-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OC8w8GT31uF/cWvfaOXA+KVfeXYQoqlqT8JtsXkSBhN5vl84yv/Jr4L3kia1puW8 WfGezdFWwRgOXimrCOwLig== 0000096294-96-000006.txt : 19960216 0000096294-96-000006.hdr.sgml : 19960216 ACCESSION NUMBER: 0000096294-96-000006 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960214 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: TANDYCRAFTS INC CENTRAL INDEX KEY: 0000096294 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-HOBBY, TOY & GAME SHOPS [5945] IRS NUMBER: 751475224 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-07258 FILM NUMBER: 96519877 BUSINESS ADDRESS: STREET 1: 1400 EVERMAN PKWY CITY: FORT WORTH STATE: TX ZIP: 76140 BUSINESS PHONE: 8175519600 MAIL ADDRESS: STREET 1: 1400 EVERMAN PKWY CITY: FORT WORTH STATE: TX ZIP: 76140 10-Q 1 SECOND QUARTER 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended December 31, 1995 OR [ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from ______________ to ________________ Commission File Number 1-7258 TANDYCRAFTS, INC. (Exact name of registrant as specified in its charter) Delaware 75-1475224 (State of incorporation) (I.R.S. Employer Identification Number) 1400 Everman Parkway, Fort Worth, Texas 76140 (Address of principal executive offices) (Zip Code) (817) 551-9600 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No___. Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Shares outstanding as of January 31, 1996 - ----------------------------- ----------------------------------------- Common Stock, $1,00 par value 12,114,950 TANDYCRAFTS, INC. Form 10-Q Quarter Ended December 31, 1995 TABLE OF CONTENTS PART 1 - FINANCIAL INFORMATION Item Page No. - ---- -------- 1. Condensed Consolidated Financial Statements 3-10 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10-17 PART II - OTHER INFORMATION 4. Submission of Matters to a Vote of Security Holders 18 6. Exhibits and Reports on Form 8-K 18 Signatures 19 PART I Item 1. Financial Statements -------------------- TANDYCRAFTS, INC. Condensed Consolidated Statements of Operations (In thousands, except per share amounts) (Unaudited) Three Months Ended Six Months Ended December 31, December 31, -------------------- ---------------------- 1995 1994 1995 1994 -------- -------- --------- -------- Net sales $ 74,347 $ 75,619 $ 136,696 $141,131 -------- -------- --------- -------- Operating Costs and expenses: Cost of goods sold 47,885 44,572 86,698 84,374 Selling, general and administrative 23,263 22,583 44,176 42,888 Restructuring charges 18,818 - 18,818 - Depreciation and amortization 1,715 1,207 3,240 2,556 -------- -------- --------- -------- Total operating costs and expenses 91,681 68,362 152,932 129,818 -------- -------- --------- -------- Operating income (loss) (17,334) 7,257 (16,236) 11,313 Interest expense, net 1,117 950 2,202 1,776 -------- -------- --------- -------- Income (loss) before provision for income taxes (18,451) 6,307 (18,438) 9,537 Provision (benefit) for income taxes (6,072) 2,210 (6,068) 3,386 -------- -------- --------- -------- Net income (loss) $ 12,379) $ 4,097 $ (12,370) $ 6,151 ========= ======== ========= ======== Net income (loss) per share $ (1.04) $ 0.36 $ (1.04) $ 0.54 ========= ======== ========= ======== Weighted average common and common equivalent shares 11,935 11,383 11,852 11,298 ========= ======== ========= ========
TANDYCRAFTS, INC. Condensed Consolidated Balance Sheets (Dollars in thousands) (Unaudited) December 31, June 30, 1995 1995 ---------- --------- ASSETS - ------ Current assets: Cash, including short-term investments $ 4,444 $ 1,807 Trade accounts receivable, net of allowance for doubtful accounts of $1,089 and $605, respectively 37,713 31,440 Inventories 59,239 65,742 Other current assets 3,580 2,991 ---------- -------- Total current assets 104,976 101,980 ---------- -------- Property and equipment, at cost 50,299 48,658 Less-accumulated depreciation (23,367) (19,951) ---------- -------- Property and equipment, net 26,932 28,707 ---------- --------- Other assets 636 604 Goodwill 41,767 47,512 ---------- --------- $ 174,311 $ 178,803 ========== ========= LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ Current liabilities: Notes payable and current potion of long-term debt $ 11,000 $ 2,000 Accounts payable 17,116 12,558 Accrued liabilities and other 13,041 12,555 ---------- ---------- Total current liabilities 41,157 27,113 ---------- ---------- Long-term debt 50,000 59,000 Deferred income taxes 2,029 2,029 Stockholders' equity: Common stock, $1 par value, 50,000,000 shares authorized, 18,527,988 shares issued 18,528 18,528 Additional paid-in capital 18,931 17,447 Retained earnings 67,714 80,084 Cost of stock in treasury, 6,449,246 shares and 6,811,300 shares, respectively (24,048) (25,398) ---------- ---------- Total stockholders' equity 81,125 90,661 ---------- ---------- $ 174,311 $ 178,803 ========== ========== TANDYCRAFTS, INC. Condensed Consolidated Statements of Cash Flows (In thousands) (Unaudited) Six Months Ended December 31, ----------------------- 1995 1994 ---------- --------- Net cash flows from operating activities $ 1,643 $ (3,383) --------- --------- Cash flows from investing activities: Additions to property and equipment, net, excluding the effect of businesses acquired (1,840) (6,044) Purchase of businesses, net of cash acquired - (3,320) --------- --------- Net cash used for investing activities (1,840) (9,364) --------- --------- Cash flows from financing activities: Sales of treasury stock to employee benefit programs 2,834 3,260 Borrowings under bank credit facility, net - 13,400 --------- --------- Net cash provided by financing activities 2,834 16,660 --------- --------- Increase (decrease) in cash, including short-term investments 2,637 3,913 Balance, beginning of period 1,807 1,506 --------- --------- Balance, end of period $ 4,444 $ 5,419 ========= ========= TANDYCRAFTS, INC. Condensed Consolidated Statement of Stockholders' Equity (Dollars in thousands) (Unaudited) Additional Common paid-in Retained Treasury stock capital earnings stock Total --------- ---------- ---------- ---------- --------- Balance, June 30, 1995 $ 18,528 $ 17,447 $ 80,084 $ (25,398) $ 90,661 Sale of 362,054 shares of treasury stock to employee benefit programs - 1,484 - 1,350 2,834 Net income for six months ended December 31, 1995 - - (12,370) - (12,370) ---------- ---------- ---------- ---------- -------- Balance, December 31, 1995 $ 18,528 $ 18,931 $ 67,714 $ (24,048) $ 81,125 ========== ========== ========== ========== ========
TANDYCRAFTS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - BASIS OF FINANCIAL STATEMENTS The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, the accompanying condensed consolidated financial statements contain all adjustments (consisting of normal recurring accruals and certain other operating and restructuring charges as more fully described in Notes 4 and 5, below) necessary for a fair statement of the Company's financial position as of December 31, 1995 and June 30, 1995, and the results of operations and cash flows for the six- month periods ended December 31, 1995 and December 31, 1994. The results of operations for the three and six-month periods ended December 31, 1995 and 1994 are not necessarily indicative of the results to be expected for the full fiscal year. The consolidated financial statements should be read in conjunction with the financial statement disclosures contained in the Company's 1995 Annual Report to Stockholders. NOTE 2 - INVENTORIES The components of inventories at December 31, 1995 consisted of the following (in thousands): Merchandise held for sale $ 39,326 Raw materials and work-in-process 19,913 -------- $ 59,239 ======== NOTE 3 - EARNINGS PER SHARE Net income (loss) per share is based upon the weighted average number of shares of common stock and common stock equivalents outstanding during the periods. For the three and six-month periods ended December 31, 1995 and 1994, the number of weighted average shares and common stock equivalents is as follows (in thousands): Three Months Ended Six Months Ended December 31, December 31, ------------------- ------------------- 1995 1994 1995 1994 -------- -------- -------- -------- Weighted average shares 11,935 11,375 11,852 11,289 Common stock equivalents - 8 - 9 -------- -------- -------- -------- Total weighted average common and common equivalent shares 11,935 11,383 11,852 11,298 ======== ======== ======== ======== NOTE 4 - STRATEGIC RESTRUCTURING AND CONSOLIDATION PROGRAM Description In the quarter ended December 31, 1995, the Company adopted a strategic restructuring and consolidation program. The primary components of this program include: (i) the sale of Cargo Furniture and Accents, (ii) the sale or closure of Prestige Leather Creations, David James Manufacturing, Brand Name Apparel and certain other individually insignificant operations, (iii) the closure of 11 retail stores including two at Sav-On Discount Office Supplies, five at Joshua's Christian Stores and four at Tandy Leather Company, (iv) the consolidation of certain functions within TWI ("Tandy Wholesale International") of Nocona Belt Company and Rivertown Button Company, which is being relocated from Houston, Minnesota to Fort Worth, Texas, (v) the consolidation, streamlining and, in some cases, outsourcing of certain functions throughout various operating units, and (vi) the retention of an outside consulting firm to assist senior management in evaluating and developing the Company's retail concepts. The adoption of this program stems from a strategy review initiated in August 1995 during which the Company's various business units were examined, including the role and strategy of each in generating sales and profits, as well as each business unit's market position and growth potential. This program is designed to improve the Company's competitive position by focusing the Company's resources in those areas which offer the greatest potential for growth and increased value for shareholders. Upon completion of this plan, the Company will be comprised of three specialty retail operations; Tandy Leather Company, Joshua's Christian Stores and Sav-On Discount Office Supplies, and two manufacturing divisions; TWI and Frames and Framed Art. The actions contemplated by this program are expected to be substantially completed by the end of the fiscal year. The Company has entered into letters of intent related to the sale of certain of the businesses targeted for sale or closure; however, all such transactions are subject to completion. Revenues and operating losses (before restructuring charges) from separately identifiable businesses targeted for sale or closure are set forth below by segment (in thousands): Three Months Ended December 31, --------------------------------------------- 1995 1994 -------------------- --------------------- Operating Operating Sales Income Sales Income --------- -------- --------- --------- Specialty manufacturing $ 4,870 $ (725) $ 6,366 $ (543) Specialty retail 4,852 112 5,117 245 --------- -------- --------- --------- Total $ 9,722 $ (613) $ 11,483 $ (298) ========= ======== ========= ========= Six Months Ended December 31, --------------------------------------------- 1995 1994 -------------------- --------------------- Operating Operating Sales Income Sales Income --------- -------- --------- --------- Specialty manufacturing $ 9,934 $ (1,217) $ 14,616 $ (770) Specialty retail 9,552 186 10,849 646 --------- -------- --------- --------- Total $ 19,486 $ (1,031) $ 25,465 $ (124) ========= ======== ========= ========= Restructuring charges As a result of the adoption of the strategic restructuring and consolidation program discussed above, the Company recorded restructuring charges of $18.8 million in the quarter ended December 31, 1995. The restructuring charges include approximately $18.0 million for asset writedowns and anticipated exit costs associated with businesses which are expected to be sold or closed and $0.8 million for asset writedowns and anticipated exit costs associated with the closure of eleven retail stores. Approximately $16.1 million of the restructuring charges relate to non-cash writedowns of assets to their estimated realizable values, including $7.5 million related to the write off of goodwill, $6.1 million related to the liquidation of inventories, $1.2 million related to the writedown of fixed assets, and $1.3 million related to the writedown of various other assets. The remaining $2.7 million of the restructuring charges represents anticipated cash outlays. Approximately $2.0 million relates to lease obligations and the remainder relates to other contractual obligations and exit costs. No severance costs have been included in the restructuring charges. The following table sets forth the restructuring charges by segment (in thousands): Asset Lease and Writedowns other Exit costs Total ----------- ---------------- ------- Specialty manufacturing $15,798 $2,145 $17,943 Specialty retail 318 517 835 Corporate 40 40 ------- ------ ------- Total $16,116 $2,702 $18,818 ======= ====== ======= The following table sets forth the accrual activity in the restructuring reserve, which is included in current accrued liabilities in the December 31, 1995 balance sheet (in thousands): Specialty Specialty Manufacturing Retail Corporate Total ------------- --------- --------- ------- Balance at June 30, 1995 $ - $ - $ - $ - Restructuring charges 17,943 835 40 18,818 Cash payments - - - - Asset writedowns* (15,798) (318) - (16,116) --------- ------ ------- ------- Balance at December 31, 1995 $ 2,145 $ 517 $ 40 $ 2,702 ========= ====== ======= ========
* (Reflected as reductions of respective asset balances at December 31, 1995.) The above provisions are estimates based on the Company's judgment at this time. Adjustments to the restructuring provisions may be necessary in the future based on further development of restructuring related costs. Although no additional restructuring plans are currently under consideration, the Company continues to evaluate possible actions which will improve the profitability and competitive position of the Company. NOTE 5 - CONTINGENT PAYMENT SETTLEMENT In connection with the November 1993 acquisition of Impulse Designs, the asset purchase agreement provided for a contingent payment to be made based upon the attainment of certain earnings thresholds for the year ended December 31, 1994. Impulse Designs met certain of these thresholds and, in January 1996, the Company made a final cash payment of approximately $2.5 million to the former owners of Impulse Designs to complete the transaction. This amount is reflected as an increase in goodwill with a corresponding increase in accrued liabilities in the December 31, 1995 balance sheet. The Company also incurred approximately $457,000 of expenses related to such settlement which are reflected in the results of operations for the quarter ended December 31, 1995. NOTE 6 - REVOLVING CREDIT FACILITY The Company has a $60 million revolving credit facility with a group of banks. During July 1995, the Company established an additional $10 million revolving credit facility that terminates on March 31, 1996. As part of the Company's planned restructuring and consolidation program discussed earlier, the bank group has agreed to extend the maturity date of the current revolving credit facility to October 1, 1997 under the existing terms and to amend certain provisions, restrictions and covenants under the revolving credit agreement as of December 31, 1995 to allow the actions contemplated by the Company's restructuring plan to occur without placing the Company in default. The Company has agreed with its lending banks to reduce the commitment amount under the revolving loan agreement from $60,000,000 to $50,000,000 by September 30, 1996. The Company currently estimates that cash generated from the sale of assets contemplated by the strategic restructuring program and cash flow from operations will enable it to reduce its borrowings under the revolving credit facility by September 30, 1996 to levels that will enable the Company to operate within the $50,000,000 commitment amount. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations GENERAL Tandycrafts, Inc. (the "Company") operates in two primary industry segments, specialty retail and specialty manufacturing. The specialty retail group consists of four distinct retail concepts: Tandy Leather Company, which sells leathercraft and related products through 175 stores located in 45 states; Joshua's Christian Stores, which sells inspirational books, music and gifts through a chain of 75 stores located in eight states; Sav-On Discount Office Supplies, which sells office supplies and related products through a chain of 38 stores located primarily in smaller markets; and Cargo Furniture and Accents, which sells a proprietary line of solid wood furniture and decorative accessories through a chain of 39 stores located primarily in regional shopping malls. The specialty manufacturing segment is comprised of four divisions: Picture Frames and Framed Art, Belts and Accessories, Outerwear and TWI. The following table presents selected financial data for each significant company or division comprising the Company's two primary industry segments for the three and six-month periods ended December 31, 1995 and 1994 (in thousands): Three Months Ended December 31, ---------------------------------------------- 1995 1994 % Increase (Decrease) -------------------- ---------------------- -------------------- Operating Operating Operating Sales Income Sales Income Sales Income ------- --------- --------- --------- -------- --------- Specialty Retail: - ---------------- Tandy Leather $ 12,317 $ 882 $ 14,005 $ 1,701 (12.1)% (48.1)% Sav-On Discount Office Supplies 7,093 26 4,569 (548) 55.2 104.7 Joshua's Christian Stores 10,300 (189) 10,326 1,078 (0.3) (117.5) Cargo Furniture & Accents 4,852 112 5,117 245 (5.2) (54.3) Restructuring charges - (835) - (100.0) --------- -------- --------- --------- ----- ------ Specialty Retail 34,562 (4) 34,017 2,476 1.6 (100.2) --------- -------- --------- --------- ----- ------ Specialty Manufacturing: - ----------------------- Frames and Framed Art 26,753 3,777 27,919 6,111 (4.2)% (38.2)% Belts and Accessories 2,754 (248) 3,714 (278) (25.8) 10.8 Outerwear 3,034 (672) 4,000 (386) (24.2) (74.1) TWI 7,244 638 5,969 796 21.4 (19.8) Restructuring charges (17,943) - (100.0) --------- -------- --------- --------- ----- ------ Specialty Manufacturing 39,785 (14,448) 41,602 6,243 (4.4) (331.4) --------- -------- --------- --------- ----- ------ Total operations, excluding corporate $ 74,347 $(14,452) $ 75,619 $ 8,719 (1.7)% (265.8)% ========= ======== ========= ========= ===== ====== Six-Months Ended December 31, ---------------------------------------------- 1995 1994 % Increase (Decrease) -------------------- ---------------------- -------------------- Operating Operating Operating Sales Income Sales Income Sales Income ------- --------- --------- --------- -------- --------- Specialty Retail: - ---------------- Tandy Leather $ 22,578 $ 1,071 $ 25,314 $ 2,530 (10.8)% (57.7)% Sav-On Discount Office Supplies 14,638 85 9,827 (710) 49.0 112.0 Joshua's Christian Stores 17,370 (916) 16,342 883 6.3 (203.7) Cargo Furniture & Accents 9,552 186 10,849 646 (12.0) (71.2) Restructuring charges (835) - (100.0) ---------- --------- --------- --------- ----- ------ Specialty Retail 64,138 (409) 62,332 3,349 2.9 (112.2) ---------- --------- --------- --------- ----- ------ Specialty Manufacturing: - ----------------------- Frames and Framed Art 45,521 5,899 49,545 9,470 (8.1)% (37.7)% Belts and Accessories 5,850 (399) 8,105 (381) (27.8) (4.7) Outerwear 6,495 (902) 9,179 (399) (29.2) (126.1) TWI 14,692 1,632 11,970 1,853 22.7 (11.9) Restructuring charges (17,943) - (100.0) ---------- --------- ---------- --------- ------ ------ Specialty Manufacturing 72,558 (11,713) 78,799 10,543 (7.9) (211.1) ---------- --------- ---------- --------- ------ ------ Total operations, excluding corporate $ 136,696 $ (12,122) $ 141,131 $ 13,892 (3.1) (187.3) ========== ========= ========== ========= ====== ======
RESULTS OF OPERATIONS Net sales Consolidated net sales for the three and six-month periods ended December 31, 1995 decreased 1.7% and 3.1%, respectively, compared to the same periods last year. Discussions relative to each of the Company's industry segments are set forth below. Specialty retail Net sales for the specialty retail segment increased 1.6% for the quarter and 2.9% for the six-months ended December 31, 1995 compared to the same periods last year. The specialty retail segment contributed 46.5% and 46.9% of consolidated net sales for the three and six-month periods ended December 31, 1995, respectively, compared to 45.0% and 44.2%, respectively, for the same periods last year. Tandy Leather Company's net retail sales and same-store sales decreased 12.1% for the quarter and 10.8% for the six-months ended December 31, 1995 compared to the same periods last year. The decrease in sales reflects a reduction in the average number of transactions per store compared to the previous year resulting primarily from the continued decline in popularity of Southwest fashion merchandise. Sav-On Discount Office Supplies ("Sav-On") achieved total net sales increases of 55.2% and 49.0% for the quarter and six-month periods ended December 31, 1995, respectively, compared to the same periods last year. The increase in total net sales was primarily the result of store expansion. Sav-On had 38 stores open at December 31, 1995 compared to 30 stores a year earlier. Same-store sales increased 17.0% for the quarter and 11.4% for the six-months ended December 31, 1995 over the comparable periods last year primarily as a result of increasing the customer base as newer stores continue to mature. Joshua's Christian Stores ("Joshua's") net sales were flat for the quarter and increased 6.3% for the six-months ended December 31, 1995 compared to the same periods last year. Joshua's had 75 stores open at December 31, 1995 compared to 70 stores open at December 31, 1994. Same-store sales decreased 8.5% and 3.2% for the three and six-month periods ended December 31, 1995, respectively. Total net sales for Cargo Furniture & Accents ("Cargo") decreased 5.2% and 12.0% for the three and six-months ended December 31, 1995, respectively, compared to the same periods last year. The decrease is primarily attributable to four fewer stores being open at December 31, 1995 than in the prior year. Specialty manufacturing Net sales for the specialty manufacturing segment decreased 4.4% and 7.9% for the three and six-month periods ended December 31, 1995, respectively, compared to the corresponding periods a year ago. The specialty manufacturing segment contributed 53.5% and 53.1% of consolidated net sales for the three and six- month periods ended December 31, 1995, respectively, compared to 55.0% and 55.8%, respectively, for the same periods last year. Net sales for the Picture Frames and Framed Art division decreased 4.2% and 8.1% for the three and six-month periods ended December 31, 1995, respectively, compared to the same period last year. The sales decrease is primarily attributable to the cancellation of certain large annual framed art orders for delivery in December by a major customer. The Company's relationship with this customer continues to be good and the Company believes the reduction in business with this customer to be temporary in nature. Net sales for the Belts and Accessories division decreased 25.8% and 27.8% for the three and six-month periods ended December 31, 1995, respectively, compared to the same periods last year. The decrease in sales reflects continuing weak demand in the cut-up belt market and continued softness in the western apparel market. Net sales for the Outerwear division decreased 24.2% and 29.2% for the three and six-month periods ended December 31, 1995, respectively, compared to the corresponding periods last year. Sales for both the quarter and six-month periods were adversely affected by continued soft demand experienced in the western apparel market and by the residual impact on retail inventories of warm weather conditions in the prior year which have adversely affected the current year's sales of jackets and sweatshirts. Also, sales to a major customer of this division have decreased as a result of the reorganization of that customer's distribution channels. Net sales for the Tandy Wholesale International ("TWI") division, increased 21.4% and 22.7% for the three and six-month periods ended December 31, 1995, respectively, compared to the same periods last year. The increase in net sales reflects strong sales gains from the licensed products operations primarily as a result of the addition of new customers, penetration into new markets and the introduction of new product lines. Operating income The Company experienced on operating loss before corporate expenses of $14,452,000 and $12,122,000, representing decreases of $23,171,000, or 265.8%, and $26,014,000, or 187.3%, for the three and six-month periods ended December 31, 1995, respectively, compared to the same periods last year. The operating loss for the three and six-month periods is primarily due to restructuring and other charges to operations recognized during the quarter ended December 31, 1995. A discussion of the restructuring charges and operating income for each segment follows: Strategic restructuring and consolidation program In the quarter ended December 31, 1995, the Company adopted a strategic restructuring and consolidation program. The primary components of this program include: (i) the sale of Cargo Furniture and Accents, (ii) the sale or closure of Prestige Leather Creations, David James Manufacturing, Brand Name Apparel and certain other individually insignificant operations, (iii) the closure of 11 retail stores including two at Sav-On Discount Office Supplies, five at Joshua's Christian Stores and four at Tandy Leather Company, (iv) the consolidation of certain functions within TWI ("Tandy Wholesale International") of Nocona Belt Company and Rivertown Button Company, which is being relocated from Houston, Minnesota to Fort Worth, Texas, (v) the consolidation, streamlining and, in some cases, outsourcing of certain functions throughout various operating units, and (vi) the retention of an outside consulting firm to assist senior management in evaluating and developing the Company's retail concepts. The adoption of this program stems from a strategy review initiated in August 1995 during which the Company's various business units were examined, including the role and strategy of each in generating sales and profits, as well as each business unit's market position and growth potential. This program is designed to improve the Company's competitive position by focusing the Company's resources in those areas which offer the greatest potential for growth and increased value for shareholders. Upon completion of this plan, the Company will be comprised of three specialty retail operations; Tandy Leather Company, Joshua's Christian Stores and Sav-On Discount Office Supplies, and two manufacturing divisions; TWI and Frames and Framed Art. The actions contemplated by this program are expected to be substantially completed by the end of the fiscal year. The Company has entered into letters of intent related to the sale of certain of the businesses targeted for sale or closure; however, all such transactions are subject to completion. Revenues and operating losses from (before restructuring charges) separately identifiable businesses targeted for sale or closure are set forth below by segment (in thousands): Three Months Ended December 31, --------------------------------------------- 1995 1994 -------------------- --------------------- Operating Operating Sales Income Sales Income -------- -------- --------- --------- Specialty manufacturing $ 4,870 $ (725) $ 6,366 $ (543) Specialty retail 4,852 112 5,117 245 -------- -------- --------- --------- Total $ 9,722 $ (613) $ 11,483 $ (298) ======== ======== ========= ========= Six Months Ended December 31, --------------------------------------------- 1995 1994 --------------------- -------------------- Operating Operating Sales Income Sales Income -------- --------- -------- --------- Specialty manufacturing $ 9,934 $ (1,217) $ 14,616 $ (770) Specialty retail 9,552 186 10,849 646 -------- --------- -------- --------- Total $ 19,486 $(1,031) $ 25,465 $ (124) ======== ========= ======== ========= Restructuring charges As a result of the adoption of the strategic restructuring and consolidation program discussed above, the Company recorded restructuring charges of $18.8 million in the quarter ended December 31, 1995. The restructuring charges include approximately $18.0 million for asset writedowns and anticipated exit costs associated with businesses which are expected to be sold or closed and $0.8 million for asset writedowns and anticipated exit costs associated with the closure of eleven retail stores. Approximately $16.1 million of the restructuring charges relate to non-cash writedowns of assets to their estimated realizable values, including $7.5 million related to the write off of goodwill, $6.1 million related to the liquidation of inventories, $1.2 million related to the writedown of fixed assets, and $1.3 million related to the writedown of various other assets. The remaining $2.7 million of the restructuring charges represents anticipated cash outlays. Approximately $2.0 million relates to lease obligations and the remainder relates to other contractual obligations and exit costs. No severance costs have been included in the restructuring charges. The following table sets forth the restructuring charges by segment (in thousands): Asset Lease and Writedowns other Exit costs Total ---------- ---------------- -------- Specialty manufacturing $ 15,798 $ 2,145 $ 17,943 Specialty retail 318 517 835 Corporate - 40 40 ---------- --------- -------- Total $ 16,116 $ 2,702 $ 18,818 ========== ========= ======== The following table sets forth the accrual activity in the restructuring reserve, which is included in current accrued liabilities in the December 31, 1995 balance sheet (in thousands): Specialty Specialty Manufacturing Retail Corporate Total ------------- ---------- --------- --------- Balance at June 30, 1995 $ - $ - $ - $ - Restructuring charges 17,943 835 40 18,818 Cash payments - - - - Asset writedowns* (15,798) (318) - (16,116) --------- -------- ------ -------- Balance at December 31, 1995 $ 2,145 $ 517 $ 40 $ 2,702 ========= ======== ====== ======== * (Reflected as reductions of respective asset balances at December 31, 1995.)
The above provisions are estimates based on the Company's judgment at this time. Adjustments to the restructuring provisions may be necessary in the future based on further development of restructuring related costs. Although no additional restructuring plans are currently under consideration, the Company continues to evaluate possible actions which will improve the profitability and competitive position of the Company. Operating income-Specialty retail The specialty retail segment experienced operating losses of $4,000 and $409,000 for the three and six-month periods ended December 31, 1995, respectively, compared to operating income of $2,476,000 and $3,349,000, respectively, for the corresponding periods last year. The specialty retail segment contributed 0.0% and 3.4% of the consolidated operating loss before corporate expenses for the three and six-month periods ended December 31, 1995, respectively, compared to 28.4% and 24.1% of consolidated operating income before corporate expenses for the corresponding periods last year. The operating loss for the specialty retail segment for the three and six-month periods ended December 31, 1995 include restructuring charges of $835,000 related to the closure of eleven retail stores, as discussed previously. The following discussions of operating income are before restructuring charges. Operating income for Tandy Leather decreased $819,000, or 48.1%, for the quarter and $1,459,000, or 57.7%, for the six-month period ended December 31, 1995 compared to the same periods last year. The decrease in operating income is primarily a result of the decrease in sales, particularly sales of Southwest fashion merchandise with its corresponding higher gross profit. Gross profit decreased $728,000 and $1,310,000 for the three and six-months ended December 31, 1995 primarily as a result of decreased sales and a change in the sales mix. Selling, general and administrative expenses increased as a percent of sales for the three and six-months ended December 31, 1995 due to the decrease in sales. Sav-On had operating income of $26,000 and $85,000 for the three and six-month periods ended December 31, 1995, respectively, compared to operating losses of $548,000 and $710,000 for the corresponding periods last year. The increase in operating income is primarily a result of increased sales and efficiency gains at both stores and administrative units. Gross profit, as a percent of sales, for the three and six-months ended December 31, 1995 increased compared to the same respective periods last year primarily as a result of more effective inventory management. Administrative expenses have decreased as a percent of sales reflecting a larger increase in sales relative to administrative and support expenses. Joshua's Christian Stores experienced operating losses of $189,000 and $916,000 for the three and six-month periods ended December 31, 1995, respectively, compared to operating income of $1,078,000 and $883,000 for the comparable periods last year. For the three and six-months ended December 31, 1995, gross profit and selling, general and administrative expenses decreased as a percent of sales from the same periods last year. The decrease in gross margin is primarily the result of heavy sales promotions during the quarter ended September 30, 1995 and inventory writedowns of approximately $900,000 taken during the quarter ended December 31, 1995. The decrease in selling, general and administrative expense as a percent of sales is due to sales increasing at a faster rate than administrative expenses. Operating income for Cargo Furniture & Accents decreased $133,000, or 54.3%, and $460,000, or 71.2%, for the three and six-month periods ended December 31, 1995, respectively, compared to the same periods last year. The decrease in operating income is attributable to a decrease in sales on four fewer stores, decreased gross margins, and the timing of shipped orders. The decrease in gross margin is primarily the result of sales promotions held during the quarter ended September 30, 1995. Operating income-Specialty manufacturing The specialty manufacturing segment experienced operating losses of $14,448,000 and $11,713,000 for the three and six-month periods ended December 31, 1995, respectively, compared to operating income of $6,243,000 and $10,543,000, respectively for the same periods last year. The specialty manufacturing segment contributed 100% and 96.6% of the consolidated operating loss before corporate expenses for the three and six-month periods ended December 31, 1995, respectively, compared to 71.6% and 75.9% of consolidated operating income before corporate expenses for the same respective periods last year. The operating loss for the specialty manufacturing segment for the three and six- month periods include restructuring charges of $17,943,000, as discussed previously. The following discussions of operating income by division are before restructuring charges. Operating income for the Picture Frames and Framed Art division decreased $2,334,000, or 38.2%, and $3,571,000, or 37.7%, for the three and six-month periods ended December 31, 1995, respectively, compared to the corresponding periods last year. The decrease in operating income is primarily attributable to the cancellation of certain large framed art orders for delivery in December by a key customer, as discussed previously. The Belts and Accessories division posted operating losses of $248,000 and $399,000 for the three and six-month periods ended December 31, 1995, respectively, compared to operating losses of $278,000 and $381,000 for the corresponding periods last year. The operating losses continue to reflect the softness in demand experienced in the cut-up and western apparel markets, resulting in lower sales and gross margins. The Outerwear division had operating losses of $672,000 and $902,000 for the three and six-month periods ended December 31, 1995, respectively, compared to operating losses of $386,000 and $399,000 for the corresponding periods last year. The decrease in operating profitability reflects the softness in demand experienced in the western apparel market as well as the residual impact on retail inventories of warm weather conditions in the prior year which adversely impacted the current year sales of sweatshirts and jackets. Operating income was also adversely impacted by the decrease in sales to a major customer of this division as a result of the reorganization of that customer's distribution channels. The TWI division's operating income decreased $158,000, or 19.8%, and $221,000, or 11.9%, for the three and six-month periods ended December 31, 1995, respectively, compared to the corresponding periods last year. The decrease in operating income reflects the continued decline of Southwest fashion merchandise sales from Tandy Leather Manufacturing and $170,000 of expenses associated with the relocation of Rivertown Button from Houston, Minnesota to Fort Worth, Texas. These factors were partially offset by increased sales and profitability in the licensed products group. Selling, general and administrative expenses Consolidated selling, general and administrative (SG&A) expenses were 31.3% and 32.3%, as a percent of sales, for the three and six-month periods ended December 31, 1995, respectively, compared to 29.9% and 30.4% for the corresponding periods last year. In total dollars, SG&A expenses increased $680,000, or 3.0%, and $1,288,000, or 3.0%, for the three and six-month periods ended December 31, 1995, respectively, compared to the corresponding periods last year. The increase in SG&A dollars compared to last year was primarily due to the impact of new store openings and increased expenses related to the sales growth in the licensed products group, as well as increases in corporate expenses related to legal settlements and other accruals. Interest expense, net Interest expense increased $167,000, or 17.6%, and $426,000, or 24.0%, for the three and six-month periods ended December 31, 1995, respectively, compared to the corresponding periods of the prior year. The increase in interest expense was due to an increase in average borrowings during the current year periods and to higher average interest rates. Depreciation and amortization Consolidated depreciation and amortization increased $508,000, or 42.1%, and $684,000, or 26.8%, for the three and six-month periods ended December 31, 1995, respectively, compared to the corresponding periods last year. The increase is due primarily to depreciation related to property and equipment of businesses acquired as well as amortization of goodwill related to acquisitions. Provision for income taxes The Company's tax benefit for the six-months ended December 31, 1995 was $6,068 compared to $3,386 of tax expense for the same period last year. The tax benefit for the six-months ended December 31, 1995 reflects current year losses which can be carried back to recover taxes paid in prior periods. The effective income tax rate in each six-month period was 33% and 35.5%, respectively. The effective income tax rate decreased 2.5% as a result of the acceleration of permanent tax differences attributable to certain sales or closures included in the restructuring charges discussed previously. LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of liquidity have come from cash flows from operations, sales of treasury stock to employee benefit programs, and borrowings under the Company's revolving credit facility. Primarily, these funds have been used to finance acquisitions, purchase property and equipment, retire the ESOP loan and finance the growth in inventories and receivables. During the six-months ended December 31, 1995, cash increased $2,637,000. Cash provided by operating activities of $1,643,000 primarily resulted from a decrease in receivables. Cash used for investing activities of $1,840,000 resulted from capital expenditures for property and equipment. Cash of approximately $2,834,000 was provided by financing activities. The Company has a $60 million revolving credit facility with a group of banks. During July 1995, the Company established an additional $10 million revolving credit facility that terminates on March 31, 1996. As part of the Company's planned restructuring and consolidation program discussed earlier, the bank group has agreed to extend the maturity date of the current revolving credit facility to October 1, 1997 under the existing terms and to amend certain provisions, restrictions and covenants under the revolving credit agreement as of December 31, 1995 to allow the actions contemplated by the Company's restructuring plan to occur without placing the Company in default. The Company has agreed with its lending banks to reduce the commitment amount under the revolving loan agreement from $60,000,000 to $50,000,000 by September 30, 1996. The Company currently estimates that cash generated from the sale of assets contemplated by the strategic restructuring program and cash flow from operations will enable it to reduce its borrowings under the revolving credit facility by September 30, 1996 to levels that will enable the Company to operate within the $50,000,000 commitment amount. In connection with the November 1993 acquisition of Impulse Designs, the asset purchase agreement provided for a contingent payment to be made based upon the attainment of certain earnings thresholds for the year ended December 31, 1994. Impulse Designs met certain of these thresholds and, in January 1996, the Company made a final cash payment of approximately $2.5 million to the former owners of Impulse Designs to complete the transaction. This amount is reflected as an increase in goodwill with a corresponding increase in accrued liabilities in the December 31, 1995 balance sheet. The Company also incurred approximately $457,000 of expenses related to such settlement which are reflected in the results of operations for the quarter ended December 31, 1995. Cash of approximately $1,840,000 was used for capital expenditures during the six-months ended December 31, 1995. Planned capital expenditures for the remainder of fiscal 1996 approximate $2,000,000 and are primarily targeted for investments in the Frames and Framed Art division. No additional new store openings are anticipated for the remainder of the fiscal year. Management believes that the Company's current cash position, its cash flows from operations and expected proceeds from the sale of assets contemplated by the strategic restructuring program will be sufficient to fund its planned operations, capital expenditures and required debt reduction for the remainder of fiscal 1996. TANDYCRAFTS, INC. PART II - OTHER INFORMATION Item 4. Submission of Matters to Vote of Security Holders - ------ ------------------------------------------------- The following proposals were approved at the Company's annual meeting held on November 8, 1995: Affirmative Votes Against Votes or Withheld ----------- ------------- 1. Election of management's slate of nominees to serve as Directors: B. Franklin Bigger 7,327,082 1,122,399 R. Earl Cox III 7,237,981 1,211,500 Jerry L. Roy 7,713,763 735,718 Joe K. Pace 7,220,631 1,228,850 Carol Smith 7,669,493 779,988 Robert Schutts 7,689,058 751,423 Michael J. Walsh 7,675,317 774,164 Item 6. Exhibits and Reports on Form 8-K - ------ -------------------------------- (a) Exhibits: Exhibit 27 Financial Data Schedule (b) Reports on Form 8-K: The Company filed a Current Report on Form 8-K, dated October 30, 1995, announcing the unaudited results of operations for the three-month period ended September 30, 1995. The Company filed a Current Report on Form 8-K, dated December 21, 1995, announcing a restructuring charges to be taken in the quarter ending December 31, 1995 associated with the implementation of a strategic restructuring and consolidation program. The Company also announced that Sheldon I. Stein had been named to the Company's Board of Directors. TANDYCRAFTS, INC. SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TANDYCRAFTS, INC. (Registrant) Date: February 14, 1996 By:/s/Jerry L. Roy ----------------------- Jerry L. Roy President, Chief Executive Officer and Director Date: February 14, 1996 By:/s/Michael J. Walsh ----------------------- Michael J. Walsh Executive Vice President and Chief Financial Officer, Secretary, General Counsel and Director (Principal Financial Officer) EX-27 2 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from Tandycrafts, Inc.'s December 31, 1995 Form 10-Q and is qualified in its entirety by reference to such Form 10-Q filing. 1,000 6-MOS JUN-30-1996 DEC-31-1995 4,444 0 38,802 1,089 59,239 104,976 50,299 23,367 174,311 41,157 0 0 0 18,528 62,597 174,311 136,696 136,696 86,698 86,698 66,234 0 2,202 (18,438) (6,068) (12,370) 0 0 0 (12,370) (1.04) (1.04)
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