-----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, NgBVmZdowfLMgXgdRsPpHitEDC8kLE6JRKz5fiMd1OD0AlMAE1jrBgK+zaUOmGKl bG0FVl5/lIBioFcT9gegQQ== 0000930661-99-002230.txt : 19991227 0000930661-99-002230.hdr.sgml : 19991227 ACCESSION NUMBER: 0000930661-99-002230 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990928 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: 99718780 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 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE --- ACT OF 1934 For the fiscal year ended June 30, 1999 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ___ EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from ________ to ________ Commission File No. 1-7258 TANDYCRAFTS, INC. (Exact name of Registrant as specified in its charter) DELAWARE 75-1475224 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1400 Everman Parkway Fort Worth, Texas 76140 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (817) 551-9600 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered - ---------------------------------------- --------------------------- Common stock, $1 par value New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No __ --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ___ As of September 13, 1999, there were 12,083,618 shares of Common Stock, $1.00 par value, outstanding, and the aggregate market value of the Common Stock of Registrant held by non-affiliates was approximately $38.3 million. DOCUMENTS INCORPORATED BY REFERENCE Location in Form 10-K Incorporated Document --------------------- --------------------- Part III Proxy Statement for 1999 Annual Meeting TANDYCRAFTS, INC. Form 10-K PART I ------ Item 1. Business - ------- -------- Tandycrafts, Inc. ("Tandycrafts" or the "Company"), a Delaware corporation, was incorporated in June 1975 to operate the handicrafts segment previously operated by Tandy Corporation. The Company is a leading maker and marketer of consumer products, including frames and wall decor, office supplies, home furnishings and gift products. The Company's products are sold nationwide through wholesale distribution channels, including mass merchandisers and specialty retailers, and direct-to-consumer channels through the Company's retail stores, mail order and the Internet. During the quarter ended December 31, 1998, the Company adopted a plan of closing its leather and crafts retail stores and related manufacturing operations which comprised substantially all of the operations within the Company's Leather and Crafts operating division. Frames and Wall Decor - --------------------- The Frames and Wall Decor division, comprised of Pinnacle Art & Frame, accounted for 60.0%, 60.0% and 57.8% of the total consolidated net sales, excluding divested operations, of the Company for fiscal years 1999, 1998 and 1997, respectively. During fiscal 1999, 1998 and 1997, the Frames and Wall Decor division had net sales of $34,719,000, $37,118,000 and $29,966,000, respectively, to one group of customers under common control. This division also had sales in fiscal 1999 and 1998 of $20,128,000 and $23,492,000, respectively, to another group of customers under common control. The Company had no other individual customer or group of customers which accounted for more than 10% of the Company's total revenue. Pinnacle Art & Frame manufactures and distributes a broad range of picture frames, framed art and mirrors under the Magee Company, Impulse Designs and Hermitage Fine Arts brands. The division has manufacturing operations in Pocahontas and Piggott, Arkansas; Van Nuys, California and a new facility in Durango, Mexico. The facility in Van Nuys is expected to be closed on or about March 31, 2000, with all production from that facility moving to the Durango, Mexico facility. The facilities in Pocahontas and Piggott, Arkansas, produce over 29 million frames annually. The Magee brand is widely recognized for manufacturing low-cost frames out of oak, pine, ash and poplar and in recent years has expanded its production capacity for metal frames and developed a new line of extruded plastic frames. Impulse Designs is a manufacturer of framed art for the mass market. Impulse has achieved a national following by introducing the works of well-known artists at popular price points. Magee and Impulse's products are sold in the United States and Canada by national account sales representatives, selling primarily to mass-merchandise retail chains, drug and grocery retail chains, department stores, general houseware merchants and specialty frame outlets. Hermitage Fine Arts produces and distributes upscale frames and framed art which is sold primarily through home furnishings specialty retailers. Pinnacle Art & Frames' revenues have historically been seasonal with a higher percentage of their sales generated during the second fiscal quarter. Office Supplies - --------------- The Office Supplies division of the Company, comprised of Sav-On Office Supplies ("Sav-On"), accounted for 24.8%, 24.7% and 24.2% of the total consolidated net sales, excluding divested operations, of the Company for fiscal years 1999, 1998 and 1997, respectively. Sav-On sells office supplies from 41 company-owned and operated specialty retail stores which average approximately 6,500 square feet. Sav-On stores are smaller store footprints than its larger depot or warehouse-style competitors and are primarily located in neighborhood strip centers. During fiscal 1999, Sav-On opened one new store and closed one store. Sav-On's stores are located in eleven states. Sav-On stores carry approximately 5,500 products, with an additional 25,000 products available via its catalog and Internet shopping programs. Sav-On's products consist primarily of office and school supplies and are purchased from a variety of suppliers. The primary customers for Sav-On are small business owners, students and homeowners. 2 Home Furnishings - ---------------- The Home Furnishings division, comprised of Cargo Furniture, Inc. ("Cargo"), was acquired in June 1999 and accounted for 3.8% of the total consolidated net sales, excluding divested operations, of the Company during fiscal year 1999. Cargo is a leading maker and marketer of children's and casual furniture and accessories. Cargo branded products are sold through a chain of 22 retail stores, located mostly in the Southwestern and Mid-Atlantic U.S. regions. Cargo products are also sold via a national network of 120 furniture dealers, through commercial sales channels to camps, colleges and institutions, and direct to consumers via toll-free ordering and the Internet. In October 1998, the Company was informed that Cargo, a former subsidiary of the Company, had obtained a financial advisor for the purpose of actively pursuing additional capital to expedite the chain's conversion of their mall- based furniture stores to their new, higher performing Cargo Collection Store concept. At that time, Cargo had opened eight of the Cargo Collection Stores and seen promising results. However, due to Cargo's limited capital resources and the poor performance of their mall-based stores, Cargo determined that it required additional capital to complete the conversion process. In December 1998, Cargo informed the Company that it was unable to obtain additional investment capital. In addition, it was probable that Cargo would be in default of certain covenants contained in their bank term note agreement, and that Cargo would not be able to cure the events of default. The Company had guaranteed Cargo's term note, and had additional amounts receivable from Cargo. On January 11, 1999, the Company was informed by Cargo's lender that Cargo had defaulted on its term note and that Cargo's lender required the Company to perform pursuant to its guaranty of the note. On February 1, 1999, the Company complied with the lender's request. As a result of making the guaranty payment, the Company had the option to obtain a majority of Cargo's common stock, thereby obtaining voting control of Cargo. Accordingly, the Company began to consolidate the results of operations of Cargo effective February 1, 1999. On June 11, 1999, the Company completed the foreclosure of Cargo and acquired 100% ownership. Gifts - ----- The Gifts division is comprised of sales, marketing, manufacturing and distribution operations for products ranging from stationery, apparel, novelty and promotional items. The Gift division's product lines are marketed by Licensed Lifestyles, J-Mar Associates and Rivertown Button Company. This division accounted for 11.4%, 15.2% and 18.0% of the total consolidated net sales, excluding divested operations, of the Company for fiscal years 1999, 1998 and 1997, respectively. Licensed Lifestyles was formed through the consolidation of TAG Express, College Flags and Birdlegs. TAG Express distributes products such as auto tags, bumper stickers, key tags, decals, light switch covers, door knob hangers, luggage tags, automobile flags, wind socks and pennants featuring logos from leading professional and collegiate sports teams. TAG Express has licenses with the NFL, NBA, NHL, Major League Baseball, U.S. Soccer League and all major colleges. The automobile flags, wind socks and pennants are manufactured by TAG Express in Lancaster, South Carolina. Birdlegs is a producer of screen-printed souvenir activewear including T-shirts, sweatshirts, cover-ups and tank tops. Licensed Lifestyles sells its products through its own direct sales force and a network of independent sales representatives, distributors, and in-house telemarketing personnel. J-Mar Associates is a producer and wholesale distributor of paper products, general consumer and inspirational gifts, both domestically and internationally. Traditionally, J-Mar's customer base was primarily comprised of over 5,700 Christian retail gift and book stores; however, with the development of its new By the Way collection of gifts, J-Mar is targeting the mainstream gift and specialty store market. J-Mar's products are primarily sold through its telemarketing and direct sales force. 3 Rivertown Button Company is a contract manufacturer of promotional buttons, ribbons, posters and stickers. Rivertown's products are marketed and sold to a wide range of customers including major corporations, schools, political campaigns, non-profit organizations, and other groups. Raw Materials - ------------- Raw materials and merchandise purchased by the Company are available from numerous sources, and the Company believes that the availability of such materials is adequate for its needs. Intangible Assets - ----------------- The Company owns a number of trademarks and copyrights. Management considers these intangibles to be valuable assets and vigorously defends them when necessary. Seasonality - ----------- The Company's operating results are subject to seasonal variation. Historically, the Company has realized a larger proportion of its sales and operating income in its second fiscal quarter (the quarter ended December 31); however, due to the divestitures of the Joshua's Christian Stores and Tandy Leather retail operations, this seasonal variation will be less significant in future years. Cash also increases in December through March due to the increase in sales during the December quarter and the subsequent collection of receivables related to those sales. Competitive Conditions - ---------------------- The picture frames and framed art sold by Pinnacle Art & Frame are readily available from other suppliers who compete actively for sales. Sav-On Office Supplies' line of office supplies competes vigorously for sales with other nationally-known brand names that are marketed by mass merchants, department stores, larger national office supply retail chains and local specialty stores. Cargo Furniture competes for sales with other nationally-known brand names that are marketed by department stores, chain stores and specialty stores. The products sold by the Gifts division are readily available from other suppliers who compete actively for sales. Environmental Affairs - --------------------- Compliance by the Company with federal, state and local environmental protection laws have not had, and are not expected to have, a material effect upon capital expenditures, earnings or the competitive position of the Company. However, the Company has been notified about a potential environmental issue regarding a property which was owned by the Company for four months in 1975. The Company has asserted defenses to this claim and will vigorously defend the claim. At any rate, based on present information, the Company believes that its potential liability would not materially affect it future operating results. Foreign Operations and Export Sales - ----------------------------------- A small amount of products manufactured by the Company is exported to independent distributors and other customers in foreign nations. The combined export operations contributed less than 10% of consolidated revenue and/or income and utilized less than 10% of the consolidated assets of Tandycrafts, Inc. for each of the last three fiscal years. During fiscal 1999, the Company built and started production in a state-of-the-art, 150,000-square-foot frame manufacturing facility in Durango, Mexico. Products manufactured by this subsidiary will be sold by Pinnacle Art & Frame through its normal sales channels. 4 Employees - --------- The Company has approximately 2,200 employees, including part-time and temporary employees. Tandycrafts, Inc. sponsors an employees' retirement savings (401-K) plan, which is coupled with a employee stock ownership plan in which eligible employees and officers may participate. The Company is not a party to any union contract and considers its relations with its employees to be very good. Item 2. Properties - ------- ---------- The Company owns certain buildings which it uses for offices, manufacturing and warehousing. The Company also leases a significant amount of retail store and factory space. The total space owned and leased is as follows:
Approximate Square Footage ------------------------------- Owned Leased Total ---------- --------- --------- Warehouse and Office 569,250 281,150 850,400 Retail 4,750 385,496 390,246 Factory 350,000 110,000 460,000 ---------- --------- --------- Totals 924,000 776,646 1,700,646 ========== ========= =========
The warehouse, office and factory space is located approximately 28% in Fort Worth, Texas, 38% at three locations in Arkansas (Frames and Wall Decor), 13% at one location in California (Frames and Wall Decor), 12% at one location in Durango, Mexico (Frames and Wall Decor), 2% at one other location in Texas (Gifts), with the remaining 7% located in Georgia and South Carolina (Gifts). The leased retail stores are generally small outlets and are located throughout 14 states of the United States. For additional lease information see Note 11 of Notes to Consolidated Financial Statements, which is set forth in Item 8 herein. Item 3. Legal Proceedings - ------- ----------------- The Company is not involved in any legal proceeding required to be disclosed pursuant to Item 103 of Regulation S-K, and no such proceeding was terminated during the fourth quarter of the 1999 fiscal year. Item 4. Submission of Matters to a Vote of Security Holders - ------- --------------------------------------------------- There were no matters submitted to a vote of security holders during the fourth quarter of the 1999 fiscal year. 5 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, 58 President and Chief Executive 1983 Officer since April 1996. Executive Vice President and Chief Financial Officer from August 1992 to April 1996. Vice President from 1986 to August 1992. General Counsel and Secretary from 1983 to 1996. James D. Allen, 39 Chief Operating Officer since May 1999, 1993 Executive Vice President and Chief Financial Officer since July 1996. Vice President from November 1993 to July 1996. Director of Special Projects from May 1993 to November 1993. Prior to May 1993, Mr. Allen was a Senior Manager in the accounting firm of Price Waterhouse LLP. Leo C. Taylor, 37 Vice President of Taxation, Risk 1996 Management and Human Resources since November 1996. Director of Tax Administration from February 1994 to November 1996. Prior to February 1994, Mr. Taylor was a Manager in the accounting firm of Price Waterhouse LLP. Russell L. Price, 34 Vice President - General Counsel and 1996 Secretary since November 1996. Counsel from March 1994 to November 1996. Prior to March 1994, Mr. Price was an associate at the law firm of Hughes & Luce, LLP. Troy A. Huseman, 31 Controller since December 1998. Director 1999 of Financial Reporting and Planning from June 1996 to December 1998. Prior to June 1996, Mr. Huseman was with the accounting firm of Price Waterhouse LLP.
None of the above officers are related by birth, adoption or marriage. All officers are elected annually by the Board of Directors to serve for the ensuing year. 6 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder ----------------------------------------------------------------- Matters - ------- Price Range of Common Stock (Quoted by quarter for the two most recent fiscal years.) High Low High Low ---- --- ---- --- Sept. 1997 $ 5.00 $ 4.31 Sept. 1998 $ 4.94 $ 2.63 Dec. 1997 $ 4.75 $ 3.63 Dec. 1998 $ 3.94 $ 3.00 March 1998 $ 5.50 $ 4.13 March 1999 $ 3.75 $ 1.88 June 1998 $ 5.94 $ 4.69 June 1999 $ 3.63 $ 2.00 The principal market for the Company's common stock is the New York Stock Exchange. As of September 13, 1999, there were approximately 6,500 shareholders of record of the Company's common stock. The Company's present policy is to retain earnings for the foreseeable future for use in the Company's business and the financing of its growth. The Company did not pay any cash dividends on its common stock during fiscal 1999 and 1998. The Company's revolving credit agreement contains provisions specifying limitations on the amount of cash payments and distributions which may be paid by the Company, including cash dividends and purchases of treasury stock. Item 6. Selected Financial Data Selected Financial Data (Unaudited) (in thousands, except per share amounts)
1999 1998 1997 1996 1995 ----------- ----------- ----------- ----------- ----------- Net sales........................................ $ 194,698 $ 232,495 $ 244,924 $ 254,284 $ 256,523 Restructuring charge............................. $ 8,145 $ - $ - $ 12,235 $ - Impairment of long-lived assets.................. $ 9,522 $ - $ - $ - $ - Operating income (loss).......................... $ (30,939) $ 10,378 $ 40 $ (11,811) $ 11,860 Income (loss) before income taxes................ $ (33,112) $ 7,119 $ (3,045) $ (15,883) $ 8,027 Net income (loss)................................ $ (23,833) $ 4,617 $ (1,918) $ (10,709) $ 5,217 Net income (loss) per common share .............. $ (1.96) $ .37 $ (.15) $ (.89) $ .46 Weighted average shares outstanding ............. 12,182 12,645 12,423 11,983 11,434 Net income (loss) as percent of net sales........ (12.2%) 2.0% (0.8%) (4.2%) 2.0% Net income (loss) as percent of beginning equity. (26.8%) 5.5% (2.3%) (11.8%) 6.6% Current assets................................... $ 63,541 $ 83,077 $ 90,017 $ 99,771 $ 101,980 Current liabilities.............................. $ 28,455 $ 24,675 $ 28,961 $ 33,751 $ 27,113 Working capital.................................. $ 35,086 $ 58,402 $ 61,056 $ 66,020 $ 74,867 Current ratio.................................... 2.2 to 1 3.4 to 1 3.1 to 1 3.0 to 1 3.8 to 1 Total assets..................................... $ 123,051 $ 150,691 $ 156,529 $ 168,579 $ 178,803 Net property and equipment....................... $ 29,560 $ 22,886 $ 25,505 $ 26,783 $ 28,707 Long-term liabilities............................ $ 31,671 $ 37,052 $ 43,294 $ 51,230 $ 61,029 Retained earnings................................ $ 48,241 $ 72,074 $ 67,457 $ 69,375 $ 80,084 Total stockholders' equity....................... $ 62,925 $ 88,964 $ 84,274 $ 83,598 $ 90,661 Common shares outstanding ....................... 12,011 12,611 12,598 12,178 11,717 Stockholders' equity per common share ........... $ 5.24 $ 7.05 $ 6.69 $ 6.86 $ 7.75
There have been no cash dividends declared or paid by the Company. 7 Item 7. Management's Discussion and Analysis of Financial Condition and Results - ------- ----------------------------------------------------------------------- of Operations - ------------- Tandycrafts, Inc. ("Tandycrafts" or the "Company") is a leading maker and marketer of consumer products, including frames and wall decor, office supplies, home furnishings and gift products. The Company's products are sold nationwide through wholesale distribution channels, including mass merchandisers and specialty retailers, and direct-to-consumer channels through the Company's retail stores, mail order and the Internet. The Company is organized into four product related operating divisions: Frames and Wall Decor, Office Supplies, Gifts and Home Furnishings. The Tandy Leather retail stores and manufacturing operations were closed during fiscal year 1999. Joshua's Christian Stores, a retail chain of Christian bookstores, was sold by the Company in May 1998. Certain statements in this discussion, other filings with the Securities and Exchange Commission and other Company statements are not historical facts but are forward looking statements. The words "believes," "expects," "estimates," "projects," "plans," "could," "may," "anticipates," or the negative thereof or other variations or similar terminology, or discussions of strategies or plans identify forward-looking statements. These forward-looking statements reflect the Company's reasonable judgments with respect to future events and are subject to risks and uncertainties that could cause actual results to differ materially from such forward-looking statements. These risks and uncertainties include, but are not limited to, the Company's ability to reduce costs through the consolidation of certain operations, customers' willingness, need, demand and financial ability to purchase the Company's products, new business opportunities, the successful development and introduction of new products, the successful transition of the Company's framed art manufacturing from Van Nuys, California to Durango, Mexico, the successful transition of framed art distribution and administration from Van Nuys, California to Fort Worth, Texas, the successful implementation of new information systems, the continued development of direct import programs, relationships with key customers, impact of the Year 2000, relationships with professional sports leagues and other licensors, the possibilities of work stoppages in professional sports leagues, price fluctuations of lumber, paper and other raw materials, seasonality of the Company's operations, effectiveness of promotional activities, changing business strategies and intense competition in retail operations. Additional factors include economic conditions such as interest rate fluctuations, consumer debt levels, inflation levels, changing consumer demand and tastes, competitive products and pricing, availability of products, inventory risks due to shifts in market demand, and regulatory and trade environmental conditions. Results of Operations The following tables present selected financial data for each of the Company's four product divisions for the years ended June 30, 1999, 1998 and 1997: Fiscal Years Ended June 30, 1999 and 1998 (Dollars in Thousands)
1999 1998 Increase (Decrease) ------------------- --------------------- -------------------- Operating Operating Income Income Operating Divisions Sales (Loss) Sales (Loss) Sales Income - ---------------------------- --------- -------- -------- ------- -------- ---------- Frames and Wall Decor $ 95,958 $ 12,128 $ 93,509 $11,784 2.6% 2.9% Office Supplies 39,562 1,933 38,460 1,878 2.9% 2.9% Home Furnishings 6,036 (602) - - 100.0% (100.0%) Gifts 18,268 (12,329) 23,684 (110) (22.9%) (11108.2%) -------- -------- -------- ------- -------- ---------- 159,824 1,130 155,653 13,552 2.7% (91.7%) Divested operations 34,874 (12,169) 76,842 163 (54.6%) (7565.6%) Restructuring charge - (8,145) - - - (100.0%) -------- -------- -------- ------- -------- ---------- Total operations, excluding corporate $194,698 $(19,184) $232,495 $13,715 (16.3%) (239.9%) ======== ======== ======== ======= ======== ==========
8 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 $ 93,509 $ 11,784 $ 85,091 $11,590 9.9% 1.7% Office Supplies 38,460 1,878 35,600 2,440 8.0% (23.0%) Gifts 23,684 (110) 26,431 (399) (10.4%) 72.4% -------- -------- -------- ------- ------- ---------- 155,653 13,552 147,122 13,631 5.8% (0.6%) Divested operations 76,842 163 97,802 (7,403) (21.4%) 102.2% -------- -------- -------- ------- ------- ---------- Total operations, excluding Corporate $232,495 $ 13,715 $244,924 $ 6,228 (5.1%) 120.2% ======== ======== ======== ======= ====== ==========
FISCAL YEARS ENDED JUNE 30, 1999 AND 1998 In fiscal 1999 consolidated net sales decreased $37,797,000, or 16.3%, compared to fiscal 1998. Excluding divested operations, net sales increased $4,171,000, or 2.7%, compared to the prior year. The sales increase can be attributed to the Company's consolidation of Cargo Furniture and Accents ("Cargo") in February 1999 and sales increases at the Frames and Wall Decor and Office Supplies divisions, partially offset by declines in the Gifts division. The Company suffered an operating loss for the year primarily as a result of the closure of the Tandy Leather retail stores and manufacturing operations, poor performance of the licensed product line of the Gift division including impairment losses recognized for certain long-lived assets, and performance under the Cargo bank debt guarantee. Discussions relative to each of the Company's product divisions are set forth below. Frames and Wall Decor Net sales for the Frames and Wall Decor division, which operates under the Pinnacle Art & Frame name, increased 2.6% during fiscal 1999. The sales growth can be attributed to solid market acceptance of Pinnacle's new plastic frames and an increase in mirror sales. Partially offsetting these increases was a decline in sales of framed art caused by a large framed art customer changing their framed art program from an everyday item to a promotional item. Looking forward, we expect sales improvements to continue in the plastic products and a rebound in framed art sales based on expected increases with existing customers and the exit of a major competitor in the framed art market during fiscal 1999. Pinnacle's operating income increased by $344,000 during fiscal 1999 and maintained the 12.6% operating margin of net sales achieved in fiscal 1998. The increase in operating income results from the sales increase as well as improved gross margins. Gross margin as a percentage of sales improved by 2.0% because of lower lumber prices in the current year and improved manufacturing efficiencies. Selling, general and administrative ("SG&A") expenses as a percentage of sales increased by 2.0% as a result of start up expenses associated with the new production facility in Mexico, increased expenditures in marketing and product development and expansion of the sales and service organization to support the growth in business with major customers. We project Pinnacle's profitability to be negatively impacted in fiscal 2000 by the direct costs associated with the relocation of framed art production from California to Mexico and the excess capacity which will be experienced while operating both the California and Mexico plants during the transition period. We plan to have the transition substantially complete by March 31, 2000 and expect operating margins to begin improving in late fiscal 2000. Office Supplies Net sales of the Office Supplies division, which is comprised of the 41- store Sav-On Office Supplies chain, increased 2.9% in fiscal 1999. The sales increase resulted from a 1% increase in same-store sales and a 41.3% increase in sales at non-comparable stores. Competition continued to impact sales growth as 12 stores saw their first or second large competitor enter their market during fiscal 1999. Historically, Sav-On stores are significantly impacted the first twelve to fifteen months after a large competitor enters a market; however, after the second year, 9 stores typically begin producing sales gains. As all but five of Sav-On's stores face at least one and many face two major competitors, Sav-On's exposure to competitive invasions has lessened. Sav-On's operating income was up slightly from the prior year. Gross margins fell slightly during fiscal 1999 primarily as a result of stronger back to school promotions and competitive pricing pressures. Partially offsetting these declines in margin was the impact of a new direct import program which showed promising initial results in fiscal 1999. SG&A expenses increased by $114,000 but decreased slightly as a percent of sales as a result of more efficient advertising programs and more efficient labor scheduling. Management plans to expand the direct import program in fiscal 2000 in response to continued competitive price pressures. Gifts Sales for the Gifts division, comprised of Licensed Lifestyles, Inc., Rivertown Button Company and J-Mar Associates, decreased $5,416,000, or 22.9%, from fiscal 1998. $5,040,000 of the decline is attributable to sales losses of licensed products. Management has continued to see weak demand for licensed products, especially for sports licensed products which have historically represented the vast majority of Licensed Lifestyles' sales. In addition to the general soft market for licensed goods, Licensed Lifestyles' traditional customer base of sporting goods retailers continued its trend of consolidation or elimination in fiscal 1999 negatively impacting sales. Sales at J-Mar were also down as a result of new product introductions in fiscal 1999 occurring late in the fiscal year; whereas, the fiscal 1998 new products were introduced in the beginning of that fiscal year. We expect the Gifts division to introduce a number of new non-licensed products in fiscal 2000 which should contribute to a change in the sales trend of this division; however, as the demand for licensed products will likely remain soft, sales may remain flat or decline in fiscal 2000. The Gifts division had an operating loss of $12,329,000 in fiscal 1999 versus a loss of $110,000 in the prior year. The 1999 loss is comprised of an impairment of long-lived assets loss of $9,522,000, discussed below, and a loss from operations of $2,807,000. The operating loss can be primarily attributed to a write-down of inventory, a decrease in sales and increased product development costs. During fiscal 1999, Licensed Lifestyles recognized a $1,680,000 loss related to the write-down of certain inventory items to their net realizable values. This write-down was primarily triggered by management's decision to discontinue several underperforming licensed product lines within the division resulting from continued softness in licensed product sales. As a result of three consecutive years of operating losses and declining sales, as well as the recent industry-wide weakening of licensed product sales, the Company performed an analysis of the recoverability of the net book value of the long-lived assets of Licensed Lifestyles, Inc., its wholly-owned licensed products subsidiary. Through this assessment, management determined that the expected future cash flows (undiscounted and before interest) from these assets were less than their net book value. These long-lived assets were then written- down to their estimated fair value based upon a valuation analysis performed by an independent third party valuation firm, resulting in an impairment loss of $9,522,000. Approximately, $9,048,000 of this charge related to the write-down of goodwill and $474,000 related to the write-down of property, plant and equipment. Despite the losses sustained in fiscal 1999, this division's new management team made significant progress in reducing the level of SG&A expenses and improving operational controls and buying practices. As such, despite the uncertain sales levels of fiscal 2000, management expects this division's operating income performance to improve in fiscal 2000. Home Furnishings In October 1998, the Company was informed that Cargo Furniture and Accents ("Cargo"), a former subsidiary of the Company, had obtained a financial advisor for the purpose of actively pursuing additional capital to expedite the chain's conversion of their mall-based furniture stores to their new, higher performing Cargo Collection Store concept. At that time, Cargo had opened eight of the Cargo Collection Stores and seen promising results. However, due to Cargo's limited capital resources and the poor performance of their mall-based stores, Cargo determined that it required additional capital to complete the conversion process. 10 In December 1998, Cargo informed the Company that it was unable to obtain additional investment capital. In addition, it was probable that Cargo would be in default of certain covenants contained in their bank term note agreement, and that Cargo would not be able to cure the events of default. The Company had guaranteed Cargo's term note, and had additional amounts receivable from Cargo. On January 11, 1999, the Company was informed by Cargo's lender that Cargo had defaulted on its term note and that Cargo's lender required the Company to perform pursuant to its guaranty of the note. On February 1, 1999, the Company complied with the lender's request. As a result of Cargo's poor financial condition, the Company determined that recovery of the $2,481,000 note balance and the receivables from Cargo was not probable. Consequently, loss provisions of $3,465,000 were recorded during the quarter ended December 31, 1998 and are included in selling, general and administrative expenses. As a result of making the guaranty payment, the Company had the option to obtain a majority of Cargo's common stock, thereby obtaining voting control of Cargo. Accordingly, the Company began to consolidate the results of operations of Cargo effective February 1, 1999, recording its assets and liabilities at their estimated fair market value at that date. On June 11, 1999, the Company completed the foreclosure of Cargo and acquired ownership. During the last five months of fiscal 1999 while the Company was consolidating Cargo in its financial statements, Cargo had sales of $6,036,000 and incurred an operating loss of $602,000. The majority of the loss is due to transaction related costs and continued poor performance of the mall-based stores. In fiscal 2000, the Company intends to convert the remaining mall-based stores to the new Collection format. In addition, the product distribution and delivery processes have been re-engineered resulting in a more cost effective distribution system which should yield favorable results in fiscal 2000. Divested Operations Divested operations in fiscal 1999 consist primarily of the leather and crafts retail stores and related manufacturing operations for which a plan of closure was approved in the second quarter of fiscal 1999. The sales and operating income for divested operations for fiscal 1998 also includes Joshua's Christian Stores, which the Company sold effective May 31, 1998. In fiscal 1999, net sales of the leather and crafts operations decreased $12,579,000 or 26.5%. The leather and crafts operations had an operating loss before a restructuring charge of $11,962,000 compared to operating income of $150,000 for the prior year. Fiscal 1999 includes a charge of $2,458,000 to write-down inventory of the leather operations to its estimated liquidation value. In fiscal 1998, Joshua's Christian stores had sales of $29,388,000 and operating income of $13,000 prior to the May 1998 sale. Restructuring Charges In the quarter ended December 31, 1998, the Board of Directors of the Company approved a plan to close the Company's 121 leather and crafts retail stores and related manufacturing operations to allow the Company to continue to narrow its focus to its more profitable business segments. The divestiture plan was substantially complete and all retail stores were closed as of June 30, 1999. As a result of this plan, the Company recorded charges totaling $11,106,000 during the quarter ended December 31, 1998. Approximately $2,960,000 of these charges related to the write-down of inventory to its estimated liquidation value and is included in cost of sales on the accompanying consolidated statements of operations. In the fourth quarter of fiscal 1999, as a result of better than expected inventory liquidation sales, $503,000 of the inventory write-down was reversed and credited to cost of sales. Approximately $8,145,000 of the charges related to the write-down of non-inventory assets and anticipated future cash outlays and is classified as restructuring charge in the accompanying consolidated statements of operations. Included in the $8,145,000 restructuring charge is approximately $5,441,000 related to non-cash write-downs of non-inventory assets to their estimated net realizable value, including $3,923,000 related to the write-off of goodwill, $1,313,000 related to the write-down of fixed assets (primarily comprised of store fixtures and 11 leasehold improvements and manufacturing equipment substantially all of which have been abandoned), and $205,000 related to the write-down of various other assets. The remaining restructuring charge of $2,704,000 represents an accrual for anticipated future cash outlays for lease obligations and other related exit costs. As of June 30, 1999, the lease agreements for 105 stores had been terminated through settlement, sub-let or assignment. Subsequent to June 30, 1999, six more leases have been settled. All of the manufacturing operations have been closed. The following table sets forth the activity in the restructuring reserve, which is included in current accrued liabilities in the June 30, 1999 balance sheet (in thousands) :
December 31, Cash June 30, 1998 Payments 1999 ------------ ------------ --------- Lease obligations $ 2,346 $ 1,881 $ 465 Other 358 227 131 ------------ ------------ --------- $ 2,704 $ 2,108 $ 596 ============ ============ =========
The above provisions are estimates based on the Company's judgment at this time. Adjustments to the restructuring provisions may be necessary in the future based on further development of restructuring related costs. Revenues and operating losses (before restructuring charges, but including the inventory write-down charge of $2,458,000) for the divested operations were $34,874,000 and $11,962,000, respectively, for the fiscal year ended June 30, 1999 compared to revenues and operating income of $47,454,000 and $150,000, respectively, in fiscal 1998 and $53,413,000 and $530,000, respectively, for fiscal 1997. Selling, General & Administrative Expenses SG&A expenses increased by $936,000 in fiscal 1999 from fiscal 1998. As a percentage of sales, SG&A increased from 27.2% to 32.9%. The increase is a result of the costs associated with the closure of Tandy Leather's retail stores and manufacturing operations and losses recognized under the performance of the Cargo bank debt guarantee. Net Interest Expense Net interest expense decreased $1,086,000, or 33.3%, in fiscal 1999 compared to the prior year. The decrease in net interest expense is due primarily to lower average borrowings, as a result of the Company's efforts to reduce long-term debt, as well as $416,000 of interest income recognized during the year related to the note received for the sale of Joshua's. Depreciation and Amortization Consolidated depreciation and amortization decreased $501,000, or 10.4%, in fiscal 1999 compared to the prior year. The decrease is primarily due to the divestiture of Joshua's at the end of fiscal 1998. Provision for Income Taxes The Company recognized a tax benefit in fiscal 1999 of $9,279,000 compared to expense of $2,502,000 in fiscal 1998. The effective tax rate for fiscal 1999 was 28% and differs from the statutory rate as a result of the write-off of non- deductible goodwill. As of June 30, 1999, the Company has total tax loss carry- forwards of $7,012,000. The Company believes that future pre-tax income during the carryforward period will be sufficient to utilize the federal loss carryforwards; however, a valuation allowance of $2,016,000 has been provided for a portion of the state loss carryforwards. FISCAL YEARS ENDED JUNE 30, 1998 AND 1997 For fiscal 1998, consolidated net sales decreased $12,429,000, or 5.1%, compared to fiscal 1997. Excluding divested operations, net sales increased $8,531,000, or 5.8%, compared to the prior year. Total operating income before corporate expenses increased $7,487,000, or 120.2%, from fiscal 1997. Excluding divested 12 operations, operating income decreased $79,000, or 0.6%, compared to the prior year. Discussions relative to each of the Company's product divisions are set forth below. Frames and Wall Decor Net sales for the Frames and Wall Decor division, comprised of Pinnacle Art & Frame, increased 9.9% compared to the prior year. Sales of picture frames increased $5,680,000, or 10.1%, while sales of framed art increased $2,738,000, or 9.4%. These sales increases are due to the addition of new customers and increased sales to existing customers. Operating income for this division increased 1.7% compared to the prior year. Gross profit as a percent of sales decreased slightly from the prior year primarily due to manufacturing inefficiencies and overtime incurred during the first half of fiscal 1998 and to increased allowances granted to customers. However, gross profit dollars for the division increased 2.2% reflecting the increased sales levels achieved in fiscal 1998. SG&A expenses increased 3.2% over the prior year primarily due to developing a new service organization in 1998 to service major customers. SG&A expenses as a percent of sales decreased less than one percent in fiscal 1998 due to the increase in sales. Office Supplies The Office Supplies division, comprised of the Sav-On Office Supplies chain, achieved an 8.0% increase in net sales over fiscal 1997 due to six stores opened since May 1997 and to same-store sales increases of 3.2%. The same-store sales increase in fiscal 1998 was achieved despite large format competitors entering seventeen of Sav-On's markets during the last nineteen months. Historically, sales at Sav-On stores are significantly impacted the first twelve to fifteen months after a large competitor enters a market; however, after the second year, the store typically begins producing sales gains once again. Sav-On's operating income decreased $562,000, or 23.0%, in fiscal 1998 compared to the prior year. The decrease in operating income is primarily attributable to first-year operating losses of $809,000 from the six stores opened since May 1997. Gross profit as a percent of sales decreased slightly compared to the prior year due to a change in sales mix, with a greater portion of total sales comprised of computer peripherals and furniture which have lower gross margins relative to other merchandise categories, and to the impact of increased competition. SG&A expenses increased $1,227,000, or 11.9%, compared to the prior year primarily due to the six new stores. Gifts Sales for the Gifts division, comprised of Licensed Lifestyles, Inc., J-Mar Associates and Rivertown Button Company, decreased 10.4% compared to the prior year. This decrease reflects an overall weaker demand for sports licensed products in fiscal 1998, specifically a weak "hot market" for Super Bowl and NHL playoff merchandise compared to the prior year, and the discontinuance of an unprofitable line of business at Licensed Lifestyles. This division had an operating loss of $110,000 in fiscal 1998 compared to a loss of $399,000 in the prior year. Gross profit as a percent of sales decreased in fiscal 1998; and, gross profit dollars decreased further as a result of the decrease in sales. SG&A expenses decreased reflecting the results of consolidation and expense reduction efforts within this division. Management strengthened the operating management in this division late in fiscal 1998. Divested Operations Divested operations in fiscal 1998 consists primarily of the leather and craft retail stores and related manufacturing operations and Joshua's Christian Stores. The sales and operating income for divested operations for fiscal 1997 also includes Cargo which the Company sold effective January 27, 1997. Net sales for the leather and crafts operations decreased 11.2% in fiscal 1998 compared to the prior year. Retail store sales declined 7.7% primarily due to the closing of 38 unprofitable stores during fiscal 1998. Same-store sales were essentially unchanged, decreasing 0.5% for the year. Sales decreased 21.8% at the wholesale operations of Tandy Leather due primarily to the discontinuance of an unprofitable line of business in early fiscal 1998 and to an overall downturn in the Western apparel market. 13 Operating income for the leather and crafts operations decreased 71.7% compared to the prior year due to the decrease in sales. Gross profit as a percent of sales increased slightly for the year; however, gross profit dollars decreased significantly due to the decrease in sales. SG&A expenses decreased 7.9%, reflecting decreases in advertising, labor and occupancy expenses attributable to the closing of 38 unprofitable stores during the year. SG&A expenses as a percentage of sales increased compared to the prior year due to a greater decrease in sales relative to the decrease in SG&A expenses. Sale of Joshua's Christian Stores The Company sold Joshua's Christian Stores effective May 31, 1998 to Family Christian Stores for consideration totaling approximately $11,500,000, with approximately $2,900,000 paid in cash at the time of closing and approximately $8,600,000 in a note receivable. The note bears interest at a rate of 7.25% and was payable in three installments on December 31 of the years 1998, 1999 and 2000. As of June 30, 1999, this note had been received in full. The sale of this business resulted in a pretax loss of $623,000, comprised primarily of transaction related costs. Selling, general and administrative expenses Consolidated selling, general and administrative expenses as a percentage of sales were 27.2% for fiscal 1998 compared to 32.3% for fiscal 1997. In total dollars, selling, general and administrative expenses decreased $16,003,000, or 20.2%, for fiscal 1998 when compared to the previous year. The decrease in expenses is a result of decreased operating expenses of the leather and crafts operations and the Gifts division, decreased corporate administrative expenses and decreased expenses related to businesses sold during 1998 and 1997. Interest expense Interest expense increased $222,000, or 7.1%, for fiscal 1998 compared to the prior year. The increase in interest expense was due primarily to a higher average interest rate in fiscal 1998 partially offset by lower average borrowings compared to the prior year. Depreciation and amortization Consolidated depreciation and amortization decreased $546,000, or 10.2%, for fiscal 1998 compared to the previous year. The decrease is due primarily to the sale or write-down of equipment related to businesses sold in 1998 and 1997. Provision for income taxes The Company recognized a tax expense of $2,502,000 in fiscal 1998 and a tax benefit of $1,127,000 in fiscal 1997. The effective income tax rate for fiscal 1998 was 35.1% compared to 37.0% for the prior year. The decrease in the effective income tax rate is a result of permanent differences created in fiscal 1997 through the charitable contribution of certain inventory. LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of liquidity have been cash flows from operations and the proceeds from the sale of Joshua's Christian Stores. These funds have been used primarily for capital expenditures, to repurchase the Company's common stock and to reduce borrowings under the Company's revolving credit facility. During fiscal 1999 cash decreased $472,000. Cash provided by operating activities of $7,845,000 primarily resulted from improved working capital management. The Company used $9,323,000 for capital expenditures and entered into a capital lease to finance certain information systems expenditures of $2,033,000. During fiscal 1999 the note receivable from the sale of Joshua's Christian Stores was collected in the amount of $8,312,000. The Company repurchased $1,995,000 of its common stock, net of employee stock plan forfeitures, and utilized cash of approximately $4,830,000 for repayments of borrowings under the Company's revolving credit facility. Effective March 31, 1999, the Company entered into a new revolving credit facility with a group of banks. The new facility is a $45 million revolving line of credit with a maturity date of March 31, 2001 and is renewable 14 annually. The amount of credit available under the facility will decline to $40 million on April 1, 2000 to reflect management's projection of reduced capital needs. The terms of the new facility are essentially the same as the $50 million facility the Company operated under previously. At June 30, 1999, the Company was not in compliance with certain covenants of the credit facility. The Company received a waiver from the banks for these covenant violations through September 30, 1999. Effective September 27, 1999, the Company reached an agreement with the banks on revised covenants, with which the Company would have been in compliance at June 30, 1999. The Company is continuing discussions with the banks regarding the possible amendment to other terms of the current credit facility. Effective November 3, 1997, the Company entered into an Interest Rate Swap Agreement with its primary bank in which a $20,000,000 notional amount of floating rate debt at LIBOR was swapped for a fixed rate of 6.01%. The Swap Agreement has a three-year term and is being accounted for as a hedge by the Company. The transaction was executed to hedge interest rate risk on the Company's interest obligation associated with a portion of its revolving credit facility, and to change the nature of the liability from a variable to a fixed interest obligation. At June 30, 1999, the Company would have had to pay approximately $125,000 to terminate the interest rate swap. This amount was obtained from the counterparties and represents the fair market value of the Swap Agreement. The Company utilizes a revolving trade accounts receivable securitization program to sell without recourse, through a wholly-owned subsidiary, certain trade accounts receivable. Under the program, the maximum amount allowed to be sold at any given time through June 30, 1999, was $12,000,000. The maximum amount of receivables that can be sold may be seasonally adjusted. At June 30, 1999, the amount of trade accounts receivable outstanding which had been sold approximated $4,247,000. The proceeds from the sales were used to reduce borrowings under the Company's revolving credit facility. Costs of the program, which primarily consist of the purchaser's financing cost of issuing commercial paper backed by the receivables, totaled $343,000 for fiscal 1999. The Company, as agent for the purchaser of the receivables, retains collection and administrative responsibilities for the purchased receivables. In September 1998, the Company's Board of Directors authorized a common share repurchase program that provides for the Company to purchase, in the open market and through negotiated transactions, up to $2,000,000 of the Company's outstanding common stock. As of June 30, 1999, the Company had repurchased approximately 540,000 shares for an aggregate purchase price of $1,995,000. Capital expenditures approximated $9,323,000 during fiscal 1999. The majority of these expenditures were related to the new frame production facility in Mexico, expanded plastic frame production capacity and information systems. Planned capital expenditures for fiscal 2000 approximate $3,500,000 and are primarily targeted for investments in Pinnacle Art & Frame and conversion of Cargo stores to the new Collection format. Management believes that the Company's current cash position, its cash flows from operations and available borrowing capacity will be sufficient to fund its current operations, capital expenditures and current growth plans. Actual results may differ from this forward-looking projection. Please refer to the discussion of risk factors contained herein. NEW ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting guidelines for derivatives and requires that an entity recognize all derivatives as either assets or liabilities on the statement of financial position and measure those instruments at fair value. This statement is effective for the Company beginning in fiscal 2001. The Company is analyzing the implementation requirements and does not anticipate that the adoption of this statement will have a material impact on the Company's consolidated financial statements. 15 In January 1998, the American Institute of Certified Public Accountants (the "AICPA") issued Statement of Position 98-1, "Accounting for the Cost of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 requires that an entity only capitalize those costs of computer software developed or obtained for internal use that were incurred in the development and implementation stages. Costs incurred during the conceptual formulation stage and training costs are expensed as incurred. SOP 98-1 becomes effective for the Company July 1, 1999; however, the Company's current policy falls within the guidelines of the statement; thus, the Company does not anticipate any impact from adopting this statement. THE YEAR 2000 The Company has a comprehensive project ("Year 2000 project") designed to minimize or eliminate business disruption caused by potential processing problems associated with the Year 2000 issue. The Year 2000 project, which addresses both the Company's information technology ("IT") systems and non-IT systems, consists of three phases: identification and analysis, planning, implementation and testing. The Company's Year 2000 project has used both internal and external resources. The first phase of the Company's Year 2000 project involved identifying and analyzing the IT and non-IT systems that the Company believed were susceptible to failures or processing errors as a result of the Year 2000 issue. This phase consisted of the Company and its operating units identifying the systems that required remediation or replacement. Through its systems requirements study, the Company believed that, with regard to IT systems, five should be remediated through replacement and three remediated through upgrades. With respect to non- IT systems, the Company believed that there was an insubstantial susceptibility to the Year 2000 issue. This phase has been completed. The second phase of the Year 2000 project involved analyzing proposed remediations and planning how to implement such remediations. The Company then established priorities for remediation. This phase has been completed for IT systems. The third phase of the Year 2000 project involved implementing the proposed remediations. With regard to IT systems, all five replacements have been substantially completed. Two of the three upgrades have been substantially completed with the last upgrade in process and scheduled to be substantially completed by the end of October 1999. Testing of the remediations is in process and further remediation efforts may be required thereafter to address Year 2000 issues discovered during testing. Further, the Company acquired the assets of Cargo Furniture and Accents ("Cargo") late in fiscal 1999. During its due diligence and since its acquisition, the Company identified and analyzed the systems of Cargo that the Company believed were susceptible to failures or processing errors as a result of Year 2000 issues. The Company then analyzed proposed remediations and planned how to implement such remediations. The Company is currently in the process of implementing Year 2000-ready systems at Cargo and currently believes that this process will be substantially completed by November 30, 1999. Additionally, as part of its Year 2000 project, the Company has identified certain service providers, vendors, suppliers, and customers ("Key Partners") that it believes are critical to business operations after January 1, 2000. The Company initiated communications with such Key Partners in an attempt to reasonably ascertain their state of Year 2000 readiness. The Company has received responses to approximately 77% of these questionnaires. The majority of such responses indicated that the Key Partner had Year 2000 remediation programs and expected to be compliant by at least calendar year end 1999. The Company has sent follow-up inquiries to the Key Partners who have not responded to the Company's questionnaire. The Company plans to continue assessment of Key Partners, which may include further communications, interviews and face-to-face meetings, as deemed appropriate. In addition, the Company has implemented a Year 2000-ready electronic data interchange ("EDI") system and is in the process of working with its business partners to convert them over to this system. Despite the Company's efforts, there can be no guarantee that the systems of other companies which the Company relies upon to conduct its operations and business will be Year 2000 compliant. 16 In addition to the above measures, the Company is developing contingency plans intended to mitigate the possible disruption in business operations from the Year 2000 issue. The Company intends to continue to evaluate and modify contingency planning as additional information becomes available. The Company estimates that the costs of the Year 2000 project will range from $2.6 million to $2.8 million. As of June 30, 1999, the Company had spent approximately $2.4 million. The cost estimates do not include any costs associated with the implementation of contingency plans and any potential costs related to any customer or other claims relating to the Year 2000 issue. Because of the large number of systems used by the Company, the significant number of service providers, vendors, suppliers and customers, and the interdependent nature of systems, there can be no guaranty that the Company will not experience some disruption in its business due to the Year 2000 issue. Although it is not currently possible to quantify the most reasonably likely worst case scenario, the possible consequences of the Company or Key Partners not being fully ready in a timely manner include without limitation temporary plant closings, delays in the delivery of products, delays in the receipt of supplies, invoice and collection errors and inventory and supply obsolescence. Consequently, the business and operations of the Company could be materially adversely affected by a temporary inability of the Company to conduct its business in the ordinary course for periods of time due to the Year 2000 issue. However, the Company believes that its Year 2000 project and related contingency planning should reduce the adverse effect any such disruptions may have. The Year 2000 project is an ongoing process and the risk assessments, estimates of costs, projected completion dates and other factors are forward- looking statements and are subject to change. Risk factors that may cause actual results to differ from estimates or projections include without limitation, the continued availability of qualified personnel and other information technology resources; the ability to identify and remediate all date sensitive lines of computer code and embedded chips; the timely receipt and installation of Year 2000-ready replacement systems and upgrades; the actions of governmental agencies, utilities and other third parties with respect to the Year 2000 issue; the ability to implement contingency plans; and the occurrence of broad-based or systemic economic failures. CONTINGENCIES A former subsidiary of the Company, which was spun-off in 1978, filed for Chapter 11 protection under the federal bankruptcy code in January 1996. As part of the bankruptcy proceedings, the former subsidiary has rejected certain store leases which were originated prior to the spin-off and for which the Company was allegedly a guarantor. An accrual for claims associated with the alleged guarantees on leases rejected as of June 30, 1999 has been established. Based on the information presently available, management believes the amount of the accrual at June 30, 1999 is adequate to cover the liability the Company may incur under the alleged guarantees. 17 Item 7a. Quantitative and Qualitative Disclosures About Market Risk - -------- ---------------------------------------------------------- The Company is exposed to changes in interest rates in the United States. The Company manages interest rate risk through the strategic use of variable rate debt and interest rate derivatives. As of June 30, 1999, the Company had only entered into one interest rate derivative; thus, the table presents the notional amount and interest rate of this derivative instrument categorized by expected maturity date. The counterparty to the derivative agreement is a major financial institution. The Company believes the risk of credit loss with this institution is minimal. The Company does not use derivatives with a risk higher than the exposure to be hedged and does not hold or issue derivative instruments for trading purposes.
(Dollars in thousands) Fair 1999 2000 2001 Total Value -------- ------- ------ ----- ------ Liabilities: Bank debt 30,000 30,000 30,000 Average interest rate 6.61% 6.61% Interest rate derivative financial instruments related to debt: Pay fixed rate, receive floating rate 20,000 20,000 (125) Average pay rate 6.01% 6.01% Average receive rate LIBOR LIBOR
18 Item 8. Financial Statements and Supplementary Data - ------- ------------------------------------------- Index to Financial Statements Financial Statements: Page -------------------- -------- Report of Independent Accountants 20 Consolidated Balance Sheets, June 30, 1999 and 1998 21 Consolidated Statements of Operations for the Years Ended June 30, 1999, 1998 and 1997 22 Consolidated Statements of Cash Flows for the Years Ended June 30, 1999, 1998 and 1997 23 Consolidated Statements of Stockholders' Equity for the Years Ended June 30, 1999, 1998 and 1997 24 Notes to Consolidated Financial Statements 25 Financial Statement Schedules: ------------------------------ For each of the three years in the period ended June 30, 1999: Schedule II - Valuation and Qualifying Accounts and Reserves 40 All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. 19 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Tandycrafts, Inc. In our opinion, the consolidated balance sheet and the related statements of operations, of cash flows and of stockholders' equity listed in the accompanying index present fairly, in all material respects, the financial position of Tandycrafts, Inc. and its subsidiaries at June 30, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1999, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 14(a)(1) on page 37 presents fairly, in all materially respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and the financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICEWATERHOUSECOOPERS LLP Fort Worth, Texas August 10, 1999 20 TANDYCRAFTS, INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands)
June 30, ------------------ 1999 1998 --------- -------- ASSETS Current assets: Cash...................................................... $ 744 $ 1,216 Trade accounts receivable, net of allowance for doubtful accounts of $2,460 and $2,755, respectively............. 20,783 28,086 Inventories............................................... 35,026 45,990 Other current assets...................................... 6,988 7,785 -------- -------- Total current assets................................... 63,541 83,077 -------- -------- Property and equipment, net................................ 29,560 22,886 Other assets............................................... 5,256 6,929 Goodwill, net.............................................. 24,694 37,799 -------- -------- $123,051 $150,691 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable......................................... $ 11,988 $ 12,155 Accrued liabilities and other............................ 16,467 12,520 -------- -------- Total current liabilities.............................. 28,455 24,675 -------- -------- Long-term debt............................................. 30,000 34,230 Long-term capital lease obligation......................... 1,671 - Deferred taxes............................................. - 2,822 Stockholders' equity: Common stock, $1 par value, 50,000,000 shares authorized, 18,527,988 issued....................................... 18,528 18,528 Additional paid-in capital............................... 20,559 20,545 Retained earnings........................................ 48,241 72,074 Common stock in treasury, at cost, 6,517,015 and 5,917,419 shares, respectively.......................... (24,403) (22,183) -------- -------- Total stockholders' equity............................ 62,925 88,964 -------- -------- Commitments and contingencies (Note 11) $123,051 $150,691 ======== ========
The accompanying notes are an integral part of these financial statements. 21 TANDYCRAFTS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts)
Year Ended June 30, --------------------------------------- 1999 1998 1997 ---------- ---------- ---------- Net sales............................................... $ 194,698 $ 232,495 $ 244,924 ---------- ---------- ---------- Operating costs and expenses: Cost of goods sold (exclusive of depreciation)......... 139,525 153,484 160,325 Selling, general and administrative.................... 64,118 63,182 79,185 Restructuring charge................................... 8,145 - - Impairment of long-lived assets........................ 9,522 - - Loss on sale of business unit.......................... - 623 - Depreciation and amortization.......................... 4,327 4,828 5,374 ---------- ---------- ---------- Total operating costs and expenses.................... 225,637 222,117 244,884 ---------- ---------- ---------- Operating income (loss)............................... (30,939) 10,378 40 Interest income......................................... 416 87 39 Interest expense........................................ 2,589 3,346 3,124 ---------- ---------- ---------- Income (loss) before income taxes....................... (33,112) 7,119 (3,045) Provision (benefit) for income taxes.................... (9,279) 2,502 (1,127) ---------- ---------- ---------- Net income (loss).................................... $ (23,833) $ 4,617 $ (1,918) ========== ========== ========== Net income (loss) per common share: Basic and diluted.................................... $ (1.96) $ .37 $ (.15) ========== ========== ========== Weighted average common shares: Basic 12,182 12,645 12,423 Diluted 12,182 12,659 12,423
The accompanying notes are an integral part of these financial statements. 22 TANDYCRAFTS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands)
Year Ended June 30, --------------------------------------- 1999 1998 1997 ---------- ---------- ---------- Cash flows from operating activities: Net income (loss)................................................ $ (23,833) $ 4,617 $ (1,918) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization................................... 4,327 4,828 5,374 Deferred income taxes........................................... (8,340) 1,543 (931) Loss on sale of business unit................................... - 623 - Impairment of long-lived assets................................. 9,522 - - Restructuring charge............................................ 8,145 - - Changes in assets and liabilities, excluding effect of businesses acquired or sold: Receivables.................................................... 7,987 4,415 (2,224) Inventories.................................................... 13,161 (3,512) 7,401 Other assets................................................... (6,325) 805 (3,054) Accounts payable, accrued expenses and income taxes............ 3,201 (5,383) 4,725 ---------- ---------- ---------- Net cash provided by operating activities................... 7,845 7,936 9,373 ---------- ---------- ---------- Cash flows from investing activities: Additions to property and equipment.............................. (9,323) (3,530) (3,794) Purchase of business, net of cash acquired....................... (270) - - Collection of note receivable.................................... 8,312 - - Proceeds from sales of assets.................................... - 2,342 3,750 ---------- ---------- ---------- Net cash used by investing activities....................... (1,281) (1,188) (44) ---------- ---------- ---------- Cash flows from financing activities: Sales of treasury stock to employee benefit plan, net............ 36 73 2,594 Purchases of treasury stock...................................... (2,242) - - Payments under bank credit facility, net......................... (4,830) (6,610) ( 12,430) ---------- ---------- ---------- Net cash used by financing activities....................... (7,036) (6,537) (9,836) ---------- ---------- ---------- Increase (decrease) in cash and cash equivalents.................. (472) 211 (507) Balance, beginning of year........................................ 1,216 1,005 1,512 ---------- ---------- ---------- Balance, end of year.............................................. $ 744 $ 1,216 $ 1,005 ========== ========== ========== Supplemental cash flow information: Cash paid (received) during the year for: Interest........................................................ $ 2,470 $ 3,303 $ 3,249 Income taxes.................................................... $ 602 $ (832) $ (3,615) Capital lease obligation incurred............................... $ 2,033 $ - -
The accompanying notes are an integral part of these financial statements. 23 TANDYCRAFTS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Dollars in thousands)
Additional Common paid-in Retained Treasury stock capital earnings stock Total ---------- ---------- ---------- ---------- ---------- Balance, June 30, 1996.............. $ 18,528 $ 19,371 $ 69,375 $ (23,676) $ 83,598 Sale of 419,271 shares of treasury stock to employee benefit plan, net.................. - 1,061 - 1,533 2,594 Net loss............................ - - (1,918) - (1,918) ---------- ---------- ---------- ---------- ---------- Balance, June 30, 1997.............. $ 18,528 $ 20,432 $ 67,457 $ (22,143) $ 84,274 Sale of 12,917 shares of treasury stock to employee benefit plan, net.................. - 113 - (40) 73 Net income.......................... - - 4,617 - 4,617 ---------- ---------- ---------- ---------- ---------- Balance, June 30, 1998.............. $ 18,528 $ 20,545 $ 72,074 $ (22,183) $ 88,964 Sale of 9,686 shares of treasury stock to employee benefit plan, net.................. - - - 36 36 Purchase of 609,282 shares of treasury stock..................... - 14 - (2,256) (2,242) Net loss............................ - - (23,833) - (23,833) ---------- ---------- ---------- ---------- ---------- Balance, June 30, 1999.............. $ 18,528 $ 20,559 $ 48,241 $ (24,403) $ 62,925 ========== ========== ========== ========== ==========
The accompanying notes are an integral part of these financial statements. 24 TANDYCRAFTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 - Accounting Principles Description of Business - Tandycrafts, Inc. ("Tandycrafts" or the "Company") is a leading maker and marketer of consumer products, including frames and wall decor, office supplies, home furnishings and gift products. The Company's products are sold nationwide through wholesale distribution channels, including mass merchandisers and specialty retailers, and direct-to-consumer channels through the Company's retail stores, mail order and the Internet. During the quarter ended December 31, 1998, the Company adopted a plan of closing its leather and crafts retail stores and related manufacturing operations and as of June 30, 1999 such operations were closed. These operations comprised substantially all of the operations within the Company's Leather and Crafts operating division. Principles of consolidation - The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries after elimination of significant inter-company accounts and transactions. Cash and cash equivalents - The Company considers, for purposes of the statement of cash flows, all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Inventories - Inventories are stated at the lower of average cost or market and consist of the following (in thousands): June 30, ---------------- 1999 1998 ------- ------- Finished goods..................... $24,282 $33,244 Raw materials and work-in-process.. 10,744 12,746 ------- ------- $35,026 $45,990 ======= ======= Property and equipment - Property and equipment is depreciated over the estimated useful lives of the assets using principally the straight-line method at the rates shown below: Buildings.......................... 3% to 10% Fixtures and equipment............. 5% to 50% Leasehold improvements............. 5% to 20%, or the life of the lease. Expenditures for maintenance, repairs, renewals and betterments which do not materially prolong the useful lives of the assets are charged to income as incurred. The cost of property retired or sold, and the related accumulated depreciation, is removed from the accounts and any gain or loss, after taking into consideration proceeds from sales, is reflected in income. Pre-opening expenses - Expenses associated with the opening of new stores are expensed as incurred. Fair value of financial instruments - The fair value of the Company's long-term debt approximates the carrying value due to the floating interest rates on such debt. The carrying value of the Company's other financial instruments approximates fair value due to the short-term maturities of the assets and liabilities. Derivative instruments - The Company has used an interest rate swap agreement to manage interest rate risk on its floating rate revolving credit facility. The interest rate swap is matched as a hedge against a portion of the Company's revolving credit facility. Amounts to be paid or received under the interest rate swap agreement are accrued as interest rates change and are recognized over the life of the swap agreement as an adjustment to interest expense. The fair value of the swap agreement is not recognized in the financial statements since it is accounted for as a hedge. Goodwill - The cost of businesses acquired in purchase transactions has been allocated among the identifiable assets and liabilities acquired based upon their fair values at the dates of acquisition. Any cost in excess of the fair value of such 25 identifiable net assets acquired has been allocated to goodwill. In general, goodwill is amortized using the straight-line method over the estimated useful life of forty years. Accumulated amortization of goodwill at June 30, 1999 and 1998 was $3,368,000 and $4,374,000, respectively. Goodwill which arose prior to October 31, 1970, aggregating $1,163,000, is reviewed annually by the Board of Directors and will continue to be carried as an asset unless the Board determines that events and circumstances indicate that there has been a decline or limitation in the value, at which time an appropriate amortization policy will be adopted. Impairment of Long-lived assets - Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the net book value of the assets may not be recoverable. An impairment loss will be recognized if the sum of the expected future cash flows (undiscounted and before interest) from the use of the assets is less than the net book value of the assets. The amount of the impairment loss is measured as the difference between the net book value and the estimated fair value of the assets. The adoption of this accounting policy in fiscal 1997 did not have a material impact on the Company's financial position or results of operations. Income taxes - Income taxes are calculated in accordance with the liability method, which requires that deferred tax assets and liabilities be recognized based on differences between the financial statement and tax bases of assets and liabilities using presently enacted rates. Net income (loss) per share - Basic earnings per share is computed by dividing income available to common shareholders by the weighted-average common shares outstanding. Diluted earnings per share is computed by dividing the income available to shareholders by the weighted-average common share and potential common shares outstanding during the period. For fiscal 1999, 1998 and 1997, the number of weighted-average shares and potential common shares is as follows (in thousands): 1999 1998 1997 ------ ------ ------ Weighted-average shares - basic........ 12,182 12,645 12,423 Potential common shares................ - 14 - ------ ------ ------ Total weighted-average common and potential common shares - diluted..... 12,182 12,659 12,423 ====== ====== ====== Advertising costs - Advertising costs are expensed the first time the advertising takes place. Advertising expense for fiscal 1999, 1998 and 1997 was $4,000,000, $5,700,000 and $7,700,000, respectively. Pervasiveness of estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Reclassifications - Certain amounts in prior years have been reclassified to conform to the current year presentation. New accounting standards - In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting guidelines for derivatives and requires that an entity recognize all derivatives as either assets or liabilities on the statement of financial position and measure those instruments at fair value. This statement is effective for the Company beginning in fiscal 2001. The Company is analyzing the implementation requirements and does not anticipate that the adoption of this statement will have a material impact on the Company's consolidated financial statements. In January 1998, the American Institute of Certified Public Accountants (the "AICPA") issued Statement of Position 98-1, "Accounting for the Cost of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 requires that an entity only capitalize those costs of computer software developed or obtained for internal use that were incurred in the development and implementation stages. Costs incurred during the conceptual formulation stage and training costs are expensed as incurred. SOP 98-1 becomes effective for the Company July 1, 1999; however, the Company's current policy falls within the guidelines of the statement; thus, the Company does not anticipate any impact from adopting this statement. 26 Comprehensive Income (Loss) - Effective July 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income". Comprehensive income is defined as the change in equity (net assets) of a business enterprise during a period, except those changes resulting from investments by owners and distributions to owners. The Company has not had any elements of income during the fiscal years 1999, 1998 or 1997 not reported in net income, thus comprehensive income is not separately reported. Note 2 - Divestiture In the quarter ended December 31, 1998, the Board of Directors of the Company approved a plan to close the Company's 121 leather and crafts retail stores and related manufacturing operations to allow the Company to continue to narrow its focus to its more profitable business segments. The divestiture plan was substantially complete and all retail stores were closed as of June 30, 1999. As a result of this plan, the Company recorded charges totaling $11,106,000 during the quarter ended December 31, 1998. Approximately $2,961,000 of these charges related to the write-down of inventory to its estimated liquidation value and is included in cost of sales in the accompanying consolidated statements of operations. In the fourth quarter of fiscal 1999, as a result of better than expected inventory liquidation sales, $503,000 of the inventory write-down was reversed and credited to cost of sales. Approximately $8,145,000 of the charges related to the write-down of non-inventory assets and anticipated future cash outlays and is classified as restructuring charge in the accompanying consolidated statements of operations. Included in the $8,145,000 restructuring charge is approximately $5,441,000 related to non-cash write-downs of non-inventory assets to their estimated net realizable value, including $3,923,000 related to the write-off of goodwill, $1,313,000 related to the write-down of fixed assets (primarily comprised of store fixtures and leasehold improvements and manufacturing equipment substantially all of which have been abandoned), and $205,000 related to the write-down of various other assets. The remaining restructuring charge of $2,704,000 represents an accrual for anticipated future cash outlays for lease obligations and other related exit costs. As of June 30, 1999, the lease agreements for 105 stores had been terminated through settlement, sub-let or assignment. Subsequent to June 30, 1999, six more leases have been settled. All of the manufacturing operations have been closed. The following table sets forth the activity in the restructuring reserve, which is included in current accrued liabilities in the June 30, 1999 balance sheet (in thousands): December 31, Cash June 30, 1998 Payments 1999 ------------ ------------ ------------ Lease obligations $ 2,346 $ 1,881 $ 465 Other 358 227 131 ------------ ------------ ------------ $ 2,704 $ 2,108 $ 596 ============ ============ ============ The above provisions are estimates based on the Company's judgment at this time. Adjustments to the restructuring provisions may be necessary in the future based on further development of restructuring related costs. Revenues and operating losses (before restructuring charges, but including the inventory write-down charge of $2,458,000) for the divested operations were $34,874,000 and $11,962,000, respectively, for the fiscal year ended June 30, 1999 compared to revenues and operating income of $47,454,000 and $150,000, respectively, in fiscal 1998 and $53,413,000 and $530,000, respectively, for fiscal 1997. 27 Note 3 - Licensed Lifestyles, Inc. As a result of three consecutive years of operating losses and declining sales, as well as the recent industry-wide weakening of licensed product sales, the Company performed an analysis of the recoverability of the net book value of the long-lived assets of Licensed Lifestyles, Inc., its wholly-owned licensed products subsidiary. Through this assessment, management determined that the expected future cash flows (undiscounted and before interest) from these assets were less than their net book value. These long-lived assets were then written- down to their estimated fair value based upon a valuation analysis performed by an independent third party valuation firm, resulting in an impairment loss of $9,522,000. Approximately, $9,048,000 of this charge related to the write-down of goodwill and $474,000 related to the write-down of property, plant and equipment. Property, plant and equipment remaining at Licensed Lifestyles has a net book value of $1,572,000 at June 30, 1999. Due to the continued softness in the sports licensed product market, management analyzed Licensed Lifestyles' product lines and decided to discontinue several under-performing lines. The discontinuance of these product lines resulted in an inventory write-down of $1,680,000 which was recorded in the quarter ended June 30, 1999. Note 4 - Sale of Joshua's Christian Stores The Company sold Joshua's Christian Stores effective May 31, 1998 to Family Christian Stores for consideration totaling approximately $11,500,000, with approximately $2,900,000 paid in cash at the time of closing and approximately $8,600,000 in a note receivable. The sale of this business resulted in a pretax loss of $623,000, comprised primarily of transaction related costs. During fiscal 1999, this note was received in full. Note 5 - Cargo Furniture and Accents In October 1998, the Company was informed that Cargo Furniture and Accents ("Cargo"), a former subsidiary of the Company, had obtained a financial advisor for the purpose of actively pursuing additional capital to expedite the chain's conversion of their mall-based furniture stores to their new, higher performing Cargo Collection Store concept. At that time, Cargo had opened eight of the Cargo Collection Stores. However, due to Cargo's limited capital resources and the poor performance of their mall-based stores, Cargo determined that it required additional capital to complete the conversion process. In December 1998, Cargo informed the Company that it was unable to obtain additional investment capital. In addition, it was probable that Cargo would be in default of certain covenants contained in their term note agreement, and Cargo would not be able to cure the events of default. The Company had guaranteed Cargo's term note, and had additional amounts receivable from Cargo. On January 11, 1999, the Company was informed by Cargo's lender that Cargo had defaulted on its term note and that Cargo's lender required the Company to perform pursuant to its guaranty of the note. On February 1, 1999, the Company complied with the lender's request. As a result of Cargo's poor financial condition, the Company determined that recovery of the $2,481,000 note balance and the receivables from Cargo was not probable. Consequently, loss provisions of $3,465,000 were recorded during the quarter ended December 31, 1998 and are included in selling, general and administrative expenses. As a result of making the guaranty payment, the Company had the option to obtain a majority of Cargo's common stock, thereby obtaining voting control of Cargo. Accordingly, the Company began to consolidate the results of operations of Cargo effective February 1, 1999, recording its assets and liabilities at their estimated fair market value at that date. On June 11, 1999, the Company completed the foreclosure of Cargo and acquired ownership. 28 Note 6 - Account Receivable Securitization The Company utilizes a revolving trade accounts receivable securitization program to sell without recourse, through a wholly-owned subsidiary, certain trade accounts receivable. Under the program, the maximum amount allowed to be sold at any given time through June 30, 1999, was $12,000,000. The maximum amount of receivables that can be sold may be seasonally adjusted. At June 30, 1999, the amount of trade accounts receivable outstanding which had been sold approximated $4,247,000. The proceeds from the sales were used to reduce borrowings under the Company's revolving credit facility. Costs of the program, which primarily consist of the purchaser's financing cost of issuing commercial paper backed by the receivables, totaled $343,000 for fiscal year ended June 30, 1999. The Company, as agent for the purchaser of the receivables, retains collection and administrative responsibilities for the purchased receivables. Note 7 - Property and Equipment and Accumulated Depreciation
As of June 30 (in thousands): 1999 1998 -------- -------- Property and equipment, at cost: Land...................................................................... $ 2,547 $ 2,419 Buildings................................................................. 15,746 13,373 Leasehold improvements.................................................... 6,756 4,233 Fixtures and equipment.................................................... 31,201 26,302 -------- -------- 56,250 46,327 Less accumulated depreciation.............................................. (26,690) (23,441) -------- -------- Property and equipment, net............................................... $ 29,560 $ 22,886 ======== ========
Note 8 - Accrued Liabilities and Other Accrued liabilities and other consisted of the following at June 30 (in thousands):
1999 1998 -------- -------- Accrued payroll and bonus.................................................. $ 3,493 $ 3,749 Income taxes payable....................................................... 877 1,122 Taxes, other than income taxes............................................. 823 667 Interest................................................................... 365 246 Restructuring accrual...................................................... 596 43 Accrual for sales allowances............................................... 1,633 1,685 Accrued legal.............................................................. 2,394 1,593 Accrued insurance.......................................................... 2,264 1,373 Other...................................................................... 4,022 2,042 -------- -------- $ 16,467 $ 12,520 ======== ========
Note 9 - Debt Effective March 31, 1999, the Company entered into a new revolving credit facility with a group of banks. The new facility is a $45 million revolving line of credit with a maturity date of March 31, 2001 and is renewable annually. The amount of credit available under the facility will decline to $40 million on April 1, 2000 to reflect management's projection of reduced capital needs. The terms of the new facility are essentially the same as the $50 million facility the Company operated under previously. At June 30, 1999, the Company was not in compliance with certain covenants of the credit facility. The Company received a waiver from the banks for these covenant violations through September 30, 1999. Effective September 27, 1999, the Company reached an agreement with its banks on revised covenants, with which the Company would have been in compliance at June 30, 1999. 29 Interest rates on borrowings under the current credit facility are based on current LIBOR or prime rates, at the option of the Company. A commitment fee of 1/4% is charged on the unused portion of the credit facility. Interest rates on borrowings at June 30, 1999 ranged from 6.28% to 6.75%. At June 30, 1999, the Company had borrowings aggregating $30,000,000 and letters of credit aggregating $414,000 outstanding under this facility. Effective November 3, 1997, the Company entered into an Interest Rate Swap Agreement with its primary bank in which a $20,000,000 notional amount of floating rate debt at LIBOR was swapped for a fixed rate of 6.01%. The Swap Agreement has a three-year term and is being accounted for as a hedge by the Company. The transaction was executed to hedge interest rate risk on the Company's interest obligation associated with a portion of its revolving credit facility, and to change the nature of the liability from a variable to a fixed interest obligation. At June 30, 1999, the Company would have had to pay approximately $125,000 to terminate the interest rate swap. This amount was obtained from the counterparties and represents the fair market value of the Swap Agreement. Note 10 - Income Taxes The provision for income taxes is as follows (in thousands):
1999 1998 1997 -------- -------- -------- Current tax expense (benefit): Federal.......................................................... $ (1,042) $ 893 $ (226) State and local.................................................. 103 66 30 -------- -------- -------- Total current.................................................... (939) 959 (196) Deferred tax expense (benefit): Federal.......................................................... (8,340) 1,543 (931) -------- -------- -------- Total provision (benefit)......................................... $ (9,279) $ 2,502 $ (1,127) ======== ======== ========
Deferred tax liabilities (assets) are comprised of the following at June 30 (in thousands):
1999 1998 -------- -------- Depreciation...................................................... $ 1,142 $ 1,413 Deferred compensation............................................. - 109 Bad debts......................................................... - 15 Goodwill.......................................................... 323 2,142 -------- -------- Total deferred tax liabilities................................... 1,465 3,679 -------- -------- Inventory......................................................... (1,130) (672) Bad debts......................................................... (335) - Restructuring reserve............................................. (323) (99) Charitable contribution carryforwards............................. (559) (450) State tax loss carryforwards...................................... (2,058) (1,291) Federal tax loss carryforwards.................................... (4,954) - Other............................................................. (773) (575) -------- -------- Total deferred tax assets........................................ (10,132) (3,087) Valuation allowance............................................... 2,168 1,249 -------- -------- Net deferred tax assets.......................................... (7,964) (1,838) -------- -------- $ (6,499) $ 1,841 ======== ========
The use of the federal and state loss carryforwards and the charitable contribution carryforwards is limited by future taxable earnings by the Company and its subsidiaries. The Company believes that future pre-tax income during the carryforward period will be sufficient to utilize the federal loss carryforwards; however, valuation allowances of $2,016,000 and $152,000, respectively, have been provided for a portion of the state loss and charitable contribution carryforwards. In fiscal 1998, the entire valuation allowance related to state tax loss carryforwards. 30 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, --------------------------------- 1999 1998 1997 -------- -------- -------- Statutory U.S. tax provision.................. $(11,258) $ 2,420 $ (1,066) Increase (decrease) in rates resulting from: State and local taxes, net................... 67 43 19 Goodwill write-offs.......................... 1,658 278 - Other........................................ 254 (239) (80) -------- -------- -------- Tax provision................................. $ (9,279) $ 2,502 $ (1,127) ======== ======== ========
Note 11 - Commitments and Contingencies The Company leases certain properties, primarily retail stores, under operating leases which expire through 2007. Real estate taxes, maintenance and certain other costs are generally borne by the Company. During fiscal 1999, the Company entered into a capital lease arrangement for computer hardware and software related to the Company's implementation of an enterprise-wide information system. Assets under capital lease of $2,033,000 are included in the consolidated balance sheet. The composition of total rental expense for operating leases is as follows (in thousands):
Year ended June 30, 1999 1998 1997 -------- -------- -------- Rentals: Minimum...................................... $ 5,280 $ 7,298 $ 8,622 Contingent (percentage of sales)............. 20 20 70 -------- -------- -------- $ 5,300 $ 7,318 $ 8,692 ======== ======== ========
Minimum rental commitments for noncancellable leases at June 30, 1999 are summarized as follows (in thousands):
Operating Capital Year ended June 30, Leases Leases -------- -------- 2000...................................... $ 3,692 $ 468 2001...................................... 3,075 468 2002...................................... 2,457 468 2003...................................... 1,264 468 2004...................................... 713 468 2005 and thereafter....................... 1,297 - -------- -------- Total minimum lease payments.............. $ 12,498 $ 2,340 ======== Less: Amount representing interest at 6.00%.................................. (307) -------- Present value of net minimum lease payments.......................... $ 2,033 ========
A former subsidiary of the Company, which was spun-off in 1978, filed for Chapter 11 protection under the federal bankruptcy code in January 1996. As part of the bankruptcy proceedings, the former subsidiary has rejected certain store leases which were originated prior to the spin-off and for which the Company was allegedly a guarantor. An accrual for claims associated with the alleged guarantees on leases rejected as of June 30, 1999 has been established. Based on the information presently available, management believes the amount of the accrual at June 30, 1999 is adequate to cover the liability the Company may incur under the alleged guarantees. 31 Note 12 - Tandycrafts Retirement Savings Plan The Tandycrafts Retirement Savings Plan (the "TRSP" or the "Plan") is open to all eligible employees of the Company employed in the United States. Participants may contribute between 3% and 15% of gross salary and wages into the 401(k) portion of the plan which becomes immediately vested. Participants also have the ability to direct their contributions into various investment options. The Company's matching contribution is 100% of the first 5% of the participant's contribution and is invested in Company common stock. The Company's contributions become vested upon completion of five years of credited service. The employee and Company contributions are maintained by a trustee. Company contributions to the Plan, net of forfeitures, for the years ended June 30, 1999, 1998 and 1997 were approximately $998,000, $1,166,000 and $1,534,000, respectively. Note 13 - Share Repurchase Program In September 1998, the Company's Board of Directors authorized a common share repurchase program that provides for the Company to purchase, in the open market and through negotiated transactions, up to $2,000,000 of the Company's outstanding common stock. As of June 30, 1999, the Company had repurchased approximately 540,000 shares for an aggregate purchase price of $1,995,000. Note 14 - Shareholder Rights Plan In May 1997, the Board of Directors adopted a shareholder rights plan and declared a dividend of one common share purchase right (a "Right") for each outstanding share of Tandycrafts common stock. Each Right entitles the registered holder the right upon exercise to purchase from the Company, that number of common shares having a market value of two times the applicable exercise price. The exercise price was initially set at $30.00 and is subject to adjustment by the Board. The Rights will become exercisable ten business days after the earliest occurrence of: (i) a public announcement that a person or group of affiliated persons has acquired, or obtained the right to acquire, beneficial ownership of 15% or more of the outstanding common shares or (ii) the commencement of, or announcement of an intention to make, a tender offer or exchange offer, the consummation of which would result in the beneficial ownership by a person or group of 15% or more of such outstanding common shares. The Rights will expire on May 19, 2007, unless the expiration date is extended or unless the Rights are earlier redeemed by the Company. The Board of Directors may amend the terms of the Rights without consent of the holder of the Rights, including an amendment to extend or reduce the period during which the Rights are redeemable or exercisable. The Rights are not separately traded, are not currently exercisable and have no voting rights until exercised. The Board may redeem the Rights for $0.01 per Right at any time prior to the Rights becoming exercisable. Note 15 - Stock Option Plans The Tandycrafts, Inc. 1992 Stock Option Plan (the "Stock Option Plan") provides for the grant of options to purchase up to 1,400,000 shares of the Company's common stock by officers and key employees. Options granted under the Stock Option Plan may not have an option price less than the fair market value of common stock on the date of grant. Options are exercisable at rates of either 20% or 33-1/3% per year beginning at least one year after the date of grant and, if not exercised, expire ten years from the date of grant. The Tandycrafts, Inc. 1992 Director Stock Option Plan (the "Director Plan") provides for the grant of options to non-employee directors to purchase up to 240,000 shares of the Company's common stock. The Director Plan options are exercisable 33-1/3% at date of grant and 16-2/3% on the first, second, third and fourth anniversaries of the date of grant and, if not exercised, expire ten years from the date of grant. 32 A summary of stock option activity under these plans follows:
Weighted - Average Exercise Shares Price ----------- ----------- Options outstanding, June 30, 1996................ 1,076,000 $ 12.33 Options granted................ 712,700 $ 4.75 Options exercised.............. - $ - Options terminated............. (1,022,800) $ 12.29 ----------- ----------- Options outstanding, June 30, 1997................ 765,900 $ 5.33 Options granted................ - $ - Options exercised.............. - $ - Options terminated............. (38,200) $ 9.62 ----------- ----------- Options outstanding, June 30, 1998................ 727,700 $ 5.11 Options granted................ 132,500 $ 3.47 Options exercised.............. - $ - Options terminated............. (30,000) $ 9.23 ----------- ----------- Options outstanding, June 30, 1999................ 830,200 $ 4.70 =========== =========== Options exercisable, June 30, 1999................ 462,746 $ 5.01 =========== =========== Options available for future grant, June 30, 1999.. 809,800 ===========
A summary of stock options outstanding and exercisable at June 30, 1999 follows:
Options Outstanding Options Exercisable -------------------------------------------------- ----------------------------- Shares Weighted-Average Shares Range of Outstanding Remaining Weighted-Average Exercisable Weighted-Average Exercise Prices at 6/30/99 Contractual Life Exercise Price at 6/30/99 Exercise Price - --------------------- ----------- ------------------- ---------------- ----------- ---------------- $10.69 - 17.62 22,400 4.14 years $12.77 21,200 $12.78 $ 3.47 - 8.82 807,800 7.94 years $ 4.47 441,546 $ 4.64 ------- ------- $ 3.47 - 17.62 830,200 $ 4.70 462,746 $ 5.01
Pro forma information regarding net income and earnings per share is required by Statement of Financial Accounting Standards No. 123 "Accounting for Stock-based Compensation" ("FAS 123"), and has been determined as if the Company had accounted for its employee stock options under the fair value method of that statement. The 132,500 options granted during fiscal 1999 have a fair market value of approximately $266,000. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants: no expected dividends, expected volatility of 32.6%, risk free interest rate of 6.00% and expected lives of seven years each. A summary of stock option transactions under both the Company's stock option plan and information about fixed-price options is presented above. 33 For purposes of pro forma disclosures, the estimated fair value of options is amortized to expense over the vesting period. The Company's pro forma information is as follows (in thousands, except per share amounts):
1999 1998 1997 --------- --------- --------- Net income (loss): As reported $ (23,833) $ 4,617 $ (1,918) Pro forma $ (24,362) $ 4,161 $ (2,096) Income (loss) per common share - basic and diluted: As reported $ (1.96) $ 0.37 $ (0.15) Pro forma $ (2.00) $ 0.33 $ (0.17)
The effects of applying FAS No. 123 in this pro forma disclosure are not indicative of future amounts as the pro forma amounts above do not include the impact of stock option awards granted prior to fiscal 1996 and additional awards anticipated in future years. Note 16 - Industry Segment and Geographic Area Information The Company is a leading maker and marketer of consumer products, including frames and wall decor, office supplies, home furnishings and gift products. The Company's products are sold nationwide through wholesale distribution channels, including mass merchandisers and specialty retailers, and direct-to-consumer channels through the Company's retail stores, mail order and the Internet. Divested operations for fiscal 1999 include the operations of the Company's former Leather and Crafts division which were closed in fiscal 1999. Divested operations for fiscal 1998 include the operations of the Company's former Leather and Crafts division and Joshua's Christian Stores which was sold in fiscal 1998. Fiscal 1997 divested operations include those operations included in the fiscal 1998 divested operations plus all business units sold or closed as a result of the December 1995 restructuring and consolidation program. During fiscal 1999, 1998 and 1997, the Company had net sales of $35,913,000, $38,495,000 and $30,467,000, respectively, to one group of customers under common control. In addition, the Company also had sales in fiscal 1999 and 1998 of $20,483,000 and $24,133,000, respectively, to another group of customers under common control. The Company had no other individual customer or group of customers which accounted for more than 10% of the Company's total revenue. The Frames and Wall Decor and Gifts divisions, in the normal course of business, grant credit with the majority of their sales. Such receivables are generally not collateralized. The concentration of credit risk within these divisions may impact the Company's overall credit risk, either positively or negatively, in that these customers may be similarly affected by industry-wide changes in economic or other conditions. The Company performs ongoing credit evaluations of its customers' financial condition and has established an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customer and other information. Intersegment sales represent sales from one division to another. Operating income (loss) is divisional revenue less divisional operating expenses, which excludes corporate expenses, goodwill amortization, interest expense and taxes on income. Identifiable assets by division are those assets that are used in each division. Corporate assets are comprised of cash and short-term investments. 34 Segment information for each of the three years in the period ended June 30, 1999 is as follows (in thousands):
1999 Frames ---- and Office Home Divested Wall Decor Supplies Furnishings Gifts Operations Consolidated ------------ ------------ ------------- ------------ ------------ ------------ Total sales.............................. $ 96,004 $ 39,629 $ 6,036 $ 18,285 $ 34,874 $ 194,828 Intersegment sales....................... (46) (67) - (17) - (130) ------------ ------------ ------------- ------------ ------------ ------------ Net sales................................ $ 95,958 $ 39,562 $ 6,036 $ 18,268 $ 34,874 $ 194,698 ============ ============ ============= ============ ============ ============ Segment operating income (loss) (1)...... $ 12,128 $ 1,933 $ (602) $ (12,329) $ (20,314) $ (19,184) ============ ============ ============= ============ ============ Corporate expenses including goodwill amortization and interest expense, net.. (13,928) ------------ Income (loss) before income taxes (1).... $ (33,112) ============ Depreciation............................. $ 1,208 $ 803 $ 64 $ 546 $ 749 $ 3,370 Goodwill amortization.................... 535 4 - 374 44 957 ------------ ------------ ------------- ------------ ------------ ------------ Total depreciation and amortization...... $ 1,743 $ 807 $ 64 $ 920 $ 793 $ 4,327 ============ ============ ============= ============ ============ ============ Identifiable assets...................... $ 77,327 $ 15,191 $ 5,756 $ 16,028 $ 8,005 $ 122,307 ============ ============ ============= ============ ============ Corporate assets......................... 744 ------------ $ 123,051 ============ Capital expenditures..................... $ 8,153 $ 300 $ 32 $ 622 $ 216 $ 9,323 ============ ============ ============= ============ ============ ============ (1) Includes restructuring costs of $10,603 in Divested Operations for the Tandy Leather divestiture.
1998 Frames ---- and Office Home Divested Wall Decor Supplies Furnishings Gifts Operations Consolidated ------------ ------------ ------------- ------------ ------------ ------------ Total sales.............................. $ 93,560 $ 38,549 $ - $ 23,805 $ 76,863 $ 232,777 Intersegment sales....................... (51) (89) - (121) (21) (282) ------------ ------------ ------------- ------------ ------------ ------------ Net sales................................ $ 93,509 $ 38,460 $ - $ 23,684 $ 76,842 $ 232,495 ============ ============ ============= ============ ============ ============ Segment operating income (loss).......... $ 11,784 $ 1,878 $ - $ (110) $ 163 $ 13,715 ============ ============ ============= ============ ============ Corporate expenses including goodwill amortization and interest expense, net.. (6,596) ------------ Income before income taxes............... $ 7,119 ============ Depreciation............................. $ 1,146 $ 798 $ - $ 470 $ 1,414 $ 3,828 Goodwill amortization.................... 535 4 - 374 87 1,000 ============ ============ ============= ============ ============ ------------ Total depreciation and amortization...... $ 1,681 $ 802 $ - $ 844 $ 1,501 $ 4,828 ============ ============ ============= ============ ============ ============ Identifiable assets...................... $ 66,583 $ 14,964 $ - $ 28,543 $ 39,385 $ 149,475 ============ ============ ============= ============ ============ Corporate assets......................... 1,216 ------------ $ 150,691 ============ Capital expenditures..................... $ 1,314 $ 569 $ - $ 497 $ 1,150 $ 3,530 ============ ============ ============= ============ ============ ============ 1997 Frames ---- and Office Home Divested Wall Decor Supplies Furnishings Gifts Operations Consolidated ------------ ------------ ------------- ------------ ------------ ------------ Total sales.............................. $ 85,160 $ 35,781 $ - $ 26,594 $ 97,854 $ 245,389 Intersegment sales....................... (69) (181) - (163) (52) (465) ------------ ------------ ------------- ------------ ------------ ------------ Net sales................................ $ 85,091 $ 35,600 $ - $ 26,431 $ 97,802 $ 244,924 ============ ============ ============= ============ ============ ============ Segment operating income (loss).......... $ 11,590 $ 2,440 $ - $ (399) $ (7,403) $ 6,228 ============ ============ ============= ============ ============ Corporate expenses including goodwill amortization and interest expense, net.. (9,273) ------------ Income (loss) before income taxes........ $ (3,045) ============ Depreciation............................. $ 1,157 $ 862 $ - $ 544 $ 1,772 $ 4,335 Goodwill amortization.................... 535 4 - 374 126 1,039 ------------ ------------ ------------- ------------ ------------ ------------ Total depreciation and amortization...... $ 1,692 $ 866 $ - $ 918 $ 1,898 $ 5,374 ============ ============ ============= ============ ============ ============ Identifiable assets...................... $ 66,828 $ 12,539 $ - $ 29,369 $ 46,788 $ 155,524 ============ ============ ============= ============ ============ Corporate assets......................... 1,005 ------------ $ 156,529 ============ Capital expenditures..................... $ 1,325 $ 782 $ - $ 769 $ 918 $ 3,794 ============ ============ ============= ============ ============ ============
35 Note 17 - Quarterly Results (Unaudited) Summarized quarterly income statements (in thousands of dollars, except per share amounts) for the years ended June 30, 1999 and 1998 are set forth below:
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter ------------------- ------------------- ------------------- ------------------- 1999 1998 1999 1998 1999 1998 1999 1998 -------- -------- -------- -------- -------- -------- -------- -------- Net sales.......................... $ 51,065 $ 55,359 $ 52,853 $ 73,237 $ 50,253 $ 53,100 $ 40,527 $ 50,799 Costs and expenses: Cost of goods sold................ 34,791 35,834 39,476 48,702 36,061 35,766 29,197 33,182 Selling and administrative........ 13,077 15,932 20,354 17,665 15,094 14,935 15,593 14,650 Restructuring charge.............. - - 8,145 - - - - - Impairment of long-lived assets... - - - - - - 9,522 - Loss on sale of business unit..... - - - - - - - 623 Depreciation and amortization..... 1,079 1,270 1,088 1,259 1,117 1,254 1,043 1,045 -------- -------- -------- -------- -------- -------- -------- -------- Operating income (loss)............ 2,118 2,323 (16,210) 5,611 (2,019) 1,145 (14,828) 1,299 Interest expense, net.............. 492 862 591 911 517 841 573 645 -------- -------- -------- -------- -------- -------- -------- -------- Income (loss) before income taxes...................... 1,626 1,461 (16,801) 4,700 (2,536) 304 (15,401) 654 Provision (benefit) for income taxes...................... 618 512 (4,578) 1,644 (663) 106 (4,656) 240 -------- -------- -------- -------- -------- -------- -------- -------- Net income (loss).................. $ 1,008 $ 949 $(12,223) $ 3,056 $ (1,873) $ 198 $(10,745) $ 414 ======== ======== ======== ======== ======== ======== ======== ======== Net income (loss) per common share - basic and diluted.. $ 0.08 $ 0.08 ($1.00) $ 0.24 ($.16) $ 0.02 ($0.89) $ 0.03 ======== ======== ======== ======== ======== ======== ======== ========
Item 9. Changes In and Disagreements With Accountants on Accounting and - ------ --------------------------------------------------------------- Financial Disclosure - -------------------- None. 36 PART III -------- Item 10. Directors and Executive Officers of the Registrant - ------- -------------------------------------------------- The information required by this item with regard to executive officers is included in Part I, Item 4 of this report under the heading "Executive Officers of the Registrant", which information is incorporated herein by reference. The information required by this item regarding the Directors of the Company and compliance with Section 16(a) of the Securities Exchange Act of 1934 is set forth in the Company's Proxy Statement for its 1999 Annual Meeting of Stockholders (the "Proxy Statement") under the heading "Election Of Directors", which information is incorporated herein by reference. Such Proxy Statement will be filed with the Commission pursuant to Regulation 14A within 120 days of the fiscal year ended June 30, 1999. Item 11. Executive Compensation - ------- ---------------------- The information concerning executive compensation is set forth in the Proxy Statement under the heading "Executive Compensation", which is incorporated herein by reference. Such Proxy Statement will be filed with the Commission pursuant to Regulation 14A within 120 days of the fiscal year ended June 30, 1999. Item 12. Security Ownership of Certain Beneficial Owners and Management - ------- -------------------------------------------------------------- The information concerning security ownership of certain beneficial owners and management is set forth in the Proxy Statement under the heading "Security Ownership of Certain Beneficial Owners and Management", which information is incorporated herein by reference. Such Proxy Statement will be filed with the Commission pursuant to Regulation 14A within 120 days of the fiscal year ended June 30, 1999. Item 13. Certain Relationships and Related Transactions - ------- ---------------------------------------------- The information concerning relationships and related transactions is set forth in the Proxy Statement under the heading "Executive Compensation - Transactions With Management and Directors", which information is incorporated herein by reference. Such Proxy Statement will be filed with the Commission pursuant to Regulation 14A within 120 days of the fiscal year ended June 30, 1999. PART IV ------- Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K - ------- --------------------------------------------------------------- (a) The following financial statements, schedules and exhibits are filed as part of this report. (1) Financial Statements and Financial Statement Schedules - See Index to Financial Statements at Item 8 on page 18 of this report. (b) Reports on Form 8-K: The Company filed a Current Report on Form 8-K, on May 5, 1999, which included the contents of a press release announcing the elevation of James D. Allen to the position of executive vice president and chief operating officer and the naming of Michael J. Murray as treasurer and Troy A. Huseman as controller. The Company filed a Current Report on Form 8-K, on June 11, 1999 which included the contents of a press release announcing plans to reorganize its Pinnacle Art & Frame unit. 37 The Company filed a Current Report on Form 8-K, on June 24, 1999, which included the contents of a press release announcing it had reacquired Fort Worth-based Cargo Furniture & Accents, a leading national manufacturer and seller of children's and casual furniture and accessories. The Company filed a Current Report on Form 8-K, on June 25, 1999, which included the contents of a press release announcing it had added retail industry veteran Colon O. Washburn as a new board member. The Company filed a Current Report on Form 8-K, on July 14, 1999, which included the contents of a press release announcing that it had welcomed Mexican President Ernesto Zedillo Ponce de Leon and a host of other dignitaries during an opening celebration at the Company's new manufacturing facility in Durango, Mexico. The Company filed a Current Report on Form 8-K, on August 17, 1999, which included the contents of a press release announcing the unaudited results of operations for three months period and fiscal year ended June 30, 1999. (c) Exhibits: A list of the exhibits required by Item 601 of regulation S-K to be filed as part of this report is set forth in the Index to Exhibits, which immediately precedes such exhibits, and is incorporated herein by reference. (d) Not applicable. ____________________ 38 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TANDYCRAFTS, INC. (Registrant) September 28, 1999 By: /s/ Michael J. Walsh -------------------------------- Michael J. Walsh President and Chief Executive Officer and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on this 28th day of September, 1999, by the following persons on behalf of the Registrant and in the capacities indicated. /s/ R. E.. Cox III -------------------------------- R. E.. Cox III Chairman of the Board /s/ James D. Allen -------------------------------- James D. Allen Executive Vice President and Chief Operating Officer (Chief Financial Officer) /s/ Troy A. Huseman -------------------------------- Troy A. Huseman Controller and Chief Accounting Officer /s/ Joe K. Pace -------------------------------- Joe K. Pace Director /s/ Sheldon I. Stein -------------------------------- Sheldon I. Stein Director /s/ Colon O. Washburn -------------------------------- Colon O. Washburn Director /s/ Michael J. Walsh -------------------------------- Michael J. Walsh President and Chief Executive Officer and Director 39 Schedule II TANDYCRAFTS, INC. AND SUBSIDIARIES Valuation and Qualifying Accounts and Reserves (In thousands)
Year ended June 30, ---------------------------------------- 1999 1998 1997 ---------- ---------- ---------- Allowance for doubtful accounts: Balance, beginning of year $ 2,755 $ 1,680 $ 790 Additions charged to profit and loss 1,000 1,644 1,971 Accounts receivable charged off, net of recoveries (1,295) (569) (1,081) ---------- ---------- ---------- Balance, end of year $ 2,460 $ 2,755 $ 1,680 ========== ========== ==========
40 TANDYCRAFTS, INC. Index to Exhibits Filed with the Annual Report on Form 10-K for the year ended June 30, 1999. Exhibit Number Description - ------ ----------- 3.1 Certificate of Incorporation (1) 3.2 Amended and Restated Bylaws of the Company (8) 3.3 Certificate of Amendment of Certificate of Incorporation dated December 7, 1992 (3) 3.4 Amended Bylaws of the Company (12) 10.1 * Executive Officers Incentive Bonus Plan (8) 10.2 * The Tandycrafts, Inc. 1992 Stock Option Plan (2) 10.3 * The Tandycrafts, Inc. 1992 Director Stock Option Plan (2) 10.4 * Form of Stock Option Agreement used to evidence stock options granted under the Tandycrafts, Inc. 1992 Stock Option Plan (3) 10.5 * Form of Stock Option Agreement used to evidence stock options granted under the Tandycrafts, Inc. 1992 Director Stock Option Plan (3) 10.6 * Amended and Restated Tandycrafts, Inc. ESOP Benefit Restoration Plan (8) 10.7 Revolving Credit and Term Loan Agreement (4) 10.8 * Amendment to the Tandycrafts, Inc. 1992 Stock Option Plan (5) 10.9 * Amended Tandycrafts, Inc. 1992 Director Stock Option Plan (6) 10.10 Second Amendment to Revolving Credit and Term Loan Agreement (7) 10.11 Third Amendment to Revolving Credit and Term Loan Agreement (8) 10.12 Fourth Amendment to Revolving Credit and Term Loan Agreement (8) 10.13 Fifth Amendment to Revolving Credit and Term Loan Agreement (9) 10.14 Sixth Amendment to Revolving Credit and Term Loan Agreement (10) 10.15 Seventh Amendment to Revolving Credit and Term Loan Agreement (11) 10.16 Eighth Amendment to Revolving Credit and Term Loan Agreement (13) 10.17 Form of Rights Agreement used to evidence the stock rights granted by the Board Directors on May 16, 1997 as a dividend to share holders of record as of May 29, 1997 (12) 10.18 Ninth Amendment to Revolving Credit and Term Loan Agreement (14) 10.19 Tenth Amendment to Revolving Credit and Term Loan Agreement (15) 10.20 Eleventh Amendment to Revolving Credit and Term Loan Agreement (15) 10.21 Twelfth Amendment to Revolving Credit and Term Loan Agreement (16) 10.22 Revolving Credit and Term Loan Agreement (17) 21 # Subsidiaries of the Registrant 23 # Consent of Independent Accountants 27 # Financial Data Schedule (filed electronically only) _______________________ # Filed herewith. * Indicates management compensatory plan, contract or arrangement. (1) Filed with the Commission as an Exhibit to the Company's Form S-1 Registration Statement (No. 2-54086) and incorporated herein by reference. (2) Filed with the Commission as an Exhibit to the Company's Definitive Proxy Statement dated October 5, 1993, which Proxy Statement was filed with the Commission as an Exhibit to the Company's Annual Report on Form 10-K for the year ended June 30, 1993. Such Exhibit is incorporated herein by reference. (3) Filed with the Commission as an Exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1993, and incorporated herein by reference. (4) Filed with the Commission as an Exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993, and incorporated herein by reference. (5) Filed with the Commission as an Exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1994, and incorporated herein by reference. (6) Filed with the Commission as an Exhibit to the Company's Definitive Proxy Statement dated October 3, 1994, which Proxy Statement was filed with the Commission as an Exhibit to the Company's Annual Report on Form 10-K for the year ended June 30, 1994. (7) Filed with the Commission as an Exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994, and incorporated herein by reference. (8) Filed with the Commission as an Exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1995 and incorporated herein by reference. (9) Filed with the Commission as an Exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1996 and incorporated herein by reference. (10) Filed with the Commission as an Exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, and incorporated herein by reference. (11) Filed with the Commission as an Exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1996, and incorporated herein by reference. (12) Filed with the Commission as a Exhibit to the Company's Form 8-K, dated May 22, 1997 and incorporated herein by reference. (13) Filed with the Commission as an Exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1997 and incorporated herein by reference. (14) Filed with the Commission as an Exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1997, and incorporated herein by reference. (15) Filed with the Commission as an Exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1998 and incorporated herein by reference. (16) Filed with the Commission as an Exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1998, and incorporated herein by reference. (17) Filed with the Commission as an Exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999, and incorporated herein by reference. EX-21 2 SUBSIDIARIES OF TANDYCRAFTS, INC. EXHIBIT 21 ---------- TANDYCRAFTS, INC. Significant Subsidiaries of Tandycrafts, Inc. as of June 30, 1999
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. Cargo Furniture, Inc. Cargo Furniture Nevada, U.S.A. Tandycrafts de Mexico, SA de C.V. Magee Mexico Durango, Mexico
Each of the corporations listed is a direct subsidiary of Tandycrafts, Inc., which owns 100% of the voting securities of each, except for TAC Holdings, Inc. which is 100% owned by Tandycrafts, Inc. and its various subsidiaries. Each of the above subsidiaries is included in the Tandycrafts, Inc. Consolidated Financial Statements for fiscal 1999. EX-23 3 CONSENT OF INDEPENDENT ACCOUNTANTS EXHIBIT 23 TANDYCRAFTS, INC. Consent of Independent Accountants We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No's. 33-85550, 33-85548 and 33-57525) of Tandycrafts, Inc., of our report dated August 10, 1999 relating to the financial statements, which appears on page 20 in this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report dated August 10, 1999 relating to the financial statement schedules, which appears in this Form 10-K. PricewaterhouseCoopers LLP Fort Worth, Texas September 28, 1999 EX-27 4 FINANCIAL DATA SCHEDULE
5 1,000 YEAR JUN-30-1999 JUL-01-1998 JUN-30-1999 744 0 23,243 2,460 35,026 63,541 56,250 26,690 123,051 28,455 0 0 0 18,528 44,397 123,051 194,698 194,698 139,525 225,637 0 0 2,589 (33,112) (9,279) (23,833) 0 0 0 (23,833) (1.96) (1.96)
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