SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended September 30, 1995
OR
[ ]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 1-7258
TANDYCRAFTS, INC.
(Exact name of registrant as specified in its charter)
Delaware 75-1475224
(State of incorporation) (I.R.S. Employer Identification Number)
1400 Everman Parkway, Fort Worth, Texas 76140
(Address of principal executive offices) (Zip Code)
(817) 551-9600
(Registrant's telephone number, including area code)
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 X No___.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Shares outstanding as of October 31, 1995
- ----------------------------- ------------------------------------------
Common Stock, $1.00 par value 11,879,148
TANDYCRAFTS, INC.
Form 10-Q
Quarter Ended September 30, 1995
TABLE OF CONTENTS
PART 1 - FINANCIAL INFORMATION
Item Page No.
- ---- --------
1. Condensed Consolidated Financial Statements 3-7
2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-12
PART II - OTHER INFORMATION
6. Exhibits and Reports on Form 8-K 13
Signatures 14
PART I
Item 1. Financial Statements
TANDYCRAFTS, INC.
Condensed Consolidated Statements of Income
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended September 30,
----------------------------------
1995 1994
------------ -------------
Net sales $ 62,349 $ 65,512
------------ -------------
Operating costs and expenses:
Cost of goods sold 38,813 39,802
Selling, general and administrative 20,913 20,305
Depreciation and amortization 1,525 1,349
------------ -------------
Total operating costs and expenses 61,251 61,456
------------ -------------
Operating income 1,098 4,056
Interest expense, net 1,085 826
------------ -------------
Income before provision for income taxes 13 3,230
Provision for income taxes 4 1,176
------------ -------------
Net income $ 9 $ 2,054
============ =============
Net income per share $ 0.00 $ 0.18
============ =============
Weighted average common and
common equivalent shares 11,769 11,214
====== ======
TANDYCRAFTS, INC.
Condensed Consolidated Balance Sheets
(Dollars in thousands)
(Unaudited)
September 30, June 30,
1995 1995
------------ -------------
ASSETS
- ------
Current assets:
Cash, including short-term investments $ 2,068 $ 1,807
Trade accounts receivable, net of
allowance for doubtful accounts
of $691 and $605, respectively 32,319 $ 31,440
Inventories 66,062 65,742
Other current assets 3,695 2,991
------------ -------------
Total current assets 104,144 101,980
------------ -------------
Property and equipment, at cost 49,394 48,658
Accumulated depreciation (21,109) (19,951)
------------ -------------
Property and equipment, net 28,285 28,707
------------ -------------
Other assets 619 604
Goodwill 47,277 47,512
------------ -------------
$ 180,325 $ 178,803
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Notes payable $ 3,400 $ 2,000
Accounts payable 14,199 12,558
Accrued liabilities and other 9,996 12,555
------------ -------------
Total current liabilities 27,595 27,113
------------ -------------
Long-term debt 59,000 59,000
Deferred income taxes 2,029 2,029
Stockholders' equity:
Common stock, $1 par value,
50,000,000 shares authorized,
18,527,988 shares issued 18,528 18,528
Additional paid-in capital 18,009 17,447
Retained earnings 80,093 80,084
Cost of stock in treasury, 6,685,555
shares and 6,811,300 shares,
respectively (24,929) (25,398)
------------ -------------
Total stockholders' equity 91,701 90,661
------------ -------------
$ 180,325 $ 178,803
============ =============
TANDYCRAFTS, INC.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Three Months Ended September 30,
----------------------------------
1995 1994
------------ ------------
Net cash flows from operating activities $ (1,361) $ (7,347)
------------ ------------
Cash flows from investing activities:
Additions to property and equipment,
net, excluding the effect of
businesses acquired (809) (3,153)
Purchase of businesses, net of
cash acquired - (168)
------------ ------------
Net cash used for investing
activities (809) (3,321)
------------ ------------
Cash flows from financing activities:
Sales of treasury stock to employee
benefit program 1,031 1,670
Borrowings under bank credit
facility, net 1,400 9,730
------------ ------------
Net cash provided by financing
activities 2,431 11,400
------------ ------------
Increase in cash, including short-term
investments 261 732
Balance, beginning of period 1,807 1,506
------------ -------------
Balance, end of period $ 2,068 $ 2,238
============ =============
TANDYCRAFTS, INC.
Condensed Consolidated Statement of Stockholders' Equity
(Dollars in thousands)
(Unaudited)
<TABLE>
<S><C>
Additional
Common paid-in Retained Treasury
stock capital earnings stock Total
------- ---------- ---------- --------- ----------
Balance, June 30, 1995 18,528 $ 17,447 $ 80,084 $ (25,398) $ 90,661
Sale of 125,745 shares of treasury stock
to employee benefit program - 562 - 469 1,031
Net income for three months ended
September 30, 1995 - - 9 - 9
-------- ---------- ---------- --------- ----------
Balance, September 30, 1995 $ 18,528 $ 18,009 $ 80,093 $ (24,929) $ 91,701
======== ========== ========== ========= ==========
</TABLE>
[S][C]
TANDYCRAFTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, the
accompanying condensed consolidated financial statements contain all adjustments
(consisting of only normal recurring adjustments) necessary for a fair statement
of the Company's financial position as of September 30, 1995 and June 30, 1995,
and the results of operations and cash flows for the three-month periods ended
September 30, 1995 and September 30, 1994. The results of operations for the
three-month periods ended September 30, 1995 and 1994 are not necessarily
indicative of the results to be expected for the full fiscal year. The
consolidated financial statements should be read in conjunction with the
financial statement disclosures contained in the Company's 1995 Annual Report to
Stockholders.
NOTE 2 - INVENTORIES
The components of inventories at September 30, 1995 consisted of the following
(in thousands):
Merchandise held for sale $ 45,978
Raw materials and work-in-process 20,084
--------
$ 66,062
========
NOTE 3 - EARNINGS PER SHARE
Net income per share is based upon the weighted average number of shares of
common stock and common stock equivalents outstanding during the periods. For
the three-month periods ended September 30, 1995 and 1994, the number of
weighted average shares and common stock equivalents is as follows (in
thousands):
Three Months Ended
September 30,
-----------------------
1995 1994
--------- ---------
Weighted average shares 11,769 11,204
Common stock equivalents - 10
--------- ---------
Total weighted average common and
common equivalent shares 11,769 11,214
========= =========
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
GENERAL
Tandycrafts, Inc. (the "Company") operates in two primary industry segments,
specialty retail and specialty manufacturing. The specialty retail group
consists of four distinct retail concepts: Tandy Leather Company, which sells
leathercraft and related products through 175 stores located in 45 states;
Joshua's Christian Stores, which sells inspirational books, music and gifts
through a chain of 72 stores located in ten states; Sav-On Discount Office
Supplies, which sells office supplies and related products through a chain of 38
stores located primarily in smaller markets; and Cargo Furniture and Accents,
which sells a proprietary line of solid wood furniture and decorative
accessories through a chain of 40 stores located primarily in regional shopping
malls. The specialty manufacturing segment is comprised of four divisions:
Picture Frames and Framed Art, Belts and Accessories, Outerwear and TWI.
The following table presents selected financial data for each significant
company or division comprising the Company's two primary industry segments for
the three-month periods ended September 30, 1995 and 1994 (in thousands):
<TABLE>
<S><C>
Three Months Ended September 30,
-------------------------------------------
1995 1994 % Increase (Decrease)
-------------------- -------------------- ---------------------
Operating Operating Operating
Sales Income Sales Income Sales Income
-------- --------- ------- --------- -------- ----------
Specialty retail:
- ----------------
Tandy Leather $ 10,262 $ 189 $ 11,309 $ 829 (9.3)% (77.2)%
Sav-On Discount Office
Supplies 7,545 59 5,259 (162) 43.5 136.4
Joshua's Christian Stores 7,070 (727) 6,016 (195) 17.5 (272.8)
Cargo Furniture & Accents 4,700 74 5,732 401 (18.0) (81.5)
-------- --------- -------- ---------- ------- ---------
Specialty retail 29,577 (405) 28,316 873 4.5 (146.4)
-------- --------- -------- ---------- ------- ---------
Specialty manufacturing:
- -----------------------
Picture Frames and
Framed Art 18,769 2,122 21,625 3,360 (13.2) (36.8)
Belts and Accessories 3,095 (151) 4,391 (104) (29.5) (45.2)
Outerwear 3,461 (231) 5,178 (13) (33.2) (1,676.9)
TWI 7,447 996 6,002 1,057 24.1 (5.8)
-------- --------- -------- ---------- ------- ---------
Specialty manufacturing 32,772 2,736 37,196 4,300 (11.9) (36.4)
-------- --------- -------- ---------- ------- ---------
Total operations,
excluding corporate $ 62,349 $ 2,331 $ 65,512 $ 5,173 (4.8)% (54.9)%
======== ========= ======== ========== ======= =========
</TABLE>
[S][C]
RESULTS OF OPERATIONS
Net sales
For the quarter ended September 30, 1995, consolidated net sales decreased
$3,163,000, or 4.8%, compared to the same period last year. Discussions relative
to each of the Company's industry segments are set forth below.
Specialty retail
Net sales for the specialty retail segment increased $1,261,000, or 4.5%,
compared to the same quarter last year. The specialty retail segment contributed
47.4% of consolidated net sales in the quarter ended September 30, 1995 compared
to 43.2% in the same quarter last year.
Tandy Leather Company's net retail sales decreased $1,047,000, or 9.3%,
compared to the same quarter last year with a decrease in same-store sales of
8.4%. The decrease in sales reflects a reduction in the average number of
transactions per store compared to the previous year resulting primarily from
the continued decline in popularity of Southwest fashion merchandise.
Sav-On Discount Office Supplies achieved a $2,286,000, or 43.5%, increase in net
sales over the same quarter last year, primarily as a result of an aggressive
store expansion program. Sav-On had 38 stores open at September 30, 1995
compared to 24 a year earlier. Same-store sales increased 9.7% primarily as a
result of increasing the customer base as newer stores continue to mature.
Joshua's Christian Stores achieved a $1,054,000, or 17.5%, increase in net
sales compared to the same quarter last year. The increase in total net sales is
primarily due to the effect of new store openings. Joshua's had 72 stores open
at September 30, 1995 compared to 67 stores open at September 30, 1994. Same-
store sales at Joshua's increased 5.8% for the quarter primarily as a result of
increased sales promotions.
Net sales for Cargo Furniture & Accents decreased $1,032,000, or 18.0%, compared
to the same quarter last year. The decrease is primarily attributable to three
fewer stores being open at September 30, 1995 than in the prior year and from
flat contract and same-store sales for the quarter.
Specialty manufacturing
Net sales for the specialty manufacturing segment decreased $4,424,000, or
11.9%, compared to the quarter ended September 30, 1994. The specialty
manufacturing segment contributed 52.6% of consolidated net sales in the quarter
ended September 30, 1995 compared to 56.8% in the same quarter last year.
The decrease in net sales for the Picture Frames and Framed Art division was
$2,856,000, or 13.2%, compared to the quarter ended September 30, 1994. The
decrease is primarily attributable to the shifting of sales to key customers
from the first to the second quarters and from a general weakness in the
specialty retail sector.
Net sales for the Belts and Accessories division decreased $1,296,000, or 29.5%,
compared to the same quarter last year. The sales decrease reflects continuing
weak demand in the cut-up belt market and continued softness in the western
apparel market.
Net sales for the Outerwear division decreased $1,717,000, or 33.2%, compared
to the same quarter last year. Sales for the quarter were adversely impacted by
continued soft demand experienced in the western apparel market and by the
residual impact on retail inventories of warm weather conditions in the prior
year which have affected the current year's sale of jackets and sweatshirts.
Also, sales to a major customer have decreased as a result of the reorganization
of that customer's distribution channels.
Net sales for the Tandy Wholesale International ("TWI") division, increased
$1,445,000, or 24.1%, compared to the same quarter last year. The increase in
net sales reflects the strong sales gains from the licensed products operations
primarily as a result of the addition of new customers, penetration into new
markets and the introduction of new product lines.
Operating income
Total operating income before corporate expenses decreased $2,842,000, or 54.9%,
to $2,331,000 for the quarter ended September 30, 1995 compared to $5,173,000
for the same quarter last year. A discussion of operating income for each
segment follows:
Specialty retail
Operating income for the specialty retail segment decreased $1,278,000, or
146.4%, resulting in an operating loss of $405,000 compared to operating income
of $873,000 for the same quarter last year.
Operating income for Tandy Leather decreased $640,000, or 77.2%, when compared
to the quarter ended September 30, 1994. The decrease in operating income is
primarily a result of the decrease in sales, particularly sales of Southwest
fashion merchandise with its corresponding higher gross profit. For the quarter,
gross profit decreased $583,000 primarily as a result of decreased sales and a
change in the sales mix. Selling, general and administrative expenses decreased
approximately $77,000 for the quarter when compared to the same quarter last
year; however, expenses as a percent of sales were up slightly due to the
decrease in sales.
Sav-On had operating income of $59,000 for the quarter ended September 30, 1995
compared to an operating loss of $162,000 for the same quarter last year. The
increase in operating income is primarily a result of increased sales and
efficiency gains at both stores and administrative units. Gross profit as a
percent of sales for the quarter decreased compared to the same quarter last
year primarily as a result of escalating paper costs which could not be passed
on to customers because of significant price competition and from increased
promotions associated with back-to-school sales. Administrative expenses have
decreased as a percent of sales reflecting the increase in sales relative to
administrative and support expenses.
Joshua's Christian Stores had an operating loss for the quarter ended September
30, 1995 of $727,000 compared to an operating loss for the same quarter last
year of $195,000. For the quarter ended September 30, 1995, gross margin and
selling, general and administrative expenses decreased as a percent of sales
from the same quarter last year. The decrease in gross margin is primarily the
result of heavy sales promotions during the quarter. The decrease in selling,
general and administrative expense is due to sales increasing at a faster rate
than administrative expenses.
Operating income for Cargo Furniture & Accents decreased $327,000, from $401,000
for the quarter ended September 30, 1994, to $74,000 for the quarter ended
September 30, 1995. The decrease in operating income is attributable to a
decrease in sales on three fewer stores, decreased gross margins, and the timing
of shipped orders. The decrease in gross margin is the result of sales
promotions and lower contract sales pricing.
Specialty manufacturing
Operating income for the specialty manufacturing segment decreased $1,564,000,
or 36.4%, from the quarter ended September 30, 1994 to $2,736,000.
Operating income for the Picture Frames and Framed Art division decreased 36.8%
from the quarter ended September 30, 1994 to $2,122,000. The decrease in
operating income for the quarter reflects a shifting of sales to key
customers from the first to the second quarters and from a general weakness in
the specialty retail sector.
The Belts and Accessories division posted an operating loss of $151,000 for the
quarter ended September 30, 1995 compared to an operating loss of $104,000 for
the same quarter last year. The decrease in operating profitability compared to
the previous year reflects the continued softness in demand experienced in the
cut-up and western apparel markets, resulting in lower sales and gross margins.
The Outerwear division had an operating loss of $231,000 for the quarter
compared to an operating loss of $13,000 for the same quarter last year. The
decrease in operating profitability reflects the softness in demand experienced
in the western apparel market as well as the residual impact on retail
inventories of warm weather conditions in the prior year which adversely
impacted current year sales of sweatshirts and jackets. Operating income was
also adversely impacted by the decrease in sales to a major customer as a result
of the reorganization of that customer's distribution channels.
The TWI division's operating income decreased $61,000, or 5.8%, for the quarter
compared to the same quarter last year. The decrease in operating income
reflects the continued decline of Southwest fashion merchandise sales from Tandy
Leather Manufacturing, partially offset by increased sales and profitability in
the licensed products group.
Selling, general and administrative expenses
Consolidated selling, general and administrative expenses were 33.5% as a
percent of sales for the quarter ended September 30, 1995 compared to 31.0% for
the same quarter last year. In total dollars, selling, general and
administrative expenses increased $608,000, or 3.0%, when compared to the same
quarter last year. The increase in expenses was primarily due to new store
openings and increased expenses related to the sales growth in the licensed
products group.
Interest expense, net
Net interest expense increased $259,000, or 31.4%, for the quarter ended
September 30, 1995 compared to the same quarter last year. The increase in
interest expense was due to an increase in average borrowings during the quarter
when compared to the prior year quarter and to higher average interest rates.
Depreciation and amortization
Consolidated depreciation and amortization increased $176,000, or 13.0%, for the
quarter ended September 30, 1995 compared to the quarter ended September 30,
1994. The increase is due primarily to depreciation related to property and
equipment of businesses acquired as well as amortization of goodwill related to
acquisitions.
Provision for income taxes
The effective income tax rate for the quarter ended September 30, 1995 was 35.0%
compared to 36.4% for the same quarter last year. The decrease in the effective
tax rate reflects a decrease in the federal statutory rate because of the
decline in income before taxes and the utilization of both federal and state
hiring tax credit programs as well as tax benefits generated from a Foreign
Sales Corporation.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity have come from cash flows from
operations, sales of treasury stock to employee benefit programs, and borrowings
under the Company's revolving credit facility. Primarily, these funds have been
used to finance acquisitions, purchase property and equipment, retire the ESOP
loan and finance the growth in inventories and receivables.
During the quarter ended September 30, 1995, cash increased $261,000. Cash used
by operating activities of $1,361,000 primarily resulted from an increase in
receivables and inventories related mainly to new store expansion and sales
increases requiring the expansion of working capital. Cash used for investing
activities of $809,000 resulted from capital expenditures for property and
equipment. Cash of approximately $2,431,000 was provided by financing
activities, primarily from borrowings under the Company's revolving credit
facility and the funding of the Company's contribution to the Tandycrafts
Employee Stock Ownership Program with treasury stock.
The Company has a $60 million revolving credit facility with a group of banks.
The credit facility is a two-year revolving line of credit, renewable annually,
and is convertible into a five-year term loan at the end of the revolving period
if not renewed. The Company also established a separate unsecured $5 million
borrowing facility from one of the banks, with interest charged on borrowings
based on the bank's prime rate. During July 1995, the Company established an
additional $10 million revolving credit facility that terminates on March 31,
1996.
In connection with the November 1993 acquisition of Impulse Designs, the Asset
Purchase Agreement (the "Agreement") provides for a contingent payment to be
made based upon the attainment of certain earnings thresholds for the year ended
December 31, 1994. In April 1995, the Company made an additional payment of $4.3
million pursuant to the terms of the Agreement. In June 1995, the former owners
of Impulse Designs filed an objection notice disputing the amount of the
additional payment. The Agreement provides for resolution of this dispute
through a process of binding arbitration. The additional amount sought by the
former owners of Impulse Designs is approximately $5.7 million. The Company
believes that no additional payment is required and has responded by filing a
counterclaim for a refund of an amount yet to be determined of the April 1995
payment. This dispute is expected to proceed to arbitration during fiscal 1996.
The range of additional payment or refund, if any, cannot yet be reasonably
determined.
Cash of approximately $809,000 was used for capital expenditures during the
quarter ended September 30, 1995. Planned capital expenditures for the
remainder of fiscal 1996 approximate $4,600,000 and are primarily targeted for
investments in the frames and framed art division and expansion of Joshua's
store base. Current store expansion plans call for Joshua's to open 16 new
stores during the remainder of fiscal 1996. Funding for new store expansion
planned for the remainder of fiscal 1996, exclusive of capital expenditures,
will approximate $2,500,000. Management believes that the Company's current
cash position, its cash flows from operations and available borrowing capacity
will be sufficient to fund its current operations, capital expenditures and
current growth plans.
Acquisitions
The Company may, from time to time, evaluate acquisition candidates which
complement its existing businesses. To the extent that the Company utilizes
debt to finance future acquisitions and goodwill associated with such
acquisitions is recorded, results of operations in future periods will be
impacted by increased interest expense and the amortization of goodwill
associated with such acquisitions.
Strategy Review
The Company plans to rigorously evaluate each of its various business segments
during the first half of fiscal 1996 to identify available actions to increase
their value to the Company and its shareholders. It is expected that the
Company will consider several options including changes in strategy or
management, restructuring of operations to achieve greater efficiency and
divestiture through a sale, spin-off or discontinuance of selected business
units. Taking one or more of these actions may result in the recognition of
one-time gains or charges during fiscal 1996. The timing and possible effect of
any such actions will not be known until completion of the strategic evaluation
by the Company and its advisors.
TANDYCRAFTS, INC.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
- ------ --------------------------------
(a) Exhibits:
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K:
The Company filed a Current Report on Form 8-K, dated August 9,
1995, which included the contents of a press release announcing
the unaudited results of operations for the three- and twelve-
month periods ended June 30, 1995.
TANDYCRAFTS, INC.
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.
TANDYCRAFTS, INC.
(Registrant)
Date: November 13, 1995 By:/s/Jerry L. Roy
-----------------------
Jerry L. Roy
President, Chief Executive Officer
and Director
Date: November 13, 1995 By:/s/Michael J. Walsh
-----------------------
Michael J. Walsh
Executive Vice President and Chief
Financial Officer, Secretary,
General Counsel and Director
(Principal Financial Officer)
Date: November 13, 1995 By:/s/Jim D. Allen
-----------------------
Jim D. Allen
Vice President and Director of
SEC Reporting
(Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Tandycrafts,
Inc.'s September 30, 1995 Form 10-Q and is qualified in its entirety by
reference to such Form 10-Q filing.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> SEP-30-1995
<CASH> 2,068
<SECURITIES> 0
<RECEIVABLES> 33,010
<ALLOWANCES> 691
<INVENTORY> 66,062
<CURRENT-ASSETS> 104,144
<PP&E> 49,394
<DEPRECIATION> 21,109
<TOTAL-ASSETS> 180,325
<CURRENT-LIABILITIES> 27,595
<BONDS> 0
<COMMON> 18,528
0
0
<OTHER-SE> 73,173
<TOTAL-LIABILITY-AND-EQUITY> 180,325
<SALES> 62,349
<TOTAL-REVENUES> 62,349
<CGS> 38,813
<TOTAL-COSTS> 61,251
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,092
<INCOME-PRETAX> 13
<INCOME-TAX> 4
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<EPS-DILUTED> 0.00
</TABLE>
