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
For the fiscal year ended June 30, 1997
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, 1997, there were 12,632,775 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 $54.8 million.
DOCUMENTS INCORPORATED BY REFERENCE
Location in Form 10-K Incorporated Document
--------------------- ---------------------
Part III Proxy Statement for 1997 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 12 of
Notes to Consolidated Financial Statements which is set forth in Item 8 herein.
Specialty Retail
- ----------------
The specialty retail segment consists of three 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
and Sav-On Office Supplies. The specialty retail segment has accounted for
46.5%, 47.0%, and 46.4% of the total consolidated net sales of the Company,
excluding divested units, for fiscal years 1997, 1996 and 1995, respectively.
Substantially all of the Company's specialty retail products are marketed
through 270 Company-owned and operated specialty retail stores located in 44
states of the United States as follows:
<TABLE><S><C>
Stores at Stores at
July 1, 1996 Opened Closed June 30, 1997
------------ ------ ------ -------------
Tandy Leather Company 173 1 8 166
Joshua's Christian Stores 74 1 9 66
Sav-On Office Supplies 36 2 - 38
---- -- -- ---
283 4 17 270
==== == == ===
</TABLE>
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 166 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 1997, Tandy Leather Company's retail operations contributed approximately
17.4% of the consolidated net sales of the Company, excluding divested units.
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 66 stores, located in ten 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 1997, Joshua's Christian Stores contributed approximately
13.8% of the consolidated net sales of the Company, excluding divested units.
Sav-On Office Supplies ("Sav-On") sells office supplies from 38 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 1997, Sav-On contributed approximately 15.3% of the consolidated net
sales of the Company, excluding divested units.
Specialty Manufacturing
- -----------------------
The specialty manufacturing segment is comprised of two divisions:
Picture Frames and Framed Art, recently consolidated under the name of Pinnacle
Art & Frame, and the Tandy Wholesale International ("TWI") division. The
specialty manufacturing segment has accounted for 53.5%, 53.0% and 53.6% of
total consolidated net sales of the Company, excluding divested units, for
fiscal years 1997, 1996 and 1995, respectively.
During fiscal 1997, the specialty manufacturing segment had net sales of
approximately $30.5 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.
Pinnacle Art & Frame, consisting of the Magee Company, Impulse Designs and
Hermitage Fine Arts, manufactures and distributes a broad range of picture
frames, framed art and mirrors. 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 and in
recent years has 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 grocery 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 relatively evenly throughout the year, Impulse's revenues
have been historically seasonal with almost one-third of their sales generated
during the second fiscal quarter. Because Magee, Impulse Designs and Hermitage
Fine Arts are recognized brand names which are strongly positioned in various
market segments, Pinnacle Art & Frame's products will continue to be marketed
under those names. Pinnacle Art & Frame contributed 36.5% of the Company's total
consolidated net sales, excluding divested units, in fiscal 1997.
The TWI division includes Tandy Leather Manufacturing, Licensed
Lifestyles, J-Mar Associates and Rivertown Button Company. Tandy Leather
Manufacturing produces many of the kits, tools and supplies which are sold
through Tandy Leather 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.
Consolidated under Tandy Leather Manufacturing is Nocona Belt Company located in
Nocona, Texas, which manufactures a wide selection of western-style belts and
leather accessories such as wallets, money clips, hatbands, jewelry and leather
care goods.
The Licensed Lifestyles division was formed through the consolidation of
TAG Express, College Flags and Birdlegs. TAG Express distributes products such
as, auto tags, bumper stickers, key tags, decals, light switch covers, door knob
hangers, luggage tags, automobile flags, wind socks and pennants featuring
leading professional and collegiate sports logos. TAG Express has licenses with
the NFL, NBA, NHL, Major League Baseball, U.S. Soccer League and all major
colleges. The automobile flags, wind socks and pennants are manufactured by TAG
in Lancaster, South Carolina. Birdlegs is a producer of screen-printed souvenir
activewear including T-shirts, sweatshirts, cover-ups and tank tops. During
fiscal 1997, Birdlegs' manufacturing facility was relocated to Lancaster, South
Carolina and consolidated with the existing Licensed Lifestyles manufacturing
facility. Licensed Lifestyles sells its products through a network of
independent sales representatives, distributors, and in-house telemarketing
personnel.
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 its
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, ribbons, posters and stickers.
The TWI division contributed approximately 17.0% of the Company's
consolidated net sales, excluding divested units, for fiscal 1997.
Strategic Restructuring and Consolidation Program
- -------------------------------------------------
In December 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, (iv) the consolidation, streamlining and, in some cases, outsourcing of
certain functions throughout various operating units, and (v) the retention of
an outside consulting firm to assist senior management in evaluating and
developing the Company's retail concepts.
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. A total of $1,113,000 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 purchasers. The
increase in the asset writedown reserve was necessary to cover asset writedowns
in excess of those originally anticipated.
In fiscal 1996, the Company 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 closed two Sav-On
stores, two Tandy Leather stores and one Joshua's store.
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 bear interest at 8.5% to 9.5% and mature at various dates
through March 26, 2000. Total proceeds from the sale of Brand Name Apparel were
approximately $1,038,000 in cash.
On January 27, 1997, the Company completed the sale of Cargo Furniture and
Accents to an acquisition group comprised of management and employees of Cargo
for proceeds of approximately $4.2 million. A portion of the purchase price was
financed through a note with a bank for which the Company provided a guaranty.
At June 30, 1997, the balance of the note guaranteed by the Company was
$2,862,000. Gain on the transaction was not material to the Company and has
been deferred as a result of the Company's guaranty. During fiscal 1997, the
Company also closed four Joshua's stores and two Tandy Leather Stores which were
targeted for closure in the strategic restructuring program.
After completing the sale of Cargo, the restructuring program is
substantially complete. The accrual remaining at June 30, 1997 is related
primarily to lease obligations. The following table sets forth the activity in
the restructuring accrual, which is included in current accrued liabilities in
the balance sheet at June 30, 1997 and June 30, 1996 (in thousands):
<TABLE><S><C>
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
Cash payments (682) (164) - (846)
Non-cash asset writedowns (354) (195) - (549)
----------- ---------- ------- ---------
Balance at June 30, 1997 $ 148 $ 80 $ - $ 228
=========== ========== ======= =========
</TABLE>
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 costs.
Revenues and operating losses included in the Company's results of
operations (before restructuring charges) from separately identifiable
businesses sold or closed are set forth below by segment (in thousands):
<TABLE><S><C>
Year Ended June 30,
--------------------------------------------------------------------
1997 1996 1995
-------------------- -------------------- --------------------
Operating Operating Operating
Income Income Income
Sales (loss) Sales (loss) Sales (loss)
------- --------- ------- --------- ------- ---------
Specialty manufacturing $ 1,416 $ (3) $14,066 $ (2,165) $25,522 $ (2,159)
Specialty retail 10,944 (231) 18,609 173 19,776 761
------- --------- ------- --------- ------- ---------
Total $12,360 $ (234) $32,675 $ (1,992) $45,298 $ (1,398)
======= ========= ======= ========= ======= =========
</TABLE>
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 through March due to the Christmas business achieved by
the Company's specialty retail segment and Pinnacle Art & Frame.
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 Pinnacle Art &
Frame are readily available from other suppliers who compete actively for sales.
The 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 3,700 employees, including part-time and
temporary employees. Tandycrafts, Inc. sponsors an employees' retirement
savings (401-K) plan, which is coupled with a employee stock ownership plan 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 349,235 156,568 505,803
Retail 12,750 714,223 726,973
Factory 571,000 236,672 807,672
--------- --------- ---------
Totals 932,985 1,107,463 2,040,448
========= ========= =========
The warehouse, office and factory space is located approximately 28% in
Fort Worth, Texas (specialty retail and specialty manufacturing), 45% at three
locations in Arkansas (specialty manufacturing), 15% at one location in
California (specialty manufacturing), 6% at three other locations in Texas
(specialty manufacturing), with the remaining 6% located in Georgia and South
Carolina (specialty manufacturing). The leased retail stores are generally
small outlets and are located throughout 44 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 1997 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 1997 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, 56 President and Chief Executive Officer 1983
since April 1996. Executive Vice
President and Chief Financial Officer:
August 1992 to April 1996. Vice
President: 1986 to August 1992.
James D. Allen, 37 Executive Vice President and Chief 1993
Financial Officer since July 1996.
Vice President: November 1993
to July 1996. Director of Special
Projects: May 1993 to November 1993.
Prior to May 1993, Mr. Allen was a
Senior Manager in the accounting
firm of Price Waterhouse LLP.
Russell L. Price, 32 Vice President - General Counsel and 1996
Secretary since since November 1996.
Corporate Counsel: March 1994 to
November 1996. Prior to March 1994,
Mr. Price was an associate at the law
firm of Hughes & Luce, LLP.
Leo C. Taylor, 35 Vice President - Taxation, Risk 1996
Management and Benefits since November
1996. Director of Tax Administration:
February 1994 to November 1996.
Prior to February 1994, Mr. Taylor
was a 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.)
High Low High Low
------ ------ ------ ------
Sept. 1995 $ 8.63 $ 6.75 Sept. 1996 $ 6.75 $ 5.13
Dec. 1995 $ 9.38 $ 6.63 Dec. 1996 $ 7.00 $ 5.88
March 1996 $ 8.13 $ 5.50 March 1997 $ 6.63 $ 4.13
June 1996 $ 8.88 $ 5.88 June 1997 $ 5.50 $ 3.75
The principal market for the Company's common stock is the New York Stock
Exchange. As of September 16, 1997, there were approximately 8,150 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 1997
and 1996. 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>
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
Net sales $ 244,924 $ 254,284 $ 256,523 $ 214,869 $ 163,255
Restructuring Charge $ - $ 18,317 $ - $ - $ -
Operating income (loss) $ 40 $ (11,811) $ 11,860 $ 15,417 $ 12,749
Income (loss) before income taxes $ (3,045) $ (15,883) $ 8,027 $ 13,980 $ 12,299
Net income (loss) $ (1,918) $ (10,709) $ 5,217 $ 8,906 $ 7,750
Net income (loss) per common share $ (.15) $ (.89) $ .46 $ .79 $ .69
Weighted average shares outstanding 12,423 11,983 11,434 11,336 11,232
Net income (loss) as percent of net sales (0.8%) (4.2%) 2.0% 4.1% 4.7%
Net income (loss) as percent of beginning equity (2.3%) (11.8%) 6.6% 13.3% 15.6%
Current assets $ 90,017 $ 99,771 $ 101,980 $ 85,414 $ 62,365
Current liabilities $ 28,961 $ 33,751 $ 27,113 $ 28,211 $ 17,427
Working capital $ 61,056 $ 66,020 $ 74,867 57,203 $ 44,938
Current ratio 3.1 to 1 3.0 to 1 3.8 to 1 3.0 to 1 3.6 to 1
Total assets $ 156,529 $ 168,579 $ 178,803 $ 150,431 $ 89,865
Net property and equipment $ 25,505 $ 26,783 $ 28,707 $ 24,953 $ 20,427
Long-term liabilities $ 43,294 $ 51,230 $ 61,029 $ 43,138 $ 5,340
Retained earnings $ 67,457 $ 69,375 $ 80,084 $ 74,867 $ 65,961
Total stockholders' equity $ 84,274 $ 83,598 $ 90,661 $ 79,082 $ 67,098
Common shares outstanding 12,598 12,178 11,717 11,161 11,163
Stockholders' equity per common share $ 6.69 $ 6.86 $ 7.75 $ 7.09 $ 6.01
</TABLE>
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 three distinct retail concepts: Tandy Leather
Company, which sells leathercraft and related products through 166 stores
located in 44 states; Joshua's Christian Stores, which sells inspirational
books, music and gifts through a chain of 66 stores in ten states; and Sav-On
Office Supplies, which sells office supplies and related products through a
chain of 38 stores located in eleven states. The specialty manufacturing segment
is comprised of two divisions: Picture Frames and Framed Art, recently
consolidated under the name of Pinnacle Art & Frame, and Tandy Wholesale
International ("TWI") division.
Certain statements in this discussion, other filings with the Securities
and Exchange Commission and other Company statements are not historical facts
but are forward-looking statements. The words "believes," "expects,"
"estimates," "projects," "plans," "could," "may," "anticipates," or the negative
thereof or other variations or similar terminology, or discussions of strategy
or plans identify forward-looking statements. These forward-looking statements
reflect the Company's reasonable judgments with respect to future events and are
subject to risks and uncertainties that could cause actual results to differ
materially from forward-looking statements. These risks and uncertainties
include, but are not limited to, the Company's ability to reduce costs through
the consolidation of certain operations, customer's willingness, need, demand
and financial ability to purchase the Company's products, new business
opportunities, the successful development and introduction of new products and
the successful development of new retail stores, the successful implementation
of new information systems, relationships with key customers, relationships with
professional sports leagues and other licensors, possibility of players' strikes
in professional sports leagues, price fluctuations for commodities such as
lumber, paper, leather and other raw materials, seasonality of the Company's
operations, effectiveness of promotional activities, changing business strategy
and intense competition in retail operations. Additional factors include
economic conditions such as interest rate fluctuations, consumer debt levels,
changing consumer demand and tastes, competitive products and pricing,
availability of products, inventory risks due to shifts in market demand,
regulatory and trade environment and other factors or risks.
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, 1997 and 1996:
Fiscal Years Ended June 30,1997 and 1996
(Dollars in Thousands)
<TABLE><S><C>
1997 1996 Increase (Decrease)
-------------------- ----------------------- --------------------
Operating Operating
Income Income Operating
Sales (loss) Sales (loss) Sales Income
-------- -------- -------- --------- -------- --------
Specialty retail:
- ----------------
Tandy Leather $ 40,414 $ 349 $ 43,281 $ 1,608 (6.6%) (78.3%)
Sav-On 35,600 2,440 29,922 1,123 19.0% 117.3%
Joshua's 32,029 (7,699) 30,845 (1,759) 3.8% (337.7%)
--------- -------- -------- --------- -------- --------
108,043 (4,910) 104,048 972 3.8% (605.1%)
--------- -------- -------- --------- -------- --------
Specialty manufacturing:
- -----------------------
Pinnacle Art & Frame 85,091 11,589 80,094 8,997 6.2% 28.8%
TWI 39,430 (217) 37,467 2,559 5.2% (108.5%)
--------- -------- -------- --------- -------- --------
124,521 11,372 117,561 11,556 5.9% (1.6%)
--------- -------- -------- --------- -------- --------
Divested operations 12,360 (234) 32,675 (1,992) (62.2%) 88.3%
Restructuring charge - - - (18,277) - 100.0%
--------- -------- -------- --------- -------- --------
Total operations, excluding
corporate $ 244,924 $ 6,228 $254,284 $ (7,741) (3.7%) 180.5%
========= ======== ======== ========= ======== ========
Fiscal Years Ended June 30, 1996 and 1995
(Dollars in Thousands)
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%)
-------- -------- -------- --------- -------- --------
104,048 972 98,019 2,760 6.2% (64.8%)
-------- -------- -------- --------- -------- --------
Specialty manufacturing:
- -----------------------
Pinnacle Art & Frame 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%)
-------- -------- -------- --------- -------- --------
117,561 11,556 113,206 15,148 3.8% (23.7%)
-------- -------- -------- --------- -------- --------
Divested operations 32,675 (1,992) 45,298 (1,398) (27.9%) (42.5%)
Restructuring charge - (18,277) - - - (100.0%)
-------- -------- -------- --------- -------- --------
Total operations, excluding
corporate $254,284 $ (7,741) $256,523 $ 16,510 (0.9%) (146.9%)
======== ======== ======== ========= ======== ========
</TABLE>
FISCAL YEARS ENDED JUNE 30, 1997 AND 1996
For fiscal 1997, consolidated net sales decreased $9,360,000, or 3.7%,
compared to fiscal 1996. Excluding divested operations, net sales increased
$10,955,000, or 4.9%, compared to the prior year. Total operating income
before corporate expenses increased $13,969,000, or 180.5%, from fiscal 1996.
Excluding divested units and the $18,277,000 restructuring charge in fiscal
1996, operating income decreased $6,066,000, or 48.4%, compared to the prior
year. Discussions relative to each of the Company's industry segments are set
forth below.
SPECIALTY RETAIL
Net sales for the specialty retail segment increased $3,995,000, or 3.8%,
while operating income decreased $5,882,000, or 605.1%, compared to fiscal
1996. The loss for fiscal 1997 includes repositioning charges of $5,300,000
taken in March 1997 to write-down and liquidate discontinued inventory and to
close certain underperforming stores at Joshua's Christian Stores. The
specialty retail segment contributed 46.5% of consolidated net sales,
excluding divested operations, in fiscal 1997 compared to 47.0% in the prior
year.
Tandy Leather Company
The 6.6% decrease in net sales at Tandy Leather is primarily attributable
to same-store sales decreases of 5.5% from fiscal 1996, as well as, the
closing of seven stores during fiscal 1997. The same-store sales decline is
attributable to a lack of successful new product introductions, high store
manager turnover, low in-stock position in top selling items and a decrease in
store traffic which was partially offset by a higher average ticket. In
response to these issues, steps were taken during the fourth quarter to
strengthen Tandy Leather's management team with a renewed focus on new product
development, improved marketing and advertising to core customer segments and
more efficient and effective merchandising, logistics and store replenishment
processes.
Operating income for Tandy Leather decreased compared to the prior year
due to the decrease in sales and a slight decrease in gross profit as a
percent of sales. The decrease in gross profit percentage is a result of a
change in sales mix. As a result of the decrease in sales of higher margin
fashion merchandise, leather products have comprised a greater portion of the
chain's total sales, bringing the overall gross margin percentage down
slightly. Selling, general and administrative expenses decreased 3.3%;
however, these expenses increased as a percentage of sales compared to the
prior year due to a greater decrease in sales relative to the decrease in
support and administrative expenses. Labor expense increased as a result of
efforts to improve retention of store managers.
Sav-On Office Supplies
Sav-On Office Supplies achieved a 19% increase in net sales over fiscal
1996 due to same-store sales increases of 21.4%, partially offset by two
stores which were closed during the current year. The fiscal 1997 sales
increase was achieved despite "big box" office supply competitors entering
nine of Sav-On's markets during the last year. The same-store sales increases
are primarily attributable to the addition of a line of PC printers and fax
machines to the merchandise assortment and a slight increase in furniture
sales. Management expects same-store sales percentage increases to decline
somewhat in fiscal 1998 due to the fact that the line of printer and fax
machines has been in the stores for a full year and, accordingly, will not
have the same percentage increase impact. Management plans to expand the
chain by opening four to six new stores in strategic markets during fiscal
1998. Actual results may differ from these forward-looking projections.
Please refer to the risk factors discussion herein.
Sav-On's operating income increased 117.3% in fiscal 1997, its second
consecutive year of increases greater than 100%. The increase in operating
income is primarily a result of increased sales and efficiency gains at both
stores and administrative units. Gross profit as a percent of sales decreased
slightly due to the addition of PC printers and fax machines, which carry
lower margins than the average of Sav-On's other merchandise categories;
however, gross margin dollars increased $1,174,000, or 9.5%, for the year.
Selling, general and administrative expense dollars decreased $146,000 or
1.4%. Although sales increased, labor expense as a percent of sales decreased
from 17.6% in fiscal 1996 to 13.1% in fiscal 1997 due to effective store labor
hour management. Total SG&A as a percentage of sales was 29% in fiscal 1997
compared to 35% in fiscal 1996.
Joshua's Christian Stores
Sales at Joshua's Christian Stores increased 3.8% over fiscal 1996 due to
same-store sales increases of 5.6%, partially offset by the lost sales from
eight stores which were closed during the year. The same-store sales increase
is primarily attributable to more effective advertising and promotions,
improved merchandise assortment and better in-stock position. After a weak
first quarter, Joshua's rebounded strongly with net sales increases of over
10% for the last three quarters of fiscal 1997. Management believes that the
repositioning charge taken in the third quarter fiscal 1997 has enabled the
chain to move quickly through its discontinued merchandise and has further
improved the merchandise assortment in the stores. It has also allowed
management to redirect their primary focus to best-selling, higher turning
inventory and higher volume stores.
The operating loss experienced by Joshua's in fiscal 1997 includes
repositioning charges of $5,300,000 to write-down and liquidate discontinued
inventory and to close thirteen stores. The current year loss, excluding the
$5,300,000 charge, was $2,400,000; however, gross margin dollars increased
$633,000, or 5.5%, with gross margin as a percent of sales increasing
slightly. Selling, general and administrative expenses, excluding the
repositioning charges, increased $1,448,000, or 11.6%, primarily due to
increases in store labor and advertising expenses. A comprehensive review of
expenses was performed late in the third quarter of fiscal 1997. As a result
of that review, a number of actions were taken to reduce store labor and other
expenses. The results of those changes became apparent in the fourth quarter
as labor expense decreased significantly and Joshua's performance exceeded
both expectations and the prior-year quarter. These results, however, are not
necessarily indicative of what can be expected in future periods.
SPECIALTY MANUFACTURING
Net sales for the specialty manufacturing segment increased $6,960,000,
or 5.9%, while operating income decreased $184,000, or 1.6%, as compared to
fiscal 1996. The specialty manufacturing segment contributed 53.5% of
consolidated net sales, excluding divested units, in fiscal 1997 compared to
53.0% in the prior year.
Pinnacle Art & Frame
The 6.2% increase in net sales for Pinnacle Art & Frame is attributable
to strong demand from existing customers and the addition of new customers.
Sales of picture frames increased $1,498,000, or 2.7%, compared to the prior
year due to new customers added during the year and to strong sales increases
in the mirror product line. Framed art sales increased $3,309,000, or 12.8%,
due to increased demand from an existing customer and several new accounts
added to the customer base in the current year.
Operating income for Pinnacle Art & Frame rebounded from $8,997,000 in
fiscal 1996 to $11,589,000 in fiscal 1997. This increase is primarily a
result of increased volume in fiscal 1997. Gross profit as a percentage of
sales increased 1.8 points due to manufacturing efficiencies and vertical
integration savings, partially offset by increases in lumber prices. Selling,
general and administrative expenses increased slightly in dollars, but
decreased as a percentage of sales due to the increase in sales without a
proportionate increase in expenses.
Tandy Wholesale International ("TWI")
Net sales for the TWI division increased 5.2% compared to fiscal 1996 due
to increased sales from the Tandy Leather Manufacturing division and from
Licensed Lifestyles. The sales increase from Licensed Lifestyles was
primarily due to increased NFL and NHL merchandise and the 1996 Atlanta
Olympic sales during the first quarter of fiscal 1997. Those increases were
partially offset by a decrease in sales of screen-printed and embroidered
active wear from Birdlegs due to soft demand in the resort market.
The TWI division experienced an operating loss of $217,000 in fiscal 1997
compared to operating income of $2,559,000 in fiscal 1996. The fiscal 1997
loss is primarily attributable to operating losses of Licensed Lifestyles due
to the write-off of inventory remaining from the 1996 Olympics, increased bad
debt expense and expenses incurred to relocate and consolidate the Birdlegs
manufacturing facility with the existing Licensed Lifestyles manufacturing
facility in Lancaster, South Carolina.
Strategic restructuring and consolidation program
In December 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, (iv) the consolidation, streamlining and, in some cases, outsourcing
of certain functions throughout various operating units, and (v) the retention
of an outside consulting firm to assist senior management in evaluating and
developing the Company's retail concepts.
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. A total of
$1,113,000 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 purchasers. The increase in the asset writedown reserve was
necessary to cover asset writedowns in excess of those originally anticipated.
In fiscal 1996, the Company sold Prestige Leather Creations and Brand
Name Apparel and closed David James Manufacturing and certain other
individually insignificant operations. On the retail side, the Company closed
two Sav-On stores, two Tandy Leather stores and one Joshua's store.
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 bear interest at 8.5% to 9.5% and mature at
various dates through March 26, 2000. Total proceeds from the sale of Brand
Name Apparel were approximately $1,038,000 in cash.
On January 27, 1997, the Company completed the sale of Cargo Furniture
and Accents to an acquisition group comprised of management and employees of
Cargo for proceeds of approximately $4.2 million. A portion of the purchase
price was financed through a note with a bank for which the Company provided a
guaranty. At June 30, 1997, the balance of the note guaranteed by the Company
was $2,862,000. Gain on the transaction was not material to the Company and
has been deferred as a result of the Company's guaranty. During fiscal 1997,
the Company also closed four Joshua's stores and two Tandy Leather Stores
which were targeted for closure in the strategic restructuring program.
After completing the sale of Cargo, the restructuring program is
substantially complete. The accrual remaining at June 30, 1997 is related
primarily to lease obligations. The following table sets forth the activity
in the restructuring accrual, which is included in current accrued liabilities
in the balance sheet at June 30, 1997 and June 30, 1996 (in thousands):
<TABLE><S><C>
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
Cash payments (682) (164) - (846)
Non-cash asset writedowns (354) (195) - (549)
------------- ---------- --------- ---------
Balance at June 30, 1997 $ 148 $ 80 $ - $ 228
============= =========== ========= =========
</TABLE>
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 costs. The
Company continues to evaluate possible actions which will improve the
profitability and competitive position of the Company.
Revenues and operating losses included in the Company's results of
operations (before restructuring charges) from separately identifiable
businesses sold or closed are set forth below by segment (in thousands):
<TABLE><S><C>
Year Ended June 30,
--------------------------------------------------------------------
1997 1996 1995
-------------------- -------------------- --------------------
Operating Operating Operating
Income Income Income
Sales (loss) Sales (loss) Sales (loss)
------- --------- ------- --------- ------- ---------
Specialty manufacturing $ 1,416 $ (3) $14,066 $ (2,165) $25,522 $ (2,159)
Specialty retail 10,944 (231) 18,609 173 19,776 761
------- -------- ------- --------- ------- ---------
Total $12,360 $ (234) $32,675 $ (1,992) $45,298 $ (1,398)
======= ======== ======= ========= ======= =========
</TABLE>
Selling, general and administrative expenses
Consolidated selling, general and administrative expenses as a percentage
of sales were 32.3% for fiscal 1997 compared to 32.0% for fiscal 1996. In
total dollars, selling, general and administrative expenses decreased
$2,242,000, or 2.8%, for fiscal 1997 when compared to the previous year. The
decrease in expenses was primarily due to a reduction in the Company's
matching contribution to the retirement savings plan, a reduction in overall
labor and benefits expense and the elimination of expenses related to those
companies closed or divested during fiscal 1996.
Interest expense
Interest expense decreased $999,000, or 24.2%, for fiscal 1997 compared
to the prior year. The decrease in interest expense was due primarily to
lower average borrowings interest rates compared to the prior year.
Depreciation and amortization
Consolidated depreciation and amortization decreased $592,000, or 9.9%,
for fiscal 1997 compared to the previous year. The decrease is due primarily
to the sale or write-down of equipment related to businesses closed or
divested during fiscal 1996.
Provision for income taxes
The Company realized tax benefits of $1,127,000 and $5,174,000 in fiscal
1997 and fiscal 1996, respectively, and a tax expense of $2,810,000 in 1995.
The effective income tax rate for fiscal 1997 was 37.0% compared to 32.6% for
the prior year. The increase in the effective income tax rate is
a result of permanent differences in fiscal 1996 attributable to certain
sales or closures included in the restructuring charges during that year, as
well as, permanent differences created in fiscal 1997 through the charitable
contribution of certain inventory.
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 was
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 $6,029,000, or 6.2%,
while operating income decreased by $1,788,000 or 64.8% compared to fiscal
1995. The specialty retail segment contributed 47.0% of consolidated net
sales, excluding divested units, in fiscal 1996 compared to 46.4% in the prior
year.
Tandy Leather Company
Tandy Leather Company's net retail sales decreased 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 in fiscal 1996 when compared
to the prior year primarily as 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 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 were 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
June 30,1996.
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 was
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 4.2% increase in net sales over
fiscal 1995 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 was offset by a
decline in same-store sales of 4.6% which was attributable to increased
competition and an unfavorable merchandise assortment at the stores.
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.
SPECIALTY MANUFACTURING
Net sales for the specialty manufacturing segment increased $4,355,000,
or 3.8%, while operating income decreased $3,592,000, or 23.7%, as compared
to fiscal 1995. The specialty manufacturing segment contributed 53.0% of
consolidated net sales, excluding divested units, in fiscal 1996 compared to
53.6% in the prior year.
Pinnacle Art & Frame
The 0.9% decrease in net sales for Pinnacle Art & Frame was 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. The decrease in sales was 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 Pinnacle Art & Frame decreased $2,655,000, or 22.8%.
This decrease was primarily attributable to the cancellation of certain large
framed art orders discussed above.
Tandy Wholesale International ("TWI")
Net sales for the TWI division increased 15.6% compared to fiscal 1995.
This increase reflected 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 was primarily due to a change in the licensing practices of a key
customer.
The operating income of the TWI division decreased 26.8%. This decrease
primarily reflected 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.
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
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 was 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
reflected 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 the effective
income tax rate was a result of the acceleration of permanent tax
differences attributable to certain sales or closures included in the
restructuring charges previously discussed.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity have come from cash flows from
operations, the liquidation of assets related to divested operations and sales
of treasury stock to employee benefit programs. These funds have been used
primarily to reduce borrowings under the Company's revolving credit facility
and to finance capital expenditures.
During the year ended June 30, 1997, cash decreased $507,000. Cash
provided by operating activities of $9,373,000 resulted primarily from a
decrease in working capital. Cash used for investing activities of $44,000
resulted primarily from capital expenditures for property and equipment
partially offset by proceeds from the sale of Cargo Furniture during fiscal
1997. Cash of approximately $9,836,000 was used by financing activities,
primarily to reduce borrowings under the Company's revolving credit facility.
The Company has a $50 million revolving credit facility with a group of
banks. Effective December 31, 1996, the Company's revolving credit facility
was renewed by its banks and the maturity was extended through October 31,
1998. The Company currently estimates that its cash flow from operations will
enable the Company to operate within the commitment amount on a continuing
basis. Actual results may differ from this forward-looking projection due to
new product introductions, increased inventory levels, new store openings and
other risk factors contained herein.
Cash of approximately $3,794,000 was used for capital expenditures during
the year ended June 30, 1997. Planned capital expenditures for fiscal 1998
approximate $4,8500,000 and are targeted primarily for investments in Pinnacle
Art & Frame. Approximately four to six additional new store openings at Sav-
On Office Supplies are anticipated for fiscal 1998. The Company's minimum
operating lease commitments for fiscal 1998 approximate $6.7 million.
Management believes that the Company's current cash position and its cash
flows from operations will be sufficient to fund its planned operations and
capital expenditures. Actual results may differ from this forward-looking
projection. Please refer to the discussion of risk factors herein.
NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 128, "Earnings per
Share", which establishes new standards for computing and presenting earnings
per share. This standard would have had no impact on the earnings per share
presented in the financial statements for fiscal 1997 and 1996. In June 1997,
the FASB issued Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income", which establishes standards for reporting
and display of comprehensive income and its components in a full set of
general-purpose financial statements. The FASB also issued in June 1997,
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information." This statement requires
that a public business enterprise report financial and descriptive information
about its reportable operating segments in complete sets of financial
statements of the enterprise and in condensed financial statements of interim
periods issued to shareholders. These three statements are effective for
fiscal years beginning after December 31, 1997 and the effect of adopting
these statements is not expected to have a material impact on 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. An accrual for claims associated with the
alleged guarantees on leases rejected as of June 30, 1996 was established in
fiscal 1996. The former subsidiary rejected additional leases for which an
additional accrual was established at June 30, 1997. Based on the information
presently available, management believes the amount of the accrual is adequate
to cover the liability the Company may incur under the alleged guarantees.
However, the former subsidiary may reject further leases with alleged
guarantees, which may result in additional potential liability to the Company.
Item 8. Financial Statements and Supplementary Data
- ------
<TABLE><S><C>
Index to Financial Statements
Financial Statements: Page
-------------------- ----
Report of Independent Accountants 18
Consolidated Balance Sheets, June 30, 1997 and 1996 19
Consolidated Statements of Operations for the Years Ended
June 30, 1997, 1996 and 1995 20
Consolidated Statements of Cash Flows for the Years
Ended June 30, 1997, 1996 and 1995 21
Consolidated Statements of Stockholders' Equity for the
Years Ended June 30, 1997, 1996 and 1995 22
Notes to Consolidated Financial Statements 23
Financial Statement Schedules:
-----------------------------
For each of the three years in the period ended June 30, 1997:
Schedule II - 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.
</TABLE>
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, 1997 and 1996,
and the results of their operations and their cash flows for each of the three
years in the period ended June 30, 1997, 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 11, 1997
TANDYCRAFTS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
June 30,
---------------------
1997 1996
--------- ---------
ASSETS
Current assets:
Cash............................................. $ 1,005 $ 1,512
Trade accounts receivable, net of allowance for
doubtful accounts of $1,680 and $784, respectively 32,614 31,741
Inventories...................................... 49,671 59,284
Other current assets............................. 6,727 7,234
--------- ---------
Total current assets.......................... 90,017 99,771
--------- ---------
Property and equipment, net........................ 25,505 26,783
Other assets....................................... 768 751
Goodwill, net...................................... 40,239 41,274
--------- ---------
$ 156,529 $ 168,579
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt................ $ - $ 3,270
Accounts payable................................. 13,196 13,259
Accrued liabilities and other.................... 15,765 17,222
--------- ---------
Total current liabilities..................... 28,961 33,751
--------- ---------
Long-term debt..................................... 40,840 50,000
Deferred taxes..................................... 2,454 1,230
Stockholders' equity:
Common stock, $1 par value, 50,000,000 shares
authorized, 18,527,988 issued................... 18,528 18,528
Additional paid-in capital....................... 20,432 19,371
Retained earnings................................ 67,457 69,375
Common stock in treasury, at cost, 5,930,336 and
6,349,607 shares, respectively.................. (22,143) (23,676)
--------- ---------
Total stockholders' equity.................... 84,274 83,598
--------- ---------
Commitments and contingencies (Note 8)
$ 156,529 $ 168,579
========= =========
The accompanying notes are an integral part of these financial statements.
TANDYCRAFTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Year Ended June 30,
-----------------------------
1997 1996 1995
-------- ------- --------
Net sales.................................... $244,924 $254,284 $256,523
-------- -------- --------
Operating costs and expenses:
Cost of goods sold (exclusive of
depreciation)............................. 160,325 160,385 155,644
Selling, general and administrative........ 79,185 81,427 83,544
Restructuring charge....................... - 18,317 -
Depreciation and amortization.............. 5,374 5,966 5,475
-------- ------- --------
Total operating costs and expenses......... 244,884 266,095 244,663
-------- ------- --------
Operating income (loss)................... 40 (11,811) 11,860
Interest income.............................. 39 51 67
Interest expense............................. 3,124 4,123 3,900
-------- ------- --------
Income (loss) before income taxes............ (3,045) (15,883) 8,027
Provision (benefit) for income taxes......... (1,127) (5,174) 2,810
-------- ------- --------
Net income (loss)....................... $ (1,918) $(10,709) $ 5,217
======== ======== ========
Net income (loss) per common share........... $ (.15) $(.89) $.46
====== ===== ====
Weighted average number of common and
common equivalent shares 12,423 11,983 11,434
====== ====== ======
The accompanying notes are an integral part of these financial statements.
TANDYCRAFTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar in thousands)
Year Ended June 30,
-----------------------------
1997 1996 1995
-------- ------- --------
Cash flows from operating activities:
Net income (loss).......................... $ (1,918) $(10,709) $ 5,217
Adjustments to reconcile net income (loss)
to net cash provided (used) by operating
activities:
Depreciation and amortization............. 5,374 5,966 5,475
(Gain) loss on sale or abandonment of assets - 24 (163)
Restructuring charge...................... - 18,317 -
Changes in assets and liabilities,
excluding effect of businesses acquired:
Receivables............................. (2,224) (3,073) (5,036)
Inventories............................. 7,401 (720) (11,901)
Other current assets.................... (3,054) (4,367) 1,734
Accounts payable, accrued expenses and
income taxes........................... 3,794 2,987 644
-------- ------- --------
Net cash provided (used) by operating
activities.......................... 9,373 8,425 (4,030)
-------- ------- --------
Cash flows from investing activities:
Additions to property and equipment........ (3,794) (4,363) (9,519)
Purchase of business, net of cash acquired. - (2,475) (9,052)
Proceeds from sales of assets.............. 3,750 2,202 1,685
-------- ------- --------
Net cash used by investing activities (44) (4,636) (16,886)
-------- ------- --------
Cash flows from financing activities:
Sales of treasury stock to employee benefit
plan, net................................. 2,594 3,646 5,817
Principal payments on ESOP debt............ - - (4,000)
Borrowings (payments) under bank credit
facility, net............................. (12,430) (7,730) 19,400
-------- ------- --------
Net cash provided (used) by financing
activities.......................... (9,836) (4,084) 21,217
-------- ------- --------
Increase (decrease) in cash and cash
equivalents................................ (507) (295) 301
Balance, beginning of year................... 1,512 1,807 1,506
-------- ------- --------
Balance, end of year......................... $ 1,005 $ 1,512 $ 1,807
======== ======= ========
Supplemental cash flow information:
Cash paid (received) during the year for:
Interest ................................. $ 3,249 $ 4,157 $ 3,902
======== ======= ========
Income taxes.............................. $ (3,615) $ (551) $ 3,272
======== ======= ========
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
Common paid-in Retained Treasury
stock capital earnings stock Total
---------- ----------- ----------- ---------- ----------
Balance, June 30, 1994.................. $ 18,528 $ 13,158 $ 74,867 $ (27,471) $ 79,082
Sale of 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
Sale of 552,835 share of
treasury stock to employee
benefit plan........................ - 1,361 - 2,061 3,422
ESOP forfeitures of 133,564 shares..... - (300) - (528) (828)
Net loss ............................. - - (1,918) - (1,918)
---------- ---------- ----------- --------- ----------
Balance, June 30, 1997.................. $ 18,528 $ 20,432 $ 67,457 $ (22,143) $ 84,274
========== ========== =========== ========= ==========
</TABLE>
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 three distinct retail
concepts: Tandy Leather Company, which sells leathercraft and related products
through 166 stores located in 44 states; Joshua's Christian Stores, which sells
inspirational books, music and gifts through a chain of 66 stores in ten states;
and Sav-On Office Supplies, which sells office supplies and related products
through a chain of 38 stores located in eleven states. The specialty
manufacturing segment is comprised of two divisions: Picture Frames and Framed
Art, recently consolidated under the name of Pinnacle Art & Frame, 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,
------------------
1997 1996
-------- -------
Finished goods......................$ 35,364 $42,966
Raw materials and work-in-process... 14,307 16,318
-------- -------
$ 49,671 $59,284
======== =======
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, 1997 and 1996 was $2,336,000 and $1,296,000, 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.
Long-lived assets - Effective July 1, 1996, the Company adopted Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of " ("FAS 121"). FAS 121
requires that long-lived assets (primarily property, plant and equipment and
goodwill) held and used by an entity or to be disposed of, be reviewed for
impairment whenever events or changes in circumstances indicate that the net
book value of the asset may not be recoverable. An impairment loss will be
recognized if the sum of the expected future cash flows (undiscounted and before
interest) from the use of the asset is less than the net book value of the
asset. The amount of the impairment loss will generally be measured as the
difference between the net book value and the estimated fair value of the
assets. The adoption of FAS 121 did not have a material impact on the Company's
financial position or results of operations.
Income taxes - Income taxes are calculated in accordance with the liability
method, 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 1997
and 1996 included no common stock equivalents, while common stock equivalents of
5,000 were included for fiscal 1995.
Advertising costs - Advertising costs are expensed the first time the
advertising takes place. Advertising expense for fiscal 1997, 1996 and 1995 was
$7.7 million, $8.8 million and $8.1 million, respectively.
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
In December 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, (iv) the consolidation, streamlining and, in some cases, outsourcing of
certain functions throughout various operating units, and (v) the retention of
an outside consulting firm to assist senior management in evaluating and
developing the Company's retail concepts.
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. A total of $1,113,000 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 purchasers. The
increase in the asset writedown reserve was necessary to cover asset writedowns
in excess of those originally anticipated.
In fiscal 1996, the Company sold Prestige Leather Creations and Brand Name
Apparel and closed David James Manufacturing and certain other individually
insignificant operations. On the retail side, the Company closed two Sav-On
stores, two Tandy Leather stores and one Joshua's store.
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 bear interest at 8.5% to 9.5% and mature at various dates
through March 26, 2000. Total proceeds from the sale of Brand Name Apparel were
approximately $1,038,000 in cash.
On January 27, 1997, the Company completed the sale of Cargo Furniture and
Accents to an acquisition group comprised of management and employees of Cargo
for proceeds of approximately $4.2 million. A portion of the purchase price was
financed through a note with a bank for which the Company provided a guaranty.
At June 30, 1997, the balance of the note guaranteed by the Company was
$2,862,000. Gain on the transaction was not material to the Company and has
been deferred as a result of the Company's guaranty. During fiscal 1997, the
Company also closed four Joshua's stores and two Tandy Leather stores which were
targeted for closure in the strategic restructuring program.
After completing the sale of Cargo, the restructuring program is
substantially complete. The accrual remaining at June 30, 1997 is related
primarily to lease obligations. The following table sets forth the activity in
the restructuring accrual, which is included in current accrued liabilities in
the balance sheet at June 30, 1997 and June 30, 1996 (in thousands):
<TABLE><S><C>
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
Cash payments (682) (164) - (846)
Non-cash asset writedowns (354) (195) - (549)
------------ --------- -------- ---------
Balance at June 30, 1997 $ 148 $ 80 $ - $ 228
============ ========= ======== =========
</TABLE>
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 costs.
Revenues and operating losses included in the Company's results of
operations (before restructuring charges) from separately identifiable
businesses sold or closed are set forth below by segment (in thousands):
<TABLE><S><C>
Year Ended June 30,
--------------------------------------------------------------------
1997 1996 1995
-------------------- -------------------- --------------------
Operating Operating Operating
Income Income Income
Sales (loss) Sales (loss) Sales (loss)
------- --------- ------- --------- ------- ---------
Specialty manufacturing $ 1,416 $ (3) $14,066 $ (2,165) $25,522 $ (2,159)
Specialty retail 10,944 (231) 18,609 173 19,776 761
------- --------- ------- --------- ------- ---------
Total $12,360 $ (234) $32,675 $ (1,992) $45,298 $ (1,398)
======= ========= ======= ========= ======= =========
</TABLE>
NOTE 3 - ACQUISITIONS
During fiscal years 1997 and 1996, the Company made no acquisitions;
however, in fiscal 1995, the Company completed two strategic acquisitions to
complement its operations. The acquisitions discussed below were accounted for
using the purchase method of accounting. Goodwill resulting from those
acquisitions is being amortized over forty years. The acquisitions made in
fiscal 1995 included the following:
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 manufactured 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 $284,000.
NOTE 4 - PROPERTY AND EQUIPMENT AND ACCUMULATED DEPRECIATION
As of June 30 (in thousands) 1997 1996
-------- -------
Property and equipment, at cost:
Land..............................$ 2,424 $ 2,424
Buildings......................... 13,588 13,457
Leasehold improvements............ 4,785 7,227
Fixtures and equipment............ 28,811 27,578
-------- -------
49,608 50,686
Less accumulated depreciation....... (24,103) (23,903)
-------- -------
Property and equipment, net.......$ 25,505 $26,783
======== =======
NOTE 5 - ACCRUED LIABILITIES AND OTHER
Accrued liabilities and other consisted of the following
at June 30 (in thousands):
1997 1996
-------- -------
Accrued payroll and bonus...........$ 4,036 $ 5,319
Taxes, other than income taxes...... 1,179 1,194
Customer deposits................... - 625
Interest............................ 203 301
Restructuring accrual............... 228 1,623
Accrual for sales allowances........ 2,442 2,060
Accrued legal....................... 1,698 1,316
Accrued insurance................... 2,052 745
Other............................... 3,927 4,039
-------- -------
$ 15,765 $17,222
======== =======
NOTE 6 - DEBT
The Company has a $50 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, 1997 ranged from 7.72% to 8.50%. At June 30, 1997, the Company had
borrowings aggregating $40,840,000 and letters of credit aggregating $12,000
outstanding under this facility. The loan agreement contains provisions
specifying certain limitations on the amount of future indebtedness, investments
and dividends, and requires the maintenance of certain financial ratios and
balances. At June 30, 1997, the Company was in compliance with such covenants.
During fiscal 1997, the bank group agreed to extend the maturity date of
the facility to October 31, 1998 under the existing terms and to amend certain
provisions, restrictions and covenants under the revolving credit agreement as
of March 31, 1997.
NOTE 7 - INCOME TAXES
The provision for income taxes is as follows (in thousands):
1997 1996 1995
------- -------- -------
Current tax expense (benefit):
Federal.............................$ (226) $ (4,361) $ 2,205
State and local..................... 30 (14) 114
------- -------- -------
Total current....................... (196) (4,375) 2,319
Deferred tax expense (benefit):
Federal............................. (931) (799) 491
------- -------- -------
Total provision (benefit).............$(1,127) $ (5,174) $ 2,810
======= ========= =======
Deferred tax liabilities (assets) are comprised of the following at June 30 (in
thousands):
1997 1996
------- --------
Depreciation..........................$ 1,637 $ 1,739
Deferred compensation................. 110 110
Goodwill.............................. 1,625 1,119
------- --------
Total deferred tax liabilities...... 3,372 2,968
------- --------
Inventory............................. (1,425) (202)
Bad debts............................. (336) (97)
Restructuring reserve................. (162) (987)
Charitable contribution carryforwards. (466) -
Loss carryforwards.................... (739) (1,077)
Deferred compensation................. (76) (119)
Lease reserves........................ (33) (37)
Other................................. (533) (253)
------- --------
Total deferred tax assets........... (3,770) (2,772)
Valuation allowance................... 697 1,034
------- --------
Net deferred tax assets............. (3,073) (1,738)
------- --------
$ 299 $ 1,230
======= ========
A valuation allowance was established in 1996 in the amount of $1,034,000.
During fiscal 1997, the valuation allowance was reduced by $337,000 as a result
of the sale of Cargo Furniture and Accents. The remaining allowance of $697,000
relates to state tax loss carryforwards. Their use is limited to the future
taxable earnings of the Company and its subsidiaries in certain states and it
was determined to be more likely than not that these state tax carryforwards
would not be utilized.
The provision for income taxes differs from the amount of income tax
determined by applying the applicable U.S. statutory federal income tax rate to
pretax income as a result of the following differences (in thousands):
Year ended June 30,
----------------------------
1997 1996 1995
------- -------- -------
Statutory U.S. tax provision..........$(1,066) $ (5,559) $ 2,729
Increase (decrease) in rates resulting
from:
State and local taxes, net......... 19 (51) 75
Goodwill write-offs................ - 526 -
Other.............................. (80) (90) 6
------- -------- -------
Tax provision.......................$(1,127) $ (5,174) $ 2,810
======= ======== =======
NOTE 8 - COMMITMENTS AND CONTINGENCIES
The Company leases certain properties, primarily retail stores, under
operating leases which expire through 2005. Real estate taxes, maintenance and
certain other costs are generally borne by the Company. The composition of
total rental expense for operating leases is as follows (in thousands):
Year ended June 30 1997 1996 1995
------- -------- -------
Rentals:
Minimum.............................$ 8,622 $ 9,812 $ 9,598
Contingent (percentage of sales).... 70 48 31
------- -------- -------
$ 8,692 $ 9,860 $ 9,629
======= ======== =======
Minimum rental commitments for noncancellable operating leases (primarily
retail store space) at June 30, 1997 are summarized as follows (in thousands):
Year ended June 30,
1998.......................... 6,670
1999.......................... 5,611
2000.......................... 4,146
2001.......................... 2,641
2002.......................... 1,782
2003 and thereafter........... 2,752
--------
$ 23,602
========
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. An accrual for claims associated with the
alleged guarantees on leases rejected as of June 30, 1996 was established in
fiscal 1996. The former subsidiary rejected additional leases for which an
additional accrual was established at June 30, 1997. Based on the information
presently available, management believes the amount of the accrual is adequate
to cover the liability the Company may incur under the 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 - TANDYCRAFTS RETIREMENT SAVINGS PLAN
During fiscal 1997, the former Tandycrafts, Inc. Employee Stock Ownership
Plan (the "ESOP") was amended and renamed Tandycrafts Retirement Savings Plan
(the "TRSP" or the "Plan"). The TRSP is open to all eligible employees of the
Company employed in the United States.
Prior to fiscal 1997, participant contributions were 5% of gross earnings
and wages which were invested in Company common stock only. The Company's
matching contribution was 200% of the participant's contribution and was also
invested in Company common stock.
Effective January 1, 1997, as a result of the amendment of the Plan,
participants may contribute between 3% and 15% of gross salary and wages into
the 401(k) portion of the plan which becomes immediately vested. Participants
also have the ability to direct their contributions into various investment
options. The Company's matching contribution is 100% of the first 5% of the
participant's contribution and is invested in Company common stock. The
Company's contribution becomes vested upon completion of five years of credited
service. The employee and Company contributions are maintained by a corporate
trustee.
During fiscal 1996, the Plan was amended to allow shares forfeited by
unvested employees to be used to reduce subsequent Company contributions to the
Plan. Previously, such forfeited shares were reallocated to the remaining plan
participants. Company contributions to the Plan, net of forfeitures, for the
years ended June 30, 1997, 1996, and 1995 were approximately $1,534,000,
$1,889,000, and $3,933,000, respectively.
NOTE 10 - SHAREHOLDER RIGHTS PLAN
In May 1997, the Board of Directors adopted a shareholder rights plan and
declared a dividend of one common share purchase right (a "Right") for each
outstanding share of Tandycrafts common stock. Each Right entitles the
registered holder the right upon exercise to purchase from the Company, that
number of common shares having a market value of two times the applicable
exercise price. The exercise price was initially set at $30.00 and is subject
to adjustment by the Board. The Rights will become exercisable ten business
days after the earliest occurrence of (i) a public announcement that a person or
group of affiliated persons has acquired, or obtained the right to acquire,
beneficial ownership of 15% or more of the outstanding common shares or (ii) the
commencement of, or announcement of an intention to make, a tender offer or
exchange offer, the consummation of which would result in the beneficial
ownership by a person or group of 15% or more of such outstanding common shares.
The Rights will expire on May 19, 2007, unless the expiration date is
extended or unless the Rights are earlier redeemed by the Company. The Board of
Directors may amend the terms of the Rights without consent of the holder of the
Rights, including an amendment to extend or reduce the period during which the
Rights are redeemable or exercisable. The Rights are not separately traded, are
not currently exercisable and have no voting rights until exercised. The Board
may redeem the Rights for $0.01 per Right at any time prior to the Rights
becoming exercisable.
NOTE 11 - 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 rates of either
20% or 33-1/3% 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 Plan 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:
Weighted -
Average
Exercise
Shares Price
------------ --------
Options outstanding,
June 30, 1994................ 1,418,900 $ 12.74
Options granted................. 77,000 $ 11.74
Options exercised............... - -
Options terminated.............. (35,800) $ 13.82
------------ -------
Options outstanding,
June 30, 1995................ 1,460,100 $ 12.66
Options granted................. 63,000 $ 8.01
Options exercised............... - $ -
Options terminated.............. (447,100) $ 12.79
------------ -------
Options outstanding,
June 30, 1996................ 1,076,000 $ 12.33
Options granted................. 712,700 $ 4.75
Options exercised............... - $ -
Options terminated.............. (1,022,800) $ 12.29
------------ -------
Options outstanding,
June 30, 1997................ 765,900 $ 5.33
============ =======
Options exercisable,
June 30, 1997................ 125,016 $ 7.36
============ =======
Options available for
future grant, June 30, 1997.. 874,100
============
A summary of stock options outstanding and exercisable at June 30, 1997 follows:
<TABLE><S><C>
Options Outstanding Options Exercisable
---------------------------------------------------- -------------------------------
Shares Weighted-Average Shares
Range of Outstanding Remaining Weighted-Average Exercisable Weighted-Average
Exercise Prices at 6/30/97 Contractual Life Exercise Price at 6/30/97 Exercise Price
- --------------- ----------- ---------------- --------------- ------------ --------------
$10.69 - 17.62 56,600 6.31 months $ 12.60 42,800 $ 12.53
$4.56 - 8.82 709,300 9.70 months $ 4.75 82,216 $ 4.67
------- -------
$4.56 - 17.62 765,900 $ 5.33 125,016 $ 7.36
</TABLE>
Pro forma information regarding net income and earnings per share is
required by Statement of Financial Accounting Standards No. 123 "Accounting for
Stock-based Compensation" ("FAS 123"), and has been determined as if the Company
had accounted for its employee stock options under the fair value method of that
statement. The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option pricing model with the following weighted-
average assumptions used for grants: no expected dividends, expected volatility
of 32.6%, risk free interest rate of 6.00% and expected lives of seven years
each.
A summary of stock option transactions under both the Company's stock
option plan and information about fixed-price options is presented above.
For purposes of pro forma disclosures, the estimated fair value of options
is amortized to expense over the vesting period. The Company's pro forma
information is as follows:
1997 1996
----------------- ------------------
As Pro As Pro
Reported Forma Reported Forma
-------- ------- -------- -------
Income (loss) available to
common shareholders $ (1,918) $(2,096) $ (10,709) $(10,738)
Income (loss) per
common share $ (0.15) $ (0.17) $ (0.89) $ (0.90)
The effects of applying FAS No. 123 in this pro forma disclosure are not
indicative of future amounts as the pro forma amounts above do not include the
impact of stock option awards granted prior to fiscal 1996 and additional awards
anticipated in future years.
NOTE 12 - 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 three
distinct retail concepts. The specialty manufacturing segment is comprised of
two divisions: Pinnacle Art & Frame and TWI. Substantially all of the specialty
retail products are marketed through 270 Company-owned specialty retail stores
located in 44 states of the United States. The specialty retail segment grants
nominal credit, primarily to institutional customers. The specialty
manufacturing segment, during fiscal 1997, 1996 and 1995, had net sales of
$30,467,000, $30,065,000 and $26,774,000, 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.
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, 1997 is as follows (in thousands):
<TABLE><S><C>
Specialty Specialty
1997 manufacturing retailing Consolidated
---- ------------ --------- ------------
Total sales $ 134,180 $ 119,173 $ 253,353
Intersegment sales (8,241) (188) (8,429)
---------- --------- ------------
Net sales $ 125,939 $ 118,985 $ 244,924
========== ========= ============
Segment operating income (loss) $ 11,369 $ (5,141) $ 6,228
========== =========
Corporate expenses including goodwill
amortization and interest expense, net (9,273)
------------
Income (loss) before income taxes $ (3,045)
============
Depreciation $ 2,166 $ 2,169 $ 4,335
Goodwill amortization 996 43 1,039
---------- --------- ------------
Total depreciation and amortization $ 3,162 $ 2,212 $ 5,374
========== ========= ============
Identifiable assets $ 117,878 $ 37,646 $ 155,524
========== =========
Corporate assets 1,005
------------
$ 156,529
============
Capital expenditures $ 1,622 $ 2,172 $ 3,794
========== ========= ============
1996
----
Total sales $ 143,090 $ 122,828 $ 265,918
Intersegment sales (11,463) (171) (11,634)
---------- --------- ------------
Net sales $ 131,627 $ 122,657 $ 254,284
========== ========= ============
Segment 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
========== ========= ============
Segment 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
========== ========= ============
</TABLE>
NOTE 13 - QUARTERLY RESULTS (UNAUDITED)
Summarized quarterly income statements (in thousands of dollars, except per
share amounts) for the years ended June 30, 1997 and 1996 are set forth below:
<TABLE><S><C>
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
-------------------- -------------------- -------------------- ------------------
1997 1996 1997 1996 1997 1996 1997 1996
-------- -------- -------- -------- -------- -------- -------- --------
Net sales $ 57,770 $ 62,349 $ 73,246 $ 74,347 $ 54,456 $ 53,556 $ 59,452 $ 64,032
Costs and expenses:
Cost of goods sold 35,688 38,813 46,732 47,885 41,128 32,834 36,777 40,853
Selling and administrative 18,662 20,913 20,775 23,263 20,062 18,186 19,686 19,065
Restructuring charge - - - 18,818 - (501) - -
Depreciation and amortization 1,372 1,525 1,391 1,715 1,315 1,482 1,296 1,244
-------- -------- -------- -------- -------- -------- -------- --------
Operating income (loss) (1) 2,048 1,098 4,348 (17,334) (8,049) 1,555 1,693 2,870
Interest expense, net 822 1,085 833 1,117 720 996 710 874
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before
income taxes 1,226 13 3,515 (18,451) (8,769) 559 983 1,996
Provision (benefit) for
income taxes 429 4 1,230 (6,072) (3,068) 195 282 699
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss) $ 797 $ 9 $ 2,285 $(12,379) $ (5,701) $ 364 $ 701 $ 1,297
======== ======== ======== ======== ======== ======== ======== ========
Net income (loss) per
common share $0.07 $0.00 $0.19 ($1.04) ($0.45) $0.03 $0.06 $0.11
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
(1) The third quarter of fiscal 1997 includes a $5,300,000 repositioning charge
at Joshua's Christian Stores to writedown and liquidate discontinued
inventory and close thirteen stores.
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 1997 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, 1997.
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, 1997.
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, 1997.
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,
1997.
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, on May 22, 1997 reporting
that on May 16, 1997 the Board of Directors voted to adopt a Rights
Agreement pursuant to which Rights to purchase shares of the Company's
Common Stock will be distributed as a dividend, one Right per share, to
record owners of the Company's Common Stock as of the close of business on
May 29, 1997. The Form 8-K also reported that the Company's bylaws were
amended by vote of the Board of Directors to include provisions relating to
the procedures for introduction of matters by shareholders at meetings of
shareholders.
(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 26, 1997 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 26th day of September, 1997, by the
following persons on behalf of the Registrant and in the capacities indicated.
/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/ Michael J. Walsh
-------------------------------------
Michael J. Walsh
President and Chief Executive Officer
and Director
Schedule II
TANDYCRAFTS, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts and Reserves
(In thousands)
Year ended June 30,
------------------------------------
1997 1996 1995
--------- --------- ---------
Allowance for doubtful accounts:
Balance, beginning of year $ 790 $ 605 $ 441
Additions charged to profit and loss 1,971 1,094 788
Accounts receivable charged off, net
of recoveries (1,081) (909) (624)
--------- --------- ---------
Balance, end of year $ 1,680 $ 790 $ 605
========= ========= =========
TANDYCRAFTS, INC.
INDEX TO EXHIBITS
Filed with the Annual Report on Form 10-K for the year ended June 30, 1997.
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)
3.4 Amended Bylaws of the Company (12)
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
(9)
10.14 Sixth Amendment to Revolving Credit and Term Loan Agreement
(10)
10.15 Seventh Amendment to Revolving Credit and Term Loan Agreement
(11)
10.16 # Eighth Amendment to Revolving Credit and Term Loan Agreement
10.17 Form of Rights Agreement used to evidence the stock rights
granted by the Board Directors on May 16, 1997 as a
dividend to share holders on record on May 29, 1997 (12)
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.
(9) Filed with the Commission as an Exhibit to the Company's Annual Report on
Form 10-K for the fiscal year ended June 30, 1996 and incorporated herein
by reference.
(10) Filed with the Commission as an Exhibit to the Company's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1996, and incorporated
herein by reference.
(11) Filed with the Commission as an Exhibit to the Company's Quarterly Report
on Form 10-Q for the quarter ended December 31, 1996, and incorporated
herein by reference.
(12) Filed with the Commission as a Exhibit to the Company's Form 8-K, dated
May 22, 1997 and incorporated herein by reference.
EIGHTH AMENDMENT TO REVOLVING
----------------------------
CREDIT AND TERM LOAN AGREEMENT
------------------------------
This Eighth Amendment To Revolving Credit And Term Loan Agreement ("Eighth
Amendment") is made by and among TANDYCRAFTS, INC., a Delaware corporation
("Company"), THE DEVELOPMENT ASSOCIATION, INC., a Texas corporation, SAV-ON,
INC., 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 WELLS FARGO BANK (TEXAS), NATIONAL
ASSOCIATION (formerly First Interstate Bank of Texas, N.A.), BANK ONE, TEXAS,
N.A. and NBD BANK (collectively, the "Banks") and WELLS FARGO BANK (TEXAS),
NATIONAL ASSOCIATION, 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, certain of Banks and Agent
entered into that certain First Amendment to Revolving Credit and Term Loan
Agreement dated December 3, 1993 ("First Amendment"); and
WHEREAS, the Company, the Guarantors, certain of Banks and Agent entered
into that certain Second Amendment To Revolving Credit and Term Loan Agreement
dated September 26, 1994 ("Second Amendment"); and
WHEREAS, the Company, Guarantors, certain of Banks and Agent entered into
that certain Third Amendment to Revolving Credit and Term Loan Agreement dated
December 31, 1994 ("Third Amendment"); and
WHEREAS, the Company, Guarantors, certain of Banks and Agent entered into
that certain Fourth Amendment to Revolving Credit and Term Loan Agreement dated
July 6, 1995 ("Fourth Amendment"); and
WHEREAS, the Company, Guarantors, certain of Banks and Agent entered into
that certain Fifth Amendment to Revolving Credit and Term Loan Agreement dated
December 31, 1995 ("Fifth Amendment"); and
WHEREAS, the Company, Guarantors, certain of Banks and Agent entered into
that certain Sixth Amendment to Revolving Credit and Term Loan Agreement dated
October 31, 1996 ("Sixth Amendment"); and
WHEREAS, the Company, Guarantors, certain of Banks and Agent entered into
that certain Seventh Amendment to Revolving Credit and Term Loan Agreement dated
December 31, 1996 ("Seventh Amendment"); and
WHEREAS, the Company, Guarantors, certain of 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:
I.
The definition of "Applicable Margin" in Article I of the Loan Agreement is
amended to read in its entirety as follows:
"Applicable Margin" shall mean the percentage set forth below
determined by reference to the Funded Debt EBITDA Ratio in effect from
time to time:
Funded Debt Adjusted InterBank Unused
EBITDA Ration Rate Fee
------------ ---- --
<2.5 .75 .225
2.5 to 3.0 .875 .25
3.0 to 3.0 1.00 .25
3.5 to 4.0 1.25 .25
4.0 to 4.5 1.75 .25
>4.5 2.00 .25
2.
Section 8.19 of the Loan Agreement is amended to 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 Funded Debt to EBITDA Ratio is at
any time greater than 4.5 to 1.0 prior to May 1, 1997 or is greater
than 4.0 to 1.0 on or after May 1, 1997, (2) Company's Account Payable
Turndays is greater than forty-five (45) days, or (3) Company fails to
comply with Section 9.17 of this Loan Agreement at any time on or
after June 30, 1996. In calculating EBITDA for purposes of this
Section 8.19, the charges in March 1997 for the restructuring of The
Development Association, Inc., shall be excluded.
3.
Sections 9.03 and 9.04 of the Loan Agreement are amended to read in their
entirety as follows:
9.03 Funded Debt to EBITDA. Permit the ratio of Funded Debt
to EBITDA to be greater than 4.75 to 1.0 prior to May 1, 1997 or
greater than 4.5 to 1.0 thereafter. In calculating EBITDA for
purposes of this Section 9.03, the charges in March 1997 for the
restructuring of The Development Association Inc. shall be
excluded.
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. In calculating EBITDA for purposes of this
Section 9.04, the charges in March 1997 for the restructuring of
The Development Association, Inc. shall be excluded.
4.
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.
5.
Except as amended by the First Amendment, the Second Amendment, the Third
Amendment, the Fourth Amendment, the Fifth Amendment, the Sixth Amendment, the
Seventh Amendment and this Eighth Amendment, the Loan Agreement is ratified and
confirmed and shall remain in full force and effect.
6.
This Eighth Amendment shall be governed by and construed in accordance with
the laws of the State of Texas.
7.
Company agrees to pay all expenses incurred by Agent and Banks in
connection with the negotiation and preparation of this Eighth Amendment,
including reasonable attorney's fees.
8.
This Eighth 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.
9.
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.
10.
This Eighth Amendment shall be binding upon and inure to the benefit of the
parties and their respective successors and assigns.
11.
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 March 31, 1997.
TANDYCRAFTS, INC., a Delaware
corporation
By: /s/ James D. Allen
--------------------------------
James D. Allen, Executive
Vice President
COMPANY
SAV-ON, INC., a Texas corporation
By: /s/ Russell Price
--------------------------------
Russell Price, Secretary
DAVID JAMES MANUFACTURING,
INC., a Texas corporation
By: /s/ Russell Price
--------------------------------
Russell Price, Secretary
BRAND NAME APPAREL, INC.
a Texas corporation
By: /s/ Russell Price
--------------------------------
Russell Price, Secretary
THE DEVELOPMENT ASSOCIATION,
INC.,
a Texas corporation
By: /s/ Russell Price
--------------------------------
Russell Price, Secretary
PLC LEATHER COMPANY,
a Nevada corporation
By: /s/ Russell Price
--------------------------------
Russell Price, Secretary
TANDYARTS, INC., a Nevada
corporation
By: /s/ Russell Price
--------------------------------
Russell Price, Secretary
COLLEGE FLAGS AND
MANUFACTURING, INC.,
a South Carolina corporation,
By: /s/ Russell Price
--------------------------------
Russell Price, Secretary
GUARANTORS
WELLS FARGO BANK (TEXAS), NATIONAL ASSOCIATION
(formerly First Interstate Bank of Texas, N.A.)
By: /s/ John Peloubet
--------------------------------
John Peloubet, Vice President
BANK ONE, TEXAS, N.A.
By: /s/ Michael D. Palmer
-------------------------------------
Michael D. Palmer, Senior
Vice President
NBD BANK
By: /s/ Jenny Gilpin
--------------------------------
Jenny Gilpin, Vice President
BANKS
EXHIBIT 21
----------
TANDYCRAFTS, INC.
Significant Subsidiaries of Tandycrafts, Inc. as of June 30, 1997
<TABLE><S><C>
Jurisdiction
of
Subsidiary's Legal Name Doing Business As Incorporation
------------------------------- ---------------------------------------- ------------------------
Development Association, Inc. Joshua's Christian Stores Texas, U.S.A.
Sav-On, Inc. Sav-On Office Supplies Texas,. U.S.A.
TAC Holdings, Inc. Delaware, U.S.A.
TandyArts, Inc. Impulse Designs/Hermitage Fine Arts Nevada, U.S.A.
Licensed Lifestyles, Inc. Tag Express/Birdlegs Nevada, U.S.A.
</TABLE>
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. Each of the above subsidiaries is included in the
Tandycrafts, Inc. Consolidated Financial Statements for fiscal 1997.
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 11, 1997, appearing on page 18 of this Form 10-K.
Price Waterhouse LLP
Fort Worth, Texas
September 26, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Tandycrafts,
Inc.'s June 30, 1997 Form 10-K and is qualified in its entirety by reference to
such Form 10-K filing.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 1,005
<SECURITIES> 0
<RECEIVABLES> 34,294
<ALLOWANCES> 1,680
<INVENTORY> 49,671
<CURRENT-ASSETS> 90,017
<PP&E> 49,608
<DEPRECIATION> 24,103
<TOTAL-ASSETS> 156,529
<CURRENT-LIABILITIES> 28,961
<BONDS> 0
0
0
<COMMON> 18,528
<OTHER-SE> 65,746
<TOTAL-LIABILITY-AND-EQUITY> 156,529
<SALES> 244,924
<TOTAL-REVENUES> 244,924
<CGS> 160,325
<TOTAL-COSTS> 244,884
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,124
<INCOME-PRETAX> (3,045)
<INCOME-TAX> (1,127)
<INCOME-CONTINUING> (1,918)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,918)
<EPS-PRIMARY> (0.15)
<EPS-DILUTED> 0
</TABLE>
