-----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, OSfRwtP0PHO9q68oulGUGLGqozkLYsF92BHRsnuQ50G7WcyE07Wb9m48DxZ0v9Zi C3zghP/sw6/fASX3IM8jMA== 0000096294-98-000030.txt : 19981006 0000096294-98-000030.hdr.sgml : 19981006 ACCESSION NUMBER: 0000096294-98-000030 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19981005 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/A SEC ACT: SEC FILE NUMBER: 001-07258 FILM NUMBER: 98720774 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/A 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K/A X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 1998 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from ________ to ________ Commission File No. 1-7258 TANDYCRAFTS, INC. (Exact name of Registrant as specified in its charter) DELAWARE 75-1475224 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1400 EVERMAN PARKWAY FORT WORTH, TEXAS 76140 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (817) 551-9600 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered - -------------------------------- ----------------------- Common stock, $1 par value New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No __ --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. As of September 15, 1998, there were 12,507,710 shares of Common Stock, $1.00 par value, outstanding, and the aggregate market value of the Common Stock of Registrant held by non-affiliates was approximately $42.6 million. DOCUMENTS INCORPORATED BY REFERENCE Location in Form 10-K Incorporated Document - --------------------------- --------------------- Part III Proxy Statement for 1998 Annual Meeting REASON FOR AMENDMENT - -------------------- This amendment corrects mislabeling of the column headings contained in Note 12 of Notes to Consolidated Financial Statement in Tandycrafts, Inc.'s Form 10-K filing for the fiscal year ended June 30, 1998. Item 8. Financial Statements and Supplementary Data - ---------------------------------------------------- Index to Financial Statements Financial Statements: Page -------------------- ------------- Report of Independent Accountants 19 Consolidated Balance Sheets, June 30, 1998 and 1997 20 Consolidated Statements of Operations for the Years Ended June 30, 1998, 1997 and 1996 21 Consolidated Statements of Cash Flows for the Years Ended June 30, 1998, 1997 and 1996 22 Consolidated Statements of Stockholders' Equity for the Years Ended June 30, 1998, 1997 and 1996 23 Notes to Consolidated Financial Statements 24 Financial Statement Schedules: ----------------------------- For each of the three years in the period ended June 30, 1998: Schedule II - Valuation and Qualifying Accounts and Reserves 37 All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Tandycrafts, Inc. In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Tandycrafts, Inc. and its subsidiaries at June 30, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICEWATERHOUSECOOPERS LLP Fort Worth, Texas August 11, 1998 TANDYCRAFTS, INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands) June 30, -------------------- 1998 1997 --------- --------- ASSETS Current assets: Cash............................................. $ 1,216 $ 1,005 Trade accounts receivable, net of allowance for Doubtful accounts of $2,755 and $1,680, respectively.................................... 28,086 32,614 Inventories...................................... 45,990 49,671 Other current assets............................. 7,785 6,727 --------- --------- Total current assets.......................... 83,077 90,017 --------- --------- Property and equipment, net........................ 22,886 25,505 Other assets....................................... 6,929 768 Goodwill, net...................................... 37,799 40,239 --------- --------- $ 150,691 $ 156,529 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable................................. 12,155 13,196 Accrued liabilities and other.................... 12,520 15,765 --------- --------- Total current liabilities..................... 24,675 28,961 --------- --------- Long-term debt..................................... 34,230 40,840 Deferred taxes..................................... 2,822 2,454 Stockholders' equity: Common stock, $1 par value, 50,000,000 shares authorized,18,527,988 issued.................... 18,528 18,528 Additional paid-in capital....................... 20,545 20,432 Retained earnings................................ 72,074 67,457 Common stock in treasury, at cost, 5,917,419 and 5,930,336 shares, respectively.............. (22,183) (22,143) --------- --------- Total stockholders' equity.................... 88,964 84,274 --------- --------- Commitments and contingencies (Note 8) $ 150,691 $ 156,529 ========= ========= The accompanying notes are an integral part of these financial statements. TANDYCRAFTS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) 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 $24,133,000 to another group of customers under common control. The Company had no other individual customer or group of customers which accounted for more than 10% of the Company's total revenue. The Frames and Wall Decor and Novelties and Promotional divisions , in the normal course of business, grant credit with the majority of their sales. Such receivables are generally not collateralized. The concentration of credit risk within these divisions may impact the Company's overall credit risk, either positively or negatively, in that these customers may be similarly affected by industry-wide changes in economic or other conditions. Intersegment sales represent sales from one division to another. Operating income (loss) is divisional revenue less divisional operating expenses, which excludes corporate expenses, goodwill amortization, interest expense and taxes on income. Identifiable assets by division are those assets that are used in each division. Corporate assets are comprised of cash and short-term investments. Segment information for each of the three years in the period ended June 30, 1998 is as follows (in thousands): 1998 Frames Leather Novelties ---- and and Office and Divested Wall Decor Crafts Supplies Promotional Operations Consolidated ---------- -------- -------- ----------- ---------- ------------ Total sales...........................................$ 96,610 $ 47,476 $ 38,549 $ 20,754 $ 29,388 $ 232,777 Intersegment sales.................................... (151) (22) (89) (20) - (282) -------- -------- -------- -------- -------- --------- Net sales $........................................... 96,459 $ 47,454 $ 38,460 $ 20,734 $ 29,388 $ 232,495 ======== ======== ======== ======== ======== ========= Segment operating income (loss)......................................$ 12,100 $ 150 $ 1,878 $ (426) $ 13 $ 13,715 ======== ======== ======== ======== ======== Corporate expenses including goodwill amortization and interest expense, net...... (6,596) --------- Income before income taxes............................ $ 7,119 ========= Depreciation..........................................$ 1,169 $ 802 $ 798 $ 447 $ 612 $ 3,828 Goodwill amortization................................. 535 87 4 374 - 1,000 -------- -------- -------- -------- -------- --------- Total depreciation and amortization...................$ 1,704 $ 889 $ 802 $ 821 $ 612 $ 4,828 ======== ======== ======== ======== ======== ========= Identifiable assets...................................$ 68,194 $ 29,888 $ 14,999 $ 27,098 $ 9,296 $ 149,475 ======== ======== ======== ======== ======== Corporate assets...................................... 1,216 --------- $ 150,691 ========= Capital expenditures................................. $ 1,330 $ 592 $ 569 $ 481 $ 558 $ 3,530 ======== ======== ======== ======== ======== ========= 1997 Frames Leather Novelties ---- and and Office and Divested Wall Decor Crafts Supplies Promotional Operations Consolidated ---------- -------- -------- ----------- ---------- ------------ Total sales...........................................$ 87,606 $ 53,465 $ 35,781 $ 24,149 $ 44,388 $ 245,389 Intersegment sales..................................... (161) (52) (181) (71) - (465) -------- -------- -------- -------- -------- --------- Net sales.............................................$ 87,445 $ 53,413 $ 35,600 $ 24,078 $ 44,388 $ 244,924 ======== ======== ======== ======== ======== ========= Segment operating income (loss).......................$ 11,990 $ 530 $ 2,440 $ (799) $ (7,933) $ 6,228 ======== ======== ======== ======== ======== Corporate expenses including goodwill amortization and interest expense, net...... (9,273) --------- Income (loss) before income taxes..................... $ (3,045) ========= Depreciation..........................................$ 1,198 $ 854 $ 862 $ 503 $ 918 $ 4,335 Goodwill amortization................................. 535 87 4 374 39 1,039 -------- -------- -------- -------- -------- --------- Total depreciation and amortization...................$ 1,733 $ 941 $ 866 $ 877 $ 957 $ 5,374 ======== ======== ======== ======== ======== ========= Identifiable assets...................................$ 67,887 $ 30,958 $ 12,593 $ 28,578 $ 15,508 $ 155,524 ======== ======== ======== ======== ======== Corporate assets...................................... 1,005 --------- $ 156,529 ========= Capital expenditures.................................$ 1,371 $ 385 $ 782 $ 723 $ 533 $ 3,794 ========= ======== ======== ======== ======== ========= 1996 Frames Leather Novelties ---- and and Office and Divested Wall Decor Crafts Supplies Promotional Operations Consolidated ---------- -------- -------- ----------- ---------- ------------ Total sales...........................................$ 82,661 $ 58,386 $ 30,068 $ 20,590 $ 63,556 $ 255,261 Intersegment sales..................................... (353) (120) (146) (321) (37) (977) -------- -------- -------- -------- -------- --------- Net sales.............................................$ 82,308 $ 58,266 $ 29,922 $ 20,269 $ 63,519 $ 254,284 ======== ======== ======== ======== ======== ========= Segment operating income (loss).......................$ 9,365 $ 2,215 $ 1,030 $ 1,580 $(21,931) $ (7,741) ======== ======== ======== ======== ======== Corporate expenses including goodwill amortization and interest expense, net...... (8,142) --------- Income (loss) before income taxes..................... $ (15,883) ========= Depreciation..........................................$ 1,107 $ 911 $ 852 $ 332 $ 1,468 $ 4,670 Goodwill amortization................................. 509 87 4 374 322 1,296 -------- -------- -------- -------- -------- --------- Total depreciation and amortization...................$ 1,616 $ 998 $ 856 $ 706 $ 1,790 $ 5,966 ======== ======== ======== ======== ======== ========= Identifiable assets...................................$ 65,060 $ 32,096 $ 12,909 $ 27,609 $ 29,393 $ 167,067 ======== ======== ======== ======== ======== Corporate assets...................................... 1,512 --------- $ 168,579 ========= Capital expenditures..................................$ 2,170 $ 357 $ 573 $ 278 $ 985 $ 4,363 ======== ======== ======== ======== ======== =========
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. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TANDYCRAFTS, INC. (Registrant) September 30, 1998 By: /s/ Michael J. Walsh -------------------------- Michael J. Walsh President and Chief Executive Officer and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on this 30th day of September, 1998, by the following persons on behalf of the Registrant and in the capacities indicated. /s/ R.E. Cox III ------------------------------- R. E.. Cox III Chairman of the Board /s/ James D. Allen ------------------------------- James D. Allen Executive Vice President and Chief Financial Officer (Chief Accounting Officer) /s/ Joe K. Pace ------------------------------- Joe K. Pace Director /s/ Sheldon I. Stein ------------------------------- Sheldon I. Stein Director /s/ Robert Schutts ------------------------------- Robert Schutts Director /s/ Michael J. Walsh ------------------------------- Michael J. Walsh President and Chief Executive Officer and Director Schedule II TANDYCRAFTS, INC. AND SUBSIDIARIES Valuation and Qualifying Accounts and Reserves (In thousands) Year ended June 30, ------------------------------------ 1998 1997 1996 --------- --------- --------- Allowance for doubtful accounts: Balance, beginning of year $ 1,680 $ 790 $ 605 Additions charged to profit and loss 1,644 1,971 1,094 Accounts receivable charged off, net of recoveries (569) (1,081) (909) --------- --------- --------- Balance, end of year $ 2,755 $ 1,680 $ 790 ========= ========= ========= EX-23 2 EXHIBIT 23 ---------- TANDYCRAFTS, INC. Consent of Independent Accountants We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No's. 33-85550, 33-85548 and 33-57525) and to the incorporation by reference in the Prospectus constituting part of the Registration Statement on Form S-3 (No. 33-88290) of Tandycrafts, Inc. of our report dated August 11, 1998, appearing on page 19 of this Form 10-K/A. Price Waterhouse LLP Fort Worth, Texas September 30, 1998 -----END PRIVACY-ENHANCED MESSAGE-----