s segment mass merchant and department store businesses and discontinuing product lines. Reduced payroll costs (quarter — $902,000; year — $1,825,000) were partly offset by contract labor increases (quarter — $639,000; year — $1,120,000). Other expense reductions, including $85,000 for director share-based compensation as a result of awards not being granted this year, were:

	Quarter		First Half
Distribution center costs	$	561,000	$	864,000
Legal and professional		217,000		240,000
Travel		179,000		287,000

Interest expense for this year’s second quarter and first half was less than the same periods last year primarily due to lower average amounts borrowed over the six-month period ($16.2 million in fiscal 2007 vs. $29.9 million in fiscal 2006) even though average interest rates for the six months were higher (7.02% in fiscal 2007 vs. 5.30% in fiscal 2006). The higher debt level at June 30 compared to December 31, 2006 related to inventory purchased for the holiday season which has been sold.

The effective income tax rate this year is 38.9% while last year it was 48.3% and 45.1% for the quarter and six months, respectively. The fiscal 2006 rates were affected by a non-deductible goodwill impairment charge in the second quarter. More income being derived this year from sales in states with lower tax rates also reduced the effective rate which is more in line with our historical rates.

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SEASONALITY

Historically our quarterly sales and operating results reflect a seasonal increase during the first and second quarters of our fiscal year.

LIQUIDITY AND CAPITAL RESOURCES

The $20.5 million operating cash flow increase for the six months ended December 31, 2006 compared to last year resulted primarily from accelerated collection of accounts receivable ($7.9 million), lower inventory levels ($6.7 million) resulting from discontinuing certain women’s accessories segment product lines and the increase in sales of ETON gift accessories and belts, reductions in other assets from refundable income taxes ($2.4 million) and maturity of a short-term cash investment ($1.1 million), increased accounts payable ($1.5 million) related to the timing of payments to vendors, and the increase in net income ($2.7 million).

Capital expenditures totaled $1.7 million during the six months ended December 31, 2006 primarily in support of inventory management, other computer related functions, and sales office remodeling. Borrowings under our credit facility were substantially less at December 31, 2006 due to improved operating cash flows. The $7 million balance was repaid in January 2007.

Our primary sources of liquidity are cash flows from operating activities and our credit facility. Information about our credit facility is incorporated herein by reference to Note 3 of the notes to condensed consolidated financial statements included in Item 1 of this Quarterly Report.

During fiscal 2007 we declared the following cash dividends, including a 45% increase in the April 2007 payment:

			Dividend
Declaration Date	Record Date	Payable Date	Per Share
August 16, 2006	September 30, 2006	October 20, 2006	$	0.0275
October 16, 2006	December 29, 2006	January 19, 2007	$	0.0275
January 31, 2007	March 30, 2007	April 20, 2007	$	0.04

We believe we have adequate financial resources and access to sufficient credit lines to satisfy our future working capital needs.

CONTRACTUAL OBLIGATIONS AND CONTINGENT LIABILITIES AND COMMITMENTS

There have been no material changes outside the ordinary course of our business in any of our contractual obligations, contingent liabilities, or commitments since June 30, 2006.

ITEM 3 — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

At December 31, 2006 our borrowings under our credit facility, which were repaid in January 2007, totaled $7 million bearing interest at 7.1%. We are subject to interest rate risk on our long-term debt.

In addition to interest rate risk on our long-term debt, we are also exposed to market risk with respect to changes in the global price level of certain commodities used in the production of our products. We routinely purchase leather hides during the year for use in the manufacture of belts. We also purchase a substantial amount of leather items from third-party suppliers. An unanticipated material increase in the market price of leather could increase the cost of these products to us and, therefore, have a negative effect on our operating results.

Market risk related to foreign currency historically has not been material since we generally have negotiated and settled agreements for the materials we purchase for the production of our products in U.S. dollars.

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ITEM 4 — CONTROLS AND PROCEDURES

We have evaluated, under the supervision and with the participation of management, including our Chief Executive Officer and our Chief Financial Officer, the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this quarterly report. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that, as of the end of the period covered by this quarterly report, our disclosure controls and procedures were effective in timely alerting them to material information (including information relating to our consolidated subsidiaries) required to be included in our Securities Exchange Act of 1934 filings. There has been no change in our internal control over financial reporting during the second quarter of fiscal 2007 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

ITEM 1A — RISK FACTORS

No material changes have occurred to our risk factors as disclosed in our Annual Report on Form 10-K for the year ended June 30, 2006.

ITEM 2 — UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table provides information regarding repurchases of shares of common stock made by us during the quarter ended December 31, 2006. All such shares were purchased in the open market and are held in a rabbi trust established under our Benefit Restoration Plan.

					Total Number Of		Maximum Number
	Total				Shares Purchased		Of Shares That May
	Number		Average		As Part Of Publicly		Yet Be Purchased As
	Of Shares		Price Paid		Announced Plans		Part Of The Plans
Period	Purchased		Per Share		Or Programs		Or Programs
October 1, 2006 to October 31, 2006		2,129	$	11.34		N/A		N/A
November 1, 2006 to November 30, 2006		318		11.97		N/A		N/A
December 1, 2006 to December 31, 2006		352		12.07		N/A		N/A
Total		2,799		11.50		N/A		N/A

ITEM 4 — SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

At our 2006 Annual Meeting of Stockholders on October 31, 2006, the stockholders voted on a proposal to re-elect three directors to our board of directors and a nonbinding stockholder proposal urging the board of directors to rescind the Company’s Preferred Share Purchase Rights Plan and establish a policy for future rights plans.

Dr. James F. Gaertner, Roger R. Hemminghaus, and Gene Stallings were re-elected to our board of directors to serve as Class I directors for a three year term expiring at the 2009 annual meeting of stockholders, or until their successors are elected and qualified. The number of votes cast and withheld and the number of broker non-votes were as follows:

Nominee	For		Withheld		Broker Non-Votes
Dr. James F. Gaertner		5,764,752		654,237	None
Roger R. Hemminghaus		5,211,065		1,207,924	None
Gene Stallings		5,764,911		654,078	None

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ITEM 4 — SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS(continued)

Votes on the nonbinding stockholder proposal urging the board of directors to rescind the Company’s Preferred Share Purchase Rights Plan and establish a policy for future rights plans, which was approved, were as follows:

For	3,806,582
Against	1,396,759
Abstain	38,191
Broker Non-Votes	1,177,457

ITEM 6 — EXHIBITS

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

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	TANDY BRANDS ACCESSORIES, INC.
	(Registrant)
February 14, 2007	/s/ J.S.B. Jenkins
	J.S.B. Jenkins
	President, Chief Executive Officer
	(Principal Executive Officer)
	/s/ Mark J. Flaherty
	Mark J. Flaherty
	Chief Financial Officer
	(Principal Accounting and Financial Officer)

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TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES

EXHIBIT INDEX

	Incorporated by Reference
	(if applicable)
Exhibit Number and Description	Form		Date		File No.		Exhibit
(3) Articles of Incorporation and Bylaws
3.1 Certificate of Incorporation of Tandy Brands Accessories, Inc.		S-1		11/02/90		33-37588		3.1
3.2 Restated Bylaws of Tandy Brands Accessories, Inc.		10-Q		2/11/05		0-18927		3.2
(4) Instruments defining the rights of security holders, including indentures
4.1 Certificate of Designations, Powers, Preferences, and Rights of Series A Junior Participating Cumulative Preferred Stock of Tandy Brands Accessories, Inc.		S-1		12/17/90		33-37588		4.1
4.2 Form of Common Stock Certificate of Tandy Brands Accessories, Inc.		S-1		12/17/90		33-37588		4.2
4.3 Form of Preferred Share Purchase Rights Certificate of Tandy Brands Accessories, Inc.		S-1		12/17/90		33-37588		4.3
4.4 Form of Rights Certificate of Tandy Brands Accessories, Inc.		8-K		11/02/99		0-18927		4
4.5 Amended and Restated Rights Agreement, dated October 19, 1999, between Tandy Brands Accessories, Inc. and Bank Boston, N.A.		8-K		11/02/99		0-18927		4
4.6 Amendment to Rights Agreement, dated October 19, 1999, between Tandy Brands Accessories, Inc. and Fleet National Bank (f.k.a. Bank Boston, N.A.)		10-Q		5/10/02		0-18927		4.7
4.7 Amended and Restated Credit Agreement among Tandy Brands Accessories, Inc. as the Borrower, Wells Fargo HSBC Trade Bank, N.A. as Administrative Agent and as a Lender, and Certain Financial Institutions, as Lenders and Wells Fargo Bank, N.A. as Arranger as of September 7, 2006		10-K		9/22/06		0-18927		4.7
(10) Material Contracts
10.1 Tandy Brands Accessories, Inc. Benefit Restoration Plan and related Trust Agreement and Amendments Nos. 1 and 2 thereto*		10-K		9/25/97		0-18927		10.14
10.2 Amendment No. 3 to the Tandy Brands Accessories, Inc. Benefit Restoration Plan, effective as of July 1, 2003*		10-K		9/23/03		0-18927		10.32

1

TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES
EXHIBIT INDEX

		Incorporated by Reference
		(if applicable)
Exhibit Number and Description		Form	Date	File No.	Exhibit
10.3	Succession Agreement, dated July 1, 2001, between Tandy Brands Accessories, Inc. and Chase Texas, N.A. (the Former Trustee) and Comerica Bank – Texas (the Trustee), relating to the Tandy Brands Accessories, Inc. Benefit Restoration Plan*	10-K	9/23/03	0-18927		10.34
10.4	Form of Indemnification Agreement between Tandy Brands Accessories, Inc. and each of its Directors	S-1	12/17/90	33-37588		10.16
10.5	Form of Indemnification Agreement between Tandy Brands Accessories, Inc. and each of its Officers	S-1	12/17/90	33-37588		10.17
10.6	Tandy Brands Accessories, Inc. Non-Qualified Formula Stock Option Plan for Non-Employee Directors*	S-8	2/10/94	33-75114		28.1
10.7	Amendment No. 4 to the Tandy Brands Accessories, Inc. Nonqualified Formula Stock Option Plan For Non-Employee Directors*	10-Q	5/10/02	0-18927		10.39
10.8	Tandy Brands Accessories, Inc. 1993 Employee Stock Option Plan and form of Stock Option Agreement thereunder*	S-8	2/10/94	33-75114		28.2
10.9	Tandy Brands Accessories, Inc. Non-Qualified Stock Option Plan for Non-Employee Directors*	S-8	2/10/94	33-75114		28.3
10.10	Tandy Brands Accessories, Inc. 1995 Stock Deferral Plan for Non-Employee Directors*	S-8	6/03/96	33-08579		99.1
10.11	Tandy Brands Accessories, Inc. 1997 Employee Stock Option Plan*	S-8	12/12/97	333-42211		99.1
10.12	Amendment No. 2 to the Tandy Brands Accessories, Inc. 1997 Employee Stock Option Plan*	10-Q	5/10/02	0-18927		10.38
10.13	Tandy Brands Accessories, Inc. Employees Investment Plan, as Amended and Restated effective July 1, 2000*	10-K	9/26/00	0-18927		10.39

2

TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES
EXHIBIT INDEX

		Incorporated by Reference
		(if applicable)
Exhibit Number and Description		Form	Date	File No.	Exhibit
10.14	Mid-Market Trust Agreement, dated August 19, 2001, between Tandy Brands Accessories, Inc. and State Street Bank and Trust Company, relating to the Tandy Brands Accessories, Inc. Employees Investment Plan*	10-K	9/23/03	0-18927		10.28
10.15	Amendments Nos. 1-3 to the Tandy Brands Accessories, Inc. Employees Investment Plan, as Amended and Restated effective July 1, 2000*	10-K	9/23/03	0-18927		10.31
10.16	Succession Agreement, dated June 20, 2002, between Tandy Brands Accessories, Inc. and Comerica Bank – Texas, (the Trustee), relating to the Tandy Brands Accessories, Inc. Employees Investment Plan*	10-K	9/23/03	0-18927		10.35
10.17	Amendment No. 4 to the Tandy Brands Accessories, Inc. Employees Investment Plan, dated December 22, 2003*	10-Q	2/12/04	0-18927		10.38
10.18	Nonqualified Stock Option Agreement for Non-Employee Directors, dated October 16, 2001, by and between Tandy Brands Accessories, Inc. and Dr. James F. Gaertner*	S-8	5/15/02	33-88276		10.2
10.19	Nonqualified Stock Option Agreement for Non-Employee Directors, dated October 16, 2001, by and between Tandy Brands Accessories, Inc. and Gene Stallings*	S-8	5/15/02	33-88276		10.4
10.20	Nonqualified Stock Option Agreement for Non-Employee Directors, dated October 16, 2001, by and between Tandy Brands Accessories, Inc. and Roger R. Hemminghaus*	S-8	5/15/02	33-88276		10.5
10.21	Nonqualified Stock Option Agreement for Non-Employee Directors, dated October 16, 2001, by and between Tandy Brands Accessories, Inc. and Colombe M. Nicholas*	S-8	5/15/02	33-88276		10.6
10.22	Tandy Brands Accessories, Inc. 2002 Omnibus Plan*	10-Q	11/12/02	0-18927		10.24
10.23	Form of Non-Employee Director Nonqualified Stock Option Agreement pursuant to the Tandy Brands Accessories, Inc. 2002 Omnibus Plan*	10-K	9/23/04	0-18927		10.39

3

TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES
EXHIBIT INDEX

		Incorporated by Reference
		(if applicable)
Exhibit Number and Description		Form	Date	File No.	Exhibit
10.24	Form of Employee Nonqualified Stock Option Agreement pursuant to the Tandy Brands Accessories, Inc. 2002 Omnibus Plan*	10-K	9/23/04	0-18927		10.40
10.25	Form of Non-Employee Director Restricted Stock Award Agreement pursuant to the Tandy Brands Accessories, Inc. 2002 Omnibus Plan*	10-K	9/23/04	0-18927		10.41
10.26	Form of Employee Restricted Stock Award Agreement pursuant to the Tandy Brands Accessories, Inc. 2002 Omnibus Plan*	10-K	9/23/04	0-18927		10.42
10.27	Form of Severance Agreement between Tandy Brands Accessories, Inc. for Executive and Senior Officers*	10-K	9/23/03	0-18927		10.33
10.28	Office Lease Agreement, dated January 31, 2004, between Koll Bren Fund VI, LP and Tandy Brands Accessories, Inc. relating to the corporate office	10-Q	2/12/04	0-18927		10.36
10.29	Acknowledgement and Release Agreement between Tandy Brands Accessories, Inc. and J.S.B. Jenkins relating to the termination of the Supplemental Executive Retirement Plan*	8-K	8/22/05	0-18927		10.45
10.30	Tandy Brands Accessories, Inc. Stock Purchase Program (As Amended And Restated Effective December 1, 2005)*	10-Q	2/10/06	0-18927		10.46
10.31	Executive Officer Compensation Summary – Fiscal 2007 and 2006 and Non-Employee Director Compensation Summary – Fiscal 2007*	8-K	4/24/06	0-18927		10.1
10.32	Summary of Incentive Bonus Plan for Executive Officers*	8-K	4/24/06	0-18927		10.2
10.33	Amendments Nos. 5-6 to the Tandy Brands Accessories, Inc. Employees Investment Plan, as Amended and Restated effective July 1, 2000*	10-Q	5/11/06	0-18927		10.44
10.34	Amendment No. 2 to the Tandy Brands Accessories, Inc. 1995 Stock Deferral Plan for Non-Employee Directors*	10-K	9/22/06	0-18927		10.35

4

TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES
EXHIBIT INDEX

		Incorporated by Reference
		(if applicable)
Exhibit Number and Description		Form	Date	File No.	Exhibit
10.35	Amended and Restated Credit Agreement among Tandy Brands Accessories, Inc. as the Borrower, Wells Fargo HSBC Trade Bank, N.A. as Administrative Agent and as a Lender, and Certain Financial Institutions, as Lenders and Wells Fargo Bank, N.A. as Arranger as of September 7, 2006	10-K	9/22/06	0-18927		10.36
10.36	Amendment No. 4 to the Tandy Brands Accessories, Inc. Benefit Restoration Plan, dated July 1, 2001*	10-Q	11/14/06	0-18927		10.37
10.37	Form of 2006 Performance Unit Award Agreement pursuant to the Tandy Brands Accessories, Inc. 2002 Omnibus Plan* **	N/A	N/A	N/A		N/A
10.38	Amendment No. 7 to the Tandy Brands Accessories, Inc. Employees Investment Plan, effective as of January 1, 2006* **	N/A	N/A	N/A		N/A
(31) Rule 13a-14(a)/15d-14(a) Certifications
31.1	Certification pursuant to Rule 13a-14(a)/15d-14(a) (Chief Executive Officer)**	N/A	N/A	N/A		N/A
31.2	Certification pursuant to Rule 13a-14(a)/15d-14(a) (Chief Financial Officer)**	N/A	N/A	N/A		N/A
(32) Section 1350 Certifications
32.1	Section 1350 Certifications (Chief Executive Officer and Chief Financial Officer)**	N/A	N/A	N/A		N/A

*	Management contract or compensatory plan
**	Filed herewith

5