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, 1998
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 15, 1998, there were 12,507,710 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 $42.6 million.
DOCUMENTS INCORPORATED BY REFERENCE
Location in Form 10-K Incorporated Document
- --------------------------- ---------------------
Part III Proxy Statement for 1998 Annual Meeting
TANDYCRAFTS, INC.
Form 10-K
PART I
------
Item 1. Business
- ------------------
Tandycrafts, Inc. ("Tandycrafts" or the "Company"), a Delaware corporation,
was incorporated in June 1975 to operate the handicrafts segment previously
operated by Tandy Corporation. The Company markets consumer products through
four distinct product-related operating divisions: Frames and Wall Decor,
Leather and Crafts, Office Supplies, and Novelties and Promotional. The
Company's products are marketed and sold through various channels, including
direct-to-consumer (e.g., retail stores, mail order, the Internet) and wholesale
distribution (e.g., direct sales force, telemarketing and outside sales
representatives). Joshua's Christian Stores, a retail chain of Christian
bookstores, was sold by the Company in May 1998.
Leather and Crafts
- ------------------
The leather and crafts division consists of both the retail and wholesale
operations of Tandy Leather & Crafts. This division accounted for 20.4%, 21.8%
and 22.9% of the total consolidated net sales of the Company for fiscal years
1998, 1997 and 1996, respectively.
Tandy Leather & Crafts ended fiscal 1998 with 128 retail stores in 42
states of the United States, having closed a net 38 stores during the year.
Tandy Leather & Crafts 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 128 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 & Crafts' sales is to the institutional
market 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 & Crafts' market. Tandy Leather &
Crafts 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 & Crafts' advertising and
direct mail efforts. Tandy Leather & Crafts 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 give on-site
demonstrations before school groups and other organizations.
The wholesale arm of Tandy Leather & Crafts manufactures, markets and
distributes leather products sold through other retail chains. The
manufacturing operation in Fort Worth produces some 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.
Office Supplies
- ---------------
The Office Supplies division of the Company, comprised of Sav-On Office
Supplies ("Sav-On"), accounted for 16.5%, 14.5% and 11.8% of the total
consolidated net sales of the Company for fiscal years 1998, 1997 and 1996,
respectively. Sav-On sells office supplies from 41 company-owned and operated
specialty retail stores which average approximately 6,500 square feet. During
fiscal 1998, Sav-On opened 4 new stores and closed 2 stores. 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.
Frames and Wall Decor
- ---------------------
The Frames and Wall division, comprised of Pinnacle Art and Frame and J-
Mar Associates, accounted for 41.5%, 35.7% and 32.4% of the total consolidated
net sales of the Company for fiscal years 1998, 1997 and 1996, respectively.
During fiscal 1998, 1997 and 1996, the Frames and Wall Decor division had net
sales of $38,495,000, $30,467,000 and $30,065,000, respectively, to one group of
customers under common control. In fiscal 1998, the Company also had sales of
$24,133,000 to another 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.
Pinnacle Art & Frame manufactures and distributes a broad range of picture
frames, framed art and mirrors under the Magee Company, Impulse Designs and
Hermitage Fine Arts brands. The facilities in Pocahontas and Piggott, Arkansas,
produce over 29 million frames annually. The Magee brand 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 Designs 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 frames and framed
art which is sold primarily through home furnishings specialty retailers.
Pinnacle Art & Frames' revenues have historically been seasonal with a higher
percentage 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.
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.
Novelties and Promotional
- ------------------------
The Novelties and Promotional division of Tandycrafts, comprised of
Licensed Lifestyles and Rivertown Button Company, accounted for 8.9%, 9.8% and
8.0% of the total consolidated net sales of the Company for fiscal years 1998,
1997 and 1996, respectively.
Licensed Lifestyles 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 its own direct sales
force and a network of independent sales representatives, distributors, and in-
house telemarketing personnel.
Rivertown Button Company is a contract manufacturer of promotional
buttons, ribbons, posters and stickers. Rivertown's products are marketed and
sold to a wide range of customers including major corporations, schools,
political campaigns, non-profit organizations, and other groups.
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. Approximately $16.2 million
of the restructuring charges related to non-cash writedowns of assets to their
estimated realizable values, including: $7.5 million related to the write off
of goodwill, $6.1 million related to the liquidation of inventories, $1.2
million related to the writedown of fixed assets, and $1.4 million related to
the writedown of various other assets. The remaining $2.1 million of the
restructuring charges represented anticipated cash outlays: $1.6 million
related to lease obligations and the remainder related to other contractual
obligation and exit costs. No severance costs were included in the
restructuring charges. Of the net charge of $18.3 million, $6.1 million was
classified in cost of goods sold and the remaining $12.2 million was classified
as restructuring charges on the fiscal 1996 Consolidated Statement of
Operations.
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 provide for 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 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.
The remaining purchase price was in the form of a note in the amount of
approximately $140,500 bearing interest at 8.5% and due at various dates through
July 1999. Working capital adjustments subsequent to the sale increased the
note by $716,000 and at June 30, 1998, the balance of the note due from Cargo
totaled $856,000. In addition, in June 1998, the Company extended a revolving
promissory note to Cargo in the amount of $300,000 bearing interest at the prime
rate of interest and maturing on December 31, 1998. At June 30, 1998, the full
amount of $300,000 was outstanding to Cargo. At June 30, 1998, the balance of
the bank note guaranteed by the Company was $2,644,000. 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, 1998 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, 1998 and June 30, 1997 (in thousands):
Total
----------
Balance at June 30, 1996 $ 1,623
Cash payments (846)
Non-cash asset writedowns (549)
----------
Balance at June 30, 1997 $ 228
Cash payments (185)
----------
Balance at June 30, 1998 $ 43
==========
Revenues included in the Company's results of operations from separately
identifiable businesses sold or closed were $91,000, $12,360,000 and $32,675,000
in fiscal 1998, 1997 and 1996, respectively. Operating losses (before
restructuring charges) from these businesses totaled $0, $234,000 and $1,992,000
in fiscal 1998, 1997 and 1996, respectively.
Raw Materials
- -------------
Raw materials and merchandise purchased by the Company 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 retail operations and the Frames and Wall Decor division.
Competitive Conditions
- ----------------------
Tandy Leather & Crafts 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.
Sav-On Office Supplies' line of office supplies competes vigorously for sales
with other nationally-known brand names that are marketed by department stores,
national chain stores and local specialty stores. The products sold by the
Novelties and Promotional division 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 2,800 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 certain buildings which it uses for offices,
manufacturing and warehousing. The Company also leases a significant
amount of retail store and factory space. The total space owned
and leased is as follows:
Approximate Square Footage
-------------------------------
Owned Leased Total
------- ------- -------
Warehouse and Office 324,000 152,381 476,381
Retail 12,750 444,538 457,288
Factory 431,000 246,672 677,672
------- ------- ---------
Totals 767,750 843,591 1,611,341
======= ======= =========
The warehouse, office and factory space is located approximately 28% in
Fort Worth, Texas, 41% at three locations in Arkansas (Frames and Wall Decor),
15% at one location in California (Frames and Wall Decor), 9% at three other
locations in Texas (Leather and Crafts and Frames and Wall Decor), with the
remaining 7% located in Georgia and South Carolina (Novelties and Promotional).
The leased retail stores are generally small outlets and are located throughout
42 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 1998 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 1998 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, 57 President and Chief Executive Officer since 1983
April 1996. Executive Vice President and
Chief Financial Officer: August 1992 to
April 1996. Vice President: 1986 to
August 1992.
James D. Allen, 38 Executive Vice President and Chief Financial 1993
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, 33 Vice President - General Counsel and Secretary 1996
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, 36 Vice President - Taxation, Risk Management and 1996
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. 1996 $ 6.75 $ 5.13 Sept. 1997 $ 5.00 $ 4.31
Dec. 1996 $ 7.00 $ 5.88 Dec. 1997 $ 4.75 $ 3.63
March 1997 $ 6.63 $ 4.13 March 1998 $ 5.50 $ 4.13
June 1997 $ 5.50 $ 3.75 June 1998 $ 5.94 $ 4.69
The principal market for the Company's common stock is the New York Stock
Exchange. As of September 15, 1998, there were approximately 7,200 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 1998
and 1997. 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>
1998 1997 1996 1995 1994
-------- -------- -------- ------- --------
Net sales........................ $232,495 $244,924 $254,284 $256,523 $214,869
Restructuring Charge............. $ - $ - - $ 12,235 $ -
Operating income (loss).......... $ 10,378 $ 40 $(11,811) 11,860 $ 15,417
Income (loss) before income taxes $ 7,119 $ (3,045) $(15,883) $ 8,027 $ 13,980
Net income (loss)................ $ 4,617 $ (1,918) $(10,709) $ 5,217 $ 8,906
Net income (loss) per common share $ .37 $ (.15) $ (.89) $ .46 $ .79
Weighted average shares outstanding 12,645 12,423 11,983 11,434 11,336
Net income (loss) as percent of
net sales 2.0% (0.8%) (4.2%) 2.0% 4.1%
Net income (loss) as percent of
beginning equity 5.5% (2.3%) (11.8%) 6.6% 13.3%
Current assets................... $ 83,077 $ 90,017 $ 99,771 $101,980 $ 85,414
Current liabilities.............. $ 24,675 $ 28,961 $ 33,751 $ 27,113 $ 28,211
Working capital.................. $ 58,402 $ 61,056 $ 66,020 74,867 $ 57,203
Current ratio.................... 3.4 to 1 3.1 to 1 3.0 to 1 3.8 to 1 3.0 to 1
Total assets..................... $150,691 $156,529 $168,579 $178,803 $150,431
Net property and equipment....... $ 22,886 $ 25,505 $ 26,783 $ 28,707 $ 24,953
Long-term liabilities............ $ 37,052 $ 43,294 $ 51,230 $ 61,029 $ 43,138
Retained earnings................ $ 72,074 $ 67,457 $ 69,375 $ 80,084 $ 74,867
Total stockholders' equity....... $ 88,964 $ 84,274 $ 83,598 $ 90,661 $ 79,082
Common shares outstanding ....... 12,611 12,598 12,178 11,717 11,161
Stockholders' equity per common
share $ 7.05 $ 6.69 $ 6.86 $ 7.75 $ 7.09
</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") markets consumer
products through four distinct product-related operating divisions: Frames and
Wall Decor, Leather and Crafts, Office Supplies, and Novelties and Promotional.
The Company's products are marketed and sold through various channels, including
direct-to-consumer (e.g., retail stores, mail order, the Internet) and wholesale
distribution (e.g., direct sales force, telemarketing and outside sales
representatives). Joshua's Christian Stores, a retail chain of Christian
bookstores, was sold by the Company in May 1998.
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 strategies
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 such 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, customers' 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, the development of direct import programs and
foreign manufacturing facilities, relationships with key customers,
relationships with professional sports leagues and other licensors, the
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 strategies 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 tables present selected financial data for each of the
Company's four product divisions for the years ended June 30, 1998, 1997 and
1996:
Fiscal Years Ended June 30, 1998 and 1997
(Dollars in Thousands)
<TABLE> <S><C>
1998 1997 Increase (Decrease)
------------------- ------------------- -------------------
Operating Operating
Income Income Operating
Divisions Sales (Loss) Sales (Loss) Sales Income
- --------------------- -------- -------- -------- -------- -------- --------
Frames and Wall Decor $ 96,459 $ 12,100 $ 87,445 $ 11,990 10.3% 0.9%
Leather and Crafts 47,454 150 53,413 530 (11.2%) (71.7%)
Office Supplies 38,460 1,878 35,600 2,440 8.0% (23.0%)
Novelties and Promotional 20,734 (426) 24,078 (799) (13.9%) 46.7%
-------- -------- -------- -------- ------ ------
203,107 13,702 200,536 14,161 1.3% (3.2%)
Divested operations 29,388 13 44,388 (7,933) (33.8%) 100.2%
-------- -------- -------- -------- ------ ------
Total operations,
excluding corporate $232,495 $ 13,715 $244,924 $ 6,228 (5.1%) 120.2%
======== ======== ======== ======== ====== ======
</TABLE>
Fiscal Years Ended June 30, 1997 and 1996
(Dollars in Thousands)
<TABLE> <S><C>
1997 1996 Increase (Decrease)
------------------- ------------------- -------------------
Operating Operating
Income Income Operating
Divisions Sales (Loss) Sales (Loss) Sales Income
- --------------------- -------- -------- -------- -------- -------- --------
Frames and Wall Decor $ 87,445 $ 11,990 $ 82,308 $ 9,365 6.2% 28.0%
Leather and Crafts 53,413 530 58,266 2,219 (8.3%) (76.1%)
Office Supplies 35,600 2,440 29,922 1,123 19.0% 117.3%
Novelties and Promotional 24,078 (799) 20,269 1,580 18.8% (150.6%)
-------- -------- -------- -------- ------ ------
200,536 14,161 190,765 14,287 5.1% (0.9%)
Divested operations 44,388 (7,933) 63,519 (9,833) (30.1%) 19.3%
Restructuring charge - - - (12,195) - 100.0%
-------- -------- -------- -------- ------ ------
Total operations,
excluding corporate $244,924 $ 6,228 $254,284 $ (7,741) (3.7%) 180.5%
======== ======== ======== ======== ====== ======
</TABLE>
FISCAL YEARS ENDED JUNE 30, 1998 AND 1997
For fiscal 1998, consolidated net sales decreased $12,429,000, or 5.1%,
compared to fiscal 1997. Excluding divested operations, net sales increased
$2,571,000, or 1.3%, compared to the prior year. Total operating income before
corporate expenses increased $7,487,000, or 120.2%, from fiscal 1997. Excluding
divested operations, operating income decreased $459,000, or 3.2%, compared to
the prior year. Discussions relative to each of the Company's product divisions
are set forth below.
Frames and Wall Decor
Net sales for the Frames and Wall Decor division, comprised of Pinnacle Art
and Frame and J-Mar Associates, accounted for 41.5% of consolidated sales in
fiscal 1998 compared to 35.7% in the prior year. Sales for the division
increased 10.3% compared to the prior year. Sales of picture frames increased
$5,680,000, or 10.1%, while sales of framed art increased $2,738,000, or 9.4%.
These sales increases are due to the addition of new customers and increased
sales to existing customers.
Operating income for this division increased 0.9% compared to the prior
year. Gross profit as a percent of sales decreased slightly from the prior year
primarily due to manufacturing inefficiencies and overtime incurred during the
first half of fiscal 1998 and to increased allowances granted to customers.
However, gross profit dollars for the division increased 2.3% reflecting the
increased sales levels achieved in fiscal 1998. Selling, general and
administrative ("SG&A") expenses increased 4.2% over the prior year primarily
due to developing a new service organization in 1998 to service major customers.
SG&A expenses as a percent of sales decreased less than one percent in fiscal
1998 due to the increase in sales.
The Frames and Wall Decor division continues to be the Company's largest
and most profitable division and, as such, Tandycrafts plans to make a
significant strategic investment during fiscal 1999 by adding a new
manufacturing facility. This facility has the potential to significantly
increase the division's production capacity, reduce the amount of overtime
currently incurred and to decrease manufacturing inefficiencies.
Leather and Crafts
Net sales for the Leather and Crafts division, which includes both the
retail and wholesale operations of Tandy Leather & Crafts, accounted for 20.4%
of consolidated sales in fiscal 1998 compared to 21.8% in the prior year.
Sales for the division decreased 11.2% in fiscal 1998 compared to the prior
year. Retail store sales declined 7.7% primarily due to the closing of 38
unprofitable stores during fiscal 1998. Same-store sales were essentially
unchanged, decreasing 0.5% for the year. Sales decreased 21.8% at the wholesale
operations of Tandy Leather due primarily to the discontinuance of an
unprofitable line of business in early fiscal 1998 and to an overall downturn in
the Western apparel market.
Operating income for the Leather and Crafts division decreased 71.7%
compared to the prior year due to the decrease in sales. Gross profit as a
percent of sales increased slightly for the year; however, gross profit dollars
decreased significantly due to the decrease in sales. SG&A expenses decreased
7.9%, reflecting decreases in advertising, labor and occupancy expenses
attributable to the closing of 38 unprofitable stores during the year. SG&A
expenses as a percentage of sales increased compared to the prior year due to a
greater decrease in sales relative to the decrease in SG&A expenses.
The Leather and Crafts division plans to continue to downsize its retail
chain to a core of higher volume stores, recover lost sales from exited markets
through mail order, and aggressively develop and pursue wholesale and mail order
channels. Key strategies in rebuilding this division include: improved
merchandise presentation, the introduction of new products and packaging
designs, improved logistics and sourcing, more focused advertising and targeted
improvements in information systems and technology to provide better operational
information and support.
Office Supplies
The Office Supplies division, comprised of the Sav-On Office Supplies
chain, accounted for 16.5% of consolidated sales in fiscal 1998 compared to
14.5% in the prior year. This division achieved an 8.0% increase in net sales
over fiscal 1997 due to six stores opened since May 1997 and to same-store sales
increases of 3.2%. The same-store sales increase in fiscal 1998 was achieved
despite large format competitors entering seventeen of Sav-On's markets during
the last nineteen months. Historically, sales at Sav-On stores are
significantly impacted the first twelve months after a large competitor enters a
market; however, after the second year, the store typically begins producing
sales gains once again.
Sav-On's operating income decreased $562,000, or 23.0%, in fiscal 1998
compared to the prior year. The decrease in operating income is primarily
attributable to first-year operating losses of $809,000 from the six stores
opened since May 1997. Gross profit as a percent of sales decreased slightly
compared to the prior year due to a change in sales mix, with a greater portion
of total sales comprised of computer peripherals and furniture which have lower
gross margins relative to other merchandise categories, and to the impact of
increased competition. SG&A expenses increased $1,227,000, or 11.9%, compared
to the prior year primarily due to the six new stores.
Management is actively pursuing various strategies to increase the
revenues and operating profits of this division. These strategies include
direct import programs, private label merchandising of certain replenishable
product and the establishment of an outside sales position in each of its stores
to increase Sav-On's visibility to commercial customers.
Novelties and Promotional
Sales for the Novelties and Promotional products division, comprised of
Licensed Lifestyles, Inc. and Rivertown Button Company, accounted for 8.9% of
consolidated sales in fiscal 1998 compared to 9.8% in the prior year. Sales for
the division decreased 13.9% compared to the prior year. This decrease reflects
an overall weaker demand for sports licensed products in fiscal 1998,
specifically a weak "hot market" for Super Bowl and NHL playoff merchandise
compared to the prior year, and the discontinuance of an unprofitable line of
business at Licensed Lifestyles.
This division had an operating loss of $426,000 in fiscal 1998 compared to
a loss of $799,000 in the prior year. Gross profit as a percent of sales
increased slightly in fiscal 1998; however, gross profit dollars decreased as a
result of the decrease in sales. SG&A expenses decreased reflecting the results
of consolidation and expense reduction efforts within this division.
Management strengthened the operating management in this division late in fiscal
1998 and expects to see improved results for the division through the
streamlining and simplifying of business processes and refocusing the business
on larger, more profitable customers.
Sale of Joshua's Christian Stores
The Company sold Joshua's Christian Stores effective May 31, 1998 to
Family Christian Stores for consideration totaling approximately $11,500,000,
with approximately $2,900,000 paid in cash at the time of closing and
approximately $8,600,000 in a note receivable. The note bears interest at a
rate of 7.25% and is payable in three installments on December 31 of the years
1998, 1999 and 2000. The sale of this business resulted in a pretax loss of
$623,000, comprised primarily of transaction related costs.
Selling, general and administrative expenses
Consolidated selling, general and administrative expenses as a percentage
of sales were 27.2% for fiscal 1998 compared to 32.3% for fiscal 1997. In total
dollars, selling, general and administrative expenses decreased $16,003,000, or
20.2%, for fiscal 1998 when compared to the previous year. The decrease in
expenses is a result of decreased operating expenses of the Leather and Crafts
and Novelties and Promotional divisions, decreased corporate administrative
expenses and decreased expenses related to businesses sold during 1998 and 1997.
Interest expense
Interest expense increased $222,000, or 7.1%, for fiscal 1998 compared to
the prior year. The increase in interest expense was due primarily to a higher
average interest rate in fiscal 1998 partially offset by lower average
borrowings compared to the prior year.
Depreciation and amortization
Consolidated depreciation and amortization decreased $546,000, or 10.2%,
for fiscal 1998 compared to the previous year. The decrease is due primarily to
the sale or write-down of equipment related to businesses sold in 1998 and 1997.
Provision for income taxes
The Company recognized a tax expense of $2,502,000 in fiscal 1998 and tax
benefits of $1,127,000 and $5,174,000 in fiscal 1997 and fiscal 1996,
respectively. The effective income tax rate for fiscal 1998 was 35.1% compared
to 37.0% for the prior year. The decrease in the effective income tax rate is a
result of permanent differences created in fiscal 1997 through the charitable
contribution of certain inventory.
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
$9,771,000, or 5.1%, 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 $12,195,000 restructuring charge in fiscal
1996, operating income decreased $126,000, or 0.9%, compared to the prior year.
Discussions relative to each of the Company's product divisions are set forth
below.
Frames and Wall Decor
The Frames and Wall Decor division comprised 35.7% of consolidated net
sales in fiscal 1997 compared to 32.4% in the prior year. The 6.2% increase in
net sales for this division was 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 the Frames and Wall Decor division rebounded from
$9,365,000 in fiscal 1996 to $11,990,000 in fiscal 1997. This increase was
primarily a result of increased volume in fiscal 1997. Gross profit as a
percentage of sales increased 1.8 percentage points due to manufacturing
efficiencies and vertical integration savings, partially offset by increases in
lumber prices. SG&A expenses increased slightly in dollars, but decreased as a
percentage of sales due to the increase in sales without a proportionate
increase in expenses.
Leather and Crafts
The Leather and Crafts division comprised 21.8% of consolidated net sales
in fiscal 1997 compared to 22.9% in the prior year. The 8.3% decrease in net
sales at Tandy Leather was 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.
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 was a result of a change in
sales mix. As a result of the decrease in sales of higher margin fashion
merchandise, leather products comprised a greater portion of the chain's total
sales, bringing the overall gross margin percentage down slightly. SG&A
expenses decreased 9.0%; however, these expenses decreased only slightly 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.
Office Supplies
The Office Supplies division comprised 14.5% of consolidated net sales in
fiscal 1997 compared to 11.8% in the prior year. 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
1997. The fiscal 1997 sales increase was achieved despite large format
competitors entering nine of Sav-On's markets during fiscal 1996. The same-
store sales increases were 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.
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 was 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. SG&A 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 more effective store labor hour management. Total SG&A as a percentage
of sales was 29% in fiscal 1997 compared to 35% in fiscal 1996.
Novelties and Promotional
The Novelties and Promotional division comprised 9.8% of consolidated net
sales in fiscal 1997 compared to 8.0% in the prior year. Net sales for this
division increased 18.8% compared to fiscal 1996 due to increased sales from
Licensed Lifestyles primarily due to increased NFL and NHL merchandise and the
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 Novelties and Promotional division experienced an operating loss of
$799,000 in fiscal 1997 compared to operating income of $1,580,000 in fiscal
1996. The fiscal 1997 loss was primarily attributable to operating losses of
Licensed Lifestyles due to the write-off of inventory remaining from the Atlanta
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.
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
was 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.
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 fiscal 1997 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.
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 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. 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.
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. Approximately $16.2 million
of the restructuring charges related to non-cash writedowns of assets to their
estimated realizable values, including: $7.5 million related to the write off
of goodwill, $6.1 million related to the liquidation of inventories, $1.2
million related to the writedown of fixed assets, and $1.4 million related to
the writedown of various other assets. The remaining $2.1 million of the
restructuring charges represented anticipated cash outlays: $1.6 million
related to lease obligations and the remainder related to other contractual
obligation and exit costs. No severance costs were included in the
restructuring charges. Of the net charge of $18.3 million, $6.1 million was
classified in cost of goods sold and the remaining $12.2 million was classified
as restructuring charges on the fiscal 1996 Consolidated Statement of
Operations.
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 provide for 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 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.
The remaining purchase price was in the form of a note in the amount of
approximately $140,500 bearing interest at 8.5% and due at various dates through
July 1999. Working capital adjustments subsequent to the sale increased the
note by $716,000 and at June 30, 1998, the balance of the note due from Cargo
totaled $856,000. In addition, in June 1998, the Company extended a revolving
promissory note to Cargo in the amount of $300,000 bearing interest at the prime
rate of interest and maturing on December 31, 1998. At June 30, 1998, the full
amount of $300,000 was outstanding to Cargo. At June 30, 1998, the balance of
the bank note guaranteed by the Company was $2,644,000. 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, 1998 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, 1998 and June 30, 1997 (in thousands):
Total
-------
Balance at June 30, 1996 $ 1,623
Cash payments (846)
Non-cash asset writedowns (549)
-------
Balance at June 30, 1997 $ 228
Cash payments (185)
-------
Balance at June 30, 1998 $ 43
=======
Revenues included in the Company's results of operations from separately
identifiable businesses sold or closed were $91,000, $12,360,000 and $32,675,000
in fiscal 1998, 1997 and 1996, respectively. Operating losses (before
restructuring charges) from these businesses totaled $0, $234,000 and $1,992,000
in fiscal 1998, 1997 and 1996, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity have come from cash flows from
operations, proceeds from the sale of Joshua's Christian Stores 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, 1998, cash increased $211,000. Cash
provided by operating activities of $7,936,000 resulted primarily from income
from operations, partially offset by an increase in working capital. Cash used
for investing activities of $1,188,000 resulted primarily from capital
expenditures for property and equipment, partially offset by cash proceeds from
the sale of Joshua's Christian Stores during fiscal 1998. Cash of approximately
$6,537,000 was used by financing activities, primarily to reduce borrowings
under the Company's revolving credit facility.
The Company has a $50,000,000 revolving credit facility with a group of
banks. Effective September 30, 1997, the Company's revolving credit facility
was renewed by its banks and the maturity was extended through October 31, 1999.
Effective November 3, 1997, the Company entered into an Interest Rate Swap
Agreement with its primary bank in which a $20,000,000 notional amount of
floating rate debt at LIBOR was swapped for a fixed rate of 6.01%. The Swap
Agreement has a three-year term and is being accounted for as a hedge by the
Company. The transaction was executed to hedge interest rate risk on the
Company's interest obligation associated with a portion of its revolving credit
facility, and to change the nature of the liability from a variable to a fixed
interest obligation. At June 30, 1998, the Company would have had to pay
approximately $120,000 to terminate the interest rate swap. This amount was
obtained from the counterparties and represents the fair market value of the
Swap Agreement.
The Company currently estimates that its cash flow from operations will
enable the Company to operate within the credit facility 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, investment in new manufacturing facilities, implementation of
information systems and other risk factors contained herein.
Cash of approximately $3,530,000 was used for capital expenditures during
the year ended June 30, 1998. Planned capital expenditures for fiscal 1999
approximate $9,253,000 and are targeted primarily for investments in Pinnacle
Art & Frame, primarily the addition of a new manufacturing facility, and for
investments in information systems. The Company's minimum operating lease
commitments for fiscal 1999 approximate $4,710,000. Management believes that
the Company's current cash position, its cash flows from operations and
borrowing capacity under its revolving credit facility 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 June 1997, the Financial Accounting Standards Board ("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.
This statement is effective for fiscal years beginning after December 15, 1997
and the Company will adopt SFAS 130 in the year ending June 30, 1999. As this
statement requires only additional disclosures, the effect of adopting it is not
expected to have a material impact on the Company's financial position or
results of operations.
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. This statement
is effective for periods beginning after December 15, 1997 and the Company will
adopt this statement in the year ending June 30, 1999. As this statement
requires only additional disclosures, the effect of adopting it is not expected
to have a material impact on the Company's financial position or results of
operations.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" which
requires an entity recognize all derivatives as either assets or liabilities in
the statement of financial position and measure those instruments at fair value.
This statement is effective for all fiscal quarters beginning after June 15,
1999. While the adoption of this statement is not expected to have a material
impact on the Company's financial position or results of operations, due to its
complexity, the Company is currently still evaluating the implications of its
adoption.
THE YEAR 2000
The Company has conducted a comprehensive review of its computer and
operating systems to identify the systems that could be affected by the "Year
2000" issue and has developed an implementation plan to address the issues.
These plans include converting to new financial information systems at several
operating units, including the entire Leather and Crafts division and The Magee
Company (within the Frames and Wall Decor division), in addition to less
significant upgrades of current software at other operations. The Company has
completed its system requirements study and is currently in the implementation
stage with a target completion date of June 30, 1999. Management believes this
implementation plan will not pose significant operational problems for the
Company. The Company currently estimates the cost of the implementation plan to
range from $1,500,000 to $2,000,000 and believes that its cash flows from
operations and available borrowing capacity will be sufficient to fund the plan.
The Company is currently focusing its available resources on implementation
of the new information systems and does not currently have contingency plans in
place for those operations requiring new systems. However, should it later
become apparent that for unforeseen reasons the Company will not be able to
complete the implementations by June 30, 1999, viable alternatives will be
explored. The Company has, and will continue to communicate with its suppliers,
key customers, financial institutions and others with which it does business to
coordinate Year 2000 conversions. Progress reports on the Year 2000 project are
presented periodically to the Company's Board of Directors.
Although there can be no assurances that the Company will be able to
complete the system implementations by the June 30, 1999 target completion date
or that it will be able to identify all Year 2000 issues before problems arise,
management believes it is taking adequate action to address the Year 2000 issue.
Actual results may differ from the forward-looking statements contained in this
discussion. Risks associated with these forward-looking statements include the
Company's ability to retain key personnel; breach of warranties,
representations, assurances or statements given to the Company by its software
vendors, suppliers and customers; the Company's ability to identify all Year
2000 issues and other such risk factors.
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, 1998 has been established.
Based on the information presently available, management believes the amount of
the accrual at June 30, 1998 is adequate to cover the liability the Company may
incur under the alleged guarantees.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
- --------------------------------------------------------------------
The Company is exposed to changes in interest rates in the United States.
The Company manages interest rate risk through the strategic use of variable
rate debt and interest rate derivatives. As of June 30, 1998, the Company had
only entered into one interest rate derivative; thus, the table presents the
notional amount and interest rate of this derivative instrument categorized by
expected maturity date. The counterparty to the derivative agreement is a major
financial institution. The Company believes the risk of credit loss with this
institution is minimal. The Company does not use derivatives with a risk
higher than the exposure to be hedged and does not hold or issue derivative
instruments for trading purposes.
Fair
1999 2000 2001 Total Value
------ ------ ------ ------- --------
Liabilities:
Bank debt 34,230 34,230 34,230
Average interest rate 6.61% 6.61%
Interest rate derivative financial
instruments related to debt:
Pay fixed rate, receive floating rate 20,000 20,000 (120)
Average pay rate 6.01% 6.01%
Average receive rate LIBOR LIBOR
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
Index to Financial Statements
Financial Statements: Page
-------------------- -------------
Report of Independent Accountants 19
Consolidated Balance Sheets, June 30, 1998 and 1997 20
Consolidated Statements of Operations for the
Years Ended June 30, 1998, 1997 and 1996 21
Consolidated Statements of Cash Flows for the Years
Ended June 30, 1998, 1997 and 1996 22
Consolidated Statements of Stockholders' Equity
for the Years Ended June 30, 1998, 1997 and 1996 23
Notes to Consolidated Financial Statements 24
Financial Statement Schedules:
-----------------------------
For each of the three years in the period
ended June 30, 1998:
Schedule II - Valuation and Qualifying Accounts
and Reserves 37
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Tandycrafts, Inc.
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of
Tandycrafts, Inc. and its subsidiaries at June 30, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended June 30, 1998, 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.
PRICEWATERHOUSECOOPERS LLP
Fort Worth, Texas
August 11, 1998
TANDYCRAFTS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
June 30,
--------------------
1998 1997
--------- ---------
ASSETS
Current assets:
Cash............................................. $ 1,216 $ 1,005
Trade accounts receivable, net of allowance for
Doubtful accounts of $2,755 and $1,680,
respectively.................................... 28,086 32,614
Inventories...................................... 45,990 49,671
Other current assets............................. 7,785 6,727
--------- ---------
Total current assets.......................... 83,077 90,017
--------- ---------
Property and equipment, net........................ 22,886 25,505
Other assets....................................... 6,929 768
Goodwill, net...................................... 37,799 40,239
--------- ---------
$ 150,691 $ 156,529
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................. 12,155 13,196
Accrued liabilities and other.................... 12,520 15,765
--------- ---------
Total current liabilities..................... 24,675 28,961
--------- ---------
Long-term debt..................................... 34,230 40,840
Deferred taxes..................................... 2,822 2,454
Stockholders' equity:
Common stock, $1 par value, 50,000,000 shares
authorized,18,527,988 issued.................... 18,528 18,528
Additional paid-in capital....................... 20,545 20,432
Retained earnings................................ 72,074 67,457
Common stock in treasury, at cost, 5,917,419
and 5,930,336 shares, respectively.............. (22,183) (22,143)
--------- ---------
Total stockholders' equity.................... 88,964 84,274
--------- ---------
Commitments and contingencies (Note 8)
$ 150,691 $ 156,529
========= =========
The accompanying notes are an integral part of these financial statements.
TANDYCRAFTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE> <S><C>
Year Ended June 30,
---------------------------------
1998 1997 1996
--------- --------- ---------
Net sales.................................... $ 232,495 $ 244,924 $ 254,284
--------- --------- ---------
Operating costs and expenses:
Cost of goods sold (exclusive of
depreciation)............................. 153,484 160,325 166,467
Selling, general and administrative........ 63,182 79,185 81,427
Restructuring charge....................... - - 12,235
Depreciation and amortization.............. 4,828 5,374 5,966
Loss on sale of business unit.............. 623 - -
--------- --------- ---------
Total operating costs and expenses......... 222,117 244,884 266,095
--------- --------- ---------
Operating income (loss)................... 10,378 40 (11,811)
Interest income.............................. 87 39 51
Interest expense............................. 3,346 3,124 4,123
--------- --------- ---------
Income (loss) before income taxes............ 7,119 (3,045) (15,883)
Provision (benefit) for income taxes......... 2,502 (1,127) (5,174)
--------- --------- ---------
Net income (loss)....................... $ 4,617 $ (1,918) $ (10,709)
========= ========= =========
Net income (loss) per common share:
Basic and diluted ...................... $.37 $(.15) $(.89)
==== ===== =====
Weighted average common shares:
Basic 12,645 12,423 11,983
Diluted 12,659 12,423 11,983
</TABLE>
The accompanying notes are an integral part of these financial statements.
TANDYCRAFTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar in thousands)
<TABLE> <S><C>
Year Ended June 30,
---------------------------------
1998 1997 1996
--------- --------- ---------
Cash flows from operating activities:
Net income (loss).......................... $ 4,617 $ (1,918) $ (10,709)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization............. 4,828 5,374 5,966
Loss on sale of business unit ............ 623 - -
Loss on sale or abandonment of assets..... - - 24
Restructuring charge...................... - - 12,235
Changes in assets and liabilities, excluding
effect of businesses acquired or sold:
Receivables............................. 4,415 (2,224) (3,073)
Inventories............................. (3,512) 7,401 5,362
Other assets............................ 805 (3,054) (4,367)
Accounts payable, accrued expenses
and income taxes....................... (3,840) 3,794 2,987
--------- --------- ---------
Net cash provided by operating
activities.......................... 7,936 9,373 8,425
--------- --------- ---------
Cash flows from investing activities:
Additions to property and equipment........ (3,530) (3,794) (4,363)
Purchase of business, net of cash acquired. - - (2,475)
Proceeds from sales of assets.............. 2,342 3,750 2,202
--------- --------- ---------
Net cash used by investing
activities.......................... (1,188) (44) (4,636)
--------- --------- ---------
Cash flows from financing activities:
Sales of treasury stock to employee benefit
plan, net................................. 73 2,594 3,646
Payments under bank credit facility, net... (6,610) (12,430) (7,730)
--------- --------- ---------
Net cash used by financing
activities.......................... (6,537) (9,836) (4,084)
--------- --------- ---------
Increase (decrease) in cash and cash
equivalents................................ 211 (507) (295)
Balance, beginning of year................... 1,005 1,512 1,807
--------- --------- ---------
Balance, end of year......................... $ 1,216 $ 1,005 $ 1,512
========= ========= =========
Supplemental cash flow information:
Cash paid (received) during the year for:
Interest ................................. $ 3,303 $ 3,249 $ 4,157
========= ========= =========
Income taxes.............................. $ (832) $ (3,615) $ (551)
========= ========= =========
</TABLE>
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, 1995. $ 18,528 $ 17,447 $ 80,084 $(25,398) $ 90,661
Sale of 461,693 shares of
treasury stock to employee
benefit plan, net.... - 1,924 - 1,722 3,646
Net loss............... - - (10,709) - (10,709)
-------- -------- -------- -------- ---------
Balance, June 30, 1996. 18,528 19,371 69,375 (23,676) 83,598
Sale of 419,271 shares of
treasury stock to employee
benefit plan, net.... - 1,061 - 1,533 2,594
Net loss............... - - (1,918) - (1,918)
-------- -------- -------- -------- ---------
Balance, June 30, 1997. $ 18,528 $ 20,432 $ 67,457 $(22,143) $ 84,274
Sale of 12,917 shares of
treasury stock to employee
benefit plan, net.... - 113 - (40) 73
Net income............. - - 4,617 - 4,617
-------- -------- -------- -------- ---------
Balance, June 30, 1998. $ 18,528 $ 20,545 $ 72,074 $(22,183) $ 88,964
======== ======== ======== ======== =========
</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")
markets consumer products through four distinct product-related operating
divisions: Frames and Wall Decor, Leather and Crafts, Office Supplies, and
Novelties and Promotional. The Company's products are marketed and sold through
various channels, including direct-to-consumer (e.g., retail stores, mail order,
the Internet) and wholesale distribution (e.g., direct sales force,
telemarketing, outside sales representatives). Joshua's Christian Stores, a
retail chain of Christian bookstores, was sold by the Company in May 1998.
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,
------------------
1998 1997
-------- --------
Finished goods......................$ 33,244 $ 35,364
Raw materials and work-in-process... 12,746 14,307
-------- --------
$ 45,990 $ 49,671
======== ========
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, 1998 and 1997 was $4,374,000 and $3,689,000, 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. Net goodwill in the amount of $1,405,000 was included in the sale of
Joshua's Christian Stores during fiscal 1998. 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.
Impairment of Long-lived assets - Long-lived assets are reviewed for impairment
whenever events or changes in circumstances indicate that the net book value of
the assets 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 assets is less than the net book value of the assets. 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 this
accounting policy in fiscal 1997 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 - The Company adopted Statement of Financial
Accounting Standards No. 128 "Earnings per Share", ("FAS 128"), effective for
the quarter ended December 31, 1997 and has applied it retroactively for all
periods presented on the Consolidated Statements of Operations. In accordance
with FAS 128, basic earnings per share is computed by dividing income available
to common shareholders by the weighted-average common shares outstanding. Since
the Company has no outstanding preferred stock, income available to shareholders
is equal to the Company's net income. Diluted earnings per share is computed by
dividing the income available to shareholders by the weighted-average common
share and potential common shares outstanding during the period. For fiscal
1998, 1997 and 1996, the number of weighted average shares and potential common
shares is as follows (in thousands):
1998 1997 1996
------ ------ ------
Weighted average shares - basic .... 12,645 12,423 11,983
Potential common shares............. 14 - -
------ ------ ------
Total weighted average common and
potential common shares - diluted 12,659 12,423 11,983
====== ====== ======
Advertising costs - Advertising costs are expensed the first time the
advertising takes place. Advertising expense for fiscal 1998, 1997 and 1996 was
$5.7 million, $7.7 million and $8.8 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 - SALE OF JOSHUA'S CHRISTIAN STORES
The Company sold Joshua's Christian Stores effective May 31, 1998 to Family
Christian Stores for consideration totaling approximately $11,500,000, with
approximately $2,900,000 paid in cash at the time of closing and approximately
$8,600,000 in a note receivable. The note bears interest at a rate of 7.25% and
is payable in three installments on December 31 of the years 1998, 1999 and
2000. The sale of this business resulted in a pretax loss of $623,000,
comprised primarily of transaction related costs.
NOTE 3 - 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. Approximately $16.2 million
of the restructuring charges related to non-cash writedowns of assets to their
estimated realizable values, including: $7.5 million related to the write off
of goodwill, $6.1 million related to the liquidation of inventories, $1.2
million related to the writedown of fixed assets, and $1.4 million related to
the writedown of various other assets. The remaining $2.1 million of the
restructuring charges represented anticipated cash outlays: $1.6 million
related to lease obligations and the remainder related to other contractual
obligation and exit costs. No severance costs were included in the
restructuring charges. Of the net charge of $18.3 million, $6.1 million was
classified in cost of goods sold and the remaining $12.2 million was classified
as restructuring charges on the fiscal 1996 Consolidated Statement of
Operations.
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 provide for 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 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.
The remaining purchase price was in the form of a note in the amount of
approximately $140,500 bearing interest at 8.5% and due at various dates through
July 1999. Working capital adjustments subsequent to the sale increased the
note by $716,000 and at June 30, 1998, the balance of the note due from Cargo
totaled $856,000. In addition, in June 1998, the Company extended a revolving
promissory note to Cargo in the amount of $300,000 bearing interest at the prime
rate of interest and maturing on December 31, 1998. At June 30, 1998, the full
amount of $300,000 was outstanding to Cargo. At June 30, 1998, the balance of
the bank note guaranteed by the Company was $2,644,000. 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, 1998 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, 1998 and June 30, 1997 (in thousands):
Total
-------
Balance at June 30, 1996 $ 1,623
Cash payments (846)
Non-cash asset writedowns (549)
-------
Balance at June 30, 1997 $ 228
Cash payments (185)
-------
Balance at June 30, 1998 $ 43
=======
Revenues included in the Company's results of operations from separately
identifiable businesses sold or closed were $91,000, $12,360,000 and $32,675,000
in fiscal 1998, 1997 and 1996, respectively. Operating losses (before
restructuring charges) from these businesses totaled $0, $234,000 and $1,992,000
in fiscal 1998, 1997 and 1996, respectively.
NOTE 4 - PROPERTY AND EQUIPMENT AND ACCUMULATED DEPRECIATION
As of June 30 (in thousands) 1998 1997
-------- --------
Property and equipment, at cost:
Land..............................$ 2,419 $ 2,424
Buildings......................... 13,373 13,588
Leasehold improvements............ 4,233 4,785
Fixtures and equipment............ 26,302 28,811
-------- --------
46,327 49,608
Less accumulated depreciation....... (23,441) (24,103)
-------- --------
Property and equipment, net.......$ 22,886 $ 25,505
======== ========
NOTE 5 - ACCRUED LIABILITIES AND OTHER
Accrued liabilities and other consisted of the following at June 30 (in
thousands):
1998 1997
-------- --------
Accrued payroll and bonus...........$ 3,749 $ 4,036
Income taxes payable................ 1,122 -
Taxes, other than income taxes...... 667 1,179
Interest............................ 246 203
Restructuring accrual............... 43 228
Accrual for sales allowances........ 1,685 2,442
Accrued legal....................... 1,593 1,698
Accrued insurance................... 1,373 2,052
Other............................... 2,042 3,927
-------- --------
$ 12,520 $ 15,765
======== ========
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. During fiscal 1998, the bank group agreed to extend the
maturity date of the facility to October 31, 1999 under the existing terms.
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, 1998
ranged from 6.54% to 8.50%. At June 30, 1998, the Company had borrowings
aggregating $34,230,000 and letters of credit aggregating $1,187,000 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,
1998, the Company was in compliance with such covenants.
Effective November 3, 1997, the Company entered into an Interest Rate Swap
Agreement with its primary bank in which a $20,000,000 notional amount of
floating rate debt at LIBOR was swapped for a fixed rate of 6.01%. The Swap
Agreement has a three-year term and is being accounted for as a hedge by the
Company. The transaction was executed to hedge interest rate risk on the
Company's interest obligation associated with a portion of its revolving credit
facility, and to change the nature of the liability from a variable to a fixed
interest obligation. At June 30, 1998, the Company would have had to pay
approximately $120,000 to terminate the interest rate swap. This amount was
obtained from the counterparties and represents the fair market value of the
Swap Agreement.
NOTE 7 - INCOME TAXES
The provision for income taxes is as follows (in thousands):
1998 1997 1996
------- -------- -------
Current tax expense (benefit):
Federal.............................$ 893 $ (226) $(4,361)
State and local..................... 66 30 (14)
------- -------- -------
Total current....................... 959 (196) (4,375)
Deferred tax expense (benefit):
Federal............................. 1,543 (931) (799)
------- -------- -------
Total provision (benefit).............$ 2,502 $ (1,127) $(5,174)
======= ======== =======
Deferred tax liabilities (assets) are comprised of the following at June 30 (in
thousands):
1998 1997
------- --------
Depreciation..........................$ 1,413 $ 1,637
Deferred compensation................. 109 110
Bad debts............................. 15 -
Goodwill.............................. 2,142 1,625
------- --------
Total deferred tax liabilities...... 3,679 3,372
------- --------
Inventory............................. (672) (1,425)
Bad debts............................. - (336)
Restructuring reserve................. (99) (162)
Charitable contribution carryforwards. (450) (466)
Loss carryforwards.................... (1,291) (739)
Deferred compensation................. (85) (76)
Lease reserves........................ (26) (33)
Other................................. (464) (533)
------- --------
Total deferred tax assets........... (3,087) (3,770)
Valuation allowance................... 1,249 697
------- --------
Net deferred tax assets............. (1,838) (3,073)
------- --------
$ 1,841 $ 299
======= ========
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. During fiscal 1998, the valuation
allowance was increased by $552,000 as a result of additional state tax loss
carryforwards. The entire remaining allowance of $1,249,000 relates to state tax
loss carryforwards. Their use is limited to the future taxable earnings of the
Company and its subsidiaries in certain states and it was determined to be more
likely than not that these state tax carryforwards would not be utilized.
The provision for income taxes differs from the amount of income tax
determined by applying the applicable U.S. statutory federal income tax rate to
pretax income as a result of the following differences (in thousands):
Year ended June 30,
----------------------------
1998 1997 1996
------- -------- -------
Statutory U.S. tax provision..........$ 2,420 $ (1,066) $(5,559)
Increase (decrease) in rates
resulting from:
State and local taxes, net.......... 43 19 (51)
Goodwill write-offs................. 278 - 526
Other............................... (239) (80) (90)
------- -------- -------
Tax provision.........................$ 2,502 $ (1,127) $(5,174)
======= ======== =======
NOTE 8 - COMMITMENTS AND CONTINGENCIES
The Company leases certain properties, primarily retail stores, under
operating leases which expire through 2007. Real estate taxes, maintenance and
certain other costs are generally borne by the Company. The composition of
total rental expense for operating leases is as follows (in thousands):
Year ended June 30, 1998 1997 1996
------- -------- -------
Rentals:
Minimum.............................$ 7,298 $ 8,622 $ 9,812
Contingent (percentage of sales).... 20 70 48
------- -------- -------
$ 7,318 $ 8,692 $ 9,860
======= ======== =======
Minimum rental commitments for noncancellable operating leases (primarily
retail store space) at June 30, 1998 are summarized as follows (in thousands):
Year ended June 30,
1999.......................... 4,710
2000.......................... 3,555
2001.......................... 2,460
2002.......................... 1,776
2003.......................... 639
2004 and thereafter........... 1,719
--------
$ 14,859
========
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, 1998 has been established.
Based on the information presently available, management believes the amount of
the accrual at June 30, 1998 is adequate to cover the liability the Company may
incur under the alleged guarantees.
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.
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 contributions become vested upon completion of five years of credited
service. The employee and Company contributions are maintained by a 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, 1998, 1997, and 1996 were approximately $1,166,000,
$1,534,000, and $1,889,000, 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, 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 granted................. - $ -
Options exercised............... - $ -
Options terminated.............. (38,200) $ 9.62
--------- -------
Options outstanding,
June 30, 1998................ 727,700 $ 5.11
========= =======
Options exercisable,
June 30, 1998................ 252,073 $ 5.55
========= =======
Options available for
future grant, June 30, 1998.. 912,300
=========
A summary of stock options outstanding and exercisable at June 30, 1998 follows:
<TABLE> <S><C>
Options Outstanding Options Exercisable
----------------------------------------------------- --------------------------------
Shares Weighted-Average Shares
Range of Outstanding Remaining Weighted-Average Exercisable Weighted-Average
Exercise Prices at 6/30/98 Contractual Life Exercise Price at 6/30/98 Exercise Price
- ----------------- ----------- ---------------- ---------------- ----------- ----------------
$10.69 - 17.62 36,400 5.24 years $ 12.66 28,200 $ 12.64
$4.56 - 8.82 691,300 8.71 years $ 4.71 223,873 $ 4.66
------- -------
$4.56 - 17.62 727,700 $ 5.11 252,073 $ 5.55
</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 (in thousands, expect per share amounts):
1998 1997 1996
-------- -------- --------
Net income (loss):
As reported $ 4,617 $ (1,918) $(10,709)
Pro forma $ 4,161 $ (2,096) $(10,738)
Income (loss) per common
share - basic and diluted:
As reported $ 0.37 $ (0.15) $ (0.89)
Pro forma $ 0.33 $ (0.17) $ (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 markets consumer products through four distinct product-related
operating divisions: Frames and Wall Decor, Leather and Crafts, Office Supplies,
and Novelties and Promotional. The Company's products are marketed and sold
through various channels, including direct-to-consumer (e.g., retail stores,
mail order, the internet) and wholesale distribution (e.g., direct sales force,
telemarketing, outside sales representatives). Divested operations include
Joshua's Christian Stores and all business units sold or closed as a result of
the December 1995 restructuring and consolidation program.
During fiscal 1998, 1997 and 1996, the Company had net sales of
$38,495,000, $30,467,000 and $30,065,000, respectively, to one group of
customers under common control. In fiscal 1998, the Company also had sales of
$24,133,000 to another group of customers under common control. The Company had
no other individual customer or group of customers which accounted for more than
10% of the Company's total revenue. The Frames and Wall Decor and Novelties and
Promotional divisions , in the normal course of business, grant credit with the
majority of their sales. Such receivables are generally not collateralized.
The concentration of credit risk within these divisions may impact the Company's
overall credit risk, either positively or negatively, in that these customers
may be similarly affected by industry-wide changes in economic or other
conditions.
Intersegment sales represent sales from one division to another.
Operating income (loss) is divisional revenue less divisional operating
expenses, which excludes corporate expenses, goodwill amortization, interest
expense and taxes on income. Identifiable assets by division are those assets
that are used in each division. Corporate assets are comprised of cash and
short-term investments.
Segment information for each of the three years in the period ended June
30, 1998 is as follows (in thousands):
<TABLE> <S><C>
1998 Leather Frames Novelties
---- and and Office and Divested
Crafts Wall Decor Supplies Promotional Operations Consolidated
-------- ---------- -------- ----------- ---------- ------------
Total sales...........................................$ 96,610 $ 47,476 $ 38,549 $ 20,754 $ 29,388 $ 232,777
Intersegment sales.................................... (151) (22) (89) (20) - (282)
-------- -------- -------- -------- -------- ---------
Net sales $........................................... 96,459 $ 47,454 $ 38,460 $ 20,734 $ 29,388 $ 232,495
======== ======== ======== ======== ======== =========
Segment operating income
(loss)......................................$ 12,100 $ 150 $ 1,878 $ (426) $ 13 $ 13,715
======== ======== ======== ======== ========
Corporate expenses including goodwill
amortization and interest expense, net...... (6,596)
---------
Income before income taxes............................ $ 7,119
=========
Depreciation..........................................$ 1,169 $ 802 $ 798 $ 447 $ 612 $ 3,828
Goodwill amortization................................. 535 87 4 374 - 1,000
-------- -------- -------- -------- -------- ---------
Total depreciation and amortization...................$ 1,704 $ 889 $ 802 $ 821 $ 612 $ 4,828
======== ======== ======== ======== ======== =========
Identifiable assets...................................$ 68,194 $ 29,888 $ 14,999 $ 27,098 $ 9,296 $ 149,475
======== ======== ======== ======== ========
Corporate assets...................................... 1,216
---------
$ 150,691
=========
Capital expenditures................................. $ 1,330 $ 592 $ 569 $ 481 $ 558 $ 3,530
======== ======== ======== ======== ======== =========
1997 Leather Frames Novelties
---- and and Office and Divested
Crafts Wall Decor Supplies Promotional Operations Consolidated
-------- ---------- -------- ----------- ---------- ------------
Total sales...........................................$ 87,606 $ 53,465 $ 35,781 $ 24,149 $ 44,388 $ 245,389
Intersegment sales..................................... (161) (52) (181) (71) - (465)
-------- -------- -------- -------- -------- ---------
Net sales.............................................$ 87,445 $ 53,413 $ 35,600 $ 24,078 $ 44,388 $ 244,924
======== ======== ======== ======== ======== =========
Segment operating income (loss).......................$ 11,990 $ 530 $ 2,440 $ (799) $ (7,933) $ 6,228
======== ======== ======== ======== ========
Corporate expenses including goodwill
amortization and interest expense, net...... (9,293)
---------
Income (loss) before income taxes..................... $ (3,065)
=========
Depreciation..........................................$ 1,198 $ 854 $ 862 $ 503 $ 918 $ 4,335
Goodwill amortization................................. 535 87 4 374 39 1,039
-------- -------- -------- -------- -------- ---------
Total depreciation and amortization...................$ 1,733 $ 941 $ 866 $ 877 $ 957 $ 5,374
======== ======== ======== ======== ======== =========
Identifiable assets...................................$ 67,887 $ 30,958 $ 12,593 $ 28,578 $ 15,508 $ 155,524
======== ======== ======== ======== ========
Corporate assets...................................... 1,005
---------
$ 156,529
=========
Capital expenditures.................................$ 1,371 $ 385 $ 782 $ 723 $ 533 $ 3,794
========= ======== ======== ======== ======== =========
1996 Leather Frames Novelties
---- and and Office and Divested
Crafts Wall Decor Supplies Promotional Operations Consolidated
-------- ---------- -------- ----------- ---------- ------------
Total sales...........................................$ 82,661 $ 58,386 $ 30,068 $ 20,590 $ 63,556 $ 255,261
Intersegment sales..................................... (353) (120) (146) (321) (37) (977)
-------- -------- -------- -------- -------- ---------
Net sales.............................................$ 82,308 $ 58,266 $ 29,922 $ 20,269 $ 63,519 $ 254,284
======== ======== ======== ======== ======== =========
Segment operating income (loss).......................$ 9,365 $ 2,215 $ 1,030 $ 1,580 $(21,931) $ (7,741)
======== ======== ======== ======== ========
Corporate expenses including goodwill
amortization and interest expense, net...... (8,142)
---------
Income (loss) before income taxes..................... $ (15,883)
=========
Depreciation..........................................$ 1,107 $ 911 $ 852 $ 332 $ 1,468 $ 4,670
Goodwill amortization................................. 509 87 4 374 322 1,296
-------- -------- -------- -------- -------- ---------
Total depreciation and amortization...................$ 1,616 $ 998 $ 856 $ 706 $ 1,790 $ 5,966
======== ======== ======== ======== ======== =========
Identifiable assets...................................$ 65,060 $ 32,096 $ 12,909 $ 27,609 $ 29,393 $ 167,067
======== ======== ======== ======== ========
Corporate assets...................................... 1,512
---------
$ 168,579
=========
Capital expenditures..................................$ 2,170 $ 357 $ 573 $ 278 $ 985 $ 4,363
======== ======== ======== ======== ======== =========
</TABLE>
NOTE 13 - QUARTERLY RESULTS (UNAUDITED)
Summarized quarterly income statements (in thousands of dollars, except per
share amounts) for the years ended June 30, 1998 and 1997 are set forth below:
<TABLE> <S><C>
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
------------------- ------------------- ------------------- -------------------
1998 1997 1998 1997 1998 1997 1998 1997
-------- -------- -------- -------- -------- -------- -------- --------
Net sales $ 55,359 $ 57,770 $ 73,237 $ 73,246 $ 53,100 $ 54,456 $ 50,799 $ 59,452
Costs and expenses:
Cost of goods sold 35,834 35,688 48,702 46,732 35,766 41,128 33,182 36,777
Selling and administrative 15,932 18,662 17,665 20,775 14,935 20,062 14,650 19,686
Loss on sale of business unit - - - - - - 623 -
Depreciation and amortization 1,270 1,372 1,259 1,391 1,254 1,315 1,045 1,296
-------- -------- -------- -------- -------- ------- -------- --------
Operating income (loss) (1) 2,323 2,048 5,611 4,348 1,145 (8,049) 1,299 1,693
Interest expense, net 862 822 911 833 841 720 645 710
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before
income taxes 1,461 1,226 4,700 3,515 304 (8,769) 654 983
Provision (benefit) for
income taxes 512 429 1,644 1,230 106 (3,068) 240 282
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss) $ 949 $ 797 $ 3,056 $ 2,285 $ 198 $ (5,701) $ 414 $ 701
======== ======== ======== ======== ======== ======== ======== ========
Net income (loss) per
common share - basic
and diluted $0.08 $0.07 $0.24 $0.19 $0.02 ($0.45) $0.03 $0.06
===== ===== ===== ===== ===== ===== ===== =====
</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, 1998.
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, 1998.
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, 1998.
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,
1998.
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 18 of this report.
(b) Reports on Form 8-K:
The Company filed a Current Report on Form 8-K, on June 8, 1998, which
included the contents of a press release announcing the sale of Joshua's
Christian Stores chain to Family Christian Stores.
The Company filed a Current Report on Form 8-K, on August 19, 1998,
which included the contents of a press release announcing the
unaudited results of operations for three months period and fiscal
year ended June 30, 1998.
(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 28, 1998 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 28th day of September, 1998, 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,
------------------------------------
1998 1997 1996
--------- --------- ---------
Allowance for doubtful accounts:
Balance, beginning of year $ 1,680 $ 790 $ 605
Additions charged to profit and loss 1,644 1,971 1,094
Accounts receivable charged off, net
of recoveries (569) (1,081) (909)
--------- --------- ---------
Balance, end of year $ 2,755 $ 1,680 $ 790
========= ========= =========
TANDYCRAFTS, INC.
INDEX TO EXHIBITS
Filed with the Annual Report on Form 10-K for the year ended June 30, 1998.
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 (13)
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 of record as of May 29, 1997 (12)
10.18 Ninth Amendment to Revolving Credit and Term Loan Agreement (14)
10.19 # Tenth Amendment to Revolving Credit and Term Loan Agreement
10.20 # Eleventh Amendment to Revolving Credit and Term Loan Agreement
21 # Subsidiaries of the Registrant
23 # Consent of Independent Accountants
27 # Financial Data Schedule (filed electronically only)
# Filed herewith.
* Indicates management compensatory plan, contract or arrangement.
(1)Filed with the Commission as an Exhibit to the Company's Form S-1
Registration Statement (No. 2-54086) and incorporated herein by reference.
(2)Filed with the Commission as an Exhibit to the Company's Definitive Proxy
Statement dated October 5, 1993, which Proxy Statement was filed with the
Commission as an Exhibit to the Company's Annual Report on Form 10-K for the
year ended June 30, 1993. Such Exhibit is incorporated herein by reference.
(3)Filed with the Commission as an Exhibit to the Company's Annual Report on
Form 10-K for the fiscal year ended June 30, 1993, and incorporated herein
by reference.
(4)Filed with the Commission as an Exhibit to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1993, and incorporated herein
by reference.
(5)Filed with the Commission as an Exhibit to the Company's Annual Report on
Form 10-K for the fiscal year ended June 30, 1994, and incorporated herein
by reference.
(6)Filed with the Commission as an Exhibit to the Company's Definitive Proxy
Statement dated October 3, 1994, which Proxy Statement was filed with the
Commission as an Exhibit to the Company's Annual Report on Form 10-K for the
year ended June 30, 1994.
(7)Filed with the Commission as an Exhibit to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1994, and incorporated herein
by reference.
(8)Filed with the Commission as an Exhibit to the Company's Annual Report on
Form 10-K for the fiscal year ended June 30, 1995 and incorporated herein by
reference.
(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.
(13)Filed with the Commission as an Exhibit to the Company's Annual Report on
Form 10-K for the fiscal year ended June 30, 1997 and incorporated herein by
reference. (10)
(14)Filed with the Commission as an Exhibit to the Company's Quarterly Report on
Form 10-Q for the quarter ended December 31, 1997, and incorporated herein
by reference.
Exhibit 10.19
-------------
TENTH AMENDMENT TO REVOLVING
CREDIT AND TERM LOAN AGREEMENT
------------------------------
This Tenth Amendment To Revolving Credit And Term Loan Agreement ("Tenth
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,
PLC LEATHER COMPANY, a Nevada corporation, TANDYARTS, INC., a Nevada
corporation, and LICENSED LIFESTYLES, INC., a Nevada 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 THE FIRST NATIONAL BANK OF CHICAGO (formerly 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 and Banks entered into that certain Eighth
Amendment to Revolving Credit and Term Loan Agreement dated March 31, 1997
("Eighth Amendment"); and
WHEREAS, the Company, Guarantors and banks entered into that certain Ninth
Amendment to Revolving Credit and Term Loan Agreement dated September 30, 1997
("Ninth 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,for good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, it is agreed by and among the Company,
Guarantors, Banks and Agent as follows:
1.
Banks waive the violation by Company of Section 8.19 of the Loan Agreement
for the quarter ended December 31, 1997.
2.
Section 8.15 of the Loan Agreement is amended to read as follows:
8.15. Sale of Accounts Receivable. Sell or permit any Subsidiary to
sell any of its accounts receivable, with or without recourse except for
(1) the sale of accounts receivable of Venture Stores, Inc. in the
approximate amount of $129,000 at a sale price of approximately $52,000 and
(2) the sale of accounts receivable from Wal-Mart, Inc.; provided, however,
that the maximum face amount of sold accounts receivable of Wal-Mart, Inc.
which may be outstanding at any time is twelve million dollars
($12,000,000); or
3.
New section 8.20 is added to the Loan Agreement which shall read in its
entirety as follows:
8.20 Year 2000 Compliant. Borrower shall perform all acts reasonably
necessary to ensure that Borrower and any business in which Borrower holds
a substantial interest become Year 2000 Compliant in a timely manner. Such
acts shall include, without limitaiton, performing a comprehensive review
and assessment of all of Borrower's systems and adopting a detailed plan,
with itemized budget, for the remediation, monitoring and testing of such
systems. As used in this paragraph, "Year 2000 Compliant" shall mean, in
regard to any entity, that all software, hardware, firmware, equipment,
goods or systems utilized by or material to the business operations or
financial condition of such entity, will properly perform date sensitive
functions before, during and after the year 2000. Borrower shall,
immediately upon request, provide to Bank such certifications or other
evidence of Borrower's compliance with the terms of this Section 8.20 as
Bank may from time to time require.
4.
Section 9.10 of the Loan Agreement is amended to read in its entirety as
follows:
9.10 Disposition of Assets Sell or otherwise dispose of more than
four million dollars ($4,000,000) in assets other than in the ordinary
course of business during the Revolving Credit Period except for the sale
of accounts receivable from Wal-Mart, Inc.; provided, however, that the
maximum face amount of sold accounts receivable of Wal-Mart, Inc. which may
be outstanding at any time is twelve million dollars ($12,000,000).
5.
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.
6.
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, the Eighth Amendment, the Ninth Amendment and this Tenth
Amendment, the Loan Agreement is ratified and confirmed and shall remain in full
force and effect.
7.
This Tenth Amendment shall be governed by and construed in accordance with
the laws of the State of Texas.
8.
Company agrees to pay all expenses incurred by Agent and Banks in
connection with the negotiation and preparation of this Tenth Amendment,
including reasonable attorney's fees.
9.
This Tenth 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.
10.
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.
11.
This Tenth Amendment shall be binding upon and inure to the benefit of the
parties and their respective successors and assigns.
12.
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, 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
--------------------------------
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
LICENSED LIFESTYLES, INC. a Nevada corporation
(successor by merger to 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/ Susan Sheffield
--------------------------------
Susan Sheffield, Vice President
BANK ONE, TEXAS, N.A.
By: /s/ Michael Wilson
--------------------------------
Michael Wilson, Senior
Vice President
THE FIRST NATIONAL BANK OF CHICAGO
By: /s/ Jenny Gilpin
--------------------------------
Jenny Gilpin, Vice President
BANKS
Exhibit 10.20
-------------
ELEVENTH AMENDMENT TO REVOLVING
CREDIT AND TERM LOAN AGREEMENT
------------------------------
This Eleventh Amendment To Revolving Credit And Term Loan Agreement
("Eleventh 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, PLC LEATHER COMPANY, a Nevada corporation, TANDYARTS, INC., a
Nevada corporation, and LICENSED LIFESTYLES, INC., a Nevada 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 THE FIRST NATIONAL BANK OF CHICAGO (formerly 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 and Banks entered into that certain Eighth
Amendment to Revolving Credit and Term Loan Agreement dated March 31, 1997
("Eighth Amendment"); and
WHEREAS, the Company, Guarantors and banks entered into that certain Ninth
Amendment to Revolving Credit and Term Loan Agreement dated September 30, 1997
("Ninth Amendment"); and
WHEREAS, the Company, Guarantors and Banks entered into that certain Tenth
Amendment to Revolving Credit and Term Loan Agreement dated December 31, 1997
("Tenth 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, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, it is agreed by and among the
Company, Guarantors, Banks and Agent as follows:
1.
Section 9.05 of the Loan Agreement is amended to read as follows:
9.05. Limitation on Dividends, Acquisitions or 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
stock (other than stock dividends) or make any other distribution on
account of any class of its 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 stock at an aggregate purchase
price not to exceed $2,000,000 during the fiscal year ended June 30, 1999
and at an aggregate purchase price not to exceed $500,000 during each
fiscal year after the fiscal year ended June 30, 1999. 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.
2.
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.
3.
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, the Eighth Amendment, the Ninth Amendment, the Tenth
Amendment and this Eleventh Amendment, the Loan Agreement is ratified and
confirmed and shall remain in full force and effect.
4.
This Eleventh Amendment shall be governed by and construed in accordance
with the laws of the State of Texas.
5.
Company agrees to pay all expenses incurred by Agent and Banks in
connection with the negotiation and preparation of this Eleventh Amendment,
including reasonable attorney's fees.
6.
This Eleventh 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.
7.
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.
8.
This Eleventh Amendment shall be binding upon and inure to the benefit of
the parties and their respective successors and assigns.
9.
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 August 10, 1998.
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
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
LICENSED LIFESTYLES, INC. a Nevada corporation
(successor by merger to 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/ Susan Sheffield
--------------------------------
Susan Sheffield, Vice President
BANK ONE, TEXAS, N.A.
By: /s/ Michael Wilson
--------------------------------
Michael Wilson, Senior
Vice President
THE FIRST NATIONAL BANK OF CHICAGO
By: /s/ Jenny Gilpin
--------------------------------
Jenny Gilpin, Vice President
BANKS
EXHIBIT 21
----------
TANDYCRAFTS, INC.
Significant Subsidiaries of Tandycrafts, Inc. as of June 30, 1998
Jurisdiction
of
Subsidiary's Legal Name Doing Business As Incorporation
------------------------- ------------------------ -------------
Development Association, Inc. J-Mar Associates 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.
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 1998.
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, 1998, appearing on page 19 of this Form 10-K.
/s/PricewaterhouseCoopers LLP
- -----------------------------
PricewaterhouseCoopers LLP
Fort Worth, Texas
September 28, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Tandycrafts,
Inc.'s June 30, 1998 Form 10-K and is qualified in its entirety by reference to
such Form 10-K filing.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,216
<SECURITIES> 0
<RECEIVABLES> 30,841
<ALLOWANCES> 2,755
<INVENTORY> 45,990
<CURRENT-ASSETS> 83,077
<PP&E> 46,327
<DEPRECIATION> 23,441
<TOTAL-ASSETS> 150,691
<CURRENT-LIABILITIES> 24,675
<BONDS> 0
0
0
<COMMON> 18,528
<OTHER-SE> 70,436
<TOTAL-LIABILITY-AND-EQUITY> 150,691
<SALES> 232,495
<TOTAL-REVENUES> 232,495
<CGS> 153,484
<TOTAL-COSTS> 222,117
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,346
<INCOME-PRETAX> 7,119
<INCOME-TAX> 2,502
<INCOME-CONTINUING> 4,617
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,617
<EPS-PRIMARY> 0.37
<EPS-DILUTED> 0.37
</TABLE>
