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 March 31, 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 March 31, 1995
- ----------------------------- ---------------------------------------
Common Stock, $1,00 par value 11,583,542
TANDYCRAFTS, INC.
Form 10-Q
Quarter Ended March 31, 1995
TABLE OF CONTENTS
PART 1 - FINANCIAL INFORMATION
Item Page No.
1. Condensed Consolidated Financial Statements 3-8
2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-15
PART II - OTHER INFORMATION
6. Exhibits and Reports on Form 8-K 16
Signatures 17
PART I
Item 1. Financial Statements
TANDYCRAFTS, INC.
Condensed Consolidated Statements of Income
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<S><C>
Three Months Ended Nine Months Ended
------------------------- -------------------------
March 31, March 31, March 31, March 31,
1995 1994 1995 1994
------------- ------------ ------------ ----------
Net sales $ 54,891 $ 52,469 $ 196,022 $ 158,048
------------ ------------ ------------ -----------
Operating costs and expenses:
Cost of products sold 33,160 31,222 117,534 93,801
Selling, general and
administrative 20,902 17,024 63,790 49,375
Depreciation and
amortization 1,465 1,046 4,021 2,866
------------ ------------ ------------ -----------
Total operating costs
and expenses 55,527 49,292 185,345 146,042
------------ ------------ ------------ -----------
Operating income (loss) (636) 3,177 10,677 12,006
Interest expense 1,001 476 2,777 1,005
------------ ------------ ------------ -----------
Income (loss) before
provision for income taxes (1,637) 2,701 7,900 11,001
Provision for income taxes (581) 1,021 2,805 4,210
------------ ------------ ------------ -----------
Net income (loss) $ (1,056) $ 1,680 $ 5,095 $ 6,791
============ ============ ============ ===========
Net income (loss) per share $ (0.09) $ 0.15 $ 0.45 $ 0.60
============ ============ ============ ===========
Weighted average common and
common equivalent shares 11,500 11,327 11,366 11,404
</TABLE>
TANDYCRAFTS, INC.
Condensed Consolidated Balance Sheets
(Dollars in thousands)
(Unaudited)
March 31, June 30,
1995 1994
--------- ---------
ASSETS
Current assets:
Cash, including short-term investments $ 1,889 $ 1,506
Trade accounts receivable, net of
allowance for doubtful accounts
of $551 and $441, respectively 26,653 26,021
Inventories 65,837 53,297
Other current assets 4,649 4,590
---------- ---------
Total current assets 99,028 85,414
---------- ---------
Property and equipment, at cost 49,586 42,303
Less-accumulated depreciation (19,930) (17,350)
---------- ---------
Property and equipment, net 29,656 24,953
---------- ---------
Other assets 582 739
Goodwill 46,930 39,325
---------- ---------
$ 176,196 $150,431
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
ESOP loan, current portion $ - $ 4,000
Accounts payable 11,919 11,333
Accrued liabilities and other 14,809 12,878
---------- ---------
Total current liabilities 26,728 28,211
---------- ---------
Long-term debt 58,700 41,600
Deferred income taxes 1,538 1,538
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 16,635 13,158
Retained earnings 79,962 74,867
Cost of stock in treasury, 6,944,446
shares and 7,367,357 shares,
respectively (25,895) (27,471)
---------- ---------
Total stockholders' equity 89,230 79,082
---------- ---------
$ 176,196 $150,431
========== =========
TANDYCRAFTS, INC.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Nine Months Ended
-----------------------
March 31, March 31,
1995 1994
--------- ---------
Net cash flows from operating activities $ (5,645) $(5,010)
--------- ---------
Cash flows from investing activities:
Additions to property and equipment,
net, excluding the effect of businesses
acquired (7,796) (3,490)
Purchase of businesses, net of cash
acquired (3,784) (36,468)
--------- ---------
Net cash used for investing
activities (11,580) (39,958)
--------- ---------
Cash flows from financing activities:
Sales of treasury stock to employee
benefit program 4,508 1,287
Purchase of treasury stock - (2,201)
Principal payments on ESOP loan (4,000) (2,000)
Borrowings under credit facility 17,100 35,000
ESOP loan payments received - 2,745
--------- ---------
Net cash provided by financing
activities 17,608 34,831
--------- ---------
Increase (decrease) in cash, including
short-term investments 383 (10,137)
Balance, beginning of period 1,506 12,075
--------- ---------
Balance, end of period $ 1,889 $ 1,938
========= =========
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, 1994 $ 18,528 $ 13,158 $ 74,867 $(27,471) $ 79,082
Sale of 381,253 shares of treasury stock
to employee benefit program - 3,087 - 1,421 4,508
Contingent payment of 41,658 shares
for businesses acquired 390 155 545
Net income for nine months ended
March 31, 1995 - - 5,095 5,095
--------- --------- --------- --------- ----------
Balance, March 31, 1995 $ 18,528 $ 16,635 $ 79,962 $ (25,895) $ 89,230
========= ========= ========= ========= ==========
</TABLE>
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 March 31, 1995 and June 30, 1994, and
the results of operations and cash flows for the nine-month periods ended March
31, 1995 and March 31, 1994. Certain prior year amounts have been reclassified
to conform to the current year classification. The results of operations for
the three and nine-month periods ended March 31, 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 1994 Annual Report to
Stockholders.
NOTE 2 - REVOLVING CREDIT FACILITY
In September 1994, the Company's $50 million revolving credit facility with a
group of banks was expanded to $60 million under the existing terms. 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.
NOTE 3 - INVENTORIES
The components of inventories at March 31, 1995 consisted of the following (in
thousands):
Merchandise held for sale $44,953
Raw materials and work-in-process 20,884
--------
$65,837
========
NOTE 4 - 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 and nine-month periods ended March 31, 1995 and 1994, the number of
weighted average shares and common stock equivalents is as follows (in
thousands):
Three Months Ended Nine Months Ended
March 31, March 31,
---------------- -----------------
1995 1994 1995 1994
------- ------- -------- --------
Weighted average shares 11,499 11,150 11,358 11,182
Common stock equivalents 1 177 8 222
------- -------- -------- --------
Total weighted average common and
common equivalent shares 11,500 11,327 11,366 11,404
======= ======== ======== ========
NOTE 5 - ACQUISITION
Effective November 1, 1994, the Company acquired the assets and assumed certain
liabilities of the Novelty Division of Trench Manufacturing Company, Inc.
("Trench"). Trench's Novelty Division manufactures pennants, bumper stickers,
foam hands and other novelty items. The acquisition was made for approximately
$3.2 million in cash and resulted in the recording of goodwill of $2.7 million,
which is being amortized over forty years. This acquisition is considered
insignificant for presentation of pro forma financial information.
NOTE 6 - CONTINGENT PAYMENT
In connection with the November 1993 acquisition of Impulse Designs, the Asset
Purchase Agreement provides for a contingent cash payment to be made based upon
the attainment of certain earnings thresholds for the year ended December 31,
1994. An estimated contingent payment of $4.3 million, subject to final
resolution of any disputed items, has been accrued in the March 31, 1995 balance
sheet. This payment was paid in April 1995.
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 70 stores located in eight states; Sav-On Discount Office
Supplies, which sells office supplies and related products through a chain of 36
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 and nine-month periods ended March 31, 1995 and 1994 (in thousands):
<TABLE>
<S><C>
Three Months Ended March 31,
--------------------------------------
1995 1994 % Increase (Decrease)
------------------- ---------------- ----------------------
Operating Operating Operating
Sales Income Sales Income Sales Income
------- -------- ------ -------- --------- -----------
Specialty retail:
- ----------------
Tandy Leather $11,442 $ 805 $11,786 $1,027 (2.9)% (21.6)%
Sav-On Discount Office
Supplies 5,552 (453) 3,858 (50) 43.9 (806.0)
Joshua's Christian Stores 6,000 (389) 4,952 - 21.2 n/a
Cargo Furniture & Accents 4,300 53 4,465 80 (3.7) (33.8)
------- ------ ------- ------ ------ ---------
Specialty retail 27,294 16 25,061 1,057 8.9 (98.5)
------- ------ ------- ------ ------ ---------
Specialty manufacturing:
- -----------------------
Picture frames and
framed art 13,497 597 14,938 2,084 (9.6) (71.4)
Belts and accessories 3,702 (69) 4,636 439 (20.1) (115.7)
Outerwear 4,402 (262) 4,483 12 (1.8) (2283.3)
TWI 5,996 241 3,351 591 78.9 (59.2)
------- ------ ------ ------ ------ ---------
Specialty manufacturing 27,597 507 27,408 3,126 0.7 (83.8)
------- ------ ------ ------ ------ --------
Total operations,
excluding corporate $54,891 $ 523 $52,469 $4,183 4.6% (87.5)%
======= ====== ======= ====== ====== ========
Nine Months Ended March 31,
--------------------------------------
1995 1994 % Increase (Decrease)
------------------- ----------------- ---------------------
Operating Operating Operating
Sales Income Sales Income Sales Income
------- --------- ------- -------- ------- ---------
Specialty retail:
- ----------------
Tandy Leather $36,755 $3,335 $37,835 $3,814 $(2.9)% $(12.6)%
Sav-On Discount Office
Supplies 15,380 (1,164) 11,231 75 36.9 (1652.0)
Joshua's Christian Stores 22,341 494 17,020 854 31.3 (42.2)
Cargo Furniture & Accents 15,149 700 15,560 646 (2.6) 8.4
------- ------- ------- ------ ------ -------
Specialty retail 89,625 3,365 81,646 5,389 9.8 (37.6)
------- ------- ------- ------ ------ -------
Specialty manufacturing:
- -----------------------
Picture frames and
framed art 63,042 10,069 43,426 5,273 45.2 91.0
Belts and accessories 11,807 (450) 9,968 973 18.4 (146.2)
Outerwear 13,582 (662) 12,889 501 5.4 (232.1)
TWI 17,966 2,096 10,119 2,334 77.5 (10.2)
------- ------- ------- ------ ------ -------
Specialty manufacturing 106,397 11,053 76,402 9,081 39.3 21.7
------- ------- ------- ------ ------ -------
Total operations,
excluding corporate $196,022 $14,418 $158,048 $14,470 24.0% (0.4)%
======== ======== ======== ======= ====== =======
</TABLE>
RESULTS OF OPERATIONS
Net sales
Consolidated net sales for the three and nine-month periods ended March 31, 1995
increased 4.6% and 24.0%, respectively, compared to the same periods 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 8.9% for the quarter and
9.8% for the nine months ended March 31, 1995 compared to the same periods last
year. The specialty retail segment contributed 49.7% and 45.7% of consolidated
net sales for the three and nine-month periods ended March 31, 1995,
respectively, compared to 47.8% and 51.7%, respectively, for the same periods
last year.
Tandy Leather Company's net retail sales and same-store sales decreased 2.9% for
the quarter and for the nine months ended March 31, 1995 compared to the same
periods last year. The decrease in sales reflects a decrease in the average
number of transactions per store compared to the same periods last year due
primarily to a decline in sales of southwest fashion merchandise. The decrease
in sales related to this merchandise category is due in part to a decline in
popularity, but also partly due to increased competition in this category.
Sav-On Discount Office Supplies ("Sav-On") achieved total net sales increases of
43.9% and 36.9% for the quarter and nine-month periods ended March 31, 1995,
respectively, compared to the same periods last year. The increase in total net
sales was primarily due the effect of new store openings. Sav-On had 36 stores
open at March 31, 1995, including six stores opened during the quarter, compared
to 18 stores open a year ago. Same-store sales increased 4.1% for the quarter
and decreased 0.9% for the nine months ended March 31, 1995 over the respective
periods last year. A primary reason for the flat same-store sales for the nine-
month period ended March 31, 1995, was management's decision to forego in fiscal
1995 certain low margin government and contract sales at the store level which
occurred in the months of July and December of fiscal 1994.
Joshua's Christian Stores ("Joshua's") had total net sales increases of 21.2%
and 31.3% for the quarter and nine months ended March 31, 1995, respectively,
compared to the same periods last year. The increase in total net sales is
primarily due to the effect of new store openings. Joshua's had 70 stores open
at March 31, 1995 compared to 58 stores open at March 31, 1994. Same-store
sales were flat for the quarter and increased 3.4% for the nine-month period
ended March 31, 1995. Same-store sales for the quarter and nine months reflect
the impact of Easter falling two weeks later this year compared to last year
(April 16 versus April 3 last year) resulting in a shift in the timing of sales
from March to April. Same-store sales results also reflect the impact of
increased competition in certain markets.
Total net sales for Cargo Furniture & Accents ("Cargo") decreased 3.7% for the
quarter and 2.6% for the nine months ended March 31, 1995 compared to the same
periods last year primarily as a result of having fewer stores open. At March
31, 1995, there were 40 Cargo stores open compared to 44 a year earlier. Same-
store sales increases for the three and nine-month periods ended March 31, 1995
were 4.9% and 4.0%, respectively.
Specialty manufacturing
Net sales for the specialty manufacturing segment increased 0.7% and 39.3% for
the three and nine-month periods ended March 31, 1995, respectively, compared to
the corresponding periods a year ago. The specialty manufacturing segment
contributed 50.3% and 54.3% of consolidated net sales for the three and nine-
month periods ended March 31, 1995, respectively, compared to 52.2% and 48.3%,
respectively, for the same periods last year.
Net sales for the Picture Frames and Framed Art division decreased 9.6% for the
three months ended March 31, 1995 compared to the same period last year. The
decrease was due primarily to a shift in the timing of certain promotional sales
from the third quarter to the second and fourth quarters. Offsetting this
decrease was the addition of a major new account and the introduction of a new
line of plastic moldings. Net sales for the nine months ended March 31, 1995
increased 45.2% compared to the same period last year. The increase reflects
the contribution of Impulse Designs which was acquired effective November 1,
1993 as well as strong demand from the existing customer base and the addition
of new customers.
Net sales for the Belts and Accessories division decreased 20.1% for the quarter
ended March 31, 1995 compared to the same quarter last year. The decrease in
sales for the quarter reflects continuing weak demand in the cut-up belt market
and continued softness in the western apparel market. Net sales for the nine
months ended March 31, 1995 increased 18.4% compared to the same period last
year, primarily due to the acquisition of Prestige Leather Creations effective
as of November 1, 1993.
Net sales for the Outerwear division decreased 1.8% for the quarter and
increased 5.4% for the nine months ended March 31, 1995 compared to the
corresponding periods last year. The increase in sales for the nine-month
period primarily reflects the contribution of Birdlegs, which was acquired
effective October 1, 1993. Sales for both the quarter and nine-month periods
were adversely affected by continued soft demand experienced in the western
apparel market. Sales for the nine-month period were also adversely impacted by
the warm weather conditions in the fall and early winter which affected the sale
of jackets and sweatshirts.
Net sales for the Tandy Wholesale International ("TWI") division, increased
78.9% and 77.5% for the three and nine-month periods ended March 31, 1995,
respectively, compared to the same periods last year. The increase in net sales
for the quarter reflects the contributions of Rivertown Button and College Flags
which were acquired effective April 1, 1994 and June 1, 1994, respectively. The
increase in net sales for the nine-month period reflects the contributions of
Rivertown Button and College Flags as well as the contribution from Tag Express,
which was acquired effective September 1, 1994. Sales for both the quarter and
for the nine months also reflect strong sales gains from the wholesale
operations of the Tandy Leather Company and Tag Express 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 $3,660,000, or 87.5%,
and $52,000, or 0.4%, for the three and nine-month periods ended March 31, 1995,
respectively, compared to the same periods last year. A discussion of operating
income for each segment follows:
Specialty retail
Operating income for the specialty retail segment decreased $1,041,000, or
98.5%, and $2,024,000, or 37.6%, for the three and nine-month periods ended
March 31, 1995, respectively, compared to the corresponding periods last year.
The specialty retail segment contributed 3.1% and 23.3% of consolidated
operating income before corporate expenses for the three and nine-month periods
ended March 31, 1995, respectively, compared to 25.3% and 37.2%, respectively,
for the same periods last year.
Operating income for Tandy Leather decreased $222,000, or 21.6%, for the quarter
and $479,000, or 12.6%, for the nine-month period ended March 31, 1995 compared
to the same periods last year. 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. While gross profit as a
percent of sales for the quarter increased compared to the same quarter last
year, gross profit decreased approximately $87,000 due primarily to the decrease
in sales. SG&A expenses for the quarter increased approximately $100,000
compared to the same quarter last year reflecting an increase in advertising
expense. For the nine-month period, gross profit as a percentage of sales
decreased slightly compared to the same period last year due primarily to a
change in the sales mix resulting in a decrease in gross profit of approximately
$829,000. SG&A expenses decreased approximately $367,000 for the nine months
compared to the same period last year, however, expenses as a percent of sales
were up slightly due to the decrease in sales.
Sav-On experienced operating losses of $453,000 and $1,164,000 for the three and
nine-month periods ended March 31, 1995, respectively, compared to an operating
loss of $50,000 and operating income of $75,000 for the respective periods last
year. The fluctuation in operating income is primarily a result of start-up and
increased administrative expenses incurred in expanding the store base from 18
stores at March 31, 1994 to 36 stores at March 31, 1995, including six stores
opened during the quarter. 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. Gross profit as a percent of sales for the nine-month
period has remained consistent with the prior year; however, administrative
expenses have increased as a percent of sales reflecting new store openings as
well as the investment made to strengthen the management team and to build the
necessary infrastructure to support a larger store base.
Joshua's Christian Stores experienced an operating loss for the quarter ended
March 31, 1995 of $389,000 compared to break-even for the same quarter last
year. For the nine months ended March 31, 1995, Joshua's operating income was
$494,000 compared to operating income for the same period last year of $854,000.
While gross margins for the quarter and nine-month periods remained relatively
constant with the prior year periods, selling, general and administrative
expenses increased as a percent of sales. The increase in expenses was due
primarily to increased advertising, increased labor expense as a result of store
expansion and the addition of corporate support personnel, and increases in
communication and data processing expenses associated with the installation and
implementation of a new merchandising and management information system. These
costs reflect an investment made in building the necessary systems to support
and manage a much larger store base.
Operating income for Cargo Furniture & Accents decreased $27,000, or 33.8%, for
the quarter and increased $54,000, or 8.4%, for the nine-month period ended
March 31, 1995 compared to the same periods last year. The decrease in
operating income for the quarter is primarily due to a decrease in sales
resulting from fewer stores in operation. Gross profit as a percentage of sales
for the quarter decreased slightly from a year ago due primarily to a change in
sales mix. The decrease in gross profit was offset by decreased expenses,
primarily labor, occupancy and administrative expenses resulting from closed
stores and an internal reorganization. For the nine-month period, gross profit
as a percent of sales remained consistent with the prior year; however, expenses
decreased as a percent of sales reflecting cost savings stemming from closed
stores as well as from an internal reorganization.
Specialty manufacturing
Operating income for the specialty manufacturing segment decreased $2,619,000,
or 83.8%, for the quarter and increased $1,972,000, or 21.7%, for the nine-month
period ended March 31, 1995 compared to the same periods last year. The
specialty manufacturing segment contributed 96.9% and 76.7% of consolidated
operating income before corporate expenses for the three and nine-month periods
ended March 31, 1995, respectively, compared to 74.7% and 62.8%, respectively,
for the same periods last year.
Operating income for the Picture Frames and Framed Art division decreased
$1,487,000, or 71.4%, for the quarter and increased $4,796,000, or 91.0%, for
the nine-month period ended March 31, 1995 compared to the corresponding periods
last year. The decrease in operating income for the quarter reflects the
decrease in sales and the corresponding impact on production efficiency as well
as price increases for certain raw materials, primarily glass and paper
products, which have not yet been passed on to customers. Selling, general and
administrative expenses for the quarter also increased compared to the same
quarter last year primarily due to higher costs associated with moving to a
larger facility and additional personnel to support sales growth. The increase
in operating income for the nine-month period reflects the contribution of
Impulse Designs which was acquired effective November 1, 1993. The increase in
operating income for the nine months also reflects increased sales and improved
gross margins resulting from manufacturing efficiency gains and a more
profitable sales mix.
The Belts and Accessories division posted operating losses of $69,000 and
$450,000 for the three and nine-month periods ended March 31, 1995,
respectively, compared to operating income of $439,000 and $973,000 for the
corresponding periods last year. The decrease in operating profitability for
the quarter and nine months compared to the same periods last year reflects the
continued softness in demand experienced in the cut-up and western apparel
markets, resulting in lower sales and gross margins. Gross margins were also
negatively impacted by increased raw materials costs, primarily leather, and
increased labor costs.
The Outerwear division had operating losses of $262,000 and $662,000 for the
three and nine-month periods ended March 31, 1995, respectively, compared to
operating income of $12,000 and $501,000 for the corresponding periods last
year. The decrease in operating profitability for the quarter and nine months
compared to the prior year periods reflects the softness in demand experienced
in the western apparel market as well as the warm weather conditions in the fall
and early winter which adversely impacted sales of sweatshirts and jackets.
Gross margins were also negatively impacted by increased raw materials costs and
increased labor costs which could not be passed on to customers.
The TWI division's operating income decreased $350,000, or 59.2%, and $238,000,
or 10.2%, for the three and nine-month periods ended March 31, 1995,
respectively, compared to the corresponding periods last year. The decrease in
operating income for the quarter and nine months reflects the continuing impact
of the Major League Baseball players strike on the sales of related licensed
products as well as production problems encountered in bringing the recently
acquired pennant manufacturing operation up to capacity.
Selling, general and administrative expenses
Consolidated selling, general and administrative (SG&A) expenses were 38.1% and
32.5% for the three and nine-month periods ended March 31, 1995, respectively,
compared to 32.4% and 31.2% for the corresponding periods last year. In total
dollars, SG&A expenses increased $3,878,000, or 22.8%, and $14,415,000, or
29.2%, for the three and nine-month periods ended March 31, 1995, respectively,
compared to the corresponding periods last year. The increase in expenses for
the three and nine-month periods was primarily due to acquisitions included for
a full period this year compared to a partial period last year and to new store
openings.
Interest expense
Interest expense increased $525,000, or 110.3%, and $1,772,000, or 176.3%, for
the three and nine-month periods ended March 31, 1995, respectively, compared to
the corresponding periods of the prior year. The increase in interest expense
was due to an increase in average borrowings during the current year periods
compared to the prior year and increased interest rates.
Depreciation and amortization
Consolidated depreciation and amortization increased $419,000, or 40.1%, and
$1,155,000, or 40.3%, for the three and nine-month periods ended March 31, 1995,
respectively, compared to the corresponding periods last year. The increase is
due primarily to depreciation related to property and equipment of businesses
acquired as well as amortization of goodwill related to acquisitions.
Depreciation expense has also increased over the prior year periods due to a
higher level of capital expenditures in the current year periods.
Provision for income taxes
The Company's effective income tax rate for the nine months ended March 31, 1995
was 35.5% compared to 38.3% for the same period last year. The reduction in the
effective tax rate reflects the Company's utilization of both federal and state
hiring tax credit programs as well as tax benefits generated from the creation
of a Foreign Sales Corporation.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are cash flows from operations, sales
of treasury stock to the ESOP, and borrowings under the Company's revolving
credit facility. The funds generated from these sources have been used
primarily to finance acquisitions, purchase property and equipment, retire the
ESOP loan and finance growth in inventories and receivables.
During the nine months ended March 31, 1995, cash increased $383,000. Cash used
by operating activities of $5,645,000 resulted primarily from an increase in
inventories and a decrease in accrued liabilities. The increase in inventories
relates mainly to new store expansion and anticipated sales growth. The
decrease in accrued liabilities relates primarily to a reduction of accrued
payroll and bonus. Cash used for investing activities of $11,580,000 resulted
primarily from capital expenditures for property and equipment and the
acquisition of the Novelty Division of Trench Manufacturing Company, Inc., which
required a cash payment of approximately $3.2 million. Cash of $17,608,000 was
provided by financing activities, primarily from borrowings under the Company's
revolving credit facility.
In September 1994, the Company's $50 million revolving credit facility with a
group of banks was increased to $60 million under the existing terms. 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.
In connection with the November 1993 acquisition of Impulse Designs, the Asset
Purchase Agreement provides for a contingent cash payment to be made based upon
the attainment of certain earnings thresholds for the year ended December 31,
1994. An estimated contingent payment of $4.3 million, subject to final
resolution of any disputed items, has been accrued in the March 31, 1995 balance
sheet. This payment was subsequently paid in April 1995.
Capital expenditures totaled approximately $7.8 million for the nine months
ended March 31, 1995. Planned capital expenditures for the remainder of fiscal
1995 approximate $1.2 million. Current store expansion plans call for Sav-On to
open 2 new stores and Joshua's Christian Stores to add 4 stores for the
remainder of fiscal 1995. Funding for new store expansion planned for the
remainder of fiscal 1995, exclusive of capital expenditures, is estimated to
approximate $575,000. 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
Effective November 1, 1994, the Company acquired the assets and assumed certain
liabilities of the Novelty Division of Trench Manufacturing Company, Inc.
("Trench"). Trench's Novelty Division manufactures and markets pennants, bumper
stickers, foam hands and other novelty items. The acquisition was made for
approximately $3.2 million in cash and resulted in the recording of goodwill of
$2.7 million, which is being amortized over forty years. This acquisition did
not have a significant impact on sales or operating income for the quarter or
nine-month period ended March 31, 1995.
The Company may, from time to time, evaluate acquisition candidates which
complement its existing businesses. To the extent that debt is utilized to
finance any such acquisitions and goodwill related to 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.
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
January 24, 1995, which included the contents of a press
release announcing the unaudited results of operations for
the three and six-month periods ended December 31, 1994.
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: May 12, 1995 By: /s/Jerry L. Roy
Jerry L. Roy
President, Chief Executive Officer
and Director
Date: May 12, 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: May 12, 1995 By: /s/Jim D. Schultz
Jim D. Schultz
Sr. Vice President and Director of
Accounting, Finance and MIS
(Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Tandycrafts,
Inc.'s March 31, 1995 Form 10-Q and is qualified in its entirety by reference to
such Form 10-Q filing.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
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<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-END> MAR-31-1995
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