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 September 30, 1999
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.
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(Exact name of registrant as specified in its charter)
Delaware 75-1475224
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(State of incorporation) (I.R.S. Employer Identification Number)
1400 Everman Parkway, Fort Worth, Texas 76140
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(Address of principal executive offices) (Zip Code)
(817) 551-9600
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(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___.
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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 October 31, 1999
- ----------------------------- -----------------------------------------
Common Stock, $1.00 par value 12,011,136
TANDYCRAFTS, INC.
Form 10-Q
Quarter Ended September 30, 1999
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................ 9-15
PART II - OTHER INFORMATION
6. Exhibits and Reports on Form 8-K............................. 16
Signatures................................................... 17
PART I
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Item 1. Financial Statements
--------------------
TANDYCRAFTS, INC.
Condensed Consolidated Statements of Operations
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended September 30,
-------------------------------
1999 1998
---------- ----------
Net sales $ 45,134 $ 51,065
---------- ----------
Operating costs and expenses:
Cost of goods sold 30,497 34,791
Selling, general and administrative 13,131 13,077
Depreciation and amortization 1,070 1,079
---------- ----------
Total operating costs and expenses 44,698 48,947
---------- ----------
Operating income 436 2,118
Interest expense, net 643 492
---------- ----------
Income (loss) before provision for
income taxes (207) 1,626
Provision for income taxes (79) 618
---------- ----------
Net income (loss) $ (128) $ 1,008
========== ==========
Net income (loss) per share - basic
and diluted $ (0.01) $ 0.08
========== ==========
Weighted average common shares:
Basic 12,011 12,472
Diluted 12,011 12,475
TANDYCRAFTS, INC.
Condensed Consolidated Balance Sheets
(Dollars in thousands)
(Unaudited)
September 30, June 30,
1999 1999
------------ -----------
ASSETS
- ------
Current assets:
Cash $ 824 $ 744
Trade accounts receivable, net of, allowance
for doubtful accounts of $2,539 and $2,460,
respectively 26,521 20,783
Inventories 38,364 35,026
Other current assets 6,426 6,988
------------ -----------
Total current assets 72,135 63,541
------------ -----------
Property and equipment, at cost 57,031 56,250
Accumulated depreciation (25,917) (26,690)
------------ -----------
Property and equipment, net 31,114 29,560
------------ -----------
Other assets 5,314 5,256
Goodwill, net 24,484 24,694
------------ -----------
$ 133,047 $ 123,051
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable 14,071 11,988
Accrued liabilities and other 15,061 16,467
------------ -----------
Total current liabilities 29,132 28,455
------------ -----------
Long-term debt 39,300 30,000
Long-term capital lease obligation 1,820 1,671
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 20,556 20,559
Retained earnings 48,113 48,241
Cost of stock in treasury, 6,516,852 shares
and 6,517,015 shares, respectively (24,402) (24,403)
------------ -----------
Total stockholders' equity 62,795 62,925
------------ -----------
$ 133,047 $ 123,051
============ ===========
TANDYCRAFTS, INC.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Three Months Ended September 30,
-------------------------------
1999 1998
---------- -----------
Net cash flows provided (used) by
operating activities $ (6,953) $ 729
---------- -----------
Cash flows from investing activities:
Additions to property and equipment, net (2,265) (1,606)
---------- -----------
Net cash used for investing activities (2,265) (1,606)
---------- -----------
Cash flows from financing activities:
Purchases of treasury stock (2) (1,106)
Borrowings under bank credit facility, net 9,300 1,680
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Net cash provided by financing activities 9,298 574
---------- -----------
Increase (decrease) in cash 80 (303)
Cash balance, beginning of period 744 1,216
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Cash balance, end of period $ 824 $ 913
========== ===========
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, 1999 $18,528 $20,559 $48,241 $(24,403) $62,925
Purchase of 163 shares of treasury stock - (3) - 1 (2)
Net income (loss) for three months ended
September 30, 1999 - - (128) - (128)
------- ------- ------- -------- -------
Balance, September 30, 1999 $18,528 $20,556 $48,113 $(24,402) $62,795
======= ======= ======= ======== =======
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 only normal recurring adjustments) necessary for a fair
presentation of the Company's financial position as of September 30, 1999 and
June 30, 1999, and the results of operations and cash flows for the three-month
periods ended September 30, 1999 and 1998. The results of operations for the
three-month periods ended September 30, 1999 and 1998 are not necessarily
indicative of the results to be expected for the full fiscal year. The
condensed consolidated financial statements should be read in conjunction with
the financial statement disclosures contained in the Company's 1999 Annual
Report to Stockholders.
NOTE 2 - INVENTORIES
The components of inventories at September 30, 1999 consisted of the following
(in thousands):
Merchandise held for sale $ 26,048
Raw materials and work-in-process 12,316
---------
$ 38,364
=========
NOTE 3 - EARNINGS (LOSS) PER SHARE
Basic earnings per share is computed by dividing income (loss) available to
common shareholders by the weighted-average common shares outstanding. Diluted
earnings per share is computed by dividing the income (loss) available to
shareholders by the weighted-average common share and potential common shares
outstanding during the period. For the three-month periods ending September 30,
the number of weighted average shares and potential common shares is as follows
(in thousands):
Three Months Ended
1999 1998
------- -------
Weighted average shares - basic 12,011 12,472
Potential common shares - 3
------- -------
Total weighted average common
and potentially dilutive shares -
diluted 12,011 12,475
======= =======
NOTE 4 - DIVESTITURE
In the quarter ended December 31, 1998, the Board of Directors of the Company
approved a plan to close the Company's 121 leather and crafts retail stores and
related manufacturing operations to allow the Company to continue to narrow its
focus to its more profitable business segments. The divestiture plan was
substantially complete and all retail stores were closed as of June 30, 1999.
As a result of this plan, the Company recorded charges totaling $10,603,000
during fiscal 1999. Approximately $2,458,000 of these charges related to the
write-down of inventory to its estimated liquidation value and approximately
$8,145,000 related to the write-down of non-inventory assets and anticipated
future cash outlays.
Included in the $8,145,000 restructuring charge is approximately $5,441,000
related to non-cash write-downs of non-inventory assets to their estimated net
realizable value, including $3,923,000 related to the write-off of goodwill,
$1,313,000 related to the write-down of fixed assets (primarily comprised of
store fixtures and leasehold improvements and manufacturing equipment
substantially all of which have been abandoned), and $205,000 related to the
write-down of various other assets. The remaining restructuring charge of
$2,704,000 represented an accrual for anticipated future cash outlays for lease
obligations and other related exit costs. As of September 30, 1999, the lease
agreements for 111 stores had been terminated through settlement, sub-let or
assignment.
The following table sets forth the activity in the restructuring reserve, which
is included in current accrued liabilities in the September 30, 1999 balance
sheet (in thousands):
June 30, Cash September 30,
1999 Payments 1999
----------- --------- ------------
Lease obligations $ 465 $ 107 $ 358
Other 131 14 117
----------- --------- ------------
$ 596 $ 121 $ 475
=========== ========= ============
The above provisions and related restructuring reserves 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 for the divested operations were $9,423,000 and
$549,000, respectively, for the three-month period ended September 30, 1998.
These operations had no revenue or operating income during the three-month
period ended September 30, 1999.
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 September 30, 1999 was $12,000,000.
The maximum amount of receivables that can be sold may be seasonally adjusted.
At September 30, 1999, the amount of trade accounts receivable outstanding which
had been sold approximated $5,402,000. 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 $79,600 and $61,700 for the
three month periods ended September 30, 1999 and 1998, respectively. The
Company, as agent for the purchaser of the receivables, retains collection and
administrative responsibilities for the purchased receivables.
NOTE 6 - DEBT
Effective March 31, 1999, the Company entered into a revolving credit facility
with a group of banks. The facility is a $45,000,000 revolving line of credit
with a maturity date of March 31, 2001 and is renewable annually. The amount of
credit available under the facility will decline to $40 million on April 1, 2000
to reflect management's projection of reduced capital needs. At September 30,
1999, the Company was not in compliance with certain covenants of the credit
facility; however, the Company received a waiver from the banks for these
covenant violations through September 30, 1999. Effective October 29, 1999, the
Company entered into an Amended and Restated Revolving Credit Agreement with the
banks under essentially the same terms as the $45 million facility, except the
amended agreement reset certain covenant requirements to levels with which the
Company expects to be able to comply. The amendment also granted the banks a
security interest in the Company's assets.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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General
Tandycrafts, Inc. ("Tandycrafts" or the "Company") is a leading maker and
marketer of consumer products, including frames and wall decor, office supplies,
home furnishings and gift products. The Company's products are sold nationwide
through wholesale distribution channels, including mass merchandisers and
specialty retailers, and direct-to-consumer channels through the Company's
retail stores, mail order and the Internet.
The Company is organized into four product related operating divisions: Frames
and Wall Decor, Office Supplies, Gifts and Home Furnishings. The Tandy Leather
retail stores and manufacturing operations were closed during fiscal year 1999.
Certain statements in this discussion, other filings with the Securities and
Exchange Commission and other Company statements are not historical facts but
are forward looking statements. The words "believes," "expects," "estimates,"
"projects," "plans," "could," "may," "anticipates," or the negative thereof or
other variations or similar terminology, or discussions of strategies or plans
identify forward-looking statements. These forward-looking statements reflect
the Company's reasonable judgments with respect to future events and are subject
to risks and uncertainties that could cause actual results to differ materially
from such forward-looking statements. These risks and uncertainties include,
but are not limited to, the Company's ability to reduce costs through the
consolidation of certain operations, customers' willingness, need, demand and
financial ability to purchase the Company's products, new business
opportunities, the successful development and introduction of new products, the
successful transition of the Company's framed art manufacturing from Van Nuys,
California to Durango, Mexico, the successful transition of framed art
distribution and administration from Van Nuys, California to Fort Worth, Texas,
the successful implementation of new information systems, the continued
development of direct import programs, the successful conversion of the Cargo
Furniture mall stores to the collection store format, relationships with key
customers, impact of the Year 2000, relationships with professional sports
leagues and other licensors, the possibilities of work stoppages in professional
sports leagues, price fluctuations of lumber, paper and other raw materials,
seasonality of the Company's operations, effectiveness of promotional
activities, changing business strategies and intense competition in retail
operations. Additional factors include economic conditions such as interest
rate fluctuations, consumer debt levels, inflation levels, changing consumer
demand and tastes, competitive products and pricing, availability of products,
inventory risks due to shifts in market demand, and regulatory and trade
environmental conditions.
The following table presents selected financial data for each of the Company's
four divisions for the three-month periods ended September 30, 1999 and 1998 (in
thousands):
Three Months Ended September 30,
----------------------------------------
1999 1998 % Increase (Decrease)
------------------- ------------------ --------------------
Operating Operating Operating
Income Income Income
Sales (loss) Sales (loss) Sales (loss)
------- ------- ------- ------- ------ -------
Frames and Wall Decor $24,562 $ 2,292 $25,649 $ 3,314 (4.2)% (30.8)%
Office Supplies 10,639 646 11,065 651 (3.8) (0.8)
Home Furnishings 4,127 (118) - - 100.0 (100.0)
Gifts 5,806 (1,086) 4,928 32 17.8 (3493.8)
------- ------- ------- ------- ------ ------
45,134 1,734 41,642 3,997 8.4 (56.6)
Divested operations - - 9,423 (549) (100.0) 100.0
------- ------- ------- ------- ------ ------
Total operations, excluding
corporate $45,134 $ 1,734 $51,065 $ 3,448 (11.6)% (49.7)%
======= ======= ======= ======= ====== ======
Results of Operations
For the quarter ended September 30, 1999, consolidated net sales decreased
$5,931,000, or 11.6%, while operating income, excluding corporate, decreased
$1,714,000, or 49.7%, compared to the same period last year. Excluding the
results of divested operations, net sales increased $3,492,000, or 8.4%, and
operating income decreased $2,263,000, or 56.6%. Discussions relative to each
of the Company's four product divisions are set forth below.
Frames and Wall Decor
Sales for the Frames and Wall Decor division decreased $1,087,000, or 4.2%,
compared to the quarter ended September 30, 1998. Frame sales decreased
$3,678,000, or 21.8%, due primarily to a major customer shifting the timing of
orders from the first quarter of fiscal 1999 to the second quarter in fiscal
2000. Framed art sales increased $991,000, or 13.6%, primarily from increased
sales to existing customers. This division also saw increases in sales of
mirrors and table top frames.
Operating income for the Frames and Wall Decor division decreased $1,022,000, or
30.8%, compared to the quarter ended September 30, 1998. Gross margin as a
percent of sales increased 1.8 percentage points due to improved operating
efficiencies and materials utilization and lower costs of raw materials.
Selling, General and Administrative ("SG&A") expenses increased $1,167,000,
reflecting start-up costs associated with the Mexico facility, increased
information systems costs and increased investment in marketing and product
development.
Office Supplies
Sales at Sav-On Office Supplies decreased $426,000, or 3.8%, compared to the
same quarter last year, with same-store sales decreasing 4.5%. Sav-On's sales
performance continues to reflect the effect of large competitors opening stores
in its markets, with only four stores without large competitors this year as
opposed to ten last years. However, as stated in previous filings, historically
Sav-On stores are significantly impacted the first twelve to fifteen months
after a large competitor enters a market but, after the second year, stores
typically begin producing sale gains. Because only four stores are without
large competition, management anticipates that, once these competitive invasions
cycle through their initial impact, revenues will begin to increase. Actual
results, however, may differ from this forward looking projection. Please see
risk factor discussions contained herein and in other filings with the SEC.
Sav-On's operating income decreased $5,000, or 0.8%, for the quarter ended
September 30, 1999 compared to the same quarter last year. Gross profit as a
percent of sales increased 0.7 points primarily due to the effect of increased
direct importing activity. SG&A expenses decreased $65,000, or 2.1%, compared
to the prior year quarter due to more efficient advertising. SG&A expenses as a
percent of sales increased to 29.1% from 28.6% in the prior year quarter as a
result of the lower sales volume in the current quarter.
Gifts
Net sales for the Gifts division increased $878,000, or 17.8%, compared to the
same quarter last year. The sales increase is due to the inclusion of Tandy
Leather Direct in this division during fiscal 2000. Tandy Leather Direct had no
sales during fiscal 1999. Excluding Tandy Leather Direct, sales of this
division decreased $617,000, or 12.5%, resulting primarily from a decline in
sales of Licensed Lifestyles, Inc. of $723,000 for the quarter. This decrease
continues to reflect the softness in the demand for sports licensed products and
the continued consolidation or elimination of the traditional customer base of
sporting goods retailers.
The Gifts division had an operating loss of $1,086,000 for the three months
ended September 30, 1999 compared to income of $32,000 for the same quarter last
year. Approximately, $713,000 of this operating loss related to Licensed
Lifestyles resulting from the decline in sales volume of this unit combined with
a decline in its gross margin percentage due to the liquidation of discontinued
lines of inventory at little or no margin. The remainder of the loss reflects
losses at Tandy Leather Direct related to the absorption of start-up and
advertising costs, primarily the annual catalogs which were mailed and expensed
during September 1999. With the exception of Licensed Lifestyles, management
currently expects the rest of this division to be profitable in the second
quarter of fiscal 2000.
Home Furnishings
Net sales and operating losses for the Home Furnishings division, comprised of
Cargo Furniture, were $4,127,000 and $118,000, respectively, for the quarter
ended September 30, 1999. Because the Company started consolidating the results
of Cargo Furniture on February 1, 1999, there were no comparable sales or
operating income amounts reported for the first quarter of fiscal 1999. The
operating loss for the first quarter of fiscal 2000 was in line with
management's expectations. The Company converted four mall stores to the Cargo
Collection store format during the quarter. Management expects to see
improvement in operating results of this division during the remainder of fiscal
2000 as the Company continues to execute its plans to reduce operating expenses,
improve gross margins, complete the conversion of stores to the Cargo collection
store format and build the Cargo brand and dealer channels.
Restructuring Charges
In the quarter ended December 31, 1998, the Board of Directors of the Company
approved a plan to close the Company's 121 leather and crafts retail stores and
related manufacturing operations to allow the Company to continue to narrow its
focus to its more profitable business segments. The divestiture plan was
substantially complete and all retail stores were closed as of June 30, 1999.
As a result of this plan, the Company recorded charges totaling $10,603,000
during fiscal 1999. Approximately $2,458,000 of these charges related to the
write-down of inventory to its estimated liquidation value and approximately
$8,145,000 related to the write-down of non-inventory assets and anticipated
future cash outlays.
Included in the $8,145,000 restructuring charge is approximately $5,441,000
related to non-cash write-downs of non-inventory assets to their estimated net
realizable value, including $3,923,000 related to the write-off of goodwill,
$1,313,000 related to the write-down of fixed assets (primarily comprised of
store fixtures and leasehold improvements and manufacturing equipment
substantially all of which have been abandoned), and $205,000 related to the
write-down of various other assets. The remaining restructuring charge of
$2,704,000 represented an accrual for anticipated future cash outlays for lease
obligations and other related exit costs. As of September 30, 1999, the lease
agreements for 111 stores had been terminated through settlement, sub-let or
assignment.
The following table sets forth the activity in the restructuring reserve, which
is included in current accrued liabilities in the September 30, 1999 balance
sheet (in thousands):
June 30, Cash September 30,
1999 Payments 1999
----------- --------- ------------
Lease obligations $ 465 $ 107 $ 358
Other 131 14 117
----------- --------- ------------
$ 596 $ 121 $ 475
=========== ========= ============
The above provisions and related restructuring reserves 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 for the divested operations were $9,423,000 and
$549,000, respectively, for the three-month period ended September 30, 1998.
These operations had no revenue or operating income during the three-month
period ended September 30, 1999.
Selling, general and administrative expenses
Consolidated selling, general and administrative expenses were 29.1% as a
percent of sales for the quarter ended September 30, 1999 compared to 25.6% for
the same quarter last year. In total dollars, selling, general and
administrative expenses increased $54,000, or 0.4%, when compared to the same
quarter last year. SG&A dollars decreased $4,426,000 due to the closure of the
Tandy Leather retail and manufacturing operations during fiscal 1999; however,
SG&A expenses increased $2,185,000 and $1,055,000, respectively, due to the
inclusion of Cargo and TL Direct in the current quarter.
Depreciation and amortization
Consolidated depreciation and amortization decreased $9,000, or 0.8%, for the
quarter ended September 30, 1999 compared to the quarter ended September 30,
1998.
Interest expense, net
Net interest expense increased $151,000, or 30.7%, for the quarter ended
September 30, 1999 compared to the same quarter last year. The increase in net
interest expense is primarily due to $170,000 of interest income recognized
during the prior year quarter related to the Family Christian Stores note
receivable. As this note was paid in full during fiscal 1999, there was no
interest income recognized during the quarter ended September 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity have come from borrowings under the
Company's revolving credit facility. These funds have been used primarily for
funding operations and capital expenditures.
During the quarter ended September 30, 1999, cash increased $80,000. Cash of
$6,953,000 was used by operating activities during the quarter primarily to
finance increases in working capital. Cash used for investing activities of
$2,265,000 resulted from capital expenditures for property and equipment
primarily at the Mexico facility. Cash of approximately $9,298,000 was provided
by financing activities through increased borrowings under the Company's
revolving credit facility.
Effective March 31, 1999, the Company entered into a revolving credit facility
with a group of banks. The facility is a $45,000,000 revolving line of credit
with a maturity date of March 31, 2001 and is renewable annually. The amount of
credit available under the facility will decline to $40 million on April 1, 2000
to reflect management's projection of reduced capital needs. At September 30,
1999, the Company was not in compliance with certain covenants of the credit
facility; however, the Company received a waiver from the banks for these
covenant violations through September 30, 1999. Effective October 29, 1999, the
Company entered into an Amended and Restated Revolving Credit Agreement with the
banks under essentially the same terms as the $45 million facility, except the
amended agreement reset certain covenant requirements to levels with which the
Company expects to be able to comply. The amendment also granted the banks a
security interest in the Company's assets.
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 September 30, 1999, the Company would have had to pay
approximately $61,000 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 September 30, 1999 was $12,000,000.
The maximum amount of receivables that can be sold may be seasonally adjusted.
At September 30, 1999, the amount of trade accounts receivable outstanding which
had been sold approximated $5,402,000. 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 $79,600 and $61,700 for the
three month periods ended September 30, 1999 and 1998, respectively. The
Company, as agent for the purchaser of the receivables, retains collection and
administrative responsibilities for the purchased receivables.
Cash of approximately $2,265,000 was used for capital expenditures during the
quarter ended September 30, 1999. Planned capital expenditures for the
remainder of fiscal 2000 approximate $1,900,000 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 a comprehensive project ("Year 2000 project") designed to
minimize or eliminate business disruption caused by potential processing
problems associated with the Year 2000 issue. The Year 2000 project, which
addresses both the Company's information technology ("IT") systems and non-IT
systems, consists of three phases: identification and analysis, planning,
implementation and testing. The Company's Year 2000 project has used both
internal and external resources.
The first phase of the Company's Year 2000 project involved identifying and
analyzing the IT and non-IT systems that the Company believed were susceptible
to failures or processing errors as a result of the Year 2000 issue. This phase
consisted of the Company and its operating units identifying the systems that
required remediation or replacement. Through its systems requirements study,
the Company believed that, with regard to IT systems, five should be remediated
through replacement and three remediated through upgrades. With respect to non-
IT systems, the Company believed that there was an insubstantial susceptibility
to the Year 2000 issue. This phase has been completed.
The second phase of the Year 2000 project involved analyzing proposed
remediations and planning how to implement such remediations. The Company then
established priorities for remediation. This phase has been completed for IT
systems.
The third phase of the Year 2000 project involved implementing the proposed
remediations. With regard to IT systems, all five replacements and all three
upgrades have been substantially completed. Testing of the remediations is in
process and further remediation efforts may be required thereafter to address
Year 2000 issues discovered during testing.
Further, the Company acquired the assets of Cargo Furniture and Accents
("Cargo") late in fiscal 1999. During its due diligence and since its
acquisition, the Company identified and analyzed the systems of Cargo that the
Company believed were susceptible to failures or processing errors as a result
of Year 2000 issues. The Company then analyzed proposed remediations and
planned how to implement such remediations. The Company has completed
implementation of Cargo's back office system, which is believed to be Year 2000
ready. The implementation of Cargo's Year 2000 ready POS systems should be
completed by December 15, 1999.
Additionally, as part of its Year 2000 project, the Company has identified
certain service providers, vendors, suppliers, and customers ("Key Partners")
that it believes are critical to business operations after January 1, 2000. The
Company initiated communications with such Key Partners in an attempt to
reasonably ascertain their state of Year 2000 readiness. The Company has
received responses to approximately 87% of these questionnaires. The majority
of such responses indicated that the Key Partner had Year 2000 remediation
programs and expected to be compliant by at least calendar year end 1999. The
Company has sent follow-up inquiries to the Key Partners who have not responded
to the Company's questionnaire. The Company plans to continue assessment of Key
Partners, which may include further communications, interviews and face-to-face
meetings, as deemed appropriate. In addition, the Company has implemented a
Year 2000-ready electronic data interchange ("EDI") system and is in the process
of working with its business partners to convert them over to this system.
Despite the Company's efforts, there can be no guarantee that the systems of
other companies which the Company relies upon to conduct its operations and
business will be Year 2000 compliant.
In addition to the above measures, the Company is developing contingency plans
intended to mitigate the possible disruption in business operations from the
Year 2000 issue. The Company intends to continue to evaluate and modify
contingency planning as additional information becomes available.
The Company estimates that the costs of the Year 2000 project will range from
$2.7 million to $2.8 million. The Company has spent approximately $2.7 million
on the Year 2000 project so far. The cost estimates do not include any costs
associated with the implementation of contingency plans and any potential costs
related to any customer or other claims relating to the Year 2000 issue.
Because of the large number of systems used by the Company, the significant
number of service providers, vendors, suppliers and customers, and the
interdependent nature of systems, there can be no guaranty that the Company will
not experience some disruption in its business due to the Year 2000 issue.
Although it is not currently possible to quantify the most reasonably likely
worst case scenario, the possible consequences of the Company or Key Partners
not being fully ready in a timely manner include without limitation temporary
plant closings, delays in the delivery of products, delays in the receipt of
supplies, invoice and collection errors and inventory and supply obsolescence.
Consequently, the business and operations of the Company could be materially
adversely affected by a temporary inability of the Company to conduct its
business in the ordinary course for periods of time due to the Year 2000 issue.
However, the Company believes that its Year 2000 project and related contingency
planning should reduce the adverse effect any such disruptions may have.
The Year 2000 project is an ongoing process and the risk assessments, estimates
of costs, projected completion dates and other factors are forward-looking
statements and are subject to change. Risk factors that may cause actual
results to differ from estimates or projections include without limitation, the
continued availability of qualified personnel and other information technology
resources; the ability to identify and remediate all date sensitive lines of
computer code and embedded chips; the timely receipt and installation of Year
2000-ready replacement systems and upgrades; the actions of governmental
agencies, utilities and other third parties with respect to the Year 2000 issue;
the ability to implement contingency plans; and the occurrence of broad-based or
systemic economic failures.
CONTINGENCIES
A former subsidiary of the Company, which was spun-off in 1978, filed for
Chapter 11 protection under the federal bankruptcy code in January 1996. As
part of the bankruptcy proceedings, the former subsidiary has rejected certain
store leases which were originated prior to the spin-off and for which the
Company was allegedly a guarantor. An accrual for claims associated with the
alleged guarantees on leases rejected as of June 30, 1999 has been established.
Based on the information presently available, management believes the amount of
the accrual at September 30, 1999 is adequate to cover the liability the Company
may incur under the alleged guarantees.
TANDYCRAFTS, INC.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
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Exhibits Description
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10.23 Amended and Restated Revolving Credit and Term Loan
Agreement
10.24 Executive Special Termination Agreement (all of the
Company's current executive officers who were serving
on such on July 1, 1999, signed agreements substantially
similar to the form attached in Exhibit 10.24)
10.25 Executive Severance Agreement (all of the Company's
current executive officers who were serving on such on
July 1, 1999, except Mr. Allen, signed agreements
substantially similar to the form attached in Exhibit
10.25)
27 Financial Data Schedule
Reports on Form 8-K:
The Company filed a Current Report on Form 8-K, dated October 27,
1999, which included the contents of a press release announcing
the unaudited results of operations for the three-month period
ended September 30, 1999.
TANDYCRAFTS, INC.
SIGNATURES
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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: November 15, 1999 By:/s/Michael J. Walsh
----------------------
Michael J. Walsh
President, Chief Executive Officer
and Director
Date: November 15, 1999 By:/s/James D. Allen
----------------------
James D. Allen
Executive Vice President and Chief
Operating Officer
(Principal Financial Officer)