-----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, T8s6GZSGg4SFl6xvAejLJHLJXx+oVrbY2vJPknApozUONFbFZcfihDlUjbOb6fOC 4vj9ML2m7gG7B/ePmQldOw== 0000096294-98-000026.txt : 19980929 0000096294-98-000026.hdr.sgml : 19980929 ACCESSION NUMBER: 0000096294-98-000026 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980928 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: TANDYCRAFTS INC CENTRAL INDEX KEY: 0000096294 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-MISCELLANEOUS SHOPPING GOODS STORES [5940] IRS NUMBER: 751475224 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-07258 FILM NUMBER: 98716076 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-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 1998 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from ________ to ________ Commission File No. 1-7258 TANDYCRAFTS, INC. (Exact name of Registrant as specified in its charter) DELAWARE 75-1475224 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1400 EVERMAN PARKWAY FORT WORTH, TEXAS 76140 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (817) 551-9600 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered - -------------------------------- ----------------------- Common stock, $1 par value New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No __ --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. As of September 15, 1998, there were 12,507,710 shares of Common Stock, $1.00 par value, outstanding, and the aggregate market value of the Common Stock of Registrant held by non-affiliates was approximately $42.6 million. DOCUMENTS INCORPORATED BY REFERENCE Location in Form 10-K Incorporated Document - --------------------------- --------------------- Part III Proxy Statement for 1998 Annual Meeting TANDYCRAFTS, INC. Form 10-K PART I ------ Item 1. Business - ------------------ Tandycrafts, Inc. ("Tandycrafts" or the "Company"), a Delaware corporation, was incorporated in June 1975 to operate the handicrafts segment previously operated by Tandy Corporation. The Company markets consumer products through four distinct product-related operating divisions: Frames and Wall Decor, Leather and Crafts, Office Supplies, and Novelties and Promotional. The Company's products are marketed and sold through various channels, including direct-to-consumer (e.g., retail stores, mail order, the Internet) and wholesale distribution (e.g., direct sales force, telemarketing and outside sales representatives). Joshua's Christian Stores, a retail chain of Christian bookstores, was sold by the Company in May 1998. Leather and Crafts - ------------------ The leather and crafts division consists of both the retail and wholesale operations of Tandy Leather & Crafts. This division accounted for 20.4%, 21.8% and 22.9% of the total consolidated net sales of the Company for fiscal years 1998, 1997 and 1996, respectively. Tandy Leather & Crafts ended fiscal 1998 with 128 retail stores in 42 states of the United States, having closed a net 38 stores during the year. Tandy Leather & Crafts retails leathercraft materials, kits and equipment used to produce functional and ornamental items and finished leathergoods. The principal merchandise lines consist of various leathers, belts and buckles, billfold kits and accessories, footwear and ladies' handbag kits, leatherworking tools and decorative items made of leather. Approximately 3,200 items are sold through 128 company-owned and operated specialty retail stores in the United States, with the strongest concentration in the southwest and on the east and west coasts. A portion of Tandy Leather & Crafts' sales is to the institutional market composed of industrial arts and crafts programs in schools, hospitals, prisons and recreational organizations. Semi-professionals and hobbyists make up an additional portion of Tandy Leather & Crafts' market. Tandy Leather & Crafts has been successful in developing a loyal repeat customer base. An important element in this achievement has been the effective use of customer purchasing information in focusing Tandy Leather & Crafts' advertising and direct mail efforts. Tandy Leather & Crafts also sponsors in-store classes, workshops and offers demonstrations in leathercrafting techniques such as carving, stamping, dyeing and jewelry making, which helps to cultivate new and repeat customers. Store managers and employees also give on-site demonstrations before school groups and other organizations. The wholesale arm of Tandy Leather & Crafts manufactures, markets and distributes leather products sold through other retail chains. The manufacturing operation in Fort Worth produces some of the kits, tools and supplies which are sold through Tandy Leather stores nationwide and wholesales similar products to other leading craft stores throughout the United States and Canada. As a significant purchaser of leather, Tandy Leather is able to command favorable pricing and terms from its suppliers which enhance this division's overall profitability. Consolidated under Tandy Leather Manufacturing is Nocona Belt Company located in Nocona, Texas, which manufactures a wide selection of western-style belts and leather accessories such as wallets, money clips, hatbands, jewelry and leather care goods. Office Supplies - --------------- The Office Supplies division of the Company, comprised of Sav-On Office Supplies ("Sav-On"), accounted for 16.5%, 14.5% and 11.8% of the total consolidated net sales of the Company for fiscal years 1998, 1997 and 1996, respectively. Sav-On sells office supplies from 41 company-owned and operated specialty retail stores which average approximately 6,500 square feet. During fiscal 1998, Sav-On opened 4 new stores and closed 2 stores. Sav-On's stores are located in eleven states. Sav-On stores carry approximately 6,200 products, consisting primarily of office and school supplies. The products sold are purchased from a variety of suppliers. The primary customers for Sav-On are small business owners, students and homeowners. Frames and Wall Decor - --------------------- The Frames and Wall division, comprised of Pinnacle Art and Frame and J- Mar Associates, accounted for 41.5%, 35.7% and 32.4% of the total consolidated net sales of the Company for fiscal years 1998, 1997 and 1996, respectively. During fiscal 1998, 1997 and 1996, the Frames and Wall Decor division had net sales of $38,495,000, $30,467,000 and $30,065,000, respectively, to one group of customers under common control. In fiscal 1998, the Company also had sales of $24,133,000 to another group of customers under common control. The Company had no other individual customer or group of customers which accounted for more than 10% of the Company's total revenue. Pinnacle Art & Frame manufactures and distributes a broad range of picture frames, framed art and mirrors under the Magee Company, Impulse Designs and Hermitage Fine Arts brands. The facilities in Pocahontas and Piggott, Arkansas, produce over 29 million frames annually. The Magee brand is widely recognized for manufacturing low-cost frames out of oak, pine and poplar and in recent years has expanded its production capacity for metal frames and developed a new line of extruded plastic frames. Impulse Designs, located in Van Nuys, California, was a strategic acquisition made by the Company in November 1993. Impulse Designs is a manufacturer of framed art for the mass market. Impulse has achieved a national following by introducing the works of well-known artists at popular price points. Magee and Impulse's products are sold in the United States and Canada by national account sales representatives, selling primarily to mass-merchandise retail chains, drug and grocery retail chains, department stores, general houseware merchants and specialty frame outlets. Also located in Van Nuys, California, Hermitage Fine Arts produces upscale frames and framed art which is sold primarily through home furnishings specialty retailers. Pinnacle Art & Frames' revenues have historically been seasonal with a higher percentage of their sales generated during the second fiscal quarter. Because Magee, Impulse Designs and Hermitage Fine Arts are recognized brand names which are strongly positioned in various market segments, Pinnacle Art & Frame's products will continue to be marketed under those names. J-Mar Associates is a producer and wholesale distributor of inspirational gift items, both domestically and internationally. J-Mar's customer base is primarily comprised of Christian retail gift and book stores. Through its telemarketing sales force, J-Mar distributes its product line to over 5,700 Christian book stores. Novelties and Promotional - ------------------------ The Novelties and Promotional division of Tandycrafts, comprised of Licensed Lifestyles and Rivertown Button Company, accounted for 8.9%, 9.8% and 8.0% of the total consolidated net sales of the Company for fiscal years 1998, 1997 and 1996, respectively. Licensed Lifestyles was formed through the consolidation of TAG Express, College Flags and Birdlegs. TAG Express distributes products such as auto tags, bumper stickers, key tags, decals, light switch covers, door knob hangers, luggage tags, automobile flags, wind socks and pennants featuring leading professional and collegiate sports logos. TAG Express has licenses with the NFL, NBA, NHL, Major League Baseball, U.S. Soccer League and all major colleges. The automobile flags, wind socks and pennants are manufactured by TAG in Lancaster, South Carolina. Birdlegs is a producer of screen-printed souvenir activewear including T-shirts, sweatshirts, cover-ups and tank tops. During fiscal 1997, Birdlegs' manufacturing facility was relocated to Lancaster, South Carolina and consolidated with the existing Licensed Lifestyles manufacturing facility. Licensed Lifestyles sells its products through its own direct sales force and a network of independent sales representatives, distributors, and in- house telemarketing personnel. Rivertown Button Company is a contract manufacturer of promotional buttons, ribbons, posters and stickers. Rivertown's products are marketed and sold to a wide range of customers including major corporations, schools, political campaigns, non-profit organizations, and other groups. Strategic Restructuring and Consolidation Program - ------------------------------------------------- In December 1995, the Company adopted a strategic restructuring and consolidation program. The primary components of this program included: (i) the sale of Cargo Furniture and Accents, (ii) the sale or closure of Prestige Leather Creations, David James Manufacturing, Brand Name Apparel and certain other individually insignificant operations, (iii) the closure of 11 retail stores, (iv) the consolidation, streamlining and, in some cases, outsourcing of certain functions throughout various operating units, and (v) the retention of an outside consulting firm to assist senior management in evaluating and developing the Company's retail concepts. As a result of the adoption of the strategic restructuring and consolidation program discussed above, the Company recorded restructuring charges of $18.8 million in the quarter ended December 31, 1995. In the quarter ended March 31, 1996, the Company reversed $501,000 of the initial reserve related to the sale of Prestige Leather Creations. Approximately $16.2 million of the restructuring charges related to non-cash writedowns of assets to their estimated realizable values, including: $7.5 million related to the write off of goodwill, $6.1 million related to the liquidation of inventories, $1.2 million related to the writedown of fixed assets, and $1.4 million related to the writedown of various other assets. The remaining $2.1 million of the restructuring charges represented anticipated cash outlays: $1.6 million related to lease obligations and the remainder related to other contractual obligation and exit costs. No severance costs were included in the restructuring charges. Of the net charge of $18.3 million, $6.1 million was classified in cost of goods sold and the remaining $12.2 million was classified as restructuring charges on the fiscal 1996 Consolidated Statement of Operations. A total of $1,113,000 of the reserve initially recorded for lease obligations was reclassified to the reserve for asset writedowns as a result of the assignment of leases to purchasers. The increase in the asset writedown reserve was necessary to provide for asset writedowns in excess of those originally anticipated. In fiscal 1996, the Company sold Prestige Leather Creations and Brand Name Apparel and closed David James Manufacturing and certain other individually insignificant operations. On the retail side, the Company closed two Sav-On stores, two Tandy Leather stores and one Joshua's store. Total proceeds from the sale of Prestige Leather approximated $1.5 million, with approximately $900,000 paid in cash and $607,000 in notes receivable which bear interest at 8.5% to 9.5% and mature at various dates through March 26, 2000. Total proceeds from the sale of Brand Name Apparel were approximately $1,038,000 in cash. On January 27, 1997, the Company completed the sale of Cargo Furniture and Accents to an acquisition group comprised of management and employees of Cargo for proceeds of approximately $4.2 million. A portion of the purchase price was financed through a note with a bank for which the Company provided a guaranty. The remaining purchase price was in the form of a note in the amount of approximately $140,500 bearing interest at 8.5% and due at various dates through July 1999. Working capital adjustments subsequent to the sale increased the note by $716,000 and at June 30, 1998, the balance of the note due from Cargo totaled $856,000. In addition, in June 1998, the Company extended a revolving promissory note to Cargo in the amount of $300,000 bearing interest at the prime rate of interest and maturing on December 31, 1998. At June 30, 1998, the full amount of $300,000 was outstanding to Cargo. At June 30, 1998, the balance of the bank note guaranteed by the Company was $2,644,000. Gain on the transaction was not material to the Company and has been deferred as a result of the Company's guaranty. During fiscal 1997, the Company also closed four Joshua's stores and two Tandy Leather Stores which were targeted for closure in the strategic restructuring program. After completing the sale of Cargo, the restructuring program is substantially complete. The accrual remaining at June 30, 1998 is related primarily to lease obligations. The following table sets forth the activity in the restructuring accrual, which is included in current accrued liabilities in the balance sheet at June 30, 1998 and June 30, 1997 (in thousands): Total ---------- Balance at June 30, 1996 $ 1,623 Cash payments (846) Non-cash asset writedowns (549) ---------- Balance at June 30, 1997 $ 228 Cash payments (185) ---------- Balance at June 30, 1998 $ 43 ========== Revenues included in the Company's results of operations from separately identifiable businesses sold or closed were $91,000, $12,360,000 and $32,675,000 in fiscal 1998, 1997 and 1996, respectively. Operating losses (before restructuring charges) from these businesses totaled $0, $234,000 and $1,992,000 in fiscal 1998, 1997 and 1996, respectively. Raw Materials - ------------- Raw materials and merchandise purchased by the Company are available from numerous sources, and the Company believes that the availability of such materials is adequate for its needs. Intangible Assets - ----------------- The Company owns a number of trademarks and copyrights. Management considers these intangibles to be valuable assets and vigorously defends them when necessary. Seasonality - ----------- The Company's operating results are subject to seasonal variation. Historically, the Company has realized a larger proportion of its sales and operating income in its second fiscal quarter (the Christmas season). Cash also increases in December through March due to the Christmas business achieved by the Company's retail operations and the Frames and Wall Decor division. Competitive Conditions - ---------------------- Tandy Leather & Crafts competes with hobby and crafts stores, including department and specialty stores, operated by individuals and various companies in all trade areas. The picture frames and framed art sold by Pinnacle Art & Frame are readily available from other suppliers who compete actively for sales. Sav-On Office Supplies' line of office supplies competes vigorously for sales with other nationally-known brand names that are marketed by department stores, national chain stores and local specialty stores. The products sold by the Novelties and Promotional division are readily available from other suppliers who compete actively for sales. Environmental Affairs - -------------------- Compliance by the Company with federal, state and local environmental protection laws have not had, and are not expected to have, a material effect upon capital expenditures, earnings or the competitive position of the Company. Foreign Operations and Export Sales - ----------------------------------- A small amount of products produced by the Company is exported to independent distributors and other customers in foreign nations. The combined export operations contributed less than 10% of consolidated revenue and/or income and utilized less than 10% of the consolidated assets of Tandycrafts, Inc. for each of the last three fiscal years. Employees - --------- The Company has approximately 2,800 employees, including part-time and temporary employees. Tandycrafts, Inc. sponsors an employees' retirement savings (401-K) plan, which is coupled with a employee stock ownership plan in which eligible employees and officers may participate. The Company is not a party to any union contract and considers its relations with its employees to be very good. Item 2. Properties - ------------------- The Company owns certain buildings which it uses for offices, manufacturing and warehousing. The Company also leases a significant amount of retail store and factory space. The total space owned and leased is as follows: Approximate Square Footage ------------------------------- Owned Leased Total ------- ------- ------- Warehouse and Office 324,000 152,381 476,381 Retail 12,750 444,538 457,288 Factory 431,000 246,672 677,672 ------- ------- --------- Totals 767,750 843,591 1,611,341 ======= ======= ========= The warehouse, office and factory space is located approximately 28% in Fort Worth, Texas, 41% at three locations in Arkansas (Frames and Wall Decor), 15% at one location in California (Frames and Wall Decor), 9% at three other locations in Texas (Leather and Crafts and Frames and Wall Decor), with the remaining 7% located in Georgia and South Carolina (Novelties and Promotional). The leased retail stores are generally small outlets and are located throughout 42 states of the United States. For additional lease information see Note 8 of Notes to Consolidated Financial Statements, which is set forth in Item 8 herein. Item 3. Legal Proceedings - -------------------------- The Company is not involved in any legal proceeding required to be disclosed pursuant to Item 103 of Regulation S-K, and no such proceeding was terminated during the fourth quarter of the 1998 fiscal year. Item 4. Submission of Matters to a Vote of Security Holders - ------------------------------------------------------------ There were no matters submitted to a vote of security holders during the fourth quarter of the 1998 fiscal year. Executive Officers of the Registrant - ------------------------------------ The following table sets forth certain information concerning the executive officers of the Company. Position and Business Experience Served as Name and Age During Past Five Years Officer Since - -------------------- ---------------------------------------- ------------- Michael J. Walsh, 57 President and Chief Executive Officer since 1983 April 1996. Executive Vice President and Chief Financial Officer: August 1992 to April 1996. Vice President: 1986 to August 1992. James D. Allen, 38 Executive Vice President and Chief Financial 1993 Officer since July 1996. Vice President: November 1993 to July 1996. Director of Special Projects: May 1993 to November 1993. Prior to May 1993, Mr. Allen was a Senior Manager in the accounting firm of Price Waterhouse LLP. Russell L. Price, 33 Vice President - General Counsel and Secretary 1996 since November 1996. Corporate Counsel: March 1994 to November 1996. Prior to March 1994, Mr. Price was an associate at the law firm of Hughes & Luce, LLP. Leo C. Taylor, 36 Vice President - Taxation, Risk Management and 1996 Benefits since November 1996. Director of Tax Administration: February 1994 to November 1996. Prior to February 1994, Mr. Taylor was a manager in the accounting firm of Price Waterhouse LLP. None of the above officers are related by birth, adoption or marriage. All officers are elected annually by the Board of Directors to serve for the ensuing year. PART II ------- Item 5. Market for the Registrant's Common Equity and Related Stockholder - -------------------------------------------------------------------------- Matters ------- Price Range of Common Stock (Quoted by quarter for the two most recent fiscal years.) High Low High Low ------ ------ ------ ------ Sept. 1996 $ 6.75 $ 5.13 Sept. 1997 $ 5.00 $ 4.31 Dec. 1996 $ 7.00 $ 5.88 Dec. 1997 $ 4.75 $ 3.63 March 1997 $ 6.63 $ 4.13 March 1998 $ 5.50 $ 4.13 June 1997 $ 5.50 $ 3.75 June 1998 $ 5.94 $ 4.69 The principal market for the Company's common stock is the New York Stock Exchange. As of September 15, 1998, there were approximately 7,200 shareholders of record of the Company's common stock. The Company's present policy is to retain earnings for the foreseeable future for use in the Company's business and the financing of its growth. The Company did not pay any cash dividends on its common stock during fiscal 1998 and 1997. The Company's revolving credit agreement contains provisions specifying limitations on the amount of cash payments and distributions which may be paid by the Company, including cash dividends and purchases of treasury stock. Item 6. Selected Financial Data - -------------------------------- Selected Financial Data (Unaudited) (in thousands, except per share amounts) 1998 1997 1996 1995 1994 -------- -------- -------- ------- -------- Net sales........................ $232,495 $244,924 $254,284 $256,523 $214,869 Restructuring Charge............. $ - $ - - $ 12,235 $ - Operating income (loss).......... $ 10,378 $ 40 $(11,811) 11,860 $ 15,417 Income (loss) before income taxes $ 7,119 $ (3,045) $(15,883) $ 8,027 $ 13,980 Net income (loss)................ $ 4,617 $ (1,918) $(10,709) $ 5,217 $ 8,906 Net income (loss) per common share $ .37 $ (.15) $ (.89) $ .46 $ .79 Weighted average shares outstanding 12,645 12,423 11,983 11,434 11,336 Net income (loss) as percent of net sales 2.0% (0.8%) (4.2%) 2.0% 4.1% Net income (loss) as percent of beginning equity 5.5% (2.3%) (11.8%) 6.6% 13.3% Current assets................... $ 83,077 $ 90,017 $ 99,771 $101,980 $ 85,414 Current liabilities.............. $ 24,675 $ 28,961 $ 33,751 $ 27,113 $ 28,211 Working capital.................. $ 58,402 $ 61,056 $ 66,020 74,867 $ 57,203 Current ratio.................... 3.4 to 1 3.1 to 1 3.0 to 1 3.8 to 1 3.0 to 1 Total assets..................... $150,691 $156,529 $168,579 $178,803 $150,431 Net property and equipment....... $ 22,886 $ 25,505 $ 26,783 $ 28,707 $ 24,953 Long-term liabilities............ $ 37,052 $ 43,294 $ 51,230 $ 61,029 $ 43,138 Retained earnings................ $ 72,074 $ 67,457 $ 69,375 $ 80,084 $ 74,867 Total stockholders' equity....... $ 88,964 $ 84,274 $ 83,598 $ 90,661 $ 79,082 Common shares outstanding ....... 12,611 12,598 12,178 11,717 11,161 Stockholders' equity per common share $ 7.05 $ 6.69 $ 6.86 $ 7.75 $ 7.09
There have been no cash dividends declared or paid by the Company. Item 7. Management's Discussion and Analysis of Financial Condition and - ------------------------------------------------------------------------- Results of Operations --------------------- Tandycrafts, Inc. ("Tandycrafts" or the "Company") markets consumer products through four distinct product-related operating divisions: Frames and Wall Decor, Leather and Crafts, Office Supplies, and Novelties and Promotional. The Company's products are marketed and sold through various channels, including direct-to-consumer (e.g., retail stores, mail order, the Internet) and wholesale distribution (e.g., direct sales force, telemarketing and outside sales representatives). Joshua's Christian Stores, a retail chain of Christian bookstores, was sold by the Company in May 1998. Certain statements in this discussion, other filings with the Securities and Exchange Commission and other Company statements are not historical facts but are forward-looking statements. The words "believes," "expects," "estimates," "projects," "plans," "could," "may," "anticipates," or the negative thereof or other variations or similar terminology, or discussions of strategies or plans identify forward-looking statements. These forward-looking statements reflect the Company's reasonable judgments with respect to future events and are subject to risks and uncertainties that could cause actual results to differ materially from such forward-looking statements. These risks and uncertainties include, but are not limited to, the Company's ability to reduce costs through the consolidation of certain operations, customers' willingness, need, demand and financial ability to purchase the Company's products, new business opportunities, the successful development and introduction of new products and the successful development of new retail stores, the successful implementation of new information systems, the development of direct import programs and foreign manufacturing facilities, relationships with key customers, relationships with professional sports leagues and other licensors, the possibility of players' strikes in professional sports leagues, price fluctuations for commodities such as lumber, paper, leather and other raw materials, seasonality of the Company's operations, effectiveness of promotional activities, changing business strategies and intense competition in retail operations. Additional factors include economic conditions such as interest rate fluctuations, consumer debt levels, changing consumer demand and tastes, competitive products and pricing, availability of products, inventory risks due to shifts in market demand, regulatory and trade environment and other factors or risks. RESULTS OF OPERATIONS The following tables present selected financial data for each of the Company's four product divisions for the years ended June 30, 1998, 1997 and 1996: Fiscal Years Ended June 30, 1998 and 1997 (Dollars in Thousands) 1998 1997 Increase (Decrease) ------------------- ------------------- ------------------- Operating Operating Income Income Operating Divisions Sales (Loss) Sales (Loss) Sales Income - --------------------- -------- -------- -------- -------- -------- -------- Frames and Wall Decor $ 96,459 $ 12,100 $ 87,445 $ 11,990 10.3% 0.9% Leather and Crafts 47,454 150 53,413 530 (11.2%) (71.7%) Office Supplies 38,460 1,878 35,600 2,440 8.0% (23.0%) Novelties and Promotional 20,734 (426) 24,078 (799) (13.9%) 46.7% -------- -------- -------- -------- ------ ------ 203,107 13,702 200,536 14,161 1.3% (3.2%) Divested operations 29,388 13 44,388 (7,933) (33.8%) 100.2% -------- -------- -------- -------- ------ ------ Total operations, excluding corporate $232,495 $ 13,715 $244,924 $ 6,228 (5.1%) 120.2% ======== ======== ======== ======== ====== ======
Fiscal Years Ended June 30, 1997 and 1996 (Dollars in Thousands) 1997 1996 Increase (Decrease) ------------------- ------------------- ------------------- Operating Operating Income Income Operating Divisions Sales (Loss) Sales (Loss) Sales Income - --------------------- -------- -------- -------- -------- -------- -------- Frames and Wall Decor $ 87,445 $ 11,990 $ 82,308 $ 9,365 6.2% 28.0% Leather and Crafts 53,413 530 58,266 2,219 (8.3%) (76.1%) Office Supplies 35,600 2,440 29,922 1,123 19.0% 117.3% Novelties and Promotional 24,078 (799) 20,269 1,580 18.8% (150.6%) -------- -------- -------- -------- ------ ------ 200,536 14,161 190,765 14,287 5.1% (0.9%) Divested operations 44,388 (7,933) 63,519 (9,833) (30.1%) 19.3% Restructuring charge - - - (12,195) - 100.0% -------- -------- -------- -------- ------ ------ Total operations, excluding corporate $244,924 $ 6,228 $254,284 $ (7,741) (3.7%) 180.5% ======== ======== ======== ======== ====== ======
FISCAL YEARS ENDED JUNE 30, 1998 AND 1997 For fiscal 1998, consolidated net sales decreased $12,429,000, or 5.1%, compared to fiscal 1997. Excluding divested operations, net sales increased $2,571,000, or 1.3%, compared to the prior year. Total operating income before corporate expenses increased $7,487,000, or 120.2%, from fiscal 1997. Excluding divested operations, operating income decreased $459,000, or 3.2%, compared to the prior year. Discussions relative to each of the Company's product divisions are set forth below. Frames and Wall Decor Net sales for the Frames and Wall Decor division, comprised of Pinnacle Art and Frame and J-Mar Associates, accounted for 41.5% of consolidated sales in fiscal 1998 compared to 35.7% in the prior year. Sales for the division increased 10.3% compared to the prior year. Sales of picture frames increased $5,680,000, or 10.1%, while sales of framed art increased $2,738,000, or 9.4%. These sales increases are due to the addition of new customers and increased sales to existing customers. Operating income for this division increased 0.9% compared to the prior year. Gross profit as a percent of sales decreased slightly from the prior year primarily due to manufacturing inefficiencies and overtime incurred during the first half of fiscal 1998 and to increased allowances granted to customers. However, gross profit dollars for the division increased 2.3% reflecting the increased sales levels achieved in fiscal 1998. Selling, general and administrative ("SG&A") expenses increased 4.2% over the prior year primarily due to developing a new service organization in 1998 to service major customers. SG&A expenses as a percent of sales decreased less than one percent in fiscal 1998 due to the increase in sales. The Frames and Wall Decor division continues to be the Company's largest and most profitable division and, as such, Tandycrafts plans to make a significant strategic investment during fiscal 1999 by adding a new manufacturing facility. This facility has the potential to significantly increase the division's production capacity, reduce the amount of overtime currently incurred and to decrease manufacturing inefficiencies. Leather and Crafts Net sales for the Leather and Crafts division, which includes both the retail and wholesale operations of Tandy Leather & Crafts, accounted for 20.4% of consolidated sales in fiscal 1998 compared to 21.8% in the prior year. Sales for the division decreased 11.2% in fiscal 1998 compared to the prior year. Retail store sales declined 7.7% primarily due to the closing of 38 unprofitable stores during fiscal 1998. Same-store sales were essentially unchanged, decreasing 0.5% for the year. Sales decreased 21.8% at the wholesale operations of Tandy Leather due primarily to the discontinuance of an unprofitable line of business in early fiscal 1998 and to an overall downturn in the Western apparel market. Operating income for the Leather and Crafts division decreased 71.7% compared to the prior year due to the decrease in sales. Gross profit as a percent of sales increased slightly for the year; however, gross profit dollars decreased significantly due to the decrease in sales. SG&A expenses decreased 7.9%, reflecting decreases in advertising, labor and occupancy expenses attributable to the closing of 38 unprofitable stores during the year. SG&A expenses as a percentage of sales increased compared to the prior year due to a greater decrease in sales relative to the decrease in SG&A expenses. The Leather and Crafts division plans to continue to downsize its retail chain to a core of higher volume stores, recover lost sales from exited markets through mail order, and aggressively develop and pursue wholesale and mail order channels. Key strategies in rebuilding this division include: improved merchandise presentation, the introduction of new products and packaging designs, improved logistics and sourcing, more focused advertising and targeted improvements in information systems and technology to provide better operational information and support. Office Supplies The Office Supplies division, comprised of the Sav-On Office Supplies chain, accounted for 16.5% of consolidated sales in fiscal 1998 compared to 14.5% in the prior year. This division achieved an 8.0% increase in net sales over fiscal 1997 due to six stores opened since May 1997 and to same-store sales increases of 3.2%. The same-store sales increase in fiscal 1998 was achieved despite large format competitors entering seventeen of Sav-On's markets during the last nineteen months. Historically, sales at Sav-On stores are significantly impacted the first twelve months after a large competitor enters a market; however, after the second year, the store typically begins producing sales gains once again. Sav-On's operating income decreased $562,000, or 23.0%, in fiscal 1998 compared to the prior year. The decrease in operating income is primarily attributable to first-year operating losses of $809,000 from the six stores opened since May 1997. Gross profit as a percent of sales decreased slightly compared to the prior year due to a change in sales mix, with a greater portion of total sales comprised of computer peripherals and furniture which have lower gross margins relative to other merchandise categories, and to the impact of increased competition. SG&A expenses increased $1,227,000, or 11.9%, compared to the prior year primarily due to the six new stores. Management is actively pursuing various strategies to increase the revenues and operating profits of this division. These strategies include direct import programs, private label merchandising of certain replenishable product and the establishment of an outside sales position in each of its stores to increase Sav-On's visibility to commercial customers. Novelties and Promotional Sales for the Novelties and Promotional products division, comprised of Licensed Lifestyles, Inc. and Rivertown Button Company, accounted for 8.9% of consolidated sales in fiscal 1998 compared to 9.8% in the prior year. Sales for the division decreased 13.9% compared to the prior year. This decrease reflects an overall weaker demand for sports licensed products in fiscal 1998, specifically a weak "hot market" for Super Bowl and NHL playoff merchandise compared to the prior year, and the discontinuance of an unprofitable line of business at Licensed Lifestyles. This division had an operating loss of $426,000 in fiscal 1998 compared to a loss of $799,000 in the prior year. Gross profit as a percent of sales increased slightly in fiscal 1998; however, gross profit dollars decreased as a result of the decrease in sales. SG&A expenses decreased reflecting the results of consolidation and expense reduction efforts within this division. Management strengthened the operating management in this division late in fiscal 1998 and expects to see improved results for the division through the streamlining and simplifying of business processes and refocusing the business on larger, more profitable customers. Sale of Joshua's Christian Stores The Company sold Joshua's Christian Stores effective May 31, 1998 to Family Christian Stores for consideration totaling approximately $11,500,000, with approximately $2,900,000 paid in cash at the time of closing and approximately $8,600,000 in a note receivable. The note bears interest at a rate of 7.25% and is payable in three installments on December 31 of the years 1998, 1999 and 2000. The sale of this business resulted in a pretax loss of $623,000, comprised primarily of transaction related costs. Selling, general and administrative expenses Consolidated selling, general and administrative expenses as a percentage of sales were 27.2% for fiscal 1998 compared to 32.3% for fiscal 1997. In total dollars, selling, general and administrative expenses decreased $16,003,000, or 20.2%, for fiscal 1998 when compared to the previous year. The decrease in expenses is a result of decreased operating expenses of the Leather and Crafts and Novelties and Promotional divisions, decreased corporate administrative expenses and decreased expenses related to businesses sold during 1998 and 1997. Interest expense Interest expense increased $222,000, or 7.1%, for fiscal 1998 compared to the prior year. The increase in interest expense was due primarily to a higher average interest rate in fiscal 1998 partially offset by lower average borrowings compared to the prior year. Depreciation and amortization Consolidated depreciation and amortization decreased $546,000, or 10.2%, for fiscal 1998 compared to the previous year. The decrease is due primarily to the sale or write-down of equipment related to businesses sold in 1998 and 1997. Provision for income taxes The Company recognized a tax expense of $2,502,000 in fiscal 1998 and tax benefits of $1,127,000 and $5,174,000 in fiscal 1997 and fiscal 1996, respectively. The effective income tax rate for fiscal 1998 was 35.1% compared to 37.0% for the prior year. The decrease in the effective income tax rate is a result of permanent differences created in fiscal 1997 through the charitable contribution of certain inventory. FISCAL YEARS ENDED JUNE 30, 1997 AND 1996 For fiscal 1997, consolidated net sales decreased $9,360,000, or 3.7%, compared to fiscal 1996. Excluding divested operations, net sales increased $9,771,000, or 5.1%, compared to the prior year. Total operating income before corporate expenses increased $13,969,000, or 180.5%, from fiscal 1996. Excluding divested units and the $12,195,000 restructuring charge in fiscal 1996, operating income decreased $126,000, or 0.9%, compared to the prior year. Discussions relative to each of the Company's product divisions are set forth below. Frames and Wall Decor The Frames and Wall Decor division comprised 35.7% of consolidated net sales in fiscal 1997 compared to 32.4% in the prior year. The 6.2% increase in net sales for this division was attributable to strong demand from existing customers and the addition of new customers. Sales of picture frames increased $1,498,000, or 2.7%, compared to the prior year due to new customers added during the year and to strong sales increases in the mirror product line. Framed art sales increased $3,309,000, or 12.8%, due to increased demand from an existing customer and several new accounts added to the customer base in the current year. Operating income for the Frames and Wall Decor division rebounded from $9,365,000 in fiscal 1996 to $11,990,000 in fiscal 1997. This increase was primarily a result of increased volume in fiscal 1997. Gross profit as a percentage of sales increased 1.8 percentage points due to manufacturing efficiencies and vertical integration savings, partially offset by increases in lumber prices. SG&A expenses increased slightly in dollars, but decreased as a percentage of sales due to the increase in sales without a proportionate increase in expenses. Leather and Crafts The Leather and Crafts division comprised 21.8% of consolidated net sales in fiscal 1997 compared to 22.9% in the prior year. The 8.3% decrease in net sales at Tandy Leather was primarily attributable to same-store sales decreases of 5.5% from fiscal 1996, as well as the closing of seven stores during fiscal 1997. The same-store sales decline is attributable to a lack of successful new product introductions, high store manager turnover, low in-stock position in top-selling items and a decrease in store traffic which was partially offset by a higher average ticket. Operating income for Tandy Leather decreased compared to the prior year due to the decrease in sales and a slight decrease in gross profit as a percent of sales. The decrease in gross profit percentage was a result of a change in sales mix. As a result of the decrease in sales of higher margin fashion merchandise, leather products comprised a greater portion of the chain's total sales, bringing the overall gross margin percentage down slightly. SG&A expenses decreased 9.0%; however, these expenses decreased only slightly as a percentage of sales compared to the prior year due to a greater decrease in sales relative to the decrease in support and administrative expenses. Labor expense increased as a result of efforts to improve retention of store managers. Office Supplies The Office Supplies division comprised 14.5% of consolidated net sales in fiscal 1997 compared to 11.8% in the prior year. Sav-On Office Supplies achieved a 19% increase in net sales over fiscal 1996 due to same-store sales increases of 21.4%, partially offset by two stores which were closed during 1997. The fiscal 1997 sales increase was achieved despite large format competitors entering nine of Sav-On's markets during fiscal 1996. The same- store sales increases were primarily attributable to the addition of a line of PC printers and fax machines to the merchandise assortment and a slight increase in furniture sales. Sav-On's operating income increased 117.3% in fiscal 1997, its second consecutive year of increases greater than 100%. The increase in operating income was primarily a result of increased sales and efficiency gains at both stores and administrative units. Gross profit as a percent of sales decreased slightly due to the addition of PC printers and fax machines, which carry lower margins than the average of Sav-On's other merchandise categories; however, gross margin dollars increased $1,174,000, or 9.5%, for the year. SG&A expense dollars decreased $146,000 or 1.4%. Although sales increased, labor expense as a percent of sales decreased from 17.6% in fiscal 1996 to 13.1% in fiscal 1997 due to more effective store labor hour management. Total SG&A as a percentage of sales was 29% in fiscal 1997 compared to 35% in fiscal 1996. Novelties and Promotional The Novelties and Promotional division comprised 9.8% of consolidated net sales in fiscal 1997 compared to 8.0% in the prior year. Net sales for this division increased 18.8% compared to fiscal 1996 due to increased sales from Licensed Lifestyles primarily due to increased NFL and NHL merchandise and the Atlanta Olympic sales during the first quarter of fiscal 1997. Those increases were partially offset by a decrease in sales of screen-printed and embroidered active wear from Birdlegs due to soft demand in the resort market. The Novelties and Promotional division experienced an operating loss of $799,000 in fiscal 1997 compared to operating income of $1,580,000 in fiscal 1996. The fiscal 1997 loss was primarily attributable to operating losses of Licensed Lifestyles due to the write-off of inventory remaining from the Atlanta Olympics, increased bad debt expense and expenses incurred to relocate and consolidate the Birdlegs manufacturing facility with the existing Licensed Lifestyles manufacturing facility in Lancaster, South Carolina. Joshua's Christian Stores Sales at Joshua's Christian Stores increased 3.8% over fiscal 1996 due to same-store sales increases of 5.6%, partially offset by the lost sales from eight stores which were closed during the year. The same-store sales increase was primarily attributable to more effective advertising and promotions, improved merchandise assortment and better in-stock position. After a weak first quarter, Joshua's rebounded strongly with net sales increases of over 10% for the last three quarters of fiscal 1997. The operating loss experienced by Joshua's in fiscal 1997 includes repositioning charges of $5,300,000 to write down and liquidate discontinued inventory and to close thirteen stores. The fiscal 1997 loss, excluding the $5,300,000 charge, was $2,400,000; however, gross margin dollars increased $633,000, or 5.5%, with gross margin as a percent of sales increasing slightly. Selling, general and administrative expenses, excluding the repositioning charges, increased $1,448,000, or 11.6%, primarily due to increases in store labor and advertising expenses. Selling, general and administrative expenses Consolidated selling, general and administrative expenses as a percentage of sales were 32.3% for fiscal 1997 compared to 32.0% for fiscal 1996. In total dollars, selling, general and administrative expenses decreased $2,242,000, or 2.8%, for fiscal 1997 when compared to the previous year. The decrease in expenses was primarily due to a reduction in the Company's matching contribution to the retirement savings plan, a reduction in overall labor and benefits expense and the elimination of expenses related to those companies closed or divested during fiscal 1996. Interest expense Interest expense decreased $999,000, or 24.2%, for fiscal 1997 compared to the prior year. The decrease in interest expense was due primarily to lower average borrowings compared to the prior year. Depreciation and amortization Consolidated depreciation and amortization decreased $592,000, or 9.9%, for fiscal 1997 compared to the previous year. The decrease is due primarily to the sale or write-down of equipment related to businesses closed or divested during fiscal 1996. Provision for income taxes The Company realized tax benefits of $1,127,000 and $5,174,000 in fiscal 1997 and fiscal 1996, respectively. The effective income tax rate for fiscal 1997 was 37.0% compared to 32.6% for the prior year. The increase in the effective income tax rate is a result of permanent differences in fiscal 1996 attributable to certain sales or closures included in the restructuring charges during that year, as well as permanent differences created in fiscal 1997 through the charitable contribution of certain inventory. STRATEGIC RESTRUCTURING AND CONSOLIDATION PROGRAM In December 1995, the Company adopted a strategic restructuring and consolidation program. The primary components of this program included: (i) the sale of Cargo Furniture and Accents, (ii) the sale or closure of Prestige Leather Creations, David James Manufacturing, Brand Name Apparel and certain other individually insignificant operations, (iii) the closure of 11 retail stores, (iv) the consolidation, streamlining and, in some cases, outsourcing of certain functions throughout various operating units, and (v) the retention of an outside consulting firm to assist senior management in evaluating and developing the Company's retail concepts. As a result of the adoption of the strategic restructuring and consolidation program discussed above, the Company recorded restructuring charges of $18.8 million in the quarter ended December 31, 1995. In the quarter ended March 31, 1996, the Company reversed $501,000 of the initial reserve related to the sale of Prestige Leather Creations. Approximately $16.2 million of the restructuring charges related to non-cash writedowns of assets to their estimated realizable values, including: $7.5 million related to the write off of goodwill, $6.1 million related to the liquidation of inventories, $1.2 million related to the writedown of fixed assets, and $1.4 million related to the writedown of various other assets. The remaining $2.1 million of the restructuring charges represented anticipated cash outlays: $1.6 million related to lease obligations and the remainder related to other contractual obligation and exit costs. No severance costs were included in the restructuring charges. Of the net charge of $18.3 million, $6.1 million was classified in cost of goods sold and the remaining $12.2 million was classified as restructuring charges on the fiscal 1996 Consolidated Statement of Operations. A total of $1,113,000 of the reserve initially recorded for lease obligations was reclassified to the reserve for asset writedowns as a result of the assignment of leases to purchasers. The increase in the asset writedown reserve was necessary to provide for asset writedowns in excess of those originally anticipated. In fiscal 1996, the Company sold Prestige Leather Creations and Brand Name Apparel and closed David James Manufacturing and certain other individually insignificant operations. On the retail side, the Company closed two Sav-On stores, two Tandy Leather stores and one Joshua's store. Total proceeds from the sale of Prestige Leather approximated $1.5 million, with approximately $900,000 paid in cash and $607,000 in notes receivable which bear interest at 8.5% to 9.5% and mature at various dates through March 26, 2000. Total proceeds from the sale of Brand Name Apparel were approximately $1,038,000 in cash. On January 27, 1997, the Company completed the sale of Cargo Furniture and Accents to an acquisition group comprised of management and employees of Cargo for proceeds of approximately $4.2 million. A portion of the purchase price was financed through a note with a bank for which the Company provided a guaranty. The remaining purchase price was in the form of a note in the amount of approximately $140,500 bearing interest at 8.5% and due at various dates through July 1999. Working capital adjustments subsequent to the sale increased the note by $716,000 and at June 30, 1998, the balance of the note due from Cargo totaled $856,000. In addition, in June 1998, the Company extended a revolving promissory note to Cargo in the amount of $300,000 bearing interest at the prime rate of interest and maturing on December 31, 1998. At June 30, 1998, the full amount of $300,000 was outstanding to Cargo. At June 30, 1998, the balance of the bank note guaranteed by the Company was $2,644,000. Gain on the transaction was not material to the Company and has been deferred as a result of the Company's guaranty. During fiscal 1997, the Company also closed four Joshua's stores and two Tandy Leather Stores which were targeted for closure in the strategic restructuring program. After completing the sale of Cargo, the restructuring program is substantially complete. The accrual remaining at June 30, 1998 is related primarily to lease obligations. The following table sets forth the activity in the restructuring accrual, which is included in current accrued liabilities in the balance sheet at June 30, 1998 and June 30, 1997 (in thousands): Total ------- Balance at June 30, 1996 $ 1,623 Cash payments (846) Non-cash asset writedowns (549) ------- Balance at June 30, 1997 $ 228 Cash payments (185) ------- Balance at June 30, 1998 $ 43 ======= Revenues included in the Company's results of operations from separately identifiable businesses sold or closed were $91,000, $12,360,000 and $32,675,000 in fiscal 1998, 1997 and 1996, respectively. Operating losses (before restructuring charges) from these businesses totaled $0, $234,000 and $1,992,000 in fiscal 1998, 1997 and 1996, respectively. LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of liquidity have come from cash flows from operations, proceeds from the sale of Joshua's Christian Stores and sales of treasury stock to employee benefit programs. These funds have been used primarily to reduce borrowings under the Company's revolving credit facility and to finance capital expenditures. During the year ended June 30, 1998, cash increased $211,000. Cash provided by operating activities of $7,936,000 resulted primarily from income from operations, partially offset by an increase in working capital. Cash used for investing activities of $1,188,000 resulted primarily from capital expenditures for property and equipment, partially offset by cash proceeds from the sale of Joshua's Christian Stores during fiscal 1998. Cash of approximately $6,537,000 was used by financing activities, primarily to reduce borrowings under the Company's revolving credit facility. The Company has a $50,000,000 revolving credit facility with a group of banks. Effective September 30, 1997, the Company's revolving credit facility was renewed by its banks and the maturity was extended through October 31, 1999. Effective November 3, 1997, the Company entered into an Interest Rate Swap Agreement with its primary bank in which a $20,000,000 notional amount of floating rate debt at LIBOR was swapped for a fixed rate of 6.01%. The Swap Agreement has a three-year term and is being accounted for as a hedge by the Company. The transaction was executed to hedge interest rate risk on the Company's interest obligation associated with a portion of its revolving credit facility, and to change the nature of the liability from a variable to a fixed interest obligation. At June 30, 1998, the Company would have had to pay approximately $120,000 to terminate the interest rate swap. This amount was obtained from the counterparties and represents the fair market value of the Swap Agreement. The Company currently estimates that its cash flow from operations will enable the Company to operate within the credit facility commitment amount on a continuing basis. Actual results may differ from this forward-looking projection due to new product introductions, increased inventory levels, new store openings, investment in new manufacturing facilities, implementation of information systems and other risk factors contained herein. Cash of approximately $3,530,000 was used for capital expenditures during the year ended June 30, 1998. Planned capital expenditures for fiscal 1999 approximate $9,253,000 and are targeted primarily for investments in Pinnacle Art & Frame, primarily the addition of a new manufacturing facility, and for investments in information systems. The Company's minimum operating lease commitments for fiscal 1999 approximate $4,710,000. Management believes that the Company's current cash position, its cash flows from operations and borrowing capacity under its revolving credit facility will be sufficient to fund its planned operations and capital expenditures. Actual results may differ from this forward-looking projection. Please refer to the discussion of risk factors herein. NEW ACCOUNTING STANDARDS In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income", which establishes standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. This statement is effective for fiscal years beginning after December 15, 1997 and the Company will adopt SFAS 130 in the year ending June 30, 1999. As this statement requires only additional disclosures, the effect of adopting it is not expected to have a material impact on the Company's financial position or results of operations. The FASB also issued in June 1997, Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information." This statement requires that a public business enterprise report financial and descriptive information about its reportable operating segments in complete sets of financial statements of the enterprise and in condensed financial statements of interim periods issued to shareholders. This statement is effective for periods beginning after December 15, 1997 and the Company will adopt this statement in the year ending June 30, 1999. As this statement requires only additional disclosures, the effect of adopting it is not expected to have a material impact on the Company's financial position or results of operations. In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" which requires an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. This statement is effective for all fiscal quarters beginning after June 15, 1999. While the adoption of this statement is not expected to have a material impact on the Company's financial position or results of operations, due to its complexity, the Company is currently still evaluating the implications of its adoption. THE YEAR 2000 The Company has conducted a comprehensive review of its computer and operating systems to identify the systems that could be affected by the "Year 2000" issue and has developed an implementation plan to address the issues. These plans include converting to new financial information systems at several operating units, including the entire Leather and Crafts division and The Magee Company (within the Frames and Wall Decor division), in addition to less significant upgrades of current software at other operations. The Company has completed its system requirements study and is currently in the implementation stage with a target completion date of June 30, 1999. Management believes this implementation plan will not pose significant operational problems for the Company. The Company currently estimates the cost of the implementation plan to range from $1,500,000 to $2,000,000 and believes that its cash flows from operations and available borrowing capacity will be sufficient to fund the plan. The Company is currently focusing its available resources on implementation of the new information systems and does not currently have contingency plans in place for those operations requiring new systems. However, should it later become apparent that for unforeseen reasons the Company will not be able to complete the implementations by June 30, 1999, viable alternatives will be explored. The Company has, and will continue to communicate with its suppliers, key customers, financial institutions and others with which it does business to coordinate Year 2000 conversions. Progress reports on the Year 2000 project are presented periodically to the Company's Board of Directors. Although there can be no assurances that the Company will be able to complete the system implementations by the June 30, 1999 target completion date or that it will be able to identify all Year 2000 issues before problems arise, management believes it is taking adequate action to address the Year 2000 issue. Actual results may differ from the forward-looking statements contained in this discussion. Risks associated with these forward-looking statements include the Company's ability to retain key personnel; breach of warranties, representations, assurances or statements given to the Company by its software vendors, suppliers and customers; the Company's ability to identify all Year 2000 issues and other such risk factors. CONTINGENCIES A former subsidiary of the Company, which was spun-off in 1978, filed for Chapter 11 protection under the federal bankruptcy code in January 1996. As part of the bankruptcy proceedings, the former subsidiary has rejected certain store leases which were originated prior to the spin-off and for which the Company was allegedly a guarantor. An accrual for claims associated with the alleged guarantees on leases rejected as of June 30, 1998 has been established. Based on the information presently available, management believes the amount of the accrual at June 30, 1998 is adequate to cover the liability the Company may incur under the alleged guarantees. Item 7a. Quantitative and Qualitative Disclosures About Market Risk - -------------------------------------------------------------------- The Company is exposed to changes in interest rates in the United States. The Company manages interest rate risk through the strategic use of variable rate debt and interest rate derivatives. As of June 30, 1998, the Company had only entered into one interest rate derivative; thus, the table presents the notional amount and interest rate of this derivative instrument categorized by expected maturity date. The counterparty to the derivative agreement is a major financial institution. The Company believes the risk of credit loss with this institution is minimal. The Company does not use derivatives with a risk higher than the exposure to be hedged and does not hold or issue derivative instruments for trading purposes. Fair 1999 2000 2001 Total Value ------ ------ ------ ------- -------- Liabilities: Bank debt 34,230 34,230 34,230 Average interest rate 6.61% 6.61% Interest rate derivative financial instruments related to debt: Pay fixed rate, receive floating rate 20,000 20,000 (120) Average pay rate 6.01% 6.01% Average receive rate LIBOR LIBOR Item 8. Financial Statements and Supplementary Data - ---------------------------------------------------- Index to Financial Statements Financial Statements: Page -------------------- ------------- Report of Independent Accountants 19 Consolidated Balance Sheets, June 30, 1998 and 1997 20 Consolidated Statements of Operations for the Years Ended June 30, 1998, 1997 and 1996 21 Consolidated Statements of Cash Flows for the Years Ended June 30, 1998, 1997 and 1996 22 Consolidated Statements of Stockholders' Equity for the Years Ended June 30, 1998, 1997 and 1996 23 Notes to Consolidated Financial Statements 24 Financial Statement Schedules: ----------------------------- For each of the three years in the period ended June 30, 1998: Schedule II - Valuation and Qualifying Accounts and Reserves 37 All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Tandycrafts, Inc. In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Tandycrafts, Inc. and its subsidiaries at June 30, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICEWATERHOUSECOOPERS LLP Fort Worth, Texas August 11, 1998 TANDYCRAFTS, INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands) June 30, -------------------- 1998 1997 --------- --------- ASSETS Current assets: Cash............................................. $ 1,216 $ 1,005 Trade accounts receivable, net of allowance for Doubtful accounts of $2,755 and $1,680, respectively.................................... 28,086 32,614 Inventories...................................... 45,990 49,671 Other current assets............................. 7,785 6,727 --------- --------- Total current assets.......................... 83,077 90,017 --------- --------- Property and equipment, net........................ 22,886 25,505 Other assets....................................... 6,929 768 Goodwill, net...................................... 37,799 40,239 --------- --------- $ 150,691 $ 156,529 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable................................. 12,155 13,196 Accrued liabilities and other.................... 12,520 15,765 --------- --------- Total current liabilities..................... 24,675 28,961 --------- --------- Long-term debt..................................... 34,230 40,840 Deferred taxes..................................... 2,822 2,454 Stockholders' equity: Common stock, $1 par value, 50,000,000 shares authorized,18,527,988 issued.................... 18,528 18,528 Additional paid-in capital....................... 20,545 20,432 Retained earnings................................ 72,074 67,457 Common stock in treasury, at cost, 5,917,419 and 5,930,336 shares, respectively.............. (22,183) (22,143) --------- --------- Total stockholders' equity.................... 88,964 84,274 --------- --------- Commitments and contingencies (Note 8) $ 150,691 $ 156,529 ========= ========= The accompanying notes are an integral part of these financial statements. TANDYCRAFTS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) Year Ended June 30, --------------------------------- 1998 1997 1996 --------- --------- --------- Net sales.................................... $ 232,495 $ 244,924 $ 254,284 --------- --------- --------- Operating costs and expenses: Cost of goods sold (exclusive of depreciation)............................. 153,484 160,325 166,467 Selling, general and administrative........ 63,182 79,185 81,427 Restructuring charge....................... - - 12,235 Depreciation and amortization.............. 4,828 5,374 5,966 Loss on sale of business unit.............. 623 - - --------- --------- --------- Total operating costs and expenses......... 222,117 244,884 266,095 --------- --------- --------- Operating income (loss)................... 10,378 40 (11,811) Interest income.............................. 87 39 51 Interest expense............................. 3,346 3,124 4,123 --------- --------- --------- Income (loss) before income taxes............ 7,119 (3,045) (15,883) Provision (benefit) for income taxes......... 2,502 (1,127) (5,174) --------- --------- --------- Net income (loss)....................... $ 4,617 $ (1,918) $ (10,709) ========= ========= ========= Net income (loss) per common share: Basic and diluted ...................... $.37 $(.15) $(.89) ==== ===== ===== Weighted average common shares: Basic 12,645 12,423 11,983 Diluted 12,659 12,423 11,983
The accompanying notes are an integral part of these financial statements. TANDYCRAFTS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollar in thousands) Year Ended June 30, --------------------------------- 1998 1997 1996 --------- --------- --------- Cash flows from operating activities: Net income (loss).......................... $ 4,617 $ (1,918) $ (10,709) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization............. 4,828 5,374 5,966 Loss on sale of business unit ............ 623 - - Loss on sale or abandonment of assets..... - - 24 Restructuring charge...................... - - 12,235 Changes in assets and liabilities, excluding effect of businesses acquired or sold: Receivables............................. 4,415 (2,224) (3,073) Inventories............................. (3,512) 7,401 5,362 Other assets............................ 805 (3,054) (4,367) Accounts payable, accrued expenses and income taxes....................... (3,840) 3,794 2,987 --------- --------- --------- Net cash provided by operating activities.......................... 7,936 9,373 8,425 --------- --------- --------- Cash flows from investing activities: Additions to property and equipment........ (3,530) (3,794) (4,363) Purchase of business, net of cash acquired. - - (2,475) Proceeds from sales of assets.............. 2,342 3,750 2,202 --------- --------- --------- Net cash used by investing activities.......................... (1,188) (44) (4,636) --------- --------- --------- Cash flows from financing activities: Sales of treasury stock to employee benefit plan, net................................. 73 2,594 3,646 Payments under bank credit facility, net... (6,610) (12,430) (7,730) --------- --------- --------- Net cash used by financing activities.......................... (6,537) (9,836) (4,084) --------- --------- --------- Increase (decrease) in cash and cash equivalents................................ 211 (507) (295) Balance, beginning of year................... 1,005 1,512 1,807 --------- --------- --------- Balance, end of year......................... $ 1,216 $ 1,005 $ 1,512 ========= ========= ========= Supplemental cash flow information: Cash paid (received) during the year for: Interest ................................. $ 3,303 $ 3,249 $ 4,157 ========= ========= ========= Income taxes.............................. $ (832) $ (3,615) $ (551) ========= ========= =========
The accompanying notes are an integral part of these financial statements. TANDYCRAFTS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Dollars in thousands) Additional Common paid-in Retained Treasury stock capital earnings stock Total -------- -------- -------- -------- --------- Balance, June 30, 1995. $ 18,528 $ 17,447 $ 80,084 $(25,398) $ 90,661 Sale of 461,693 shares of treasury stock to employee benefit plan, net.... - 1,924 - 1,722 3,646 Net loss............... - - (10,709) - (10,709) -------- -------- -------- -------- --------- Balance, June 30, 1996. 18,528 19,371 69,375 (23,676) 83,598 Sale of 419,271 shares of treasury stock to employee benefit plan, net.... - 1,061 - 1,533 2,594 Net loss............... - - (1,918) - (1,918) -------- -------- -------- -------- --------- Balance, June 30, 1997. $ 18,528 $ 20,432 $ 67,457 $(22,143) $ 84,274 Sale of 12,917 shares of treasury stock to employee benefit plan, net.... - 113 - (40) 73 Net income............. - - 4,617 - 4,617 -------- -------- -------- -------- --------- Balance, June 30, 1998. $ 18,528 $ 20,545 $ 72,074 $(22,183) $ 88,964 ======== ======== ======== ======== =========
The accompanying notes are an integral part of these financial statements. TANDYCRAFTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - ACCOUNTING PRINCIPLES Description of Business - Tandycrafts, Inc. ("Tandycrafts" or the "Company") markets consumer products through four distinct product-related operating divisions: Frames and Wall Decor, Leather and Crafts, Office Supplies, and Novelties and Promotional. The Company's products are marketed and sold through various channels, including direct-to-consumer (e.g., retail stores, mail order, the Internet) and wholesale distribution (e.g., direct sales force, telemarketing, outside sales representatives). Joshua's Christian Stores, a retail chain of Christian bookstores, was sold by the Company in May 1998. Principles of consolidation - The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries after elimination of significant inter-company accounts and transactions. Cash and cash equivalents - The Company considers, for purposes of the statement of cash flows, all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Inventories - Inventories are stated at the lower of average cost or market and consist of the following (in thousands): June 30, ------------------ 1998 1997 -------- -------- Finished goods......................$ 33,244 $ 35,364 Raw materials and work-in-process... 12,746 14,307 -------- -------- $ 45,990 $ 49,671 ======== ======== Property and equipment - Property and equipment is depreciated over the estimated useful lives of the assets using principally the straight-line method at the rates shown below: Buildings......................3% to 10% Fixtures and equipment.........5% to 50% Leasehold improvements.........5% to 20%, or the life of the lease. Expenditures for maintenance, repairs, renewals and betterments which do not materially prolong the useful lives of the assets are charged to income as incurred. The cost of property retired or sold, and the related accumulated depreciation, is removed from the accounts and any gain or loss, after taking into consideration proceeds from sales, is reflected in income. Pre-opening expenses - Expenses associated with the opening of new stores are expensed as incurred. Fair value of financial instruments - The fair value of the Company's long-term debt approximates the carrying value due to the floating interest rates on such debt. The carrying value of the Company's other financial instruments approximates fair value due to the short-term maturities of the assets and liabilities. Goodwill - The cost of businesses acquired in purchase transactions has been allocated among the identifiable assets and liabilities acquired based upon their fair values at the dates of acquisition. Any cost in excess of the fair value of such identifiable net assets acquired has been allocated to goodwill. In general, goodwill is amortized using the straight-line method over the estimated useful life of forty years. Accumulated amortization of goodwill at June 30, 1998 and 1997 was $4,374,000 and $3,689,000, respectively. Net goodwill in the amount of $7,477,000 was written-off in the quarter ended December 31, 1995 as part of the restructuring program adopted during that quarter. Net goodwill in the amount of $1,405,000 was included in the sale of Joshua's Christian Stores during fiscal 1998. Goodwill which arose prior to October 31, 1970, aggregating $2,147,000, is reviewed annually by the Board of Directors and will continue to be carried as an asset unless the Board determines that events and circumstances indicate that there has been a decline or limitation in the value, at which time an appropriate amortization policy will be adopted. Impairment of Long-lived assets - Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the net book value of the assets may not be recoverable. An impairment loss will be recognized if the sum of the expected future cash flows (undiscounted and before interest) from the use of the assets is less than the net book value of the assets. The amount of the impairment loss will generally be measured as the difference between the net book value and the estimated fair value of the assets. The adoption of this accounting policy in fiscal 1997 did not have a material impact on the Company's financial position or results of operations. Income taxes - Income taxes are calculated in accordance with the liability method, which requires that deferred tax assets and liabilities be recognized based on differences between the financial statement and tax bases of assets and liabilities using presently enacted rates. Net income (loss) per share - The Company adopted Statement of Financial Accounting Standards No. 128 "Earnings per Share", ("FAS 128"), effective for the quarter ended December 31, 1997 and has applied it retroactively for all periods presented on the Consolidated Statements of Operations. In accordance with FAS 128, basic earnings per share is computed by dividing income available to common shareholders by the weighted-average common shares outstanding. Since the Company has no outstanding preferred stock, income available to shareholders is equal to the Company's net income. Diluted earnings per share is computed by dividing the income available to shareholders by the weighted-average common share and potential common shares outstanding during the period. For fiscal 1998, 1997 and 1996, the number of weighted average shares and potential common shares is as follows (in thousands): 1998 1997 1996 ------ ------ ------ Weighted average shares - basic .... 12,645 12,423 11,983 Potential common shares............. 14 - - ------ ------ ------ Total weighted average common and potential common shares - diluted 12,659 12,423 11,983 ====== ====== ====== Advertising costs - Advertising costs are expensed the first time the advertising takes place. Advertising expense for fiscal 1998, 1997 and 1996 was $5.7 million, $7.7 million and $8.8 million, respectively. Pervasiveness of estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Reclassifications - Certain amounts in prior years have been reclassified to conform to the current year presentation. NOTE 2 - SALE OF JOSHUA'S CHRISTIAN STORES The Company sold Joshua's Christian Stores effective May 31, 1998 to Family Christian Stores for consideration totaling approximately $11,500,000, with approximately $2,900,000 paid in cash at the time of closing and approximately $8,600,000 in a note receivable. The note bears interest at a rate of 7.25% and is payable in three installments on December 31 of the years 1998, 1999 and 2000. The sale of this business resulted in a pretax loss of $623,000, comprised primarily of transaction related costs. NOTE 3 - STRATEGIC RESTRUCTURING AND CONSOLIDATION PROGRAM In December 1995, the Company adopted a strategic restructuring and consolidation program. The primary components of this program included: (i) the sale of Cargo Furniture and Accents, (ii) the sale or closure of Prestige Leather Creations, David James Manufacturing, Brand Name Apparel and certain other individually insignificant operations, (iii) the closure of 11 retail stores, (iv) the consolidation, streamlining and, in some cases, outsourcing of certain functions throughout various operating units, and (v) the retention of an outside consulting firm to assist senior management in evaluating and developing the Company's retail concepts. As a result of the adoption of the strategic restructuring and consolidation program discussed above, the Company recorded restructuring charges of $18.8 million in the quarter ended December 31, 1995. In the quarter ended March 31, 1996, the Company reversed $501,000 of the initial reserve related to the sale of Prestige Leather Creations. Approximately $16.2 million of the restructuring charges related to non-cash writedowns of assets to their estimated realizable values, including: $7.5 million related to the write off of goodwill, $6.1 million related to the liquidation of inventories, $1.2 million related to the writedown of fixed assets, and $1.4 million related to the writedown of various other assets. The remaining $2.1 million of the restructuring charges represented anticipated cash outlays: $1.6 million related to lease obligations and the remainder related to other contractual obligation and exit costs. No severance costs were included in the restructuring charges. Of the net charge of $18.3 million, $6.1 million was classified in cost of goods sold and the remaining $12.2 million was classified as restructuring charges on the fiscal 1996 Consolidated Statement of Operations. A total of $1,113,000 of the reserve initially recorded for lease obligations was reclassified to the reserve for asset writedowns as a result of the assignment of leases to purchasers. The increase in the asset writedown reserve was necessary to provide for asset writedowns in excess of those originally anticipated. In fiscal 1996, the Company sold Prestige Leather Creations and Brand Name Apparel and closed David James Manufacturing and certain other individually insignificant operations. On the retail side, the Company closed two Sav-On stores, two Tandy Leather stores and one Joshua's store. Total proceeds from the sale of Prestige Leather approximated $1.5 million, with approximately $900,000 paid in cash and $607,000 in notes receivable which bear interest at 8.5% to 9.5% and mature at various dates through March 26, 2000. Total proceeds from the sale of Brand Name Apparel were approximately $1,038,000 in cash. On January 27, 1997, the Company completed the sale of Cargo Furniture and Accents to an acquisition group comprised of management and employees of Cargo for proceeds of approximately $4.2 million. A portion of the purchase price was financed through a note with a bank for which the Company provided a guaranty. The remaining purchase price was in the form of a note in the amount of approximately $140,500 bearing interest at 8.5% and due at various dates through July 1999. Working capital adjustments subsequent to the sale increased the note by $716,000 and at June 30, 1998, the balance of the note due from Cargo totaled $856,000. In addition, in June 1998, the Company extended a revolving promissory note to Cargo in the amount of $300,000 bearing interest at the prime rate of interest and maturing on December 31, 1998. At June 30, 1998, the full amount of $300,000 was outstanding to Cargo. At June 30, 1998, the balance of the bank note guaranteed by the Company was $2,644,000. Gain on the transaction was not material to the Company and has been deferred as a result of the Company's guaranty. During fiscal 1997, the Company also closed four Joshua's stores and two Tandy Leather Stores which were targeted for closure in the strategic restructuring program. After completing the sale of Cargo, the restructuring program is substantially complete. The accrual remaining at June 30, 1998 is related primarily to lease obligations. The following table sets forth the activity in the restructuring accrual, which is included in current accrued liabilities in the balance sheet at June 30, 1998 and June 30, 1997 (in thousands): Total ------- Balance at June 30, 1996 $ 1,623 Cash payments (846) Non-cash asset writedowns (549) ------- Balance at June 30, 1997 $ 228 Cash payments (185) ------- Balance at June 30, 1998 $ 43 ======= Revenues included in the Company's results of operations from separately identifiable businesses sold or closed were $91,000, $12,360,000 and $32,675,000 in fiscal 1998, 1997 and 1996, respectively. Operating losses (before restructuring charges) from these businesses totaled $0, $234,000 and $1,992,000 in fiscal 1998, 1997 and 1996, respectively. NOTE 4 - PROPERTY AND EQUIPMENT AND ACCUMULATED DEPRECIATION As of June 30 (in thousands) 1998 1997 -------- -------- Property and equipment, at cost: Land..............................$ 2,419 $ 2,424 Buildings......................... 13,373 13,588 Leasehold improvements............ 4,233 4,785 Fixtures and equipment............ 26,302 28,811 -------- -------- 46,327 49,608 Less accumulated depreciation....... (23,441) (24,103) -------- -------- Property and equipment, net.......$ 22,886 $ 25,505 ======== ======== NOTE 5 - ACCRUED LIABILITIES AND OTHER Accrued liabilities and other consisted of the following at June 30 (in thousands): 1998 1997 -------- -------- Accrued payroll and bonus...........$ 3,749 $ 4,036 Income taxes payable................ 1,122 - Taxes, other than income taxes...... 667 1,179 Interest............................ 246 203 Restructuring accrual............... 43 228 Accrual for sales allowances........ 1,685 2,442 Accrued legal....................... 1,593 1,698 Accrued insurance................... 1,373 2,052 Other............................... 2,042 3,927 -------- -------- $ 12,520 $ 15,765 ======== ======== NOTE 6 - DEBT The Company has a $50 million revolving credit facility with a group of banks. The credit facility is an unsecured, two-year revolving line of credit, renewable annually. During fiscal 1998, the bank group agreed to extend the maturity date of the facility to October 31, 1999 under the existing terms. Interest rates on borrowings are based on current LIBOR or prime rates, at the option of the Company. A commitment fee of 1/4% is charged on the unused portion of the credit facility. Interest rates on borrowings at June 30, 1998 ranged from 6.54% to 8.50%. At June 30, 1998, the Company had borrowings aggregating $34,230,000 and letters of credit aggregating $1,187,000 outstanding under this facility. The loan agreement contains provisions specifying certain limitations on the amount of future indebtedness, investments and dividends, and requires the maintenance of certain financial ratios and balances. At June 30, 1998, the Company was in compliance with such covenants. Effective November 3, 1997, the Company entered into an Interest Rate Swap Agreement with its primary bank in which a $20,000,000 notional amount of floating rate debt at LIBOR was swapped for a fixed rate of 6.01%. The Swap Agreement has a three-year term and is being accounted for as a hedge by the Company. The transaction was executed to hedge interest rate risk on the Company's interest obligation associated with a portion of its revolving credit facility, and to change the nature of the liability from a variable to a fixed interest obligation. At June 30, 1998, the Company would have had to pay approximately $120,000 to terminate the interest rate swap. This amount was obtained from the counterparties and represents the fair market value of the Swap Agreement. NOTE 7 - INCOME TAXES The provision for income taxes is as follows (in thousands): 1998 1997 1996 ------- -------- ------- Current tax expense (benefit): Federal.............................$ 893 $ (226) $(4,361) State and local..................... 66 30 (14) ------- -------- ------- Total current....................... 959 (196) (4,375) Deferred tax expense (benefit): Federal............................. 1,543 (931) (799) ------- -------- ------- Total provision (benefit).............$ 2,502 $ (1,127) $(5,174) ======= ======== ======= Deferred tax liabilities (assets) are comprised of the following at June 30 (in thousands): 1998 1997 ------- -------- Depreciation..........................$ 1,413 $ 1,637 Deferred compensation................. 109 110 Bad debts............................. 15 - Goodwill.............................. 2,142 1,625 ------- -------- Total deferred tax liabilities...... 3,679 3,372 ------- -------- Inventory............................. (672) (1,425) Bad debts............................. - (336) Restructuring reserve................. (99) (162) Charitable contribution carryforwards. (450) (466) Loss carryforwards.................... (1,291) (739) Deferred compensation................. (85) (76) Lease reserves........................ (26) (33) Other................................. (464) (533) ------- -------- Total deferred tax assets........... (3,087) (3,770) Valuation allowance................... 1,249 697 ------- -------- Net deferred tax assets............. (1,838) (3,073) ------- -------- $ 1,841 $ 299 ======= ======== A valuation allowance was established in 1996 in the amount of $1,034,000. During fiscal 1997, the valuation allowance was reduced by $337,000 as a result of the sale of Cargo Furniture and Accents. During fiscal 1998, the valuation allowance was increased by $552,000 as a result of additional state tax loss carryforwards. The entire remaining allowance of $1,249,000 relates to state tax loss carryforwards. Their use is limited to the future taxable earnings of the Company and its subsidiaries in certain states and it was determined to be more likely than not that these state tax carryforwards would not be utilized. The provision for income taxes differs from the amount of income tax determined by applying the applicable U.S. statutory federal income tax rate to pretax income as a result of the following differences (in thousands): Year ended June 30, ---------------------------- 1998 1997 1996 ------- -------- ------- Statutory U.S. tax provision..........$ 2,420 $ (1,066) $(5,559) Increase (decrease) in rates resulting from: State and local taxes, net.......... 43 19 (51) Goodwill write-offs................. 278 - 526 Other............................... (239) (80) (90) ------- -------- ------- Tax provision.........................$ 2,502 $ (1,127) $(5,174) ======= ======== ======= NOTE 8 - COMMITMENTS AND CONTINGENCIES The Company leases certain properties, primarily retail stores, under operating leases which expire through 2007. Real estate taxes, maintenance and certain other costs are generally borne by the Company. The composition of total rental expense for operating leases is as follows (in thousands): Year ended June 30, 1998 1997 1996 ------- -------- ------- Rentals: Minimum.............................$ 7,298 $ 8,622 $ 9,812 Contingent (percentage of sales).... 20 70 48 ------- -------- ------- $ 7,318 $ 8,692 $ 9,860 ======= ======== ======= Minimum rental commitments for noncancellable operating leases (primarily retail store space) at June 30, 1998 are summarized as follows (in thousands): Year ended June 30, 1999.......................... 4,710 2000.......................... 3,555 2001.......................... 2,460 2002.......................... 1,776 2003.......................... 639 2004 and thereafter........... 1,719 -------- $ 14,859 ======== A former subsidiary of the Company, which was spun-off in 1978, filed for Chapter 11 protection under the federal bankruptcy code in January 1996. As part of the bankruptcy proceedings, the former subsidiary has rejected certain store leases which were originated prior to the spin-off and for which the Company was allegedly a guarantor. An accrual for claims associated with the alleged guarantees on leases rejected as of June 30, 1998 has been established. Based on the information presently available, management believes the amount of the accrual at June 30, 1998 is adequate to cover the liability the Company may incur under the alleged guarantees. NOTE 9 - TANDYCRAFTS RETIREMENT SAVINGS PLAN During fiscal 1997, the former Tandycrafts, Inc. Employee Stock Ownership Plan (the "ESOP") was amended and renamed Tandycrafts Retirement Savings Plan (the "TRSP" or the "Plan"). The TRSP is open to all eligible employees of the Company employed in the United States. Participants may contribute between 3% and 15% of gross salary and wages into the 401(k) portion of the plan which becomes immediately vested. Participants also have the ability to direct their contributions into various investment options. The Company's matching contribution is 100% of the first 5% of the participant's contribution and is invested in Company common stock. The Company's contributions become vested upon completion of five years of credited service. The employee and Company contributions are maintained by a trustee. During fiscal 1996, the Plan was amended to allow shares forfeited by unvested employees to be used to reduce subsequent Company contributions to the Plan. Previously, such forfeited shares were reallocated to the remaining plan participants. Company contributions to the Plan, net of forfeitures, for the years ended June 30, 1998, 1997, and 1996 were approximately $1,166,000, $1,534,000, and $1,889,000, respectively. NOTE 10 - SHAREHOLDER RIGHTS PLAN In May 1997, the Board of Directors adopted a shareholder rights plan and declared a dividend of one common share purchase right (a "Right") for each outstanding share of Tandycrafts common stock. Each Right entitles the registered holder the right upon exercise to purchase from the Company, that number of common shares having a market value of two times the applicable exercise price. The exercise price was initially set at $30.00 and is subject to adjustment by the Board. The Rights will become exercisable ten business days after the earliest occurrence of: (i) a public announcement that a person or group of affiliated persons has acquired, or obtained the right to acquire, beneficial ownership of 15% or more of the outstanding common shares or (ii) the commencement of, or announcement of an intention to make, a tender offer or exchange offer, the consummation of which would result in the beneficial ownership by a person or group of 15% or more of such outstanding common shares. The Rights will expire on May 19, 2007, unless the expiration date is extended or unless the Rights are earlier redeemed by the Company. The Board of Directors may amend the terms of the Rights without consent of the holder of the Rights, including an amendment to extend or reduce the period during which the Rights are redeemable or exercisable. The Rights are not separately traded, are not currently exercisable and have no voting rights until exercised. The Board may redeem the Rights for $0.01 per Right at any time prior to the Rights becoming exercisable. NOTE 11 - STOCK OPTION PLANS The Tandycrafts, Inc. 1992 Stock Option Plan (the "Stock Option Plan") provides for the grant of options to purchase up to 1,400,000 shares of the Company's common stock by officers and key employees. Options granted under the Stock Option Plan may not have an option price less than the fair market value of common stock on the date of grant. Options are exercisable at rates of either 20% or 33-1/3% per year beginning at least one year after the date of grant and, if not exercised, expire ten years from the date of grant. The Tandycrafts, Inc. 1992 Director Stock Option Plan (the "Director Plan") provides for the grant of options to non-employee directors to purchase up to 240,000 shares of the Company's common stock. The Director Plan options are exercisable 33-1/3% at date of grant and 16-2/3% on the first, second, third and fourth anniversaries of the date of grant and, if not exercised, expire ten years from the date of grant. A summary of stock option activity under these plans follows: Weighted - Average Exercise Shares Price --------- ------- Options outstanding, June 30, 1995................ 1,460,100 $ 12.66 Options granted................. 63,000 $ 8.01 Options exercised............... - $ - Options terminated.............. (447,100) $ 12.79 --------- ------- Options outstanding, June 30, 1996................ 1,076,000 $ 12.33 Options granted................. 712,700 $ 4.75 Options exercised............... - $ - Options terminated.............. (1,022,800) $ 12.29 --------- ------- Options outstanding, June 30, 1997................ 765,900 $ 5.33 Options granted................. - $ - Options exercised............... - $ - Options terminated.............. (38,200) $ 9.62 --------- ------- Options outstanding, June 30, 1998................ 727,700 $ 5.11 ========= ======= Options exercisable, June 30, 1998................ 252,073 $ 5.55 ========= ======= Options available for future grant, June 30, 1998.. 912,300 ========= A summary of stock options outstanding and exercisable at June 30, 1998 follows: Options Outstanding Options Exercisable ----------------------------------------------------- -------------------------------- Shares Weighted-Average Shares Range of Outstanding Remaining Weighted-Average Exercisable Weighted-Average Exercise Prices at 6/30/98 Contractual Life Exercise Price at 6/30/98 Exercise Price - ----------------- ----------- ---------------- ---------------- ----------- ---------------- $10.69 - 17.62 36,400 5.24 years $ 12.66 28,200 $ 12.64 $4.56 - 8.82 691,300 8.71 years $ 4.71 223,873 $ 4.66 ------- ------- $4.56 - 17.62 727,700 $ 5.11 252,073 $ 5.55
Pro forma information regarding net income and earnings per share is required by Statement of Financial Accounting Standards No. 123 "Accounting for Stock-based Compensation" ("FAS 123"), and has been determined as if the Company had accounted for its employee stock options under the fair value method of that statement. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted- average assumptions used for grants: no expected dividends, expected volatility of 32.6%, risk free interest rate of 6.00% and expected lives of seven years each. A summary of stock option transactions under both the Company's stock option plan and information about fixed-price options is presented above. For purposes of pro forma disclosures, the estimated fair value of options is amortized to expense over the vesting period. The Company's pro forma information is as follows (in thousands, expect per share amounts): 1998 1997 1996 -------- -------- -------- Net income (loss): As reported $ 4,617 $ (1,918) $(10,709) Pro forma $ 4,161 $ (2,096) $(10,738) Income (loss) per common share - basic and diluted: As reported $ 0.37 $ (0.15) $ (0.89) Pro forma $ 0.33 $ (0.17) $ (0.90) The effects of applying FAS No. 123 in this pro forma disclosure are not indicative of future amounts as the pro forma amounts above do not include the impact of stock option awards granted prior to fiscal 1996 and additional awards anticipated in future years. NOTE 12 - INDUSTRY SEGMENT AND GEOGRAPHIC AREA INFORMATION The Company markets consumer products through four distinct product-related operating divisions: Frames and Wall Decor, Leather and Crafts, Office Supplies, and Novelties and Promotional. The Company's products are marketed and sold through various channels, including direct-to-consumer (e.g., retail stores, mail order, the internet) and wholesale distribution (e.g., direct sales force, telemarketing, outside sales representatives). Divested operations include Joshua's Christian Stores and all business units sold or closed as a result of the December 1995 restructuring and consolidation program. During fiscal 1998, 1997 and 1996, the Company had net sales of $38,495,000, $30,467,000 and $30,065,000, respectively, to one group of customers under common control. In fiscal 1998, the Company also had sales of $24,133,000 to another group of customers under common control. The Company had no other individual customer or group of customers which accounted for more than 10% of the Company's total revenue. The Frames and Wall Decor and Novelties and Promotional divisions , in the normal course of business, grant credit with the majority of their sales. Such receivables are generally not collateralized. The concentration of credit risk within these divisions may impact the Company's overall credit risk, either positively or negatively, in that these customers may be similarly affected by industry-wide changes in economic or other conditions. Intersegment sales represent sales from one division to another. Operating income (loss) is divisional revenue less divisional operating expenses, which excludes corporate expenses, goodwill amortization, interest expense and taxes on income. Identifiable assets by division are those assets that are used in each division. Corporate assets are comprised of cash and short-term investments. Segment information for each of the three years in the period ended June 30, 1998 is as follows (in thousands): 1998 Leather Frames Novelties ---- and and Office and Divested Crafts Wall Decor Supplies Promotional Operations Consolidated -------- ---------- -------- ----------- ---------- ------------ Total sales...........................................$ 96,610 $ 47,476 $ 38,549 $ 20,754 $ 29,388 $ 232,777 Intersegment sales.................................... (151) (22) (89) (20) - (282) -------- -------- -------- -------- -------- --------- Net sales $........................................... 96,459 $ 47,454 $ 38,460 $ 20,734 $ 29,388 $ 232,495 ======== ======== ======== ======== ======== ========= Segment operating income (loss)......................................$ 12,100 $ 150 $ 1,878 $ (426) $ 13 $ 13,715 ======== ======== ======== ======== ======== Corporate expenses including goodwill amortization and interest expense, net...... (6,596) --------- Income before income taxes............................ $ 7,119 ========= Depreciation..........................................$ 1,169 $ 802 $ 798 $ 447 $ 612 $ 3,828 Goodwill amortization................................. 535 87 4 374 - 1,000 -------- -------- -------- -------- -------- --------- Total depreciation and amortization...................$ 1,704 $ 889 $ 802 $ 821 $ 612 $ 4,828 ======== ======== ======== ======== ======== ========= Identifiable assets...................................$ 68,194 $ 29,888 $ 14,999 $ 27,098 $ 9,296 $ 149,475 ======== ======== ======== ======== ======== Corporate assets...................................... 1,216 --------- $ 150,691 ========= Capital expenditures................................. $ 1,330 $ 592 $ 569 $ 481 $ 558 $ 3,530 ======== ======== ======== ======== ======== ========= 1997 Leather Frames Novelties ---- and and Office and Divested Crafts Wall Decor Supplies Promotional Operations Consolidated -------- ---------- -------- ----------- ---------- ------------ Total sales...........................................$ 87,606 $ 53,465 $ 35,781 $ 24,149 $ 44,388 $ 245,389 Intersegment sales..................................... (161) (52) (181) (71) - (465) -------- -------- -------- -------- -------- --------- Net sales.............................................$ 87,445 $ 53,413 $ 35,600 $ 24,078 $ 44,388 $ 244,924 ======== ======== ======== ======== ======== ========= Segment operating income (loss).......................$ 11,990 $ 530 $ 2,440 $ (799) $ (7,933) $ 6,228 ======== ======== ======== ======== ======== Corporate expenses including goodwill amortization and interest expense, net...... (9,293) --------- Income (loss) before income taxes..................... $ (3,065) ========= Depreciation..........................................$ 1,198 $ 854 $ 862 $ 503 $ 918 $ 4,335 Goodwill amortization................................. 535 87 4 374 39 1,039 -------- -------- -------- -------- -------- --------- Total depreciation and amortization...................$ 1,733 $ 941 $ 866 $ 877 $ 957 $ 5,374 ======== ======== ======== ======== ======== ========= Identifiable assets...................................$ 67,887 $ 30,958 $ 12,593 $ 28,578 $ 15,508 $ 155,524 ======== ======== ======== ======== ======== Corporate assets...................................... 1,005 --------- $ 156,529 ========= Capital expenditures.................................$ 1,371 $ 385 $ 782 $ 723 $ 533 $ 3,794 ========= ======== ======== ======== ======== ========= 1996 Leather Frames Novelties ---- and and Office and Divested Crafts Wall Decor Supplies Promotional Operations Consolidated -------- ---------- -------- ----------- ---------- ------------ Total sales...........................................$ 82,661 $ 58,386 $ 30,068 $ 20,590 $ 63,556 $ 255,261 Intersegment sales..................................... (353) (120) (146) (321) (37) (977) -------- -------- -------- -------- -------- --------- Net sales.............................................$ 82,308 $ 58,266 $ 29,922 $ 20,269 $ 63,519 $ 254,284 ======== ======== ======== ======== ======== ========= Segment operating income (loss).......................$ 9,365 $ 2,215 $ 1,030 $ 1,580 $(21,931) $ (7,741) ======== ======== ======== ======== ======== Corporate expenses including goodwill amortization and interest expense, net...... (8,142) --------- Income (loss) before income taxes..................... $ (15,883) ========= Depreciation..........................................$ 1,107 $ 911 $ 852 $ 332 $ 1,468 $ 4,670 Goodwill amortization................................. 509 87 4 374 322 1,296 -------- -------- -------- -------- -------- --------- Total depreciation and amortization...................$ 1,616 $ 998 $ 856 $ 706 $ 1,790 $ 5,966 ======== ======== ======== ======== ======== ========= Identifiable assets...................................$ 65,060 $ 32,096 $ 12,909 $ 27,609 $ 29,393 $ 167,067 ======== ======== ======== ======== ======== Corporate assets...................................... 1,512 --------- $ 168,579 ========= Capital expenditures..................................$ 2,170 $ 357 $ 573 $ 278 $ 985 $ 4,363 ======== ======== ======== ======== ======== =========
NOTE 13 - QUARTERLY RESULTS (UNAUDITED) Summarized quarterly income statements (in thousands of dollars, except per share amounts) for the years ended June 30, 1998 and 1997 are set forth below: 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter ------------------- ------------------- ------------------- ------------------- 1998 1997 1998 1997 1998 1997 1998 1997 -------- -------- -------- -------- -------- -------- -------- -------- Net sales $ 55,359 $ 57,770 $ 73,237 $ 73,246 $ 53,100 $ 54,456 $ 50,799 $ 59,452 Costs and expenses: Cost of goods sold 35,834 35,688 48,702 46,732 35,766 41,128 33,182 36,777 Selling and administrative 15,932 18,662 17,665 20,775 14,935 20,062 14,650 19,686 Loss on sale of business unit - - - - - - 623 - Depreciation and amortization 1,270 1,372 1,259 1,391 1,254 1,315 1,045 1,296 -------- -------- -------- -------- -------- ------- -------- -------- Operating income (loss) (1) 2,323 2,048 5,611 4,348 1,145 (8,049) 1,299 1,693 Interest expense, net 862 822 911 833 841 720 645 710 -------- -------- -------- -------- -------- -------- -------- -------- Income (loss) before income taxes 1,461 1,226 4,700 3,515 304 (8,769) 654 983 Provision (benefit) for income taxes 512 429 1,644 1,230 106 (3,068) 240 282 -------- -------- -------- -------- -------- -------- -------- -------- Net income (loss) $ 949 $ 797 $ 3,056 $ 2,285 $ 198 $ (5,701) $ 414 $ 701 ======== ======== ======== ======== ======== ======== ======== ======== Net income (loss) per common share - basic and diluted $0.08 $0.07 $0.24 $0.19 $0.02 ($0.45) $0.03 $0.06 ===== ===== ===== ===== ===== ===== ===== =====
(1) The third quarter of fiscal 1997 includes a $5,300,000 repositioning charge at Joshua's Christian Stores to writedown and liquidate discontinued inventory and close thirteen stores. Item 9. Changes In and Disagreements With Accountants on Accounting and - ------------------------------------------------------------------------ Financial Disclosure -------------------- None. PART III -------- Item 10. Directors and Executive Officers of the Registrant - ------------------------------------------------------------ The information required by this item with regard to executive officers is included in Part I, Item 4 of this report under the heading "Executive Officers of the Registrant", which information is incorporated herein by reference. The information required by this item regarding the Directors of the Company and compliance with Section 16(a) of the Securities Exchange Act of 1934 is set forth in the Company's Proxy Statement for its 1997 Annual Meeting of Stockholders (the "Proxy Statement") under the heading "Election Of Directors", which information is incorporated herein by reference. Such Proxy Statement will be filed with the Commission pursuant to Regulation 14A within 120 days of the fiscal year ended June 30, 1998. Item 11. Executive Compensation - -------------------------------- The information concerning executive compensation is set forth in the Proxy Statement under the heading "Executive Compensation", which is incorporated herein by reference. Such Proxy Statement will be filed with the Commission pursuant to Regulation 14A within 120 days of the fiscal year ended June 30, 1998. Item 12. Security Ownership of Certain Beneficial Owners and Management - ------------------------------------------------------------------------ The information concerning security ownership of certain beneficial owners and management is set forth in the Proxy Statement under the heading "Security Ownership of Certain Beneficial Owners and Management", which information is incorporated herein by reference. Such Proxy Statement will be filed with the Commission pursuant to Regulation 14A within 120 days of the fiscal year ended June 30, 1998. Item 13. Certain Relationships and Related Transactions - -------------------------------------------------------- The information concerning relationships and related transactions is set forth in the Proxy Statement under the heading "Executive Compensation - Transactions With Management and Directors", which information is incorporated herein by reference. Such Proxy Statement will be filed with the Commission pursuant to Regulation 14A within 120 days of the fiscal year ended June 30, 1998. PART IV ------- Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K - ------------------------------------------------------------------------- (a) The following financial statements, schedules and exhibits are filed as part of this report. (1) Financial Statements and Financial Statement Schedules - See Index to Financial Statements at Item 8 on page 18 of this report. (b) Reports on Form 8-K: The Company filed a Current Report on Form 8-K, on June 8, 1998, which included the contents of a press release announcing the sale of Joshua's Christian Stores chain to Family Christian Stores. The Company filed a Current Report on Form 8-K, on August 19, 1998, which included the contents of a press release announcing the unaudited results of operations for three months period and fiscal year ended June 30, 1998. (c) Exhibits: A list of the exhibits required by Item 601 of regulation S-K to be filed as part of this report is set forth in the Index to Exhibits, which immediately precedes such exhibits, and is incorporated herein by reference. (d) Not applicable. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TANDYCRAFTS, INC. (Registrant) September 28, 1998 By: /s/ Michael J. Walsh -------------------------- Michael J. Walsh President and Chief Executive Officer and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on this 28th day of September, 1998, by the following persons on behalf of the Registrant and in the capacities indicated. /s/ R.E. Cox III ------------------------------- R. E.. Cox III Chairman of the Board /s/ James D. Allen ------------------------------- James D. Allen Executive Vice President and Chief Financial Officer (Chief Accounting Officer) /s/ Joe K. Pace ------------------------------- Joe K. Pace Director /s/ Sheldon I. Stein ------------------------------- Sheldon I. Stein Director /s/ Robert Schutts ------------------------------- Robert Schutts Director /s/ Michael J. Walsh ------------------------------- Michael J. Walsh President and Chief Executive Officer and Director Schedule II TANDYCRAFTS, INC. AND SUBSIDIARIES Valuation and Qualifying Accounts and Reserves (In thousands) Year ended June 30, ------------------------------------ 1998 1997 1996 --------- --------- --------- Allowance for doubtful accounts: Balance, beginning of year $ 1,680 $ 790 $ 605 Additions charged to profit and loss 1,644 1,971 1,094 Accounts receivable charged off, net of recoveries (569) (1,081) (909) --------- --------- --------- Balance, end of year $ 2,755 $ 1,680 $ 790 ========= ========= ========= TANDYCRAFTS, INC. INDEX TO EXHIBITS Filed with the Annual Report on Form 10-K for the year ended June 30, 1998. Exhibit Number Description - ------- ---------------------- 3.1 Certificate of Incorporation (1) 3.2 Amended and Restated Bylaws of the Company (8) 3.3 Certificate of Amendment of Certificate of Incorporation dated December 7, 1992 (3) 3.4 Amended Bylaws of the Company (12) 10.1 * Executive Officers Incentive Bonus Plan (8) 10.2 * The Tandycrafts, Inc. 1992 Stock Option Plan (2) 10.3 * The Tandycrafts, Inc. 1992 Director Stock Option Plan (2) 10.4 * Form of Stock Option Agreement used to evidence stock options granted under the Tandycrafts, Inc. 1992 Stock Option Plan (3) 10.5 * Form of Stock Option Agreement used to evidence stock options granted under the Tandycrafts, Inc. 1992 Director Stock Option Plan (3) 10.6 * Amended and Restated Tandycrafts, Inc. ESOP Benefit Restoration Plan (8) 10.7 Revolving Credit and Term Loan Agreement (4) 10.8 * Amendment to the Tandycrafts, Inc. 1992 Stock Option Plan (5) 10.9 * Amended Tandycrafts, Inc. 1992 Director Stock Option Plan (6) 10.10 Second Amendment to Revolving Credit and Term Loan Agreement (7) 10.11 Third Amendment to Revolving Credit and Term Loan Agreement (8) 10.12 Fourth Amendment to Revolving Credit and Term Loan Agreement (8) 10.13 Fifth Amendment to Revolving Credit and Term Loan Agreement (9) 10.14 Sixth Amendment to Revolving Credit and Term Loan Agreement (10) 10.15 Seventh Amendment to Revolving Credit and Term Loan Agreement (11) 10.16 Eighth Amendment to Revolving Credit and Term Loan Agreement (13) 10.17 Form of Rights Agreement used to evidence the stock rights granted by the Board Directors on May 16, 1997 as a dividend to share holders of record as of May 29, 1997 (12) 10.18 Ninth Amendment to Revolving Credit and Term Loan Agreement (14) 10.19 # Tenth Amendment to Revolving Credit and Term Loan Agreement 10.20 # Eleventh Amendment to Revolving Credit and Term Loan Agreement 21 # Subsidiaries of the Registrant 23 # Consent of Independent Accountants 27 # Financial Data Schedule (filed electronically only) # Filed herewith. * Indicates management compensatory plan, contract or arrangement. (1)Filed with the Commission as an Exhibit to the Company's Form S-1 Registration Statement (No. 2-54086) and incorporated herein by reference. (2)Filed with the Commission as an Exhibit to the Company's Definitive Proxy Statement dated October 5, 1993, which Proxy Statement was filed with the Commission as an Exhibit to the Company's Annual Report on Form 10-K for the year ended June 30, 1993. Such Exhibit is incorporated herein by reference. (3)Filed with the Commission as an Exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1993, and incorporated herein by reference. (4)Filed with the Commission as an Exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993, and incorporated herein by reference. (5)Filed with the Commission as an Exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1994, and incorporated herein by reference. (6)Filed with the Commission as an Exhibit to the Company's Definitive Proxy Statement dated October 3, 1994, which Proxy Statement was filed with the Commission as an Exhibit to the Company's Annual Report on Form 10-K for the year ended June 30, 1994. (7)Filed with the Commission as an Exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994, and incorporated herein by reference. (8)Filed with the Commission as an Exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1995 and incorporated herein by reference. (9)Filed with the Commission as an Exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1996 and incorporated herein by reference. (10)Filed with the Commission as an Exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, and incorporated herein by reference. (11)Filed with the Commission as an Exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1996, and incorporated herein by reference. (12)Filed with the Commission as a Exhibit to the Company's Form 8-K, dated May 22, 1997 and incorporated herein by reference. (13)Filed with the Commission as an Exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1997 and incorporated herein by reference. (10) (14)Filed with the Commission as an Exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1997, and incorporated herein by reference. EX-10.19 2 Exhibit 10.19 ------------- TENTH AMENDMENT TO REVOLVING CREDIT AND TERM LOAN AGREEMENT ------------------------------ This Tenth Amendment To Revolving Credit And Term Loan Agreement ("Tenth Amendment") is made by and among TANDYCRAFTS, INC., a Delaware corporation ("Company"), THE DEVELOPMENT ASSOCIATION, INC., a Texas corporation, SAV-ON, INC., a Texas corporation, DAVID JAMES MANUFACTURING, INC., a Texas corporation, PLC LEATHER COMPANY, a Nevada corporation, TANDYARTS, INC., a Nevada corporation, and LICENSED LIFESTYLES, INC., a Nevada corporation (hereinafter collectively referred to as the "Guarantors"), and WELLS FARGO BANK (TEXAS), NATIONAL ASSOCIATION (formerly First Interstate Bank of Texas, N.A.), BANK ONE, TEXAS, N.A. and THE FIRST NATIONAL BANK OF CHICAGO (formerly NBD BANK) (collectively, the "Banks") and WELLS FARGO BANK (TEXAS), NATIONAL ASSOCIATION, as agent for the Banks ("Agent"); and WHEREAS, the Company, certain of Guarantors and Agent entered into that certain Revolving Credit and Term Loan Agreement dated September 29, 1993 (the "Loan Agreement"); and WHEREAS, the Company, certain of Guarantors, certain of Banks and Agent entered into that certain First Amendment to Revolving Credit and Term Loan Agreement dated December 3, 1993 ("First Amendment"); and WHEREAS, the Company, the Guarantors, certain of Banks and Agent entered into that certain Second Amendment To Revolving Credit and Term Loan Agreement dated September 26, 1994 ("Second Amendment"); and WHEREAS, the Company, Guarantors, certain of Banks and Agent entered into that certain Third Amendment to Revolving Credit and Term Loan Agreement dated December 31, 1994 ("Third Amendment"); and WHEREAS, the Company, Guarantors, certain of Banks and Agent entered into that certain Fourth Amendment to Revolving Credit and Term Loan Agreement dated July 6, 1995 ("Fourth Amendment"); and WHEREAS, the Company, Guarantors, certain of Banks and Agent entered into that certain Fifth Amendment to Revolving Credit and Term Loan Agreement dated December 31, 1995 ("Fifth Amendment"); and WHEREAS, the Company, Guarantors, certain of Banks and Agent entered into that certain Sixth Amendment to Revolving Credit and Term Loan Agreement dated October 31, 1996 ("Sixth Amendment"); and WHEREAS, the Company, Guarantors, certain of Banks and Agent entered into that certain Seventh Amendment to Revolving Credit and Term Loan Agreement dated December 31, 1996 ("Seventh Amendment"); and WHEREAS, the Company, Guarantors and Banks entered into that certain Eighth Amendment to Revolving Credit and Term Loan Agreement dated March 31, 1997 ("Eighth Amendment"); and WHEREAS, the Company, Guarantors and banks entered into that certain Ninth Amendment to Revolving Credit and Term Loan Agreement dated September 30, 1997 ("Ninth Amendment"); and WHEREAS, the Company, Guarantors, certain of Banks and Agent desire to amend the Loan Agreement in certain respects; and WHEREAS, capitalized terms used herein shall have the meaning assigned to them in the Loan Agreement unless the context otherwise requires or provides. NOW,THEREFORE,for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, it is agreed by and among the Company, Guarantors, Banks and Agent as follows: 1. Banks waive the violation by Company of Section 8.19 of the Loan Agreement for the quarter ended December 31, 1997. 2. Section 8.15 of the Loan Agreement is amended to read as follows: 8.15. Sale of Accounts Receivable. Sell or permit any Subsidiary to sell any of its accounts receivable, with or without recourse except for (1) the sale of accounts receivable of Venture Stores, Inc. in the approximate amount of $129,000 at a sale price of approximately $52,000 and (2) the sale of accounts receivable from Wal-Mart, Inc.; provided, however, that the maximum face amount of sold accounts receivable of Wal-Mart, Inc. which may be outstanding at any time is twelve million dollars ($12,000,000); or 3. New section 8.20 is added to the Loan Agreement which shall read in its entirety as follows: 8.20 Year 2000 Compliant. Borrower shall perform all acts reasonably necessary to ensure that Borrower and any business in which Borrower holds a substantial interest become Year 2000 Compliant in a timely manner. Such acts shall include, without limitaiton, performing a comprehensive review and assessment of all of Borrower's systems and adopting a detailed plan, with itemized budget, for the remediation, monitoring and testing of such systems. As used in this paragraph, "Year 2000 Compliant" shall mean, in regard to any entity, that all software, hardware, firmware, equipment, goods or systems utilized by or material to the business operations or financial condition of such entity, will properly perform date sensitive functions before, during and after the year 2000. Borrower shall, immediately upon request, provide to Bank such certifications or other evidence of Borrower's compliance with the terms of this Section 8.20 as Bank may from time to time require. 4. Section 9.10 of the Loan Agreement is amended to read in its entirety as follows: 9.10 Disposition of Assets Sell or otherwise dispose of more than four million dollars ($4,000,000) in assets other than in the ordinary course of business during the Revolving Credit Period except for the sale of accounts receivable from Wal-Mart, Inc.; provided, however, that the maximum face amount of sold accounts receivable of Wal-Mart, Inc. which may be outstanding at any time is twelve million dollars ($12,000,000). 5. Company and Guarantors warrant and represent to Banks that no Event of Default exists. By their execution hereof, each of the Guarantors ratify and confirm the terms of the Guaranty Agreement dated August 17, 1994, agree that the Guaranty Agreement shall remain in full force and effect and unconditionally agree that the Guaranty Agreement is enforceable against each of them in accordance with its terms. 6. Except as amended by the First Amendment, the Second Amendment, the Third Amendment, the Fourth Amendment, the Fifth Amendment, the Sixth Amendment, the Seventh Amendment, the Eighth Amendment, the Ninth Amendment and this Tenth Amendment, the Loan Agreement is ratified and confirmed and shall remain in full force and effect. 7. This Tenth Amendment shall be governed by and construed in accordance with the laws of the State of Texas. 8. Company agrees to pay all expenses incurred by Agent and Banks in connection with the negotiation and preparation of this Tenth Amendment, including reasonable attorney's fees. 9. This Tenth Amendment may be executed in any number of multiple counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original, and all of which taken together shall constitute one and the same agreement. 10. Banks, Company, and Guarantors agree to be bound by the current Arbitration Program of Agent which is incorporated by reference herein and is acknowledged as received by the parties pursuant to which any and all disputes shall be resolved by mandatory binding arbitration upon the request of any party. 11. This Tenth Amendment shall be binding upon and inure to the benefit of the parties and their respective successors and assigns. 12. THIS WRITTEN AGREEMENT REPRESENTS THE FINAL AGREEMENT AMONG THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES. Executed to be effective as of December 31, 1997. TANDYCRAFTS, INC., a Delaware corporation By: /s/ James D. Allen -------------------------------- James D. Allen, Executive Vice President COMPANY SAV-ON, INC., a Texas corporation By: /s/ Russell Price -------------------------------- Russell Price, Secretary DAVID JAMES MANUFACTURING, INC., a Texas corporation By: /s/ Russell Price -------------------------------- THE DEVELOPMENT ASSOCIATION, INC., a Texas corporation By: /s/ Russell Price -------------------------------- Russell Price, Secretary PLC LEATHER COMPANY, a Nevada corporation By: /s/ Russell Price -------------------------------- Russell Price, Secretary TANDYARTS, INC., a Nevada corporation By: /s/ Russell Price -------------------------------- Russell Price, Secretary LICENSED LIFESTYLES, INC. a Nevada corporation (successor by merger to College Flags and Manufacturing, Inc., a South Carolina corporation) By: /s/ Russell Price -------------------------------- Russell Price, Secretary GUARANTORS WELLS FARGO BANK (TEXAS), NATIONAL ASSOCIATION (formerly First Interstate Bank of Texas, N.A.) By: /s/ Susan Sheffield -------------------------------- Susan Sheffield, Vice President BANK ONE, TEXAS, N.A. By: /s/ Michael Wilson -------------------------------- Michael Wilson, Senior Vice President THE FIRST NATIONAL BANK OF CHICAGO By: /s/ Jenny Gilpin -------------------------------- Jenny Gilpin, Vice President BANKS EX-10.20 3 Exhibit 10.20 ------------- ELEVENTH AMENDMENT TO REVOLVING CREDIT AND TERM LOAN AGREEMENT ------------------------------ This Eleventh Amendment To Revolving Credit And Term Loan Agreement ("Eleventh Amendment") is made by and among TANDYCRAFTS, INC., a Delaware corporation ("Company"), THE DEVELOPMENT ASSOCIATION, INC., a Texas corporation, SAV-ON, INC., a Texas corporation, DAVID JAMES MANUFACTURING, INC., a Texas corporation, PLC LEATHER COMPANY, a Nevada corporation, TANDYARTS, INC., a Nevada corporation, and LICENSED LIFESTYLES, INC., a Nevada corporation (hereinafter collectively referred to as the "Guarantors"), and WELLS FARGO BANK (TEXAS), NATIONAL ASSOCIATION (formerly First Interstate Bank of Texas, N.A.), BANK ONE, TEXAS, N.A. and THE FIRST NATIONAL BANK OF CHICAGO (formerly NBD BANK) (collectively, the "Banks") and WELLS FARGO BANK (TEXAS), NATIONAL ASSOCIATION, as agent for the Banks ("Agent"); and WHEREAS, the Company, certain of Guarantors and Agent entered into that certain Revolving Credit and Term Loan Agreement dated September 29, 1993 (the "Loan Agreement"); and WHEREAS, the Company, certain of Guarantors, certain of Banks and Agent entered into that certain First Amendment to Revolving Credit and Term Loan Agreement dated December 3, 1993 ("First Amendment"); and WHEREAS, the Company, the Guarantors, certain of Banks and Agent entered into that certain Second Amendment To Revolving Credit and Term Loan Agreement dated September 26, 1994 ("Second Amendment"); and WHEREAS, the Company, Guarantors, certain of Banks and Agent entered into that certain Third Amendment to Revolving Credit and Term Loan Agreement dated December 31, 1994 ("Third Amendment"); and WHEREAS, the Company, Guarantors, certain of Banks and Agent entered into that certain Fourth Amendment to Revolving Credit and Term Loan Agreement dated July 6, 1995 ("Fourth Amendment"); and WHEREAS, the Company, Guarantors, certain of Banks and Agent entered into that certain Fifth Amendment to Revolving Credit and Term Loan Agreement dated December 31, 1995 ("Fifth Amendment"); and WHEREAS, the Company, Guarantors, certain of Banks and Agent entered into that certain Sixth Amendment to Revolving Credit and Term Loan Agreement dated October 31, 1996 ("Sixth Amendment"); and WHEREAS, the Company, Guarantors, certain of Banks and Agent entered into that certain Seventh Amendment to Revolving Credit and Term Loan Agreement dated December 31, 1996 ("Seventh Amendment"); and WHEREAS, the Company, Guarantors and Banks entered into that certain Eighth Amendment to Revolving Credit and Term Loan Agreement dated March 31, 1997 ("Eighth Amendment"); and WHEREAS, the Company, Guarantors and banks entered into that certain Ninth Amendment to Revolving Credit and Term Loan Agreement dated September 30, 1997 ("Ninth Amendment"); and WHEREAS, the Company, Guarantors and Banks entered into that certain Tenth Amendment to Revolving Credit and Term Loan Agreement dated December 31, 1997 ("Tenth Amendment"); and WHEREAS, the Company, Guarantors, certain of Banks and Agent desire to amend the Loan Agreement in certain respects; and WHEREAS, capitalized terms used herein shall have the meaning assigned to them in the Loan Agreement unless the context otherwise requires or provides. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, it is agreed by and among the Company, Guarantors, Banks and Agent as follows: 1. Section 9.05 of the Loan Agreement is amended to read as follows: 9.05. Limitation on Dividends, Acquisitions or Stock and Restricted Investments. Company covenants that it will not, and will not permit any of its Subsidiaries to, pay or declare any dividend on any class of its stock (other than stock dividends) or make any other distribution on account of any class of its stock (other than dividends or distributions payable solely in shares of its stock) or redeem, purchase or otherwise acquire, directly or indirectly, any shares of its stock (all of the foregoing being herein called "Restricted Payments"); provided, however, Company shall be entitled to redeem its stock at an aggregate purchase price not to exceed $2,000,000 during the fiscal year ended June 30, 1999 and at an aggregate purchase price not to exceed $500,000 during each fiscal year after the fiscal year ended June 30, 1999. Notwithstanding the foregoing, no Restricted Payments shall be made unless, after giving effect thereto, no Event of Default shall have occurred and be continuing. There shall not be included in the limitation on Restricted Payments any dividends paid by any Subsidiary of Company (a) to its corporate parent which is also a Subsidiary of the Company, or (b) to the Company. 2. Company and Guarantors warrant and represent to Banks that no Event of Default exists. By their execution hereof, each of the Guarantors ratify and confirm the terms of the Guaranty Agreement dated August 17, 1994, agree that the Guaranty Agreement shall remain in full force and effect and unconditionally agree that the Guaranty Agreement is enforceable against each of them in accordance with its terms. 3. Except as amended by the First Amendment, the Second Amendment, the Third Amendment, the Fourth Amendment, the Fifth Amendment, the Sixth Amendment, the Seventh Amendment, the Eighth Amendment, the Ninth Amendment, the Tenth Amendment and this Eleventh Amendment, the Loan Agreement is ratified and confirmed and shall remain in full force and effect. 4. This Eleventh Amendment shall be governed by and construed in accordance with the laws of the State of Texas. 5. Company agrees to pay all expenses incurred by Agent and Banks in connection with the negotiation and preparation of this Eleventh Amendment, including reasonable attorney's fees. 6. This Eleventh Amendment may be executed in any number of multiple counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original, and all of which taken together shall constitute one and the same agreement. 7. Banks, Company, and Guarantors agree to be bound by the current Arbitration Program of Agent which is incorporated by reference herein and is acknowledged as received by the parties pursuant to which any and all disputes shall be resolved by mandatory binding arbitration upon the request of any party. 8. This Eleventh Amendment shall be binding upon and inure to the benefit of the parties and their respective successors and assigns. 9. THIS WRITTEN AGREEMENT REPRESENTS THE FINAL AGREEMENT AMONG THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES. Executed to be effective as of August 10, 1998. TANDYCRAFTS, INC., a Delaware corporation By: /s/ James D. Allen -------------------------------- James D. Allen, Executive Vice President COMPANY SAV-ON, INC., a Texas corporation By: /s/ Russell Price -------------------------------- Russell Price, Secretary DAVID JAMES MANUFACTURING, INC., a Texas corporation By: /s/ Russell Price -------------------------------- Russell Price, Secretary THE DEVELOPMENT ASSOCIATION, INC., a Texas corporation By: /s/ Russell Price -------------------------------- Russell Price, Secretary PLC LEATHER COMPANY, a Nevada corporation By: /s/ Russell Price -------------------------------- Russell Price, Secretary TANDYARTS, INC., a Nevada corporation By: /s/ Russell Price -------------------------------- Russell Price, Secretary LICENSED LIFESTYLES, INC. a Nevada corporation (successor by merger to College Flags and Manufacturing, Inc., a South Carolina corporation) By: /s/ Russell Price -------------------------------- Russell Price, Secretary GUARANTORS WELLS FARGO BANK (TEXAS), NATIONAL ASSOCIATION (formerly First Interstate Bank of Texas, N.A.) By: /s/ Susan Sheffield -------------------------------- Susan Sheffield, Vice President BANK ONE, TEXAS, N.A. By: /s/ Michael Wilson -------------------------------- Michael Wilson, Senior Vice President THE FIRST NATIONAL BANK OF CHICAGO By: /s/ Jenny Gilpin -------------------------------- Jenny Gilpin, Vice President BANKS EX-21 4 EXHIBIT 21 ---------- TANDYCRAFTS, INC. Significant Subsidiaries of Tandycrafts, Inc. as of June 30, 1998 Jurisdiction of Subsidiary's Legal Name Doing Business As Incorporation ------------------------- ------------------------ ------------- Development Association, Inc. J-Mar Associates Texas, U.S.A. Sav-On, Inc. Sav-On Office Supplies Texas, U.S.A. TAC Holdings, Inc. Delaware, U.S.A. Tandyarts, Inc. Impulse Designs/Hermitage Fine Arts Nevada, U.S.A. Licensed Lifestyles, Inc. Tag Express/Birdlegs Nevada, U.S.A. Each of the corporations listed is a direct subsidiary of Tandycrafts, Inc., which owns 100% of the voting securities of each, except for TAC Holdings, Inc. which is 100% owned by Tandycrafts, Inc. and its various subsidiaries. Each of the above subsidiaries is included in the Tandycrafts, Inc. Consolidated Financial Statements for fiscal 1998. EX-23 5 EXHIBIT 23 ---------- TANDYCRAFTS, INC. Consent of Independent Accountants We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No's. 33-85550, 33-85548 and 33-57525) and to the incorporation by reference in the Prospectus constituting part of the Registration Statement on Form S-3 (No. 33-88290) of Tandycrafts, Inc. of our report dated August 11, 1998, appearing on page 19 of this Form 10-K. /s/PricewaterhouseCoopers LLP - ----------------------------- PricewaterhouseCoopers LLP Fort Worth, Texas September 28, 1998 EX-27 6
5 This schedule contains summary financial information extracted from Tandycrafts, Inc.'s June 30, 1998 Form 10-K and is qualified in its entirety by reference to such Form 10-K filing. 1000 YEAR JUN-30-1998 JUN-30-1998 1,216 0 30,841 2,755 45,990 83,077 46,327 23,441 150,691 24,675 0 0 0 18,528 70,436 150,691 232,495 232,495 153,484 222,117 0 0 3,346 7,119 2,502 4,617 0 0 0 4,617 0.37 0.37
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