<PAGE>
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, 1999
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 13, 1999, there were 12,083,618 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 $38.3 million.
DOCUMENTS INCORPORATED BY REFERENCE
Location in Form 10-K Incorporated Document
--------------------- ---------------------
Part III Proxy Statement for 1999 Annual Meeting
<PAGE>
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 is a leading maker and
marketer of consumer products, including frames and wall decor, office supplies,
home furnishings and gift products. The Company's products are sold nationwide
through wholesale distribution channels, including mass merchandisers and
specialty retailers, and direct-to-consumer channels through the Company's
retail stores, mail order and the Internet. During the quarter ended December
31, 1998, the Company adopted a plan of closing its leather and crafts retail
stores and related manufacturing operations which comprised substantially all of
the operations within the Company's Leather and Crafts operating division.
Frames and Wall Decor
- ---------------------
The Frames and Wall Decor division, comprised of Pinnacle Art & Frame,
accounted for 60.0%, 60.0% and 57.8% of the total consolidated net sales,
excluding divested operations, of the Company for fiscal years 1999, 1998 and
1997, respectively. During fiscal 1999, 1998 and 1997, the Frames and Wall Decor
division had net sales of $34,719,000, $37,118,000 and $29,966,000,
respectively, to one group of customers under common control. This division also
had sales in fiscal 1999 and 1998 of $20,128,000 and $23,492,000, respectively,
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 division has manufacturing operations in
Pocahontas and Piggott, Arkansas; Van Nuys, California and a new facility in
Durango, Mexico. The facility in Van Nuys is expected to be closed on or about
March 31, 2000, with all production from that facility moving to the Durango,
Mexico facility. 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, ash 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 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. Hermitage Fine Arts produces and distributes 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.
Office Supplies
- ---------------
The Office Supplies division of the Company, comprised of Sav-On Office
Supplies ("Sav-On"), accounted for 24.8%, 24.7% and 24.2% of the total
consolidated net sales, excluding divested operations, of the Company for fiscal
years 1999, 1998 and 1997, respectively. Sav-On sells office supplies from 41
company-owned and operated specialty retail stores which average approximately
6,500 square feet. Sav-On stores are smaller store footprints than its larger
depot or warehouse-style competitors and are primarily located in neighborhood
strip centers. During fiscal 1999, Sav-On opened one new store and closed one
store. Sav-On's stores are located in eleven states. Sav-On stores carry
approximately 5,500 products, with an additional 25,000 products available via
its catalog and Internet shopping programs. Sav-On's products consist primarily
of office and school supplies and are purchased from a variety of suppliers. The
primary customers for Sav-On are small business owners, students and
homeowners.
2
<PAGE>
Home Furnishings
- ----------------
The Home Furnishings division, comprised of Cargo Furniture, Inc.
("Cargo"), was acquired in June 1999 and accounted for 3.8% of the total
consolidated net sales, excluding divested operations, of the Company during
fiscal year 1999. Cargo is a leading maker and marketer of children's and casual
furniture and accessories. Cargo branded products are sold through a chain of 22
retail stores, located mostly in the Southwestern and Mid-Atlantic U.S. regions.
Cargo products are also sold via a national network of 120 furniture dealers,
through commercial sales channels to camps, colleges and institutions, and
direct to consumers via toll-free ordering and the Internet.
In October 1998, the Company was informed that Cargo, a former subsidiary
of the Company, had obtained a financial advisor for the purpose of actively
pursuing additional capital to expedite the chain's conversion of their mall-
based furniture stores to their new, higher performing Cargo Collection Store
concept. At that time, Cargo had opened eight of the Cargo Collection Stores and
seen promising results. However, due to Cargo's limited capital resources and
the poor performance of their mall-based stores, Cargo determined that it
required additional capital to complete the conversion process.
In December 1998, Cargo informed the Company that it was unable to obtain
additional investment capital. In addition, it was probable that Cargo would be
in default of certain covenants contained in their bank term note agreement, and
that Cargo would not be able to cure the events of default. The Company had
guaranteed Cargo's term note, and had additional amounts receivable from Cargo.
On January 11, 1999, the Company was informed by Cargo's lender that Cargo
had defaulted on its term note and that Cargo's lender required the Company to
perform pursuant to its guaranty of the note. On February 1, 1999, the Company
complied with the lender's request.
As a result of making the guaranty payment, the Company had the option to
obtain a majority of Cargo's common stock, thereby obtaining voting control of
Cargo. Accordingly, the Company began to consolidate the results of operations
of Cargo effective February 1, 1999. On June 11, 1999, the Company completed the
foreclosure of Cargo and acquired 100% ownership.
Gifts
- -----
The Gifts division is comprised of sales, marketing, manufacturing and
distribution operations for products ranging from stationery, apparel, novelty
and promotional items. The Gift division's product lines are marketed by
Licensed Lifestyles, J-Mar Associates and Rivertown Button Company. This
division accounted for 11.4%, 15.2% and 18.0% of the total consolidated net
sales, excluding divested operations, of the Company for fiscal years 1999, 1998
and 1997, 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 logos from
leading professional and collegiate sports teams. 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
Express in Lancaster, South Carolina. Birdlegs is a producer of screen-printed
souvenir activewear including T-shirts, sweatshirts, cover-ups and tank tops.
Licensed Lifestyles sells its products through its own direct sales force and a
network of independent sales representatives, distributors, and in-house
telemarketing personnel.
J-Mar Associates is a producer and wholesale distributor of paper products,
general consumer and inspirational gifts, both domestically and internationally.
Traditionally, J-Mar's customer base was primarily comprised of over 5,700
Christian retail gift and book stores; however, with the development of its new
By the Way collection of gifts, J-Mar is targeting the mainstream gift and
specialty store market. J-Mar's products are primarily sold through its
telemarketing and direct sales force.
3
<PAGE>
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.
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 quarter ended December 31);
however, due to the divestitures of the Joshua's Christian Stores and Tandy
Leather retail operations, this seasonal variation will be less significant in
future years. Cash also increases in December through March due to the increase
in sales during the December quarter and the subsequent collection of
receivables related to those sales.
Competitive Conditions
- ----------------------
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 mass merchants, department
stores, larger national office supply retail chains and local specialty stores.
Cargo Furniture competes for sales with other nationally-known brand names that
are marketed by department stores, chain stores and specialty stores. The
products sold by the Gifts 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.
However, the Company has been notified about a potential environmental issue
regarding a property which was owned by the Company for four months in 1975. The
Company has asserted defenses to this claim and will vigorously defend the
claim. At any rate, based on present information, the Company believes that its
potential liability would not materially affect it future operating results.
Foreign Operations and Export Sales
- -----------------------------------
A small amount of products manufactured 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. During fiscal 1999, the Company
built and started production in a state-of-the-art, 150,000-square-foot frame
manufacturing facility in Durango, Mexico. Products manufactured by this
subsidiary will be sold by Pinnacle Art & Frame through its normal sales
channels.
4
<PAGE>
Employees
- ---------
The Company has approximately 2,200 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:
<TABLE>
<CAPTION>
Approximate Square Footage
-------------------------------
Owned Leased Total
---------- --------- ---------
<S> <C> <C> <C>
Warehouse and Office 569,250 281,150 850,400
Retail 4,750 385,496 390,246
Factory 350,000 110,000 460,000
---------- --------- ---------
Totals 924,000 776,646 1,700,646
========== ========= =========
</TABLE>
The warehouse, office and factory space is located approximately 28% in
Fort Worth, Texas, 38% at three locations in Arkansas (Frames and Wall Decor),
13% at one location in California (Frames and Wall Decor), 12% at one location
in Durango, Mexico (Frames and Wall Decor), 2% at one other location in Texas
(Gifts), with the remaining 7% located in Georgia and South Carolina (Gifts).
The leased retail stores are generally small outlets and are located throughout
14 states of the United States.
For additional lease information see Note 11 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 1999 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 1999 fiscal year.
5
<PAGE>
Executive Officers of the Registrant
- ------------------------------------
The following table sets forth certain information concerning the executive
officers of the Company.
<TABLE>
<CAPTION>
Position and Business Experience Served as
Name and Age During Past Five Years Officer Since
- ------------ ------------------------------------- ---------------
<S> <C> <C>
Michael J. Walsh, 58 President and Chief Executive 1983
Officer since April 1996. Executive
Vice President and Chief Financial
Officer from August 1992 to April 1996.
Vice President from 1986 to August 1992.
General Counsel and Secretary from 1983
to 1996.
James D. Allen, 39 Chief Operating Officer since May 1999, 1993
Executive Vice President and Chief
Financial Officer since July 1996.
Vice President from November 1993 to
July 1996. Director of Special Projects
from May 1993 to November 1993. Prior
to May 1993, Mr. Allen was a Senior
Manager in the accounting firm of
Price Waterhouse LLP.
Leo C. Taylor, 37 Vice President of Taxation, Risk 1996
Management and Human Resources since
November 1996. Director of Tax
Administration from February 1994 to
November 1996. Prior to February 1994,
Mr. Taylor was a Manager in the
accounting firm of Price Waterhouse LLP.
Russell L. Price, 34 Vice President - General Counsel and 1996
Secretary since November 1996. Counsel
from March 1994 to November 1996. Prior to
March 1994, Mr. Price was an associate at
the law firm of Hughes & Luce, LLP.
Troy A. Huseman, 31 Controller since December 1998. Director 1999
of Financial Reporting and Planning from
June 1996 to December 1998. Prior to June
1996, Mr. Huseman was with the accounting
firm of Price Waterhouse LLP.
</TABLE>
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.
6
<PAGE>
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. 1997 $ 5.00 $ 4.31 Sept. 1998 $ 4.94 $ 2.63
Dec. 1997 $ 4.75 $ 3.63 Dec. 1998 $ 3.94 $ 3.00
March 1998 $ 5.50 $ 4.13 March 1999 $ 3.75 $ 1.88
June 1998 $ 5.94 $ 4.69 June 1999 $ 3.63 $ 2.00
The principal market for the Company's common stock is the New York
Stock Exchange. As of September 13, 1999, there were approximately 6,500
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 1999
and 1998. 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>
<CAPTION>
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net sales........................................ $ 194,698 $ 232,495 $ 244,924 $ 254,284 $ 256,523
Restructuring charge............................. $ 8,145 $ - $ - $ 12,235 $ -
Impairment of long-lived assets.................. $ 9,522 $ - $ - $ - $ -
Operating income (loss).......................... $ (30,939) $ 10,378 $ 40 $ (11,811) $ 11,860
Income (loss) before income taxes................ $ (33,112) $ 7,119 $ (3,045) $ (15,883) $ 8,027
Net income (loss)................................ $ (23,833) $ 4,617 $ (1,918) $ (10,709) $ 5,217
Net income (loss) per common share .............. $ (1.96) $ .37 $ (.15) $ (.89) $ .46
Weighted average shares outstanding ............. 12,182 12,645 12,423 11,983 11,434
Net income (loss) as percent of net sales........ (12.2%) 2.0% (0.8%) (4.2%) 2.0%
Net income (loss) as percent of beginning equity. (26.8%) 5.5% (2.3%) (11.8%) 6.6%
Current assets................................... $ 63,541 $ 83,077 $ 90,017 $ 99,771 $ 101,980
Current liabilities.............................. $ 28,455 $ 24,675 $ 28,961 $ 33,751 $ 27,113
Working capital.................................. $ 35,086 $ 58,402 $ 61,056 $ 66,020 $ 74,867
Current ratio.................................... 2.2 to 1 3.4 to 1 3.1 to 1 3.0 to 1 3.8 to 1
Total assets..................................... $ 123,051 $ 150,691 $ 156,529 $ 168,579 $ 178,803
Net property and equipment....................... $ 29,560 $ 22,886 $ 25,505 $ 26,783 $ 28,707
Long-term liabilities............................ $ 31,671 $ 37,052 $ 43,294 $ 51,230 $ 61,029
Retained earnings................................ $ 48,241 $ 72,074 $ 67,457 $ 69,375 $ 80,084
Total stockholders' equity....................... $ 62,925 $ 88,964 $ 84,274 $ 83,598 $ 90,661
Common shares outstanding ....................... 12,011 12,611 12,598 12,178 11,717
Stockholders' equity per common share ........... $ 5.24 $ 7.05 $ 6.69 $ 6.86 $ 7.75
</TABLE>
There have been no cash dividends declared or paid by the Company.
7
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- ------- -----------------------------------------------------------------------
of Operations
- -------------
Tandycrafts, Inc. ("Tandycrafts" or the "Company") is a leading maker and
marketer of consumer products, including frames and wall decor, office supplies,
home furnishings and gift products. The Company's products are sold nationwide
through wholesale distribution channels, including mass merchandisers and
specialty retailers, and direct-to-consumer channels through the Company's
retail stores, mail order and the Internet.
The Company is organized into four product related operating divisions:
Frames and Wall Decor, Office Supplies, Gifts and Home Furnishings. The Tandy
Leather retail stores and manufacturing operations were closed during fiscal
year 1999. 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, the
successful transition of the Company's framed art manufacturing from Van Nuys,
California to Durango, Mexico, the successful transition of framed art
distribution and administration from Van Nuys, California to Fort Worth, Texas,
the successful implementation of new information systems, the continued
development of direct import programs, relationships with key customers, impact
of the Year 2000, relationships with professional sports leagues and other
licensors, the possibilities of work stoppages in professional sports leagues,
price fluctuations of lumber, paper 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, inflation levels, changing consumer demand and tastes, competitive
products and pricing, availability of products, inventory risks due to shifts in
market demand, and regulatory and trade environmental conditions.
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, 1999, 1998 and
1997:
Fiscal Years Ended June 30, 1999 and 1998
(Dollars in Thousands)
<TABLE>
<CAPTION>
1999 1998 Increase (Decrease)
------------------- --------------------- --------------------
Operating Operating
Income Income Operating
Divisions Sales (Loss) Sales (Loss) Sales Income
- ---------------------------- --------- -------- -------- ------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Frames and Wall Decor $ 95,958 $ 12,128 $ 93,509 $11,784 2.6% 2.9%
Office Supplies 39,562 1,933 38,460 1,878 2.9% 2.9%
Home Furnishings 6,036 (602) - - 100.0% (100.0%)
Gifts 18,268 (12,329) 23,684 (110) (22.9%) (11108.2%)
-------- -------- -------- ------- -------- ----------
159,824 1,130 155,653 13,552 2.7% (91.7%)
Divested operations 34,874 (12,169) 76,842 163 (54.6%) (7565.6%)
Restructuring charge - (8,145) - - - (100.0%)
-------- -------- -------- ------- -------- ----------
Total operations, excluding
corporate $194,698 $(19,184) $232,495 $13,715 (16.3%) (239.9%)
======== ======== ======== ======= ======== ==========
</TABLE>
8
<PAGE>
Fiscal Years Ended June 30, 1998 and 1997
(Dollars in Thousands)
<TABLE>
<CAPTION>
1998 1997 Increase (Decrease)
------------------- --------------------- --------------------
Operating Operating
Income Income Operating
Divisions Sales (Loss) Sales (Loss) Sales Income
- ----------------------------- -------- --------- -------- ------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Frames and Wall Decor $ 93,509 $ 11,784 $ 85,091 $11,590 9.9% 1.7%
Office Supplies 38,460 1,878 35,600 2,440 8.0% (23.0%)
Gifts 23,684 (110) 26,431 (399) (10.4%) 72.4%
-------- -------- -------- ------- ------- ----------
155,653 13,552 147,122 13,631 5.8% (0.6%)
Divested operations 76,842 163 97,802 (7,403) (21.4%) 102.2%
-------- -------- -------- ------- ------- ----------
Total operations, excluding
Corporate $232,495 $ 13,715 $244,924 $ 6,228 (5.1%) 120.2%
======== ======== ======== ======= ====== ==========
</TABLE>
FISCAL YEARS ENDED JUNE 30, 1999 AND 1998
In fiscal 1999 consolidated net sales decreased $37,797,000, or 16.3%,
compared to fiscal 1998. Excluding divested operations, net sales increased
$4,171,000, or 2.7%, compared to the prior year. The sales increase can be
attributed to the Company's consolidation of Cargo Furniture and Accents
("Cargo") in February 1999 and sales increases at the Frames and Wall Decor and
Office Supplies divisions, partially offset by declines in the Gifts division.
The Company suffered an operating loss for the year primarily as a result of the
closure of the Tandy Leather retail stores and manufacturing operations, poor
performance of the licensed product line of the Gift division including
impairment losses recognized for certain long-lived assets, and performance
under the Cargo bank debt guarantee. 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, which operates under the
Pinnacle Art & Frame name, increased 2.6% during fiscal 1999. The sales growth
can be attributed to solid market acceptance of Pinnacle's new plastic frames
and an increase in mirror sales. Partially offsetting these increases was a
decline in sales of framed art caused by a large framed art customer changing
their framed art program from an everyday item to a promotional item. Looking
forward, we expect sales improvements to continue in the plastic products and a
rebound in framed art sales based on expected increases with existing customers
and the exit of a major competitor in the framed art market during fiscal 1999.
Pinnacle's operating income increased by $344,000 during fiscal 1999 and
maintained the 12.6% operating margin of net sales achieved in fiscal 1998. The
increase in operating income results from the sales increase as well as improved
gross margins. Gross margin as a percentage of sales improved by 2.0% because of
lower lumber prices in the current year and improved manufacturing efficiencies.
Selling, general and administrative ("SG&A") expenses as a percentage of sales
increased by 2.0% as a result of start up expenses associated with the new
production facility in Mexico, increased expenditures in marketing and product
development and expansion of the sales and service organization to support the
growth in business with major customers. We project Pinnacle's profitability to
be negatively impacted in fiscal 2000 by the direct costs associated with the
relocation of framed art production from California to Mexico and the excess
capacity which will be experienced while operating both the California and
Mexico plants during the transition period. We plan to have the transition
substantially complete by March 31, 2000 and expect operating margins to begin
improving in late fiscal 2000.
Office Supplies
Net sales of the Office Supplies division, which is comprised of the 41-
store Sav-On Office Supplies chain, increased 2.9% in fiscal 1999. The sales
increase resulted from a 1% increase in same-store sales and a 41.3% increase in
sales at non-comparable stores. Competition continued to impact sales growth as
12 stores saw their first or second large competitor enter their market during
fiscal 1999. Historically, Sav-On stores are significantly impacted the first
twelve to fifteen months after a large competitor enters a market; however,
after the second year,
9
<PAGE>
stores typically begin producing sales gains. As all but five of Sav-On's stores
face at least one and many face two major competitors, Sav-On's exposure to
competitive invasions has lessened.
Sav-On's operating income was up slightly from the prior year. Gross
margins fell slightly during fiscal 1999 primarily as a result of stronger back
to school promotions and competitive pricing pressures. Partially offsetting
these declines in margin was the impact of a new direct import program which
showed promising initial results in fiscal 1999. SG&A expenses increased by
$114,000 but decreased slightly as a percent of sales as a result of more
efficient advertising programs and more efficient labor scheduling. Management
plans to expand the direct import program in fiscal 2000 in response to
continued competitive price pressures.
Gifts
Sales for the Gifts division, comprised of Licensed Lifestyles, Inc.,
Rivertown Button Company and J-Mar Associates, decreased $5,416,000, or 22.9%,
from fiscal 1998. $5,040,000 of the decline is attributable to sales losses of
licensed products. Management has continued to see weak demand for licensed
products, especially for sports licensed products which have historically
represented the vast majority of Licensed Lifestyles' sales. In addition to the
general soft market for licensed goods, Licensed Lifestyles' traditional
customer base of sporting goods retailers continued its trend of consolidation
or elimination in fiscal 1999 negatively impacting sales. Sales at J-Mar were
also down as a result of new product introductions in fiscal 1999 occurring late
in the fiscal year; whereas, the fiscal 1998 new products were introduced in the
beginning of that fiscal year. We expect the Gifts division to introduce a
number of new non-licensed products in fiscal 2000 which should contribute to a
change in the sales trend of this division; however, as the demand for licensed
products will likely remain soft, sales may remain flat or decline in fiscal
2000.
The Gifts division had an operating loss of $12,329,000 in fiscal 1999
versus a loss of $110,000 in the prior year. The 1999 loss is comprised of an
impairment of long-lived assets loss of $9,522,000, discussed below, and a loss
from operations of $2,807,000. The operating loss can be primarily attributed to
a write-down of inventory, a decrease in sales and increased product development
costs. During fiscal 1999, Licensed Lifestyles recognized a $1,680,000 loss
related to the write-down of certain inventory items to their net realizable
values. This write-down was primarily triggered by management's decision to
discontinue several underperforming licensed product lines within the division
resulting from continued softness in licensed product sales.
As a result of three consecutive years of operating losses and declining
sales, as well as the recent industry-wide weakening of licensed product sales,
the Company performed an analysis of the recoverability of the net book value of
the long-lived assets of Licensed Lifestyles, Inc., its wholly-owned licensed
products subsidiary. Through this assessment, management determined that the
expected future cash flows (undiscounted and before interest) from these assets
were less than their net book value. These long-lived assets were then written-
down to their estimated fair value based upon a valuation analysis performed by
an independent third party valuation firm, resulting in an impairment loss of
$9,522,000. Approximately, $9,048,000 of this charge related to the write-down
of goodwill and $474,000 related to the write-down of property, plant and
equipment.
Despite the losses sustained in fiscal 1999, this division's new management
team made significant progress in reducing the level of SG&A expenses and
improving operational controls and buying practices. As such, despite the
uncertain sales levels of fiscal 2000, management expects this division's
operating income performance to improve in fiscal 2000.
Home Furnishings
In October 1998, the Company was informed that Cargo Furniture and Accents
("Cargo"), a former subsidiary of the Company, had obtained a financial advisor
for the purpose of actively pursuing additional capital to expedite the chain's
conversion of their mall-based furniture stores to their new, higher performing
Cargo Collection Store concept. At that time, Cargo had opened eight of the
Cargo Collection Stores and seen promising results. However, due to Cargo's
limited capital resources and the poor performance of their mall-based stores,
Cargo determined that it required additional capital to complete the conversion
process.
10
<PAGE>
In December 1998, Cargo informed the Company that it was unable to obtain
additional investment capital. In addition, it was probable that Cargo would be
in default of certain covenants contained in their bank term note agreement, and
that Cargo would not be able to cure the events of default. The Company had
guaranteed Cargo's term note, and had additional amounts receivable from Cargo.
On January 11, 1999, the Company was informed by Cargo's lender that Cargo
had defaulted on its term note and that Cargo's lender required the Company to
perform pursuant to its guaranty of the note. On February 1, 1999, the Company
complied with the lender's request. As a result of Cargo's poor financial
condition, the Company determined that recovery of the $2,481,000 note balance
and the receivables from Cargo was not probable. Consequently, loss provisions
of $3,465,000 were recorded during the quarter ended December 31, 1998 and are
included in selling, general and administrative expenses.
As a result of making the guaranty payment, the Company had the option to
obtain a majority of Cargo's common stock, thereby obtaining voting control of
Cargo. Accordingly, the Company began to consolidate the results of operations
of Cargo effective February 1, 1999, recording its assets and liabilities at
their estimated fair market value at that date. On June 11, 1999, the Company
completed the foreclosure of Cargo and acquired ownership.
During the last five months of fiscal 1999 while the Company was
consolidating Cargo in its financial statements, Cargo had sales of $6,036,000
and incurred an operating loss of $602,000. The majority of the loss is due to
transaction related costs and continued poor performance of the mall-based
stores. In fiscal 2000, the Company intends to convert the remaining mall-based
stores to the new Collection format. In addition, the product distribution and
delivery processes have been re-engineered resulting in a more cost effective
distribution system which should yield favorable results in fiscal 2000.
Divested Operations
Divested operations in fiscal 1999 consist primarily of the leather and
crafts retail stores and related manufacturing operations for which a plan of
closure was approved in the second quarter of fiscal 1999. The sales and
operating income for divested operations for fiscal 1998 also includes Joshua's
Christian Stores, which the Company sold effective May 31, 1998.
In fiscal 1999, net sales of the leather and crafts operations decreased
$12,579,000 or 26.5%. The leather and crafts operations had an operating loss
before a restructuring charge of $11,962,000 compared to operating income of
$150,000 for the prior year. Fiscal 1999 includes a charge of $2,458,000 to
write-down inventory of the leather operations to its estimated liquidation
value. In fiscal 1998, Joshua's Christian stores had sales of $29,388,000 and
operating income of $13,000 prior to the May 1998 sale.
Restructuring Charges
In the quarter ended December 31, 1998, the Board of Directors of the
Company approved a plan to close the Company's 121 leather and crafts retail
stores and related manufacturing operations to allow the Company to continue to
narrow its focus to its more profitable business segments. The divestiture plan
was substantially complete and all retail stores were closed as of June 30,
1999.
As a result of this plan, the Company recorded charges totaling $11,106,000
during the quarter ended December 31, 1998. Approximately $2,960,000 of these
charges related to the write-down of inventory to its estimated liquidation
value and is included in cost of sales on the accompanying consolidated
statements of operations. In the fourth quarter of fiscal 1999, as a result of
better than expected inventory liquidation sales, $503,000 of the inventory
write-down was reversed and credited to cost of sales. Approximately $8,145,000
of the charges related to the write-down of non-inventory assets and anticipated
future cash outlays and is classified as restructuring charge in the
accompanying consolidated statements of operations.
Included in the $8,145,000 restructuring charge is approximately $5,441,000
related to non-cash write-downs of non-inventory assets to their estimated net
realizable value, including $3,923,000 related to the write-off of goodwill,
$1,313,000 related to the write-down of fixed assets (primarily comprised of
store fixtures and
11
<PAGE>
leasehold improvements and manufacturing equipment substantially all of which
have been abandoned), and $205,000 related to the write-down of various other
assets. The remaining restructuring charge of $2,704,000 represents an accrual
for anticipated future cash outlays for lease obligations and other related exit
costs.
As of June 30, 1999, the lease agreements for 105 stores had been
terminated through settlement, sub-let or assignment. Subsequent to June 30,
1999, six more leases have been settled. All of the manufacturing operations
have been closed.
The following table sets forth the activity in the restructuring reserve,
which is included in current accrued liabilities in the June 30, 1999 balance
sheet (in thousands) :
<TABLE>
<CAPTION>
December 31, Cash June 30,
1998 Payments 1999
------------ ------------ ---------
<S> <C> <C> <C>
Lease obligations $ 2,346 $ 1,881 $ 465
Other 358 227 131
------------ ------------ ---------
$ 2,704 $ 2,108 $ 596
============ ============ =========
</TABLE>
The above provisions are estimates based on the Company's judgment at this
time. Adjustments to the restructuring provisions may be necessary in the future
based on further development of restructuring related costs.
Revenues and operating losses (before restructuring charges, but including
the inventory write-down charge of $2,458,000) for the divested operations were
$34,874,000 and $11,962,000, respectively, for the fiscal year ended June 30,
1999 compared to revenues and operating income of $47,454,000 and $150,000,
respectively, in fiscal 1998 and $53,413,000 and $530,000, respectively, for
fiscal 1997.
Selling, General & Administrative Expenses
SG&A expenses increased by $936,000 in fiscal 1999 from fiscal 1998. As a
percentage of sales, SG&A increased from 27.2% to 32.9%. The increase is a
result of the costs associated with the closure of Tandy Leather's retail stores
and manufacturing operations and losses recognized under the performance of the
Cargo bank debt guarantee.
Net Interest Expense
Net interest expense decreased $1,086,000, or 33.3%, in fiscal 1999
compared to the prior year. The decrease in net interest expense is due
primarily to lower average borrowings, as a result of the Company's efforts to
reduce long-term debt, as well as $416,000 of interest income recognized during
the year related to the note received for the sale of Joshua's.
Depreciation and Amortization
Consolidated depreciation and amortization decreased $501,000, or 10.4%, in
fiscal 1999 compared to the prior year. The decrease is primarily due to the
divestiture of Joshua's at the end of fiscal 1998.
Provision for Income Taxes
The Company recognized a tax benefit in fiscal 1999 of $9,279,000 compared
to expense of $2,502,000 in fiscal 1998. The effective tax rate for fiscal 1999
was 28% and differs from the statutory rate as a result of the write-off of non-
deductible goodwill. As of June 30, 1999, the Company has total tax loss carry-
forwards of $7,012,000. The Company believes that future pre-tax income during
the carryforward period will be sufficient to utilize the federal loss
carryforwards; however, a valuation allowance of $2,016,000 has been provided
for a portion of the state loss carryforwards.
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
$8,531,000, or 5.8%, compared to the prior year. Total operating income before
corporate expenses increased $7,487,000, or 120.2%, from fiscal 1997. Excluding
divested
12
<PAGE>
operations, operating income decreased $79,000, or 0.6%, 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
& Frame, increased 9.9% 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 1.7% 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 2.2% reflecting the
increased sales levels achieved in fiscal 1998. SG&A expenses increased 3.2%
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.
Office Supplies
The Office Supplies division, comprised of the Sav-On Office Supplies
chain, 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
to fifteen 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.
Gifts
Sales for the Gifts division, comprised of Licensed Lifestyles, Inc., J-Mar
Associates and Rivertown Button Company, decreased 10.4% 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 $110,000 in fiscal 1998 compared to
a loss of $399,000 in the prior year. Gross profit as a percent of sales
decreased in fiscal 1998; and, gross profit dollars decreased further 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.
Divested Operations
Divested operations in fiscal 1998 consists primarily of the leather and
craft retail stores and related manufacturing operations and Joshua's Christian
Stores. The sales and operating income for divested operations for fiscal 1997
also includes Cargo which the Company sold effective January 27, 1997.
Net sales for the leather and crafts operations 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.
13
<PAGE>
Operating income for the leather and crafts operations 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.
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
was payable in three installments on December 31 of the years 1998, 1999 and
2000. As of June 30, 1999, this note had been received in full. 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
operations and the Gifts division, 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 a tax
benefit of $1,127,000 in fiscal 1997. 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity have been cash flows from
operations and the proceeds from the sale of Joshua's Christian Stores. These
funds have been used primarily for capital expenditures, to repurchase the
Company's common stock and to reduce borrowings under the Company's revolving
credit facility.
During fiscal 1999 cash decreased $472,000. Cash provided by operating
activities of $7,845,000 primarily resulted from improved working capital
management. The Company used $9,323,000 for capital expenditures and entered
into a capital lease to finance certain information systems expenditures of
$2,033,000. During fiscal 1999 the note receivable from the sale of Joshua's
Christian Stores was collected in the amount of $8,312,000. The Company
repurchased $1,995,000 of its common stock, net of employee stock plan
forfeitures, and utilized cash of approximately $4,830,000 for repayments of
borrowings under the Company's revolving credit facility.
Effective March 31, 1999, the Company entered into a new revolving credit
facility with a group of banks. The new facility is a $45 million revolving line
of credit with a maturity date of March 31, 2001 and is renewable
14
<PAGE>
annually. The amount of credit available under the facility will decline to $40
million on April 1, 2000 to reflect management's projection of reduced capital
needs. The terms of the new facility are essentially the same as the $50 million
facility the Company operated under previously. At June 30, 1999, the Company
was not in compliance with certain covenants of the credit facility. The Company
received a waiver from the banks for these covenant violations through September
30, 1999. Effective September 27, 1999, the Company reached an agreement with
the banks on revised covenants, with which the Company would have been in
compliance at June 30, 1999. The Company is continuing discussions with the
banks regarding the possible amendment to other terms of the current credit
facility.
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, 1999, the Company would have had to pay
approximately $125,000 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 utilizes a revolving trade accounts receivable securitization
program to sell without recourse, through a wholly-owned subsidiary, certain
trade accounts receivable. Under the program, the maximum amount allowed to be
sold at any given time through June 30, 1999, was $12,000,000. The maximum
amount of receivables that can be sold may be seasonally adjusted. At June 30,
1999, the amount of trade accounts receivable outstanding which had been sold
approximated $4,247,000. The proceeds from the sales were used to reduce
borrowings under the Company's revolving credit facility. Costs of the program,
which primarily consist of the purchaser's financing cost of issuing commercial
paper backed by the receivables, totaled $343,000 for fiscal 1999. The Company,
as agent for the purchaser of the receivables, retains collection and
administrative responsibilities for the purchased receivables.
In September 1998, the Company's Board of Directors authorized a common
share repurchase program that provides for the Company to purchase, in the open
market and through negotiated transactions, up to $2,000,000 of the Company's
outstanding common stock. As of June 30, 1999, the Company had repurchased
approximately 540,000 shares for an aggregate purchase price of $1,995,000.
Capital expenditures approximated $9,323,000 during fiscal 1999. The
majority of these expenditures were related to the new frame production facility
in Mexico, expanded plastic frame production capacity and information systems.
Planned capital expenditures for fiscal 2000 approximate $3,500,000 and are
primarily targeted for investments in Pinnacle Art & Frame and conversion of
Cargo stores to the new Collection format. Management believes that the
Company's current cash position, its cash flows from operations and available
borrowing capacity will be sufficient to fund its current operations, capital
expenditures and current growth plans. Actual results may differ from this
forward-looking projection. Please refer to the discussion of risk factors
contained herein.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This statement establishes accounting and reporting
guidelines for derivatives and requires that an entity recognize all derivatives
as either assets or liabilities on the statement of financial position and
measure those instruments at fair value. This statement is effective for the
Company beginning in fiscal 2001. The Company is analyzing the implementation
requirements and does not anticipate that the adoption of this statement will
have a material impact on the Company's consolidated financial statements.
15
<PAGE>
In January 1998, the American Institute of Certified Public Accountants
(the "AICPA") issued Statement of Position 98-1, "Accounting for the Cost of
Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1
requires that an entity only capitalize those costs of computer software
developed or obtained for internal use that were incurred in the development and
implementation stages. Costs incurred during the conceptual formulation stage
and training costs are expensed as incurred. SOP 98-1 becomes effective for the
Company July 1, 1999; however, the Company's current policy falls within the
guidelines of the statement; thus, the Company does not anticipate any impact
from adopting this statement.
THE YEAR 2000
The Company has a comprehensive project ("Year 2000 project") designed to
minimize or eliminate business disruption caused by potential processing
problems associated with the Year 2000 issue. The Year 2000 project, which
addresses both the Company's information technology ("IT") systems and non-IT
systems, consists of three phases: identification and analysis, planning,
implementation and testing. The Company's Year 2000 project has used both
internal and external resources.
The first phase of the Company's Year 2000 project involved identifying and
analyzing the IT and non-IT systems that the Company believed were susceptible
to failures or processing errors as a result of the Year 2000 issue. This phase
consisted of the Company and its operating units identifying the systems that
required remediation or replacement. Through its systems requirements study, the
Company believed that, with regard to IT systems, five should be remediated
through replacement and three remediated through upgrades. With respect to non-
IT systems, the Company believed that there was an insubstantial susceptibility
to the Year 2000 issue. This phase has been completed.
The second phase of the Year 2000 project involved analyzing proposed
remediations and planning how to implement such remediations. The Company then
established priorities for remediation. This phase has been completed for IT
systems.
The third phase of the Year 2000 project involved implementing the proposed
remediations. With regard to IT systems, all five replacements have been
substantially completed. Two of the three upgrades have been substantially
completed with the last upgrade in process and scheduled to be substantially
completed by the end of October 1999. Testing of the remediations is in process
and further remediation efforts may be required thereafter to address Year 2000
issues discovered during testing.
Further, the Company acquired the assets of Cargo Furniture and Accents
("Cargo") late in fiscal 1999. During its due diligence and since its
acquisition, the Company identified and analyzed the systems of Cargo that the
Company believed were susceptible to failures or processing errors as a result
of Year 2000 issues. The Company then analyzed proposed remediations and planned
how to implement such remediations. The Company is currently in the process of
implementing Year 2000-ready systems at Cargo and currently believes that this
process will be substantially completed by November 30, 1999.
Additionally, as part of its Year 2000 project, the Company has identified
certain service providers, vendors, suppliers, and customers ("Key Partners")
that it believes are critical to business operations after January 1, 2000. The
Company initiated communications with such Key Partners in an attempt to
reasonably ascertain their state of Year 2000 readiness. The Company has
received responses to approximately 77% of these questionnaires. The majority of
such responses indicated that the Key Partner had Year 2000 remediation programs
and expected to be compliant by at least calendar year end 1999. The Company has
sent follow-up inquiries to the Key Partners who have not responded to the
Company's questionnaire. The Company plans to continue assessment of Key
Partners, which may include further communications, interviews and face-to-face
meetings, as deemed appropriate. In addition, the Company has implemented a Year
2000-ready electronic data interchange ("EDI") system and is in the process of
working with its business partners to convert them over to this system. Despite
the Company's efforts, there can be no guarantee that the systems of other
companies which the Company relies upon to conduct its operations and business
will be Year 2000 compliant.
16
<PAGE>
In addition to the above measures, the Company is developing contingency
plans intended to mitigate the possible disruption in business operations from
the Year 2000 issue. The Company intends to continue to evaluate and modify
contingency planning as additional information becomes available.
The Company estimates that the costs of the Year 2000 project will range
from $2.6 million to $2.8 million. As of June 30, 1999, the Company had spent
approximately $2.4 million. The cost estimates do not include any costs
associated with the implementation of contingency plans and any potential costs
related to any customer or other claims relating to the Year 2000 issue.
Because of the large number of systems used by the Company, the significant
number of service providers, vendors, suppliers and customers, and the
interdependent nature of systems, there can be no guaranty that the Company will
not experience some disruption in its business due to the Year 2000 issue.
Although it is not currently possible to quantify the most reasonably likely
worst case scenario, the possible consequences of the Company or Key Partners
not being fully ready in a timely manner include without limitation temporary
plant closings, delays in the delivery of products, delays in the receipt of
supplies, invoice and collection errors and inventory and supply obsolescence.
Consequently, the business and operations of the Company could be materially
adversely affected by a temporary inability of the Company to conduct its
business in the ordinary course for periods of time due to the Year 2000 issue.
However, the Company believes that its Year 2000 project and related contingency
planning should reduce the adverse effect any such disruptions may have.
The Year 2000 project is an ongoing process and the risk assessments,
estimates of costs, projected completion dates and other factors are forward-
looking statements and are subject to change. Risk factors that may cause actual
results to differ from estimates or projections include without limitation, the
continued availability of qualified personnel and other information technology
resources; the ability to identify and remediate all date sensitive lines of
computer code and embedded chips; the timely receipt and installation of Year
2000-ready replacement systems and upgrades; the actions of governmental
agencies, utilities and other third parties with respect to the Year 2000 issue;
the ability to implement contingency plans; and the occurrence of broad-based or
systemic economic failures.
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, 1999 has been established. Based on
the information presently available, management believes the amount of the
accrual at June 30, 1999 is adequate to cover the liability the Company may
incur under the alleged guarantees.
17
<PAGE>
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, 1999, 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.
<TABLE>
<CAPTION>
(Dollars in thousands)
Fair
1999 2000 2001 Total Value
-------- ------- ------ ----- ------
<S> <C> <C> <C> <C> <C>
Liabilities:
Bank debt 30,000 30,000 30,000
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 (125)
Average pay rate 6.01% 6.01%
Average receive rate LIBOR LIBOR
</TABLE>
18
<PAGE>
Item 8. Financial Statements and Supplementary Data
- ------- -------------------------------------------
Index to Financial Statements
Financial Statements: Page
-------------------- --------
Report of Independent Accountants 20
Consolidated Balance Sheets, June 30, 1999 and 1998 21
Consolidated Statements of Operations for the Years
Ended June 30, 1999, 1998 and 1997 22
Consolidated Statements of Cash Flows for the Years
Ended June 30, 1999, 1998 and 1997 23
Consolidated Statements of Stockholders' Equity for
the Years Ended June 30, 1999, 1998 and 1997 24
Notes to Consolidated Financial Statements 25
Financial Statement Schedules:
------------------------------
For each of the three years in the period ended
June 30, 1999:
Schedule II - Valuation and Qualifying Accounts
and Reserves 40
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
19
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Tandycrafts, Inc.
In our opinion, the consolidated balance sheet and the related statements of
operations, of cash flows and of stockholders' equity listed in the accompanying
index present fairly, in all material respects, the financial position of
Tandycrafts, Inc. and its subsidiaries at June 30, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended June 30, 1999, in conformity with generally accepted accounting
principles. In addition, in our opinion, the financial statement schedule listed
in the index appearing under Item 14(a)(1) on page 37 presents fairly, in all
materially respects, the information set forth therein when read in conjunction
with the related consolidated financial statements. These financial statements
and the financial statement schedule are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements and financial statement schedule 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 10, 1999
20
<PAGE>
TANDYCRAFTS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
June 30,
------------------
1999 1998
--------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 744 $ 1,216
Trade accounts receivable, net of allowance for doubtful
accounts of $2,460 and $2,755, respectively............. 20,783 28,086
Inventories............................................... 35,026 45,990
Other current assets...................................... 6,988 7,785
-------- --------
Total current assets................................... 63,541 83,077
-------- --------
Property and equipment, net................................ 29,560 22,886
Other assets............................................... 5,256 6,929
Goodwill, net.............................................. 24,694 37,799
-------- --------
$123,051 $150,691
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................... $ 11,988 $ 12,155
Accrued liabilities and other............................ 16,467 12,520
-------- --------
Total current liabilities.............................. 28,455 24,675
-------- --------
Long-term debt............................................. 30,000 34,230
Long-term capital lease obligation......................... 1,671 -
Deferred taxes............................................. - 2,822
Stockholders' equity:
Common stock, $1 par value, 50,000,000 shares authorized,
18,527,988 issued....................................... 18,528 18,528
Additional paid-in capital............................... 20,559 20,545
Retained earnings........................................ 48,241 72,074
Common stock in treasury, at cost, 6,517,015 and
5,917,419 shares, respectively.......................... (24,403) (22,183)
-------- --------
Total stockholders' equity............................ 62,925 88,964
-------- --------
Commitments and contingencies (Note 11)
$123,051 $150,691
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
21
<PAGE>
TANDYCRAFTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net sales............................................... $ 194,698 $ 232,495 $ 244,924
---------- ---------- ----------
Operating costs and expenses:
Cost of goods sold (exclusive of depreciation)......... 139,525 153,484 160,325
Selling, general and administrative.................... 64,118 63,182 79,185
Restructuring charge................................... 8,145 - -
Impairment of long-lived assets........................ 9,522 - -
Loss on sale of business unit.......................... - 623 -
Depreciation and amortization.......................... 4,327 4,828 5,374
---------- ---------- ----------
Total operating costs and expenses.................... 225,637 222,117 244,884
---------- ---------- ----------
Operating income (loss)............................... (30,939) 10,378 40
Interest income......................................... 416 87 39
Interest expense........................................ 2,589 3,346 3,124
---------- ---------- ----------
Income (loss) before income taxes....................... (33,112) 7,119 (3,045)
Provision (benefit) for income taxes.................... (9,279) 2,502 (1,127)
---------- ---------- ----------
Net income (loss).................................... $ (23,833) $ 4,617 $ (1,918)
========== ========== ==========
Net income (loss) per common share:
Basic and diluted.................................... $ (1.96) $ .37 $ (.15)
========== ========== ==========
Weighted average common shares:
Basic 12,182 12,645 12,423
Diluted 12,182 12,659 12,423
</TABLE>
The accompanying notes are an integral part of these financial statements.
22
<PAGE>
TANDYCRAFTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................................ $ (23,833) $ 4,617 $ (1,918)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization................................... 4,327 4,828 5,374
Deferred income taxes........................................... (8,340) 1,543 (931)
Loss on sale of business unit................................... - 623 -
Impairment of long-lived assets................................. 9,522 - -
Restructuring charge............................................ 8,145 - -
Changes in assets and liabilities, excluding effect
of businesses acquired or sold:
Receivables.................................................... 7,987 4,415 (2,224)
Inventories.................................................... 13,161 (3,512) 7,401
Other assets................................................... (6,325) 805 (3,054)
Accounts payable, accrued expenses and income taxes............ 3,201 (5,383) 4,725
---------- ---------- ----------
Net cash provided by operating activities................... 7,845 7,936 9,373
---------- ---------- ----------
Cash flows from investing activities:
Additions to property and equipment.............................. (9,323) (3,530) (3,794)
Purchase of business, net of cash acquired....................... (270) - -
Collection of note receivable.................................... 8,312 - -
Proceeds from sales of assets.................................... - 2,342 3,750
---------- ---------- ----------
Net cash used by investing activities....................... (1,281) (1,188) (44)
---------- ---------- ----------
Cash flows from financing activities:
Sales of treasury stock to employee benefit plan, net............ 36 73 2,594
Purchases of treasury stock...................................... (2,242) - -
Payments under bank credit facility, net......................... (4,830) (6,610) ( 12,430)
---------- ---------- ----------
Net cash used by financing activities....................... (7,036) (6,537) (9,836)
---------- ---------- ----------
Increase (decrease) in cash and cash equivalents.................. (472) 211 (507)
Balance, beginning of year........................................ 1,216 1,005 1,512
---------- ---------- ----------
Balance, end of year.............................................. $ 744 $ 1,216 $ 1,005
========== ========== ==========
Supplemental cash flow information:
Cash paid (received) during the year for:
Interest........................................................ $ 2,470 $ 3,303 $ 3,249
Income taxes.................................................... $ 602 $ (832) $ (3,615)
Capital lease obligation incurred............................... $ 2,033 $ - -
</TABLE>
The accompanying notes are an integral part of these financial statements.
23
<PAGE>
TANDYCRAFTS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands)
<TABLE>
<CAPTION>
Additional
Common paid-in Retained Treasury
stock capital earnings stock Total
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
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
Sale of 9,686 shares of
treasury stock to employee
benefit plan, net.................. - - - 36 36
Purchase of 609,282 shares of
treasury stock..................... - 14 - (2,256) (2,242)
Net loss............................ - - (23,833) - (23,833)
---------- ---------- ---------- ---------- ----------
Balance, June 30, 1999.............. $ 18,528 $ 20,559 $ 48,241 $ (24,403) $ 62,925
========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
24
<PAGE>
TANDYCRAFTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Accounting Principles
Description of Business - Tandycrafts, Inc. ("Tandycrafts" or the "Company") is
a leading maker and marketer of consumer products, including frames and wall
decor, office supplies, home furnishings and gift products. The Company's
products are sold nationwide through wholesale distribution channels, including
mass merchandisers and specialty retailers, and direct-to-consumer channels
through the Company's retail stores, mail order and the Internet. During the
quarter ended December 31, 1998, the Company adopted a plan of closing its
leather and crafts retail stores and related manufacturing operations and as of
June 30, 1999 such operations were closed. These operations comprised
substantially all of the operations within the Company's Leather and Crafts
operating division.
Principles of consolidation - The accompanying consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries after
elimination of significant inter-company accounts and transactions.
Cash and cash equivalents - The Company considers, for purposes of the statement
of cash flows, all highly liquid investments purchased with an original maturity
of three months or less to be cash equivalents.
Inventories - Inventories are stated at the lower of average cost or market and
consist of the following (in thousands):
June 30,
----------------
1999 1998
------- -------
Finished goods..................... $24,282 $33,244
Raw materials and work-in-process.. 10,744 12,746
------- -------
$35,026 $45,990
======= =======
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.
Derivative instruments - The Company has used an interest rate swap agreement to
manage interest rate risk on its floating rate revolving credit facility. The
interest rate swap is matched as a hedge against a portion of the Company's
revolving credit facility. Amounts to be paid or received under the interest
rate swap agreement are accrued as interest rates change and are recognized over
the life of the swap agreement as an adjustment to interest expense. The fair
value of the swap agreement is not recognized in the financial statements since
it is accounted for as a hedge.
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
25
<PAGE>
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, 1999 and
1998 was $3,368,000 and $4,374,000, respectively. Goodwill which arose prior to
October 31, 1970, aggregating $1,163,000, 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 is 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 - Basic earnings per share is computed by dividing
income available to common shareholders by the weighted-average common shares
outstanding. 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 1999, 1998 and 1997, the
number of weighted-average shares and potential common shares is as follows (in
thousands):
1999 1998 1997
------ ------ ------
Weighted-average shares - basic........ 12,182 12,645 12,423
Potential common shares................ - 14 -
------ ------ ------
Total weighted-average common and
potential common shares - diluted..... 12,182 12,659 12,423
====== ====== ======
Advertising costs - Advertising costs are expensed the first time the
advertising takes place. Advertising expense for fiscal 1999, 1998 and 1997 was
$4,000,000, $5,700,000 and $7,700,000, 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.
New accounting standards - In June 1998, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities." This statement establishes
accounting and reporting guidelines for derivatives and requires that an entity
recognize all derivatives as either assets or liabilities on the statement of
financial position and measure those instruments at fair value. This statement
is effective for the Company beginning in fiscal 2001. The Company is analyzing
the implementation requirements and does not anticipate that the adoption of
this statement will have a material impact on the Company's consolidated
financial statements.
In January 1998, the American Institute of Certified Public Accountants
(the "AICPA") issued Statement of Position 98-1, "Accounting for the Cost of
Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1
requires that an entity only capitalize those costs of computer software
developed or obtained for internal use that were incurred in the development and
implementation stages. Costs incurred during the conceptual formulation stage
and training costs are expensed as incurred. SOP 98-1 becomes effective for the
Company July 1, 1999; however, the Company's current policy falls within the
guidelines of the statement; thus, the Company does not anticipate any impact
from adopting this statement.
26
<PAGE>
Comprehensive Income (Loss) - Effective July 1, 1998, the Company adopted SFAS
No. 130, "Reporting Comprehensive Income". Comprehensive income is defined as
the change in equity (net assets) of a business enterprise during a period,
except those changes resulting from investments by owners and distributions to
owners. The Company has not had any elements of income during the fiscal years
1999, 1998 or 1997 not reported in net income, thus comprehensive income is not
separately reported.
Note 2 - Divestiture
In the quarter ended December 31, 1998, the Board of Directors of the
Company approved a plan to close the Company's 121 leather and crafts retail
stores and related manufacturing operations to allow the Company to continue to
narrow its focus to its more profitable business segments. The divestiture plan
was substantially complete and all retail stores were closed as of June 30,
1999.
As a result of this plan, the Company recorded charges totaling $11,106,000
during the quarter ended December 31, 1998. Approximately $2,961,000 of these
charges related to the write-down of inventory to its estimated liquidation
value and is included in cost of sales in the accompanying consolidated
statements of operations. In the fourth quarter of fiscal 1999, as a result of
better than expected inventory liquidation sales, $503,000 of the inventory
write-down was reversed and credited to cost of sales. Approximately $8,145,000
of the charges related to the write-down of non-inventory assets and anticipated
future cash outlays and is classified as restructuring charge in the
accompanying consolidated statements of operations.
Included in the $8,145,000 restructuring charge is approximately $5,441,000
related to non-cash write-downs of non-inventory assets to their estimated net
realizable value, including $3,923,000 related to the write-off of goodwill,
$1,313,000 related to the write-down of fixed assets (primarily comprised of
store fixtures and leasehold improvements and manufacturing equipment
substantially all of which have been abandoned), and $205,000 related to the
write-down of various other assets. The remaining restructuring charge of
$2,704,000 represents an accrual for anticipated future cash outlays for lease
obligations and other related exit costs.
As of June 30, 1999, the lease agreements for 105 stores had been
terminated through settlement, sub-let or assignment. Subsequent to June 30,
1999, six more leases have been settled. All of the manufacturing operations
have been closed.
The following table sets forth the activity in the restructuring reserve,
which is included in current accrued liabilities in the June 30, 1999 balance
sheet (in thousands):
December 31, Cash June 30,
1998 Payments 1999
------------ ------------ ------------
Lease obligations $ 2,346 $ 1,881 $ 465
Other 358 227 131
------------ ------------ ------------
$ 2,704 $ 2,108 $ 596
============ ============ ============
The above provisions are estimates based on the Company's judgment at this
time. Adjustments to the restructuring provisions may be necessary in the future
based on further development of restructuring related costs.
Revenues and operating losses (before restructuring charges, but including
the inventory write-down charge of $2,458,000) for the divested operations were
$34,874,000 and $11,962,000, respectively, for the fiscal year ended June 30,
1999 compared to revenues and operating income of $47,454,000 and $150,000,
respectively, in fiscal 1998 and $53,413,000 and $530,000, respectively, for
fiscal 1997.
27
<PAGE>
Note 3 - Licensed Lifestyles, Inc.
As a result of three consecutive years of operating losses and declining
sales, as well as the recent industry-wide weakening of licensed product sales,
the Company performed an analysis of the recoverability of the net book value of
the long-lived assets of Licensed Lifestyles, Inc., its wholly-owned licensed
products subsidiary. Through this assessment, management determined that the
expected future cash flows (undiscounted and before interest) from these assets
were less than their net book value. These long-lived assets were then written-
down to their estimated fair value based upon a valuation analysis performed by
an independent third party valuation firm, resulting in an impairment loss of
$9,522,000. Approximately, $9,048,000 of this charge related to the write-down
of goodwill and $474,000 related to the write-down of property, plant and
equipment. Property, plant and equipment remaining at Licensed Lifestyles has a
net book value of $1,572,000 at June 30, 1999.
Due to the continued softness in the sports licensed product market,
management analyzed Licensed Lifestyles' product lines and decided to
discontinue several under-performing lines. The discontinuance of these product
lines resulted in an inventory write-down of $1,680,000 which was recorded in
the quarter ended June 30, 1999.
Note 4 - 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 sale of this business resulted in a pretax
loss of $623,000, comprised primarily of transaction related costs. During
fiscal 1999, this note was received in full.
Note 5 - Cargo Furniture and Accents
In October 1998, the Company was informed that Cargo Furniture and Accents
("Cargo"), a former subsidiary of the Company, had obtained a financial advisor
for the purpose of actively pursuing additional capital to expedite the chain's
conversion of their mall-based furniture stores to their new, higher performing
Cargo Collection Store concept. At that time, Cargo had opened eight of the
Cargo Collection Stores. However, due to Cargo's limited capital resources and
the poor performance of their mall-based stores, Cargo determined that it
required additional capital to complete the conversion process.
In December 1998, Cargo informed the Company that it was unable to obtain
additional investment capital. In addition, it was probable that Cargo would be
in default of certain covenants contained in their term note agreement, and
Cargo would not be able to cure the events of default. The Company had
guaranteed Cargo's term note, and had additional amounts receivable from Cargo.
On January 11, 1999, the Company was informed by Cargo's lender that Cargo
had defaulted on its term note and that Cargo's lender required the Company to
perform pursuant to its guaranty of the note. On February 1, 1999, the Company
complied with the lender's request. As a result of Cargo's poor financial
condition, the Company determined that recovery of the $2,481,000 note balance
and the receivables from Cargo was not probable. Consequently, loss provisions
of $3,465,000 were recorded during the quarter ended December 31, 1998 and are
included in selling, general and administrative expenses.
As a result of making the guaranty payment, the Company had the option to
obtain a majority of Cargo's common stock, thereby obtaining voting control of
Cargo. Accordingly, the Company began to consolidate the results of operations
of Cargo effective February 1, 1999, recording its assets and liabilities at
their estimated fair market value at that date. On June 11, 1999, the Company
completed the foreclosure of Cargo and acquired ownership.
28
<PAGE>
Note 6 - Account Receivable Securitization
The Company utilizes a revolving trade accounts receivable securitization
program to sell without recourse, through a wholly-owned subsidiary, certain
trade accounts receivable. Under the program, the maximum amount allowed to be
sold at any given time through June 30, 1999, was $12,000,000. The maximum
amount of receivables that can be sold may be seasonally adjusted. At June 30,
1999, the amount of trade accounts receivable outstanding which had been sold
approximated $4,247,000. The proceeds from the sales were used to reduce
borrowings under the Company's revolving credit facility. Costs of the program,
which primarily consist of the purchaser's financing cost of issuing commercial
paper backed by the receivables, totaled $343,000 for fiscal year ended June 30,
1999. The Company, as agent for the purchaser of the receivables, retains
collection and administrative responsibilities for the purchased receivables.
Note 7 - Property and Equipment and Accumulated Depreciation
<TABLE>
<CAPTION>
As of June 30 (in thousands): 1999 1998
-------- --------
<S> <C> <C>
Property and equipment, at cost:
Land...................................................................... $ 2,547 $ 2,419
Buildings................................................................. 15,746 13,373
Leasehold improvements.................................................... 6,756 4,233
Fixtures and equipment.................................................... 31,201 26,302
-------- --------
56,250 46,327
Less accumulated depreciation.............................................. (26,690) (23,441)
-------- --------
Property and equipment, net............................................... $ 29,560 $ 22,886
======== ========
</TABLE>
Note 8 - Accrued Liabilities and Other
Accrued liabilities and other consisted of the following at June 30 (in
thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Accrued payroll and bonus.................................................. $ 3,493 $ 3,749
Income taxes payable....................................................... 877 1,122
Taxes, other than income taxes............................................. 823 667
Interest................................................................... 365 246
Restructuring accrual...................................................... 596 43
Accrual for sales allowances............................................... 1,633 1,685
Accrued legal.............................................................. 2,394 1,593
Accrued insurance.......................................................... 2,264 1,373
Other...................................................................... 4,022 2,042
-------- --------
$ 16,467 $ 12,520
======== ========
</TABLE>
Note 9 - Debt
Effective March 31, 1999, the Company entered into a new revolving credit
facility with a group of banks. The new facility is a $45 million revolving line
of credit with a maturity date of March 31, 2001 and is renewable annually. The
amount of credit available under the facility will decline to $40 million on
April 1, 2000 to reflect management's projection of reduced capital needs. The
terms of the new facility are essentially the same as the $50 million facility
the Company operated under previously. At June 30, 1999, the Company was not in
compliance with certain covenants of the credit facility. The Company received a
waiver from the banks for these covenant violations through September 30, 1999.
Effective September 27, 1999, the Company reached an agreement with its banks on
revised covenants, with which the Company would have been in compliance at June
30, 1999.
29
<PAGE>
Interest rates on borrowings under the current credit facility 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, 1999 ranged from 6.28% to 6.75%. At June 30, 1999, the
Company had borrowings aggregating $30,000,000 and letters of credit aggregating
$414,000 outstanding under this facility.
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, 1999, the Company would have had to pay
approximately $125,000 to terminate the interest rate swap. This amount was
obtained from the counterparties and represents the fair market value of the
Swap Agreement.
Note 10 - Income Taxes
The provision for income taxes is as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Current tax expense (benefit):
Federal.......................................................... $ (1,042) $ 893 $ (226)
State and local.................................................. 103 66 30
-------- -------- --------
Total current.................................................... (939) 959 (196)
Deferred tax expense (benefit):
Federal.......................................................... (8,340) 1,543 (931)
-------- -------- --------
Total provision (benefit)......................................... $ (9,279) $ 2,502 $ (1,127)
======== ======== ========
</TABLE>
Deferred tax liabilities (assets) are comprised of the following at June 30 (in
thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Depreciation...................................................... $ 1,142 $ 1,413
Deferred compensation............................................. - 109
Bad debts......................................................... - 15
Goodwill.......................................................... 323 2,142
-------- --------
Total deferred tax liabilities................................... 1,465 3,679
-------- --------
Inventory......................................................... (1,130) (672)
Bad debts......................................................... (335) -
Restructuring reserve............................................. (323) (99)
Charitable contribution carryforwards............................. (559) (450)
State tax loss carryforwards...................................... (2,058) (1,291)
Federal tax loss carryforwards.................................... (4,954) -
Other............................................................. (773) (575)
-------- --------
Total deferred tax assets........................................ (10,132) (3,087)
Valuation allowance............................................... 2,168 1,249
-------- --------
Net deferred tax assets.......................................... (7,964) (1,838)
-------- --------
$ (6,499) $ 1,841
======== ========
</TABLE>
The use of the federal and state loss carryforwards and the charitable
contribution carryforwards is limited by future taxable earnings by the Company
and its subsidiaries. The Company believes that future pre-tax income during
the carryforward period will be sufficient to utilize the federal loss
carryforwards; however, valuation allowances of $2,016,000 and $152,000,
respectively, have been provided for a portion of the state loss and charitable
contribution carryforwards. In fiscal 1998, the entire valuation allowance
related to state tax loss carryforwards.
30
<PAGE>
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):
<TABLE>
<CAPTION>
Year ended June 30,
---------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Statutory U.S. tax provision.................. $(11,258) $ 2,420 $ (1,066)
Increase (decrease) in rates resulting from:
State and local taxes, net................... 67 43 19
Goodwill write-offs.......................... 1,658 278 -
Other........................................ 254 (239) (80)
-------- -------- --------
Tax provision................................. $ (9,279) $ 2,502 $ (1,127)
======== ======== ========
</TABLE>
Note 11 - 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. During fiscal 1999, the
Company entered into a capital lease arrangement for computer hardware and
software related to the Company's implementation of an enterprise-wide
information system. Assets under capital lease of $2,033,000 are included in
the consolidated balance sheet. The composition of total rental expense for
operating leases is as follows (in thousands):
<TABLE>
<CAPTION>
Year ended June 30, 1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Rentals:
Minimum...................................... $ 5,280 $ 7,298 $ 8,622
Contingent (percentage of sales)............. 20 20 70
-------- -------- --------
$ 5,300 $ 7,318 $ 8,692
======== ======== ========
</TABLE>
Minimum rental commitments for noncancellable leases at June 30, 1999 are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
Operating Capital
Year ended June 30, Leases Leases
-------- --------
<S> <C> <C>
2000...................................... $ 3,692 $ 468
2001...................................... 3,075 468
2002...................................... 2,457 468
2003...................................... 1,264 468
2004...................................... 713 468
2005 and thereafter....................... 1,297 -
-------- --------
Total minimum lease payments.............. $ 12,498 $ 2,340
========
Less: Amount representing interest at
6.00%.................................. (307)
--------
Present value of net minimum
lease payments.......................... $ 2,033
========
</TABLE>
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, 1999 has been established. Based on
the information presently available, management believes the amount of the
accrual at June 30, 1999 is adequate to cover the liability the Company may
incur under the alleged guarantees.
31
<PAGE>
Note 12 - Tandycrafts Retirement Savings Plan
The Tandycrafts Retirement Savings Plan (the "TRSP" or the "Plan") 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.
Company contributions to the Plan, net of forfeitures, for the years ended June
30, 1999, 1998 and 1997 were approximately $998,000, $1,166,000 and $1,534,000,
respectively.
Note 13 - Share Repurchase Program
In September 1998, the Company's Board of Directors authorized a common
share repurchase program that provides for the Company to purchase, in the open
market and through negotiated transactions, up to $2,000,000 of the Company's
outstanding common stock. As of June 30, 1999, the Company had repurchased
approximately 540,000 shares for an aggregate purchase price of $1,995,000.
Note 14 - 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 15 - 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.
32
<PAGE>
A summary of stock option activity under these plans follows:
<TABLE>
<CAPTION>
Weighted -
Average
Exercise
Shares Price
----------- -----------
<S> <C> <C>
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 granted................ 132,500 $ 3.47
Options exercised.............. - $ -
Options terminated............. (30,000) $ 9.23
----------- -----------
Options outstanding,
June 30, 1999................ 830,200 $ 4.70
=========== ===========
Options exercisable,
June 30, 1999................ 462,746 $ 5.01
=========== ===========
Options available for
future grant, June 30, 1999.. 809,800
===========
</TABLE>
A summary of stock options outstanding and exercisable at June 30, 1999 follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------- -----------------------------
Shares Weighted-Average Shares
Range of Outstanding Remaining Weighted-Average Exercisable Weighted-Average
Exercise Prices at 6/30/99 Contractual Life Exercise Price at 6/30/99 Exercise Price
- --------------------- ----------- ------------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$10.69 - 17.62 22,400 4.14 years $12.77 21,200 $12.78
$ 3.47 - 8.82 807,800 7.94 years $ 4.47 441,546 $ 4.64
------- -------
$ 3.47 - 17.62 830,200 $ 4.70 462,746 $ 5.01
</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 132,500 options granted during fiscal 1999 have a fair market
value of approximately $266,000. 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.
33
<PAGE>
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, except per share amounts):
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Net income (loss):
As reported $ (23,833) $ 4,617 $ (1,918)
Pro forma $ (24,362) $ 4,161 $ (2,096)
Income (loss) per
common share - basic and diluted:
As reported $ (1.96) $ 0.37 $ (0.15)
Pro forma $ (2.00) $ 0.33 $ (0.17)
</TABLE>
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 16 - Industry Segment and Geographic Area Information
The Company is a leading maker and marketer of consumer products, including
frames and wall decor, office supplies, home furnishings and gift products. The
Company's products are sold nationwide through wholesale distribution channels,
including mass merchandisers and specialty retailers, and direct-to-consumer
channels through the Company's retail stores, mail order and the Internet.
Divested operations for fiscal 1999 include the operations of the Company's
former Leather and Crafts division which were closed in fiscal 1999. Divested
operations for fiscal 1998 include the operations of the Company's former
Leather and Crafts division and Joshua's Christian Stores which was sold in
fiscal 1998. Fiscal 1997 divested operations include those operations included
in the fiscal 1998 divested operations plus all business units sold or closed as
a result of the December 1995 restructuring and consolidation program.
During fiscal 1999, 1998 and 1997, the Company had net sales of
$35,913,000, $38,495,000 and $30,467,000, respectively, to one group of
customers under common control. In addition, the Company also had sales in
fiscal 1999 and 1998 of $20,483,000 and $24,133,000, respectively, 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 Gifts 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. The Company performs
ongoing credit evaluations of its customers' financial condition and has
established an allowance for doubtful accounts based upon factors surrounding
the credit risk of specific customer and other information.
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.
34
<PAGE>
Segment information for each of the three years in the period ended June
30, 1999 is as follows (in thousands):
<TABLE>
<CAPTION>
1999 Frames
---- and Office Home Divested
Wall Decor Supplies Furnishings Gifts Operations Consolidated
------------ ------------ ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Total sales.............................. $ 96,004 $ 39,629 $ 6,036 $ 18,285 $ 34,874 $ 194,828
Intersegment sales....................... (46) (67) - (17) - (130)
------------ ------------ ------------- ------------ ------------ ------------
Net sales................................ $ 95,958 $ 39,562 $ 6,036 $ 18,268 $ 34,874 $ 194,698
============ ============ ============= ============ ============ ============
Segment operating income (loss) (1)...... $ 12,128 $ 1,933 $ (602) $ (12,329) $ (20,314) $ (19,184)
============ ============ ============= ============ ============
Corporate expenses including goodwill
amortization and interest expense, net.. (13,928)
------------
Income (loss) before income taxes (1).... $ (33,112)
============
Depreciation............................. $ 1,208 $ 803 $ 64 $ 546 $ 749 $ 3,370
Goodwill amortization.................... 535 4 - 374 44 957
------------ ------------ ------------- ------------ ------------ ------------
Total depreciation and amortization...... $ 1,743 $ 807 $ 64 $ 920 $ 793 $ 4,327
============ ============ ============= ============ ============ ============
Identifiable assets...................... $ 77,327 $ 15,191 $ 5,756 $ 16,028 $ 8,005 $ 122,307
============ ============ ============= ============ ============
Corporate assets......................... 744
------------
$ 123,051
============
Capital expenditures..................... $ 8,153 $ 300 $ 32 $ 622 $ 216 $ 9,323
============ ============ ============= ============ ============ ============
(1) Includes restructuring costs of $10,603 in Divested Operations for the Tandy Leather divestiture.
</TABLE>
<TABLE>
<CAPTION>
1998 Frames
---- and Office Home Divested
Wall Decor Supplies Furnishings Gifts Operations Consolidated
------------ ------------ ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Total sales.............................. $ 93,560 $ 38,549 $ - $ 23,805 $ 76,863 $ 232,777
Intersegment sales....................... (51) (89) - (121) (21) (282)
------------ ------------ ------------- ------------ ------------ ------------
Net sales................................ $ 93,509 $ 38,460 $ - $ 23,684 $ 76,842 $ 232,495
============ ============ ============= ============ ============ ============
Segment operating income (loss).......... $ 11,784 $ 1,878 $ - $ (110) $ 163 $ 13,715
============ ============ ============= ============ ============
Corporate expenses including goodwill
amortization and interest expense, net.. (6,596)
------------
Income before income taxes............... $ 7,119
============
Depreciation............................. $ 1,146 $ 798 $ - $ 470 $ 1,414 $ 3,828
Goodwill amortization.................... 535 4 - 374 87 1,000
============ ============ ============= ============ ============ ------------
Total depreciation and amortization...... $ 1,681 $ 802 $ - $ 844 $ 1,501 $ 4,828
============ ============ ============= ============ ============ ============
Identifiable assets...................... $ 66,583 $ 14,964 $ - $ 28,543 $ 39,385 $ 149,475
============ ============ ============= ============ ============
Corporate assets......................... 1,216
------------
$ 150,691
============
Capital expenditures..................... $ 1,314 $ 569 $ - $ 497 $ 1,150 $ 3,530
============ ============ ============= ============ ============ ============
1997 Frames
---- and Office Home Divested
Wall Decor Supplies Furnishings Gifts Operations Consolidated
------------ ------------ ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Total sales.............................. $ 85,160 $ 35,781 $ - $ 26,594 $ 97,854 $ 245,389
Intersegment sales....................... (69) (181) - (163) (52) (465)
------------ ------------ ------------- ------------ ------------ ------------
Net sales................................ $ 85,091 $ 35,600 $ - $ 26,431 $ 97,802 $ 244,924
============ ============ ============= ============ ============ ============
Segment operating income (loss).......... $ 11,590 $ 2,440 $ - $ (399) $ (7,403) $ 6,228
============ ============ ============= ============ ============
Corporate expenses including goodwill
amortization and interest expense, net.. (9,273)
------------
Income (loss) before income taxes........ $ (3,045)
============
Depreciation............................. $ 1,157 $ 862 $ - $ 544 $ 1,772 $ 4,335
Goodwill amortization.................... 535 4 - 374 126 1,039
------------ ------------ ------------- ------------ ------------ ------------
Total depreciation and amortization...... $ 1,692 $ 866 $ - $ 918 $ 1,898 $ 5,374
============ ============ ============= ============ ============ ============
Identifiable assets...................... $ 66,828 $ 12,539 $ - $ 29,369 $ 46,788 $ 155,524
============ ============ ============= ============ ============
Corporate assets......................... 1,005
------------
$ 156,529
============
Capital expenditures..................... $ 1,325 $ 782 $ - $ 769 $ 918 $ 3,794
============ ============ ============= ============ ============ ============
</TABLE>
35
<PAGE>
Note 17 - Quarterly Results (Unaudited)
Summarized quarterly income statements (in thousands of dollars, except per
share amounts) for the years ended June 30, 1999 and 1998 are set forth below:
<TABLE>
<CAPTION>
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
------------------- ------------------- ------------------- -------------------
1999 1998 1999 1998 1999 1998 1999 1998
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales.......................... $ 51,065 $ 55,359 $ 52,853 $ 73,237 $ 50,253 $ 53,100 $ 40,527 $ 50,799
Costs and expenses:
Cost of goods sold................ 34,791 35,834 39,476 48,702 36,061 35,766 29,197 33,182
Selling and administrative........ 13,077 15,932 20,354 17,665 15,094 14,935 15,593 14,650
Restructuring charge.............. - - 8,145 - - - - -
Impairment of long-lived assets... - - - - - - 9,522 -
Loss on sale of business unit..... - - - - - - - 623
Depreciation and amortization..... 1,079 1,270 1,088 1,259 1,117 1,254 1,043 1,045
-------- -------- -------- -------- -------- -------- -------- --------
Operating income (loss)............ 2,118 2,323 (16,210) 5,611 (2,019) 1,145 (14,828) 1,299
Interest expense, net.............. 492 862 591 911 517 841 573 645
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before
income taxes...................... 1,626 1,461 (16,801) 4,700 (2,536) 304 (15,401) 654
Provision (benefit) for
income taxes...................... 618 512 (4,578) 1,644 (663) 106 (4,656) 240
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss).................. $ 1,008 $ 949 $(12,223) $ 3,056 $ (1,873) $ 198 $(10,745) $ 414
======== ======== ======== ======== ======== ======== ======== ========
Net income (loss) per
common share - basic and diluted.. $ 0.08 $ 0.08 ($1.00) $ 0.24 ($.16) $ 0.02 ($0.89) $ 0.03
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
Item 9. Changes In and Disagreements With Accountants on Accounting and
- ------ ---------------------------------------------------------------
Financial Disclosure
- --------------------
None.
36
<PAGE>
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 1999 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, 1999.
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, 1999.
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, 1999.
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,
1999.
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 May 5, 1999,
which included the contents of a press release announcing the
elevation of James D. Allen to the position of executive vice
president and chief operating officer and the naming of Michael J.
Murray as treasurer and Troy A. Huseman as controller.
The Company filed a Current Report on Form 8-K, on June 11, 1999
which included the contents of a press release announcing plans to
reorganize its Pinnacle Art & Frame unit.
37
<PAGE>
The Company filed a Current Report on Form 8-K, on June 24, 1999,
which included the contents of a press release announcing it had reacquired
Fort Worth-based Cargo Furniture & Accents, a leading national manufacturer
and seller of children's and casual furniture and accessories.
The Company filed a Current Report on Form 8-K, on June 25, 1999,
which included the contents of a press release announcing it had added
retail industry veteran Colon O. Washburn as a new board member.
The Company filed a Current Report on Form 8-K, on July 14, 1999,
which included the contents of a press release announcing that it had
welcomed Mexican President Ernesto Zedillo Ponce de Leon and a host of
other dignitaries during an opening celebration at the Company's new
manufacturing facility in Durango, Mexico.
The Company filed a Current Report on Form 8-K, on August 17, 1999,
which included the contents of a press release announcing the unaudited
results of operations for three months period and fiscal year ended June
30, 1999.
(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.
____________________
38
<PAGE>
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, 1999 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, 1999, 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 Operating Officer
(Chief Financial Officer)
/s/ Troy A. Huseman
--------------------------------
Troy A. Huseman
Controller and
Chief Accounting Officer
/s/ Joe K. Pace
--------------------------------
Joe K. Pace
Director
/s/ Sheldon I. Stein
--------------------------------
Sheldon I. Stein
Director
/s/ Colon O. Washburn
--------------------------------
Colon O. Washburn
Director
/s/ Michael J. Walsh
--------------------------------
Michael J. Walsh
President and Chief Executive
Officer and Director
39
<PAGE>
Schedule II
TANDYCRAFTS, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts and Reserves
(In thousands)
<TABLE>
<CAPTION>
Year ended June 30,
----------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Allowance for doubtful accounts:
Balance, beginning of year $ 2,755 $ 1,680 $ 790
Additions charged to profit and loss 1,000 1,644 1,971
Accounts receivable charged off, net
of recoveries (1,295) (569) (1,081)
---------- ---------- ----------
Balance, end of year $ 2,460 $ 2,755 $ 1,680
========== ========== ==========
</TABLE>
40
<PAGE>
TANDYCRAFTS, INC.
Index to Exhibits
Filed with the Annual Report on Form 10-K for the year ended June 30, 1999.
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)
<PAGE>
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 (15)
10.20 Eleventh Amendment to Revolving Credit and Term Loan Agreement (15)
10.21 Twelfth Amendment to Revolving Credit and Term Loan Agreement (16)
10.22 Revolving Credit and Term Loan Agreement (17)
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.
(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.
<PAGE>
(15) Filed with the Commission as an Exhibit to the Company's Annual Report on
Form 10-K for the fiscal year ended June 30, 1998 and incorporated herein
by reference.
(16) Filed with the Commission as an Exhibit to the Company's Quarterly Report
on Form 10-Q for the quarter ended December 31, 1998, and incorporated
herein by reference.
(17) Filed with the Commission as an Exhibit to the Company's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1999, and incorporated herein
by reference.
<PAGE>
EXHIBIT 21
----------
TANDYCRAFTS, INC.
Significant Subsidiaries of Tandycrafts, Inc. as of June 30, 1999
<TABLE>
<CAPTION>
Jurisdiction
of
Subsidiary's Legal Name Doing Business As Incorporation
- ------------------------------------ ------------------------------------ ---------------
<S> <C> <C>
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.
Cargo Furniture, Inc. Cargo Furniture Nevada, U.S.A.
Tandycrafts de Mexico,
SA de C.V. Magee Mexico Durango, Mexico
</TABLE>
Each of the corporations listed is a direct subsidiary of Tandycrafts,
Inc., which owns 100% of the voting securities of each, except for TAC Holdings,
Inc. which is 100% owned by Tandycrafts, Inc. and its various subsidiaries.
Each of the above subsidiaries is included in the Tandycrafts, Inc. Consolidated
Financial Statements for fiscal 1999.
<PAGE>
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) of Tandycrafts,
Inc., of our report dated August 10, 1999 relating to the financial statements,
which appears on page 20 in this Annual Report on Form 10-K. We also consent to
the incorporation by reference of our report dated August 10, 1999 relating to
the financial statement schedules, which appears in this Form 10-K.
PricewaterhouseCoopers LLP
Fort Worth, Texas
September 28, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 744
<SECURITIES> 0
<RECEIVABLES> 23,243
<ALLOWANCES> 2,460
<INVENTORY> 35,026
<CURRENT-ASSETS> 63,541
<PP&E> 56,250
<DEPRECIATION> 26,690
<TOTAL-ASSETS> 123,051
<CURRENT-LIABILITIES> 28,455
<BONDS> 0
0
0
<COMMON> 18,528
<OTHER-SE> 44,397
<TOTAL-LIABILITY-AND-EQUITY> 123,051
<SALES> 194,698
<TOTAL-REVENUES> 194,698
<CGS> 139,525
<TOTAL-COSTS> 225,637
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,589
<INCOME-PRETAX> (33,112)
<INCOME-TAX> (9,279)
<INCOME-CONTINUING> (23,833)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (23,833)
<EPS-BASIC> (1.96)
<EPS-DILUTED> (1.96)
</TABLE>
