-----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, UX1hJgpThkA48MfPcnMgFwcNh/4YqrndzmWGeFphEBnrCZBXASIGDw1aBv8nuSRY hcMC1fznAk3IPz+L5+97UQ== 0000096294-99-000012.txt : 19990217 0000096294-99-000012.hdr.sgml : 19990217 ACCESSION NUMBER: 0000096294-99-000012 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990216 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-Q SEC ACT: SEC FILE NUMBER: 001-07258 FILM NUMBER: 99540963 BUSINESS ADDRESS: STREET 1: 1400 EVERMAN PKWY CITY: FORT WORTH STATE: TX ZIP: 76140 BUSINESS PHONE: 8175519600 MAIL ADDRESS: STREET 1: 1400 EVERMAN PKWY CITY: FORT WORTH STATE: TX ZIP: 76140 10-Q 1 SECOND QUARTER 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended December 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from ______________ to ________________ Commission File Number 1-7258 TANDYCRAFTS, INC. (Exact name of registrant as specified in its charter) Delaware 75-1475224 (State of incorporation) (I.R.S. Employer Identification Number) 1400 Everman Parkway, Fort Worth, Texas 76140 (Address of principal executive offices) (Zip Code) (817) 551-9600 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No___. ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Shares outstanding as of January 31, 1999 - ----------------------------- ----------------------------------------- Common Stock, $1,00 par value 12,046,717 TANDYCRAFTS, INC. Form 10-Q Quarter Ended December 31, 1998 TABLE OF CONTENTS PART 1 - FINANCIAL INFORMATION Item Page No. - ---- -------- 1. Condensed Consolidated Financial Statements.................. 3-9 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................ 10-17 PART II - OTHER INFORMATION 4. Submission of Matters to a Vote of Security Holders...................................................... 18 6. Exhibits and Reports on Form 8-K............................. 18 Signatures................................................... 19 PART I ------ Item 1. Financial Statements -------------------- TANDYCRAFTS, INC. Condensed Consolidated Statements of Operations (In thousands, except per share amounts) (Unaudited) Three Months Ended Six Months Ended December 31, December 31, ----------------------- ------------------------- 1998 1997 1998 1997 ---------- ---------- ---------- ----------- Net sales $ 52,853 $ 73,237 $ 103,918 $ 128,596 ---------- ---------- ---------- ----------- Operating costs and expenses: Cost of goods sold 39,476 48,702 74,267 84,536 Selling, general and 20,354 17,665 33,431 33,597 administrative Restructuring charges 8,145 - 8,145 - Depreciation and amortization 1,088 1,259 2,167 2,529 Total operating costs and expenses 69,063 67,626 118,010 120,662 Operating income (loss) (16,210) 5,611 (14,092) 7,934 Interest expense, net 591 911 1,083 1,773 Income (loss) before provision for income taxes (16,801) 4,700 (15,175) 6,161 Provision (benefit) for income taxes (4,578) 1,644 (3,960) 2,156 Net income (loss) $ (12,223) $ 3,056 $ (11,215) $ 4,005 ========== ========== ========== ========== Net income (loss) per share - basic and diluted $ (1.00) $ 0.24 $ (0.91) $ 0.32 ========= ========== ========= ========== Weighted average common shares Basic 12,179 12,685 12,326 12,661 Diluted 12,184 12,685 12,330 12,661
TANDYCRAFTS, INC. Condensed Consolidated Balance Sheets (Dollars in thousands) (Unaudited) December 31, June 30, 1998 1998 ------------ ----------- ASSETS - ------ Current assets: Cash $ 1,013 $ 1,216 Trade accounts receivable, net of allowance for doubtful accounts of $3,300 and $2,755, respectively 24,066 28,086 Inventories 43,274 45,990 Other current assets 8,655 7,785 ------------ ----------- Total current assets 77,008 83,077 ------------ ----------- Property and equipment, at cost 49,611 46,327 Accumulated depreciation (26,142) (23,441) ------------ ----------- Property and equipment, net 23,469 22,886 ------------ ----------- Other assets 5,887 6,929 Goodwill 33,375 37,799 ------------ ----------- $ 139,739 $ 150,691 ============ =========== LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ Current liabilities: Accounts payable 10,114 12,155 Accrued liabilities and other 18,574 12,520 ------------ ----------- Total current liabilities 28,688 24,675 ------------ ----------- Long-term debt 32,500 34,230 Deferred income taxes 2,822 2,822 Stockholders' equity: Common stock, $1 par value, 50,000,000 shares authorized, 18,527,988 shares issued 18,528 18,528 Additional paid-in capital 20,545 20,545 Retained earnings 60,859 72,074 Cost of stock in treasury, 6,464,416 shares and 5,917,419 shares, respectively (24,203) (22,183) ------------ ----------- Total stockholders' equity 75,729 88,964 ------------ ----------- $ 139,739 $ 150,691 ============ =========== TANDYCRAFTS, INC. Condensed Consolidated Statements of Cash Flows (In thousands) (Unaudited) Six Months Ended December 31, -------------------------- 1998 1997 ---------- ---------- Net cash flows from operating activities $ 7,108 $ (4,116) ---------- ---------- Cash flows from investing activities: Additions to property and equipment, net (3,561) (2,066) ---------- ---------- Net cash used for investing activities (3,561) (2,066) ---------- ---------- Cash flows from financing activities: Sales of treasury stock to employee benefit program, net - 448 Purchases of treasury stock (2,020) - Borrowings (payments) under bank credit facility, net (1,730) 5,220 ---------- ---------- Net cash provided (used) by financing activities (3,750) 5,668 ---------- ---------- Decrease in cash (203) (514) Balance, beginning of period 1,216 1,005 ---------- ---------- Balance, end of period $ 1,013 $ 491 ========== ========== TANDYCRAFTS, INC. Condensed Consolidated Statement of Stockholders' Equity (Dollars in thousands) (Unaudited) Additional Common paid-in Retained Treasury stock capital Earnings stock Total -------- -------- -------- -------- -------- Balance, June 30, 1998 $ 18,528 $ 20,545 $ 72,074 $(22,183) $ 88,964 Purchase of 546,997 shares of treasury stock - - - (2,020) (2,020) Net income (loss) for six months ended December 31, 1998 - - (11,215) - (11,215) -------- -------- -------- -------- -------- Balance, December 31, 1998 $ 18,528 $ 20,545 $ 60,859 $(24,203) $ 75,729 ======== ======== ======== ======== ========
TANDYCRAFTS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - BASIS OF FINANCIAL STATEMENTS The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, the accompanying condensed consolidated financial statements contain all adjustments (consisting of normal recurring accruals) necessary for a fair statement of the Company's financial position as of December 31, 1998 and June 30, 1998, and the results of operations and cash flows for the six-month periods ended December 31, 1998 and December 31, 1997. The results of operations for the three and six-month periods ended December 31, 1998 and 1997 are not necessarily indicative of the results to be expected for the full fiscal year. The consolidated financial statements should be read in conjunction with the financial statement disclosures contained in the Company's 1998 Annual Report to Stockholders. NOTE 2 - INVENTORIES The components of inventories at December 31, 1998 consisted of the following (in thousands): Merchandise held for sale $ 31,080 Raw materials and work-in-process 12,194 --------- $ 43,274 ========= NOTE 3 - EARNINGS PER SHARE Basic earnings per share is computed by dividing income available to common shareholders by the weighted-average common shares outstanding. Since the Company has no outstanding preferred stock, income available to shareholders is equal to the Company's net income. Diluted earnings per share is computed by dividing the income available to shareholders by the weighted-average common shares and potentially dilutive common shares outstanding during the period. For the three and six-month periods ending December 31, 1998 and 1997, the number of weighted average shares and potentially dilutive common shares is as follows (in thousands): Three Months Ended Six Months Ended December 31, December 31, ----------------- ---------------- 1998 1997 1998 1997 ------- ------- ------- ------- Weighted average shares - basic 12,179 12,685 12,326 12,661 Potentially dilutive shares 5 - 4 - ------- ------- ------- ------- Total weighted average common and potentially dilutive shares - diluted 12,184 12,685 12,330 12,661 ======= ======= ======= ======= NOTE 4 - 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 million of the Company's outstanding common stock. As of December 31, 1998, the Company had repurchased approximately 496,000 shares for an aggregate purchase price of $1,861,000. NOTE 5 - ACCOUNTS 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 December 31, 1998, was $12,000,000. The maximum amount of receivables that can be sold is seasonally adjusted. At December 31, 1998, the amount of trade accounts receivable outstanding which had been sold approximated $7,906,000. 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 $122,000 and $184,000 for the three and six-month periods ended December 31, 1998, respectively. The Company, as agent for the purchaser of the receivables, retains collection and administrative responsibilities for the purchased receivables. NOTE 6 - 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 operating business segments. The divestiture plan calls for all retail stores and related manufacturing operations to be closed by 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 liquidation value and is included in cost of sales on the Condensed Consolidated Statements of Operations. Approximately $8,145,000 of the charges related to the write-down of assets and anticipated future cash outlays and is classified as restructuring charge on the Condensed Consolidated Statements of Operations. Approximately $5,441,000 of the restructuring charge related to non-cash write- downs of assets to their estimated net realizable value, including $3,923,000 related to the write-down of goodwill, $1,313,000 related to the write-down of fixed assets (primarily comprised of store fixtures and leasehold improvements and manufacturing equipment all of which will be abandoned or sold), 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 exit costs. The following table sets forth the activity in the restructuring reserve, which is included in current accrued liabilities in the December 31, 1998 balance sheet (in thousands): Lease obligations $ 2,346 Other 358 -------- $ 2,704 ======== 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 $2,961,000) for the operations to be divested are set forth below (in thousands): Three months ended Six months ended December 31, December 31, --------------------- ---------------------- 1998 1997 1998 1997 ---------- --------- --------- ---------- Sales $ 10,758 $ 13,472 $ 20,185 $ 24,977 Operating income (loss) (4,926) 384 (5,475) 506 NOTE 7 - SUBSEQUENT EVENT 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 investment capital from several sources to expedite the chain's conversion of their mall-based furniture stores to their new, higher performing Cargo Collection Store concept. To date, Cargo has opened eight of the Cargo Collection Stores and seen promising results from these stores. However, due to Cargo's limited capital resources and the poor performance of their mall-based stores, Cargo determined that it required a capital infusion to complete the conversion process. In December, 1998, Cargo informed the Company that they were 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 defaulted on its term note and Cargo's lender required the Company to perform pursant to its guaranty of this note. On February 1, 1999, the Company complied with the lender's request. As a result of this payment, the Company has the option to obtain a majority of Cargo's common stock, thereby obtaining voting control of Cargo. As such, the Company will begin to consolidate the results of operations of Cargo. Due to Cargo's poor financial condition, the Company determined that recovery of the $2,481,000 note balance and the receivables from Cargo was unlikely. Loss provisions of $3,465,000 were recorded as selling, general and administrative expenses in the December 31, 1998 financial statements. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations --------------------- GENERAL Tandycrafts, Inc. ("Tandycrafts" or the "Company") markets consumer products through four distinct product-related operating divisions: Frames and Wall Decor, Leather and Crafts, Office Supplies, and Novelties and Promotional. The Company's products are marketed and sold through various channels, including direct-to-consumer (e.g., retail stores, mail order, the Internet) and wholesale distribution (e.g., direct sales force, telemarketing and outside sales representatives). During the quarter ended December 31, 1998, the Company adopted a plan of closing its leather and crafts retail stores and related manufacturing operations. These divested operations comprise substantially all of the operations within the Company's Leather and Crafts operating division. Certain statements in this discussion, other filings with the Securities and Exchange Commission and other Company statements are not historical facts but are forward-looking statements. The words "believes," "expects," "estimates," "projects," "plans," "could," "may," "anticipates," or the negative thereof or other variations or similar terminology, or discussions of strategies or plans identify forward-looking statements. These forward-looking statements reflect the Company's reasonable judgments with respect to future events and are subject to risks and uncertainties that could cause actual results to differ materially from such forward-looking statements. These risks and uncertainties include, but are not limited to, the Company's ability to reduce costs through the consolidation of certain operations, customers' willingness, need, demand and financial ability to purchase the Company's products, new business opportunities, the successful development and introduction of new products and the successful development of new retail stores, the successful implementation of new information systems, the development of direct import programs and foreign manufacturing facilities, relationships with key customers, relationships with professional sports leagues and other licensors, the possibility of players' strikes in professional sports leagues, price fluctuations for commodities such as lumber, paper, leather and other raw materials, seasonality of the Company's operations, effectiveness of promotional activities, changing business strategies and intense competition in retail operations. Additional factors include economic conditions such as interest rate fluctuations, consumer debt levels, changing consumer demand and tastes, competitive products and pricing, availability of products, inventory risks due to shifts in market demand, regulatory and trade environment and other factors or risks. The following table presents selected financial data for each of the Company's three continuing product divisions and divested operations for the three and six-month periods ended December 31, 1998 and 1997 (in thousands): Three Months Ended December 31, ----------------------------------------- 1998 1997 % Increase (Decrease) ------------------- -------------------- ------------------- Operating Operating Operating Income Income Income Sales (loss) Sales (loss) Sales (loss) -------- -------- -------- -------- -------- -------- Frames and Wall Decor $ 28,152 $ 3,980 $ 32,825 $ 4,891 (14.2)% (18.6)% Office Supplies 9,779 278 9,668 309 1.1 (10.0) Novelties and Promotional 4,164 (202) 6,113 244 (31.9) (182.8) -------- -------- -------- -------- ----- ------ 42,095 4,056 48,606 5,444 (13.4) (25.5) Divested operations 10,758 (5,054) 24,631 1,409 (56.3) (458.7) Restructuring charge - (8,145) - - - (100.0) -------- -------- -------- -------- ----- ------ Total operations, Excluding corporate $ 52,853 $ (9,143) $ 73,237 $ 6,853 (27.8)% (233.4)% ======== ======== ======== ======== ===== ====== Six Months Ended December 31, ----------------------------------------- 1998 1997 % Increase (Decrease) ------------------- ------------------- ------------------- Operating Operating Operating Income Income Income Sales (loss) Sales (loss) Sales (loss) -------- -------- -------- -------- -------- -------- Frames and Wall Decor $ 54,534 $ 7,345 $ 53,165 $ 6,883 2.6% 6.7% Office Supplies 20,844 930 20,267 912 2.8 2.0 Novelties and Promotional 8,355 (221) 12,101 723 (31.0) (130.6) -------- -------- -------- -------- ----- ------ 83,733 8,054 85,533 8,518 (2.1) (5.4) Divested operations 20,185 (5,603) 43,063 1,352 (53.1) (514.4) Restructuring charge - (8,145) - - - (100.0) -------- -------- -------- -------- ----- ------ Total operations, Excluding corporate $103,918 $ (5,694) $128,596 $ 9,870 (19.2)% (157.7)% ======== ======== ======== ======== ===== ======
RESULTS OF OPERATIONS Consolidated net sales decreased $20,384,000, or 27.8%, and $24,678,000, or 19.2%, respectively, for the three and six-month periods ended December 31, 1998, as compared to the same periods of the prior year. Excluding divested operations, consolidated net sales decreased $6,511,000, or 13.4%, and $1,800,000, or 2.1%, respectively, for the three and six-month periods ended December 31, 1998 compared to last year. The Company experienced operating losses before corporate expenses of $9,143,000 and $5,694,000, respectively, for the three and six-month periods ended December 31, 1998, compared to operating income of $6,853,000 and $9,870,000, respectively, for the same periods last year. Excluding divested operations and restructuring charges, operating income decreased $1,388,000, or 25.5%, and $464,000, or 5.4%, respectively, for the three and six-month periods ended December 31, 1998, compared to the same periods of the previous year. Discussions relative to each of the Company's product divisions are set forth below. Frames and Wall Decor Net sales at the Frames and Wall Decor division decreased $4,673,000, or 14.2%, for the three months ended December 31, 1998; however, as a result of a strong first quarter of fiscal 1999, sales for the six months ended December 31, 1998 increased $1,369,000, or 2.6%, compared to last year. The decrease in sales for the three-month period is primarily due to a shift in the timing of shipments between the first and second quarters of fiscal 1998 compared to the previous year and to a large one-time promotional order in the second quarter of fiscal 1998 which was not repeated in the current year. The sales increase for the six-month period primarily reflects the increase in sales of framed art to existing customers. Operating income for the Frames and Wall Decor division decreased $911,000, or 18.6%, for the quarter ended December 31, 1998, but increased $462,000, or 6.7%, for six-month periods then ended, compared to same periods last year. The decrease in operating income for the quarter is a result of the lower sales volume compared to the prior year quarter. For the six-month period, gross margin as a percent of sales increased one percentage point due to improved operating efficiencies and decreases in lumber prices from the prior year. The increase in the gross margin percentage combined with the increase in sales volume for the six months resulted in an increase in gross margin dollars of approximately $1,276,000. Selling, General and Administrative ("SG&A") expenses increased $854,000, or 14.4%, over the six months primarily due to increased marketing and product development costs related to the framed art program. SG&A expenses as a percent of sales increased to 12.4% for the six month period ended December 31, 1998 compared to 11.2% for the same period last year. Office Supplies Sav-On Office Supplies' net sales increased $111,000, or 1.1%, and $577,000, or 2.8%, respectively, for the three and six-month periods ended December 31, 1998, compared to the same periods last year. Same store sales for the two periods of fiscal 1999 increased less than one percent due primarily to increased competition in Sav-On's existing markets. Sales were positively impacted by four stores which were opened during the first six months of fiscal 1998 being open for a full six months in the current year. Sav-On's operating income decreased $31,000, or 10.0%, for the quarter, but increased $18,000, or 2.0%, for the six-month period ended December 31, 1998, compared to the same periods last year. Gross margin as a percent of sales decreased 0.9 points and 1.5 points, respectively, for the three and six-month periods primarily due to a change in sales mix, with lower-margin office equipment and promotional merchandise comprising a larger percentage of total sales. SG&A expenses were flat for the quarter but decreased $70,000, or 1.1%, for the six month period compared to the same periods of the prior year. SG&A expenses as a percent of sales decreased to 29.8% from 30.9% in the prior year six month period. Novelties and Promotional Net sales for the Novelties and Promotional division decreased $1,949,000, or 31.9%, and $3,746,000, or 31.0%, respectively for the three and six-month periods ended December 31, 1998, compared to the same periods last year. The decrease in net sales reflects a generally weaker market for sports-licensed novelty products, with weaker Major League Baseball and National Football League "hot market" sales and the National Basketball Association lock-out, as well as a conscious effort to reposition this division's business to focus on larger, more profitable customers. The Novelties and Promotional division had operating losses of $202,000 and $221,000, respectively, for the three and six month periods ended December 31, 1998 compared to income of $244,000 and $723,000, respectively, for the same periods last year. Gross margin dollars and gross margin as a percent of sales for this division decreased for both periods of fiscal 1999 due to the decrease in sales with relatively fixed manufacturing overhead costs. SG&A expenses decreased $400,000 and $520,000, respectively, for the three and six-month periods primarily due to a reduction in labor and administrative costs. Divested Operations Divested operations at December 31, 1998 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 the divested operations for the two periods ending December 31, 1997 also includes Joshua's Christian Stores which the Company sold effective May 31, 1998. For the three and six month periods ended December 31, 1998, net sales of the leather and crafts operations decreased $2,714,000, or 20.1%, and $4,792,000, or 19.2%, respectively. The leather and crafts operations had operating losses of $4,926,000 and $5,475,000, respectively, for the three and six-month periods ended December 31, 1998 compared to operating income of $384,000 and $506,000, respectively, for the same periods of the prior year. Both periods of fiscal 1999 include a charge of $2,961,000 to write-down inventory of the leather operations to its liquidation value. 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 operating business segments. The divestiture plan calls for all retail stores and related manufacturing operations to be closed by 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 liquidation value and is included in cost of sales on the Condensed Consolidated Statements of Operations. Approximately $8,145,000 of the charges related to the write-down of assets and anticipated future cash outlays and is classified as restructuring charge on the Condensed Consolidated Statements of Operations. Approximately $5,441,000 of the restructuring charge related to non-cash write- downs of assets to their estimated net realizable value, including $3,923,000 related to the write-down of goodwill, $1,313,000 related to the write-down of fixed assets (primarily comprised of store fixtures and leasehold improvements and manufacturing equipment all of which will be abandoned or sold), 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 exit costs. The following table sets forth the activity in the restructuring reserve, which is included in current accrued liabilities in the December 31, 1998 balance sheet (in thousands): Lease obligations $ 2,346 Other 358 -------- $ 2,704 ======== The above provisions are estimates based on the Company's judgment at this time. Adjustments to the restructuring provisions may be necessary in the future based on further development of restructuring related costs. Although no additional restructuring plans are currently under consideration, the Company continues to evaluate possible actions which will improve the profitability and competitive position of the Company. Revenues and operating losses (before restructuring charges, but including the inventory write-down charge of $2,961,000) for the operations to be divested are set forth below (in thousands): Three months ended Six months ended December 31, December 31, --------------------- ----------------------- 1998 1997 1998 1997 ---------- --------- ---------- ---------- Sales $ 10,758 $ 13,472 $ 20,185 $ 24,977 Operating income (loss) (4,926) 384 (5,475) 506 Selling, general and administrative expenses Consolidated selling, general and administrative (SG&A) expenses were 38.5% and 32.2%, as a percent of sales, for the three and six-month periods ended December 31, 1998, respectively, compared to 24.1% and 26.2% for the corresponding periods last year. In total dollars, SG&A expenses increased $2,689,000, or 15.2%, for the three-month period ended December 31, 1998, but decreased $166,000, or 0.5%, for the six-month period ended December 31, 1998, compared to the corresponding periods last year. The increase in SG&A expense for the three-month period is primarily attributable to the $3,465,000 expense recognized during the quarter related to the Company's performance under the Cargo note guaranty and the write-down of other amounts receivable from Cargo. For the six-month period, the increase in SG&A expense due to the Cargo charges was offset by decreases resulting from the elimination of expenses related to operations discontinued in fiscal 1998 and to tighter expense controls. Interest expense, net Interest expense decreased $320,000, or 35.1%, and $690,000, or 38.9%, for the three and six-month periods ended December 31, 1998, respectively, compared to the corresponding periods of the prior year. These decreases are primarily due to $170,000 and $340,000 of interest income recognized during the three and six-month periods ended December 31, 1998, respectively, and to lower average borrowings during the current year. Depreciation and amortization Consolidated depreciation and amortization decreased $171,000, or 13.6%, and $362,000, or 14.3%, for the three and six-month periods ended December 31, 1998, respectively, compared to the corresponding periods last year. The decrease is due primarily due to the divestiture of Joshua's during fiscal 1998. SUBSEQUENT EVENT 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 investment capital from several sources to expedite the chain's conversion of their mall-based furniture stores to their new, higher performing Cargo Collection Store concept. To date, Cargo has opened eight of the Cargo Collection Stores and seen promising results from these stores. However, due to Cargo's limited capital resources and the poor performance of their mall-based stores, Cargo determined that it required a capital infusion to complete the conversion process. In December, 1998, Cargo informed the Company that they were 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 defaulted on its term note and Cargo's lender required the Company to perform pursant to its guaranty of this note. On February 1, 1999, the Company complied with the lender's request. As a result of this payment, the Company has the option to obtain a majority of Cargo's common stock, thereby obtaining voting control of Cargo. As such, the Company will begin to consolidate the results of operations of Cargo. Due to Cargo's poor financial condition, the Company determined that recovery of the $2,481,000 note balance and the receivables from Cargo was unlikely. Loss provisions of $3,465,000 were recorded as selling, general and administrative expenses in the December 31, 1998 financial statements. The Company is currently evaluating the best course of action of the Company with respect to Cargo. LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of liquidity have come from cash flows from operations. These funds have been used primarily for capital expenditures, to repurchase the Company's common stock and to repay borrowings under the Company's revolving credit facility. During the six-months ended December 31, 1998, cash decreased $203,000. Cash provided by operating activities of $7,108,000 primarily resulted from improved working capital management and profitability (net of non-cash write-downs). Cash used for investing activities of $3,561,000 resulted primarily from capital expenditures for property and equipment. Cash of approximately $3,750,000 was used by financing activities for repayments of borrowings under the Company's revolving credit facility and for repurchases of the Company's common stock. The Company has a $50 million revolving credit facility with a group of banks. The credit facility is a two-year revolving line of credit renewable annually. Effective September 30, 1997, the Company's revolving credit facility was renewed by its banks and the maturity was extended to October 31, 1999. Effective February 9, 1999, the revolving credit facility was amended to extend the maturity to January 31, 2000, and to change certain provisions, restrictions and covenants under the facility as of December 31, 1998, to allow the restructuring plan approved in the quarter then ended to occur without placing the Company in default. The Company and the banks are currently negotiating a new credit facility which the Company expects to finalize by March 1999 on essentially the same terms as the existing 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 December 31, 1998, the Company would have had to pay approximately $378,000 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 also 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 December 31, 1998, was $12,000,000. The maximum amount of receivables that can be sold is seasonally adjusted. At December 31, 1998, the amount of trade accounts receivable which had been sold approximated $7,906,000. 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 $122,000 and $184,000 for the three and six month periods ended December 31, 1998, respectively, and are included in SG&A expense in the accompanying Consolidated Statements of Operations. 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 million of the Company's outstanding common stock. As of December 31, 1998, the Company had repurchased approximately 496,000 shares for an aggregate purchase price of $1,861,000. Cash of approximately $3,561,000 was used for capital expenditures during the six months ended December 31, 1998. Planned capital expenditures for the remainder of fiscal 1999 approximate $5,692,000 and are primarily targeted for investments in the Frames and Wall Decor division and investments in information systems. 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, see risk factors discussed herein. THE YEAR 2000 The Company has initiated a comprehensive project ("Year 2000 project") designed to minimize or eliminate business disruption caused by 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, and 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 involves identifying and analyzing the IT and non-IT systems that are susceptible to failures or processing errors as a result of Year 2000 issue. This phase consisted of the Company and its operating units identifying the systems that may require 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 involves 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 involves implementing and testing the proposed remediations. With regard to IT systems, two of the five replacements have been completed and the other three are in process. The three upgrades and testing are in process. The Company's objective is to substantially complete the implementation and testing phase by June 30, 1999, although further remediation efforts may be required thereafter to address Year 2000 issues discovered during this phase. Additionally, as part of its Year 2000 project, the Company has identified certain service providers, vendors, suppliers, and customers ("Key Partners") that it believed were critical to business operations after January 1, 2000. The Company initiated communications with such Key Partners in an attempt to reasonably ascertain their stage of Year 2000 readiness. The Company has received responses to approximately 60% 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 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. Despite the Company's efforts, there can be no guaranty that the systems of other companies which the Company relies upon to conduct its operations and business will be compliant. In addition to the above measures, the Company is currently 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 $1.5 million to $2.0 million. As of December 31, 1998, the Company had spent approximately $1.0 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 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. Factors that may cause such changes 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; 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 December 31, 1998 has been established. Based on the information presently available, management believes the amount of the accrual at December 31, 1998 is adequate to cover the liability the Company may incur under the alleged guarantees. TANDYCRAFTS, INC. PART II - OTHER INFORMATION Item 4. Submission of Matters to Vote of Security Holders - ------ ------------------------------------------------- The following proposals were approved at the Company's annual meeting held on November 11, 1998: Affirmative Votes Against Votes or Withheld ----------- ------------- 1. Election of management's slate of nominees to serve as Directors: R. Earl Cox III 10,383,040 1,344,902 Joe K. Pace 10,415,967 1,311,975 Robert Schutts 10,380,789 1,347,153 Sheldon I. Stein 10,407,087 1,320,855 Michael J. Walsh 10,475,807 1,252,135 Item 6. Exhibits and Reports on Form 8-K - ------ ------------------------------------ (a) Exhibits: Exhibit 10.21 Twelfth Amendment to Revolving Credit and Term Loan Agreement Exhibit 27 Financial Data Schedule (b) Reports on Form 8-K: The Company filed a Current Report on Form 8-K, dated January 7, 1999, announcing that Robert Schutts, a longtime member of the Tandycrafts board of directors, passed away Tuesday, December 22, 1998. The Company filed a Current Report on Form 8-K, dated January 13, 1999, announcing plans to close its leather and crafts retail stores and related manufacturing operations. The Company filed a Current Report on Form 8-K, dated January 22, 1999, which included pro forma information based on the historical financial statements of Tandycrafts, Inc. adjusted to give effect to the disposition of it leather and crafts retail stores and related manufacturing operations. The Company filed a Current Report on Form 8-K, dated January 26, 1999, which included the contents of a press release announcing the unaudited results of operations for the three and six-month periods ended December 31, 1998. TANDYCRAFTS, INC. SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TANDYCRAFTS, INC. (Registrant) Date: February 15, 1999 By:/s/Michael J. Walsh --------------------------- Michael J. Walsh President, Chief Executive Officer and Director Date: February 15, 1999 By:/s/James D. Allen --------------------------- James D. Allen Executive Vice President and Chief Financial Officer (Principal Financial Officer) Date: February 15, 1999 By:/s/Troy A. Huseman --------------------------- Troy A. Huseman Assistant Vice President and Chief Accounting Officer EX-10.21 2 EXHIBIT 10.21 TWELFTH AMENDMENT TO REVOLVING ------------------------------ CREDIT AND TERM LOAN AGREEMENT ------------------------------ This Twelfth Amendment To Revolving Credit And Term Loan Agreement ("Twelfth Amendment") is made by and among TANDYCRAFTS, INC., a Delaware corporation ("Company"), THE DEVELOPMENT ASSOCIATION, INC., a Texas corporation, SAV-ON, INC., a Texas corporation, DAVID JAMES MANUFACTURING, INC., a Texas corporation, PLC LEATHER COMPANY, a Nevada corporation, TANDYARTS, INC., a Nevada corporation, and LICENSED LIFESTYLES, INC., a Nevada corporation (hereinafter collectively referred to as the "Guarantors"), and WELLS FARGO BANK (TEXAS), NATIONAL ASSOCIATION (formerly First Interstate Bank of Texas, N.A.), BANK ONE, TEXAS, N.A. and THE FIRST NATIONAL BANK OF CHICAGO (formerly NBD BANK) (collectively, the "Banks") and WELLS FARGO BANK (TEXAS), NATIONAL ASSOCIATION, as agent for the Banks ("Agent"); and WHEREAS, the Company, certain of Guarantors and Agent entered into that certain Revolving Credit and Term Loan Agreement dated September 29, 1993 (the "Loan Agreement"); and WHEREAS, the Company, certain of Guarantors, certain of Banks and Agent entered into that certain First Amendment to Revolving Credit and Term Loan Agreement dated December 3, 1993 ("First Amendment"); and WHEREAS, the Company, the Guarantors, certain of Banks and Agent entered into that certain Second Amendment To Revolving Credit and Term Loan Agreement dated September 26, 1994 ("Second Amendment"); and WHEREAS, the Company, Guarantors, certain of Banks and Agent entered into that certain Third Amendment to Revolving Credit and Term Loan Agreement dated December 31, 1994 ("Third Amendment"); and WHEREAS, the Company, Guarantors, certain of Banks and Agent entered into that certain Fourth Amendment to Revolving Credit and Term Loan Agreement dated July 6, 1995 ("Fourth Amendment"); and WHEREAS, the Company, Guarantors, certain of Banks and Agent entered into that certain Fifth Amendment to Revolving Credit and Term Loan Agreement dated December 31, 1995 ("Fifth Amendment"); and WHEREAS, the Company, Guarantors, certain of Banks and Agent entered into that certain Sixth Amendment to Revolving Credit and Term Loan Agreement dated October 31, 1996 ("Sixth Amendment"); and WHEREAS, the Company, Guarantors, certain of Banks and Agent entered into that certain Seventh Amendment to Revolving Credit and Term Loan Agreement dated December 31, 1996 ("Seventh Amendment"); and WHEREAS, the Company, Guarantors and Banks entered into that certain Eighth Amendment to Revolving Credit and Term Loan Agreement dated March 31, 1997 ("Eighth Amendment"); and WHEREAS, the Company, Guarantors and banks entered into that certain Ninth Amendment to Revolving Credit and Term Loan Agreement dated September 30, 1997 ("Ninth Amendment"); and WHEREAS, the Company, Guarantors and Banks entered into that certain Tenth Amendment to Revolving Credit and Term Loan Agreement dated December 31, 1997 ("Tenth Amendment"); and WHEREAS, the Company, Guarantors and Banks entered into that one certain Eleventh Amendment to Revolving Credit and Term Loan Agreement dated August 10, 1998 ("Eleventh Amendment"); and WHEREAS, the Company, Guarantors, certain of Banks and Agent desire to amend the Loan Agreement in certain respects; and WHEREAS, capitalized terms used herein shall have the meaning assigned to them in the Loan Agreement unless the context otherwise requires or provides. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, it is agreed by and among the Company, Guarantors, Banks and Agent as follows: 1. Section 1.77 of the Loan Agreement is amended to read as follows: 1.77. "Termination Date" shall mean November 30, 1999. ---------------- 2. Company and Guarantors warrant and represent to Banks that no Event of Default exists. By their execution hereof, each of the Guarantors ratify and confirm the terms of the Guaranty Agreement dated August 17, 1994, agree that the Guaranty Agreement shall remain in full force and effect and unconditionally agree that the Guaranty Agreement is enforceable against each of them in accordance with its terms. 3. Except as amended by the First Amendment, the Second Amendment, the Third Amendment, the Fourth Amendment, the Fifth Amendment, the Sixth Amendment, the Seventh Amendment, the Eighth Amendment, the Ninth Amendment, the Tenth Amendment, the Eleventh Amendment and this Twelfth Amendment, the Loan Agreement is ratified and confirmed and shall remain in full force and effect. 4. This Twelfth Amendment shall be governed by and construed in accordance with the laws of the State of Texas. 5. At the time of execution of this Twelfth Amendment, Company agrees to pay Agent for the pro-rata benefit of Banks an amendment fee in the amount of six thousand dollars ($6,000). Company agrees to pay all expenses incurred by Agent and Banks in connection with the negotiation and preparation of this Twelfth Amendment, including reasonable attorney's fees. 6. This Twelfth Amendment may be executed in any number of multiple counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original, and all of which taken together shall constitute one and the same agreement. 7. Banks, Company, and Guarantors agree to be bound by the current Arbitration Program of Agent which is incorporated by reference herein and is acknowledged as received by the parties pursuant to which any and all disputes shall be resolved by mandatory binding arbitration upon the request of any party. 8. This Twelfth Amendment shall be binding upon and inure to the benefit of the parties and their respective successors and assigns. 9. THIS WRITTEN AGREEMENT REPRESENTS THE FINAL AGREEMENT AMONG THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES. Executed to be effective as of November 9, 1998. TANDYCRAFTS, INC., a Delaware corporation By: /s/ James D. Allen -------------------------------- James D. Allen, Executive Vice President COMPANY SAV-ON, INC., a Texas corporation By: /s/ Russell Price -------------------------------- Russell Price, Secretary DAVID JAMES MANUFACTURING, INC., a Texas corporation By: /s/ Russell Price -------------------------------- Russell Price, Secretary THE DEVELOPMENT ASSOCIATION, INC., a Texas corporation By: /s/ Russell Price -------------------------------- Russell Price, Secretary PLC LEATHER COMPANY, a Nevada corporation By: /s/ Russell Price -------------------------------- Russell Price, Secretary TANDYARTS, INC., a Nevada corporation By: /s/ Russell Price -------------------------------- Russell Price, Secretary LICENSED LIFESTYLES, INC. a Nevada corporation (successor by merger to College Flags and Manufacturing, Inc., a South Carolina corporation) By: /s/ Russell Price -------------------------------- Russell Price, Secretary GUARANTORS WELLS FARGO BANK (TEXAS), NATIONAL ASSOCIATION (formerly First Interstate Bank of Texas, N.A.) By: /s/ Susan Sheffield -------------------------------- Susan Sheffield, Vice President BANK ONE, TEXAS, N.A. By: /s/ Michael Wilson -------------------------------- Michael Wilson, Senior Vice President THE FIRST NATIONAL BANK OF CHICAGO By: /s/ Jenny Gilpin -------------------------------- Jenny Gilpin, Vice President BANKS EX-27 3
5 This schedule contains summary finanical information extracted from Tandycrafts, Inc. December 31, 1998 Form 10-Q and is qualified in its entirety by reference to such 10-Q filing. 1,000 6-MOS JUN-30-1999 DEC-31-1998 1,013 0 27,366 3,300 43,274 77,008 49,611 26,142 139,739 28,688 0 0 0 18,528 57,201 139,739 103,918 103,918 74,267 109,865 0 8,145 1,083 (15,175) (3,960) (11,215) 0 0 0 (11,215) (0.91) (0.91)
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