SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended December 31, 1996
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the transition period from ______________ to ________________
Commission File Number 1-7258
TANDYCRAFTS, INC.
(Exact name of registrant as specified in its charter)
Delaware 75-1475224
(State of incorporation) (I.R.S. Employer Identification Number)
1400 Everman Parkway, Fort Worth, Texas 76140
(Address of principal executive offices) (Zip Code)
(817) 551-9600
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No___.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Shares outstanding as of January 31, 1996
- ----------------------------- -----------------------------------------
Common Stock, $1,00 par value 12,560,767
TANDYCRAFTS, INC.
Form 10-Q
Quarter Ended December 31, 1996
TABLE OF CONTENTS
PART 1 - FINANCIAL INFORMATION
Item Page No.
- ---- --------
1. Condensed Consolidated Financial Statements 3-9
2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-16
PART II - OTHER INFORMATION
4. Submission of Matters to a Vote of Security
Holders 17
6. Exhibits and Reports on Form 8-K 17
Signatures 18
PART I
-------
Item 1. Financial Statements
--------------------
TANDYCRAFTS, INC.
Condensed Consolidated Statements of Operations
(In thousands, except per share amounts)
(Unaudited)
<TABLE><S><C>
Three Months Ended Six Months Ended
December 31, December 31,
------------------------ -----------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
Net sales $ 73,246 $ 74,347 $ 131,016 $ 136,696
---------- ---------- ---------- ----------
Operating costs and expenses:
Cost of goods sold 46,732 47,885 82,420 86,698
Selling, general and administrative 20,775 23,263 39,437 44,176
Restructuring charges 0 18,818 0 18,818
Depreciation and amortization 1,391 1,715 2,763 3,240
---------- ---------- ---------- ----------
Total operating costs and expenses 68,898 91,681 124,620 152,932
---------- ---------- ---------- ----------
Operating income (loss) 4,348 (17,334) 6,396 (16,236)
Interest expense, net 833 1,117 1,655 2,202
---------- ---------- ---------- ----------
Income (loss) before provision
for income taxes 3,515 (18,451) 4,741 (18,438)
Provision (benefit) for income taxes 1,230 (6,072) 1,659 (6,068)
---------- ---------- ---------- ----------
Net income (loss) $ 2,285 $ (12,379) $ 3,082 $ (12,370)
========== ========== ========== ==========
Net income (loss) per share $ 0.19 $ (1.04) $ 0.25 $ (1.04)
========== ========== ========== ==========
Weighted average common and
common equivalent shares 12,346 11,935 12,272 11,852
========== ========== ========== ==========
</TABLE>
TANDYCRAFTS, INC.
Condensed Consolidated Balance Sheets
(Dollars in thousands)
(Unaudited)
December 31, June 30,
1996 1996
------------ ------------
ASSETS
- ------
Current assets:
Cash, including short-term investments $ 2,225 $ 1,512
Trade accounts receivable, net of allowance
for doubtful accounts of $1,268 and
$784, respectively 34,352 31,741
Inventories 58,010 59,284
Other current assets 3,660 7,234
------------ ------------
Total current assets 98,247 99,771
------------ ------------
Property and equipment, at cost 51,510 50,686
Accumulated depreciation (25,476) (23,903)
------------ ------------
Property and equipment, net 26,034 26,783
------------ ------------
Other assets 752 751
Goodwill 40,757 41,274
------------ ------------
$ 165,790 $ 168,579
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Current portion of long-term debt $ 0 $ 3,270
Accounts payable 14,284 13,259
Accrued liabilities and other 14,701 17,222
------------ ------------
Total current liabilities 28,985 33,751
------------ ------------
Long-term debt 47,010 50,000
Deferred income taxes 1,230 1,230
Stockholders' equity:
Common stock, $1 par value, 50,000,000
shares authorized, 18,527,988 shares issued 18,528 18,528
Additional paid-in capital 20,120 19,371
Retained earnings 72,457 69,375
Cost of stock in treasury, 6,044,751 shares
and 6,349,607 shares, respectively (22,540) (23,676)
------------ ------------
Total stockholders' equity 88,565 83,598
------------ ------------
$ 165,790 $ 168,579
============ ============
TANDYCRAFTS, INC.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Six Months Ended
December 31,
-----------------------------
1996 1995
------------ ------------
Net cash flows from operating activities $ 6,714 $ 1,643
------------ ------------
Cash flows from investing activities:
Additions to property and equipment, net (1,626) (1,840)
------------ ------------
Net cash used for investing activities (1,626) (1,840)
------------ ------------
Cash flows from financing activities:
Sales of treasury stock to employee benefit
program, net 1,885 2,834
Borrowings under bank credit facility, net (6,260) -
------------ ------------
Net cash provided (used) by financing
activities (4,375) 2,834
------------ ------------
Increase in cash, including short-term
investments 713 2,637
Balance, beginning of period 1,512 1,807
------------ ------------
Balance, end of period $ 2,225 $ 4,444
============ ============
TANDYCRAFTS, INC.
Condensed Consolidated Statement of Stockholders' Equity
(Dollars in thousands)
(Unaudited)
<TABLE><S><C>
Additional
Common paid-in Retained Treasury
stock capital earnings stock Total
------- ---------- -------- -------- --------
Balance, June 30, 1996 $18,528 $ 19,371 $ 69,375 $(23,676) $ 83,598
ESOP forfeitures of 69,097 shares - (247) - (258) (505)
Sale of 373,953 shares of treasury stock
to employee benefit program - 996 - 1,394 2,390
Net income for six months ended
December 31, 1996 - - 3,082 - 3,082
------- -------- -------- -------- --------
Balance, December 31, 1996 $18,528 $ 20,120 $ 72,457 $(22,540) $ 88,565
======= ======== ======== ======== ========
</TABLE>
TANDYCRAFTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, the
accompanying condensed consolidated financial statements contain all adjustments
(consisting of normal recurring accruals and restructuring charges as more fully
described in Note 4, below) necessary for a fair statement of the Company's
financial position as of December 31, 1996 and June 30, 1996, and the results of
operations and cash flows for the six-month periods ended December 31, 1996 and
December 31, 1995. The results of operations for the three and six-month
periods ended December 31, 1996 and 1995 are not necessarily indicative of the
results to be expected for the full fiscal year. The consolidated financial
statements should be read in conjunction with the financial statement
disclosures contained in the Company's 1996 Annual Report to Stockholders.
NOTE 2 - INVENTORIES
The components of inventories at December 31, 1996 consisted of the following
(in thousands):
Merchandise held for sale $ 43,044
Raw materials and work-in-process 14,966
--------
$ 58,010
========
NOTE 3 - EARNINGS PER SHARE
Net income (loss) per share is based upon the weighted average number of shares
of common stock and common stock equivalents outstanding during the periods.
For the three and six-month periods ended December 31, 1996 and 1995, the number
of weighted average shares and common stock equivalents is as follows (in
thousands):
Three Months Ended Six Months Ended
December 31, December 31,
----------------- -----------------
1996 1995 1996 1995
------- ------- ------- -------
Weighted average shares 12,346 11,935 12,272 11,852
Common stock equivalents - - - -
------- ------- ------- -------
Total weighted average common and
common equivalent shares 12,346 11,935 12,272 11,852
======= ======= ======= =======
NOTE 4 - STRATEGIC RESTRUCTURING AND CONSOLIDATION PROGRAM
Description
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 $18.3
million in fiscal 1996. During the three and six month periods ended December
31, 1996, $131,000 and $470,000, respectively, 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.
During the six months ended December 31, 1996, the Company closed one Tandy
Leather store, two Sav-On stores and three Joshua's Christian stores which were
initially targeted in the restructuring program.
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.
Gain on the transaction is not expected to be material and will be deferred as a
result of the Company's guaranty.
After completing the sale of Cargo, the restructuring program is substantially
complete. The accrual remaining at December 31, 1996 primarily represents lease
obligations related to stores and manufacturing facilities which were closed as
part of the restructuring program.
The following table sets forth the activity in the restructuring accrual, which
is included in current accrued liabilities in the December 31, 1996 balance
sheet (in thousands):
<TABLE><S><C>
Specialty Specialty
Manufacturing Retail Corporate Total
------------- --------- --------- -------
Balance at June 30, 1996 $ 1,184 $ 439 $ - $ 1,623
Cash payments (571) (135) - (706)
Non-cash asset writedowns (439) (31) - (470)
------- ------- ----- -------
Balance at December 31, 1996 $ 174 $ 273 $ - $ 447
======= ======= ===== =======
</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. Although no additional
restructuring plans are currently under consideration, the Company continues to
evaluate possible actions which will improve the profitability and competitive
position of the Company.
Revenues and operating losses (before restructuring charges) from separately
identifiable businesses divested as part of the restructuring plan are set forth
below by segment (in thousands):
Three Months Ended December 31,
-----------------------------------------
1996 1995
------------------ -------------------
Operating Operating
Income Income
Sales (loss) Sales (loss)
------- -------- ------- --------
Specialty manufacturing $ 527 $ - $ 4,852 $ (763)
Specialty retail 4,709 (125) 4,852 112
------- -------- ------- --------
Total $ 5,236 $ (125) $ 9,704 $ (651)
======= ======== ======= ========
Six Months Ended December 31,
-----------------------------------------
1996 1995
------------------ -------------------
Operating Operating
Income Income
Sales (loss) Sales (loss)
------- -------- ------- --------
Specialty manufacturing $ 1,396 $ (3) $ 9,901 $ (1,293)
Specialty retail 9,835 (3) 9,552 186
------- -------- ------- --------
Total $11,231 $ (6) $19,453 $ (1,107)
======= ======== ======= ========
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
GENERAL
Tandycrafts, Inc. (the "Company") operates in two primary industry segments,
specialty retail and specialty manufacturing. The specialty retail group
consists of four distinct retail concepts: Tandy Leather Company, which sells
leathercraft and related products through 172 stores located in 45 states;
Joshua's Christian Stores, which sells inspirational books, music and gifts
through a chain of 72 stores located in eight states; Sav-On Office Supplies,
which sells office supplies and related products through a chain of 36 stores
located primarily in smaller markets; and Cargo Furniture and Accents, which
sells a proprietary line of solid wood furniture and decorative accessories
through a chain of 38 stores located primarily in regional shopping malls. As
further discussed under the heading Strategic restructuring and consolidation
program, the Company sold Cargo to an acquisition group comprised of management
and employees of Cargo effective January 27, 1997. The specialty manufacturing
segment is comprised of two divisions: Picture Frames and Framed Art and TWI.
With the exception of historical information, the matters discussed herein are
forward-looking statements that involve risks and uncertainties that may cause
actual results to differ from such projections. These risks and uncertainties
include, but are not limited to, the performance of each operating unit,
relationships with certain key customers, commodity price fluctuations, product
demand, inventory fluctuations due to shifts in market demand and preferences,
the regulatory and trade environment, interest rate fluctuations, recessionary
factors, seasonality and other factors or risks indicated in filings with the
Securities and Exchange Commission.
The following table presents selected financial data for each significant
company or division comprising the Company's two primary industry segments for
the three and six-month periods ended December 31, 1996 and 1995 (in thousands):
<TABLE><S><C>
Three Months Ended December 31,
-----------------------------------------
1996 1995 % Increase (Decrease)
------------------- ------------------- ---------------------
Operating Operating Operating
Sales Income Sales Income Sales Income
-------- --------- -------- --------- ------- ---------
Specialty Retail:
- -----------------
Tandy Leather $ 11,573 $ 676 $ 12,317 $ 882 $ (6.0)% (23.4)%
Sav-On Office Supplies 8,571 388 7,093 26 20.8 1392.3
Joshua's Christian Stores 11,330 230 10,300 (189) 10.0 221.7
Cargo Furniture & Accents 4,709 (125) 4,852 112 (2.9) (211.6)
Restructuring charges - - - - (835) 100.0
-------- ------- -------- ------- ------ -------
Specialty Retail 36,183 1,169 34,562 (4) 4.7 29325.0
-------- ------- -------- ------- ------ -------
Specialty Manufacturing:
- -----------------------
Frames and Framed Art 27,295 4,353 26,628 3,833 2.5% 13.6%
TWI 9,241 (170) 8,305 425 11.3 140.0)
Divested Units 527 - 4,852 (763) (89.1) 100.0
Restructuring charges - - - (17,943) - 100.0
-------- ------- -------- ------- ------ -------
Specialty Manufacturing 37,063 4,183 39,785 (14,448) (6.8) 128.9
-------- ------- -------- ------- ------ -------
Total operations, excluding
corporate $ 73,246 $ 5,352 $ 74,347 ($14,452) (1.5)% 137.0%
======== ======= ======== ======= ====== =======
Six Months Ended December 31,
-----------------------------------------
1996 1995 % Increase (Decrease)
------------------- ------------------- ----------------------
Operating Operating Operating
Sales Income Sales Income Sales Income
-------- --------- -------- --------- ------- ---------
Specialty Retail:
- ----------------
Tandy Leather $ 21,131 $ 346 $ 22,578 $ 1,071 (6.4)% (67.7)%
Sav-On Office Supplies 18,026 950 14,638 85 23.1 1017.6
Joshua's Christian Stores 17,158 (517) 17,370 (916) (1.2) 43.6
Cargo Furniture & Accents 9,835 (3) 9,552 186 3.0 (101.6)
Restructuring charges - - - (835) - 100.0
-------- ------- -------- ------- ----- -------
Specialty Retail 66,150 776 64,138 (409) 3.1 289.7
-------- ------- -------- ------- ----- -------
Specialty Manufacturing:
- -----------------------
Frames and Framed Art 44,118 6,484 45,261 5,990 (2.5)% 8.2%
TWI 19,352 768 17,396 1,533 11.2 (49.9)
Divested Units 1,396 (3) 9,901 (1,293) (85.9) 99.8
Restructuring charges - - - (17,943) - 100.0
-------- ------- -------- ------- ----- -------
Specialty Manufacturing 64,866 7,249 72,558 (11,713) (10.6) 161.9
-------- ------- -------- ------- ----- -------
Total operations, excluding
corporate $131,016 $ 8,025 $135,696 ($12,122) (4.2)% 166.2%
======== ======= ======== ======= ===== =======
</TABLE>
RESULTS OF OPERATIONS
Consolidated net sales for the three and six-month periods ended December 31,
1996 decreased $1,101,000, or 1.5%, and $5,680,000, or 4.2%, respectively,
compared to the same periods last year. Operating income for the three and six-
month periods ending December 31, 1996 was $5,352,000 and $8,025,000,
respectively, as compared to operating losses of $14,452,000 and $12,122,000,
respectively, for the same periods of the prior year. Excluding restructuring
charges, operating income increased $1,026,000, or 23.7%, and $1,369,000, or
20.3%, respectively, for the three and six-month periods ending December 31,
1996 compared to the same periods of the previous 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 4.7% for the quarter and
3.1% for the six-months ended December 31, 1996 compared to the same periods
last year. The specialty retail segment contributed 49.4% and 50.5% of
consolidated net sales for the three and six-month periods ended December 31,
1996, respectively, compared to 46.5% and 46.9%, respectively, for the same
periods last year. Before restructuring charges of $835,000 taken in December
1995, operating income increased $338,000, or 40.7%, and $350,000, or 82.2%,
respectively, for the three and six-month periods ending December 31, 1996
compared to the same periods of the previous year.
Tandy Leather Retail
Tandy Leather Company's net retail sales decreased 6.0% for the quarter and 6.4%
for the six-months ended December 31, 1996 compared to the same periods last
year. Same-store sales at Tandy Leather for the three and six-month periods
ending December 31, 1996 decreased 5.4% and 5.7%, respectively. The decrease in
sales is attributable to a shorter Christmas selling season in 1996, high store
manager turnover and inclement weather in California and the Northwest during
December 1996 which negatively impacted sales.
Operating income at Tandy Leather decreased $206,000, or 23.4%, and $725,000, or
67.7%, for the quarter and six months ended December 31, 1996, respectively.
These decreases in operating income are the result of declining sales combined
with slight declines in gross margins and increases in selling, general and
administrative ("SG&A") expenses as a percent of sales during the two periods.
For the quarter ended December 31, 1996, gross profit decreased $376,000;
however, gross profit as a percentage of sales was relatively unchanged compared
to the same quarter of the previous year. SG&A expenses for the quarter
decreased $168,000, but increased 1.4 points as a percent of sales due to the
sales decline during the quarter. For the six-month period ended December 31,
1996, gross profit decreased $1,037,000 due primarily to decreased sales and to
a reduction in gross margin as a percent of sales caused by the declining market
in Southwest fashion. SG&A for the six-month period decreased $311,000 from the
same period last year, but increased 1.7 points as a percent of sales due to the
lower sales levels in 1996.
Sav-On Office Supplies
Sav-On achieved total net sales increases of 20.8% and 23.1% for the quarter and
six-month periods ended December 31, 1996, respectively, compared to the same
periods last year. Same-store sales increased 23.4% and 25.9% for the quarter
and the six-months ended December 31, 1996, respectively, over the comparable
periods last year. The sales increase is partially due to the continued
maturation of the stores within this chain and the addition of a line of PC
printers and fax machines to the merchandise assortment.
Sav-On had operating income of $388,000 and $950,000 for the three and six-month
periods ended December 31, 1996, respectively, compared to operating income of
$26,000 and $85,000 for the corresponding periods last year. The increase in
operating income is primarily a result of increased sales and efficiency gains
at both stores and administrative units. SG&A expenses, as a percent of sales,
have declined 7.7 points and 6.6 points for the three and six-month periods
ended December 31, 1996, respectively, compared to the same periods last year
primarily due to an increase in sales without a corresponding increases in labor
and occupancy costs. Gross profit, as a percent of sales, for the three and six-
months ended December 31, 1996, decreased slightly compared to the respective
periods last year primarily as a result of the addition of the PC printers and
fax machines, which carry lower margins than the average of Sav-On's other
merchandise categories.
Joshua's Christian Stores
Joshua's net sales for the quarter ended December 31, 1996 increased 10.0%
compared to the same quarter last year, while sales for the six-month period
ended December 31, 1996 decreased $212,000 or 1.2%. Same-store sales increased
9.4% for the quarter but decreased 3.6% for the six-month period ended December
31, 1996. The sales increase for the quarter is the result of successful
holiday sales promotions and improved product assortment in the stores. The six-
month sales results were negatively impacted by significant price promotions in
the first quarter of the prior year which were not repeated this year.
Joshua's Christian Stores had operating income of $230,000 for the quarter and
operating losses of $517,000 for the six-month period ended December 31, 1996
compared to operating losses of $189,000 and $916,000, respectively, for the
comparable periods last year. For the three and six-months ended December 31,
1996, gross profit as a percent of sales increased; however, SG&A expenses as a
percent of sales also increased. Gross margin increased primarily as a result
of heavy sales promotions and inventory writedowns of approximately $900,000
taken during the six months ended December 31, 1995. The increase in selling,
general and administrative expenses as a percent of sales is due to increases in
labor, occupancy and advertising costs incurred in management's efforts to
improve store staff levels and to increase customer traffic.
Cargo Furniture & Accents
Net sales for Cargo decreased 2.9% for the quarter and increased 3.0% for the
six months ended December 31, 1996 compared to the same periods last year. The
increase in sales for the six-month period is due to an increase in contract and
dealer sales. The decrease in sales during the quarter ended December 31, 1996
was primarily a result of the product availability problems with a major
supplier as well as the shorter holiday selling season in 1996.
Cargo experienced operating losses of $125,000 and $3,000 for the three and six-
month periods ended December 31, 1996, respectively, compared to operating
income of $112,000 and $186,000, respectively, for the same periods last year.
The operating loss for the quarter is attributable to contract and dealer sales,
with their lower gross margins, representing a larger percentage of total sales
and to additional expenses associated with product availability problems.
SPECIALTY MANUFACTURING
Net sales for the specialty manufacturing segment decreased 6.8% and 10.6% for
the three and six-month periods ended December 31, 1996, respectively, compared
to the corresponding periods a year ago. The specialty manufacturing segment
contributed 50.6% and 49.5% of consolidated net sales for the three and six-
month periods ended December 31, 1996, respectively, compared to 53.5% and
53.1%, respectively, for the same periods last year. Operating income for this
segment was $4,183,000 and $7,249,000 for the three and six-month periods ended
December 31, 1996, respectively, compared to operating losses of $14,448,000 and
$11,713,000, respectively, for the same periods of last year. Excluding the
results of divested units and restructuring charges of $17,943,000 taken in
December 1995, sales of this segment increased $1,603,000, or 4.6%, and
$813,000, or 1.3%, for the three and six-month periods ending December 31, 1996,
respectively, while operating income decreased $75,000, or 1.8%, and $277,000,
or 3.6%, respectively.
Picture Frames and Framed Art
Net sales for the Picture Frames and Framed Art division increased 2.5% and
decreased 2.5% for the three and six-month periods ended December 31, 1996,
respectively, compared to the same periods last year. The sales increase for
the quarter is primarily attributable to the cancellation of certain large
framed art orders by a major customer in December of the prior year. The
decrease for the six-month period is primarily due to a lag in orders from a
major customer. In late December 1996, large orders were placed by this
customer with only a portion being filled by quarter-end, resulting in an
increase in the backlog of open orders for this division of $3,621,000 or 139%
at December 31, 1996 compared to the prior year.
Operating income for the Picture Frames and Framed Art division increased
$520,000, or 13.6%, and $494,000, or 8.2%, for the three and six-month periods
ended December 31, 1996, respectively, compared to the corresponding periods
last year. The increase in operating income is primarily attributable to the
cancellation of certain large framed art orders by a key customer in December of
the prior year, which were not repeated in the current year.
Tandy Wholesale International ("TWI")
Net sales for the TWI division, increased 11.3% and 11.2% for the three and six-
month periods ended December 31, 1996, respectively, compared to the same
periods last year. The increases in net sales reflect the increased wholesale
sales of Tandy Leather Manufacturing, as well as, sales gains from the licensed
products operations primarily due to increased NFL and NBA merchandise sales and
the 1996 Olympic sales during the first quarter of fiscal 1997.
The TWI division experienced operating losses of $170,000 and operating income
of $768,000 for the three and six-month periods ended December 31, 1996,
respectively, compared to operating income of $425,000 and $1,533,000 for the
corresponding periods of last year. The operating loss for the quarter and the
decrease in operating income for the six months are due to slight profitability
decreases at Tandy Leather Manufacturing and significant decreases in operating
income of the Licensed Products Group due to customer returns of Olympic
products, severance costs, and to decreased margins on the liquidation of
remaining Olympic inventory sold during the quarter ended December 31, 1996.
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 $18.3
million in fiscal 1996. During the three and six month periods ended December
31, 1996, $131,000 and $470,000, respectively, 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.
During the six months ended December 31, 1996, the Company closed one Tandy
Leather store, two Sav-On stores and three Joshua's Christian stores which were
initially targeted in the restructuring program.
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.
Gain on the transaction is not expected to be material and will be deferred as a
result of the Company's guaranty.
After completing the sale of Cargo, the restructuring program is substantially
complete. The accrual remaining at December 31, 1996 primarily represents lease
obligations related to stores and manufacturing facilities which were closed as
part of the restructuring program.
The following table sets forth the activity in the restructuring accrual, which
is included in current accrued liabilities in the December 31, 1996 balance
sheet (in thousands):
<TABLE><S><C>
Specialty Specialty
Manufacturing Retail Corporate Total
------------- --------- --------- -------
Balance at June 30, 1996 $1,184 $ 439 $ - $ 1,623
Cash payments (571) (135) - (706)
Non-cash asset writedowns (439) (31) - (470)
------- ------ ----- -------
Balance at December 31, 1996 $ 174 $ 273 $ - $ 447
======= ====== ===== =======
</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. Although no additional
restructuring plans are currently under consideration, the Company continues to
evaluate possible actions which will improve the profitability and competitive
position of the Company.
Revenues and operating losses from (before restructuring charges) separately
identifiable businesses divested as part of the restructuring plan are set forth
below by segment (in thousands):
Three Months Ended December 31,
-----------------------------------------
1996 1995
------------------ -------------------
Operating Operating
Income Income
Sales (loss) Sales (loss)
------- -------- ------- --------
Specialty manufacturing $ 527 $ - $ 4,852 $ (763)
Specialty retail 4,709 (125) 4,852 112
------- -------- ------- --------
Total $ 5,236 $ (125) $ 9,704 $ (651)
======= ======== ======= ========
Six Months Ended December 31,
-----------------------------------------
1996 1995
------------------ -------------------
Operating Operating
Income Income
Sales (loss) Sales (loss)
------- -------- ------- --------
Specialty manufacturing $ 1,396 $ (3) $ 9,901 $ (1,293)
Specialty retail 9,835 (3) 9,552 186
------- -------- ------- --------
Total $11,231 $ (6) $19,453 $ (1,107)
======= ======== ======= ========
Selling, general and administrative expenses
Consolidated selling, general and administrative (SG&A) expenses were 28.4% and
30.1%, as a percent of sales, for the three and six-month periods ended December
31, 1996, respectively, compared to 31.3% and 32.3% for the corresponding
periods last year. In total dollars, SG&A expenses decreased $2,488,000, or
10.7%, and $4,739,000, or 11.7%, for the three and six-month periods ended
December 31, 1996, respectively, compared to the corresponding periods last
year. The decrease in expenses was primarily due to the elimination of expenses
related to those companies closed or divested during fiscal 1996 and to a
reduction in labor and benefits expenses.
Interest expense, net
Interest expense decreased $284,000, or 25.4%, and $547,000, or 24.8%, for the
three and six-month periods ended December 31, 1996, respectively, compared to
the corresponding periods of the prior year. The decrease in interest expense
was due to a reduction in average borrowings during the current year periods and
to lower average interest rates.
Depreciation and amortization
Consolidated depreciation and amortization decreased $324,000, or 18.9%, and
$477,000, or 14.7%, for the three and six-month periods ended December 31, 1996,
respectively, compared to the corresponding periods last year. The decrease is
due primarily to the sale or write-down of equipment of businesses closed or
divested during fiscal 1996.
Provision for income taxes
The Company's tax expense for the six-months ended December 31, 1996 was $1,659
compared to $6,068 of tax benefit for the same period last year. The tax
benefit for the six-months ended December 31, 1995 reflected losses of that year
which could be carried back to recover taxes paid in prior periods. The
effective income tax rate in each six-month period was 35% and 32.9%,
respectively. The effective income tax rate increased 2.1% as a result of the
acceleration of permanent tax differences in fiscal 1996 attributable to certain
sales or closures included in the restructuring charges discussed previously.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity have come from cash flows from
operations and sales of treasury stock to employee benefit programs. Primarily,
these funds have been used to reduce borrowings under the Company's revolving
credit facility, purchase property and equipment, and finance the growth in
inventories and receivables.
During the six-months ended December 31, 1996, cash increased $713,000. Cash
provided by operating activities of $6,714,000 resulted from operating income
plus a decrease in inventory and an increase in accounts payable offset by an
increase in receivables. Cash used for investing activities of $1,626,000
resulted primarily from capital expenditures for property and equipment. Cash
of approximately $4,375,000 was used by financing activities, primarily to
reduce borrowings under the Company's revolving credit facility, partially
offset by the funding of the Company's contribution to the Tandycrafts Employee
Stock Ownership Program with treasury stock.
Effective December 31, 1996, the Company's revolving credit facility was renewed
by its banks. The maturity of the credit facility was extended through October
1, 1998 and the commitment amount under the credit facility was reduced to $55
million. The Company also agreed that the commitment amount would be lowered to
$50 million effective May 1, 1997. The Company estimates that cash generated
from the sale of Cargo Furniture and Accents and cash flow from operations will
enable the Company to operate within that commitment amount on a continuing
basis. Actual results may differ from this forward-looking projection. Please
refer to the discussion of risk factors contained herein.
Cash of approximately $1,480,000 was used for capital expenditures during the
six-months ended December 31, 1996. Planned capital expenditures for the
remainder of fiscal 1997 approximate $3,520,000 and are primarily targeted for
investments in the Frames and Framed Art division and expansion of Sav-On's
store base. Current store expansion plans call for Sav-On to open up to six new
stores during the remainder of fiscal 1997. Management believes that the
Company's current cash position, its cash flows from operations and available
borrowing capacity will be sufficient to fund its planned operations and capital
expenditures for the remainder of fiscal 1997. Actual results may differ from
this forward-looking projection. Please refer to the discussion of risk factors
contained herein.
CONTINGENCIES
A former subsidiary of the Company, which was spun-off in 1978, filed for
Chapter 11 protection under the federal bankruptcy code in January 1996. As
part of the bankruptcy proceedings, the former subsidiary has rejected certain
store leases which were originated prior to the spin-off and for which the
Company was allegedly a guarantor. A reserve for losses associated with these
alleged guarantees was established in fiscal 1996 and, based on the present
information with respect to about the rejected leases, management believes such
reserve is adequate to cover any alleged liability the Company may have the
Company's liability under these alleged guarantees. Actual results may differ
from this forward-looking projection. The former subsidiary may reject further
alleged guaranteed leases with alleged guarantees, which may result in
additional potential liabilitylosses. Please refer to the risk factors
discussion herein.
TANDYCRAFTS, INC.
PART II - OTHER INFORMATION
Item 4. Submission of Matters to Vote of Security Holders
- ------ -------------------------------------------------
The following proposals were approved at the Company's annual
meeting held on November 13, 1996:
Affirmative Votes Against
Votes or Withheld
--------- ------------
1. Election of management's slate of nominees
to serve as Directors:
B. Franklin Bigger 7,642,546 1,323,211
R. Earl Cox III 7,280,435 1,685,322
Joe K. Pace 7,288,091 1,677,666
Robert Schutts 7,381,016 1,584,741
Sheldon I. Stein 7,219,113 1,746,644
Michael J. Walsh 7,348,028 1,617,729
Item 6. Exhibits and Reports on Form 8-K
- ------ --------------------------------
(a) Exhibits:
Exhibit 10.15 Seventh Amendment to Revolving Credit and Term
Loan Agreement
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K:
The Company filed a Current Report on Form 8-K, dated January 28,
1997, which included the contents of a press release announcing
the unaudited results of operations for the three and six-month
periods ended December 31, 1996.
The Company filed a Current Report on Form 8-K, dated January 20,
1997, which included the contents of a press release announcing
the resignation of Frank Bigger as Director of Tandycrafts, Inc.
and as Chief Executive Officer of its Frames and Framed Art
Division.
TANDYCRAFTS, INC.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TANDYCRAFTS, INC.
(Registrant)
Date: February 14, 1997 By:/s/Michael J. Walsh
-----------------------
Michael J. Walsh
President, Chief Executive Officer
and Director
Date: February 14, 1997 By:/s/James D. Allen
-----------------------
James D. Allen
Executive Vice President and Chief
Financial Officer
(Principal Financial Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Tandycrafts,
Inc.'s Form 10-Q for the quarter ended December 31, 1996 and is qualified in its
entirety by reference to such 10-Q filing.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> DEC-31-1996
<CASH> 2,225
<SECURITIES> 0
<RECEIVABLES> 35,620
<ALLOWANCES> 1,268
<INVENTORY> 58,010
<CURRENT-ASSETS> 98,247
<PP&E> 51,510
<DEPRECIATION> 25,476
<TOTAL-ASSETS> 165,790
<CURRENT-LIABILITIES> 28,985
<BONDS> 0
0
0
<COMMON> 18,528
<OTHER-SE> 70,037
<TOTAL-LIABILITY-AND-EQUITY> 165,790
<SALES> 131,016
<TOTAL-REVENUES> 131,016
<CGS> 82,420
<TOTAL-COSTS> 124,620
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,655
<INCOME-PRETAX> 4,741
<INCOME-TAX> 1,659
<INCOME-CONTINUING> 3,082
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,082
<EPS-PRIMARY> 0.25
<EPS-DILUTED> 0
</TABLE>
SEVENTH AMENDMENT TO REVOLVING
CREDIT AND TERM LOAN AGREEMENT
------------------------------
This Seventh Amendment to Revolving Credit and Term Loan Agreement ("Sixth
Amendment") is made by and among TANDYCRAFTS, INC., a Delaware corporation
("Company"), CASUAL CONCEPTS, INC., a Texas corporation, THE DEVELOPMENT
ASSOCIATION, INC., a Texas corporation, SAV-ON, INC., a Texas corporation, 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, 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, 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, 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, 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, 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, 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, Banks and Agent desire to amend the Loan
Agreement in certain respects; and
WHEREAS, capitalized terms used herein shall have the meaning assigned to
them in the Loan Agreement unless the context otherwise requires or provides.
NOW, THEREFORE, it is agreed by and among the Company, Guarantors, Banks
and Agent as follows:
1.
Section 1.25 and Section 1.77 of the Loan Agreement are amended to read in
their entirety as follows:
1.25 "EBITDA" shall mean for any period, the sum of Consolidated Net
Income (excluding extraordinary gains and losses) and income taxes, Non-
Cash Charges and interest expense deducted in calculating such Consolidated
Net Income during such period.
***
1.77 "Termination Date" shall mean October 31, 1998.
2.
The following definitions are added to Article I of the Loan Agreement:
"Funded Debt EBITDA Ratio" shall mean the ratio of Senior Funded Debt
to EBITDA.
"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 3.5 1.00 .25
3.5 to 4.0 1.25 .25
4.0 to 4.5 1.75 .375
4.5 to 4.75 2.25 .50
3.
The Total Commitment shall be reduced to fifty-five million dollars
($55,000,000) and Exhibit A of the Loan Agreement shall be amended to read in
the form attached hereto as Exhibit A-1 effective as of January 2, 1997. The
Total Commitment shall be reduced to $50,000,000 and Exhibit A of the Loan
Agreement shall be amended to read in its entirety as in the form attached
hereto as Exhibit A-2 effective May 1, 1997.
4.
Section 2.03 of the Loan Agreement is amended to read as follows:
2.03. Interest Rate. The unpaid principal of each
Floating Prime Advance shall bear interest from the date of
advance until paid at a rate per annum which shall from day
to day be equal to the lesser of: (a) the Floating Prime
Rate in effect from day to day or (b) the Maximum Rate. The
unpaid principal of each Eurodollar Advance shall bear
interest from the date of advance until paid at a rate per
annum which shall be equal to the lesser of (a) the sum of
the Adjusted InterBank Rate for the applicable Interest
Period, plus the Applicable Margin determined as of the end
of the immediately preceding quarter or (b) the Maximum
Rate. All past due principal of, and to the extent
permitted by applicable law, interest on the Notes shall
bear interest at the Past Due Rate. Notwithstanding the
foregoing, the unpaid principal balance of the Notes shall
bear interest as provided in Section 4.05(c) hereof, upon
the occurrence of the circumstances described in such
section.
5.
A new Section 2.07 of the Loan Agreement is added to the Loan Agreement
which shall read in its entirety as follows:
2.07 Unused Fee. In addition to the payments provided
for in Article IV hereof, Company shall pay to Agent, for
the account of each Bank, on the first day of each fiscal
quarter of Company, a revolving credit loan commitment fee
at the rate per annum equal to the Applicable Margin
determined as of the beginning of such fiscal quarter of
Company (calculated on the basis of a year consisting of 360
days) on the average daily amount of such Bank's Commitment
which was unused during the immediately preceding fiscal
quarter of Company.
6.
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 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.
7.
Section 9.03, Section 9.05 and Section 9.07 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.
***
9.05 Limitation on Dividends, Acquisition of Stock and
Restricted Investments. Company covenants that it will not, and will
not permit any of its Subsidiaries to, pay or declare any dividend on
any class of its capital stock (other than stock dividends) or make
any other distribution on account of any class of its capital stock
(other than dividends or distributions payable solely in shares of its
stock) or redeem, purchase or otherwise acquire, directly or
indirectly, any shares of its stock (all of the foregoing being herein
called "Restricted Payments"): provided, however, Company shall be
entitled to redeem its capital stock at an aggregate purchase price
not to exceed five hundred thousand ($500,000) during any fiscal year
of Company. Notwithstanding the foregoing, no Restricted Payments
shall be made unless, after giving effect thereto, no Event of Default
shall have occurred and be continuing. There shall not be included in
the limitation on Restricted Payments any dividends paid by any
Subsidiary of Company (a) to its corporate parent which is also a
Subsidiary of the Company, or (b) to the Company.
***
9.07 Limitation on Acquisitions. Acquire or commit or agree to
acquire the stock or business of any Person.
8.
The interest rate on the unpaid principal amount of outstanding Advances
shall be adjusted to the interest rate which would be applicable if each such
Advance were made on the effective date of this Seventh Amendment.
9.
Company and Guarantors warrant and represent to Banks that no Event of
Default exists. By their execution hereof, each of the Guarantors ratify and
confirm the terms of the Guaranty Agreement dated August 17, 1994, agree that
the Guaranty Agreement shall remain in full force and effect and unconditionally
agree that the Guaranty Agreement is enforceable against each of them in
accordance with its terms.
10.
Except as amended by the First Amendment, the Second Amendment, the Third
Amendment, the Fourth Amendment, the Fifth Amendment, the Sixth Amendment and
this Seventh Amendment, the Loan Agreement is ratified and confirmed and shall
remain in full force and effect.
11.
This Seventh Amendment shall be governed by and construed in accordance
with the laws of the State of Texas.
12.
Company agrees to pay all expenses incurred by Agent and Banks in
connection with the negotiation and preparation of this Seventh Amendment,
including reasonable attorney's fees.
13.
This Seventh Amendment may be executed in any number of multiple
counterparts and by different parties hereto in separate counterparts, each of
which when so executed shall be deemed to be an original, and all of which taken
together shall constitute one and the same agreement.
14.
Banks, Company, and Guarantors agree to be bound by the current Arbitration
Program of Agent which is incorporated by reference herein and is acknowledged
as received by the parties pursuant to which any and all disputes shall be
resolved by mandatory binding arbitration upon the request of any party.
15.
This Seventh Amendment shall be binding upon and inure to the benefit of
the parties and their respective successors and assigns.
16.
THIS WRITTEN AGREEMENT REPRESENTS THE FINAL AGREEMENT AMONG THE PARTIES AND
MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE
PARTIES.
Executed to be effective as of December 31, 1996.
TANDYCRAFTS, INC., a Delaware
corporation
By:
-------------------------
James D. Allen, Executive
Vice President
COMPANY
CASUAL CONCEPTS, INC., a Texas
corporation
By:
-------------------------
Russell Price, Secretary
SAV-ON, INC., a Texas corporation
By:
-------------------------
Russell Price, Secretary
DAVID JAMES MANUFACTURING,
INC., a Texas corporation
By:
-------------------------
Russell Price, Secretary
BRAND NAME APPAREL, INC.
a Texas corporation
By:
-------------------------
Russell Price, Secretary
THE DEVELOPMENT ASSOCIATION,
INC., a Texas corporation
By:
-------------------------
Russell Price, Secretary
PLC LEATHER COMPANY, a Nevada
corporation
By:
-------------------------
Russell Price, Secretary
TANDYARTS, INC., a Nevada
corporation
By:
-------------------------
Russell Price, Secretary
COLLEGE FLAGS AND
MANUFACTURING, INC.,
a South Carolina corporation,
By:
-------------------------
Russell Price, Secretary
GUARANTORS
WELLS FARGO BANK (TEXAS), NATIONAL ASSOCIATION
(formerly First Interstate Bank of Texas, N.A.)
By:
-------------------------
Steve Wood, Senior Vice President
By:
-------------------------
John Peloubet, Vice President
BANK ONE, N.A.
By:
-------------------------
Michael D. Palmer, Senior
Vice President
NBD BANK
By:
-------------------------
William J. McCaffrey, Assistant
Vice President
BANKS
EXHIBIT A-1
-----------
Commitment
Percentage
Banks Commitment (Rounded)
- ----- ---------- ------------
Wells Fargo Bank (Texas),
National Association $27,500,000 50%
Bank One, Texas N.A. $13,750,000 25%
NBD Bank, N.A. $13,750,000 25%
----------- ---
Total Commitment $55,000,000 100%
=========== ===
EXHIBIT A-2
-----------
Commitment
Percentage
Banks Commitment (Rounded)
- ----- ---------- ------------
Wells Fargo Bank (Texas),
National Association $25,000,000 50%
Bank One, Texas N.A. $12,500,000 25%
NBD Bank, N.A. $12,500,000 25%
----------- ---
Total Commitment $50,000,000 100%
=========== ===
