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 2009 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 when applicable.
Results of Operations
During the first quarter of fiscal 2010, net sales were $29.4 million, representing a $3.8 million or 14.9% increase over the comparable quarter in fiscal 2009. The quarter-on-quarter increase in net sales reflected increased shipments primarily to customers in the mass merchandising and off- price channels, offset by decreased shipments to customers in the department store channel. The increased shipments to mass merchandising and off-price channels reflected primarily the impact of shifts in timing of shipments to customers in those channels. The decreased shipments in the department store channel reflected primarily the impact of certain customer bankruptcies during calendar 2008 on comparable shipments on our first quarter of fiscal 2010.
Gross profit for the first quarter of fiscal 2010 was $12.3 million or 41.7% of net sales, compared to $10.2 million or 39.6% of net sales for the first quarter in fiscal 2009. This increase of $2.1 million in gross profit and 2.1 percentage points as a percent of net sales reflected both increased shipments for the quarter over the same prior year quarter and the impact of lower product costs due to the reduction in oil prices and availability of supplier capacity in the period in which we placed our fall season orders versus the same period in the prior year.
Selling, general and administrative ("SG&A") expenses were 29.9% and 33.5% as a percent of net sales for the first quarter of fiscal 2010 and first quarter of fiscal 2009, respectively. The quarter-on-quarter net increase of $221 thousand reflected primarily the net impact of higher payroll expenses and a pension settlement loss recognized in the first quarter of fiscal 2010 offset by reduced selling related expense in coop advertising, shows and exhibits.
For the first quarter of fiscal 2010, we recorded net interest income of $148 thousand, which was comparable to the $145 thousand of net interest income for the first quarter of fiscal 2009.
During the first quarter of fiscal 2010 and the first quarter of fiscal 2009, we reported income tax expense of $1.4 million and $612 thousand, respectively. The tax rates for the first quarter of fiscal 2010 and first quarter of fiscal 2009 were 37.6% and 35.7% , respectively.
Based on the results of operations noted above, we reported net earnings of $2.3 million or $0.21 per diluted common share for the first quarter of fiscal 2010 and approximately $1.1 million or $0.10 per diluted common share for the first quarter of fiscal 2009.
Seasonality
Although our various product lines are sold on a year-round basis, the demands for specific products or styles are 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 and shift, results for any particular quarter may not be indicative of results for the full year.

Looking ahead to the remainder of fiscal 2010 and beyond Looking forward, we are well positioned for the upcoming holiday season and our anticipated performance for fiscal 2010. We are working very closely with retailers to manage in-store inventory and to ensure that they have the appropriate mix of products to maximize their holiday sell-through over the next eight weeks. As the most productive period of our fiscal year, retail performance during the Christmas season remains critical to the Company's annual success. We previously indicated that we were planning fiscal 2010 revenue relatively flat due to the uncertainty still swirling about the economy and some segments of retail. Based upon open orders, our performance at retail thus far and the expectation that our products will continue to sell-through at or above last year's levels, we now expect to report modest annual revenue growth for the full fiscal year.
Liquidity and Capital Resources
Our only source of revenue and our primary source of cash flow come from our operating activities. When cash inflows are less than cash outflows, we also have access to funds under our Bank Facility, as described further below in this section, subject to its terms. We may seek to finance future capital investment programs through various methods, including, but not limited to, cash flow 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, other operating expenses and accounts receivable, funding of capital expenditures 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 lesser extent, through trade letters of credit. Such trade letters of credit are drawn against our Bank Facility at the time of shipment of the products and reduce the amount available under our Bank Facility when issued.
Cash and cash equivalents on hand were approximately $3.5 million at September 26, 2009 compared to $1.4 million at September 27, 2008 and $14.3 million at June 27, 2009. Short-term investments were approximately $15.3 million at September 26, 2009, $8.2 million at September 27, 2008 and $25.0 million at June 27, 2009. At the end of the first quarter of fiscal 2010, we carried a portfolio of $15.3 million in short-term investments, including $12.1 million of marketable investment securities consisting of variable rate demand notes and $3.2 million of other short-term investments. The marketable investment securities are classified as available-for-sale securities. These marketable investment securities are carried at cost, which approximates fair value based on FASB ASC 820-10 (for the overall Subtopic of topic 820 on fair value measurements and disclosures) level two input assumptions used in our valuation methodology. The other short-term investments are classified as held-to-maturity securities and include several corporate bonds, commercial paper investments and bank certificates of deposit. These other short-term investments have individual maturity dates ranging from November 2009 to February 2010.
Operating Activities
During the first quarter of fiscal 2010 and the comparable period of fiscal 2009, our profitable operations used cash of approximately $20.3 million and $15.8 million, respectively. The operating cash flows during these periods primarily reflected the impact of timing in our shipments and inventory purchased in each of those periods as well as the timing of sales and collections in accounts receivable. During all of fiscal 2009 and the first quarter of fiscal 2010, we funded our operations entirely by using our cash flow from operations.
Our working capital ratio, which is calculated by dividing total current assets by total current liabilities, was 4.3:1 at September 26, 2009, 3.8:1 at September 27, 2008 and 6.2:1 at June 27, 2009. The decrease in this ratio from June 27, 2009 to September 26, 2009 primarily reflected the impact of increases in accounts receivable, inventory and current liabilities due to the seasonality of our business.
We anticipate that we will continue to fund our operations by using our internal cash reserves in the future. Based on our tax net operating loss ("NOLs") carryforward position at the end of fiscal 2009 and our expected profitability in the future, we anticipate being able to utilize the NOLs in future periods, which will favorably impact our cash flow during those periods. We expect to begin paying U.S. federal income taxes during fiscal 2010.

Changes in the primary components of our working capital accounts for the first quarter of fiscal 2010 and first quarter of fiscal 2009, respectively, were as follows:
• Net accounts receivable increased by $15.0 million and 9.0 million in the first quarter of fiscal 2010 and the first quarter of fiscal 2009, respectively. The change in net accounts receivable during these reporting periods primarily reflected the timing of shipments of finished goods inventory to our customers consistent with the seasonality of our business, and the timing of cash collections and customer deductions for promotions and other allowances.

• Net inventories increased by $15.2 million and $14.7 million during the first quarter of fiscal 2010 and 2009 respectively. The increases reflected the net effect of the timing of purchases of finished goods from third-party manufacturers and shipments to our customers over the quarterly periods.

• Accounts payable increased by $8.1 million and $8.0 million during the first quarter of fiscal 2010 and 2009, respectively. These changes were due primarily to the timing of purchases and payment for finished goods inventory in line with the seasonality of our business.

• Accrued expenses decreased by $1.7 million and $1.5 million during the first quarter of fiscal 2010 and 2009. The decrease in accrued expenses was primarily due to the payment during these periods of bonuses, which had been accrued at each of fiscal 2009 and fiscal 2008, respectively.

Investing Activities
During the first quarter of fiscal 2010 and the first quarter of fiscal 2009, our investing activities provided $9.5 million and $2.9 million in cash, respectively. During the first quarter of fiscal 2010, our investing activities involved primarily the liquidation of $9.7 million in short-term investments, offset by $137 thousand in capital expenditures. The cash provided from the liquidation of short-term investments was used to fund our seasonal growth in accounts receivable and inventory.
Financing activities
During the first quarter of fiscal 2010, financing activities provided $17 thousand in cash. This financing cash inflow included proceeds related to stock options exercised by employees during the period, offset in part by a reduction in our outstanding debt obligations.
2010 Liquidity
We believe our sources of cash and cash equivalents, short-term investments, cash from operations and funds available under our Bank Facility, as described below, will be adequate to fund our operations and capital expenditures through the remainder of fiscal 2010.
Bank Facility
Our Company is party to an unsecured credit facility with The Huntington National Bank ("Huntington"). The original facility dated March 29, 2007 was modified on June 26, 2009. Under this second modification of the Bank Facility, Huntington is obligated to advance us funds for a period of two and a half years ending with December 31, 2011, subject to a one-year renewal option thereafter, up to the following amounts:

                              July to December       January to June
                Fiscal 2010       $12 million           $5 million
                Fiscal 2011       $10 million           $5 million
                Fiscal 2012       $8 million

The terms of the Bank Facility require the Company to satisfy certain financial covenants including (a) satisfying a minimum fixed charge coverage ratio of not less than 1.25 to 1.0 which is calculated on a trailing 12-month basis, and
(b) maintaining a consolidated net worth of not less than $44 million, increased annually by 50% of the Company' consolidated net income after June 28, 2009. The Bank Facility must be rested for 30 consecutive days beginning in February of each year. Also, the borrowing under the Bank Facility may not exceed 80% of the Company's eligible accounts receivable plus 50% of its eligible inventory at any one time. As of September 26, 2009, we were in compliance with these financial covenants.

The Bank Facility provides that Huntington will issue on behalf of the Company letters of credit with a maximum aggregate value of up to $1.5 million. The aggregate dollar amount of outstanding letters of credit is deducted from the available balance under the Bank Facility. At September 26, 2009, we had $10.5 million available under the Bank Facility, which was reduced by the aggregate amount of letters of credit outstanding.
The interest rate on the Bank Facility is a variable rate equal to LIBOR plus 2.75%. The applicable interest rate on the Bank Facility at September 26, 2009 was 3.00%, assuming a 30-day LIBOR rate of .25% on that date. Additionally, the modified agreement requires us to pay a quarterly unused line fee at the rate of 3/8% of the average unused Bank Facility balance. During the first quarter of fiscal 2010, we did not use the Bank Facility and incurred unused line fees of approximately $10 thousand. We incurred a commitment fee of approximately $43 thousand on the loan modification effective as of June 26, 2009 and $4 thousand of this fee was amortized as expense during the first quarter of fiscal 2010. Other Long-Term Indebtedness and Current Installments of Long-Term Debt As of September 26, 2009, we reported approximately $90 thousand as current installments of long-term debt, which represented the current portion of our obligation associated with the agreement originally entered into with the mother of our chairman as disclosed in Note (15) of the Notes to Consolidated Financial Statements included in our 2009 Form 10-K. At September 26, 2009, we reported approximately $75 thousand as consolidated long-term debt, all of which was related to the obligation under this agreement. Contractual Obligations
There have been no material changes to "Contractual Obligations" since the end of fiscal 2009, other than routine payments. For more detail on contractual obligations, please refer to the discussion under the caption "Liquidity and Capital Resources - Other Matters Impacting Liquidity and Capital Resources" in "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations" of Part II of our 2009 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 Notes (1)
(a) through (u) of the Notes to Consolidated Financial Statements in "Item 8 - Financial Statements and Supplementary Data." of Part II of our 2009 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 special 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 first quarter of fiscal 2010, there were no significant adjustments related to our customer incentive reserves of $1.3 million established at June 27, 2009.

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 are subjective and require certain assumptions. Actual charges for uncollectible amounts have not differed materially from our estimates in prior periods.

b) 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 quarter of fiscal 2010, there were no significant write-downs recorded to inventory.

c) 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 refund of federal income taxes due to our net operating loss carryforward position, and our projections of future profits. In addition, we make ongoing assessments of income tax exposures that may arise at the federal, state or local tax levels. As a result of these evaluations, any exposure deemed more likely than not will be quantified and accrued as tax expense during the period and reported in a reserve for uncertain tax positions. 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 quarter of fiscal 2010, the end of the first quarter of fiscal 2009, or the end of fiscal 2009 at either the state or federal tax levels.

d) We establish 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 end, and we monitor these assumptions over the course of the fiscal year.

e) 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 Notes (1) (a) through (u) of the Notes to Consolidated Financial Statements in "Item 8 - Financial Statements and Supplementary Data." of Part II of our 2009 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 estimate. Recently Issued Accounting Standards
See "Note (12). Recently Issued Accounting Standards" of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for a description of recent accounting pronouncements.