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)
<TABLE><S><C>
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
</TABLE>
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)
<TABLE><S><C>
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
======== ======== ======== ======== ========
</TABLE>
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):
<TABLE><S><C>
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)%
======== ======== ======== ======== ===== ======
</TABLE>
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
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
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
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.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> DEC-31-1998
<CASH> 1,013
<SECURITIES> 0
<RECEIVABLES> 27,366
<ALLOWANCES> 3,300
<INVENTORY> 43,274
<CURRENT-ASSETS> 77,008
<PP&E> 49,611
<DEPRECIATION> 26,142
<TOTAL-ASSETS> 139,739
<CURRENT-LIABILITIES> 28,688
<BONDS> 0
0
0
<COMMON> 18,528
<OTHER-SE> 57,201
<TOTAL-LIABILITY-AND-EQUITY> 139,739
<SALES> 103,918
<TOTAL-REVENUES> 103,918
<CGS> 74,267
<TOTAL-COSTS> 109,865
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 8,145
<INTEREST-EXPENSE> 1,083
<INCOME-PRETAX> (15,175)
<INCOME-TAX> (3,960)
<INCOME-CONTINUING> (11,215)
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,215)
<EPS-PRIMARY> (0.91)
<EPS-DILUTED> (0.91)
</TABLE>
