Quarterly Report (10-q)

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)

þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 29, 2012

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-08769

R.G. BARRY CORPORATION

(Exact name of registrant as specified in its charter)


OHIO		31-4362899
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

13405 Yarmouth Road NW, Pickerington, Ohio		43147
(Address of principal executive offices)		(Zip Code)

614-864-6400

(Registrant’s telephone number, including area code)

Not Applicable

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ 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 the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ

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

Common Shares, $1 Par Value, Outstanding as of February 6, 2013 – 11,290,894

Index to Exhibits at page 32

R.G. BARRY CORPORATION

INDEX TO QUARTERLY REPORT ON FORM 10-Q

For the Second Quarter of Fiscal 2013

(Period Ended December 29, 2012)


	Page
PART I — FINANCIAL INFORMATION

ITEM 1 — Financial Statements		4
ITEM 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations		19
ITEM 3 — Quantitative and Qualitative Disclosures About Market Risk		28
ITEM 4 — Controls and Procedures		29

PART II — OTHER INFORMATION

ITEM 1 — Legal Proceedings		30
ITEM 1A — Risk Factors		30
ITEM 2 — Unregistered Sales of Equity Securities and Use of Proceeds		30
ITEM 3 — Defaults Upon Senior Securities		30
ITEM 4 — Mine Safety Disclosures		30
ITEM 5 — Other Information		30
ITEM 6 — Exhibits		30

SIGNATURES		31

INDEX TO EXHIBITS		32

“Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995:

Some of the disclosures in this Quarterly Report on Form 10-Q contain forward-looking statements that involve substantial risks and uncertainties. You can identify these statements by forward-looking words such as “may,” “expect,” “could,” “should,” “anticipate,” “believe,” “estimate,” or words with similar meanings. Any statements that refer to projections of our future performance, anticipated trends in our business and other characterizations of future events or circumstances are forward-looking statements. These statements, which are forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995, are based upon our current plans and strategies and reflect our current assessment of the risks and uncertainties related to our business. These risks include, but are not limited to: our continuing ability to source products from third parties located within and outside North America; competitive cost pressures; the loss of retailer customers to competitors, consolidations, bankruptcies or liquidations; shifts in consumer preferences; the impact of the global financial crisis and general economic conditions on consumer spending; the impact of the highly seasonal nature of our footwear business upon our operations; inaccurate forecasting of consumer demand; difficulties liquidating excess inventory; disruption of our supply chain or distribution networks; our ability to implement new enterprise resource information systems; a failure in or a breach of our operational or security systems or infrastructure, or those of our third-party suppliers and other service providers, including as a result of cyber-attacks; the unexpected loss of any of the skills and experience provided by our senior officers; our ability to successfully integrate any new business acquisitions; and our investment of excess cash in certificates of deposit and other variable rate demand note securities. You should read this Quarterly Report on Form 10-Q carefully because the forward-looking statements contained in it (1) discuss our future expectations; (2) contain projections of our future results of operations or of our future financial condition; or (3) state other “forward-looking” information. The risk factors described in this Quarterly Report on Form 10-Q and in our other filings with the Securities and Exchange Commission (the “SEC”), in particular “Item 1A. Risk Factors” of Part I of our Annual Report on Form 10-K for the fiscal year ended June 30, 2012 (the “2012 Form 10-K”), give examples of the types of uncertainties that may cause actual performance to differ materially from the expectations we describe in our forward-looking statements. If the events described in “Item 1A. Risk Factors” of Part I of our 2012 Form 10-K occur, they could have a material adverse effect on our business, operating results and financial condition. You should also know that it is impossible to predict or identify all risks and uncertainties related to our business. Consequently, no one should consider any such list to be a complete set of all potential risks and uncertainties. Forward-looking statements speak only as of the date on which they are made, and we undertake no obligation to update any forward-looking statement to reflect circumstances or events that occur after the date on which the statement is made to reflect unanticipated events, except as required by applicable law. Any further disclosures in our filings with the SEC should also be considered.

Definitions

As used in this Quarterly Report on Form 10-Q, unless the context otherwise requires, references to “our,” “us,” “we” and the “Company” refer to R.G. Barry Corporation and its consolidated subsidiaries. In addition, the terms listed below reflect the respective periods noted:


Second quarter of fiscal 2013		13 weeks ended December 29, 2012
Second quarter of fiscal 2012		13 weeks ended December 31, 2011

First half of fiscal 2013		26 weeks ended December 29, 2012
First half of fiscal 2012		26 weeks ended December 31, 2011

Fiscal 2013		52 weeks ending June 29, 2013
Fiscal 2012		52 weeks ended June 30, 2012

PART I — FINANCIAL INFORMATION

ITEM 1 — FINANCIAL STATEMENTS

R.G. BARRY CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)


	December 29, 2012			June 30, 2012
	(unaudited)
ASSETS
Cash and cash equivalents	$	24,116		$	16,112
Short-term investments		17,299			25,599
Accounts receivable:
Trade (less allowances of $7,176 and $1,786, respectively)		19,340			13,011
Other		141			165
Inventory		19,829			21,149
Deferred tax assets – current		2,190			2,190
Prepaid expenses		742			674

Total current assets		83,657			78,900

Property, plant and equipment, at cost		12,680			12,238
Less accumulated depreciation and amortization		8,544			8,052

Net property, plant and equipment		4,136			4,186

Deferred tax assets – noncurrent		3,817			4,043
Goodwill		15,510			15,510
Trade names		9,200			9,200
Other intangible assets (net of accumulated amortization of $3,668 and $2,798, respectively)		12,665			13,530
Other assets		2,958			2,897

Total assets	$	131,943		$	128,266

LIABILITIES AND SHAREHOLDERS’ EQUITY
Short-term notes payable	$	—		$	1,750
Current installments of long-term debt		4,286			4,286
Accounts payable		8,654			10,962
Accrued expenses		6,348			5,701

Total current liabilities		19,288			22,699

Long-term debt, excluding current installments		18,214			20,357
Accrued retirement costs and other		10,811			10,803

Total liabilities		48,313			53,859

Shareholders’ equity:
Preferred shares, $1 par value per share: Authorized 3,775 Class A Shares, 225 Series II Junior Participating Class A Shares, and 1,000 Class B Shares; none issued		—			—
Common shares, $1 par value per share: Authorized 22,500 shares; issued and outstanding 11,291 and 11,182 shares, respectively (excluding treasury shares of 1,085 and 1,048, respectively)		11,291			11,182
Additional capital in excess of par value		22,769			22,281
Accumulated other comprehensive loss		(11,645	)		(11,679	)
Retained earnings		61,215			52,623

Total shareholders’ equity		83,630			74,407

Total liabilities and shareholders’ equity	$	131,943		$	128,266

See accompanying notes to condensed consolidated financial statements.

R.G. BARRY CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share amounts)


	Second Quarter						First Half
	Fiscal 2013			Fiscal 2012			Fiscal 2013			Fiscal 2012
	(unaudited)			(unaudited)			(unaudited)			(unaudited)
Net sales	$	48,505		$	55,599		$	95,737		$	105,829
Cost of sales		27,951			32,602			54,266			60,579

Gross profit		20,554			22,997			41,471			45,250
Selling, general and administrative expenses		11,930			12,415			22,921			23,295

Operating profit		8,624			10,582			18,550			21,955
Other income		242			88			465			175
Interest income		18			21			45			30
Interest expense		(193	)		(210	)		(396	)		(474	)

Earnings before income taxes		8,691			10,481			18,664			21,686
Income tax expense		3,390			4,130			7,229			8,445

Net earnings	$	5,301		$	6,351		$	11,435		$	13,241

Net earnings per common share
Basic	$	0.47		$	0.57		$	1.01		$	1.19

Diluted	$	0.46		$	0.56		$	0.99		$	1.17

Weighted average number of common shares outstanding
Basic		11,372			11,179			11,327			11,157

Diluted		11,564			11,364			11,526			11,335

Common shares outstanding at end of period		11,291			11,136			11,291			11,136

Cash dividends declared per common share	$	0.17		$	0.07		$	0.25		$	0.14

See accompanying notes to condensed consolidated financial statements.

R.G. BARRY CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)


	Second Quarter						First Half
	Fiscal 2013			Fiscal 2012			Fiscal 2013			Fiscal 2012
	(unaudited)			(unaudited)			(unaudited)			(unaudited)
Net earnings	$	5,301		$	6,351		$	11,435		$	13,241

Other comprehensive income adjustments:
Reclassification for interest paid on interest rate contract		55			64			111			133
Income tax effect of interest paid on interest rate contract		(22	)		(24	)		(44	)		(50	)

Unrealized loss on interest rate contract		(4	)		(38	)		(55	)		(338	)
Income tax effect of unrealized loss on interest rate contract		2			15			22			127

Comprehensive income	$	5,332		$	6,368		$	11,469		$	13,113

See accompanying notes to condensed consolidated financial statements.

R.G. BARRY CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)


	First Half Fiscal 2013			First Half Fiscal 2012
	(unaudited)			(unaudited)
Operating activities:
Net earnings	$	11,435		$	13,241
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization		1,341			1,541
Deferred income tax expense		205			140
Gross excess tax benefit from exercise of stock options and vesting of restricted stock units		(286	)		(72	)
Stock-based compensation expense on equity awards		824			752
Change in customer return and program accruals		5,390			7,039
Changes in:
Accounts receivable, gross		(11,695	)		(15,501	)
Inventory		1,321			6,611
Prepaid expenses and other assets		(114	)		(180	)
Accounts payable		(2,268	)		(4,007	)
Accrued expenses		374			6,649
Accrued retirement costs and other		62			(499	)

Net cash provided by operating activities		6,589			15,714

Investing activities:
Proceeds from the sale of short-term investments		19,199			12,982
Purchases of short-term investments		(10,899	)		(23,116	)
Purchases of property, plant and equipment		(482	)		(1,323	)

Net cash provided (used) by investing activities		7,818			(11,457	)

Financing activities:
Borrowings from revolving bank facility		—			3,000
Payment of borrowings from revolving bank facility		—			(3,000	)
Repayment of short-term notes payable		(1,750	)		—
Principal repayment of long-term debt		(2,143	)		(1,786	)
Proceeds from stock options exercised		25			414
Gross excess tax benefit from exercise of stock options and vesting of restricted stock units		286			72
Dividends paid		(2,821	)		(1,553	)

Net cash used by financing activities		(6,403	)		(2,853	)

Net increase in cash and cash equivalents		8,004			1,404
Cash and cash equivalents at the beginning of the period		16,112			9,107

Cash and cash equivalents at the end of the period	$	24,116		$	10,511

See accompanying notes to condensed consolidated financial statements.

R.G. BARRY CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

for the Second Quarter/First Half of Fiscal 2013 and the Second Quarter/First Half of Fiscal 2012

(dollar amounts in thousands, except per share data)

1. Basis of Presentation

R.G. Barry Corporation, an Ohio corporation, is engaged, with its subsidiaries, including Foot Petals, Inc. and Baggallini, Inc. (collectively, the “Company”), in designing, sourcing, marketing and distributing footwear, foot and shoe care products and hand bags, tote bags and other travel accessories. The Company operates in two reportable segments: (1) Footwear that encompasses primarily slippers, sandals, hybrid and active fashion footwear; and (2) Accessories products including foot and shoe care products, handbags, tote bags and other travel accessories. The Company’s products are sold predominantly in North America in the accessory sections of department stores, chain stores, warehouse clubs, specialty stores, television shopping networks, e-tailing/internet based retailers, discount stores and mass merchandising channels of distribution.

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and have been prepared in accordance with the United States of America (“U.S.”) generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of SEC Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation of the financial condition and results of operations at the dates and for the interim periods presented, have been included. The financial information shown in the accompanying condensed consolidated balance sheet as of the end of fiscal 2012 is derived from the Company’s audited consolidated financial statements. Certain reclassifications have been made to the comparative 2012 condensed consolidated statement of cash flows in order to conform to the 2013 presentation.

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in financial statements and accompanying notes. Actual results could differ from those estimates.

The Company’s reporting period is a fifty-two-week or fifty-three-week period (“fiscal year”), ending annually on the Saturday nearest June 30. Operating results for the second quarter and the first half of fiscal 2013 are not necessarily indicative of the annual results that may be expected for fiscal 2013. For further information, refer to the consolidated financial statements and notes thereto included in “ Item 8 – Financial Statements and Supplementary Data. ” of Part II of the 2012 Form 10-K.

2. Fair Value of Financial Instruments

At December 29, 2012, as part of its cash management and investment program, the Company maintained a portfolio of $17,299 in short-term investments, comprised of $10,310 of marketable investment securities in the form of variable rate demand notes and $6,989 in other short-term investments. The marketable investment securities are classified as available-for-sale. These marketable investment securities are carried at cost, which approximates fair value. The other short-term investments are classified as held-to-maturity securities and consist of commercial paper, which have individual maturity dates ranging from February 2013 to March 2013. Held-to-maturity debt securities are debt securities which the Company has the ability and intent to hold until maturity and are recorded at amortized cost, adjusted for the amortization or accretion of premiums or discounts.

In addition, at December 29, 2012, the Company held a derivative instrument in the form of an interest rate contract that served as a cash flow hedge on interest rate change exposure on a portion of its borrowings under a floating-rate term-loan facility entered into by the Company in March 2011. See “Note 9—Derivative Instruments and Hedging Activities” below.

Financial Accounting Standards Board Accounting Standard Codification (“FASB ASC”) 820-10 (the overall Subtopic of topic 820 on fair value measurements and disclosures) provides guidance on fair value measurements of financial assets and financial liabilities and for fair value measurements of nonfinancial items that are recognized or disclosed at fair value in the financial statements on a recurring basis. This accounting standard provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:

•

Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

•

Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

•

Level 3 inputs are unobservable inputs for the asset or liability.

R.G. BARRY CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

for the Second Quarter/First Half of Fiscal 2013 and the Second Quarter/First Half of Fiscal 2012

(dollar amounts in thousands, except per share data)

The level in the fair value hierarchy within which a fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety.

Cash, cash equivalents, short-term investments, accounts receivable, short-term notes payable, accounts payable and accrued expenses, as reported in the condensed consolidated financial statements, approximate their respective fair values because of the short-term maturity of those instruments. The fair value of the Company’s long-term debt is based on the present value of expected cash flows, considering expected maturity and using current interest rates available to the Company for borrowings with similar terms. The carrying amount of the Company’s long-term debt approximates its fair value.

The following table presents assets and liabilities that were measured at fair value on a recurring basis (including items that were required to be measured at fair value) at December 29, 2012:


			Fair Value Measurements at Reporting Date Using:
	Carrying Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Available-for-sale securities	$	10,310		—	$	10,310		—

Total	$	10,310		—	$	10,310		—

Liabilities:
Interest rate contract	$	432		—	$	432		—

Total	$	432		—	$	432		—

The following table presents assets and liabilities that were measured at fair value on a recurring basis (including items that were required to be measured at fair value) at June 30, 2012:


			Fair Value Measurements at Reporting Date Using:
	Carrying Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Available-for-sale securities	$	17,145		—	$	17,145		—

Total	$	17,145		—	$	17,145		—

Liabilities:
Interest rate contract	$	472		—	$	472		—

Total	$	472		—	$	472		—

The fair value for available-for-sale securities was based on market observable inputs and the fair value of the interest rate contract was determined based on models utilizing market observable inputs and credit risk.

R.G. BARRY CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

for the Second Quarter/First Half of Fiscal 2013 and the Second Quarter/First Half of Fiscal 2012

(dollar amounts in thousands, except per share data)

3. Stock-Based Compensation

The Amended and Restated 2005 Long-Term Incentive Plan (the “2005 Plan”) is the only equity-based compensation plan under which future awards may be made to employees of the Company and non-employee directors of R.G. Barry Corporation other than the employee stock purchase plan, currently inactive, in which only employees of the Company are eligible to participate. The Company’s previous equity-based compensation plans remained in effect with respect to the then outstanding awards following the original approval of the 2005 Plan. By shareholder action at the 2009 Annual Meeting of Shareholders, the 2005 Plan was amended to provide for an additional 500,000 common shares to be made available for future awards under the 2005 Plan (the “Amended 2005 Plan”).

The Amended 2005 Plan provides for the granting of nonqualified stock options (“NQs”), incentive stock options (“ISOs”) that qualify under Section 422 of the Internal Revenue Code, stock appreciation rights, restricted stock, restricted stock units (“RSUs”), stock grants, stock units and cash awards, each as defined in the Amended 2005 Plan. Grants of restricted or unrestricted stock, RSUs and cash awards may also be performance-based awards, as defined in the Amended 2005 Plan.

During the first quarter of fiscal 2013 and the first quarter of fiscal 2012, the Company granted performance-based RSUs to certain members of management. Each performance-based RSU is equivalent to one common share. The number of RSUs eligible for settlement to participants is ultimately based on the level of diluted earnings per share achieved by the Company at certain established minimum, target and maximum levels, for the fiscal year in which such performance-based RSUs are granted. If the minimum level of diluted earnings per share is not achieved for the fiscal year of grant, all of the performance-based RSUs underlying the award will be forfeited. If diluted earnings per share exceed the minimum level, the number of units eligible for settlement will be determined when the annual financial results are finalized by the Company and one-third of those units will be settled. The remaining performance-based RSUs eligible for settlement will vest to the participants based on continued service rendered to the Company over the following two fiscal-year periods, with annual pro rata vesting and settlement occurring at the end of each fiscal year. Except in instances of death or retirement where pro rata vesting would be applied, participants must be employed by the Company at the time of settlement in order to be vested in any portion of the award otherwise to be settled.

Performance-based RSUs will be settled through an issuance of common shares for 50% of the performance-based RSUs and through cash payment for the other 50% of the performance-based RSUs valued at the fair value of a common share at the time of settlement. Based on expected annual diluted earnings per share by the Company as projected at second quarter-end for fiscal 2013 and fiscal 2012, the number of total eligible performance-based RSUs was computed at 54,400 for fiscal 2013 and 73,560 for fiscal 2012, of which 50% was accounted for as an equity award and 50% was accounted for as a cash settlement award. The fair value of the equity award was determined based on the closing market price of a common share at the date of grant of $14.88 and $10.51 for the fiscal 2013 and fiscal 2012 awards, respectively. Similarly, the fair value of the cash settlement award was initially based on the market price of a common share at the date of grant but is subject to periodic revaluation as changes occur in the market price of a common share over the time period of the award.

In addition, consistent with its employee compensation policy, the Company granted an aggregate of 18,500 and 23,550 time-based RSUs, to certain members of management during the first quarter of fiscal 2013 and the first quarter of fiscal 2012, respectively, which vest in equal annual installments over three years.

Consistent with its non-employee directors compensation policy, the Company also awarded an aggregate of 18,700 and 20,370 unrestricted common shares with immediate vesting to the non-employee directors of R.G. Barry Corporation during the second quarter of fiscal 2013 and the second quarter of fiscal 2012, respectively. The fair value of these awards of common shares was $257 for the second quarter of fiscal 2013 and the second quarter of fiscal 2012, respectively. The fair value was based on the market price of the Company’s common shares at the date of grant of each award, and was included as part of the total stock-based compensation expense discussed in the following paragraph.

Under the provisions of FASB ASC 718, the Company recognized, as part of selling, general and administrative expenses, $635 and $984 of stock-based compensation expense for the second quarter and the first half of 2013, respectively. The Company recognized $613 and $873 of stock-based compensation expense for the second quarter and the first half of fiscal 2012, respectively.

The Company did not grant any stock options during the first half of fiscal 2013 or the first half of fiscal 2012, but has historically granted stock options at times to certain members of management and non-employee directors. Total compensation cost of stock options granted, but not yet vested as of December 29, 2012, was approximately $13, which will be recognized over a weighted-average period of approximately two years.

R.G. BARRY CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

for the Second Quarter/First Half of Fiscal 2013 and the Second Quarter/First Half of Fiscal 2012

(dollar amounts in thousands, except per share data)

During the second quarter of fiscal 2013 and the second quarter of fiscal 2012, the Company recognized gross excess tax benefits of $0 and $60, respectively. During the first half of fiscal 2013 and the first half of 2012, the Company recognized gross excess tax benefits of $286 and $72, respectively, as additional paid-in capital under the provisions of FASB ASC 718 related to the vesting of RSUs and exercises of stock options.

Activity with respect to stock options for the first half of fiscal 2013 was as follows:


	Number of		Number of		Weighted-
	common shares		common shares		Average
	subject to ISOs		subject to NQs		exercise price
Outstanding at June 30, 2012		7,500		17,000	$	7.12
Granted		—		—		—
Exercised		7,500		—		3.27
Expired/Cancelled		—		—		—

Outstanding at December 29, 2012		—		17,000	$	8.82

Options exercisable at December 29, 2012		—		9,800

Activity with respect to time-based RSUs for the first half of fiscal 2013 was as follows:


	Number of Common shares Underlying RSUs			Grant Date Fair Value
Nonvested at June 30, 2012		324,900		$	8.43
Granted		18,500			14.88
Vested		(102,200	)		8.38
Forfeited/Cancelled		(14,500	)		8.50

Nonvested at December 29, 2012		226,700		$	10.56

Activity with respect to performance-based RSUs, with future settlement at vesting in common shares, for the first half of fiscal 2013 was as follows:


	Number of Common shares Underlying RSUs			Grant Date Fair Value
Nonvested at June 30, 2012		51,900		$	10.51
Granted, estimated based on annual target diluted earnings per share		27,700			14.88
Vested		(17,300	)		10.51
Forfeited/Cancelled		(1,400	)		12.09

Nonvested at December 29, 2012		60,900		$	12.46

During the first half of fiscal 2013 and the first half of fiscal 2012, an aggregate of 27,700 and 36,780, respectively, of performance-based RSUs with future settlement at vesting to be made in cash were granted and accounted for as cash settlement awards (based on expected diluted earnings per share by the Company for fiscal 2013 and fiscal 2012, respectively). The fair value of the awards is subject to initial valuation and subsequent periodic revaluation at the end of each reporting period based on the corresponding market price of a common share of the Company.

Total compensation cost of time-based and performance-based compensation awards not yet vested as of December 29, 2012 was as follows:


	Unrecognized Compensation Cost		Weighted-average period in years
Time-based RSU awards	$	1,257		1-2
Performance-based RSU awards (accounted for as equity award)		331		2-3
Performance-based RSU awards (accounted for as cash settlement award)		532		2-3

The aggregate intrinsic value, as defined in FASB ASC 718, of stock options exercised and RSUs vested during the first half of fiscal 2013 and the first half of fiscal 2012 was $1,846 and $437, respectively.

R.G. BARRY CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

for the Second Quarter/First Half of Fiscal 2013 and the Second Quarter/First Half of Fiscal 2012

(dollar amounts in thousands, except per share data)

4. Accounts Receivable Reserves

Activity with respect to accounts receivable reserves for the first half of fiscal 2013 and the first half of fiscal 2012 were as follows:


	Fiscal 2013			Fiscal 2012
Accounts receivable reserves at the beginning of the fiscal year	$	1,786		$	3,522
Customer incentive, coop advertising and return allowance accruals		8,929			12,862
Deductions and other charges to reserves		(3,315	)		(5,041	)
Other adjustments to reserves		(224	)		(692	)

Accounts receivable reserves at the end of the first half of the fiscal year	$	7,176		$	10,651

Other adjustments to reserves in the table above reflected the difference between estimates made at the end of fiscal 2012 and fiscal 2011, respectively, and actual claims as processed during the subsequent first half of fiscal 2013 and the subsequent first half of fiscal 2012, respectively.

5. Inventories

Inventory by category consisted of the following:


	December 29, 2012		June 30, 2012
Raw materials	$	1	$	666
Finished goods		19,828		20,483

Total inventory	$	19,829	$	21,149

Inventory write-downs, recognized as a part of cost of sales, were $113 and $358 for the second quarter of fiscal 2013 and second quarter of fiscal 2012, respectively, and $326 and $396 for the first half of fiscal 2013 and the first half of fiscal 2012, respectively.

6. Goodwill and Other Intangible Assets

The Company uses the acquisition method of accounting for any business acquisitions and recognizes intangible assets separately from goodwill. The acquired assets and assumed liabilities in an acquisition are measured and recognized based on their estimated fair value at the date of acquisition, with goodwill representing the excess of the consideration transferred over the fair value of the identifiable net assets.

Purchased goodwill and intangible assets with indefinite lives, such as trade names, are not amortized, but instead are tested for impairment annually, during the second fiscal quarter, or more frequently if events or changes in circumstances indicate that impairment may be present. The Company adopted ASU 2011-8 and early adopted ASU 2012-2, and performed a one-step qualitative assessment for its annual impairment test evaluation during the second quarter of fiscal 2013 on goodwill and indefinite life intangible assets. In conducting the qualitative assessment, the Company considered relevant events and circumstances that affect the fair value or carrying amount of a reporting unit and indefinite life intangible assets. Such events and circumstances could include macroeconomic conditions, industry and market considerations, overall financial performance, entity and reporting unit specific events, and capital markets pricing. The Company considered the extent to which each of the adverse events and circumstances identified affect the comparison of a reporting unit and indefinite life intangible assets’ fair value with its carrying amount. The Company placed more weight on the events and circumstances that most affect a reporting unit and indefinite life intangible assets’ fair value or the carrying amount of its net assets. The Company considered positive and mitigating events and circumstances that may affect its determination of whether it is more likely than not that the fair value of a reporting unit and indefinite life intangible assets are less than its carrying amount. The Company also considered recent valuations of its reporting units and indefinite life intangible assets, including the difference between the most recent fair value estimate and the carrying amount. These factors were all considered by management in reaching its conclusion about whether to perform the first step of the impairment test. If management had concluded that further testing was required, the Company would have performed a quantitative valuation to estimate the fair value of its reporting units and indefinite life intangible assets.

There were no goodwill or intangible assets impairment indicators identified during the first half of fiscal 2013 or during the first half of fiscal 2012.

R.G. BARRY CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

for the Second Quarter/First Half of Fiscal 2013 and the Second Quarter/First Half of Fiscal 2012

(dollar amounts in thousands, except per share data)

Other intangible assets included the following:


	December 29, 2012
	Weighted- average amortization period		Gross carrying amount		Accumulated amortization			Net carrying amount
Amortizing intangible assets:
Customer relationships		9.4 years	$	15,600	$	(3,046	)	$	12,554
Trademarks, patents and fees		5 years		733		(622	)		111

Total intangible assets subject to amortization			$	16,333	$	(3,668	)	$	12,665


	June 30, 2012
	Weighted- average amortization period		Gross carrying amount		Accumulated amortization			Net carrying amount
Amortizing intangible assets:
Customer relationships		9.4 years	$	15,600	$	(2,198	)	$	13,402
Trademarks, patents and fees		5 years		728		(600	)		128

Total intangible assets subject to amortization			$	16,328	$	(2,798	)	$	13,530

The Company recognized aggregate customer relationships and trademarks, patents and fees amortization expense of $435 and $427 in the second quarter of fiscal 2013 and the second quarter of fiscal 2012, respectively. For the first half of 2013 and the first half of fiscal 2012, the Company recognized aggregate customer relationships and trademarks, patents and fees amortization expense of $871 and $866, respectively, and reported that expense as part of selling, general and administrative expenses in the accompanying condensed consolidated statements of income.

7. Accrued expenses

Accrued expenses consisted of the following:


	December 29, 2012		June 30, 2012
Salaries and wages	$	1,973	$	3,308
Income taxes		2,815		357
Other taxes		116		147
Current pension liabilities		585		585
Other		859		1,304

Total accrued expenses	$	6,348	$	5,701

8. Income Taxes

Income tax expense for the second quarter and first half of fiscal 2013 and the second quarter and first half of fiscal 2012 differed from the amounts computed by applying the U.S. Federal income tax rate of 35% in fiscal 2013 and fiscal 2012, respectively, to earnings before income taxes as a result of the following:


	Second Quarter				First Half
	Fiscal 2013		Fiscal 2012		Fiscal 2013			Fiscal 2012
Computed “expected” tax expense	$	3,041	$	3,668	$	6,532		$	7,590
State income tax expense, net of federal income tax benefit		347		391		744			814
Other, net		2		71		(47	)		41

Total expense	$	3,390	$	4,130	$	7,229		$	8,445

R.G. BARRY CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

for the Second Quarter/First Half of Fiscal 2013 and the Second Quarter/First Half of Fiscal 2012

(dollar amounts in thousands, except per share data)

Management is required to estimate the annual effective tax rate based upon its forecast of annual pre-tax earnings. To the extent the actual pre-tax results or anticipated permanent tax differences for the year differ from forecasted estimates applied at the end of the most recent interim period, the actual tax rate recognized in fiscal 2013 could be materially different from the forecasted rate as of the end of the second quarter of fiscal 2013.

Income tax expense for the second quarter and first half of fiscal 2013 and the second quarter and first half of fiscal 2012 was estimated based on projected annual income, discrete tax adjustments and annual tax rates for the respective tax jurisdictions applicable to the Company. Income tax expense as reported had an income tax rate of 38.7% for fiscal 2013 and of 38.9% for fiscal 2012.

FASB ASC 740-10 (the overall Subtopic of topic 740 on income taxes) prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. During the first half of fiscal 2013, there were no changes in evaluations made under FASB ASC 740-10. There were no reserves for uncertain tax positions existing at the end of the first half of fiscal 2013 or at the end of fiscal 2012.

9. Derivative Instruments and Hedging Activities

The Company may utilize from time to time derivative financial instruments to manage exposure to certain risks related to its ongoing operations. The primary risk managed through the use of derivative instruments is interest rate risk. In January 2011, the Company entered into an interest rate contract with an initial notional amount of $15,000 to hedge the changes in cash flows attributable to changes in the LIBOR rate associated with the five-year term loan entered into by the Company in March 2011. Under this interest rate contract, the Company pays a fixed interest rate of 3.94% and receives a variable rate based on LIBOR plus 1.85%. The notional amount of this interest rate contract is required to be 50% of the amount of the term loan through the expiration of its five-year term.

The Company is exposed to counter-party credit risk on any derivative instrument. Accordingly, as part of its risk management policy, the Company maintains strict counter-party credit guidelines and enters into any derivative instrument only with a major financial institution. The Company does not have significant exposure to any counterparty and management believes the risk of loss is remote and, in any event, would not be material.

Refer to “Note 2—Fair Value of Financial Instruments” for additional information regarding the fair value of the derivative instrument.

The following table summarizes the fair value of the Company’s derivative instrument and the line item in which it was recorded in the condensed consolidated balance sheet at December 29, 2012 and June 30, 2012:


		Liability Derivative at Fair Value
	Balance Sheet Location	December 29, 2012		June 30, 2012
Derivative designated as hedging instrument:
Interest rate contract	Accrued expenses	$	176	$	186
	Accrued retirement costs and other		241		286

		$	417	$	472

Cash Flow Hedges

The following table summarizes the pre-tax loss recognized in other comprehensive income (“OCI”) and the pre-tax loss reclassified from accumulated OCI into earnings for the derivative instrument designated as a cash flow hedge during each of the second quarter and first half of fiscal 2013 and the second quarter and first half of fiscal 2012.

R.G. BARRY CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

for the Second Quarter/First Half of Fiscal 2013 and the Second Quarter/First Half of Fiscal 2012

(dollar amounts in thousands, except per share data)


	Gross Loss Recognized in OCI (Effective Portion)		Location of Loss Reclassified from Accumulated OCI (Effective Portion)		Loss Reclassified from Accumulated OCI (Effective Portion)		Location of Loss (Ineffective Portion) and Excluded from Effectiveness Testing		Loss (Ineffective Portion) and Excluded from Effectiveness Testing
For the second quarter of fiscal 2013:
Interest rate contract	$	4		Interest expense	$	55		Interest expense	$	—
For the first half of fiscal 2013:
Interest rate contract	$	55		Interest expense	$	111		Interest expense	$	—

For the second quarter of fiscal 2012:
Interest rate contract	$	38		Interest expense	$	64		Interest expense	$	—
For the first half of fiscal 2012:
Interest rate contract	$	338		Interest expense	$	133		Interest expense	$	—

The estimated net amount of the loss in accumulated OCI at December 29, 2012 expected to be reclassified into the consolidated statement of income within the next twelve months is $176.

10. Employee Retirement Plans

The Company expects to make payments in the aggregate of $1,611 during fiscal 2013 to the funded, qualified associates’ retirement plan (“ARP”) and to meet its current year payment obligation for the unfunded, nonqualified supplemental retirement plans (collectively, “SRP”). In the first half of fiscal 2013, contributions of $507 were made into the ARP and payments of $328 were made to participants in the SRP.

The components of net periodic benefit cost for the retirement plans in the aggregate during each period noted below consisted of the following:


	Second Quarter						First Half
	Fiscal 2013			Fiscal 2012			Fiscal 2013			Fiscal 2012
Service cost	$	—		$	—		$	—		$	—
Interest cost		434			505			868			1,011
Expected return on plan assets		(450	)		(481	)		(900	)		(962	)
Net amortization		450			348			900			695

Total pension expense	$	434		$	372		$	868		$	744

11. Net Earnings per Common Share

Basic net earnings per common share is based on the weighted-average number of common shares outstanding during each reporting period. Diluted net earnings per common share is based on the weighted-average number of common shares outstanding during each reporting period, plus, when their effect is dilutive, potential common shares consisting of common shares underlying certain unexercised stock options and unvested time-based and performance-based RSUs.

R.G. BARRY CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

for the Second Quarter/First Half of Fiscal 2013 and the Second Quarter/First Half of Fiscal 2012

(dollar amounts in thousands, except per share data)

The following table presents a reconciliation of the denominator used for each period in computing basic and diluted earnings per common share, with common shares in the table represented in thousands:


	Second Quarter				First Half
	Fiscal 2013		Fiscal 2012		Fiscal 2013		Fiscal 2012
Numerator:
Net earnings	$	5,301	$	6,351	$	11,435	$	13,241

Denominator:
Weighted-average common shares outstanding		11,372		11,179		11,327		11,157
Effect of dilutive securities: stock options and RSUs		192		185		199		177

Weighted-average common shares outstanding, assuming dilution		11,564		11,364		11,526		11,334

Basic net earnings per common share	$	0.47	$	0.57	$	1.01	$	1.19

Diluted net earnings per common share	$	0.46	$	0.56	$	0.99	$	1.17

The Company did not exclude any stock options from the calculation of diluted net earnings per common share for the second quarter of fiscal 2013. The Company excluded stock options to purchase five thousand common shares from the calculation of diluted net earnings per common share for the second quarter of fiscal 2012 due to the anti-dilutive nature of these stock options measured using the average market price of the underlying common shares.

12. Changes in Equity

The following table provides a summary of the changes in total equity for the first half of fiscal 2013:


	Common shares		Additional capital in excess of par value			Accumulated other comprehensive loss			Retained earnings			Net Shareholders’ Equity
Balance at June 30, 2012	$	11,182	$	22,281		$	(11,679	)	$	52,623		$	74,407
Net earnings		—		—			—			11,435			11,435
Stock-based compensation expense		—		567			—			—			567
Stock-based compensation tax benefit realized		—		286			—			—			286
Other comprehensive income on interest rate contract, net of tax of $22		—		—			34			—			34
Restricted stock units vested and stock options exercised		109		(365	)		—			—			(256	)
Dividends declared at $0.25 per common share		—		—			—			(2,843	)		(2,843	)

Balance at December 29, 2012	$	11,291	$	22,769		$	(11,645	)	$	61,215		$	83,630

13. Segment Reporting

The Company primarily markets footwear and accessories products sold predominantly in North America and operates with two reportable segments which include: (1) Footwear that encompasses primarily slippers, sandals, hybrid and active fashion footwear; and (2) Accessories products including shoe and foot care products, handbags, tote bags and other travel accessories. The accounting policies of the reportable segments are the same, except that the disaggregated information has been prepared using certain management reports, which by their very nature require estimates.

The Company operates with a reporting structure which included a separate Business Unit President for each operating unit, with each Business Unit President reporting to the Chief Executive Officer (“CEO”) of R.G. Barry Corporation. Each Business Unit President has financial performance responsibility for the operating unit.

While many selling, general and administrative (“SGA”) expenses are directly attributable to each operating unit, certain corporate support expenses are incurred and assigned to the respective operating units based on estimated usage of Company services. Operating profit as measured for each segment includes sales, cost of sales, direct and allocated SGA expenses. This segment measure of operating profit or loss, as defined, is the primary indicator of financial performance used by management.

R.G. BARRY CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

for the Second Quarter/First Half of Fiscal 2013 and the Second Quarter/First Half of Fiscal 2012

(dollar amounts in thousands, except per share data)

Other corporate expenses incurred are deemed to be applicable to the Company as a whole and are not allocated to any specific business segment. These unallocated expenses primarily include areas such as the Company’s corporate and governance functions, including the CEO, Chief Financial Officer and Board of Directors, as well as expense areas including annual accrued incentive, stock compensation, pension, professional fees and similar corporate expenses. Segment operating profit, as reported below, is based on the same definition of operating profit as described in the paragraph immediately above.


Second Quarter Fiscal 2013	Footwear		Accessories		Unallocated Corporate			Total
Net sales	$	39,493	$	9,012	$	—		$	48,505
Gross profit		15,668		4,886		—			20,554
Operating profit		9,814		1,572		(2,762	)		8,624

First Half Fiscal 2013	Footwear		Accessories		Unallocated Corporate			Total
Net sales	$	77,764	$	17,973	$	—		$	95,737
Gross profit		31,510		9,961		—			41,471
Operating profit		20,654		3,373		(5,477	)		18,550

Second Quarter Fiscal 2012	Footwear		Accessories		Unallocated Corporate			Total
Net sales	$	47,905	$	7,694	$	—		$	55,599
Gross profit		18,457		4,540		—			22,997
Operating profit		12,316		1,588		(3,322	)		10,582

First Half Fiscal 2012	Footwear		Accessories		Unallocated Corporate			Total
Net sales	$	90,080	$	15,749	$			$	105,829
Gross profit		36,101		9,149		—			45,250
Operating profit		24,711		3,378		(6,134	)		21,955

As of December 29, 2012	Footwear		Accessories		Unallocated Corporate			Total
Total assets	$	50,376	$	51,730	$	29,837		$	131,943

As of June 30, 2012	Footwear		Accessories		Unallocated Corporate			Total
Total assets	$	39,573	$	50,402	$	38,291		$	128,266

Unallocated corporate assets were comprised of corporate assets including building, software, furniture and equipment, investments, deferred tax assets, cash surrender assets associated with insurance policies and other nominal intangible or deposit type assets held by the Company. Changes between Footwear segment and unallocated corporate assets from the end of fiscal 2012 to the end of the first half of fiscal 2013 reflected the seasonal nature of the business and related working capital requirements in that period.

14. Related Party Transactions

Under an existing agreement, the Company is obligated for up to two years after the death of the Company’s non-executive chairman (the “chairman”) to purchase, if the estate elects to sell, up to $4,000 of the Company’s common shares, at their then fair market value. For a period of two years following the chairman’s death, the Company has a right of first refusal to purchase any common shares owned by the chairman at the time of his death if his estate elects to sell such common shares and has the right to purchase such common shares on the same terms and conditions as the estate proposes to sell such common shares to a third party. To fund its potential obligation to purchase such common shares, the Company maintains two insurance policies on the life of the chairman. The cumulative cash surrender value of the policies at the end of the first half of fiscal 2013 was $2,849, which is included in other assets in the condensed consolidated balance sheets.

R.G. BARRY CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

for the Second Quarter/First Half of Fiscal 2013 and the Second Quarter/First Half of Fiscal 2012

(dollar amounts in thousands, except per share data)

Effective in March 2004 and continuing through a portion of the second quarter of fiscal 2013, the Company had borrowed $1,750 against the cash surrender value of one of these policies, which was included in short-term notes payable at June 30, 2012 on the accompanying condensed consolidated balance sheet. The full amount of the short-term note payable was repaid during the second quarter of fiscal 2013.

15. Commitments and Contingent Liabilities

The Company is from time to time involved in claims and litigation considered normal in the ordinary course of its business. While it is not feasible to predict the ultimate outcome, in the opinion of management, the resolution of such matters is not expected to have a material adverse effect on the Company’s annual financial position, income and cash flows.

16. Recently Issued Accounting Standards

In August 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2011-08, Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment . This amended accounting guidance as issued is intended to simplify how an entity is to test goodwill for impairment. The amended guidance allows an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. The two-step quantitative goodwill impairment test is required if, based on its qualitative assessment, an entity determines that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The Company adopted the updated accounting guidance for the annual impairment test performed during the second quarter of fiscal 2013, which did not have an impact on the Company’s financial statements.

In December 2011, the FASB issued ASU 2011-12, Comprehensive Income (Topic 220), which deferred the effective date for applying ASU 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income, in respect of certain provisions relating to the presentation of separate line items on the income statement for reclassifications of items out of accumulated other comprehensive income into income, in order for the FASB to further evaluate this change in standard before implementation. The deferral is temporary and other provisions of ASU 2011-05 were effective for the Company beginning July 1, 2012.

In December 2011, the FASB issued ASU 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. This update requires additional disclosures about offsetting and related arrangements on assets and liabilities to enable users of financial statements to understand the effect of such arrangements on an entity’s financial position as reported. This amendment is effective for fiscal 2014, and adoption of this standard change will only affect the footnote disclosures within consolidated financial statements. Once adopted, these disclosure provisions will apply retrospectively for all comparative periods presented.

In July 2012, the FASB issued ASU 2012-2, Intangibles-Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment. This update provides an entity with the option to make a qualitative assessment about the likelihood that an indefinite-lived intangible asset is impaired and then determine whether it should perform a quantitative impairment test. The amendment is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012 with early adoption permitted. The Company early adopted this change for the annual impairment test during the second quarter of fiscal 2013, which did not have an impact on the Company’s financial statements.

R.G. BARRY CORPORATION AND SUBSIDIARIES

ITEM 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations

Introduction

Our Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to provide investors and others with information we believe is necessary to understand the Company’s financial condition, changes in financial condition, results of operations and cash flows. Our MD&A should be read in conjunction with the Company’s Condensed Consolidated Financial Statements and related Notes to Condensed Consolidated Financial Statements and other information included in this Quarterly Report on Form 10-Q. This Quarterly Report on Form 10-Q should also be read in conjunction with our 2012 Form 10-K.

Unless the context otherwise requires, references in this MD&A to “our”, “us”, “we” or the “Company” refer to R.G. Barry Corporation and its consolidated subsidiaries.

Our Company and subsidiaries, Foot Petals, Inc. and Baggallini, Inc., are engaged in designing, sourcing, marketing and distributing footwear; foot and shoe care products; and hand bags, tote bags and other travel accessories. We operate with three operating segments, two of which are aggregated into a single reportable segment. The two reportable segments include: (1) Footwear that encompasses primarily slippers, sandals, hybrid and active fashion footwear; and (2) Accessories products including foot and shoe care products, handbags, tote bags and other travel accessories. Our products are sold predominantly in North America in accessory sections of department stores, chain stores, warehouse clubs, specialty stores, television shopping networks, e-tailing/internet based retailers, discount stores and mass merchandising channels of distribution.

The Company operates with a reporting structure including a separate Business Unit President for each operating unit, with each Business Unit President reporting to the Chief Executive Officer (CEO) of R.G. Barry Corporation. Each Business Unit President has financial performance responsibility for the operating unit.

Under this reporting structure, the operating profit or loss measure for an operating unit includes sales, cost of sales, direct and allocated SGA expenses from certain corporate support areas for which expenses incurred are allocated to each operating units based on estimated usage of Company services. Other corporate expenses are deemed applicable to the Company as a whole and are not allocated to any specific operating unit. Such expenses include costs associated with the Company’s corporate and governance functions, including the CEO, Chief Financial Officer and Board of Directors, as well as such expense areas as annual accrued incentive, stock compensation, pension, professional fees and similar corporate expenses.

Our Footwear and Accessories segment results reported below for the second quarter and first half of fiscal 2013 and the second quarter and first half of fiscal 2012 have been presented based on this reporting approach.

All comments made herein relative to period over period comparisons refer to results reported for the second quarter of fiscal 2013 as compared to the second quarter of fiscal 2012, or the first half of fiscal 2013 as compared to the first half of fiscal 2012.

Consolidated Results of Operations

Listed below are excerpts from our condensed consolidated statements of income for the second quarter of fiscal 2013 and of fiscal 2012:


(all amounts are in 000’s)	Second Quarter Fiscal 2013			% of Net Sales			Second Quarter Fiscal 2012			% of Net Sales			Increase (Decrease)
Net sales	$	48,505			100.0		$	55,599			100.0		$	(7,094	)
Gross profit		20,554			42.4			22,997			41.4			(2,443	)
Selling, general and administrative expense		11,930			24.6			12,415			22.3			(485	)
Operating profit		8,624			17.8			10,582			19.0			(1,958	)
Other income		242			0.5			88			0.2			154
Interest income		18			0.0			21			0.0			(3	)
Interest expense		(193	)		(0.4	)		(210	)		(0.4	)		(17	)
Earnings before income taxes		8,691			17.9			10,481			18.9			(1,790	)
Income tax expense		3,390			7.0			4,130			7.4			(740	)
Net earnings		5,301			10.9			6,351			11.4			(1,050	)

Consolidated net sales decreased by 12.8%, reflecting a decrease in net sales in the Footwear segment offset in part by an increase in net sales in the Accessories segment. The decrease in shipments in the Footwear segment of $8.4 million or 17.6% was primarily associated with customers in the department store, off-price customer and mass merchandising channels. Quarter-over-quarter shipments in the Accessories segment increased by $1.3 million, or 17.1%, primarily reflecting increased shipments to off-price, international, mass merchandising and department store customer channels offset by decreased shipments in the catalog/dot com, televised retailer and other customer channels.

Consolidated gross profit dollars decreased by 10.6% and gross profit as a percentage of net sales expanded by 100 basis points. The decrease in gross profit dollars was primarily the net result of lower sales volume noted above; the expansion in gross profit as a percentage of sales reflected the effect of segment, customer and product mix in sales during the period.

Consolidated SGA expense decreased by 3.9%, with the net decrease primarily including lower incentive expense accruals, higher expense associated with our Accessories segment businesses and net lower expenses from a broad range of areas.

Consolidated other income reflected higher levels of royalty income associated with our current licensing agreements; consolidated interest expense was relatively flat.

The effective tax rates for the second quarter of fiscal 2013 and the second quarter of fiscal 2012 were 39.0% and 39.4%, respectively.

Based on the results of operations noted above, we reported consolidated net earnings of $5.3 million or $0.46 per diluted common share for the second quarter of fiscal 2013 and consolidated net earnings of $6.4 million or $0.56 per diluted common share for the second quarter of fiscal 2012.

Listed below are excerpts from our condensed consolidated statements of income for the first half of fiscal 2013 and of fiscal 2012:


(all amounts are in 000’s)	First Half Fiscal 2013			% of Net Sales			First Half Fiscal 2012			% of Net Sales			Increase (Decrease)
Net sales	$	95,737			100.0		$	105,829			100.0		$	(10,092	)
Gross profit		41,471			43.3			45,250			42.8			(3,779	)
Selling, general and administrative expense		22,921			23.9			23,295			22.0			(374	)
Operating profit		18,550			19.4			21,955			20.7			(3,405	)
Other income		465			0.5			175			0.2			290
Interest income		45			0.0			30			0.0			15
Interest expense		(396	)		(0.4	)		(474	)		(0.4	)		(78	)
Earnings before income taxes		18,664			19.5			21,686			20.5			(3,022	)
Income tax expense		7,229			7.6			8,445			8.0			(1,216	)
Net earnings		11,435			11.9			13,241			12.5			(1,806	)

Consolidated net sales decreased by 9.5%, reflecting a decrease in net sales in the Footwear segment offset in part by an increase in net sales in the Accessories segment. The decrease in shipments in the Footwear segment of $12.3 or 13.7% million was primarily associated with customers in the department store, mass merchandising, warehouse club and off-price customer channels, offset in part by an increase in shipments with customers in the catalog/dot com and international channels. Shipments in the Accessories segment increased by $2.2 million, or 14.1%, reflecting increased net shipments to customers in off-price, international, mass merchandising and department store customer channels offset by decreased shipments in the catalog/dot com, televised retailer and other customer channels.

Consolidated gross profit dollars decreased by 8.4% and gross profit as a percentage of net sales expanded by 50 basis points. The decrease in gross profit dollars was primarily due to the lower sales volume noted above; the expansion in gross profit as a percentage of sales primarily reflected the effect of segment, customer and product mix in sales during the period.

Consolidated SGA expense decreased by 1.6%, with the net decrease primarily including lower bonus incentive expense accruals and other net lower expense from a broad range of Footwear segment and corporate areas offset in part by higher expense associated with our Accessories segment businesses as discussed below.

Consolidated other income reflected higher levels of royalty income associated with our current licensing agreements; consolidated interest expense was relatively flat.

The tax rates for the first half of fiscal 2013 and the first half of fiscal 2012 were 38.7% and 38.9%, respectively.

Based on the results of operations noted above, we reported consolidated net earnings of $11.4 million or $0.99 per diluted common share for the first half of fiscal 2013 and consolidated net earnings of $13.2 million or $1.17 per diluted common share for the first half of fiscal 2012.

Results of Operations—Footwear segment

Our Footwear segment encompasses designing, sourcing, marketing and distributing footwear products. We define footwear as a product category that includes primarily slippers, sandals and hybrid and active fashion footwear. Our footwear products are sold in North America primarily in the accessory sections of department stores, chain stores, warehouse clubs, discount stores and mass merchandising channels of distribution.

Selected financial results for the second quarter of fiscal 2013 and of fiscal 2012 were:


(all amounts are in 000’s)	Second Quarter Fiscal 2013		% of Net Sales		Second Quarter Fiscal 2012		% of Net Sales		Decrease
Net sales	$	39,493		100.0	$	47,905		100.0	$	(8,412	)
Gross profit		15,668		39.7		18,457		38.5		(2,789	)
Operating profit		9,813		24.8		12,316		25.7		(2,503	)

Net sales decreased by 17.6% with the decrease shown primarily in shipments to customers in the department store, mass merchandising and off-price customer channels.

Gross profit dollars decreased by 15.1% and gross profit as a percentage of net sales expanded by 120 basis points. The quarter-over-quarter decrease in gross profit dollars reflected the impact of decreased shipment volumes; the increase in gross profit as a percentage of sales was due to the relative mix of shipments and related margin to customers in various channels.

Operating profit decreased by $2.5 million, reflecting the net impact of the decrease in gross profit noted above offset in part by a decrease in SGA expenses reported in a broad range of expense areas.

Selected financial results for the first half of fiscal 2013 and of fiscal 2012 were:


(all amounts are in 000’s)	First Half Fiscal 2013		% of Net Sales		First Half Fiscal 2012		% of Net Sales		Decrease
Net sales	$	77,764		100.0	$	90,080		100.0	$	(12,316	)
Gross profit		31,510		40.5		36,101		40.1		(4,591	)
Operating profit		20,654		26.6		24,711		27.4		(4,057	)

Net sales decreased by 13.7% in the Footwear segment with the decrease shown primarily in shipments to customers in the department store, mass merchandising, warehouse club channels and off-price customer channels, offset in part by an increase in shipments to customers in the catalog/dot com and televised retailer channels.

Gross profit dollars decreased by 12.7% and gross profit as a percentage of net sales increased by 40 basis points. The decrease in gross profit dollars reflected primarily the impact of decreased shipment volumes noted above; the expansion in gross profit as a percentage of sales was due to the relative mix of shipments and related margin to customers in various channels.

Operating profit decreased by $4.1 million, reflecting the impact of the decrease in gross profit noted above offset in part by a decrease in SGA expenses in a broad range of areas.

Results of Operations—Accessories segment

The Accessories segment, comprised of Foot Petals and Baggallini, encompasses the designing, sourcing, marketing and distribution of a variety of accessory category products. These consumer product offerings range from shoe and foot care products to handbags, tote bags and other travel accessories. These products are sold predominately in North America through customers primarily in the specialty and independent store, televised retailer, e-tailing/internet based retail, upper tier department store, mass merchandising and discount store channels. Our business activity with these customers is primarily replenishment in nature, with most of our sales spread evenly throughout the year.

Selected financial results for the second quarter of fiscal 2013 and of fiscal 2012 were:


(all amounts in 000’s)	Second Quarter Fiscal 2013		% of Net Sales		Second Quarter Fiscal 2012		% of Net Sales		Increase (Decrease)
Net sales	$	9,012		100.0	$	7,694		100.0	$	1,318
Gross profit		4,886		54.2		4,540		59.0		346
Operating profit		1,572		17.4		1,588		20.6		(16	)

Net sales increased quarter over quarter by 17.1% with increased shipments to customers in both existing and new channels, with most of the net growth primarily reported in shipments to a variety of customer channels including off-price, international, mass merchandising and department store, offset by decreased shipments in the catalog/dot com, televised retailer and other customer channels.

Gross profit dollars increased by 7.6% and gross profit as a percentage of net sales contracted by 480 basis points. The increase in gross profit dollars reflected the increased shipment volumes noted above. The decrease in gross profit as a percentage of sales reflected primarily the relative mix of shipments (and related margins) to customers in various channels.

Operating profit was relatively flat with increased gross profit substantially offset by increased SGA spending. Increased spending primarily reflected higher shipping expenses associated with the increase in volume referenced above as well as higher marketing and selling expenses incurred, which were in line with our long-term strategic growth goals for this segment.

Selected financial results for the first half of fiscal 2013 and of fiscal 2012 were:


(all amounts in 000’s)	First Half Fiscal 2013		% of Net Sales		First Half Fiscal 2012		% of Net Sales		Increase (Decrease)
Net sales	$	17,973		100.0	$	15,749		100.0	$	2,224
Gross profit		9,961		55.4		9,149		58.1		812
Operating profit		3,373		18.8		3,378		21.4		(5	)

Net sales increased period over period by 14.1% with increased shipments to customers in both existing and new channels, with most of the net growth in shipments seen in off-price, international, mass merchandising and department store customer channels, offset by decreased shipments in the catalog/dot com, televised retailer and other customer channels.

Gross profit dollars increased by 8.9% and gross profit as a percentage of net sales contracted by 270 basis points. The increase in gross profit dollars reflected the increased shipment volumes noted above. The decrease in gross profit as a percentage of sales reflected primarily the relative mix of shipments (and related margins) to customers in various channels.

Operating profit was relatively flat with increased gross profit substantially offset by increased SGA spending. Increased spending primarily reflected higher shipping expenses associated with the increase in volume referenced above as well higher marketing and selling expenses incurred, which were in line with our long-term strategic growth goals for this segment.

Results of Operations – Unallocated Corporate Expenses

Consistent with our internal reporting structure, certain corporate expenses deemed applicable to the Company as a whole were not allocated to any business segment. Such costs included those associated with the Company’s corporate and governance functions, including the CEO, Chief Financial Officer and Board of Directors, as well as such expense areas as annual accrued bonus incentive, stock compensation, pension charges, professional fees and similar corporate expenses. These unallocated costs are shown below:


(all amounts are in 000’s)	Fiscal 2013		Fiscal 2012		Decrease
Second Quarter	$	2,761	$	3,322	$	561
First Half		5,477		6,134		657

The decrease in unallocated expense primarily reflected lower accrued incentive bonus expense applicable to individuals working in all areas of the Company, offset by increased expenses from a broad range of other areas.

Seasonality

Although our various product lines in our Footwear and Accessories segments are sold on a year-round basis, the demand for specific products or styles within our Footwear segment is highly seasonal. For example, the demand for gift-oriented slipper products is higher in the fall holiday season than it is in the spring and summer seasons. As the timing of product shipments and other events affecting the retail business may vary, results for any particular quarter may not be indicative of results for the full fiscal year or for future comparable quarters. A majority of our annual shipments is expected to continue to be seasonal in nature for the foreseeable future.

Looking ahead to the remainder of Fiscal 2013 and beyond

Looking ahead to the remainder of fiscal 2013 and beyond, our strategies are centered on growing market share in existing channels; pursuing new retail distribution opportunities; expanding our business internationally; and continuing our growth through appropriate acquisitions. We expect our business model over time to perform at or above levels consistent with top quartile performance among our industry peers. We expect to continue to deliver performance that drives revenue and profitability growth and long-term shareholder value.

Liquidity and Capital Resources

Our only source of revenue and a primary source of cash flow comes from our operating activities, in addition to funds available through our Revolving Credit Facility, as described further below in the section captioned “Credit Agreement”, subject to its terms. When cash inflows are less than cash outflows, we have access to funds under our Revolving Credit Facility. In addition, we can and have obtained bank borrowings specific to business acquisitions. We may seek to finance future capital investment programs through various methods, including, but not limited to, cash flows from operations and borrowings under our current or additional credit facilities.

Our liquidity requirements arise from the funding of our working capital needs, which include primarily: inventory; operating expenses; accounts receivable; funding of capital expenditures; business acquisitions; payment of cash dividends and income tax; and repayment of our indebtedness. Generally, most of our product purchases from third-party manufacturers are acquired on an open- account basis, and to a significantly lesser extent, through trade letters of credit. Such trade letters of credit are drawn against our Revolving Credit Facility at the time of shipment of the products and reduce the amount available under that facility when issued.

Cash and cash equivalents on hand were approximately $24.1 million at December 29, 2012, compared to $10.5 million at December 31, 2011 and $16.1 million at June 30, 2012. Short-term investments were approximately $17.3 million at December 29, 2012, $25.7 million at December 31, 2011 and $25.6 million at June 30, 2012.

Operating Activities

Our operations provided approximately $6.6 million and $15.7 million of cash during first half of fiscal 2013 and the first half of fiscal 2012, respectively, based primarily on the seasonality of our Footwear segment business. The operating cash flows primarily reflected the impact of timing in our Footwear and Accessories segment shipments and inventory purchased, as well as the timing of collections and customer deductions in accounts receivable, payments for inventory purchases and relative incentive bonus and income tax accruals and payments.

Our working capital ratio, which is calculated by dividing total current assets by total current liabilities, was 4.3:1 at December 29, 2012, 3.9:1 at December 31, 2011 and 3.5:1 at June 30, 2012. The difference in this ratio from December 29, 2012 to December 31, 2011 reflected primarily the effect of incremental earnings over the intervening twelve-month period.

We anticipate that we will continue to fund our operations and meet our debt obligations in the future primarily by using cash generated from operations.

Changes in the primary components of our working capital accounts for the first half of fiscal 2013 and the first half of fiscal 2012, respectively, were as follows:

•

The increases in accounts receivable of $11.7 million and $15.5 million, respectively, reflected primarily seasonal Footwear segment and increased Accessories segment shipments during the second quarter as compared to the same period of fiscal 2012; and the relative timing of customer collections and deductions.

•

Net inventories decreased by $1.3 million and $6.6 million, respectively, in line with the seasonal nature of the Footwear segment business.

•

Accounts payable decreased by $2.3 million and $4.0 million, respectively. These changes were due primarily to the timing of purchases, payment for and shipments of finished goods inventory in our Footwear segment and in line with the seasonal nature of that business.

•

Accrued expenses increased by $374 thousand and $6.6 million, respectively. Changes in the period reflect the impact of annual incentive expense and income tax expense accruals during the period, with normally an offsetting impact from the payment of annual incentive bonuses accrued at the end of the preceding fiscal year. The difference in relative change in fiscal 2013 compared to the same period in fiscal 2012 was due primarily to the absence of any incentive bonus payment during the first half of fiscal 2012 and comparative income tax accruals made during the respective periods.

Investing Activities

Our investing activities provided $7.8 million in cash during the first half of fiscal 2013 and used $11.5 million in cash during the first half of fiscal 2012. This net activity primarily reflected the net effect from the sale and purchase of investments during the respective periods. In addition, we reported capital expenditures of $482 thousand and $1.3 million during the first half of fiscal 2013 and the first half of fiscal 2012, respectively.

Financing Activities

Financing activities during the first half of fiscal 2013 and the first half of fiscal 2012 used $6.4 million and $2.9 million in cash, respectively, primarily reflecting the principal repayment of long-term debt. In addition, during the first half of fiscal 2013, we repaid the approximately $1.8 million outstanding balance on our short-term note. In the first half of fiscal 2012, we also obtained and repaid $3 million in revolving credit to finance our then seasonal working capital requirements for the Footwear segment.

2013 Liquidity

We believe our sources of cash and cash equivalents, short-term investments, cash from operations and funds available under our Revolving Credit Facility, as described below, will be adequate to fund our operations, capital expenditures and payment of dividends through the remainder of fiscal 2013.

Credit Agreement

Under the terms of a bank facility (“Bank Facility”) entered into in March 2011, The Huntington National Bank (“Huntington”) is obligated to advance funds to us for a period of three years under a revolving credit facility (“Revolving Credit Facility”). We may have outstanding indebtedness of up to $5 million under the Revolving Credit Facility from January through June of each calendar year and up to $10 million from July through December of each calendar year. The availability under the Revolving Credit Facility includes a $1.5 million sub-facility for letters of credit. Under the terms of the Bank Facility, we may request that Huntington increase the Revolving Credit Facility by an amount of up to $5 million. The termination and maturity date of the Revolving Credit Facility is March 1, 2014. The interest rate on the Revolving Credit Facility is a rate equal to LIBOR plus 1.75%. Additionally, the Company pays a quarterly fee equal to 0.25% of the daily average unused amount of the Revolving Credit Facility, and paid a one-time $25 thousand facility fee in connection with the Revolving Credit Facility. This facility fee is being amortized over the term of the Revolving Credit Facility. Further, the Revolving Credit Facility must not have any outstanding borrowings for at least 30 consecutive days commencing on July 1 and continuing through June 30 of the following year. There was no outstanding balance on the Revolving Credit Facility at December 29, 2012 and no borrowings under this Revolving Credit Facility occurred during the first half of fiscal 2013.

Under the terms of the Bank Facility, Huntington also provided us $30 million under a term loan facility (the “Term Loan Facility”). Under the Term Loan Facility, Huntington disbursed $15 million on March 1, 2011 and the remaining $15 million on March 31, 2011. We began paying monthly principal payments in the amount of $357 thousand, together with accrued interest, on April 1, 2011, with the then remaining outstanding balance and accrued interest due and payable on March 1, 2016. The interest rate on the Term Loan Facility is a rate equal to LIBOR plus 1.85%. In conjunction with the Bank Facility, we entered into an interest rate contract that provides for a fixed interest rate of 3.94% on a notional amount of 50% of the outstanding principal balance of the term loan.

We paid Huntington a one-time facility commitment fee of $75 thousand in connection with the Term Loan Facility; this fee is being amortized over the term of the loan. The applicable interest rate on the Term Loan Facility at December 29, 2012 was 2.06%, assuming a 30-day LIBOR rate of 0.21% on that date.

Under the terms of the Bank Facility, we are required to satisfy certain financial covenants, including (a) satisfying a minimum fixed charge coverage ratio test of not less than 1.1 to 1.0, which is calculated quarterly on a trailing 12-month basis beginning with the fiscal quarter ending on or nearest to March 31, 2012, (b) satisfying a funded debt leverage ratio test of not greater than 2.25 to 1.00, which is calculated quarterly beginning with the fiscal quarter ending on or nearest to March 31, 2012 and (c) maintaining a consolidated net worth of at least $52 million, increased annually by an amount equal to 50% of the Company’s consolidated net income subsequent to July 2, 2011. At December 29, 2012, we were in compliance with all these financial covenants.

Other Long-Term Indebtedness and Current Installments of Long-Term Debt

At December 29, 2012, we reported $4.3 million as the current portion of long-term debt. The term loan under the Term Loan Facility has a seven-year amortization schedule, and we are obligated to make interest and principal payments over the five-year term of the loan, with a final payment for the balance remaining due at the end of the five-year term.

During fiscal 2011 as noted above, we entered into an interest rate contract, with an initial notional amount of $15 million, which extends through the five-year period of the term loan obtained in fiscal 2011 and used to fund our business acquisitions. This interest rate contract has a fixed interest rate of 3.94% and extends over the period of the term loan with a notional amount that will adjust over time to an amount approximating fifty percent of the outstanding term loan balance. This interest rate contract has been accounted for as an effective cash flow hedge for a portion of the term loan.

Contractual Obligations

There have been no material changes to “Contractual Obligations” since the end of fiscal 2012, other than routine payments and obligations under the Bank Facility. For more detail on our contractual obligations, please refer to the discussion under the caption “Liquidity and Capital Resources – Other Matters Impacting Liquidity and Capital Resources – Contractual Obligations” in “ Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations ” of Part II of our 2012 Form 10-K.

Critical Accounting Policies and Use of Significant Estimates

The preparation of financial statements in accordance with U.S. GAAP requires that we make certain estimates. These estimates can affect reported revenues, expenses and results of operations, as well as the reported values of certain assets and liabilities. We make these estimates after gathering as much information from as many resources, both internal and external, as are available at the time. After reasonably assessing the conditions that exist at the time, we make these estimates and prepare consolidated financial statements accordingly. These estimates are made in a consistent manner from period to period, based upon historical trends and conditions and after review and analysis of current events and circumstances. We believe these estimates reasonably reflect the current assessment of the financial impact of events whose actual outcomes will not become known to us with certainty until sometime in the future.

The following discussion of critical accounting policies is intended to bring to the attention of readers those accounting policies that management believes are critical to the Company’s consolidated financial statements and other financial disclosures. It is not intended to be a comprehensive list of all of our significant accounting policies that are more fully described in Note (1) of the Notes to Consolidated Financial Statements in “ Item 8—Financial Statements and Supplementary Data. ” of Part II of our 2012 Form 10-K.

A summary of the critical accounting policies requiring management estimates follows:

a) We recognize revenue when the following criteria are met:

•

goods are shipped from our warehouses and other third-party distribution locations, at which point our customers take ownership and assume risk of loss;

•

collection of the relevant receivable is probable;

•

persuasive evidence of an arrangement exists; and

•

the sales price is fixed or determinable.

In certain circumstances, we sell products to customers under arrangements which provide for return privileges, discounts, promotions and other sales incentives. At the time we recognize revenue, we reduce our measurement of revenue by an estimate of the potential future returns and allowable retailer promotions and incentives, and recognize a corresponding reduction in reported trade accounts receivable. These estimates have traditionally been, and continue to be, sensitive to and dependent on a variety of factors including, but not limited to, quantities sold to our customers and the related selling and marketing support programs; channels of distribution; sell-through rates at retail; the acceptance of the styling of our products by consumers; the overall economic environment; consumer confidence leading towards and through the holiday selling season; and other related factors. During the second quarter and first half of fiscal 2013, we recognized reserve adjustments that increased our earnings before income tax by $60 thousand and $224 thousand, respectively, primarily related to our Footwear segment customer incentive reserves of $1.1 million established at June 30, 2012. During the second quarter and first half of fiscal 2012, we recognized reserve adjustments that increased our earnings before income tax by $489 thousand and $692 thousand, respectively, related to our Footwear segment customer incentive reserves of $2.2 million established at July 2, 2011.

We monitor the creditworthiness of our customers and the related collection of monies owed to us. In circumstances where we become aware of a specific customer’s inability to meet its financial obligations, a specific reserve for bad debts is taken as a reduction to accounts receivable to reduce the net recognized receivable to the amount reasonably expected to be collected. For all other customers, we recognize estimated reserves for bad debts based on our historical collection experience, the financial condition of our customers, an evaluation of current economic conditions and anticipated trends, each of which is subjective and requires certain assumptions. Actual charges for uncollectible amounts were not materially different from our estimates during the first half of fiscal 2013 or during the first half of fiscal 2012.

We value inventories using the lower of cost or market, based upon the first-in, first-out (“FIFO”) costing method. We evaluate our inventories for any reduction in realizable value in light of the prior selling season, the overall economic environment and our expectations for the upcoming selling seasons, and we record the appropriate write-downs based on this evaluation. During the first half of fiscal 2013 and the first half of fiscal 2012, there were no significant write-downs to inventory recorded.

We make an assessment of the amount of income taxes that will become currently payable or recoverable for the just concluded period, and the deferred tax costs or benefits that will become realizable for income tax purposes in the future, as a consequence of differences between results of operations as reported in conformity with U.S. GAAP, and the requirements of the income tax codes existing in the various jurisdictions where we operate. In evaluating the future benefits of deferred tax assets, we examine our capacity for generating future taxable profit. In addition, we make ongoing assessments of income tax exposures that may arise at the Federal, state or local tax levels. U.S. GAAP principles require that a position taken or expected to be taken in a tax return be recognized in the financial statements when it is more likely than not (i.e., a likelihood of more than fifty percent) that the position would be sustained upon examination by tax authorities. A recognized tax position is then measured at the largest amount of benefit that has a greater than fifty percent likelihood of being realized upon settlement. Any identified exposures will be subjected to continuing assessment and estimates will be revised accordingly as information becomes available to us. We had no tax reserve for uncertain tax positions at the end of the first half of fiscal 2013 or at the end of the first half of fiscal 2012 at the Federal, state or local tax levels.

We make assumptions to measure our pension liabilities and project the long-term rate of return expected on the invested pension assets in our qualified associates’ retirement plan. Changes in assumptions, which may be caused by conditions in the debt and equity markets, changes in asset mix, and plan experience, could have a material effect on our pension obligations and expenses, and can affect our net income, assets, and shareholders’ equity. Changes in assumptions may also result in voluntary or mandatory requirements to make additional contributions to our qualified associates’ retirement plan. These assumptions are reviewed and reset as appropriate at the pension measurement date commensurate with the end of our fiscal year, and we monitor these assumptions over the course of the fiscal year.

We review the carrying value of our long-lived assets including property, plant and equipment and intangible assets with finite useful lives for impairment whenever events or change in circumstances warrant such review. Impairment testing involves a comparison of the sum of the undiscounted future cash flows of the asset or asset group to its respective carrying amount. If the sum of the undiscounted future cash flows exceeds the carrying amount, then no impairment exists. There were no impairment indicators present during the first half of fiscal 2013.

Goodwill and intangible assets with indefinite lives, such as trade names, are not amortized, but instead are tested for impairment annually, during the Company’s second fiscal quarter, or more frequently if events or changes in circumstances indicate that impairment may be present. Application of goodwill impairment testing involves judgment, including but not limited to, the identification of reporting units and estimating the fair value of each reporting unit. A reporting unit is defined as an operating segment or one level below an operating segment. We test goodwill at the reporting level. The goodwill impairment test consists of comparing the fair value of each reporting unit, determined using discounted cash flows, to each reporting unit’s respective carrying value. If the estimated fair value of a reporting unit exceeds its carrying value, there is no impairment. If the carrying amount of the reporting unit exceeds its estimated fair value, goodwill impairment is indicated. The amount of the impairment is determined by comparing the fair value of the net assets of the reporting unit, excluding goodwill, to its estimated fair value, with the difference representing the implied fair value of the goodwill. If the implied fair value of the goodwill is lower than its carrying value, the difference is recorded as an impairment charge in the consolidated statements of operations. This impairment testing can consist of either a qualitative approach to evaluate impairment where no significant changes in key assumptions are deemed to have occurred since the performance of the last quantitative analysis or through performance of a full quantitative analysis.

The Company adopted ASU 2011-8 and early adopted ASU 2012-2, and performed a one-step qualitative assessment for its annual impairment test evaluation during the second quarter of fiscal 2013 on goodwill and indefinite life intangible assets. In conducting the qualitative assessment, the Company considered relevant events and circumstances that affect the fair value or carrying amount of a reporting unit and indefinite life intangible assets. Such events and circumstances could include macroeconomic conditions, industry and market considerations, overall financial performance, entity and reporting unit specific events, and capital markets pricing. The Company considered the extent to which each of the adverse events and circumstances identified affect the comparison of a reporting unit and indefinite life intangible assets’ fair value with its carrying amount. The Company placed more weight on the events and circumstances that most affect a reporting unit and indefinite life intangible assets’ fair value or the carrying amount of its net assets. The Company considered positive and mitigating events and circumstances that may affect its determination of whether it is more likely than not that the fair value of a reporting unit and indefinite life intangible assets are less than its carrying amount. The Company also considered recent valuations of its reporting units and indefinite life intangible assets, including the difference between the most recent fair value estimate and the carrying amount. These factors were all considered by management in reaching its conclusion about whether to perform the first step of the impairment test. If management had concluded that further testing was required, the Company would have performed a quantitative valuation to estimate the fair value of its reporting units and indefinite life intangible assets.

There are various other accounting policies that also require management’s judgment. For an additional discussion of all of our significant accounting policies, please see Note (1) of the Notes to Consolidated Financial Statements in “Item 8—Financial Statements and Supplementary Data. ” of Part II of our 2012 Form 10-K.

Actual results may vary from these estimates as a consequence of activities after the period-end estimates have been made. These subsequent activities will have either a positive or negative impact upon the results of operations in a period subsequent to the period when we originally made the estimates.

Recently Issued Accounting Standards

See “Note 16—Recently Issued Accounting Standards” of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q, for any recently issued but not yet adopted accounting standards that could have a significant effect on the Company when they are implemented.

ITEM 3 — Quantitative and Qualitative Disclosures About Market Risk

Market Risk Sensitive Instruments — Foreign Currency

During fiscal 2012 and through the first half of fiscal 2013, substantially all of our sales and all of our purchases were denominated in U.S. dollars, and accordingly, we did not have any foreign currency risk.

Market Risk Sensitive Instruments — Interest Rates

Our principal market risk exposure relates to the impact of changes in short-term interest rates that may result from the floating rate nature of our Bank Facility. At December 29, 2012, we had $22.5 million outstanding under the Term Loan Facility. We have an interest rate contract with Huntington that effectively fixes the interest rate at 3.94% for fifty percent of the loan balance and an interest rate equal to LIBOR plus 1.85% applies to the remainder of the loan balance under the Term Loan Facility.

Interest rate changes can impact interest expense on the unhedged portion of the term loan, the level of earnings from short-term investments and the measurement of pension liabilities, which measurement is performed on an annual basis.

ITEM 4 – Controls and Procedures

Evaluation of Disclosure Controls and Procedures

With the participation of the President and Chief Executive Officer (the principal executive officer) and the Senior Vice President-Finance and Chief Financial Officer (the principal financial officer), the Company’s management has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the quarterly period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, the Company’s President and Chief Executive Officer and the Company’s Senior Vice President-Finance and Chief Financial Officer have concluded that:

information required to be disclosed by the Company in this Quarterly Report on Form 10-Q and the other reports that the Company files or submits under the Exchange Act would be accumulated and communicated to the Company’s management, including its principal executive officer and its principal financial officer, as appropriate to allow timely decisions regarding required disclosure;

information required to be disclosed by the Company in this Quarterly Report on Form 10-Q and the other reports that the Company files or submits under the Exchange Act would be recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms; and

the Company’s disclosure controls and procedures were effective as of the end of the quarterly period covered by this Quarterly Report on Form 10-Q.

Changes in Internal Control Over Financial Reporting

There were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the Company’s quarterly period ended December 29, 2012, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

No response required.

Item 1A. Risk Factors

Please see the “Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995 at the front of this Quarterly Report on Form 10-Q and “Item 1A. Risk Factors” of Part I of our 2012 Form 10-K for information regarding risk factors. There have been no material changes from the risk factors previously disclosed in “Item 1A. Risk Factors” of Part I of our 2012 Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(a) and (b) Not applicable

(c) Neither R.G. Barry Corporation nor any “affiliated purchaser” of R.G. Barry Corporation, as defined in Rule 10b-18 (a) (3) under the Securities Exchange Act of 1934, as amended, purchased any common shares of R.G. Barry Corporation during the quarterly period ended December 29, 2012. R.G. Barry Corporation does not currently have in effect a publicly-announced repurchase plan or program.

Item 3. Defaults Upon Senior Securities

(a), (b) Not Applicable

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

See Index to Exhibits at page 32.

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.


	R.G. BARRY CORPORATION
	Registrant

Date: February 6, 2013	By:	/s/ José G. Ibarra
		José G. Ibarra
		Senior Vice President – Finance and Chief Financial
		Officer (Principal Financial Officer)
		(Duly Authorized Officer)

R.G. BARRY CORPORATION

INDEX TO EXHIBITS


Exhibit No.	Description	Location

31.1	Rule 13a-14(a)/15d-14(a) Certifications (Principal Executive Officer)	Filed herewith

31.2	Rule 13a-14(a)/15d-14(a) Certifications (Principal Financial Officer)	Filed herewith

32.1	Section 1350 Certifications (Principal Executive Officer and Principal Financial Officer)	Furnished herewith

101.INS	XBRL Instance Document	Submitted electronically herewith #

101.SCH	XBRL Taxonomy Extension Schema Document	Submitted electronically herewith #

101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document	Submitted electronically herewith #

101.LAB	XBRL Taxonomy Extension Label Linkbase Document	Submitted electronically herewith #

101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document	Submitted electronically herewith #

101.DEF	XBRL Taxonomy Extension Definition Linkbase Document	Submitted electronically herewith #

#— Attached as Exhibit 101 to this Quarterly Report on Form 10-Q of R.G. Barry Corporation are the following documents formatted in XBRL (eXtensible Business Reporting Language):

(i)

Condensed Consolidated Balance Sheets at December 29, 2012 and June 30, 2012;

(ii)

Condensed Consolidated Statements of Income for the second quarter and first half of fiscal 2013 and the second quarter and first half of fiscal 2012;

(iii)

Condensed Consolidated Statements of Comprehensive Income for the second quarter and first half of fiscal 2013 and the second quarter and first half of fiscal 2012;

(iv)

Condensed Consolidated Statements of Cash Flows for the first half of fiscal 2013 and the first half of fiscal 2012; and

(v)

Notes to Condensed Consolidated Financial Statements for the second quarter and first half of fiscal 2013 and the second quarter and first half of fiscal 2012

In accordance with Rule 406T of Regulation S-T, the XBRL related documents in Exhibit 101 to this Quarterly Report on Form 10-Q are deemed not filed or part of a registration statement or prospectus for purposes of Section 11 or Section 12 of the Securities Act of 1933, as amended; are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended; and otherwise are not subject to liability under those Sections.

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