UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
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
REASON FOR AMENDMENT
- --------------------
This amendment corrects mislabeling of the column headings contained in Note 12
of Notes to Consolidated Financial Statement in Tandycrafts, Inc.'s Form 10-K
filing for the fiscal year ended June 30, 1998.
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
$24,133,000 to another group of customers under common control. The Company had
no other individual customer or group of customers which accounted for more than
10% of the Company's total revenue. The Frames and Wall Decor and Novelties and
Promotional divisions , in the normal course of business, grant credit with the
majority of their sales. Such receivables are generally not collateralized.
The concentration of credit risk within these divisions may impact the Company's
overall credit risk, either positively or negatively, in that these customers
may be similarly affected by industry-wide changes in economic or other
conditions.
Intersegment sales represent sales from one division to another.
Operating income (loss) is divisional revenue less divisional operating
expenses, which excludes corporate expenses, goodwill amortization, interest
expense and taxes on income. Identifiable assets by division are those assets
that are used in each division. Corporate assets are comprised of cash and
short-term investments.
Segment information for each of the three years in the period ended June
30, 1998 is as follows (in thousands):
<TABLE><S><C>
1998 Frames Leather Novelties
---- and and Office and Divested
Wall Decor Crafts Supplies Promotional Operations Consolidated
---------- -------- -------- ----------- ---------- ------------
Total sales...........................................$ 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 Frames Leather Novelties
---- and and Office and Divested
Wall Decor Crafts 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...... (9,273)
---------
Income (loss) before income taxes..................... $ (3,045)
=========
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 Frames Leather Novelties
---- and and Office and Divested
Wall Decor Crafts 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.
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 30, 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 30th 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
========= ========= =========
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/A.
Price Waterhouse LLP
Fort Worth, Texas
September 30, 1998
