UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended June 30, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ________ to ________
Commission File No. 1-7258
TANDYCRAFTS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 75-1475224
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1400 EVERMAN PARKWAY
FORT WORTH, TEXAS 76140
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (817) 551-9600
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
- --------------------------- -----------------------
Common stock, $1 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
As of September 16, 1996, there were 12,331,604 shares of Common Stock,
$1.00 par value, outstanding, and the aggregate market value of the Common Stock
of Registrant held by non-affiliates was approximately $69.8 million.
DOCUMENTS INCORPORATED BY REFERENCE
Location in Form 10-K Incorporated Document
--------------------- ----------------------
Part III Proxy Statement for 1996 Annual Meeting
TANDYCRAFTS, INC.
Form 10-K
PART I
------
Item 1. Business
- ------ --------
Tandycrafts, Inc. (the "Company"), a Delaware corporation, was incorporated
in June 1975 to operate the handicrafts segment previously operated by Tandy
Corporation. The Company consists of two primary industry segments: specialty
retail and specialty manufacturing. Industry Segment and Geographic Area
Information with respect to the Company's business is found in Note 11 of Notes
to Consolidated Financial Statements which is set forth in Item 8 herein.
Specialty Retail
- ----------------
The specialty retail segment consists of four retail concepts, each
specializing in the sale to the public of distinctive lines of products.
Included in this segment are Tandy Leather Company, Joshua's Christian Stores,
Sav-On Office Supplies and Cargo Furniture and Accents. The specialty retail
segment has accounted for 48.2%, 45.9% and 50.1% of the total consolidated net
sales of the Company for fiscal years 1996, 1995 and 1994, respectively.
Substantially all of the Company's specialty retail products are marketed
through 322 Company-owned and operated specialty retail stores located in 45
states of the United States as follows:
Stores at Stores at
July 1, 1995 Opened Closed June 30, 1996
------------ ------ ------ -------------
Tandy Leather Company 175 - 2 173
Cargo Furniture and Accents 40 - 1 39
Joshua's Christian Stores 72 3 1 74
Sav-On Discount Office
Supplies 38 - 2 36
--- --- --- ----
325 3 6 322
=== === === ===
Tandy Leather Company retails leathercraft materials, kits and equipment
used to produce functional and ornamental items and finished leathergoods. The
principal merchandise lines consist of various leathers, belts and buckles,
billfold kits and accessories, footwear and ladies' handbag kits, leatherworking
tools and decorative items made of leather. Approximately 3,200 items are sold
through 173 company-owned and operated specialty retail stores in the United
States, with the strongest concentration in the southwest and on the east and
west coasts. A portion of Tandy Leather Company's sales is to the institutional
market. This market is composed of industrial arts and crafts programs in
schools, hospitals, prisons and recreational organizations. Semi-professionals
and hobbyists make up an additional portion of Tandy Leather Company's market.
Tandy Leather Company has been successful in developing a loyal repeat customer
base. An important element in this achievement has been the effective use of
customer purchasing information in focusing Tandy Leather Company's advertising
and direct mail efforts. Tandy Leather Company also sponsors in-store classes,
workshops and offers demonstrations in leathercrafting techniques such as
carving, stamping, dyeing and jewelry making, which helps to cultivate new and
repeat customers. Store managers and employees also go out into the community
to give on-site demonstrations before school groups and other organizations. In
fiscal 1996, Tandy Leather Company's retail operations contributed approximately
17% of the consolidated net sales of the Company.
Cargo Furniture and Accents ("Cargo") sells a proprietary line of solid
wood furniture, bedding and complimentary accessories to residential,
institutional and commercial customers from 39 company-owned and operated
specialty retail stores primarily located in regional shopping malls in 12
states across the country. Cargo stores are located primarily in the Northeast,
Mid-Atlantic, Southeast and South-Central United States. The company obtains
the furniture it sells primarily from one source, but merchandise could be
obtained from other sources, if necessary. In fiscal 1996, Cargo contributed
approximately 7% of the consolidated net sales of the Company.
Joshua's Christian Stores is one of the largest national specialty retail
chains of inspirational books, music and gift items. Joshua's Christian Stores
operates a chain of 74 stores, located in 12 southern tier states. The stores
average approximately 3,000 square feet in size. Store locations are
predominantly in strip centers close to major shopping malls, which allows for
lower rent and occupancy costs, while at the same time benefiting from their
proximity to major shopping malls. Joshua's Christian Stores carries an
extensive selection of quality books, Bibles, music, gifts and cards which are
purchased from various suppliers. In fiscal 1996, Joshua's Christian stores
contributed approximately 12% of the consolidated net sales of the Company.
Sav-On Office Supplies ("Sav-On") sells discount office supplies from 36
company-owned and operated specialty retail stores which average approximately
5,000 square feet. Sav-On's stores are located in eleven states. Sav-On stores
carry approximately 6,200 products, consisting primarily of office and school
supplies. The products sold are purchased from a variety of suppliers. The
primary customers for Sav-On are small business owners, students and homeowners.
In fiscal 1996, Sav-On contributed approximately 12% of the consolidated net
sales of the Company.
Specialty Manufacturing
- -----------------------
The specialty manufacturing segment is comprised of two divisions: Picture
Frames and Framed Art and the Tandy Wholesale International ("TWI") division.
The specialty manufacturing segment has accounted for 51.8%, 54.1% and 49.9% of
total consolidated net sales of the Company for fiscal years 1996, 1995 and
1994, respectively.
During fiscal 1996, the specialty manufacturing segment had net sales of
approximately $30.0 million to a group of customers under common control. The
Company had no other individual customer or group of customers which accounted
for more than 10% of the Company's total consolidated net sales.
The Picture Frames and Framed Art division, consisting of the Magee
Company, Impulse Designs and Hermitage Fine Arts manufactures and distributes a
broad range of picture frames, framed art, mirrors and bulletin boards. From
facilities in Pocahontas and Piggott, Arkansas, Magee produces over 29 million
frames annually. Magee is widely recognized for manufacturing low-cost frames
out of oak, pine and poplar. During fiscal 1995, Magee expanded its production
capacity for metal frames and developed a new line of extruded plastic frames.
Impulse Designs, located in Van Nuys, California, was a strategic acquisition
made by the Company in November 1993. Impulse is a manufacturer of framed art
for the mass market. Impulse has achieved a national following by introducing
the works of well-known artists at popular price points. Magee and Impulse's
products are sold in the United States and Canada by national account sales
representatives, selling primarily to mass-merchandise retail chains, drug and
food retail chains, department stores, general houseware merchants and specialty
frame outlets. Also located in Van Nuys, California, Hermitage Fine Arts
produces upscale framed art which is sold primarily through home furnishings
specialty retailers. While Magee's revenues are spread evenly throughout the
year, Impulse's revenues have been historically seasonal with almost one-third
of their sales generated during the Christmas season. The Picture Frames and
Framed Art division contributed 32% of the Company's total consolidated net
sales in fiscal 1996.
The TWI division includes Tandy Leather Manufacturing and the Licensed
Products Group. Tandy Leather Manufacturing produces many of the kits, tools
and supplies which are sold through those stores nationwide and wholesales
similar products to other leading craft stores throughout the United States and
Canada. As a significant purchaser of leather, Tandy Leather is able to command
favorable pricing and terms from its suppliers which enhance this division's
overall profitability. In conjunction with the restructuring and consolidation
program adopted in December 1995, Nocona Belt Company was consolidated with
Tandy Leather Manufacturing. Nocona Belt Company, located in Nocona, Texas,
manufactures a wide selection of western-style belts and leather accessories
such as wallets, money clips, hatbands, jewelry and leather care goods. Nocona
Belt Company markets its products nationally and internationally through
independent representatives who are responsible for maintaining Nocona Belt
Company's existing account base, as well as generating new business. Nocona
Belt Company attends national trade shows several times annually, publishes
catalogs, brochures and stickers, and distributes direct mail packages on a
monthly basis.
The Licensed Products Group is comprised of TAG Express, College Flags,
Birdlegs, J-Mar Associates and Rivertown Button Company. TAG Express
distributes products featuring leading professional and collegiate sports logos,
including auto tags, bumper stickers, key tags, decals, light switch covers,
door knob hangers, luggage tags, automobile flags, wind socks and pennants. TAG
Express has licenses with the NFL, NBA, NHL, Major League Baseball, U.S. Soccer
League, the 1996 Olympics and all major colleges. TAG Express sells its
products through a network of independent sales representatives, distributors
and in-house telemarketing personnel. The automobile flags, wind socks and
pennants sold by TAG are manufactured by College Flags in Lancaster, South
Carolina. Birdlegs is a producer of screen-printed souvenir activewear
including T-shirts, sweatshirts, cover-ups and tank tops. Recognizing that
creative design is critical to the success of most screen printing companies,
Birdlegs maintains a strong creative staff to generate hundreds of new designs
required each year. Birdlegs markets its products through an in-house sales
force, as well as independent representatives. J-Mar Associates is a producer
and wholesale distributor of inspirational gift items, both domestically and
internationally. J-Mar's customer base is primarily comprised of Christian
retail gift and book stores. Through it telemarketing sales force, J-Mar
distributes its product line to over 5,700 Christian book stores. Rivertown
Button Company is a contract manufacturer of promotional buttons. Buttons are
manufactured for a wide range of customers including corporate promotions and
advertising campaigns, political and public service groups. The company also
sells, ribbons, poster and stickers. The TWI division contributed approximately
15% of the Company's consolidated net sales for fiscal 1996.
Strategic Restructuring and Consolidation Program
- -------------------------------------------------
In the quarter ended December 31, 1995, the Company adopted a strategic
restructuring and consolidation program. The primary components of this program
included: (i) the sale of Cargo Furniture and Accents, (ii) the sale or closure
of Prestige Leather Creations, David James Manufacturing, Brand Name Apparel and
certain other individually insignificant operations, (iii) the closure of 11
retail stores including two at Sav-On Office Supplies, five at Joshua's
Christian Stores and four at Tandy Leather Company, (iv) the consolidation of
certain functions within TWI of Nocona Belt Company.
As of June 30, 1996, the restructuring and consolidation program was
substantially completed and management expects the action contemplated by the
plan to be fully completed during fiscal 1997. Since December 31, 1995, the
Company has sold Prestige Leather Creations and Brand Name Apparel and has
closed David James Manufacturing and certain other individually insignificant
operations. In addition, Nocona Belt Company has been successfully consolidated
into TWI. On the retail side, the Company has closed two Sav-On stores, two
Tandy Leather stores and one Joshua's store. The Company expects to complete
the sale of Cargo during the first half of fiscal 1997.
Raw Materials
- -------------
Raw materials used in the specialty manufacturing segment are available
from numerous sources and the Company believes that the availability of such
materials is adequate for its needs.
Intangible Assets
- -----------------
The Company owns a number of trademarks and copyrights. Management
considers these intangibles to be valuable assets and vigorously defends them
when necessary.
Seasonality
- -----------
The Company's operating results are subject to seasonal variation.
Historically, the Company has realized a larger proportion of its sales and
operating income in its second fiscal quarter (the Christmas season). Cash also
increases in December due to the Christmas business achieved by the Company's
specialty retail segment.
Competitive Conditions
- ----------------------
Tandy Leather Company competes with hobby and crafts stores, including
department and specialty stores, operated by individuals and various companies
in all trade areas. The picture frames and framed art sold by the Magee
Company, Impulse Designs and Hermitage Fine Arts are readily available from
other suppliers who compete actively for sales. The Cargo Furniture and Accents
line of furniture, Joshua's Christian Stores line of inspirational items and
Sav-On Office Supplies line of office supplies, compete vigorously for sales
with other nationally-known brand names that are marketed by department stores,
chain stores and local specialty stores. The belts, accessories and apparel
sold by the Nocona Belt Company and Birdlegs are readily available from other
suppliers who compete actively for sales. The licensed novelty and promotional
products sold by TAG Express and Rivertown Button are readily available from
other suppliers who compete actively for sales.
Environmental Affairs
- ---------------------
Compliance by the Company with federal, state and local environmental
protection laws have not had, and are not expected to have, a material effect
upon capital expenditures, earnings or the competitive position of the Company.
Foreign Operations and Export Sales
- -----------------------------------
A small amount of products produced by the Company is exported to
independent distributors and other customers in foreign nations. The combined
export operations contributed less than 10% of consolidated revenue and/or
income and utilized less than 10% of the consolidated assets of Tandycrafts,
Inc. for each of the last three fiscal years.
Employees
- ---------
The Company has approximately 3,800 employees, including part-time and
temporary employees. Tandycrafts, Inc. sponsors an employees' deferred salary
and investment (401-K) plan, which is coupled with the Tandycrafts, Inc.
Employee Stock Ownership Plan (the "ESOP") in which eligible employees and
officers may participate. The Company is not a party to any union contract and
considers its relations with its employees to be very good.
Item 2. Properties
- ------ ----------
The Company owns buildings which it uses for offices, manufacturing and
warehousing. The Company also leases a significant amount of retail store
space. The total space owned and leased is as follows:
Approximate Square Footage
-------------------------------
Owned Leased Total
------- --------- ---------
Warehouse and Office 349,235 239,118 588,353
Retail 12,750 764,428 777,178
Factory 571,000 195,572 766,572
------- --------- ---------
Totals 932,985 1,199,118 2,132,103
======= ========= =========
The warehouse, office and factory space is located approximately 30% in
Fort Worth, Texas (specialty retail and specialty manufacturing), 44% at three
locations in Arkansas (specialty manufacturing), 15% at one location in
California (specialty manufacturing), 4% at three other locations in Texas
(specialty manufacturing), with the remaining 7% located in Georgia and South
Carolina (specialty manufacturing). The leased retail stores are generally
small outlets and are located throughout 45 states of the United States.
For additional lease information see Note 8 of Notes to Consolidated
Financial Statements, which is set forth in Item 8 herein.
Item 3. Legal Proceedings
- ------ -----------------
The Company is not involved in any legal proceeding required to be
disclosed pursuant to Item 103 of Regulation S-K, and no such proceeding was
terminated during the fourth quarter of the 1996 fiscal year.
Item 4. Submission of Matters to a Vote of Security Holders
- ------ ---------------------------------------------------
There were no matters submitted to a vote of security holders during the
fourth quarter of the 1996 fiscal year.
Executive Officers of the Registrant
- ------------------------------------
The following table sets forth certain information concerning the executive
officers of the Company.
Position and Business Experience Served as
Name and Age During Past Five Years Officer Since
- ------------ -------------------------------- -------------
Michael J. Walsh, 55 President and Chief Executive 1983
Officer since April 1996.
Executive Vice President and
Chief Financial Officer: August
1992 to April 1996. Vice President:
1986 to August 1992.
James D. Allen, 36 Executive Vice President and 1993
Chief Financial Officer since
July 1996. Vice President:
November 1993 to July 1996.
Director of Special Projects:
May 1993. Prior to May 1993,
Mr. Allen was a Senior Manager
in the accounting firm of
Price Waterhouse LLP.
None of the above officers are related by birth, adoption or marriage. All
officers are elected annually by the Board of Directors to serve for the ensuing
year.
PART II
-------
Item 5.Market for the Registrant's Common Equity and Related Stockholder Matters
- ------ -------------------------------------------------------------------------
Price Range of Common Stock
(Quoted by quarter for the two most recent fiscal years.)
<TABLE>
<S><C>
High Low High Low
---- --- ---- ---
Sept. 1994 $ 13.13 $ 10.88 Sept. 1995 $ 8.63 $ 6.75
Dec. 1994 $ 13.00 $ 10.75 Dec. 1995 $ 9.38 $ 6.63
March 1995 $ 11.50 $ 8.25 March 1996 $ 8.13 $ 5.50
June 1995 $ 9.50 $ 7.50 June 1996 $ 8.88 $ 5.88
</TABLE>[S][C]
The principal market for the Company's common stock is the New York Stock
Exchange. As of September 16, 1996, there were approximately 8,720
shareholders of record of the Company's common stock.
The Company's present policy is to retain earnings for the foreseeable
future for use in the Company's business and the financing of its growth. The
Company did not pay any cash dividends on its common stock during fiscal 1996
and 1995. The Company's revolving credit agreement contains provisions
specifying limitations on the amount of cash payments and distributions which
may be paid by the Company, including cash dividends and purchases of treasury
stock.
Item 6. Selected Financial Data
- ------ -----------------------
Selected Financial Data (Unaudited)
(in thousands, except per share amounts)
<TABLE>
<S><C>
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
Net sales $254,284 $256,523 $214,869 $163,255 $133,135
Restructuring Charge $ 18,317 $ - $ - $ - $ 4,800
Operating income (loss) $(11,811) $ 11,860 $ 15,417 $ 12,749 $ 1,575
Income (loss) before income taxes $(15,883) $ 8,027 $ 13,980 $ 12,299 $ 1,129
Net income (loss) $(10,709) $ 5,217 $ 8,906 $ 7,750 $ 536
Net income (loss) per common share $ (.89) $ .46 $ .79 $ .69 $ .05
Weighted average shares outstanding 11,983 11,434 11,336 11,232 10,263
Net income (loss) as percent of
net sales (4.2%) 2.0% 4.1% 4.7% .4%
Net income (loss) as percent of
beginning equity (11.8%) 6.6% 13.3% 15.6% 1.1%
Current assets $ 99,771 $101,980 $ 85,414 $ 62,365 $ 46,201
Current liabilities $ 33,751 $ 27,113 $ 28,211 $ 17,427 $ 15,163
Working capital $ 66,020 $ 74,867 $ 57,203 $ 44,938 $ 31,038
Current ratio 3.0 to 1 3.8 to 1 3.0 to 1 3.6 to 1 3.1 to 1
Total assets $168,579 $178,803 $150,431 $ 89,865 $ 71,328
Net property and equipment $ 26,783 $ 28,707 $ 24,953 $ 20,427 $ 20,859
Long-term liabilities $ 51,230 $ 61,029 $ 43,138 $ 5,340 $ 6,668
Retained earnings $ 69,375 $ 80,084 $ 74,867 $ 65,961 $ 58,211
Total stockholders' equity $ 83,598 $ 90,661 $ 79,082 $ 67,098 $ 49,497
Common shares outstanding 12,178 11,717 11,161 11,163 10,144
Stockholders' equity per
common share $ 6.86 $ 7.75 $ 7.09 $ 6.01 $ 4.88
</TABLE> [S][C]
There have been no cash dividends declared or paid by the Company.
Item 7. Management's Discussion and Analysis of Financial Condition and
- ------ ---------------------------------------------------------------
Results of Operations
---------------------
Tandycrafts, Inc. ("Tandycrafts" or the "Company") operates in two primary
industry segments, specialty retail and specialty manufacturing. The specialty
retail segment consists of four distinct retail concepts: Tandy Leather Company,
which sells leathercraft and related products through 173 stores located in 45
states; Joshua's Christian Stores, which sells inspirational books, music and
gifts through a chain of 74 stores in twelve states; Sav-On Office Supplies,
which sells office supplies and related products through a chain of 36 stores
located in eleven states; and Cargo Furniture and Accents, which sells a
proprietary line of solid wood furniture and accessories through a chain of 39
stores located primarily in regional shopping malls. The specialty manufacturing
segment is comprised of two divisions: Picture Frames and Framed Art and Tandy
Wholesale International ("TWI") division.
With the exception of historical information, the matters discussed herein
are forward-looking statements that involve risks and uncertainties that may
cause actual results to differ from such projections. These risks and
uncertainties include, but are not limited to, the performance of each operating
unit, relationships with certain key customers, commodity price fluctuations,
product demand, inventory fluctuations due to shifts in market demand and
preferences, the regulatory and trade environment, interest rate fluctuations,
recessionary factors, seasonality and other factors or risks indicated in
filings with the Securities and Exchange Commission.
RESULTS OF OPERATIONS
The following table presents selected financial data for each significant
company or division comprising the Company's two primary industry segments for
the years ended June 30, 1996 and 1995:
Fiscal Years Ended June 30, 1996 and 1995
(Dollars in Thousands)
<TABLE>
<S><C>
1996 1995 Increase (Decrease)
------------------- ------------------ ---------------------
Operating Operating
Income Income Operating
Sales (loss) Sales (loss) Sales Income
------- --------- ------- -------- ------- ----------
Specialty retail:
- ----------------
Tandy Leather $ 43,281 $ 1,608 $ 47,757 $ 3,970 (9.4%) (59.5%)
Sav-On 29,922 1,123 20,647 (1,735) 44.9% 164.7%
Joshua's 30,845 (1,759) 29,615 525 4.2% (435.0%)
Cargo 18,609 173 19,776 761 (5.9%) (77.3%)
Restructuring charge - (835) - - - (100.0%)
-------- --------- -------- -------- ------- ---------
122,657 310 117,795 3,521 4.1% (91.2%)
-------- --------- -------- -------- ------- ---------
Specialty manufacturing;
- -----------------------
Picture frames and framed
art 80,094 8,997 80,797 11,652 (0.9%) (22.8%)
TWI 37,467 2,559 32,409 3,496 15.6% (26.8%)
Divested units 14,066 (2,165) 25,522 (2,159) (44.9%) (0.3%)
Restructuring charge - (17,442) - - - (100.0%)
-------- --------- -------- -------- ------ ---------
131,627 (8,051) 138,728 12,989 (5.1%) (162.0%)
-------- --------- -------- -------- ------ ---------
Total operations,
excluding corporate $254,284 $ (7,741) $256,523 $ 16,510 (0.9%) (146.9%)
======== ========= ======== ======== ====== =========
</TABLE> [S][C]
Fiscal Years Ended June 30, 1995 and 1994
(Dollars in Thousands)
<TABLE>
<S><C>
1995 1994 Increase (Decrease)
------------------- ------------------ ---------------------
Operating Operating
Income Income Operating
Sales (loss) Sales (loss) Sales Income
------- --------- -------- -------- ------- ----------
Specialty retail:
- ----------------
Tandy Leather $ 47,757 $ 3,970 $ 49,273 $ 4,802 (3.1%) (17.3%)
Sav-On 20,647 (1,735) 14,635 (390) 41.1% (344.9%)
Joshua's 29,615 525 23,254 1,060 27.4% (50.5%)
Cargo 19,776 761 20,488 898 (3.5%) (15.3%)
-------- --------- -------- -------- ------ ---------
117,795 3,521 107,650 6,370 9.4% (44.7%)
-------- --------- -------- -------- ------ ---------
Specialty manufacturing:
- -----------------------
Picture frames and framed
art 80,797 11,652 58,646 7,552 37.8% 54.3%
TWI 32,409 3,496 25,654 4,926 26.3% (29.0%)
Divested units 25,522 (2,159) 22,919 784 11.4% (375.4%)
-------- --------- -------- -------- ------ ---------
138,728 12,989 107,219 13,262 29.4% (2.1%)
-------- --------- -------- -------- ------ ---------
Total operations,
excluding corporate $256,523 $ 16,510 $214,869 $ 19,632 19.4% (15.9%)
======== ========= ======== ======== ====== =========
</TABLE> [S][C]
FISCAL YEARS ENDED JUNE 30, 1996 AND 1995
For fiscal 1996, consolidated net sales decreased $2,239,000, or 0.9%,
compared to fiscal 1995. Total operating income before corporate expenses
decreased $24,251,000 or 146.9% from fiscal 1995. The operating loss is
primarily due to the restructuring and other charges to operations recognized
during the quarter ended December 31, 1995. Discussions relative to each of the
Company's industry segments are set forth below.
SPECIALTY RETAIL
Net sales for the specialty retail segment increased $4,862,000, or 4.1%,
while operating income decreased by $3,211,000 or 91.2% compared to fiscal 1995.
The decrease in operating income includes a restructuring charge of $835,000 for
the closure of certain underperforming stores. The specialty retail segment
contributed 48.2% of consolidated net sales in fiscal 1996 compared to 45.9% in
the prior year.
Tandy Leather Company
Tandy Leather Company's net retail sales decreased $4,476,000, or 9.4%,
primarily attributable to same-store sales decreases of 9.3% from fiscal 1995.
Tandy Leather continued to experience a decline in sales of certain merchandise
categories, particularly Southwest fashion merchandise, as changes in consumer
tastes and trends combined with greater competition in this product category
from other craft stores negatively impacted sales.
Operating income for Tandy Leather decreased $2,362,000, or 59.5%, when
compared to the prior year. This decrease in operating income is primarily a
result of the decrease in sales, particularly sales of Southwest fashion
merchandise with a corresponding higher gross profit. Gross profit as a
percentage of sales for this unit decreased slightly, while selling, general and
administrative expenses decreased in dollars but increased as a percentage of
sales in fiscal 1996 compared to 1995 due to a greater decrease in sales
relative to the decrease in support and administrative expenses.
Sav-On Office Supplies
Sav-On achieved a $9,275,000, or 44.9%, increase in net sales over fiscal
1995 due to same-store sales increases of 12.8% and to the inclusion of a full
year of sales in fiscal 1996 for 18 stores which were opened during 1995. The
same-store sales increases are attributable to the continuing maturation of the
nine stores opened in fiscal 1994. Two underperforming stores were closed
during the fourth quarter of 1996, bringing the chain total to 36 stores at year
end.
Sav-On had operating income of $1,123,000 for fiscal 1996 compared to a
loss of $1,735,000 in fiscal 1995. The increase in operating income is
primarily a result of increased sales and efficiency gains at both stores and
administrative units. Gross profits as a percentage of sales increased slightly
due to more effective merchandising and inventory management. Selling, general
and administrative expenses as a percentage of sales decreased significantly due
to larger increases in sales relative to expenses.
Joshua's Christian Stores
Joshua's Christian Stores achieved a $1,230,000, or 4.2%, increase in net
sales over fiscal 1995. The increase in total net sales is due to the increase
in the number of stores and the maturation of stores less than 24 months old.
Joshua's had 72 stores open at June 30, 1995 and 74 stores open at June 30,
1996. The increase in sales is offset by a decline in same-store sales of 4.6%
which is attributable to increased competition and an unfavorable merchandise
assortment at the stores. The merchandise assortment has been re-evaluated by
Joshua's new management team and management expects the recent trend of same-
store sales losses and declining gross margins to begin improving during fiscal
1997. Actual results, however, may differ from this forward-looking statement.
Please see the discussion of risk factors which could impact this projection
herein.
Joshua's experienced an operating loss of $1,759,000 for fiscal 1996
compared to operating income of $525,000 for fiscal 1995. Gross profit as a
percentage of sales decreased primarily due to inventory write-downs and as a
result of the unfavorable merchandise assortment discussed above. Selling,
general and administrative costs increased with the opening of three new stores
in fiscal 1996, but decreased 1.8 points as a percentage of sales.
Cargo Furniture & Accents
Net sales for Cargo decreased $1,167,000, or 5.9%, compared to fiscal 1995.
This decrease is attributable to the closure of one store during fiscal 1996 and
same-store sales decreases of 1.8% compared to the prior year. The decrease in
same-store sales was partially offset by increased sales in the contract
division of Cargo.
Operating income for Cargo decreased $588,000 or 77.3% for fiscal 1996
compared to fiscal 1995. This decrease is attributable to the lower sales
levels combined with a decrease in gross margin as sales promotions and contract
sales, with lower margins, comprised a larger percentage of total sales during
fiscal 1996.
Cargo was targeted by Tandycrafts' Board of Directors to be divested as
part of the restructuring program adopted in December 1995. As such,
Tandycrafts is currently pursuing the sale of this unit.
SPECIALTY MANUFACTURING
Net sales for the specialty manufacturing segment decreased $7,101,000, or
5.1%, while operating income decreased $21,040,000 or 162.0% as compared to
fiscal 1995. The decrease in operating income includes a restructuring charge
of $17,442,000 related to the closure or divestiture of certain underperforming
business units. The decrease in sales also reflects the closure or divestiture
of certain underperforming units during fiscal 1996. The specialty
manufacturing segment contributed 51.8% of consolidated net sales in fiscal 1996
compared to 54.1% in the prior year.
Picture Frames and Framed Art
The decrease in net sales for the Picture Frames and Framed Art division
was $703,000, or 0.9%, compared to fiscal 1995. This decrease is attributable
to the cancellation of certain large framed art orders by a key customer during
fiscal 1996. These canceled orders were the result of inventory overbuying
experienced by that customer which management expects to be alleviated in fiscal
1997. The decrease in sales is partially offset by the increase in sales of
picture frames and mirrors, the introduction of new products and the addition of
new customers.
Operating income for the Picture Frames and Framed Art division decreased
$2,655,000 or 22.8%. This decrease is primarily attributable to the
cancellation of certain large framed art orders discussed above.
Tandy Wholesale International ("TWI")
Net sales for the TWI division, increased $5,058,000, or 15.6%, compared to
fiscal 1995. This increase reflects the increased sales of the licensed
products group resulting primarily from the addition of new customers,
penetration into new markets and the introduction of new product lines. Also
affecting these sales, though to a lesser extent, were sales of Atlanta `96
Olympic merchandise. The increased sales of the licensed products group were
partially offset by decreased sales at Tandy Leather Manufacturing. This
decrease is primarily due to a change in the licensing practices of a key
customer.
The operating income of the TWI division decreased $937,000 or 26.8%. This
decrease primarily reflects the decline in sales at Tandy Leather Manufacturing
and also includes $170,000 of expenses associated with the relocation of
Rivertown Button from Houston, Minnesota to Fort Worth, Texas. The decrease in
operating income at Tandy Leather Manufacturing was partially offset by
increased profitability in the licensed products group.
Strategic restructuring and consolidation program
In the quarter ended December 31, 1995, the Company adopted a strategic
restructuring and consolidation program. The primary components of this program
included: (i) the sale of Cargo Furniture and Accents, (ii) the sale or closure
of Prestige Leather Creations, David James Manufacturing, Brand Name Apparel and
certain other individually insignificant operations, (iii) the closure of 11
retail stores including two at Sav-On Office Supplies, five at Joshua's
Christian Stores and four at Tandy Leather Company, (iv) the consolidation of
certain functions within TWI of Nocona Belt Company and Rivertown Button
Company, (v) the consolidation, streamlining and, in some cases, outsourcing of
certain functions throughout various operating units, and (vi) the retention of
an outside consulting firm to assist senior management in evaluating and
developing the Company's retail concepts.
The adoption of this program was a direct result of a strategic review
initiated in August 1995 during which the Company's various business units were
examined, including the role and strategy of each in generating sales and
profits, as well as each business unit's market position and growth potential.
The intent of this program was to improve the Company's competitive position by
focusing the Company's resources in those areas which offer the greatest
potential for growth and increased value for shareholders. Upon completion of
this plan, the Company will be comprised of three specialty retail operations;
Tandy Leather Company, Joshua's Christian Stores and Sav-On Office Supplies, and
two manufacturing divisions; TWI and Picture Frames and Framed Art.
Restructuring charges
As a result of the adoption of the strategic restructuring and
consolidation program discussed above, the Company recorded restructuring
charges of $18.8 million in the quarter ended December 31, 1995. In the quarter
ended March 31, 1996, the Company reversed $501,000 of the initial reserve
related to the sale of Prestige Leather Creations. In the quarter ended June
30, 1996, $564,000 of the reserve initially recorded for lease obligations was
reclassified to the reserve for asset writedowns as a result of the assignment
of leases to the purchasers. The increase in the asset writedown reserve was
necessary to cover asset writedowns in excess of those originally anticipated by
management.
The net restructuring charges include approximately $17.5 million for asset
writedowns and anticipated exit costs associated with specialty manufacturing
businesses targeted for sale or closure to be sold or closed and $0.8 million
for asset writedowns and anticipated exit costs associated with the closure of
certain retail stores. Approximately $16.2 million of the restructuring charges
relate to non-cash writedowns of assets to their estimated realizable values,
including $7.5 million related to the write off of goodwill, $6.1 million
related to the liquidation of inventories, $1.2 million related to the writedown
of fixed assets, and $1.4 million related to the writedown of various other
assets. The remaining $2.1 million of the restructuring charges represents
anticipated cash outlays. Approximately $1.6 million relates to lease
obligations and the remainder relates to other contractual obligations and exit
costs. No severance costs have been included in the restructuring charges. The
following table sets forth the restructuring charges by segment (in thousands):
Specialty Specialty
Manufacturing Retail Corporate Total
------------- --------- --------- ---------
Asset writedowns $ 15,861 $ 318 $ - $ 16,179
Lease and other
exit costs 1,581 517 40 2,138
-------- ------ ---- --------
Restructuring charge
for the year ended
June 30, 1996 $ 17,442 $ 835 $ 40 $ 18,317
======== ====== ==== ========
The following table sets forth the accrual activity in the restructuring
reserve, which is included in current accrued liabilities in the June 30, 1996
balance sheet (in thousands):
Specialty Specialty
Manufacturing Retail Corporate Total
------------- --------- --------- ---------
Balance at June 30, 1995 $ - $ - $ - $ -
Restructuring charges 17,943 835 40 18,818
Cash payments (397) (78) (40) (515)
Non-cash asset writedowns (15,861) (318) - (16,179)
Non-cash adjustment to
restructuring charges (501) - - (501)
-------- ------ ---- --------
Balance at June 30, 1996 $ 1,184 $ 439 $ - $ 1,623
======== ====== ==== ========
As of June 30, 1996, the restructuring and consolidation program is
substantially complete and management expects it to be fully completed during
fiscal 1997. Since December 31, 1995, the Company has sold Prestige Leather
Creations and Brand Name Apparel and has closed David James Manufacturing and
certain other individually insignificant operations. On the retail side, the
Company has closed two Sav-On stores, two Tandy Leather stores and one Joshua's
store. The Company expects to complete the sale of Cargo during the first half
of fiscal 1997.
Total proceeds from the sale of Prestige Leather approximated $1.5 million,
with approximately $900,000 being paid in cash and $607,000 in notes receivable
which bearbearing interest at 8.5% to 9.5% and maturematuring at various dates
through March 26, 2000. Total proceeds from the sale of Brand Name Apparel were
approximately $1,038,000 in cash.
The above provisions are estimates based on the Company's judgment at this
time. Adjustments to the restructuring provisions may be necessary in the
future based on further development of restructuring related activitiescosts;
however, management believes the $1.6 million accrualbalance at June 30, 1996 is
adequate to cover the remaining liability of the restructuring program adopted
in December 1995. AltThough no additional restructuring plans are currently
under consideration, the Company continues to evaluate possible actions which
are aimed at improving the profitability and competitive position of the
Company.
Revenues and operating losses (before restructuring charges) from
separately identifiable businesses targeted for sale or closure are set forth
below by segment (in thousands):
Year Ended June 30,
--------------------------------------------
1996 1995
-------------------- ---------------------
Operating Operating
Income Income
Sales (loss) Sales (loss)
-------- --------- -------- --------
Specialty retail $ 18,609 $ 173 $ 19,776 $ 761
Specialty manufacturing 14,066 (2,165) 25,522 (2,159)
-------- -------- -------- --------
Total $ 32,675 $ (1,992) $ 45,298 $ (1,398)
======== ======== ======== ========
Selling, general and administrative expenses
Consolidated selling, general and administrative expenses as a percentage
of sales were 32.0% for fiscal 1996 compared to 32.6% for fiscal 1995. In total
dollars, selling, general and administrative expenses decreased $2,117,000, or
2.5%, for fiscal 1996 when compared to the previous year. The decrease in
expenses was primarily due to the reduction in expenses related to those
companies divested or closed during fiscal 1996 and to a change in the
provisions of the Company's Employee Stock Ownership Plan ("ESOP") which reduced
the Company's contributions in fiscal 1996 by approximately $1.6 million.
Effective July 1, 1995, the ESOP was amended to allow forfeited shares to be
used to reduce future Company contributions to the ESOP. Previously, such
forfeited shares were reallocated to the remaining active plan participants.
Interest expense
Interest expense increased $223,000, or 5.7%, for fiscal 1996 when compared
to the prior year. The increase in interest expense was due primarily to higher
average borrowings during the current year interest rates compared to the prior
year.
Depreciation and amortization
Consolidated depreciation and amortization increased $491,000, or 9.0%, for
fiscal 1996 when compared to the previous year. The increase is due primarily
to depreciation on the capital expenditures made during fiscal 1996.
Provision for income taxes
The Company realized a tax benefit of $5,174,000 in fiscal 1996 compared to
tax expense of $2,810,000 in 1995. The tax benefit in fiscal 1996 reflects
current year losses which can be carried back to recover taxes paid in prior
periods. The effective income tax rate for fiscal 1996 was 32.6% compared to
35.0% for the prior year. The decrease in theThis effective income tax rate
decrease is a result of the acceleration of permanent tax differences
attributable to certain sales or closures included in the restructuring charges
previously discussed.
FISCAL YEARS ENDED JUNE 30, 1995 AND 1994
For fiscal 1995, consolidated net sales increased $41,654,000, or 19.4%,
compared to fiscal 1994. Total operating income before corporate expenses
decreased $3,122,000, or 15.9% in fiscal 1995 compared to fiscal 1994.
Discussions relative to each of the Company's industry segments are set forth
below.
SPECIALTY RETAIL
Net sales for the specialty retail segment increased $10,145,000, or 9.4%,
while operating income decreased $2,849,000, or 44.7%, compared to fiscal 1994.
The specialty retail segment contributed 45.9% of consolidated net sales in
fiscal 1995 compared to 50.1% in the prior year. This segment also contributed
21.3% of consolidated operating income before corporate expenses for fiscal 1995
compared to 32.4% in the previous year.
Tandy Leather Company
Tandy Leather Company's net retail sales decreased $1,516,000, or 3.1%,
from fiscal 1994 with a decrease in same-store sales of 3.4%. The decrease in
sales reflected a reduction in the average number of transactions per store
compared to the previous year due primarily to a decline in sales of sSouthwest
fashion merchandise. The decrease in sales related to this merchandise category
was due in part to a decline in popularity, but also due to increased
competition.
Operating income for Tandy Leather decreased $832,000, or 17.3%, when
compared to the prior year. The decrease in operating income was primarily a
result of the decrease in sales, particularly sales of Southwest fashion
merchandise with its corresponding higher gross profit. For the year, gross
profit decreased $1,264,000 and also as a percent of sales primarily as a result
of decreased sales and a change in the sales mix. Selling, general and
administrative expenses decreased approximately $447,000 for the year when
compared to last year; however, expenses as a percent of sales were up slightly
due to the decrease in sales.
Sav-On Office Supplies
Sav-On achieved a $6,012,000, or 41.1%, increase in net sales over fiscal
1994, primarily as a result of an aggressive store expansion program. During
fiscal 1995, Sav-On continued to increase its store base by opening 18 new
stores in targeted markets. Same-store sales were flat during the year
primarily as a result of 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.
Sav-On experienced an operating loss of $1,735,000 for the year ended June
30, 1995 compared to an operating loss of $390,000 for the previous year. The
decrease in operating income was primarily a result of start-up and increased
administrative expenses incurred in expanding the store base from 21 stores at
June 30, 1994 to 38 stores at June 30, 1995. Gross profit as a percent of sales
for the year decreased compared to fiscal 1994 primarily as a result of
escalating paper costs which could not be passed on to customers because of
significant price competition. Also, administrative expenses 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
Joshua's achieved a $6,361,000, or 27.4%, increase in net sales over fiscal
1994. The increase in total net sales was primarily due to the effect of new
store openings. Joshua's had 72 stores open at June 30, 1995 compared to 61
stores open at June 30, 1994. Same-store sales at Joshua's increased 3.7% for
the year and reflected the impact of increased competition in certain markets.
Joshua's Christian Stores had operating income for the year ended June 30,
1995 of $525,000 compared to operating income for the same period last year of
$1,060,000. Gross margins for fiscal 1995 were consistent with fiscal 1994
while selling, general and administrative expenses increased as a percent of
sales. The increase in selling, general and administrative expenses was due
primarily to increased advertising; increased labor expense resulting from store
expansion and additional support personnel; and increases in communication and
data processing expenses associated with the installation and implementation of
a new merchandising and management information system.
Cargo Furniture & Accents
Net sales for Cargo decreased $712,000, or 3.5%, compared to fiscal 1994,
primarily as a result of the closure of three stores during fiscal 1995. Same-
store sales increased 1.2%. The flat same-store sales were attributable to the
sluggish economy, particularly in the fourth quarter, higher interest rates, and
reduced new home starts during fiscal 1995.
Operating income for Cargo decreased $137,000 from $898,000 in fiscal 1994,
to $761,000 in fiscal 1995. The decrease in operating income was attributable to
the sluggish economy, higher interest rates, and fewer home starts. For fiscal
1995, gross profit as a percent of sales remained consistent with the prior
year; however, selling, general and administrative expenses were reduced as a
result of cost savings stemming from closed stores as well as from internal
reorganization.
SPECIALTY MANUFACTURING
Net sales for the specialty manufacturing segment increased $31,509,000, or
29.4%, while operating income decreased $273,000 or 2.1% compared to fiscal
1994. The specialty manufacturing segment contributed 54.1% of consolidated net
sales in fiscal 1995 compared to 49.9% in the prior year. This segment also
contributed 78.7% of consolidated operating income before corporate expenses for
the year ended June 30, 1995 compared to 67.6% for the previous year.
Picture Frames and Framed Art
The increase in net sales for the Picture Frames and Framed Art division
was $22,281,000, or 37.7%, compared to fiscal 1994. The increase reflected 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.
Operating income for this division increased 55.8% over fiscal 1994 to
$11,451,000. The increase reflected the contribution of Impulse Designs which
was acquired effective November 1, 1993. The increase in operating income for
fiscal 1995 also reflected increased sales and improved gross margins resulting
from manufacturing efficiency gains and a more profitable sales mix.
Tandy Wholesale International ("TWI")
Net sales for the TWI division increased $6,755,000, or 26.3%, compared to
fiscal 1994. The increase in net sales reflected the contributions of Rivertown
Button, College Flags and Tag Express, which were acquired effective April 1,
1994, June 1, 1994 and September 1, 1993, respectively. Sales for the year also
reflected 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.
The TWI division's operating income decreased $1,430,000, or 29.0% for
fiscal 1995, compared to the previous year. The decrease in operating income
reflected the impact of the professional baseball and hockey players strikes on
the sales of related licensed products as well as production difficulties
encountered assimilating the recently acquired pennant manufacturing operation.
Selling, general and administrative expenses
Consolidated selling, general and administrative expenses were 32.6% for
fiscal 1995 compared to 32.0% for fiscal 1994. In total dollars, selling,
general and administrative expenses increased $14,699,000, or 21.4%, for fiscal
1995 when compared to the previous year. The increase in expenses was primarily
due to acquisitions included for a full year compared to a partial period last
year and to new store openings.
Interest expense
Interest expense increased $2,319,000, or 146.7%, for fiscal 1995 when
compared to the prior year. The increase in interest expense was due to an
increase in average borrowings during the year compared to the prior year and to
increased interest rates.
Depreciation and amortization
Consolidated depreciation and amortization increased $1,457,000, or 36.3%,
for fiscal 1995 compared to the previous year. The increase was due primarily
to depreciation related to property and equipment of businesses acquired as well
as amortization of goodwill related to acquisitions. Depreciation expense also
increased over the prior year due to a higher level of capital expenditures.
Provision for income taxes
The effective income tax rate for fiscal 1995 was 35.0% compared to 36.3%
for the prior year. The decrease in the effective tax rate reflected a decrease
in the 1995 federal statutory rate because of the decline in income before
taxes, and lower state taxes.
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. These funds have been used
primarily to finance acquisitions, purchase property and equipment, retire the
ESOP loan and finance growth in inventories and receivables.
During the year ended June 30, 1996, cash decreased $295,000. Cash
provided by operating activities of $8,425,000 resulted primarily from a
decrease in working capital. Cash used for investing activities of $4,636,000
resulted primarily from capital expenditures for property and equipment and the
payment of additional consideration for the acquisition of Impulse Designs.
Cash of approximately $4,084,000 was used by financing activities, primarily to
reduce borrowings under the Company's revolving credit facility.
The Company has a $60 million revolving credit facility with a group of
banks. During July 1995, the Company established an additional $10 million
revolving credit facility that terminated on March 31, 1996. As part of the
Company's restructuring and consolidation program adopted in December 1995, the
bank group agreed to extend the maturity date of the current revolving credit
facility to October 1, 1997 under the existing terms and to amend certain
provisions, restrictions and covenants under the revolving credit agreement as
of December 31, 1995 to allow the actions contemplated by the Company's
restructuring plan to occur without placing the Company in default. The Company
has agreed with its lending banks to reduce the commitment amount under the
revolving loan agreement from $60,000,000 to $50,000,000 by October 31, 1996.
The Company currently estimates that cash generated from the sale of assets
contemplated by the strategic restructuring program and cash flow from
operations will enable it to reduce its borrowings under the revolving credit
facility by October 31, 1996 to levels that will enable the Company to operate
within the $50,000,000 commitment amount. Actual results may differ from this
forward-looking projection. Please refer to the discussion of risk factors
herein.
In the quarter ended March 31, 1996, the Company sold certain assets and
liabilities of Prestige Leather Creations for consideration of approximately
$1.5 million. Such consideration consisted of approximately $900,000 in cash
and $607,000 in notes receivable. The notes receivable bear interest at 8.5% to
9.5% and have payment terms which mature at various dates through March 26,
2000. In the fourth quarter of fiscal 1996, the Company sold certain assets and
liabilities of Brand Name Apparel, Inc. for consideration of $1,038,000 in cash.
In connection with the November 1993 acquisition of Impulse Designs, the
asset purchase agreement provided for a contingent payment to be made based upon
the attainment of certain earnings thresholds for the year ended December 31,
1994March 31, 1995. Impulse Designs met certain of these thresholds and, in
January 1996, the Company made a final cash payment of approximately $2.5
million to the former owners of Impulse Designs to complete the transaction.
This amount is reflected as goodwill in the June 30, 1996 balance sheet. The
Company also incurred approximately $457,000 of expenses related to such
settlement which were reflected in the results of operations for the quarter
ended December 31, 1995.
Cash of approximately $4,363,000 was used for capital expenditures during
the year ended June 30, 1996. Planned capital expenditures for fiscal 1997
approximate $5,0500,000 and are targeted primarily for investments in the
Picture Frames and Framed Art division. Approximately six additional new store
openings at Sav-oOn Office Supplies are anticipated for fiscal 1997. The
Company's minimum operating lease commitments for fiscal 1997 are approximately
$7.9 million. Management believes that the Company's current cash position, its
cash flows from operations and expected proceeds from the sale of assets
contemplated by the strategic restructuring program will be sufficient to fund
its planned operations, capital expenditures and required debt reduction.
Actual results may differ from this forward-looking projection. Please refer to
the discussion of risk factors herein.
NEW ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ,
which is effective for fiscal years beginning after December 15, 1995. In
October 1995, the FASB issued Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("SFAS 123"), which is effective
for transactions entered into in fiscal years that begin after December 15,
1995. SFAS 123 establishes a fair value based method of accounting for stock-
based compensation plans. The effect of adopting both of these standards is
not expected to be material to the Company's financial position or results of
operations.
CONTINGENCIES
A former subsidiary of the Company, which was spun-off in 1978, filed for
Chapter 11 protection under the federal bankruptcy code in January 1996. As
part of the bankruptcy proceedings, the former subsidiary has rejected certain
store leases which were originated prior to the spin-off and for which the
Company was allegedly a guarantor. A reserve for losses associated with these
alleged guarantees has been established and, based on the present information
with respect to about the rejected leases, management believes such reserve is
adequate to cover any liability the Company may have the Company's liability
under these alleged guarantees. Actual results may differ from this forward-
looking projection. The former subsidiary may reject further alleged guaranteed
leases with alleged guarantees, which may result in additional potential
liabilitylosses. Please refer to the risk factors discussion herein.
Item 8. Financial Statements and Supplementary Data
- ------ -------------------------------------------
Index to Financial Statements
Financial Statements: Page
-------------------- -----------
Report of Independent Accountants 18
Consolidated Balance Sheets, June 30, 1996
and 1995 19
Consolidated Statements of Operations for
the Years Ended June 30, 1996, 1995 and 1994 20
Consolidated Statements of Cash Flows for the
Years Ended June 30, 1996, 1995 and 1994 21
Consolidated Statements of Stockholders' Equity
for the Years Ended June 30, 1996, 1995 and 1994 22
Notes to Consolidated Financial Statements 23
Financial Statement Schedules:
-----------------------------
For each of the three years in the period ended
June 30, 1996:
Schedule VIII - Valuation and Qualifying Accounts
and Reserves 36
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Tandycrafts, Inc.
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Tandycrafts, Inc. and its subsidiaries at June 30, 1996 and 1995,
and the results of their operations and their cash flows for each of the three
years in the period ended June 30, 1996, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Fort Worth, Texas
August 12, 1996
TANDYCRAFTS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
June 30,
---------------------
1996 1995
--------- ---------
ASSETS
Current assets:
Cash, including short-term investments of $9 and
$259, respectively $ 1,512 $ 1,807
Trade accounts receivable, net of allowance for
doubtful accounts of $784 and $605, respectively 31,741 31,440
Inventories 59,284 65,742
Other current assets 7,234 2,991
--------- ---------
Total current assets 99,771 101,980
--------- ---------
Property and equipment, net 26,783 28,707
Other assets 751 604
Goodwill, net 41,274 47,512
--------- ---------
$ 168,579 $ 178,803
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 3,270 $ 2,000
Accounts payable 13,259 12,558
Accrued liabilities and other 17,222 12,555
--------- ---------
Total current liabilities 33,751 27,113
--------- ---------
Long-term debt 50,000 59,000
Deferred taxes 1,230 2,029
Stockholders' equity:
Common stock, $1 par value, 50,000,000
shares authorized, 18,527,988 issued 18,528 18,528
Additional paid-in capital 19,371 17,447
Retained earnings 69,375 80,084
Common stock in treasury, at cost,
6,349,607 and 6,811,300 shares, respectively (23,676) (25,398)
--------- ---------
Total stockholders' equity 83,598 90,661
--------- ---------
Commitments and contingencies (Note 8)
$ 168,579 $ 178,803
========= =========
The accompanying notes are an integral part of these financial statements.
TANDYCRAFTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<S><C>
Year Ended June 30,
-----------------------------------
1996 1995 1994
--------- --------- ---------
Net sales $ 254,284 $ 256,523 $ 214,869
--------- --------- ---------
Operating costs and expenses:
Cost of goods sold (exclusive of depreciation) 160,385 155,644 126,589
Selling, general and administrative 81,427 83,544 68,845
Restructuring charge 18,317 - -
Depreciation and amortization 5,966 5,475 4,018
--------- --------- ---------
Total operating costs and expenses 266,095 244,663 199,452
--------- --------- ---------
Operating income (loss) (11,811) 11,860 15,417
Interest income 51 67 144
Interest expense 4,123 3,900 1,581
--------- --------- ---------
Income (loss) before income taxes (15,883) 8,027 13,980
Provision (benefit) for income taxes (5,174) 2,810 5,074
--------- --------- ---------
Net income (loss) $ (10,709) $ 5,217 $ 8,906
========= ========= =========
Net income (loss) per common share $ (.89) $.46 $.79
====== ==== ====
Weighted average number of common and
common equivalent shares 11,983 11,434 11,336
====== ====== ======
</TABLE> [S][C]
The accompanying notes are an integral part of these financial statements.
TANDYCRAFTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar in thousands)
<TABLE>
<S><C>
Year Ended June 30,
-----------------------------------
1996 1995 1994
--------- --------- ---------
Cash flows from operating activities:
Net income (loss) $ (10,709) $ 5,217 $ 8,906
Adjustments to reconcile net income (loss)
to net cash provided (used) by
operating activities:
Depreciation and amortization 5,966 5,475 4,018
(Gain) loss on sale or abandonment of assets 24 (163) 56
Restructuring charge 18,317 - -
Changes in assets and liabilities,
excluding effect of businesses acquired:
Receivables (3,073) (5,036) (5,781)
Inventories (720) (11,901) (7,143)
Other current assets (4,367) 1,734 (2,605)
Accounts payable, accrued expenses
and income taxes 2,987 644 592
--------- --------- ---------
Net cash provided (used) by
operating activities 8,425 (4,030) (1,957)
--------- --------- ---------
Cash flows from investing activities:
Additions to property and equipment (4,363) (9,519) (6,269)
Purchase of business, net of cash acquired (2,475) (9,052) (45,064)
Proceeds from sales of assets 2,202 1,685 43
--------- --------- ---------
Net cash used by investing activities (4,636) (16,886) (51,290)
--------- --------- ---------
Cash flows from financing activities:
Sales of treasury stock to employee benefit
plan, net 3,646 5,817 2,254
Purchases of treasury stock - - (2,201)
Principal payments on ESOP debt - (4,000) (2,000)
Borrowings (payments) under bank
credit facility (7,730) 19,400 41,600
Loan payments received from ESOP - - 3,025
--------- --------- ---------
Net cash provided (used) by
financing activities (4,084) 21,217 42,678
--------- --------- ---------
Increase (decrease) in cash and
cash equivalents (295) 301 (10,569)
Balance, beginning of year 1,807 1,506 12,075
--------- --------- ---------
Balance, end of year $ 1,512 $ 1,807 $ 1,506
========= ========= =========
Supplemental cash flow information:
Cash paid (received) during the year for:
Interest $ 4,157 $ 3,902 $ 1,490
========= ========= =========
Income taxes $ (551) $ 3,272 $ 5,114
========= ========= =========
</TABLE> [S][C]
The accompanying notes are an integral part of these financial statements.
TANDYCRAFTS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands)
<TABLE>
<S><C>
Additional Receivable
Common paid-in Retained Treasury from
stock capital earnings stock ESOP Total
-------- -------- ---------- --------- ---------- --------
Balance, June 30, 1993 $ 18,528 $ 11,464 $ 65,961 $(25,830) $ (3,025) $ 67,098
Purchase of 156,518 shares
of treasury stock - - - (2,201) - (2,201)
Sale of 154,190 shares of
treasury stock to
employee benefit plan - 1,694 - 560 - 2,254
ESOP loan payments to
Company, 698,993 pledged
shares released - - - - 3,025 3,025
Net income - - 8,906 - - 8,906
-------- -------- -------- -------- --------- --------
Balance, June 30, 1994 18,528 13,158 74,867 (27,471) - 79,082
Sale of 514,399 shares
of treasury stock to
employee benefit plan - 3,899 - 1,918 - 5,817
Contingent payment of
41,658 shares for
acquired business - 390 - 155 - 545
Net income - - 5,217 - - 5,217
-------- -------- -------- -------- --------- --------
Balance, June 30, 1995 18,528 17,447 80,084 (25,398) - $ 90,661
Sale of 692,262 share of
treasury stock to
employee benefit plan - 2,676 - 2,582 - 5,258
ESOP forfeitures of
230,569 shares - (752) - (860) - (1,612)
Net loss - - (10,709) - - (10,709)
-------- -------- -------- -------- --------- --------
Balance, June 30, 1996 $ 18,528 $ 19,371 $ 69,375 $(23,676) $ - $ 83,598
======== ======== ======== ======== ========= ========
</TABLE> [S][C]
The accompanying notes are an integral part of these financial statements.
TANDYCRAFTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ACCOUNTING PRINCIPLES
Description of Business - Tandycrafts, Inc. ("Tandycrafts" or the "Company")
operates in two primary industry segments, specialty retail and specialty
manufacturing. The specialty retail segment consists of four distinct retail
concepts: Tandy Leather Company, which sells leathercraft and related products
through 173 stores located in 45 states; Joshua's Christian Stores, which sells
inspirational books, music and gifts through a chain of 74 stores in twelve
states; Sav-On Office Supplies, which sells office supplies and related products
through a chain of 36 stores located in eleven states; and Cargo Furniture and
Accents, which sells a proprietary line of solid wood furniture and accessories
through a chain of 39 stores located primarily in regional shopping malls. The
specialty manufacturing segment is comprised of two divisions: Picture Frames
and Framed Art and Tandy Wholesale International ("TWI") division.
Principles of consolidation - The accompanying consolidated financial
statements include the accounts of the Company and its wholly-owned subsidiaries
after elimination of significant inter-company accounts and transactions.
Cash and cash equivalents - The Company considers, for purposes of the
statement of cash flows, all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Inventories - Inventories are stated at the lower of average cost or market and
consist of the following (in thousands):
June 30,
------------------
1996 1995
-------- --------
Finished goods $ 42,966 $ 46,276
Raw materials and work-in-process 16,318 19,466
-------- --------
$ 59,284 $ 65,742
======== ========
Property and equipment - Property and equipment is depreciated over the
estimated useful lives of the assets using principally the straight-line method
at the rates shown below:
Buildings 3% to 10%
Fixtures and equipment 5% to 50%
Leasehold improvements 5% to 20%, or the life of the lease.
Expenditures for maintenance, repairs, renewals and betterments which do
not materially prolong the useful lives of the assets are charged to income as
incurred. The cost of property retired or sold, and the related accumulated
depreciation, is removed from the accounts and any gain or loss, after taking
into consideration proceeds from sales, is reflected in income.
Pre-opening expenses - Expenses associated with the opening of new stores are
expensed as incurred.
Fair value of financial instruments - The fair value of the Company's long-term
debt approximates the carrying value due to the floating interest rates on such
debt. The carrying value of the Company's other financial instruments
approximates fair value due to the short-term maturities of the assets and
liabilities.
Goodwill - The cost of businesses acquired in purchase transactions has been
allocated among the identifiable assets and liabilities acquired based upon
their fair values at the dates of acquisition. Any cost in excess of the fair
value of such identifiable net assets acquired has been allocated to goodwill.
In general, goodwill is amortized using the straight-line method over the
estimated useful life of forty years. Accumulated amortization of goodwill at
June 30, 1996 and 1995 was $1,296,000 and $1,743,000, respectively. Net
goodwill in the amount of $7,477,000 was written-off in the quarter ended
December 31, 1995 as part of the restructuring program adopted during that
quarter. Goodwill which arose prior to October 31, 1970, aggregating
$2,147,000, is reviewed annually by the Board of Directors and will continue to
be carried as an asset unless the Board determines that events and circumstances
indicate that there has been a decline or limitation in the value, at which time
an appropriate amortization policy will be adopted. Annually, the carrying value
of goodwill related to purchase transactions is evaluated to determine if events
and circumstances indicate a potential impairment of the recoverability of such
goodwill. The carrying value of goodwill will be reduced if it is probable that
the undiscounted cash flows from the related operations will be less than the
carrying amounts of the goodwill and other long-lived assets.
Income taxes - Income taxes are calculated in accordance with Statement of
Financial Accounting Standards No. 109 "Accounting for Income Taxes" which
requires that deferred tax assets and liabilities be recognized based on
differences between the financial statement and tax bases of assets and
liabilities using presently enacted rates.
Net income (loss) per share - Net income (loss) per share of common stock is
based upon the weighted average number of shares of common stock and common
stock equivalents outstanding during the periods, after giving effect to stock
splits. The computation of weighted average shares outstanding for fiscal 1996
included no common stock equivalents, while common stock equivalents of 5,000
and 171,000 were included for fiscal 1995 and 1994, respectively.
Advertising costs - Advertising costs are expensed the first time the
advertising takes place. Advertising expense for fiscal 1996, 1995 and 1994 was
$8.8 million, $8.1 million and $5.1 million, respectively.
New accounting standards - In March 1995, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of" , which is effective for fiscal years beginning after December
15, 1995. In October 1995, the FASB issued Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), which
is effective for transactions entered into in fiscal years that begin after
December 15, 1995. SFAS 123 establishes a fair value based method of accounting
for stock-based compensation plans. The effect of adopting both of these
standards is not expected to be material to the Company's financial position or
results of operations.
Pervasiveness of estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Reclassifications - Certain amounts in prior years have been reclassified to
conform to the current year presentation.
NOTE 2 - STRATEGIC RESTRUCTURING AND CONSOLIDATION PROGRAM
Description
In the quarter ended December 31, 1995, the Company adopted a strategic
restructuring and consolidation program. The primary components of this program
included: (i) the sale of Cargo Furniture and Accents, (ii) the sale or closure
of Prestige Leather Creations, David James Manufacturing, Brand Name Apparel and
certain other individually insignificant operations, (iii) the closure of 11
retail stores including two at Sav-On Office Supplies, five at Joshua's
Christian Stores and four at Tandy Leather Company, (iv) the consolidation of
certain functions within TWI of Nocona Belt Company and Rivertown Button
Company, which was relocated from Houston, Minnesota to Fort Worth, Texas, (v)
the consolidation, streamlining and, in some cases, outsourcing of certain
functions throughout various operating units, and (vi) the retention of an
outside consulting firm to assist senior management in evaluating and developing
the Company's retail concepts.
The adoption of this program was a direct result of a strategic review
initiated in August 1995 during which the Company's various business units were
examined, including the role and strategy of each in generating sales and
profits, as well as each business unit's market position and growth potential.
The intent of this program was to improve the Company's competitive position by
focusing the Company's resources in those areas which offer the greatest
potential for growth and increased value for shareholders. Upon completion of
this plan, the Company will be comprised of three specialty retail operations;
Tandy Leather Company, Joshua's Christian Stores and Sav-On Office Supplies, and
two manufacturing divisions; TWI and Picture Frames and Framed Art.
Restructuring charges
As a result of the adoption of the strategic restructuring and
consolidation program discussed above, the Company recorded restructuring
charges of $18.8 million in the quarter ended December 31, 1995. In the quarter
ended March 31, 1996, the Company reversed $501,000 of the initial reserve
related to the sale of Prestige Leather Creations. In the quarter ended June
30, 1996, $564,000 of the reserve initially recorded for lease obligations was
reclassified to the reserve for asset writedowns as a result of the assignment
of leases to the purchasers. The increase in the asset writedown reserve was
necessary to cover asset writedowns in excess of those originally anticipated by
management.
The net restructuring charges include approximately $17.5 million for asset
writedowns and anticipated exit costs associated with specialty manufacturing
businesses targeted for sale or closureto be sold or closed and $0.8 million for
asset writedowns and anticipated exit costs associated with the closure of
certain retail stores. Approximately $16.2 million of the restructuring charges
relate to non-cash writedowns of assets to their estimated realizable values,
including $7.5 million related to the write off of goodwill, $6.1 million
related to the liquidation of inventories, $1.2 million related to the writedown
of fixed assets, and $1.4 million related to the writedown of various other
assets. The remaining $2.1 million of the restructuring charges represents
anticipated cash outlays. Approximately $1.6 million relates to lease
obligations and the remainder relates to other contractual obligations and exit
costs. No severance costs have been included in the restructuring charges. The
following table sets forth the restructuring charges by segment (in thousands):
Specialty Specialty
Manufacturing Retail Corporate Total
------------- --------- --------- --------
Asset writedowns $ 15,861 $ 318 $ - $ 16,179
Lease and other exit
costs 1,581 517 40 2,138
-------- ----- ---- --------
Restructuring charge
for the year ended
June 30, 1996 $ 17,442 $ 835 $ 40 $ 18,317
======== ===== ==== ========
The following table sets forth the accrual activity in the restructuring
reserve, which is included in current accrued liabilities in the June 30, 1996
balance sheet (in thousands):
Specialty Specialty
Manufacturing Retail Corporate Total
------------- --------- --------- --------
Balance at June 30, 1995 $ - $ - $ - $ -
Restructuring charges 17,943 835 40 18,818
Cash payments (397) (78) (40) (515)
Non-cash asset writedowns (15,861) (318) - (16,179)
Non-cash adjustment to
restructuring charges (501) - - (501)
-------- ----- ---- --------
Balance at June 30, 1996 $ 1,184 $ 439 $ - $ 1,623
======== ===== ==== ========
As of June 30, 1996, the restructuring and consolidation program is
substantially complete and management expects it to be fully completed during
fiscal 1997. Since December 31, 1995, the Company has sold Prestige Leather
Creations and Brand Name Apparel and has closed David James Manufacturing and
certain other individually insignificant operations. On the retail side, the
Company has closed two Sav-On stores, two Tandy Leather stores and one Joshua's
store. The Company expects to complete the sale of Cargo during the first half
of fiscal 1997.
Total proceeds from the sale of Prestige Leather approximated $1.5 million,
with approximately $900,000 being paid in cash and $607,000 in notes receivable
which bearbearing interest at 8.5% to 9.5% and maturematuring at various dates
through March 26, 2000. Total proceeds from the sale of Brand Name Apparel were
approximately $1,038,000 in cash.
The above provisions are estimates based on the Company's judgment at this
time. Adjustments to the restructuring provisions may be necessary in the
future based on further development of restructuring related activitiescosts.
Although no additional restructuring plans are currently under consideration,
the Company continues to evaluate possible actions which are aimed at improving
the profitability and competitive position of the Company.
Revenues and operating losses (before restructuring charges) from
separately identifiable businesses targeted for sale or closure are set forth
below by segment (in thousands):
Year Ended June 30,
--------------------------------------------
1996 1995
-------------------- --------------------
Operating Operating
Income Income
Sales (loss) Sales (loss)
-------- -------- -------- ---------
Specialty retail $ 18,609 $ 173 $ 19,776 $ 761
Specialty manufacturing 14,066 (2,165) 25,522 (2,159)
-------- -------- -------- ---------
Total $ 32,675 $ (1,992) $ 45,298 $ (1,398)
======== ======== ======== =========
NOTE 3 - ACQUISITIONS
During fiscal 1996, the Company made no acquisitions; however, in the prior
two fiscal years, the Company completed a number of strategic acquisitions to
complement its operations. All acquisitions discussed below were accounted for
using the purchase method of accounting. Goodwill resulting from these
acquisitions is being amortized over forty years. The following discussion
outlines the acquisitions made in fiscal 1995 and 1994.
Fiscal 1995
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 $3.7 million in cash and resulted in the recording of goodwill of
$3.1 million.
During fiscal 1995, the Company, through its wholly-owned subsidiary
Joshua's Christian Stores, purchased two Christian book stores for an aggregate
purchase price of approximately $600,000 in cash. The acquisitions resulted in
the recording of goodwill of approximately $284,000.
Fiscal 1994
Effective September 1, 1993 the Company acquired the net assets of TAG
Express, a marketer of products featuring leading professional and collegiate
sports logos, for approximately $5.2 million in cash. The acquisition resulted
in the recording of goodwill of $4.0 million.
On September 30, 1993, the Company acquired the net assets of Birdlegs,
Inc. ("Birdlegs") for approximately $4.2 million in cash. Birdlegs produces and
markets screen-printed active wear. The acquisition resulted in the recording of
goodwill of $2.4 million.
Effective November 1, 1993, the Company purchased substantially all of the
assets and assumed certain liabilities of Prestige Leather Creations, Inc.
("Prestige") for $8.7 million in cash. Prestige manufactures and markets a broad
line of men's and women's belts ranging from the low-end to the high-end market
segments of the belt industry. During fiscal 1995, additional consideration of
$600,000 became due to the former owners based upon the occurrence of certain
events as specified in the purchase agreement. The acquisition resulted in the
recording of goodwill of $5.9 million.
Effective November 1, 1993, the Company purchased substantially all of the
outstanding assets and assumed certain liabilities of Impulse Designs, Inc.
("Impulse") for $17.7 million in cash. Impulse is a leading producer of framed
art to mass-market retailers. The terms of the purchase agreement provided for a
contingent cash payment based upon the attainment of certain earnings thresholds
for the year ended December 31, 1994. In April 1995, the Company paid $4.3
million in accordance with such provision of the purchase agreement and in
January 1996, the Company made a final cash payment of approximately $2.5
million to the former owners of Impulse Designs to complete the transaction.
This amount is reflected as an increase in goodwill in the June 30, 1996 balance
sheet. In total, this acquisition has resulted in the recording of goodwill of
$21.4 million. The Company also incurred approximately $457,000 of expenses
related to the settlement of the contingent payment which are reflected in the
results of operations for fiscal 1996.
Effective April 1, 1994, the Company purchased the net assets of Rivertown
Button, Inc. for approximately $6.0 million in cash. Rivertown Button is a
contract manufacturer of promotional buttons. The acquisition resulted in the
recording of goodwill of $4.3 million.
During fiscal 1994, the Company, through its wholly-owned subsidiary
Joshua's Christian Stores, purchased eight Christian book stores for an
aggregate purchase price of $1.9 million in cash. The acquisitions resulted in
the recording of goodwill of $1.4 million.
During fiscal 1994, the Company purchased three other businesses for cash
aggregating $1.9 million. These acquisitions resulted in the recording of
goodwill of $1.6 million.
NOTE 4 - PROPERTY AND EQUIPMENT AND ACCUMULATED DEPRECIATION
As of June 30 (in thousands) 1996 1995
-------- --------
Property and equipment, at cost:
Land $ 2,424 $ 2,441
Buildings 13,457 12,568
Leasehold improvements 7,227 7,187
Fixtures and equipment 27,578 26,462
-------- --------
50,686 48,658
Less accumulated depreciation (23,903) (19,951)
-------- --------
Property and equipment, net $ 26,783 $ 28,707
======== ========
NOTE 5 - ACCRUED LIABILITIES AND OTHER
Accrued liabilities and other consisted of the following at June 30 (in
thousands):
1996 1995
-------- --------
Accrued payroll and bonus $ 5,319 $ 6,652
Taxes, other than income taxes 1,194 1,135
Customer deposits 625 430
Interest 301 335
Restructuring accrual 1,623 -
Accrual for sales allowances 2,060 1,136
Other 6,100 2,867
-------- --------
$ 17,222 $ 12,555
======== ========
NOTE 6 - DEBT
The Company has a $60 million revolving credit facility with a group of
banks. The credit facility is an unsecured, two-year revolving line of credit,
renewable annually. Interest rates on borrowings are based on current LIBOR or
prime rates, at the option of the Company. A commitment fee of 1/4% is charged
on the unused portion of the credit facility. Interest rates on borrowings at
June 30, 1996 ranged from 6.375% to 6.414%. At June 30, 1996, the Company had
borrowings aggregating $53,270,000 and letters of credit aggregating $544,000
outstanding under this facility. The loan agreement contains provisions
specifying certain limitations on the amount of future indebtedness, investments
and dividends, and requires the maintenance of certain financial ratios and
balances. At June 30, 1996, the Company was in compliance with such covenants.
As part of the Company's planned restructuring and consolidation program
discussed in Note 2, the bank group agreed to extend the maturity date of the
current revolving credit facility to October 1, 1997 under the existing terms
and to amend certain provisions, restrictions and covenants under the revolving
credit agreement as of December 31, 1995 to allow the actions contemplated by
the Company's restructuring plan to occur without placing the Company in
default. The Company has agreed with its lending banks to reduce the commitment
amount under the revolving loan agreement from $60,000,000 to $50,000,000 by
October 31, 1996. As a result, the Company has classified $3,270,000 as current
on the June 30, 1996 balance sheet.
In April 1995, the Company executed three $1 million promissory notes with
its agent bank. The promissory notes were due on July 3, 1995. Two of the
notes were repaid and the third note was refinanced under the Company's long-
term credit facility discussed above and was therefore classified as long-term
debt at June 30, 1996.
On July 6, 1995, the Company established an additional $10 million
unsecured revolving credit facility with its primary bankers. Interest rates on
borrowings were based on current LIBOR or prime rates, at the option of the
Company and a commitment fee of 1/4% was charged on any unused portion of the
credit facility. This credit facility terminated on March 31, 1996.
NOTE 7 - INCOME TAXES
The provision for income taxes is as follows (in thousands):
1996 1995 1994
------- ------- -------
Current tax expense (benefit):
Federal $(4,361) $ 2,205 $ 4,440
State and local (14) 114 436
------- ------- -------
Total current (4,375) 2,319 4,876
Deferred tax expense (benefit):
Federal (799) 491 198
------- ------- --------
Total provision (benefit) $(5,174) $ 2,810 $ 5,074
======= ======= ========
Deferred tax liabilities (assets) are comprised of the following at June 30 (in
thousands):
1996 1995
-------- --------
Depreciation $ 1,739 $ 1,758
Deferred compensation 110 -
Goodwill 1,119 834
-------- --------
Total deferred tax liabilities 2,968 2,592
-------- --------
Inventory (202) (273)
Bad debts (97) (172)
Restructuring accrual (987)
Loss carryforwards (1,077) -
Deferred compensation (119) (65)
Lease reserves (37) (42)
Other (253) (11)
-------- --------
Total deferred tax assets (2,772) (563)
Valuation allowance 1,034 -
-------- --------
Net deferred tax assets (1,738) (563)
-------- --------
$ 1,230 $ 2,029
======== ========
A valuation allowance was established in 1996 in the amount of $1,034,000.
This allowance relates to state tax loss carryforwards. Their use is limited to
the future taxable earnings of the Company and its subsidiaries in certain
states and it was determined to be more likely than not that these state tax
carryforwards would not be utilized.
The provision for income taxes differs from the amount of income tax
determined by applying the applicable U.S. statutory federal income tax rate to
pretax income as a result of the following differences (in thousands):
Year ended June 30,
-----------------------------
1996 1995 1994
------- ------- -------
Statutory U.S. tax rates $(5,559) $ 2,729 $ 4,793
Increase (decrease) in rates
resulting from:
State and local taxes, net (51) 75 286
Goodwill write-offs 526 - -
Other (90) 6 (5)
------- ------- -------
Effective tax rates $(5,174) $ 2,810 $ 5,074
======= ======= =======
NOTE 8 - COMMITMENTS AND CONTINGENCIES
The Company leases certain properties consisting primarily of retail stores
and transportation equipment under operating leases expiring through 2004.
Real estate taxes, maintenance and certain other costs are borne by the
Company under the provisions of most of the leases.
The composition of total rental expense for operating leases is as follows
(in thousands):
Year ended June 30 1996 1995 1994
------- ------- -------
Rentals:
Minimum $ 9,812 $ 9,598 $ 7,760
Contingent (percentage of sales) 48 31 54
------- ------- -------
$ 9,860 $ 9,629 $ 7,814
======= ======= =======
Minimum rental commitments for noncancellable operating leases (primarily
retail store space) at June 30, 1996 are summarized as follows (in thousands):
Year ended June 30,
1997 $ 7,915
1998 6,518
1999 4,968
2000 3,221
2001 1,754
2002 and thereafter 2,002
---------
$ 26,378
=========
A former subsidiary of the Company, which spun-off in 1978, filed for
Chapter 11 protection under the federal bankruptcy code in January 1996. As
part of the bankruptcy proceedings, the former subsidiary has rejected certain
store leases which were originated prior to the spin-off and for which the
Company was allegedly a guarantor. A reserve for losses associated with these
alleged guarantees has been established and, based on the present information
with respect to about the rejected leases, management believes such reserve is
adequate to cover any liability the Company may havethe Company's liability
under these alleged guarantees. However, the former subsidiary may reject
further leases with alleged guarantees, which may result in additional potential
liability to the Company.
NOTE 9 - EMPLOYEE STOCK OWNERSHIP PLAN
During fiscal 1988, the Company adopted the Tandycrafts, Inc. Employee
Stock Ownership Plan (the "ESOP" or the "Plan") which is open to all eligible
employees of the Company employed in the United States. Under the Plan, a
participant contributes 5% of his earnings into the section 401(k) portion of
the Plan, which is immediately vested and is used to purchase common stock of
the Company. The Company's matching contribution is 200% of the participant's
contribution. As of July 1, 1996, the Company's matching contribution was
reduced to 100% of the participant's contribution. The Company's contribution
is vested upon completion of five years of credited service. The employee and
Company contributions are paid to a corporate trustee.
During fiscal 1996, the ESOP was amended to allow shares forfeited by
unvested employees to be used to reduce subsequent Company contributions to the
ESOP. Previously, such forfeited shares were reallocated to the remaining plan
participants. Company contributions to the ESOP, net of forfeitures, for the
years ended June 30, 1996, 1995, and 1994 were approximately $1,889,000,
$3,933,000, and $3,953,000, respectively. Forfeitures totaled $1,612,000 in
fiscal 1996.
NOTE 10 - STOCK OPTION PLANS
The Tandycrafts, Inc. 1992 Stock Option Plan (the "Stock Option Plan")
provides for the grant of options to purchase up to 1,400,000 shares of the
Company's common stock by officers and key employees. Options granted under the
Stock Option Plan may not have an option price less than the fair market value
of common stock on the date of grant. Options are exercisable at a rate of 20%
per year beginning at least one year after the date of grant and, if not
exercised, expire ten years from the date of grant.
The Tandycrafts, Inc. 1992 Director Stock Option Plan (the "Director Plan")
provides for the grant of options to non-employee directors to purchase up to
240,000 shares of the Company's common stock. The Director options are
exercisable 33-1/3% at date of grant and 16-2/3% on the first, second, third and
fourth anniversaries of the date of grant and, if not exercised, expire ten
years from the date of grant.
A summary of stock option activity under these plans follows:
Option amount
Shares per share
------------ ------------
Options outstanding,
June 30, 1994 1,418,900 $10.69-18.44
Options granted 77,000 $ 8.82-12.57
Options exercised
Options terminated (35,800) $11.13-18.44
------------ ------------
Options outstanding,
June 30, 1995 1,460,100 $ 8.82-18.44
Options granted 63,000 $ 8.00-8.25
Options exercised - $ -
Options terminated (447,100) $10.69-18.44
------------ ------------
Options outstanding,
June 30, 1996 1,076,000 $ 8.00-18.44
============ ============
Options exercisable,
June 30, 1996 583,012 $ 8.00-18.44
============ ============
Options available for
future grant, June 30, 1996 558,400
============
NOTE 11 - INDUSTRY SEGMENT AND GEOGRAPHIC
AREA INFORMATION
The Company operates in two primary industry segments, specialty retail and
specialty manufacturing. The specialty retail segment is comprised of four
distinct retail concepts. The specialty manufacturing segment is comprised of
two divisions: Picture Frames and Framed Art and TWI. Substantially all of the
specialty retail products are marketed through 322 Company-owned specialty
retail stores located in 45 states of the United States. The specialty retail
segment grants nominal credit primarily to institutional customers. The
specialty manufacturing segment, during fiscal 1996, 1995 and 1994, had net
sales of $30,065,000, $26,774,000 and $24,259,000, respectively, to a group of
customers under common control. The Company had no other individual customer or
group of customers which accounted for more than 10% of the Company's total
revenue. The specialty manufacturing segment, in the normal course of business,
grants credit with the majority of its sales. Such receivables are generally
not collateralized. The concentration of credit risk within this segment may
impact the Company's overall credit risk, either positively or negatively, in
that these customers may be similarly affected by industry-wide changes in
economic or other conditions. Historically, credit losses experienced by the
Company on receivables generally have not been material.
Intersegment sales represent sales from the specialty manufacturing group
to the specialty retail group. Operating income (loss) is segment revenue less
segment operating expenses, which excludes corporate charges, goodwill
amortization, interest expense and taxes on income. Identifiable assets by
segment are those assets that are used in each segment. Corporate assets are
comprised of cash and short-term investments.
Segment information for each of the three years in the period ended June
30, 1996 is as follows (in thousands):
Specialty Specialty
1996 manufacturing retailing Consolidated
---- ------------- --------- ------------
Total sales $ 143,090 $ 122,828 $ 265,918
Intersegment sales (11,463) (171) (11,634)
--------- --------- ---------
Net sales $ 131,627 $ 122,657 $ 254,284
========= ========= =========
Operating income (loss) (1) $ (8,051) $ 310 $ (7,741)
========= =========
Corporate expenses including goodwill
amortization and interest expense, net (8,142)
---------
Income (loss) before income taxes (1) $ (15,883)
=========
Depreciation $ 2,304 $ 2,366 $ 4,670
Goodwill amortization 1,068 228 1,296
--------- --------- ---------
Total depreciation and amortization $ 3,372 $ 2,594 $ 5,966
========= ========= =========
Identifiable assets $ 113,559 $ 53,508 $ 167,067
========= =========
Corporate assets 1,512
---------
$ 168,579
=========
Capital expenditures $ 2,680 $ 1,683 $ 4,363
========= ========= =========
(1) Includes restructuring charges of $17,442 and $835 for specialty
manufacturing and specialty retailing, respectively.
1995
----
Total sales $ 150,552 $ 117,966 $ 268,518
Intersegment sales (11,824) (171) (11,995)
--------- --------- ---------
Net sales $ 138,728 $ 117,795 $ 256,523
========= ========= =========
Operating income $ 12,989 $ 3,521 $ 16,510
========= =========
Corporate expenses including goodwill
amortization and interest expense, net (8,483)
---------
Income before income taxes 8,027
=========
Depreciation $ 2,225 $ 2,180 $ 4,405
Goodwill amortization 1,027 43 1,070
--------- --------- ---------
Total depreciation and amortization $ 3,252 $ 2,223 $ 5,475
========= ========= =========
Identifiable assets $ 121,753 $ 55,243 $ 176,996
========= =========
Corporate assets 1,807
---------
$ 178,803
=========
Capital expenditures $ 5,272 $ 4,247 $ 9,519
========= ========= =========
1994
----
Total sales $ 116,736 $ 107,650 $ 224,386
Intersegment sales (9,517) - (9,517)
--------- --------- ---------
Net sales $ 107,219 $ 107,650 $ 214,869
========= ========= =========
Operating income $ 13,262 $ 6,370 $ 19,632
========= =========
Corporate expenses including goodwill
amortization and interest expense, net (5,652)
---------
Income before income taxes $ 13,980
=========
Depreciation $ 1,705 $ 1,730 $ 3,435
Goodwill amortization 571 12 583
--------- --------- ---------
Total depreciation and amortization $ 2,276 $ 1,742 $ 4,018
========= ========= =========
Identifiable assets $ 103,538 $ 45,387 $ 148,925
========= =========
Corporate assets 1,506
---------
$ 150,431
=========
Capital expenditures $ 3,147 $ 3,122 $ 6,269
========= ========= =========
NOTE 12 - QUARTERLY RESULTS (UNAUDITED)
Summarized quarterly income statements (in thousands of dollars, except per
share amounts) for the years ended June 30, 1996 and 1995 are set forth below:
<TABLE>
<S><C>
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
------------------ ------------------ ------------------ ------------------
1996 1995 1996 1995 1996 1995 1996 1995
-------- -------- -------- -------- -------- -------- -------- --------
Net sales $ 62,349 $ 65,512 $ 74,347 $ 75,619 $ 53,556 $ 54,891 $ 64,032 $ 60,501
Costs and expenses:
Cost of goods sold 38,813 39,802 47,885 44,572 32,834 33,160 40,853 38,110
Selling and administrative 20,913 20,305 23,263 22,583 18,186 20,902 19,065 19,754
Restructuring charge - - 18,818 - (501) - - -
Depreciation and amortization 1,525 1,349 1,715 1,207 1,482 1,465 1,244 1,454
-------- -------- -------- -------- -------- -------- -------- --------
Operating income (loss) 1,098 4,056 (17,334) 7,257 1,555 (636) 2,870 1,183
Interest expense, net 1,085 826 1,117 950 996 1,001 874 1,056
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before
income taxes 13 3,230 (18,451) 6,307 559 (1,637) 1,996 127
Provision (benefit) for
income taxes 4 1,176 (6,072) 2,210 195 (581) 699 5
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss) $ 9 $ 2,054 $(12,379) $ 4,097 $ 364 $ (1,056) $ 1,297 $ 122
======== ======== ======== ======== ======== ======== ======== ========
Net income (loss) per
common share $0.00 $0.18 ($1.04) $0.36 $0.03 ($0.09) $.11 $.01
===== ===== ===== ===== ===== ===== ==== ====
</TABLE> [S][C]
Item 9. Changes In and Disagreements With Accountants on Accounting and
- ------ ---------------------------------------------------------------
Financial Disclosure
--------------------
None.
PART III
--------
Item 10. Directors and Executive Officers of the Registrant
- ------- --------------------------------------------------
The information required by this item with regard to executive officers is
included in Part I, Item 4 of this report under the heading "Executive Officers
of the Registrant", which information is incorporated herein by reference.
The information required by this item regarding the Directors of the
Company and compliance with Section 16(a) of the Securities Exchange Act of 1934
is set forth in the Company's Proxy Statement for its 1995 Annual Meeting of
Stockholders (the "Proxy Statement") under the heading "Election Of Directors",
which information is incorporated herein by reference. Such Proxy Statement
will be filed with the Commission pursuant to Regulation 14A within 120 days of
the fiscal year ended June 30, 1996.
Item 11. Executive Compensation
- ------- ----------------------
The information concerning executive compensation is set forth in the Proxy
Statement under the heading "Executive Compensation", which is incorporated
herein by reference. Such Proxy Statement will be filed with the Commission
pursuant to Regulation 14A within 120 days of the fiscal year ended June 30,
1996.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------- --------------------------------------------------------------
The information concerning security ownership of certain beneficial owners
and management is set forth in the Proxy Statement under the heading "Security
Ownership of Certain Beneficial Owners and Management", which information is
incorporated herein by reference. Such Proxy Statement will be filed with the
Commission pursuant to Regulation 14A within 120 days of the fiscal year ended
June 30, 1996.
Item 13. Certain Relationships and Related Transactions
- ------- ----------------------------------------------
The information concerning relationships and related transactions is set
forth in the Proxy Statement under the heading "Executive Compensation -
Transactions With Management and Directors", which information is incorporated
herein by reference. Such Proxy Statement will be filed with the Commission
pursuant to Regulation 14A within 120 days of the fiscal year ended June 30,
1996.
PART IV
-------
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
- ------- ---------------------------------------------------------------
(a) The following financial statements, schedules and exhibits are filed as
part of this report.
(1) Financial Statements and Financial Statement Schedules - See
Index to Financial Statements at Item 8 on page 17 of this
report.
(b) Reports on Form 8-K:
The Company filed a Current Report on Form 8-K, dated April 28, 1996,
which included the contents of a press release announcing the resignation
of Jerry L. Roy as Chief Executive Officer of the Company.
The Company filed a Current Report on Form 8-K, dated April 23, 1996,
which included the contents of a press release announcing the unaudited
results of operations for the three and nine-month periods ended March 31,
1996
The Company filed a Current Report on Form 8-K, dated August 13, 1996,
which included the contents of a press release announcing the unaudited
results of operations for the three and twelve-month periods ended June 30,
1996.
(c) Exhibits:
A list of the exhibits required by Item 601 of regulation S-K to be
filed as part of this report is set forth in the Index to Exhibits, which
immediately precedes such exhibits, and is incorporated herein by
reference.
(d) Not applicable.
--------------------
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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)
September 27, 1996 By: /s/ Michael J. Walsh
----------------------
Michael J. Walsh
President and Chief Executive Officer
and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on this 27th day of September, 1996, by the
following persons on behalf of the Registrant and in the capacities indicated.
/s/ B. Frank Bigger
-------------------------------
B. Frank Bigger
Director
/s/ R.E. Cox III
-------------------------------
R. E.. Cox III
Chairman of the Board
/s/ James D. Allen
-------------------------------
James D. Allen
Executive Vice President and
Chief Financial Officer
(Chief Accounting Officer)
/s/ Joe K. Pace
-------------------------------
Joe K. Pace
Director
/s/ Sheldon I. Stein
-------------------------------
Sheldon I. Stein
Director
/s/ Robert Schutts
-------------------------------
Robert Schutts
Director
/s/ Carol Smith
-------------------------------
Carol Smith
Director
/s/ Michael J. Walsh
-------------------------------
Michael J. Walsh
President and Chief Executive Officer
and Director
Schedule VIII
TANDYCRAFTS, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts and Reserves
(In thousands)
Year ended June 30,
-----------------------------------
1996 1995 1994
--------- --------- ---------
Allowance for doubtful accounts:
Balance, beginning of year $ 605 $ 441 $ 264
Additions charged to profit and loss 1,094 788 343
Accounts receivable charged off, net
of recoveries (909) (624) (166)
--------- --------- ---------
Balance, end of year $ 790 $ 605 $ 441
========= ========= =========
TANDYCRAFTS, INC.
INDEX TO EXHIBITS
Filed with the Annual Report on Form 10-K for the year ended June 30, 1996.
Exhibit
Number Description
- ------- -----------
3.1 Certificate of Incorporation (1)
3.2 Amended and Restated Bylaws of the Company (8)
3.3 Certificate of Amendment of Certificate of Incorporation
dated December 7, 1992 (3)
10.1 * Executive Officers Incentive Bonus Plan (8)
10.2 * The Tandycrafts, Inc. 1992 Stock Option Plan (2)
10.3 * The Tandycrafts, Inc. 1992 Director Stock Option Plan (2)
10.4 * Form of Stock Option Agreement used to evidence stock options
granted under the Tandycrafts, Inc. 1992 Stock Option Plan (3)
10.5 * Form of Stock Option Agreement used to evidence stock options
granted under the Tandycrafts, Inc. 1992 Director Stock Option
Plan (3)
10.6 * Amended and Restated Tandycrafts, Inc. ESOP Benefit Restoration
Plan (8)
10.7 Revolving Credit and Term Loan Agreement (4)
10.8 * Amendment to the Tandycrafts, Inc. 1992 Stock Option Plan (5)
10.9 * Amended Tandycrafts, Inc. 1992 Director Stock Option Plan (6)
10.10 Second Amendment to Revolving Credit and Term Loan Agreement (7)
10.11 Third Amendment to Revolving Credit and Term Loan Agreement (8)
10.12 Fourth Amendment to Revolving Credit and Term Loan Agreement (8)
10.13 # Fifth Amendment to Revolving Credit and Term Loan Agreement
21 # Subsidiaries of the Registrant
23 # Consent of Independent Accountants
27 # Financial Data Schedule (filed electronically only)
# Filed herewith.
* Indicates management compensatory plan, contract or arrangement.
(1)Filed with the Commission as an Exhibit to the Company's Form S-1
Registration Statement (No. 2-54086) and incorporated herein by reference.
(2)Filed with the Commission as an Exhibit to the Company's Definitive Proxy
Statement dated October 5, 1993, which Proxy Statement was filed with the
Commission as an Exhibit to the Company's Annual Report on Form 10-K for the
year ended June 30, 1993. Such Exhibit is incorporated herein by reference.
(3)Filed with the Commission as an Exhibit to the Company's Annual Report on
Form 10-K for the fiscal year ended June 30, 1993, and incorporated herein
by reference.
(4)Filed with the Commission as an Exhibit to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1993, and incorporated herein
by reference.
(5)Filed with the Commission as an Exhibit to the Company's Annual Report on
Form 10-K for the fiscal year ended June 30, 1994, and incorporated herein
by reference.
(6)Filed with the Commission as an Exhibit to the Company's Definitive Proxy
Statement dated October 3, 1994, which Proxy Statement was filed with the
Commission as an Exhibit to the Company's Annual Report on Form 10-K for the
year ended June 30, 1994.
(7)Filed with the Commission as an Exhibit to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1994, and incorporated herein
by reference.
(8)Filed with the Commission as an Exhibit to the Company's Annual Report on
Form 10-K for the fiscal year ended June 30, 1995 and incorporated herein by
reference.
EXHIBIT 10.13
-------------
FIFTH AMENDMENT TO REVOLVING
CREDIT AND TERM LOAN AGREEMENT
------------------------------
This Fifth Amendment to Revolving Credit and Term Loan Agreement ("Fifth
Amendment") is made by and among TANDYCRAFTS, INC., a Delaware corporation
("Company"), CASUAL CONCEPTS, INC., a Texas corporation, THE DEVELOPMENT
ASSOCIATION, INC., a Texas corporation, SAV-ON, INC., a Texas corporation,
NOCONA BELT COMPANY, a Texas corporation, DAVID JAMES MANUFACTURING, INC., a
Texas corporation, BRAND NAME APPAREL, INC., a Texas corporation, PLC LEATHER
COMPANY, a Nevada corporation, TANDYARTS, INC., a Nevada corporation, and
COLLEGE FLAGS AND MANUFACTURING, INC., a South Carolina corporation,
(hereinafter collectively referred to as the "Guarantors"), and FIRST INTERSTATE
BANK OF TEXAS, N.A., THE SUMITOMO BANK, LTD., CHICAGO BRANCH and NBD BANK
(collectively, the "Banks") and FIRST INTERSTATE BANK OF TEXAS, N. A., as agent
for the Banks ("Agent"); and
WHEREAS, the Company, certain of Guarantors and Agent entered into that
certain Revolving Credit and Term Loan Agreement dated September 29, 1993 (the
"Loan Agreement"); and
WHEREAS, the Company, certain of Guarantors, Banks and Agent entered into
that certain First Amendment to Revolving Credit and Term Loan Agreement dated
December 3, 1993; and
WHEREAS, the Company, the Guarantors, Banks and Agent entered into that
certain Second Amendment To Revolving Credit and Term Loan Agreement dated
September 26, 1994; and
WHEREAS, the Company, Guarantors, Banks and Agent entered into that certain
Third Amendment to Revolving Credit and Term Loan Agreement dated December 31,
1994; and
WHEREAS, the Company, Guarantors, Banks and Agent entered into that certain
Fourth Amendment to Revolving Credit and Term Loan Agreement dated July 6, 1995;
and
WHEREAS, the Company, Guarantors, Banks and Agent desire to amend the Loan
Agreement in certain respects; and
WHEREAS, capitalized terms used herein shall have the meaning assigned to
them in the Loan Agreement unless the context otherwise requires or provides.
NOW, THEREFORE, it is agreed by and among the Company, Guarantors, Banks
and Agent as follows:
1.
A new Section 1.00 is added to the Loan Agreement which shall read in its
entirety as follows:
1.00 Accounts Payable Turndays shall mean 365 divided by the quotient
of the aggregate amount of the cost of goods of Company and its
Subsidiaries during the preceding twelve (12) month period divided by the
aggregate amount of accounts payable of Company and its Subsidiaries.
2.
Section 1.59 and Section 1.73 of the Loan Agreement are amended to read in
their entirety as follows:
1.59. "Non-Cash Charges" shall mean the sum of depreciation and
amortization (including amortization of good will) and those charges
identified as non-cash charges in the quarter ended December 31, 1995
relating to the restructuring program of Company plus the net increase in
deferred tax liability, if any, less the net decrease in deferred tax
liability, if any, plus contributions of common stock of Company by Company
to the Tandycrafts, Inc. Employee Stock Ownership Plan during such period,
all as reflected in the Consolidated financial statements of Company and
its Subsidiaries in accordance with GAAP in an amount not to exceed the
aggregate amount deducted by Company for such period for Federal income tax
purposes with respect to Company's contribution to the Tandycrafts, Inc.
Employee Stock Ownership Plan.
* * *
1.73 "Termination Date" shall mean October 1, 1997.
3.
The first paragraph of Section 2.01(a) of the Loan Agreement is
amended to read in its entirety as follows:
2.01 Revolving Credit Commitment
(a) Revolving Loan Commitments. Subject to the terms and conditions
of this Loan Agreement, each Bank severally agrees to extend to Company,
from the date hereof through the Termination Date (the "Revolving Credit
Period"), a revolving line of credit which shall not exceed at any one time
outstanding the amount set forth opposite its name on Exhibit "A" (for each
Bank, such amount is hereinafter referred to as its "Commitment"). No Bank
shall be obligated to make any Advance hereunder if, immediately after
giving effect thereto, the aggregate amount of all indebtedness and
obligation of Company to such Bank hereunder exceeds such Bank's
Commitment. If at any time the aggregate amount of all indebtedness and
obligations of Company to any Bank hereunder exceeds such Bank's
Commitment, Company shall promptly pay to Agent for application to the
unpaid principal balance of such Bank's Note in an amount such that the
aggregate amount of all indebtedness and obligations of Company to such
Bank (after giving effect to such payment and reduction in the unpaid
principal balance of such Bank's Note) shall not exceed such Bank's
Commitment.
4.
The Total Commitment shall be reduced to fifty million dollars
($50,000,000) and Exhibit A of the Loan Agreement shall be amended to read in
the form attached hereto effective as of October 31, 1996.
5.
Article III of the Loan Agreement is hereby deleted in its entirety.
6.
A new Section 8.19 is added to the Loan Agreement which shall read in its
entirety as follows:
8.19 Pledge of Stock. Company agrees to promptly pledge to Agent for
the benefit of Banks all of the capital stock of its Subsidiaries in the
event of the occurrence of any of the following on or after March 31, 1996:
(1) the ratio of the sum of Consolidated Net Income, Non- ash Charges and
Approved Additional Income for the preceding four quarters to Senior Funded
Debt as of the end of the most recent fiscal quarter is at any time less
than .275 to 1.0, (2) Company's after tax loss for the fiscal year ended
June 30, 1996 is greater than eleven million two hundred thousand dollars
($11,200,000), (3) Company's Account Payable Turndays is greater than
forty-five (45) days, or (4) Company fails to comply with Section 9.17 of
this Loan Agreement at any time on or after June 30, 1996.
7.
Section 9.04, Section 9.10 and Section 9.18 of the Loan Agreement is
amended to read in its entirety as follows:
9.04. EBITDA to Interest Expense. Permit the ratio of the sum of
EBITDA for the four preceding fiscal quarters to interest expense incurred
during the four preceding fiscal quarters to be less than 3.0 to 1.0.
9.10. Disposition of Assets. Sell or otherwise dispose of more
than four million dollars ($4,000,000) in assets other than in the ordinary
course of business except for the fiscal year ended June 30, 1996 during
which Company shall not sell or otherwise dispose of more than thirty
million dollars ($30,000,000) in assets other than in the ordinary course
of business.
* * *
9.18 Capital Expenditures. Permit the aggregate amount of Capital
Expenditures to exceed four million five hundred thousand dollars
($4,500,000) during the fiscal year ending June 30, 1996 or to exceed six
million dollars ($6,000,000) during any other fiscal year.
8.
Section 12.12 of the Loan Agreement is amended to read in its entirety as
follows:
12.12. Amendments, Waivers, etc. Agent may enter into any
amendment or modification of, or may waive compliance with the terms of,
any of the Loan Documents with the written direction of the Majority Banks;
provided that the consent of all Banks shall be required before Agent may
take or omit to take any action under any of the Loan Documents directly
affecting (a) the extension of the maturity of or the postponement of the
payment of any portion of the principal of or interest on a Revolving
Credit Loan or any fees relating thereto, (b) a reduction of or increase in
the principal amount of or rate of interest payable on Revolving Credit
Loans or any fees related thereto, or (c) the release of Company. Nor
shall any of the following occur without the consent of all Banks: (a) any
amendment to the definition of Majority Banks, (b) any amendment to this
Section 12.12, or (c) any waiver of compliance with Section 8.19 of this
Loan Agreement. The Commitment of a Bank shall not be increased without
the consent of such Bank. If any Bank is unwilling to consent to any
amendment or modification of, or waiver of compliance with, the Loan
Agreement (where the consent of such Bank is required), the consenting
Majority Banks shall have the right, but not the obligation, to repurchase
such Bank's Percentage of the Obligation at such time for a purchase price
equal to Bank's Percentage of any and all unpaid Advances made by Agent to
the Company under the Loan Agreement, any and all unpaid interest thereon
and unpaid accrued fees or other amounts owing to such Bank.
9.
Company and Guarantors warrant and represent to Banks that no Event of
Default exists. By their execution hereof, each of the Guarantors ratify and
confirm the terms of the Guaranty Agreement dated August 17, 1994, agree that
the Guaranty Agreement shall remain in full force and effect and unconditionally
agree that the Guaranty Agreement is enforceable against each of them in
accordance with its terms.
10.
Except as amended by the First Amendment, the Second Amendment, the Third
Amendment the Fourth Amendment and this Fifth Amendment, the Loan Agreement is
ratified and confirmed and shall remain in full force and effect.
11.
This Fifth Amendment shall be governed by and construed in accordance with
the laws of the State of Texas.
12.
Company agrees to pay all expenses incurred by Agent and Banks in
connection with the negotiation and preparation of this Fifth Amendment,
including reasonable attorney's fees.
13.
This Fifth Amendment may be executed in any number of multiple counterparts
and by different parties hereto in separate counterparts, each of which when so
executed shall be deemed to be an original, and all of which taken together
shall constitute one and the same agreement.
14.
Banks, Company, and Guarantors agree to be bound by the current Arbitration
Program of Agent which is incorporated by reference herein and is acknowledged
as received by the parties pursuant to which any and all disputes shall be
resolved by mandatory binding arbitration upon the request of any party.
15.
This Fifth Amendment shall be binding upon and inure to the benefit of the
parties and their respective successors and assigns.
16.
THIS WRITTEN AGREEMENT REPRESENTS THE FINAL AGREEMENT AMONG THE PARTIES AND
MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE
PARTIES.
Executed to be effective as of December 31, 1995.
TANDYCRAFTS, INC., a Delaware
corporation
By:
--------------------------------
Jerry L. Roy, President
COMPANY
CASUAL CONCEPTS, INC., a Texas
corporation
By:
--------------------------------
Michael J. Walsh, Vice President
SAV-ON, INC., a Texas corporation
By:
--------------------------------
Michael J. Walsh, Vice President
NOCONA BELT COMPANY, a Texas
corporation
By:
--------------------------------
Michael J. Walsh, Vice President
DAVID JAMES MANUFACTURING,
INC., a Texas corporation
By:
--------------------------------
Michael J. Walsh, Vice President
BRAND NAME APPAREL, INC.,
a Texas corporation
By:
--------------------------------
Michael J. Walsh, Vice President
THE DEVELOPMENT ASSOCIATION,
INC., a Texas corporation
By:
--------------------------------
Michael J. Walsh, Vice President
PLC LEATHER COMPANY,
a Nevada corporation
By:
--------------------------------
Michael J. Walsh, Vice President
TANDYARTS, INC., a Nevada
corporation
By:
--------------------------------
Michael J. Walsh, Vice President
COLLEGE FLAGS AND
MANUFACTURING, INC.,
a South Carolina corporation,
By:
--------------------------------
Michael J. Walsh, Vice President
GUARANTORS
FIRST INTERSTATE BANK OF
TEXAS, N.A.
By:
---------------------------------
Steve Wood, Senior Vice President
By:
---------------------------------
John Peloubet, Vice President
THE SUMITOMO BANK, LTD.,
CHICAGO BRANCH
By:
---------------------------------
Name:
--------------------------------
Title:
-------------------------------
NBD BANK
By:
---------------------------------
Name:
--------------------------------
Title:
-------------------------------
BANKS
EXHIBIT A
---------
Commitment
Percentage
Banks Commitment (Rounded)
------ ---------- ----------
First Interstate Bank
of Texas, N.A. $25,000,000 50%
The Sumitomo Bank, Ltd., $12,500,000 25%
Chicago Branch
NBD Bank, N.A. $12,500,000 25%
----------- ---
Total Commitment $50,000,000 100%
=========== ====
EXHIBIT 21
----------
TANDYCRAFTS, INC.
Significant Subsidiaries of Tandycrafts, Inc. as of June 30, 1996
<TABLE>
<S><C>
Jurisdiction
of
Subsidiary's Legal Name Doing Business As Incorporation
----------------------------- --------------------------- ---------------
Casual Concepts, Inc. Cargo Furniture & Accents Texas, U.S.A.
Development Association, Inc. Joshua's Christian Stores Texas, U.S.A.
Sav-On, Inc. Sav-On Office Supplies Texas, U.S.A.
David James Manufacturing, Inc. David James Fashions Texas, U.S.A.
Brand Name Apparel, Inc. Brand Name Apparel Texas, U.S.A.
TAC Holdings, Inc. Delaware, U.S.A.
PLC Leather Company Prestige Leather Creations Nevada, U.S.A.
TandyArts, Inc. Impulse Designs Nevada, U.S.A.
College Flags and
Manufacturing Company, Inc. College Flags/TAG Express South Carolina, U.S.A.
Hermitage Fine Arts, Inc. Hermitage Fine Arts Nevada, U.S.A.
</TABLE> [S][C]
Each of the corporations listed is a direct subsidiary of Tandycrafts,
Inc., which owns 100% of the voting securities of each, except for TAC Holdings,
Inc. which is 100% owned by Tandycrafts, Inc. and its various subsidiaries, and
Hermitage Fine Arts, Inc., which is 100% owned by TandyArts, Inc. Each of the
above subsidiaries is included in the Tandycrafts, Inc. Consolidated Financial
Statements for fiscal 1996.
EXHIBIT 23
----------
TANDYCRAFTS, INC.
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No's. 33-85550, 33-85548 and 33-57525) and to the
incorporation by reference in the Prospectus constituting part of the
Registration Statement on Form S-3 (No. 33-88290) of Tandycrafts, Inc. of our
report dated August 12, 1996, appearing on page 16 of this Form 10-K.
Price Waterhouse LLP
Fort Worth, Texas
September 27, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Tandycrafts,
Inc.'s June 30, 1996 Form 10-K and is qualified in its entirety by reference to
such Form 10-K filing.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> JUN-30-1996
<CASH> 1,512
<SECURITIES> 0
<RECEIVABLES> 32,525
<ALLOWANCES> 784
<INVENTORY> 59,284
<CURRENT-ASSETS> 99,771
<PP&E> 50,686
<DEPRECIATION> 23,903
<TOTAL-ASSETS> 168,579
<CURRENT-LIABILITIES> 33,751
<BONDS> 0
0
0
<COMMON> 18,528
<OTHER-SE> 65,070
<TOTAL-LIABILITY-AND-EQUITY> 168,579
<SALES> 254,284
<TOTAL-REVENUES> 254,284
<CGS> 160,385
<TOTAL-COSTS> 266,095
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,123
<INCOME-PRETAX> (15,883)
<INCOME-TAX> (5,174)
<INCOME-CONTINUING> (10,709)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,709)
<EPS-PRIMARY> (0.89)
<EPS-DILUTED> 0
</TABLE>
