ITEM 1. BUSINESS.
GENERAL Tandy Corporation, a Delaware corporation, was incorporated in 1967 ("Tandy" or the"Company"). The Company engages in the retail sale of consumer electronics including personal computers primarily in the United States. The Company's retail operations include the Radio Shack(R), McDuff Electronics(R), The Edge in Electronics(R), Computer City(R) and Incredible Universe(R) store chains as well as some new test concepts. See "Management's Discussion and Analysis of Results of Operations and Financial Condition" found in Item 7 for a discussion of divisional sales data.
Radio Shack. Radio Shack is the Company's largest operating division. At December 31, 1994, Radio Shack had 4,598 company-owned stores located throughout the United States. These stores average approximately 2,350 square feet in area and are located in major malls, strip centers and individual store fronts, primarily in metropolitan markets. To provide service to smaller communities, Radio Shack had on the same date a network of 2,005 dealer/franchise stores. The dealers are generally engaged in other retail operations and augment their sales with Radio Shack products. This network includes 67 international dealers at December 31, 1994.
The 4,598 company-owned stores carry a broad assortment of electronic parts and accessories, audio/video equipment, personal computers, cellular and conventional telephones as well as specialized products such as scanners, electronic toys and hard to find batteries. The personal computers, which account for approximately 12% of Radio Shack's sales, primarily target entry level users seeking computers for home, individual and small business use. The Company plans to open 100 company- owned Radio Shack stores each year for the next five years. Many of these new stores will be in major markets such as Chicago, New York, Atlanta and Los Angeles. Radio Shack is also focusing on Alternative Channels of Distribution ("ACD"), which are geared to enhance its "service oriented" approach. A few ACDs include The Repair Shop at Radio Shack(SM), Radio Shack Gift Express(SM), and direct delivery service.
Computer City. As of December 31, 1994, the Company had 69 Computer City(R) stores open, four of which were in Europe and three in Canada. The Computer City chain operates as a supercenter format featuring many name brand computers, software and related products, including U.S. Logic, IBM, Apple, Sony, Lotus, Borland, Microsoft, Packard-Bell, Compaq, AST and Hewlett-Packard. The sixty-one Computer City Supercenters average about 23,000 square feet and carry more than 5,000 products. At December 31, 1994, there were eight Computer City Express(SM) stores which are approximately 10,000 square feet and serve smaller markets. The Company plans to open 20 to 30 additional stores in 1995, which includes 6 to 10 Computer City Express stores.
Incredible Universe. At December 31, 1994, Tandy operated nine Incredible Universe(R) stores. These stores are approximately 184,000 square feet and offer a broad selection of consumer electronics and appliances. The Company opened its ninth store in Auburn, Washington late in 1994. In 1995 the Company plans to open stores in Denver, Indianapolis, New York Metro, Houston, San Diego, Salt Lake City and greater Washington, D.C., markets. In addition, one more Incredible Universe store may open in 1995.
Tandy Name Brand Retail Group. At December 31, 1994, the Tandy Name Brand Retail Group ("Tandy Name Brand") was comprised of VideoConcepts(R), McDuff Electronics and Appliance(R) Supercenters and The Edge in Electronics(R) retail outlets. This group then operated a total of 306 stores which sold name brand televisions, audio equipment, personal computers and other electronic products and appliances.
Tandy Name Brand operated three distinctly different types of store formats -- mall stores, boutique stores and supercenters. The 219 mall stores averaged 3,100 square feet in size while the 71 supercenters, which are located in stand-alone or strip center locations, averaged 12,300 square feet. The Edge in Electronics began operating in 1990. These electronic boutique stores are designed for mall customers interested in fashionable personal and portable name brand electronics. As of December 31, 1994, these 16 stores were located in major malls and averaged approximately 1,100 square feet.
On December 30, 1994, the Company adopted a business restructuring plan to close or convert 233 stores which included VideoConcept and McDuff Electronics mall stores and a few McDuff Electronics and Appliance Supercenters. The stores will be closed during the first quarter of 1995. Of the 233 stores, 33 sites will be converted to Radio Shack or Computer City Express stores. On January 3, 1995, the Company also announced that Tandy Name Brand will be dissolved and the continuing stores will become part of a new Specialty Retail Group of the Radio Shack division. This group will be comprised of McDuff Electronics and Appliance Supercenters, The Edge in Electronics, Famous Brand Electronics Warehouse and Audio, Video and Computers retail outlets. See "Management's Discussion and Analysis of Results of Operations and Financial Condition" found in Item 7 and Note 4 of the Notes to Consolidated Financial Statements for more information on the plan.
The Company closed 110 Tandy Name Brand stores in the first quarter of 1993. See "Management's Discussion and Analysis of Results of Operations and Financial Condition" found in Item 7 and Note 4 of the Notes to Consolidated Financial Statements for more information.
Supporting the retail operations is an extensive infrastructure that includes:
A&A International, Inc. - This wholly-owned subsidiary of the Company serves the wide-ranging international import/export, sourcing, evaluation, logistics and quality control needs of the Company. InterTAN Inc. ("InterTAN") is the largest outside customer of the Company. Most of A&A's activity for InterTAN involves sourcing of goods from manufacturers in the Far East. For more discussion on InterTAN see Note 22 of the Notes to Consolidated Financial Statements.
Tandy Service Centers - The Company maintains a large service and support network in the consumer electronics retail industry. These centers repair name brand and private label products sold through all of the Company's retail distribution channels. These centers are also the primary support for the Repair Shop at Radio Shack program. There are 128 service centers throughout the nation and Canada and over one million parts are stocked in the Tandy Service division.
Regional Distribution Centers - The 15 distribution centers ship over one million cartons each month to the Company's retail outlets. This group also supports the Radio Shack Gift Express service.
Tandy Information Services - TIS collects information from the retail stores nationwide and updates a large database with sales and other information. This database is a sophisticated marketing tool benefiting every phase of the Company's operations. TIS also processes inventory, accounting, payroll, telecommunications and other operating information for all of the Company's operations. In addition, specialized information is tracked for the Company's distribution and corporate activities.
Tandy Credit Corporation - This operation, a wholly owned subsidiary of the Company, has helped to support sales of the Company's retail operations and provided the retail divisions with additional marketing flexibility through the utilization of credit promotions. This group has in the past maintained and managed Tandy's various private label credit cards.
In December 1994, the Company sold the Computer City and Incredible Universe credit card portfolios to SPS Transaction Services, Inc.("SPS"), a majority-owned subsidiary of Dean Witter, Discover & Co. In January 1995, the Company signed an agreement with SPS to sell Tandy Credit and the Radio Shack and McDuff private label credit card portfolios. The sale of Tandy Credit and the sale of the Radio Shack and McDuff portfolios is contingent upon and subject to regulatory, rating agency and other approvals. This transaction is expected to close during the first half of 1995. See "Management's Discussion and Analysis of Results of Operations and Financial Condition" found in Item 7 and Note 3 of the Notes to Consolidated Financial Statements for more information.
Tandy National Bank (the "Bank"), a limited purpose nationally chartered credit card bank, was established on May 11, 1994. The Bank, a wholly-owned subsidiary of Tandy Corporation, was created to operate the private label consumer credit card programs for Tandy. All new accounts approved after May 12, 1994 were originated and owned by the Bank. After the Company's sale of all the private label credit card portfolios, the Bank will cease operations.
Tandy Transportation, Inc. - A large fleet of tractors and trailers transports much of the merchandise from the ports of entry to the Company's regional distribution centers and local distribution facilities for delivery to the Company's retail outlets.
Consumer Electronics Manufacturing - The Company also engages in the manufacturing business with nine manufacturing facilities in the United States and two overseas manufacturing operations in China and Taiwan. The China operation is a joint venture. These 11 manufacturing facilities cover a total of 1,472,000 square feet and employ approximately 4,000 workers and professionals as of December 31, 1994. The Company manufactures a variety of products for use in its consumer electronics retailing operations. The products include audio, video, telephony, antennas, wire and cable products and a wide variety of hard to find parts for consumer electronic products. Most of the Company's manufacturing output is sold through the Radio Shack store chain. The Taiwan manufacturing plant will be closed in the first half of 1995 and its products will be manufactured by the China operations.
DISCONTINUED OPERATIONS On June 25, 1993, the Board of Directors of Tandy adopted a formal plan of divestiture under which it would sell its computer manufacturing and marketing businesses, the O'Sullivan Industries, Inc.("O'Sullivan") ready-to-assemble furniture manufacturing and related marketing business, the Memtek Products division and the Lika printed circuit board business. See "Discontinued Operations" in Management's Discussion and Analysis of Results of Operations and Financial Condition for further discussion.
The Company closed the sale of the computer manufacturing and marketing businesses to AST Research, Inc. ("AST") on July 13, 1993, and the sale of Memtek Products manufacturing and marketing operations on December 16, 1993 to Hanny Magnetics (B.V.I.) Limited, a British Virgin Islands corporation, including the license agreement with Memorex Telex, N.V. for the use of the Memorex trademark on licensed consumer electronics products. On February 2, 1994, the Company sold all the common stock of O'Sullivan Industries Holdings, Inc., the parent company of O'Sullivan, to the public at $22 per share. On October 11, 1994, Tandy sold the assets used in its Lika(R) printed circuit board division to Viktron Limited Partnership, an Illinois limited partnership. The proceeds from the sale and liquidation of assets approximated $16,380,000 which included $7,754,000 in cash, proceeds from liquidation of retained assets of $5,594,000 and secured promissory notes for $3,032,000.
In connection with the computer manufacturing sale, the Memtek Products sale and the Lika sale, the Company agreed to retain certain liabilities primarily relating to warranty obligations on products sold prior to the sale. Management believes that accrued reserves, as reflected on its December 31, 1994 balance sheet, are adequate to cover estimated future warranty obligations for the products.
SEASONALITY As is the case with other retail businesses, the Company's net sales and other revenues are greater during the Christmas season than during other periods of the year. There is a corresponding pre-seasonal inventory build-up requiring working capital associated with the anticipated increased sales volume. For additional information, see Note 23 of the Notes to Consolidated Financial Statements.
PATENTS AND TRADEMARKS Tandy owns or is licensed to use many trademarks related to its business in the United States and in foreign countries. Radio Shack, Computer City, Incredible Universe, McDuff Electronics, VideoConcepts, Realistic, Tandy and Optimus are some of the registered marks most widely used by the Company. Tandy believes that the Radio Shack, Computer City and Incredible Universe names and marks are well-recognized and associated with a high-quality service provider by consumers. The Company's products are sold primarily under the Radio Shack, Optimus, Tandy, Computer City and Realistic trademarks which are registered in the U.S. and many foreign countries. The Company believes that the loss of the Radio Shack name or mark would be material to its business, but does not believe that the loss of any one trademark registration would be material.
Tandy also owns various patents relating to retail and support functions and various products which Tandy has previously designed and manufactures.
SUPPLIERS The Company obtains merchandise from a large number of suppliers from various parts of the world. Alternative sources of supply exist for most merchandise and raw materials purchased by the Company. As the Company's product line is diverse, the Company would not expect a lack of availability of any single product or raw material to have a material impact on its operations.
BACKLOG ORDERS The Company has no material backlog of orders for the products it sells.
COMPETITION The consumer electronics retail business is highly competitive. The Company competes in the sale of its products and services with department stores, mail order houses, discount stores, general merchants, home appliance stores and gift stores which sell comparable products manufactured by others. Competitors range in size from local drug and hardware stores to large chains and department stores. Computer store chains and franchise groups as well as independent computer stores and several major retailers compete with the Company in the retail personal computer marketplace. Consumer electronic and computer mail-order companies also compete with the Company. The products which compete with those sold by the Company are manufactured by numerous domestic and foreign manufacturers. Many of these products carry nationally recognized brand names or private labels and are sold in markets common to the Company. Some of the Company's competitors have financial resources equal to or greater than the Company's resources.
Management believes that among the factors that are important to its competitive position are price, quality, service and the broad selection of electronic products and computers carried at conveniently located retail outlets. The Company's utilization of trained personnel and its ability to use national and local advertising media are important to the Company's ability to compete in the consumer electronics marketplace. Management of the Company believes it is a strong competitor with respect to each of the factors referenced above. Given the highly competitive nature of the consumer electronics retail business, no assurance can be given that the Company will continue to compete successfully with respect to each of the factors referenced above. Also, the Company would be adversely affected if its competitors were to offer their products at significantly lower prices, introduce innovative or technologically superior products not yet available to the Company or if the Company were unable to obtain products in a timely manner for an extended period of time.
The Company focuses on various types of store formats to address the marketplace. Each of the Company's retailing formats uses a distinct but complementary path to the marketplace, based on its unique customer appeal, marketing strengths and margin structure.
Radio Shack. Radio Shack(R) stores offer the shopping convenience of approximately 6,600 dealers and company-owned stores, high-quality private label products, unique selection, knowledgeable personnel and excellent customer service. Radio Shack has strong sales in approximately 3,200 different items in such consumer-demand product categories as speakers, batteries, communications equipment, tape decks, antennas, electronic components and accessories.
Computer City. Computer City(R) stores offer approximately 5,000 different name-brand items, competitive prices and excellent customer service on computers, computer software and accessories. While the SuperCenters are approximately 23,000 square feet, Computer City Express stores average 10,000 square feet and serve smaller markets and also supplement SuperCenters in larger markets.
Incredible Universe. A new concept in the retailing of name brand consumer electronics and appliances, these stores are approximately 184,000 square feet in size and carry over 85,000 different stock-keeping units which provide the customer with a "universe" of choices.
Tandy Name Brand. In the past the Company has sold name brand consumer electronics and appliances through Tandy Name Brand which included three distinctly different types of store formats. The Tandy Name Brand group will be dissolved and continuing stores will be integrated into the Radio Shack division as the Specialty Retail Group.
The Company has faced intense competition in its consumer electronics retailing businesses. Competition is driven by technology and product cycles, as well as the economy. In the consumer electronics retailing business, competitive factors include price, product quality, product features, consumer services, manufacturing and distribution capability and brand reputation.
RESEARCH AND DEVELOPMENT Research and development expenditures are not significant.
EMPLOYEES As of December 31, 1994, the Company had approximately 45,800 employees, excluding approximately 1,700 full time employees associated with the Tandy Name Brand, Tandy Credit Division and Service Contract group which the Company has announced it will close or sell. The number includes approximately 4,000 temporary retail employees remaining from the Christmas selling season. Management of the Company considers the relationship between the Company and its employees to be good. It does not anticipate any work stoppage due to labor difficulties.
ITEM 2.
ITEM 2. PROPERTIES. Information on the Company's properties is in "Management's Discussion and Analysis of Results of Operations and Financial Condition" and the financial statements included in this Form 10-K and is incorporated herein by reference. The following items are discussed further on the referenced pages:
Page Retail Outlets ...................... 14 Property, Plant and Equipment ....... 40 Leases .............................. 43
The Company leases rather than owns most of its retail facilities. However, the buildings of three of the Incredible Universe stores are owned rather than leased. The Radio Shack, Tandy Name Brand and Computer City stores are located primarily in major shopping malls, stand-alone buildings or shopping centers owned by other companies. The Company owns most of the property on which its executive offices are located in Fort Worth, Texas as well as five distribution facilities and most of its manufacturing facilities and land located throughout the United States. Existing warehouse and office facilities are deemed adequate to meet the Company's needs in the foreseeable future.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS. The Company is a defendant in a consolidated action titled "O'Sullivan Industries Holdings, Inc. Securities Litigation", which was commenced in 1994 and is currently pending before the United States District Court for the Western District of Missouri. The plaintiffs seek damages in an unspecified amount alleging that O'Sullivan's initial public offering prospectus, certain press releases and other materials contained material misrepresentations and omissions. They have also named O'Sullivan, O'Sullivan's officers and directors, and the underwriters as defendants. Tandy believes that the lawsuit is totally without merit and is defending itself vigorously. It further believes that even though an adverse resolution of the litigation may have a negative impact on its results of operations in the year of resolution, resolution will not have a material adverse effect on its financial condition or liquidity.
Tandy has various claims, lawsuits, disputes with third parties, investigations and pending actions involving allegations of negligence, product defects, discrimination, infringement of intellectual property rights, securities matters, tax deficiencies, violations of permits or licenses, and breach of contract and other matters against the Company and its subsidiaries incident to the operation of its business. The liability, if any, associated with these matters was not determinable at December 31, 1994. While certain of these matters involve substantial amounts, and although occasional adverse settlements or resolutions may occur and negatively impact earnings in the year of settlement, it is the opinion of management that their ultimate resolution will not have a materially adverse effect on Tandy's financial position.
EXECUTIVE OFFICERS OF THE REGISTRANT (SEE ITEM 10 OF PART III). The following is a list of Tandy Corporation's executive officers, their ages, positions and length of service with the Company as of March 30, 1995.
Position (Date Elected Years with Name to Current Position) Age Company ---- -------------------- --- ---------- John V. Roach Chairman of the Board, 56 27 Chief Executive Officer and President (July 1982)
William C. Bousquette Executive Vice President 58 4 (1) (January 1994-January 22, 1995)
Dwain H. Hughes Senior Vice President and 47 15 (2) Chief Financial Officer (January 1995)
Robert M. McClure Senior Vice President - 59 22 (3) Tandy Retail Services (January 1994)
Herschel C. Winn Senior Vice President 63 26 and Secretary (November 1979)
Mark W. Barfield Vice President - Tax 37 7 (4) (May 1994)
Lou Ann Blaylock Vice President - 56 24 (5) Corporate Relations (January 1993)
Frederick W. Padden Vice President - Law 62 4 (6) and Assistant Secretary (January 1994)
Ronald L. Parrish Vice President - 52 8 Corporate Development (April 1987)
Richard L. Ramsey Vice President and 49 28 Controller (January 1986)
Leonard H. Roberts President of Radio Shack 46 1 (7) (July 1993)
There are no family relationships among the executive officers listed and there are no arrangements or understandings pursuant to which any of them were appointed as executive officers. All executive officers of Tandy Corporation are elected by the Board of Directors annually to serve for the ensuing year, or until their successors are elected. All of the executive officers listed above have served the Company in various capacities over the past five years, except for Messrs. Bousquette, Padden and Roberts.
(1) Mr. Bousquette served as Executive Vice President and Chief Financial Officer of the Company from November 1990 to January 1993 and from January 1994 to December 1994. He served as Executive Vice President only from January 1, 1995 to January 22, 1995 when he resigned as an employee of the Company. He served as Chief Executive Officer of TE Electronics Inc. from January 1993 to January 22, 1995. Prior to joining Tandy, he served as Executive Vice President and Chief Financial Officer of Emerson Electric Company from March 1984 until November 1990.
(2) Mr. Hughes was elected Senior Vice President and Chief Financial Officer of the Company effective January 1, 1995. Mr. Hughes served as Vice President and Treasurer of the Company from June 1991 until December 1994. From June 1989 until June 1991, Mr. Hughes was Assistant Treasurer of the Company.
(3) Mr. McClure served as President of the Tandy Electronics Division from August 1987 until January 1993 when he was elected as Chief Operating Officer and President of TE Electronics Inc. On January 1, 1994, Mr. McClure was named Senior Vice President - Tandy Retail Services.
(4) Mr. Barfield served as Director of Federal and International Taxes from April 1991 through May 1994 when he was named Vice President - Tax. From January 1988 through April 1991 he was the Federal Income Tax Manager for the Company.
(5) Mrs. Blaylock was Director of Corporate Relations from January 1986 until she was named Vice President - Corporate Relations in January 1993.
(6) Mr. Padden has been the Vice President - Law of the Company since January 1994 and has been Vice President and Secretary of TE Electronics Inc. since January 1993. From January 1991 to January 1993 he was the Deputy General Counsel - Intellectual Property for Tandy Corporation. Prior to joining Tandy he was a General Attorney at AT&T-Bell Laboratories from 1984 to January 1991.
(7) Mr. Roberts became President of the Radio Shack Division on July 7, 1993. Prior to joining Tandy he served as the Chairman and Chief Executive Officer of Shoney's, Inc. from 1990 to 1993.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET FOR COMMON STOCK The Company's common stock is listed on the New York Stock Exchange and trades under the symbol "TAN". The following table presents the high and low sale prices for the Company's common stock for each quarter of the two years ended December 31, 1994.
Dividends Quarter Ended: High Low Close Declared ------- ------ ------- --------- December 31, 1994 $50 5/8 $41 $50 1/8 $.18 September 30,1994 43 7/8 33 3/8 43 .15 June 30, 1994 38 5/8 30 3/4 34 1/2 .15 March 31, 1994 49 7/8 35 1/4 36 1/4 .15 December 31, 1993 50 3/4 35 3/8 49 1/2 .15 September 30,1993 37 3/8 28 1/8 36 7/8 .15 June 30, 1993 32 3/8 28 3/8 30 .15 March 31, 1993 32 1/8 24 5/8 29 5/8 .15
HOLDERS OF RECORD At March 21, 1995 there were 33,672 holders of record of the Company's common stock.
DIVIDENDS The Board of Directors periodically reviews the Company's dividend policy. On December 16, 1994, the Board of Directors approved a quarterly dividend of $0.18 per common share, which represents a 20% increase over the prior quarterly payment of $0.15 per share.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
Tandy Corporation ("Tandy" or the "Company") changed its fiscal year end from June 30 to December 31 effective December 31, 1992.
The following Management's Discussion and Analysis of Results of Operations and Financial Condition compares the year ended December 31, 1994 with the years ended December 31, 1993 and June 30, 1992. Although the years ended December 31, 1993 and June 30, 1992 end at different times of the year, management believes that the seasonality of the retail business relating to Christmas is so significant that it would distort trends and related percentage comparisons to sales for the readers if a full year's results were compared to the six-month transition period ended December 31, 1992. Information for the six months ended December 31, 1992 is included in the tables herein for informational purposes only. Significant events occurring during such period are described in the respective sections below.
For the year ended December 31, 1994, Tandy's sales increased 21% to $4,943,679,000 from $4,102,551,000 for the year ended December 31, 1993. The increase in sales was primarily attributable to the addition of six Incredible Universe(R) and 29 Computer City(R) stores during 1994. A net increase of 45 company-owned Radio Shack(R) stores also contributed to the sales increase. Partially offsetting these upward trends in sales was an overall decline in sales for Tandy Name Brand. This decline can be partially attributed to the fact that 110 McDuff(R) and VideoConcepts(R) stores were closed during February 1993. See "Provision for Business Restructuring" below for further discussion of Tandy Name Brand.
Tandy posted a 5% same store sales increase with all divisions showing same store increases during the year. Radio Shack and Computer City achieved same store sales increases of 5% while the Tandy Name Brand group was only up slightly. Radio Shack same store sales increases continue to be attributable to its focus on its core business (i.e. consumer electronics, cellular telephones, parts and accessories) which have higher margins versus personal computers which have smaller margins. Incredible Universe, with three old stores, experienced a 20% comparable stores sales gain during calendar 1994. Same store sales increases reflect growing demand for consumer electronics amid a strong economy.
During 1994, Tandy and InterTAN Inc. ("InterTAN") entered into a new import/export agreement under which Tandy's A&A operations would act as InterTAN's agent in importing consumer electronics from the Far East. Commencing in March 1994, only the purchasing agent commission and sales made by Tandy manufacturing plants to InterTAN were recorded as sales. InterTAN purchases from third parties through A&A are no longer recorded as sales, reflecting the arrangement under the new merchandise agreement; however, commission income is reported as operating revenue. Accordingly, reported sales by Tandy to InterTAN in 1994, reflected in Import/Export and Other Sales, were considerably lower than in 1993, however, the earned income relating thereto was not materially different. See the discussion in the "InterTAN Update" found below.
For the year ended December 31, 1993, overall sales grew 12% to $4,102,551,000 as compared to $3,649,284,000 for the fiscal year ended June 30, 1992. This increase was primarily due to the opening of three Incredible Universe stores and the expansion of the Computer City store chain. Computer City sales increases were the result of 25 additional stores since June 30, 1992 and comparable store sales gains at old stores in excess of 30% for the year ended December 31, 1993. Tandy Name Brand experienced a sales decrease in calendar 1993 as compared to the June 1992 fiscal year. This decrease was primarily a result of the closing of 110 McDuff and VideoConcepts stores in February 1993. This decline was offset by the addition of three Incredible Universe stores. The first two Incredible Universe stores were opened in the fall of 1992, and the third was added in the fall of 1993. Shipments to InterTAN decreased for calendar year 1993 as compared to the fiscal year ended June 30, 1992. On a comparable store basis, Radio Shack's sales increased slightly during the year ended December 31, 1993, as compared to the fiscal year ended June 30, 1992. A moderate increase in sales of Radio Shack's core business was offset by a decline in sales of personal computers through the Radio Shack division.
The decrease in Radio Shack's computer business reflects the impact of sharply lower pricing in response to competitive pressures in the marketplace. The changing dynamics of the personal computer business had a significant impact on Radio Shack's performance during 1993 and fiscal 1992, and to a lesser extent in 1994. A combination of shifts in competitive retail distribution to superstores and telemarketing combined with rapidly declining prices has taken the computer category from approximately 17.0% of Radio Shack's sales with a gross profit of approximately 29.0% in the year ended June 30, 1992, to approximately 12.0% of sales and a gross profit of approximately 13.7% for the year ended December 31, 1994. Radio Shack's extensive assortment of electronic parts, accessories and specialty items differentiates it from other consumer electronics retailers in the marketplace. The table below shows the breakdown by major category of Radio Shack sales.
GROSS PROFIT Gross profit as a percent of sales declined in 1994 to 39.0% from the 1993 level of 41.9%. This decrease reflects the continued expansion of Tandy's lower gross margin retail formats. During calendar year 1994, Computer City and Incredible Universe represented 31.7% of total sales and operating revenues compared to 18.6% of the 1993 total. Offsetting the mix of business shift within Tandy are the increasing gross margins in Radio Shack in calendar 1994, which continue to benefit from a lower percentage of sales related to low margin computer equipment and a higher percentage associated with the sale of higher gross margin categories including parts, accessories and consumer electronics. Management anticipates that Tandy's consolidated gross profit percentage will continue to decline as the effects of the Computer City and Incredible Universe expansions are increasingly reflected in the gross profit mix.
Gross profit as a percent of sales and operating revenues for the year ended December 31, 1993 was 41.9% as compared to 43.5% for the six months ended December 31, 1992, and 47.2% for the fiscal year ended June 30, 1992. The decline, in part, reflects the faster growth of new high-volume formats such as Computer City and Incredible Universe which have inherently lower gross margins than Radio Shack stores. Combined Computer City and Incredible Universe sales contributed 18.6%, 8.9% and 2.6% to consolidated sales in the year ended December 31, 1993, the six months ended December 31, 1992 and the year ended June 30, 1992, respectively. Competitive pressures in name brand electronics retailing decreased Tandy Name Brand's gross margins in each of the periods ended December 31, 1993 and 1992 and June 30, 1992. Additionally, gross margins were impacted in the Tandy Name Brand units by the increasing percentage of sales related to the lower margin computer category.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses ("SG&A") as a percent of sales and operating revenues for the year ended December 31, 1994 declined from the year ended December 31, 1993, as well as from the year ended June 30, 1992 and from the six months ended December 31, 1992. The accompanying table summarizes the breakdown of various components of SG&A and their related percentage of sales and operating revenues. The lower SG&A percentage reflects the lower costs, relative to net sales and operating revenues, of the Company's newer retail formats, as well as the operating costs achieved through cost reduction programs.
Specific items impacting year-to-year comparisons are: (1) for the year ended December 31, 1993, foreign currency transactions include a $1,796,000 realized loss on the sale of the cellular joint ventures; (2) other expenses in calendar 1993 are net of a gain of $6,047,000 on the sale of the cellular joint ventures, and (3) in fiscal year 1992, the sale of a Japanese subsidiary, the assets of which were primarily real estate, resulted in the recording of a gain of $12,093,000 in other SG&A and a foreign currency gain of $6,894,000. The Company's exposure to foreign currency fluctuations has decreased significantly with the divestiture of the European marketing operations.
Although payroll and commissions expense has increased in dollars, this cost has decreased as a percent of sales and operating revenues in the year ended December 31, 1994 as compared to the year ended December 31, 1993 and the fiscal year ended June 30, 1992. This is due to the increase in Computer City and Incredible Universe sales as a percentage of total sales and operating revenues from 2.6% in fiscal 1992 to 31.7% in 1994; these divisions have an inherently lower salary structure when compared to Radio Shack. In addition, Computer City payroll expense as a percent of Computer City sales has decreased from 1993 to 1994, while that of the other retail divisions has remained approximately the same from year to year.
Advertising costs have decreased as a percent of sales and operating revenues in the year ended December 31, 1994 as compared to the year ended December 31, 1993 and the fiscal year ended June 30, 1992. Management has focused its efforts on more efficient advertising methods for Radio Shack utilizing the Company's database of customer activity to reduce costs while maintaining market awareness. Advertising costs increased in dollars compared to the prior year as new Computer City and Incredible Universe stores opened and Radio Shack shifted its marketing program to electronic media. The Company currently spends approximately 30% of its advertising funds for television and radio commercials, compared to 20% in previous years. Radio Shack's advertising spots have been shifted from sports-related events to prime-time shows in order to reach a broader audience.
Rent expense has increased slightly in dollars but decreased as a percent of sales during the year ended December 31, 1994 as compared to the year ended December 31, 1993. The increase in rent expense is due a net increase of 45 Radio Shack stores and the addition of 29 Computer City stores and six Incredible Universe stores. Incredible Universe and Computer City formats typically have lower rent, as a percent of sales, than Tandy overall. As a percent of sales, rent decreased from fiscal 1992 in comparison with that for the year ended December 31, 1993 resulting in part from Computer City's lower rent to sales ratio.
Other SG&A costs have increased over that of the prior year due to several factors, including an increase in discount fees paid to third party bank cards because of both increased sales in the Computer City and Incredible Universe formats and an increase in credit card sales as a percent of sales. Further, Radio Shack merchandise repair expenses increases of $8,261,000 primarily reflected an increase in extended service plan sales. The change in other SG&A also reflects the $6,047,000 gain noted above on the 1993 sale of the Company's interests in two cellular telephone manufacturing joint ventures and an increase in legal and attorney fees of $4,671,000 in 1994.
The Company's credit operations have been successful in supporting sales of the retail operations. Private label credit cards represented 35% of credit sales for the year ended December 31, 1994, 34% for the year ended December 31, 1993, 36% for the six months ended December 31, 1992 and 43% in fiscal 1992. This decline in the percentage from 1992 results from increased sales through the Computer City and Incredible Universe stores which have a lower percentage of private label credit card usage. Expenses associated with the credit card operations, which are included in SG&A expense, have decreased as a percent of sales due to a decrease in credit losses reflecting a stronger economy. As discussed more fully in Note 3 of the Notes to Consolidated Financial Statements, the Company has sold its Computer City and Incredible Universe private label credit card portfolios and expects in the first half of 1995 to sell its Radio Shack and McDuff private label credit card portfolios. Once completed, the Company will no longer incur bad debt expense or servicing costs associated with its private label credit cards. In 1995, the Company will begin to receive a fee from the unrelated third party financer of its private label credit card portfolio balance for the generation of normal interest bearing accounts, and will pay a fee for the generation of special purpose promotional accounts, such as "zero percent interest for twelve months" programs. See Note 3 of the Notes to Consolidated Financial Statements for further discussion of the Company's pending disposition of its credit operations.
DEPRECIATION AND AMORTIZATION Depreciation and amortization expense as a percent of sales and operating revenues decreased slightly in the year ended December 31, 1994 as compared with the year ended December 31, 1993 and the fiscal year ended June 30, 1992. The dollar amount of depreciation and amortization expense for the year ended December 31, 1994 increased 6% over the dollar amount for the year ended December 31, 1993 and 14% over that for the year ended June 30, 1992. The increase is due to additional capital expenditures related to the six Incredible Universe stores added in 1994, and the addition of 29 Computer City stores this year. Three Incredible Universe stores and 25 Computer City stores were added from June 30, 1992 to December 31, 1993, thereby increasing depreciation and amortization from fiscal 1992 to calendar 1993.
NET INTEREST (INCOME)/EXPENSE Net interest income was $48,565,000 for the year ended December 31, 1994, $25,831,000 for the year ended December 31, 1993 and $24,245,000 for the fiscal year ended June 30, 1992. Interest income in all three years is primarily attributable to the Company's credit card operations; however, in fiscal 1994 the Company also received interest income from the IRS reflecting the settlement of outstanding tax issues of approximately $9,582,000, and interest income earned on notes receivable from AST Research Inc. and InterTAN which approximated $5,724,000 and $8,280,000, respectively. Increased short-term investments resulted from proceeds received from the divestiture of discontinued manufacturing and marketing operations, as well as from cash provided by operating activities. Interest income as it relates to the AST Research Inc. and InterTAN notes receivable is expected to continue in fiscal 1995. See further discussion on notes receivable in the "InterTAN Update" and "Discontinued Operations" sections of Management's Discussion and Analysis below.
Interest income from credit operations was $46,868,000 for the year ended December 31, 1994, $57,401,000 for the year ended December 31, 1993 and $62,307,000 for the fiscal year ended June 30, 1992. Interest income from the credit card company has decreased in the last three years as a result of increased use of certain special sales promotions and marketing initiatives, some of which provide for no interest charges for specified initial periods. The decline in average credit card receivables results from increased payments from credit customers reflecting the overall improvement in the economy and a desire by consumers to shift debt to lower interest rate instruments. Due to the December 1994 sale of the Computer City and Incredible Universe credit card portfolios, the Company will no longer include any interest income from these portfolios. Since the sale, at net book value, of the Radio Shack and McDuff portfolios is contingent upon and subject to regulatory and rating agency approvals, the Company will continue to include interest income from these portfolios until final approval is received and the sale is completed. This sale is expected to close in the first half of 1995.
The decrease in interest expense for the year ended December 31, 1994 as compared to the years ended December 31, 1993 and June 30, 1992 is due to the decrease of total debt and lower U.S. interest rates. Short-term debt has decreased 41% and long-term debt has decreased 18% from December 31, 1993 due to the repayment of debt such as subordinated debentures, medium-term notes and commercial paper. The Company expects overall interest expense to increase in 1995 as compared to interest expense in 1994. As the Company receives cash proceeds from the sale of its credit operations, it will apply a significant portion of such proceeds to the repayment of short-term debt, for store expansion and to fund its 12,500,000 share repurchase program, of which approximately 5,000,000 shares had been repurchased as of December 31, 1994.
PROVISION FOR BUSINESS RESTRUCTURING In December 1994, the Company adopted a business restructuring plan to close or convert 233 of the 306 Tandy Name Brand stores. Closed stores will include 151 VideoConcepts, 30 McDuff mall stores and 19 McDuff Supercenters. Thirty-three other mall stores or McDuff Supercenters will be converted to Radio Shack or Computer City Express stores. It is anticipated that a majority of these planned closures will be completed by the end of the first quarter of 1995. Approximately 57 McDuff Supercenters and 16 The Edge in Electronics stores will remain open and will become part of the Specialty Retail Group of Radio Shack. A pre-tax charge of $89,071,000 was taken in the fourth quarter of fiscal 1994 related to the closing and conversion of these stores. The components of the restructuring charge and an analysis of the amounts charged against the reserve are outlined in a table in Note 4 of the Notes to Consolidated Financial Statements.
The lease obligations, termination benefits and conversion of 33 stores will require cash outlays, most of which are expected to be made during 1995. The cash outlays will be financed by operating cash flows. Management anticipates that pre-tax operating losses during the period of store closures will approximate $6,000,000 to $8,000,000 (unaudited).
Sales and operating revenues associated with the closing of Tandy Name Brand stores were approximately $261,990,000 (unaudited) and $271,914,000 (unaudited) for calendar years 1994 and 1993, respectively, and operating losses approximated $18,125,000 (unaudited) and $15,342,000 (unaudited) for calendar 1994 and 1993, respectively. During the fiscal year ended June 30, 1992, sales and operating revenues and operating losses from the closing stores were approximately $254,531,000 (unaudited) and $10,169,000 (unaudited), respectively. The results of the closing stores for the six months ended December 31, 1992 are not presented because, due to the seasonal nature of the stores' operations, such results would not be comparable to any of the twelve-month results for the other periods presented. In conjunction with this restructuring, 1,425 (unaudited) employees will be terminated, most of which are store employees and managers. As of December 31, 1994, no employees had been terminated and, accordingly, no termination benefits had been paid.
The Company adopted a plan resulting in business restructuring charges during the six months ended December 31, 1992 designed to improve the Company's competitiveness and future profitability. The pre-tax charge of $48,000,000 related primarily to the closing of 110 of the then 432 Tandy Name Brand stores, mainly McDuff Supercenters in major market areas and, to a lesser extent, the elimination of certain product lines. Some product lines were reduced or eliminated after consideration of competitive factors and market trends. These stores were closed in the first quarter of 1993.
GAIN ON SALE OF CREDIT OPERATIONS AND EXTENDED SERVICE CONTRACTS In December 1994 the Company entered into an agreement with SPS Transaction Services, Inc., a majority-owned subsidiary of Dean Witter, Discover & Company ("SPS") to sell its Computer City and Incredible Universe private label credit card portfolios without recourse. As a result of the agreement, in which Tandy received cash of $85,764,000 and will receive a deferred payment of $179,777,000, the Company recognized a gain of $35,708,000 in the accompanying Consolidated Statements of Income. The deferred payment amount does not bear interest. Principal will be paid monthly with the total principal amount of $179,777,000 due over a twelve month period. The Company has discounted the deferred payment by $3,477,000 to yield approximately 5% over the twelve month payout period. As a result, the discounted deferred payment amount of $176,300,000 is classified as current in the accompanying Consolidated Balance Sheet at December 31, 1994. The Company also signed a letter of intent to sell its Radio Shack and McDuff private label credit card portfolios at net book value and without recourse to SPS in 1995, including the rights to the securitized accounts (see Note 6 of the Notes to Consolidated Financial Statements). The agreement for the sale of McDuff and Radio Shack portfolios was completed in January 1995, subject only to regulatory and rating agency approval which should be forthcoming in the first half of 1995. Tandy anticipates receiving approximately $290,000,000 (unaudited) cash and a deferred payment approximating $80,000,000 (unaudited), on terms similar to the deferred payment arrangement mentioned above.
Tandy National Bank (the "Bank"), a limited purpose nationally chartered credit card bank, was established on May 11, 1994. The Bank, a wholly-owned subsidiary of Tandy, was created to operate the consumer credit card programs for Tandy. All new accounts approved after May 12, 1994 were originated and owned by the Bank. After the Company's sale of the private label credit card portfolios, the Bank will cease operations.
Effective December 1994, the Company transferred all of its existing obligations with respect to extended service contracts in force at December 31, 1994, with the exception of certain contracts aggregating approximately $7,734,000, to an unrelated third party. The unrelated third party contractually assumed all of the Company's legal obligations and risk of future loss pursuant to the extended service contracts in exchange for $75,059,000, of which $70,702,000 was paid in December 1994 and $4,357,000 was paid in February 1995. As a result, the Company has recognized a gain of $55,729,000 associated with this transaction in its accompanying Consolidated Statements of Income. The Company will continue to provide repair services to customers who tender products pursuant to the extended service contracts on a non-exclusive basis. The unrelated third party will pay the Company competitive market rates for repairs on products tendered pursuant to the extended service contracts.
The Company will continue to sell extended service contracts on behalf of the unrelated third party and will receive a commission upon the sale. The commission will be recognized as commission income at the time of sale.
PROVISION FOR INCOME TAXES The effective tax rate for the year ended December 31, 1994 was 37.6% and was 37.1% for the year ended December 31, 1993. The higher effective tax rates for these two years as compared to 36.2% for the year ended June 30, 1992 reflects the impact of the increase of the federal tax rate to 35% from 34% which was effective January 1, 1993. The effective tax rate for the six-month period ended December 31, 1992 was 34.2%. This lower effective rate reflects the successful resolution of certain IRS examinations during the period.
The IRS Dallas field office is reviewing the Company's 1987-1989 tax returns. The review in Dallas could lead to referral to the IRS National office. The resolution of this matter could result in additional taxes and interest to the Company related to the spin-off of InterTAN and raises questions about the private letter rulings issued by the IRS regarding the spin-off and certain other tax matters. Although aggregate additional taxes involved in these transactions could potentially range from $0 to $46 million, based on the advice of the Company's independent tax advisors, the Company believes it would prevail if any tax litigation had to be instituted. Any ultimate tax assessment would also include interest. In any event, the Company believes the ultimate resolution would have no material impact on the Company's financial condition.
Financial Accounting Standard No. 109, "Accounting for Income Taxes", which the Company adopted January 1, 1993, is discussed in Note 12 of the Notes to Consolidated Financial Statements.
DISCONTINUED OPERATIONS On June 25, 1993, the Board of Directors of Tandy adopted a formal plan of divestiture under which the Company would sell its computer manufacturing and marketing businesses, the O'Sullivan Industries, Inc. ("O'Sullivan") ready-to-assemble furniture manufacturing and related marketing business, the Memtek Products division and the Lika printed circuit board business.
Computer Manufacturing. The Company closed the sale of the computer manufacturing and marketing businesses to AST Research, Inc. ("AST") on July 13, 1993. In accordance with the terms of the definitive agreement between Tandy and AST, Tandy received $15,000,000 upon closing of the sale. The balance of the purchase price of $90,000,000 is payable by a promissory note. The principal amount of this promissory note is payable by July 12, 1996; interest is accrued and paid annually. The interest rate on the promissory note is currently 4.94% per annum and is adjusted annually, not to exceed 5% per annum. The terms of the promissory note stipulate that the outstanding principal balance may be paid at maturity at AST's option in cash or the common stock of AST. However, at Tandy's option not more than 50% of the initial principal balance may be paid in common stock of AST. The promissory note is supported by a standby letter of credit in the amount of the lesser of $100,000,000 or 70% of the outstanding principal amount of the promissory note. At December 31, 1994, the standby letter of credit approximated $67,704,000.
In October 1993, the Company sold its computer marketing operations in France to AST, together with certain other multimedia assets and additional Swedish inventory, in return for an increase in the principal amount of the promissory note described above to $96,700,000. The Company has discounted this note by $2,000,000 and the discount will be recognized as interest using the effective interest rate method over the life of the note.
Memtek Products. On November 10, 1993, the Company executed a definitive agreement with Hanny Magnetics (B.V.I.) Limited, a British Virgin Islands corporation ("Hanny"), to purchase certain assets of the Company's Memtek Products operations, including the license agreement with Memorex Telex, N.V. for the use of the Memorex trademark on licensed consumer electronics products. This sale closed on December 16, 1993. Hanny is a subsidiary of Hanny Magnetics (Holdings) Limited, a Bermuda corporation, listed on the Hong Kong Stock Exchange. Proceeds from this sale aggregated $69,602,000. The $7,102,000 receivable which remained at December 31, 1993 was paid in 1994.
O'Sullivan Industries. On January 27, 1994 the Company announced that it had reached an agreement with the underwriters to sell all the common stock of O'Sullivan Industries Holdings, Inc., the parent company of O'Sullivan, to the public at $22 per share. The net proceeds realized by Tandy in the initial public offering, together with a $40,000,000 cash dividend from O'Sullivan, approximated $350,000,000. The initial public offering closed on February 2, 1994.
Tandy has recognized income of approximately $4,399,000, net of tax, during the year ended December 31, 1994, pursuant to a Tax Sharing and Tax Benefit Reimbursement Agreement between Tandy and O'Sullivan under which Tandy receives payments from O'Sullivan approximating the federal tax benefit that O'Sullivan realizes from the increased tax basis of its assets resulting from the initial public offering. The higher tax basis increases O'Sullivan's tax deductions and, accordingly, reduces income taxes payable by O'Sullivan. These payments will be made over a 15-year time period and are contingent upon O'Sullivan's taxable income each year. The Company is recognizing these payments as additional sale proceeds and gain in the year in which the payments become due and payable to the Company pursuant to the Tax Sharing and Tax Benefit Reimbursement Agreement. The additional gain is recorded as a reduction of SG&A expense in the accompanying Consolidated Statements of Income.
Lika. On October 11, 1994, Tandy sold the assets used in its Lika(R) printed circuit board division to Viktron Limited Partnership, an Illinois limited partnership. The proceeds from the sale and liquidation of assets approximated $16,380,000 which included $7,754,000 in cash, proceeds from liquidation of retained assets of $5,594,000 and secured promissory notes for $3,032,000.
In connection with the computer manufacturing sale, the Memtek Products sale and the Lika sale, the Company agreed to retain certain liabilities primarily relating to warranty obligations on products sold prior to the sale. Management believes that accrued reserves, as reflected on its December 31, 1994 balance sheet, are adequate to cover estimated future warranty obligations for the products.
Tandy's cash flow and liquidity, in management's opinion, remains strong. During the year ended December 31, 1994, cash provided by operations was $268,938,000 as compared to $322,294,000 for the year ended December 31, 1993. The decreased cash flow from operations was due partially to the financing of receivables and inventories related to the expansion of Computer City and Incredible Universe store chains. The increase of $261,071,000 in cash used to fund accounts receivable was due primarily to the increase in Tandy Credit receivables related to increased retail sales by Computer City and Incredible Universe and the use of certain special sales promotions and marketing initiatives, some of which provide for no interest charges for specified initial periods. Inventory required $156,129,000 more cash in 1994 than in 1993. The increase in inventory during 1994 related to new store openings and increases in average inventory to ensure in-stock positions throughout the Christmas selling season. Partially offsetting the cash used to finance receivables and inventory were the sale of the Computer City and Incredible Universe private label credit card portfolios which provided cash of $85,764,000 as well as increases in accounts payable, accrued expenses and income taxes which provided $184,017,000 more cash in 1994 than in 1993. The 1994 increase in accounts payable, accrued expenses and income taxes is net of the cash expended, approximating $70,702,000, associated with the transfer of the legal obligation and risk of loss for existing extended service contracts to an unrelated third party.
During the year ended December 31, 1993, cash provided by operations was $322,294,000 as compared to $146,782,000 for the fiscal year ended June 30, 1992. The increased cash flow from operations in calendar 1993 compared to fiscal year ended June 30, 1992 was due partially to receivables which provided $30,133,000 in cash in 1993 but used $121,719,000 in 1992. The decline in accounts receivable in 1993 versus 1992 was due to the liquidation of receivables related to the divested operations and lower consumer receivables related to the Company's private label credit card portfolio. The latter reason reflects consumers' desires to liquidate debt with higher interest rates and the overall improved economy. Inventory required less cash in calendar 1993 than in fiscal 1992.
Investing activities involved capital expenditures primarily for retail expansion totaling $180,559,000 for the year ended December 31, 1994, $129,287,000 for the year ended December 31, 1993, and $127,495,000 for the year ended June 30, 1992. Proceeds from the sale of property, plant and equipment in 1994 resulted primarily from a sale-leaseback transaction involving certain Incredible Universe stores which netted the Company $52,719,000 in cash. Proceeds received from the sale of divested operations totaled $359,004,000 and $111,988,000 during the years ended December 31, 1994 and 1993, respectively. See "Discontinued Operations". Investing activities in 1993 also included $31,663,000 for the purchase of InterTAN's bank debt and the extension and funding of a working capital line of credit. See "InterTAN Update" for further information. Future store expansions and refurbishments and other capital expenditures are expected to approximate $180,000,000 to $200,000,000 per year over the next two years and will be funded primarily from available cash, cash flow from operations and proceeds from the sale of the private label credit card portfolios.
Purchases of treasury stock used cash of $275,415,000, $27,650,000 and $527,773,000 in 1994, 1993 and fiscal 1992, respectively. Increases in treasury stock purchases in 1994 related primarily to the share repurchase program. See "Capital Structure and Financial Condition" for further discussion. Financing activities in fiscal 1992 included the February 1992 sale of $2.14 Depositary Shares of the Company's Series C Preferred Equity Redemption Convertible Stock ("PERCS") for $429,982,000 and the subsequent purchase of common stock with such proceeds. Sales of treasury stock to the Company's Stock Purchase Program generated cash of $41,579,000, $42,067,000 and $49,590,000 in 1994, 1993, and fiscal 1992, respectively. Dividends paid, net of tax, in 1994, 1993 and fiscal 1992 amounted to $74,512,000, $74,873,000 and $56,132,000, respectively. The increase in dividends since fiscal 1992 is mainly the result of dividends paid on the PERCS which were issued in fiscal 1992. As a result of the Company calling its PERCS in March 1995, the Company will eliminate its dividend payment to the PERCS of approximately $32,000,000. However, it will pay upon conversion a dividend to the PERCS shareholders of approximately $4,815,000. Preferred stock dividends are expected to exceed $11,000,000 in 1995. The Company plans to fund the preferred stock and common stock dividends with available cash and cash flow from operations, as well as from the proceeds from the sale of its credit card portfolios.
In 1994 and 1993, the Company decreased short-term borrowings by $110,393,000 and $46,885,000, respectively, and increased short-term borrowings by $57,533,000 in fiscal 1992. The consistent reduction in short-term borrowings has been funded primarily by proceeds from the sale of divested operations and cash provided by operations. The Company's primary source of short-term debt, for which borrowings and repayments have been presented net in the Consolidated Statements of Cash Flows, consists of short-term seasonal bank debt and commercial paper. The commercial paper matures within ninety days as does the short-term seasonal bank debt.
Following are the current credit ratings for Tandy Corporation, which are investment grade:
Standard Category Moody's and Poor's -------- ------- ---------- Medium Term Notes Baa2 A- ESOP Senior Notes Baa2 A- Commercial Paper P-2 A-2
CAPITAL STRUCTURE AND FINANCIAL CONDITION The Company's balance sheet and financial condition continue to be strong. The Company's available borrowing facilities as of December 31, 1994 are detailed in Note 9 of the Notes to Consolidated Financial Statements.
In the fiscal year ended June 30, 1992, the Company issued 150,000 PERCS shares and used the proceeds of this offering to purchase $430,000,000 of the Company's common stock for treasury. The PERCS are discussed further in Note 18 of the Notes to Consolidated Financial Statements. On January 23, 1995, Tandy announced that it had exercised its right to call the issued and outstanding PERCS for conversion on March 10, 1995 prior to the mandatory conversion date of April 15, 1995. To complete the redemption, the Company will issue from treasury stock approximately 11,816,000 shares of Tandy Corporation common stock.
On August 1, 1994, the Company announced that its Board of Directors authorized management to purchase up to 7,500,000 shares of its common stock in addition to shares required for employee plans. On December 30, 1994, the Board of Directors authorized management to increase the share repurchase program to 12,500,000 shares. Purchases will be made from time to time in the open market, and it is expected that funding of the program will come from existing cash, short-term debt and proceeds from the sale of the credit card portfolios. At December 31, 1994, approximately 5,000,000 shares had been repurchased under this program.
The Company's issue of 10% subordinated debentures due June 30, 1994 was called by the Company on February 23, 1994 for redemption on April 1, 1994. The redemption was at 100% of face value or $32,431,000.
The revolving credit backup facilities to Tandy's commercial paper program were renewed in May 1994. These facilities are to be used only if maturing commercial paper cannot be repaid due to an inability to sell new commercial paper. This agreement is composed of two facilities--one for $200,000,000 expiring May 1995 and another $200,000,000 facility expiring in May 1997. Annual commitment fees for the facilities are 2/25 of 1% per annum and 1/8 of 1% per annum, respectively, whether used or unused.
In fiscal 1991, the Company filed a shelf registration for $500,000,000, of which $400,000,000 was designated for medium-term notes, and Tandy Credit Corporation increased its medium-term note program by $200,000,000. During fiscal 1991, short-term debt was refinanced by the issuance of $155,500,000 in medium-term notes. Tandy's medium-term notes outstanding at December 31, 1994 totaled $73,044,000 compared to $125,479,000 at December 31, 1993.
The total debt-to-capitalization ratio was 17.1%, 22.8%, 27.3% and 23.4% at December 31, 1994, December 31, 1993, December 31, 1992 and June 30, 1992, respectively. This debt-to-capitalization ratio should improve further in fiscal 1995 due to the cash proceeds from the sales of the credit operations being used to retire debt, fund the repurchase of outstanding common shares into treasury shares and for other purposes.
Management believes that the Company's present borrowing capacity is greater than the established credit lines and long-term debt in place. Management also believes that the Company's cash flow from operations, cash and short-term investments and its available borrowing facilities are more than adequate to fund planned store expansion and to meet debt service and dividend requirements and to fund its share repurchase program.
INFLATION Inflation has not significantly impacted the Company over the past three years. Management does not expect inflation to have a significant impact on operations in the foreseeable future unless global situations substantially affect the world economy.
NEW ACCOUNTING STANDARDS The American Institute of Certified Public Accountants issued Statement of Position 93-7, "Reporting on Advertising Costs," in December 1993. The statement generally requires all advertising costs to be expensed in the period in which the costs are incurred or the first time the advertising takes place, and is effective for years beginning after June 15, 1994. The statement is not anticipated to have any material effect on the results of operations or financial condition of the Company.
SALE OF JOINT VENTURE INTEREST During the quarter ended September 30, 1993, the Company entered into definitive agreements with Nokia Corporation ("Nokia") to sell the Company's interests in two cellular telephone manufacturing joint ventures with Nokia, TMC Company Ltd. located in Masan, Korea, and TNC Company located in Fort Worth, Texas. Pursuant to the terms of the definitive agreements, the Company received an aggregate of approximately $31,700,000 for its interests in these joint ventures. The Company also entered into a three-year Preferred Supplier Agreement pursuant to which it has agreed to purchase from Nokia substantially all of Radio Shack's requirements for cellular telephones at prevailing competitive market prices at the time of the purchase. These operations were not part of the overall divestment plan adopted in June 1993 by the Company's Board of Directors; therefore, the gain on the sale and their results of operations were not included in discontinued operations.
INTERTAN UPDATE InterTAN, the former foreign retail operations of Tandy, was spun off to Tandy stockholders as a tax-free dividend in fiscal 1987. Under the merchandise purchase terms of the original distribution agreement, InterTAN could purchase on payment terms products sold or secured by Tandy. A&A International ("A&A"), a subsidiary of Tandy, was the exclusive purchasing agent for products originating in the Far East for InterTAN.
On July 16, 1993 InterTAN had an account payable to Tandy of approximately $17,000,000, of which $7,600,000 was in default. InterTAN's outstanding purchase orders for merchandise placed under the distribution agreement with Tandy, but not yet shipped, totaled approximately $44,000,000. Because InterTAN had defaulted, on July 16 Tandy terminated the merchandise purchase terms of the distribution agreement and the license agreements. Tandy offered InterTAN interim license agreements which expired July 22, 1993, unless extended. The agreements were extended on July 23, 1993.
On July 30, 1993 Trans World Electronics, Inc. ("Trans World"), a subsidiary of Tandy, reached agreement with InterTAN's banking syndicate to buy approximately $42,000,000 of InterTAN's debt at a negotiated, discounted price. The closing of this purchase occurred on August 5, 1993, at which time Tandy resumed limited shipments to InterTAN and granted a series of short-term, interim licenses pending the execution of new license and merchandise agreements. The debt purchased from the banks has been restructured into a seven-year note with interest of 8.64% due semiannually beginning February 25, 1994 and semiannual principal payments beginning February 25, 1995 (the "Series A" note). Trans World provided approximately $10,000,000 in working capital and trade credit to InterTAN. Interest on the working capital loan (the "Series B" note) of 8.11% is due semiannually beginning February 25, 1994 with the principal due in full on August 25, 1996. Trans World also has received warrants with a five-year term exercisable for approximately 1,450,000 shares of InterTAN common stock at an exercise price of $6.618 per share. As required by an agreement with Tandy, InterTAN has registered the warrants under the Securities Act of 1933. At December 31, 1994, InterTAN's common stock price, as quoted in the Wall Street ----------- Journal, was $8.125 per share. The fair market value of the ------- warrants at December 31, 1994 approximates $2,500,000.
In addition to the bank debt purchased by Trans World and the working capital loan, InterTAN's obligations to Trans World included two additional notes for approximately $23,665,000 (the "Series C" note) and $24,037,000 (the "Series D" note) with interest rates of 7.5% and 8%, respectively. The notes represented the restructuring of InterTAN accounts payable for merchandise already shipped and required monthly interest payments. All principal and interest on the Series C note was paid in full by December 31, 1993. The Series D note was paid in full during the first quarter of 1994. All of Tandy's debt from InterTAN is secured by a first priority lien on substantially all of InterTAN's assets in Canada and the U.K.
A new merchandise agreement was reached with InterTAN in October 1993 which requires future purchase orders to be backed by letters of credit posted by InterTAN. New license agreements provide for a future royalty to Tandy. InterTAN had obligations for purchase orders outstanding for merchandise ordered by A&A for InterTAN but not yet shipped totaling approximately $24,705,000 at December 31, 1994.
InterTAN has increased its bank revolving credit facility with the new banking syndicate to Canadian $60,000,000 (U.S. $42,774,000 equivalent at December 31, 1994). In the case of InterTAN's default on the bank credit line, Tandy will, at the option of InterTAN's new banking syndicate, purchase InterTAN's inventory and related accounts receivable at 50% of their net book value, up to the amount of outstanding bank loans, but not to exceed Canadian $60,000,000. In that event, Tandy could foreclose on its first priority lien on InterTAN's assets in Canada and the U.K. If Tandy fails to purchase the inventory and related accounts receivable of InterTAN from the banking syndicate, the syndicate upon notice to Tandy and expiration of time, can foreclose upon InterTAN's assets in Canada and the U.K. ahead of Tandy. The inventory repurchase agreement between InterTAN's banking syndicate and Tandy has been amended and restated to reflect the foregoing.
As of December 31, 1994 InterTAN owed Tandy an aggregate of $39,965,000, net of discount. The current portion of the obligation approximates $8,707,000 and the non-current portion approximates $31,258,000. In 1994 Tandy recognized $3,855,000 in accretion of discount on the note receivable from InterTAN which resulted from the purchase of the bank debt at a discounted price. Accretion of this discount is based on the effective interest rate method. Tandy recognized sales to and commission income from InterTAN of approximately $19,764,000 and interest income of $8,280,000 during fiscal 1994. During the year ended December 31, 1993, Tandy recognized approximately $93,315,000 of sales to InterTAN and interest income of $3,085,000. Tandy's sales to InterTAN totaled $90,130,000 during the six months ended December 31, 1992 and $171,126,000 during fiscal 1992.
A&A will continue as the exclusive purchasing agent for InterTAN in the Far East on a commission basis. Commencing in March 1994, only the purchasing agent commission and sales by Tandy manufacturing plants to InterTAN were recorded as sales and operating revenues. InterTAN purchases from third parties through A&A are no longer recorded as sales, reflecting the arrangement under the new merchandise agreement. Accordingly, sales by Tandy to InterTAN in 1994 are considerably lower than in prior years, however, the earned income relating thereto was not materially different.
Through February 1995 InterTAN has met all of its payment obligations to Tandy. In addition, its operations have improved in fiscal 1995 as evidenced by its published net income for the six months ended December 31, 1994 approximating $17,704,000 or $1.11 per fully diluted share as opposed to net income of $4,567,000 or $0.49 per fully diluted share for the same period in the prior year. As a result, nothing has come to the attention of management which would indicate that InterTAN would not be able to continue to meet its payment obligations pursuant to the debt agreements with Tandy.
Canadian tax authorities are reviewing InterTAN's Canadian subsidiary's 1987-89 tax returns. The Company cannot determine whether the ultimate resolution of that review will have an effect on InterTAN's ability to meet its obligations to Tandy, but at the present, the Company believes that the ultimate resolution of this review will not impair InterTAN's ability to meet its obligations to Tandy.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Index to Consolidated Financial Statements is found on page 27. The Company's Financial Statements and Notes to Consolidated Financial Statements follow the index.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Tandy will file a definitive proxy statement with the Securities and Exchange Commission not later than 120 days after the end of the fiscal year covered by this Form 10-K pursuant to Regulation 14A. The information called for by this Item with respect to directors has been omitted pursuant to General Instruction G(3). This information is incorporated by reference from the Proxy Statement for the 1995 Annual Meeting. For information relating to the Executive Officers of the Company, see Part I of this report. The Section 16(A) reporting information is incorporated by reference from the Proxy Statement for the 1995 Annual Meeting.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Tandy will file a definitive proxy statement with the Securities and Exchange Commission not later than 120 days after the end of the fiscal year covered by this Form 10-K pursuant to Regulation 14A. The information called for by this Item with respect to executive compensation has been omitted pursuant to General Instruction G(3). This information is incorporated by reference from the Proxy Statement for the 1995 Annual Meeting.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Tandy will file a definitive proxy statement with the Securities and Exchange Commission not later than 120 days after the end of the fiscal year covered by this Form 10-K pursuant to Regulation 14A. The information called for by this Item with respect to security ownership of certain beneficial owners and management has been omitted pursuant to General Instruction G(3). This information is incorporated by reference from the Proxy Statement for the 1995 Annual Meeting.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Tandy will file a definitive proxy statement with the Securities and Exchange Commission not later than 120 days after the end of the fiscal year covered by this Form 10-K pursuant to Regulation 14A. The information called for by this Item with respect to certain relationships and transactions with management and others has been omitted pursuant to General Instruction G(3). This information is incorporated by reference from the Proxy Statement for the 1995 Annual Meeting.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Documents filed as part of this report. 1. Financial Statements
The financial statements filed as a part of this report are listed in the "Index to Consolidated Financial Statements" on page 27. The index and statements are incorporated herein by reference.
3. Exhibits required by Item 601 of Regulation S-K
A list of the exhibits required by Item 601 of Regulation S-K and filed as part of this report is set forth in the Index to Exhibits on page 56, which immediately precedes such exhibits.
Certain instruments defining the rights of holders of long-term debt of the Company and its consolidated subsidiaries are not filed as exhibits to this report because the total amount of securities authorized thereunder does not exceed ten percent of the total assets of the Company on a consolidated basis. The Company hereby agrees to furnish the Securities and Exchange Commission copies of such instruments upon request.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed for the three months ended December 31, 1994.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Tandy Corporation has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
TANDY CORPORATION
March 30, 1995 /s/ John V. Roach ------------------------------- John V. Roach Chairman of the Board, Chief Executive Officer and President
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Tandy Corporation has duly caused this report to be signed on its behalf by the following persons in the capacities indicated on this 30th day of March, 1995.
Signature Title
/s/ John V. Roach Chairman of the Board, Chief -------------------------- Executive Officer and President John V. Roach (Chief Executive Officer)
/s/ Dwain H. Hughes Senior Vice President and Chief -------------------------- Financial Officer Dwain H. Hughes (Principal Financial Officer)
/s/ Richard L. Ramsey Vice President and Controller -------------------------- Richard L. Ramsey (Principal Accounting Officer)
/s/ James I. Cash, Jr. Director -------------------------- James I. Cash, Jr.
/s/ Lewis F. Kornfeld, Jr. Director -------------------------- Lewis F. Kornfeld, Jr.
/s/ Jack L. Messman Director -------------------------- Jack L. Messman
/s/ William G. Morton Director -------------------------- William G. Morton
-------------------------- Director Thomas G. Plaskett
/s/ William T. Smith Director -------------------------- William T. Smith
/s/ Alfred J. Stein Director -------------------------- Alfred J. Stein
/s/ William E. Tucker Director -------------------------- William E. Tucker
/s/ Jesse L. Upchurch Director -------------------------- Jesse L. Upchurch
/s/ John A. Wilson Director -------------------------- John A. Wilson
TANDY CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Accountant .................... 28 Consolidated Statements of Income for each of the two years ended December 31, 1994, the six months ended December 31, 1992 and the year ended June 30, 1992 .......................... 29 Consolidated Balance Sheets at December 31, 1994 and December 31, 1993 ............................. 30 Consolidated Statements of Cash Flows for each of the two years ended December 31, 1994, the six months ended December 31, 1992 and the year ended June 30, 1992 ............................... 31 Consolidated Statements of Stockholders' Equity for each of the two years ended December 31, 1994, the six months ended December 31, 1992 and the year ended June 30, 1992 ............................... 32-33 Notes to Consolidated Financial Statements .......... 34-55
Separate financial statements of Tandy Corporation have been omitted because Tandy is primarily an operating company and the amount of restricted net assets of consolidated and unconsolidated subsidiaries and Tandy's equity in undistributed earnings of 50% or less-owned companies accounted for by the equity method are not significant. All subsidiaries of Tandy Corporation are included in the consolidated financial statements. Financial statements of 50% or less-owned companies have been omitted because they do not, considered individually or in the aggregate, constitute a significant subsidiary.
The financial statement schedules should be read in conjunction with the consolidated financial statements. All other schedules have been omitted because they are not applicable, not required or the information is included in the consolidated financial statements or notes thereto.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Tandy Corporation
In our opinion, the consolidated financial statements listed in the accompanying index on page 27 present fairly, in all material respects, the financial position of Tandy Corporation and its subsidiaries (the "Company") at December 31, 1994 and 1993, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 1994, the six months ended December 31, 1992, and for the year ended June 30, 1992 in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for income taxes in 1993.
/s/ Price Waterhouse LLP -------------------------- PRICE WATERHOUSE LLP
Fort Worth, Texas February 22, 1995
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Tandy Corporation and Subsidiaries
NOTE 1-DESCRIPTION OF BUSINESS Tandy Corporation ("Tandy" or the "Company") is engaged in consumer electronics retailing including the retail sale of personal computers. Radio Shack is the largest of Tandy's retail store systems with company-owned stores and dealer/franchise outlets. Tandy also operates the Computer City and Incredible Universe store chains. Tandy Name Brand includes McDuff Electronics mall stores and Supercenters, VideoConcepts mall stores and The Edge in Electronics boutique stores. On December 30, 1994, the Company adopted a formal plan to close 233 Tandy Name Brand stores, and as a result of the closings, the Tandy Name Brand Retail Group will be dissolved in 1995. The remaining 73 Tandy Name Brand stores will be transferred to the Radio Shack division. Additionally, Tandy continues to operate certain related retail support groups and consumer electronics manufacturing businesses.
NOTE 2-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of Tandy and its wholly owned subsidiaries including its credit and insurance subsidiaries. Investments in 20% to 50% owned companies are accounted for on the equity method. The manufacturing and marketing operatins included in the divestment plan have been accounted for as discontinued operations. See Note 21 for further information relating to discontinued operations. Significant intercompany transactions are eliminated in consolidation.
CHANGE IN FISCAL YEAR: On January 10, 1993, the Board of Directors authorized the fiscal year of Tandy to be changed from June 30 to December 31 and as of December 31, 1992 this change was made. The fiscal periods of certain foreign operations end one month earlier than the Company's year end to facilitate their inclusion in the consolidated financial statements.
FOREIGN CURRENCY TRANSLATION: In accordance with the Financial Accounting Standards Board (the "FASB") Statement No. 52, "Foreign Currency Translation," balance sheet accounts of the Company's foreign operations are translated from foreign currencies into U.S. dollars at year end or historical rates while income and expenses are translated at the weighted average sales exchange rates for the year. Translation gains or losses related to net assets located outside the United States are shown as a separate component of stockholders' equity. Losses aggregating $19,803,000, net of tax, relating to discontinued operations were transferred from equity and charged to loss on disposal of discontinued operations during 1993. Gains and losses resulting from foreign currency transactions (transactions denominated in a currency other than the entity's functional currency) are included in net income. Such foreign currency transaction gains approximated $1,495,000 for the year ended December 31, 1994, $762,000 for the year ended December 31, 1993, $3,065,000 for the six months ended December 31, 1992 and $10,642,000 for the year ended June 30, 1992.
CHANGE IN ACCOUNTING PRINCIPLE-PROVISION FOR INCOME TAXES: In January 1993, the Company adopted Statement of Financial Accounting Standard ("FAS") No. 109, "Accounting for Income Taxes" ("FAS 109") and applied the provisions prospectively. The adoption of FAS 109 changes the Company's method of accounting for income taxes from the deferred method ("APB 11") to an asset and liability approach. Previously, the Company deferred the past tax effects of timing differences between financial reporting and taxable income. The asset and liability approach requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities.
The adjustments to the January 1, 1993 balance sheet to adopt FAS 109 totaled $13,014,000. Approximately $9,786,000 of this adjustment related to continuing operations and the remaining $3,228,000 was from discontinued operations. The aggregate amount of $13,014,000 is refleted in the accompanying 1993 Consolidated Statements of Income as the cumulative effect of change in accounting principle. It primarily represents the impact of adjusting deferred taxes to reflect the then current tax rate of 34% as opposed to the higher tax rates that were in effect when the deferred taxes originated. See Note 12 for further discussion of income taxes.
EXTENDED SERVICE CONTRACTS: Tandy's retail operations offer extended service contracts on products sold. These contracts generally provide extended service coverage for period of 12 to 48 months. Contracts sold prior to January 1, 1995 were offered directly by the Company, and thus the Company was the responsible party. The Company accounts for such contracts in accordance with FASB Technical Bulletin No. 90-1, "Accounting for Separately Priced Extended Warranty and Product Maintenance Contracts" which requires that revenues from sales of extended service contracts be recognized ratably over the lives of the contracts. Costs directly related to sales of such contracts are deferred and charged to expense proportionately as the revenues are recognized. A loss is recognized on extended service contracts if the sum of the expected costs of providing services under the contracts exceeds related unearned revenue.
As described in Note 3, the Company transferred all obligations with respect to contracts in force at December 31, 1994 to an unrelated party, except certain contracts aggregating approximately $7,734,000. The Company will sell extended service contracts offered by the unrelated third party subsequent to 1994. The Company will receive a commission from the unrelated third party upon sale of each contract. The commissions will be recognized as income in the period in which the contracts are sold.
CASH AND SHORT-TERM INVESTMENTS: Cash on hand in stores, deposits in banks and short-term investments with original maturities of three months or less are considered cash and cash equivalents. Short-term investments are carried at cost, which approximates market value.
ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS: CREDIT OPERATIONS-The customer receivables of the credit operations are classified as current assets, including amounts which are contractually due after one year. This is consitent with retail industry practices.
Finance charges, late charges and returned check fees arising from the Company's private label credit cards are recognized when earned as interest income. The Company's policy is to write off accounts when they become 180 days past due or whenever deemed uncollectible by management, whichever is sooner. Collection efforts continue subsequent to write-off.
The Company is charged a fee by an outside accounts receivable processing service for establishing new accounts. These initial direct costs are capitalized and amortized on a straight-line basis over a period of 84 months, the estimated life over which the account will be used by a customer. These costs are shown in the accompanying Consolidated Balance Sheets as a part of the related accounts receivable. Amortization of these loan origination costs are included as a reduction of interest income in the accompanying Consolidated Statements of Income. Costs to process accounts on an ongoing basis are expensed as incurred.
As described in Note 3, the Company's Computer City and Incredible Universe private label credit card portfolios were sold in December 1994, and a letter of intent was signed to sell Tandy Credit and the Company's Radio Shack and McDuff private label credit card portfolios in the first half of 1995, subject to regulatory and rating agency approval. Commencing in 1995, sales made pursuant to Computer City and Incredible Universe private label credit card programs, as well as sales made pursuant to the Radio Shack private label credit card program made subsequent to the finalization of its sales agreement, will be financed by an unrelated third party.
OTHER CUSTOMER RECEIVABLES-An allowance for doubtful accounts is provided when accounts are determined to be uncollectible.
Concentrations of credit risk with respect to customer receivables are limited due to the large number of customers comprising the Company's customer base and their location in many different geographic areas of the country; however, see Note 8 for a discussion of a concentration of credit risk of long-term receivables. The fair value of total receivables, recorded at approximately $898,027,000 on the Consolidated Balance Sheet at December 31, 1994, is approximately $912,000,000.
INVENTORIES: Inventories are stated at the lower of cost (principally based on average cost) or market value and are comprised primarily of finished goods.
PROPERTY, PLANT AND EQUIPMENT: For financial reporting purposes, depreciation and amortization are primarily calculated using the straight-line method, which amortizes the cost of the assets over their estimated useful lives. The ranges of estimated useful lives are:
_____________________________________________________________ Buildings ....................... 10-40 years Buildings under capital lease ... over the life of the lease Equipment ....................... 2-15 years Leasehold improvements .......... primarily, the shorter of the life of the improvements or the term of the related lease and certain renewal periods _____________________________________________________________
When depreciable assets are sold or retired, the related cost and accumulated depreciation are removed from the accounts. Any gains or losses are included in selling, general and administrative expenses. Major additions and betterments are capitalized. Maintenance and repairs which do not materially improve or extend the lives of the respective assets are charged to operating expenses as incurred. Amortization of buildings under capital lease is included in depreciation and amortization in the Consolidated Statements of Income.
AMORTIZATION OF EXCESS PURCHASE PRICE OVER NET TANGIBLE ASSETS OF BUSINESSES ACQUIRED: The excess purchase price is generally amortized over a 40-year period using the straight-line method and the net balance is classified as a non-current asset. The Company periodically reviews goodwill to assess recoverability, and impairments would be recognized in operating results if a permanent diminution in value were to occur.
FAIR VALUE OF FINANCIAL INSTRUMENTS: The fair value of financial instruments is determined by reference to various market data and other valuation techniques as appropriate. Unless otherwise disclosed, the fair values of financial instruments approximate their recorded values.
HEDGING AND DERIVATIVE ACTIVITY: The Company has not historically utilized derivatives to manage foreign currency risks and exposure except for an immaterial amount of foreign exchange forward contracts used to hedge a portion of its foreign purchases. As of December 31, 1994, the Company had no outstanding purchase orders for which a foreign exchange contract was used as a hedge. The few contracts that were used did not involve leverage and did not have other high risk characteristics. Moody's has assigned a counterparty rating to Tandy Corporation of Baa2. This rating is an opinion of the financial capacity of Tandy to honor its senior obligations under financial contracts. Financial contracts entered into by Tandy include the limited use of foreign currency forwards to hedge foreign exchange risk arising from the purchase of inventory.
In conjunction with sale-leaseback transactions of Incredible Universe properties, the Company from time to time may enter into interest rate swaps to lock in a fixed rate that Company management believes is beneficial in the long-term. Through March 10, 1995, the Company entered into five swaps whereby it traded floating rates for fixed rates ranging from 7.185% to 7.875%. These swaps related to notional amounts of approximately $90,000,000; the Board of Directors has authorized management to enter into such swaps up to notional amounts not exceeding $250,000,000. During 1994, 1993, the six months ended December 31, 1992 and the year ended June 30, 1992, the Company was not a party to any interest rate swaps.
REVENUES: Retail sales are recorded on the accrual basis. Credit service charges are recorded monthly on the basis of customer account balances.
STORE PRE-OPENING COSTS: Direct incremental expenses associated with the openings of new Computer City and Incredible Universe stores, comprised primarily of payroll and payroll-related costs, are deferred and amortized over a twelve-month period from the date of the store opening. Deferred store pre-opening expenses for Computer City and Incredible Universe approximated $4,538,000 and $1,845,000 at December 31, 1994 and 1993, respectively.
NET INCOME PER AVERAGE COMMON AND COMMON EQUIVALENT SHARE: Net income per average common and common equivalent share is computed by dividing net income less the Series B convertible stock dividends by the weighted average common and common equivalent shares outstanding during the period. As the Preferred Equity Redemption Convertible Preferred Stock ("PERCS") mandatorily convert into common stock, they are considered outstanding common stock and the dividends are not deducted from net income for purposes of calculating net income per average common and common equivalent share. On January 23, 1995, the Company announced that the PERCS would be converted on March 10, 1995. To complete the conversion, the Company will issue approximately 11,816,000 shares of Tandy Corporation common stock out of treasury stock. Current year weighted average share calculations include approximately 11,816,000 common shares relating to the PERCS. Per share amounts and the weighted average number of shares outstanding for the year ended December 31, 1993, the six-month period ended December 31, 1992 and for the fiscal year ended June 30, 1992, have been retroactively restated to reflect the PERCS conversion into approximately 11,816,000 common shares in lieu of the prior year assumption of 12,457,000 shares which was based on the December 31, 1993 common stock price.
Earnings available per common and common equivalent share amounts initially reported by the Company for the year ended December 31, 1993, the six months ended December 31, 1992 and the fiscal year ended June 30, 1992 were $2.48, $0.84 and $2.58 for income from continuing operations, respectively, and $1.18, $0.02 and $2.24 for net income, respectively. Fully diluted earnings available per common and common equivalent share are not presented since dilution is less than 3%.
The Series B convertible stock dividends were $6,777,000 for the year ended December 31, 1994, $7,136,000 for the year ended December 31, 1993, $2,419,000, net of tax, for the six months ended December 31, 1992 and $4,911,000, net of tax, in fiscal 1992. The taxes netted against these amounts for the six months ended December 31, 1992 and in fiscal 1992 were $1,246,000 and $2,530,000, respectively. Upon adoption of FAS 109 as of January 1, 1993 and in accordance with EITF 92-3, preferred dividends utilized in the earnings per share calculation can no longer be reduced for associated tax benefits paid on unallocated preferred stock held by an employee stock ownership plan. Dividends on the PERCS, which were issued in February 1992, were $32,100,000 for each of the two years ended December 31, 1994, $16,050,000 for the six months ended December 31, 1992 and $12,573,000 for the year ended June 30, 1992.
Earnings available per common and common equivalent share for each period presented, assuming the PERCS converted to common stock under the "if converted" method and only if dilutive, would have been presented as in the table which follows.
TREASURY STOCK REPURCHASE PROGRAM: On August 1, 1994, the Company announced that its Board of Directors authorized management to purchase up to 7,500,000 shares of its common stock in addition to shares required for employee plans. On December 30, 1994, the Board of Directors authorized management to increase the share repurchase program to 12,500,000 shares. Purchases will be made from time to time in the open market, and it is expected that funding of the program will come from existing cash, short-term debt and proceeds from the sale of the credit card portfolios. At December 31, 1994, approximately 5,000,000 shares had been repurchased under this program.
NEW ACCOUNTING STANDARDS: The American Institute of Certified Public Accountants issued Statement of Position 93-7, "Reporting on Advertising Costs," in December 1993. The statement generally requires all advertising costs to be expensed in the period in which the costs are incurred or the first time the advertising takes place, and is effective for years beginning after June 15, 1994. The statement is not anticipated to have any material effect on the results of operations or financial condition of the Company.
NOTE 3-GAIN ON SALE OF CREDIT OPERATIONS AND EXTENDED SERVICE CONTRACTS In December 1994 the Company entered into an agreement with SPS Transaction Services, Inc., a majority-owned subsidiary of Dean Witter, Discover & Company ("SPS") to sell its Computer City and Incredible Universe private label credit card portfolios without recourse. As a result of the agreement, in which Tandy received cash of $85,764,000 and will receive a deferred payment of $179,777,000, the Company recognized a gain of $35,708,000 in the accompanying Consolidated Statements of Income. The deferred payment amount does not bear interest. Principal will be paid monthly with the total principal amount of $179,777,000 due over a twelve month period. The Company has discounted the deferred payment by $3,477,000 to yield approximately 5% over the twelve month payout period. As a result, the discounted deferred payment amount of $176,300,000 is classified as current in the accompanying Consolidated Balance Sheet at December 31, 1994. The Company also signed a letter of intent to sell its Radio Shack and McDuff private label credit card portfolios at net book value and without recourse to SPS in 1995 including the rights to the securitized accounts (see Note 6). The agreement for the sale of McDuff and Radio Shack portfolios was completed in January 1995, subject only to regulatory and rating agency approvals which should be forthcoming in the first half of 1995. Tandy anticipates receiving approximately $290,000,000 (unaudited) cash and a deferred payment approximating $80,000,000 (unaudited), on terms similar to the deferred payment arrangement mentioned above.
Effective December 1994, the Company transferred all of its existing obligations with respect to extended service contracts in force at December 31, 1994, with the exception of certain contracts aggregating approximately $7,734,000, to an unrelated third party. The unrelated third party contractually assumed all of the Company's legal obligations and risk of future loss pursuant to the extended service contracts in exchange for $75,059,000, of which $70,702,000 was paid in December 1994 and $4,357,000 was paid in February 1995. As a result, the Company has recognized a gain of $55,729,000 associated with this transaction in its accompanying Consolidated Statements of Income. The Company will continue to provide repair services to customers who tender products pursuant to the extended service contracts on a non-exclusive basis. The unrelated third party will pay the Company competitive market rates for repairs on products tendered pursuant to the extended service contracts.
The Company will continue to sell extended service contracts on behalf of the unrelated third party and will receive a commission upon the sale. The commission will be recognized as commission income at the time of sale.
NOTE 4-RESTRUCTURING CHARGES In December 1994, the Company adopted a business restructuring plan to close or convert 233 of the 306 Tandy Name Brand stores. Closed stores will include 151 VideoConcepts, 30 McDuff mall stores and 19 McDuff Supercenters. Thirty-three other mall stores or McDuff Supercenters will be converted to Radio Shack or Computer City Express stores. It is anticipated that a majority of these stores will be closed by the end of the first quarter of 1995. Approximately 57 McDuff Supercenters and 16 The Edge in Electronics stores will remain open and will become part of the Specialty Retail Group of Radio Shack. A pre-tax charge of $89,071,000 was taken in the fourth quarter of fiscal 1994 related to the closing and conversion of these stores. The components of the restructuring charge and an analysis of the amounts charged against the reserve are outlined in the following table:
(In thousands) -------------- Lease obligations $46,682 Impairment of fixed assets 17,991 Inventory impairment 16,600 Goodwill impairment 4,222 Termination benefits 1,218 Other 2,358 ------- Total restructuring reserve charge 89,071
Costs charged against the reserve: Goodwill (4,222) Lease payments (1,466) ------- Ending reserve $83,383 =======
The lease obligations, termination benefits and conversion of 33 stores will require cash outlays, most of which are expected to be made during 1995. The cash outlays will be financed by operating cash flows. Management anticipates that pre-tax operating losses during the period of store closures will approximate $6,000,000 to $8,000,000 (unaudited).
Sales and operating revenues associated with the closing of Tandy Name Brand stores were approximately $261,990,000 (unaudited) and $271,914,000 (unaudited) for calendar years 1994 and 1993, respectively, and operating losses approximated $18,125,000 (unaudited) and $15,342,000 (unaudited) for calendar 1994 and 1993, respectively. During the fiscal year ended June 30, 1992, sales and operating revenues and operating losses from the closing stores were approximately $254,531,000 (unaudited) and $10,169,000 (unaudited), respectively. The results of the closing stores for the six months ended December 31, 1992 are not presented because, due to the seasonal nature of the stores' operations, such results would not be comparable to any of the twelve-month results for the other periods presented. In conjunction with this restructuring, 1,425 (unaudited) employees will be terminated, most of which are store employees and managers. As of December 31, 1994, no employees had been terminated and, accordingly, no termination benefits had been paid.
The Company adopted a plan resulting in business restructuring charges during the six months ended December 31, 1992 designed to improve the Company's competitiveness and future profitability. The pre-tax charge of $48,000,000 related primarily to the closing of 110 of the then 432 Tandy Name Brand stores, mainly McDuff Supercenters in major market areas and, to a lesser extent, the elimination of certain product lines. Some product lines were reduced or eliminated after consideration of competitive factors and market trends. These stores were closed in the first quarter of 1993. Additional restructuring charges of $39,500,000, related to discontinued operations, were recognized in the six months ending December 31, 1992 and primarily related to the write-off of goodwill, the rationalization of certain product lines and the closure of certain operations. This restructuring charge is included in the operating loss from discontinued operations.
NOTE 5-SHORT-TERM INVESTMENTS The weighted average interest rate was 5.2% at December 31, 1994 for short-term investments totaling $80,373,000. The weighted average interest rate was 3.2% at December 31, 1993 for short-term investments totaling $153,839,000.
NOTE 6-ACCOUNTS AND NOTES RECEIVABLE
Effective May 1, 1991, the Company transferred $573,500,000 of its customer receivables to a trust which, in turn, on June 18, 1991, sold $350,000,000 of certificates representing undivided interests in the trust in a public offering. At December 31, 1994 and 1993, $300,990,000 and $350,000,000, respectively, of the certificates were outstanding and, accordingly, were not reflected in the Company's accounts receivable balances. The fair value of the certificates at December 31, 1994 was approximately $301,652,000. At December 31, 1994, the balance of the receivables in the trust approximated $534,129,000. The Company owns the remaining undivided interest in the trust not represented by the certificates and will continue to service the receivables for the trust until the sale of Tandy Credit to SPS is completed. The Company has no plans to issue additional series of certificates as the Trust is included in the sale of Tandy's remaining private label credit card portfolio balances to SPS in 1995. For further discussion of the sale of the private label credit card portfolios, see Note 3.
Cash flows generated from the receivables in the trust are dedicated to the payment of interest on the certificates which have an annual fixed interest rate of 8.25%, absorption of defaulted accounts in the trust and payment of servicing fees to the Company with any remaining cash flows remitted to the Company. In the event that such excess cash flows are not sufficient to absorb defaulted accounts, the Company is contingently liable up to a maximum amount of $136,100,000.
Customer receivable balances of credit operations are classified as current assets in accordance with industry practice. The Company's private label credit card accounts involve revolving rather than installment payments and many customers pay off their balances sooner than the contractual term. The repayment terms of the Company's private label credit cards are as follows: Radio Shack and McDuff customers must pay each month a minimum of 1/33 of any balance greater than $1,000, and Incredible Universe and Computer City customers must pay each month a minimum of 1/25 of any balance greater than $1,000. For any balances less than $1,000, the minimum monthly payment ranges between $15 and $35 for each customer account.
Interest income related to the Company's credit card operations totaled $46,868,000 for the year ended December 31, 1994, $57,401,000 for the year ended December 31, 1993, $31,308,000 for the six months ended December 31, 1992 and $62,307,000 for the year ended June 30, 1992. In 1994 the Company received interest income from the IRS reflecting the settlement of outstanding tax issues of approximately $9,582,000, as well as interest income earned on notes receivable from AST Research Inc. ("AST") and InterTAN Inc. ("InterTAN") approximating $5,724,000 and $8,280,000, respectively.
NOTE 8-OTHER ASSETS Other assets include the excess purchase price over net tangible assets of businesses acquired of $13,747,000 at December 31, 1994 and $18,207,000 at December 31, 1993. These amounts are net of accumulated amortization of $5,035,000, and $4,485,000, respectively. The balance of other assets at December 31, 1994 also includes long-term receivables relating to InterTAN , AST and Lika of $128,926,000, net of discount of $16,796,000. The balance at December 31, 1993 includes long-term receivables relating to InterTAN and AST of $126,384,000, net of discount of $22,198,000. See Notes 21 and 22 for a further description of the terms of the AST and InterTAN notes receivable.
NOTE 9-INDEBTEDNESS AND BORROWING FACILITIES Borrowings payable within one year are summarized in the accompanying short-term debt table on page 42. The short-term debt caption includes primarily domestic seasonal borrowings. The current portion of long-term debt at December 31, 1994 includes $45,000,000 of senior notes and $6,208,000 of medium-term notes and other loans. The current portion of long-term debt at December 31, 1993 includes $52,497,000 of medium-term notes and $30,204,000 of bank debt and other loans. The short-term debt at December 31, 1993 also included $31,739,000 of 10% subordinated debentures due June 30, 1994. These subordinated debentures were called by the Company on February 23, 1994 for redemption on April 1, 1994. The redemption was at a price equal to 100% of face value of the subordinated debentures for a total of $32,431,000.
Tandy's short-term credit facilities, including revolving credit lines, are summarized in the accompanying short-term borrowing facilities table found on page 43. The method used to compute averages in the short-term borrowing facilities table is based on a daily weighted average computation which takes into consideration the time period such debt was outstanding as well as the amount outstanding. The Company's primary source of short-term debt, for which borrowings and repayments have been presented net in the Consolidated Statements of Cash Flows, consists of short-term seasonal bank debt and commercial paper. The commercial paper matures within ninety days as does the short-term seasonal bank debt.
A commercial paper program was established during fiscal 1991 for Tandy and was renewed in May 1994. The Company has $400,000,000 in committed facilities in place for the commercial paper program. These facilities are to be used only if maturing commercial paper cannot be repaid due to an inability to sell new paper. This agreement is composed of two facilities--one for $200,000,000 expiring in May 1995 and another facility for $200,000,000 expiring in May 1997. Annual commitment fees for the facilities are 2/25 of 1% per annum and 1/8 of 1% per annum, respectively, whether used or unused. The commercial paper facilities limit the amount of commercial paper that may be outstanding to a maximum of $400,000,000. At December 31, 1994, there were no amounts outstanding under the facilities.
Long-term debt, net of current maturities, at December 31, 1994 and December 31, 1993 totaled $153,318,000 and $186,638,000, respectively. Included in long-term debt at December 31, 1993 is $45,000,000 of 8.69% senior notes due January 15, 1995. These senior notes had been outstanding since February 7, 1990.
Tandy completed a $500,000,000 shelf registration in January 1991 of which $400,000,000 was designated for medium-term notes. Tandy Credit's $400,000,000 shelf registration was amended in October 1990 to add a $200,000,000 Series B medium-term note program. At December 31, 1994 available borrowing capacity under Tandy's and Tandy Credit's medium-term note programs aggregated $429,200,000. Medium-term notes outstanding at December 31, 1994 totaled $73,044,000 compared to $125,479,000 at December 31, 1993. The weighted average coupon rates of medium-term notes outstanding at December 31, 1994 and 1993 were 8.5% and 8.7%, respectively. The $6,000,000 of Tandy Credit's medium-term notes maturing in May and August of 1995 were paid in full in February 1995. Tandy Corporation's medium-term notes mature as follows:
(In thousands) ------------------------------------------------- Second quarter, 1996 .................... $ 1,500 Third quarter, 1996 ..................... 11,200 Second quarter, 1997 .................... 28,500 Second quarter, 1998 .................... 20,000 Third quarter, 1998 ..................... 5,000 Fourth quarter, 1999 .................... 1,000 -------------------------------------------------
The Company established an employee stock ownership trust in June 1990. Further information on the trust and its related indebtedness, which is guaranteed by the Company, is detailed in the discussion of the Tandy Employees Stock Ownership Plan in Note 14.
Long-term borrowings outstanding at December 31, 1994 mature as follows:
(In thousands) ------------------------------------------------- 1995 .................................... $61,683 1996 .................................... 23,076 1997 .................................... 41,399 1998 .................................... 37,948 1999 .................................... 12,015 2000 and thereafter ..................... 38,880 -------------------------------------------------
The fair value of the Company's long-term debt of $191,763,000 (including current portion, but excluding capital leases) is approximately $194,098,000 at December 31, 1994.
NOTE 10-LEASES Tandy leases rather than owns most of its facilities. The Radio Shack stores comprise the largest portion of Tandy's leased facilities. The Radio Shack, Tandy Name Brand and Computer City stores are located primarily in major shopping malls, shopping centers or freestanding facilities owned by other companies. The Company owns three of the nine Incredible Universe buildings. The store leases are generally based on a minimum rental plus a percentage of the store's sales in excess of a stipulated base figure. Tandy also leases distribution centers and office space. In 1994, under a sale and leaseback agreement with an unrelated third party, the Company sold certain Incredible Universe stores for approximately $52,719,000 and leased the properties back under a lease agreement which matures on September 9, 1999. The transaction produced a gain of approximately $1,664,000 which was deferred and is being amortized over the life of the lease periods. The Company does not have any continuing involvement under the sale-leaseback transaction. The future minimum lease payments are included in the table below.
Future minimum rent commitments at December 31, 1994 for all long-term noncancelable leases (net of immaterial amounts of sublease rent income) are included in the following table.
(In thousands) Operating Leases Capital Leases ------------------------------------------------------------- 1995 .................... $147,803 $ 4,051 1996 .................... 141,224 4,051 1997 .................... 124,564 4,089 1998 .................... 107,232 4,195 1999 .................... 88,641 4,422 2000 and thereafter ..... 336,975 43,325 ------- Total minimum lease payments 64,133 Less: Amount representing interest (40,895) ------- Present value of net minimum lease payments $23,238 =======
NOTE 12-INCOME TAXES The components of the provision for income taxes and a reconciliation of the U.S. statutory tax rate to the Company's effective income tax rate are given in the accompanying tables.
The IRS Dallas field office is reviewing the Company's 1987-1989 tax returns. The review in Dallas could lead to referral to the IRS National office. The resolution of this matter could result in additional taxes and interest to the Company related to the spin-off of InterTAN and raises questions about the private letter rulings issued by the IRS regarding the spin-off and certain other tax matters. Although aggregate additional taxes involved in these transactions could potentially range from $0 to $46 million, based on the advice of the Company's independent tax advisors, the Company believes it would prevail if any tax litigation had to be instituted. Any ultimate tax assessment would also include interest. In any event the Company believes the ultimate resolution would have no material impact on the Company's financial condition.
In January 1993, the Company adopted FAS No. 109. The adoption of FAS 109 changes the Company's method of accounting for income taxes from the deferred method ("APB 11") to an asset and liability approach. Previously, the Company deferred the past tax effects of timing differences between financial reporting and taxable income. The asset and liability approach requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities.
The adjustments to the January 1, 1993 balance sheet to adopt FAS 109 totaled $13,014,000. Approximately $9,786,000 of this adjustment related to continuing operations and the remaining $3,228,000 was from discontinued operations. The aggregate amount of $13,014,000 was reflected in 1993 net income as the cumulative effect of change in accounting principle. It primarily represents the impact of adjusting deferred taxes to reflect the then current tax rate of 34% as opposed to the higher tax rates that were in effect when the deferred taxes originated. The Company subsequently increased its U.S. deferred tax asset in 1993 as a result of legislation enacted during 1993 which increased the corporate tax rate from 34% to 35%. Deferred tax assets and liabilities as of December 31, 1994 and December 31, 1993 were comprised of the following:
NOTE 13-STOCK PURCHASE AND SAVINGS PLANS Stock purchase and savings plans are offered by Tandy Corporation to its employees. These plans are designed to provide employees with a consistent investment program which provides for their retirement and an opportunity to participate in the Company's growth.
TANDY CORPORATION STOCK PURCHASE PROGRAM ("SPP"). The SPP is available to most employees who have been employed at least six months. Participants may contribute 1% to 10% of annual compensation. The Company matches 40%, 60% or 80% of the employee's contribution depending on the length of the employee's participation in the SPP. Tandy's contributions to the SPP were $16,881,000 and $18,955,000 for the calendar years ended December 31, 1994 and 1993, respectively, and $8,756,000 for the six months ended December 31, 1992. For fiscal 1992 the Company's contributions were $20,253,000.
TANDY EMPLOYEES DEFERRED SALARY AND INVESTMENT PLAN ("DIP"). An eligible employee electing to participate in the DIP may defer 5% of annual compensation, subject to certain limitations established by the Tax Reform Act of 1986. The Company pays this amount into the plan as a deferred salary contribution for the account of the employee. The employee's 5% contribution is considered deferred compensation and is not taxed to the employee as long as it remains in the plan. Beginning October 1990, the Company began making contributions to the newly formed employee stock ownership plan described in Note 14 in lieu of the matching contributions to the DIP. To participate in the employee stock ownership plan, employees must continue to make deferred salary contributions to the DIP. In June 1992, the Company received a determination letter ruling that the DIP is a qualified 401(k) plan. An administrative committee appointed by the Board of Directors invests the DIP's assets primarily in Tandy securities.
NOTE 14-TANDY EMPLOYEES STOCK OWNERSHIP PLAN ("TESOP") As a continuation of the Company's programs to encourage employee ownership of Tandy stock, the Company formed the TESOP on June 28, 1990. On July 31, 1990, the TESOP trustee borrowed $100,000,000 at an interest rate of 9.34% with varying semi-annual principal payments through June 30, 2000. On December 15, 1994, the TESOP entered into an agreement with an unrelated third party to refinance a portion of the TESOP's indebtedness by borrowing $5,063,000 at an interest rate of 8.76% to retire a portion of the original $100,000,000 indebtedness. The maturity date of this borrowing is December 30, 2000. The TESOP plans to borrow an additional $11,630,000 over the next five years. The final maturity on the additional borrowings is projected to be December 30, 2002. Dividend payments and contributions from Tandy will be used to repay the indebtedness. Because Tandy has guaranteed the repayment of these notes, the indebtedness of the TESOP is recognized as a long-term obligation in the accompanying consolidated balance sheet. An offsetting charge has been made in the stockholders' equity section of the accompanying consolidated balance sheet to reflect unearned compensation related to the TESOP.
The TESOP trustee used the proceeds from the issuance of the 1990 notes to purchase 100,000 shares of Series B TESOP Convertible Preferred Stock (the "TESOP Preferred Stock") from Tandy at a price of $1,000 per share. Each share of such stock is convertible into 21.768 shares of Tandy common stock. The annual cumulative dividend on TESOP Preferred Stock is $75.00 per share, payable semi-annually. This series of stock has certain liquidation preferences and may be redeemed by Tandy after July 1, 1994 at specified premiums.
During the term of the TESOP, the TESOP Preferred Stock will be allocated to the participants annually based on the total debt service made on the indebtedness. In 1994 the TESOP was amended to provide for quarterly withdrawals by participants and an annual allocation of TESOP Preferred Stock to participants. The first annual allocation will occur on March 31, 1995. The allocations of preferred stock to the individual participants' accounts are determined according to the terms of the TESOP. As vested participants withdraw from the TESOP, payments are made in cash or Tandy common stock. The preferred stock has a face value of $1,000 per share and the Company is obligated to redeem the preferred stock at the higher of the appraised value or $1,000 per share in the event of a participant's withdrawal. The Company has the option to redeem the preferred stock in either cash or common stock. Forfeited shares are returned to the TESOP and allocated to the accounts of other participants. In June 1992 the Company received a determination letter ruling from the IRS that the TESOP was a qualified employee stock ownership plan.
In fiscal 1991 Tandy recorded, as a component of stockholders' equity, $100,000,000 of unearned compensation to reflect the value of the TESOP Preferred Stock sold to the TESOP. As shares of the TESOP Preferred Stock are allocated to the TESOP participants, compensation expense is recorded and unearned compensation is reduced. Interest expense on the TESOP notes is also recognized as a cost of the TESOP. The compensation component of the TESOP expense is reduced by the amount of dividends accrued on the TESOP Preferred Stock with any dividends in excess of the compensation expense reflected as a reduction of interest expense. During the year ended December 31, 1994, the compensation and interest costs related to the TESOP before the reduction for the allocation of dividends were $10,008,000 and $6,202,000, respectively. The compensation and interest costs related to the TESOP before the reduction for the allocation of dividends were $9,605,000 and $7,195,000, respectively, during the year ended December 31, 1993. During the six months ended December 31, 1992, the compensation and interest costs related to the TESOP before the reduction for the allocation of dividends were $4,266,000 and $3,969,000, respectively. Such amounts for fiscal 1992 were $8,233,000 and $8,526,000, respectively. Contributions from Tandy to the TESOP for the years ended December 31, 1994 and 1993 totaled $11,189,000 and $17,895,000, respectively, including the $6,777,000 and $7,135,000 of dividends paid on the TESOP Preferred Stock. Contributions for the six months ended December 31, 1992 and the year ended June 30, 1992 totaled $9,269,000 and $16,926,000, respectively, including the $3,665,000 and $7,441,000 of dividends paid on the TESOP Preferred Stock.
At September 30, 1994, 31,020 shares of TESOP Preferred Stock had been released and allocated to participants' accounts in the TESOP (including 10,288 shares which had been withdrawn by participants). At December 31, 1994, 8,142 shares of TESOP Preferred Stock were released for allocation to participants at March 31, 1995. At December 31, 1994, 60,838 shares of TESOP Preferred Stock were available for later release and allocation to participants over the remaining life of the TESOP.
Under the terms of Tandy's guarantee of the notes, Tandy is obligated to make semiannual contributions to the TESOP to enable it to pay principal and interest on the debt securities. Tandy has fully and unconditionally guaranteed the TESOP's payment obligations, whether at maturity, upon redemption, upon declaration of acceleration or otherwise. The holders of the notes have no recourse against the assets of the TESOP except in the event that the TESOP defaults on payments due and then only to the extent that the TESOP holds cash payments made by Tandy to the TESOP to enable it to meet its obligations under the notes and any earnings attributable to such contributions. No amounts were in default as of December 31, 1994. The TESOP fiscal year ends on March 31. At March 31, 1994, the TESOP held as assets $95,786,000 of TESOP Preferred Stock and $4,186,000 of receivables and had liabilities comprised of the remaining principal on the notes of $68,980,000 and accrued interest payable on the notes of $1,611,000, resulting in net assets of $29,381,000.
NOTE 15-STOCK OPTIONS AND PERFORMANCE AWARDS 1985 Stock Option Plan ("SOP") ------------------------------ Under the 1985 SOP, as amended, options to acquire up to 2,000,000 fully registered shares of Tandy's common stock may be granted to officers and key management employees of the Company. The Organization and Compensation Committee (the "Committee") has sole discretion in determining whether to grant options, who shall receive them, the number of options granted to any individual and whether an option will be an incentive stock option or a nonstatutory stock option. The term of incentive stock options may not exceed 10 years and the term of nonstatutory stock options may not exceed a term of 10 years plus one month. No option may be exercised within one year of the date of grant and then may be exercised in specified installments only after stated intervals of time.
The maximum amount that may be exercised at the expiration of each of the first through fifth anniversaries of the nonstatutory stock options is 20%. On each of the first three anniversaries of the date of grant of the incentive stock options, one-third of each individual's options become exercisable. Upon termination of employment, the optionee must exercise all currently vested options by the earlier of the option expiration date(s) or three months from the date of termination of employment or forfeit such options, except that upon retirement at age 55 or older the three months is extended to 12 months in the case of nonstatutory stock options only. Notwithstanding the grant of options initially exercisable in installments, upon the termination of employment as a result of death or total disability of an optionee, all options then held shall for a period of 12 months, subject to earlier termination at the fixed expiration date, become immediately exercisable without regard to dates at which the installments are exercisable. Upon the retirement of an optionee at age 55 or older, the Committee may in its discretion accelerate the dates at which remaining installments of options may be exercised to the date of retirement. In the event of a change in control, all outstanding options become immediately exercisable for the full number of shares subject to options. The option price is determined by the Committee at the time the option is granted, but the option price will not be less than 100% of the fair market value of the stock on the date of grant. Since the option prices have been fixed at the market price on the date of grant, no compensation has been charged against earnings by the Company. Authorized and unissued shares or treasury stock may be issued to participants when options are exercised.
The SOP provides for adjustments to be made to options outstanding under the plan in order to prevent dilution of options upon the occurrence of a number of events, including the distribution of shares of a subsidiary of the Company to its stockholders.
Under the SOP there were 1,290,974 vested options which could have been exercised for a total price of $44,460,052 at December 31, 1994. Shares available for additional grants under the SOP were 242,626 at December 31, 1994.
1993 Incentive Stock Plan ("ISP") --------------------------------- During March 1993, the Board adopted the ISP, as amended. The ISP is administered by the Committee. A total of 3,000,000 shares of the Company's common stock were reserved for issuance under the ISP and have been registered with the Securities and Exchange Commission.
The ISP permits the grant of incentive stock options ("ISOs"), nonstatutory stock options (options which are not ISOs) ("NSOs"), stock appreciation rights ("SARs"), restricted stock, performance units or performance shares.
Grants of options under the ISP shall be for terms specified by the Committee, except that the term shall not exceed 10 years (5 years if granted to a 10% or more stockholder of the Company's common stock). Subject to the discretion of the Committee, options become exercisable in such installments and at such times as specified in the option agreements, payments for shares issuable upon exercise of an option may be made in cash, common stock, or a combination of both. The amount payable upon exercise of a SAR may be made at the discretion of the Committee either in cash or common stock or in a combination of cash and common stock. Provisions of the ISP generally provide that in the event of a change in control all options become immediately and fully exercisable and all restrictions on restricted stock lapse.
As part of the ISP, each non-employee director of the Company receives a grant of NSOs for 3,000 shares of the Company's common stock on the first business day of September of each year ("Director Options"). Director Options have an exercise price of 100% of the fair market value of the Company's common stock on the trading day prior to the date of grant, vest as to one-third of the shares annually on the first three anniversary dates of the date of grant and expire 10 years after the date of grant. The first grant of the Director Options was made on September 1, 1993.
The exercise price of an option (other than a Director Option) is determined by the Committee, provided that the exercise price shall not be less than 100% of the fair market value of a share of the Company's common stock on the date of grant.
At December 31, 1994 there were 122,290 vested options which could have been exercised for a total exercise price of $4,584,645 and 2,258,200 shares available for additional grants under the ISP. The ISP shall terminate on the tenth anniversary of the day preceding the date of its adoption by the Board and no option or award shall be granted under the ISP thereafter.
Stock option activity from June 30, 1991 through December 31, 1994, including GRiD options, is summarized in the accompanying chart.
NOTE 16-PREFERRED SHARE PURCHASE RIGHTS In August 1986 the Board of Directors adopted a stockholder rights plan and declared a dividend of one right for each outstanding share of Tandy common stock. The Board amended the rights plan in June 1988 and amended and restated the rights plan in June 1990. The rights, which will expire on June 22, 2000, are currently represented by the common stock certificates and when they become exercisable will entitle holders to purchase one one-thousandth of a share of Tandy Series A Junior Participating Preferred Stock for an exercise price of $140 (subject to adjustment). The rights will become exercisable and will trade separately from the common stock only upon the date of public announcement that a person, entity or group ("Person") has acquired 15% or more of Tandy's outstanding common stock without the prior consent or approval of the disinterested directors ("Acquiring Person") or ten days after the commencement or public announcement of a tender or exchange offer which would result in any person becoming an Acquiring Person. In the event that any person becomes an Acquiring Person, the rights will be exercisable for 60 days thereafter for Tandy common stock with a prior market value (as determined under the rights plan) equal to twice the exercise price. In the event that, after any person becomes an Acquiring Person, the Company engages in certain mergers, consolidations, or sales of assets representing 50% or more of its assets or earning power with an Acquiring Person (or persons acting on behalf of or in concert with an Acquiring Person) or in which all holders of common stock are not treated alike, the rights will be exercisable for common stock of the acquiring or surviving company with a prior market value (as determined under the rights plan) equal to twice the exercise price. The rights will not be exercisable by any Acquiring Person. The rights are redeemable at a price of $.05 per right prior to any person becoming an Acquiring Person or, under certain circumstances, after the expiration of the 60-day period described above, but the rights may not be redeemed or the rights plan amended for 180 days following a change in a majority of the members of the Board (or if certain agreements are entered into during such 180-day period).
NOTE 17-TERMINATION PROTECTION PLANS In August 1990, the Board of Directors of the Company approved termination protection plans and amendments to various other benefit plans including the stock purchase program and deferred salary and investment plan described in Note 13. These plans provide for defined termination benefits to be paid to eligible employees of the Company who have been terminated, without cause, following a change in control of the Company (as defined). In addition, for a certain period of time following employee termination, the Company, at its expense, must continue to provide on behalf of the terminated employee certain employment benefits. In general, during the twelve months following a change in control, the Company may not terminate or change existing employee benefit plans in any way which will affect accrued benefits or decrease the rate of the Company's contribution to the plans.
NOTE 18-ISSUANCE OF SERIES C PERCS AND TENDER OFFER In February 1992, the Company issued 15,000,000 depositary shares of Series C Conversion Preferred Stock ("Series C PERCS") at $29.50 per depositary share (equivalent to $2,950.00 for each Series C PERCS). Each of the depositary shares represents ownership of 1/100th of a share of Series C PERCS. The annual dividend for each depositary share is $2.14 (based on the annual dividend rate for each Series C PERCS of $214.00). On April 15, 1995, each of the depositary shares will automatically convert into (i) one share of Tandy common stock (equivalent to 100 shares for each Series C PERCS) subject to adjustment in certain events and (ii) the right to receive on such date an amount in cash equal to all accrued and unpaid dividends thereon. The liquidation preference for each depositary share is $29.50 (equivalent to $2,950.00 for each Series C PERCS) plus any accrued and unpaid dividends.
Tandy announced on January 23, 1995 that it had exercised its right to call all the issued and outstanding PERCS for conversion on March 10, 1995, prior to its mandatory conversion date of April 15, 1995. For each PERCS depositary share redeemed, 0.787757 Tandy common shares will be issued for an aggregate of approximately 11,816,000 shares. In addition, each PERCS depositary share will receive a dividend in cash of $0.321 representing the accrued dividend from January 16, 1995 through the redemption date of March 10, 1995.
NOTE 19-SUPPLEMENTAL CASH FLOW INFORMATION The effects of changes in foreign exchange rates on cash balances have not been material. Cash flows from operating activities included cash payments as follows:
A capital lease obligation of $23,873,000 was recorded during the year for the lease of certain retail stores.
NOTE 20-LITIGATION The Company is a defendant in a consolidated action titled "O'Sullivan Industries Holdings, Inc. Securities Litigation", which was commenced in 1994 and is currently pending before the United States District Court for the Western District of Missouri. The plaintiffs seek damages in an unspecified amount alleging that O'Sullivan's initial public offering prospectus, certain press releases and other materials contained material misrepresentations and omissions. They have also named O'Sullivan, O'Sullivan's officers and directors, and the underwriters as defendants. Tandy believes that the lawsuit is totally without merit and is defending itself vigorously. It further believes that even though an adverse resolution of the litigation may have a negative impact on its results of operation in the year of resolution, resolution will not have a material adverse effect on its financial condition or liquidity.
Tandy has various claims, lawsuits, disputes with third parties, investigations and pending actions involving allegations of negligence, product defects, discrimination, infringement of intellectual property rights, securities matters, tax deficiencies, violations of permits or licenses, and breach of contract and other matters against the Company and its subsidiaries incident to the operation of its business. The liability, if any, associated with these matters was not determinable at December 31, 1994. While certain of these matters involve substantial amounts, and although occasional adverse settlements or resolutions may occur and negatively impact earnings in the year of settlement, it is the opinion of management that their ultimate resolution will not have a materially adverse effect on Tandy's financial position.
NOTE 21-DISCONTINUED OPERATIONS On June 25, 1993, the Board of Directors of Tandy adopted a formal plan of divestiture under which the Company would sell its computer manufacturing and marketing businesses, the O'Sullivan Industries, Inc. ("O'Sullivan") ready-to-assemble furniture manufacturing and related marketing business, the Memtek Products division and the Lika printed circuit board business.
Computer Manufacturing. The Company closed the sale of the computer manufacturing and marketing businesses to AST Research, Inc. ("AST") on July 13, 1993. In accordance with the terms of the definitive agreement between Tandy and AST, Tandy received $15,000,000 upon closing of the sale. The balance of the purchase price of $90,000,000 is payable by a promissory note. The principal amount of this promissory note is payable by July 12, 1996; interest is accrued and paid annually. The interest rate on the promissory note is currently 4.94% per annum and is adjusted annually, not to exceed 5% per annum. The terms of the promissory note stipulate that the outstanding principal balance may be paid at maturity at AST's option in cash or the common stock of AST. However, at Tandy's option not more than 50% of the initial principal balance may be paid in common stock of AST. The promissory note is supported by a standby letter of credit in the amount of the lesser of $100,000,000 or 70% of the outstanding principal amount of the promissory note. At December 31, 1994, the standby letter of credit approximated $67,704,000.
In October 1993, the Company sold its computer marketing operations in France to AST, together with certain other multimedia assets and additional Swedish inventory, in return for an increase in the principal amount of the promissory note described above to $96,700,000. The Company has discounted this note by $2,000,000 and the discount will be recognized as interest using the effective interest rate method over the life of the note.
Memtek Products. On November 10, 1993, the Company executed a definitive agreement with Hanny Magnetics (B.V.I.) Limited, a British Virgin Islands corporation ("Hanny"), to purchase certain assets of the Company's Memtek Products operations, including the license agreement with Memorex Telex, N.V. for the use of the Memorex trademark on licensed consumer electronics products. This sale closed on December 16, 1993. Hanny is a subsidiary of Hanny Magnetics (Holdings) Limited, a Bermuda corporation, listed on the Hong Kong Stock Exchange. Proceeds from this sale aggregated $69,602,000. The $7,102,000 receivable which remained at December 31, 1993 was paid in 1994.
O'Sullivan Industries. On January 27, 1994 the Company announced that it had reached an agreement with the underwriters to sell all the common stock of O'Sullivan Industries Holdings, Inc., the parent company of O'Sullivan, to the public at $22 per share. The net proceeds realized by Tandy in the initial public offering, together with a $40,000,000 cash dividend from O'Sullivan Industries, Inc., approximated $350,000,000. The initial public offering closed on February 2, 1994.
Tandy has recognized income of approximately $4,399,000, net of tax, during the year ended December 31, 1994 pursuant to a Tax Sharing and Tax Benefit Reimbursement Agreement between Tandy and O'Sullivan under which Tandy receives payments from O'Sullivan approximating the federal tax benefit that O'Sullivan realizes from the increased tax basis of its assets resulting from the initial public offering. The higher tax basis increases O'Sullivan's tax deductions and, accordingly, reduces income taxes payable by O'Sullivan. These payments will be made over a 15-year time period and are contingent upon O'Sullivan's taxable income each year. The Company is recognizing these payments as additional sale proceeds and gain in the year in which the payments become due and payable to the Company pursuant to the Tax Sharing and Tax Benefit Reimbursement Agreement. The additional gain is recorded as a reduction of SG&A expense in the accompanying Consolidated Statements of Income.
Lika. On October 11, 1994, Tandy sold the assets used in its Lika(R) printed circuit board division to Viktron Limited Partnership, an Illinois limited partnership. The proceeds from the sale and liquidation of assets approximated $16,380,000 which included $7,754,000 in cash, proceeds from liquidation of retained assets of $5,594,000 and secured promissory notes for $3,032,000.
In connection with the computer manufacturing sale, the Memtek Products sale and the Lika sale, the Company agreed to retain certain liabilities primarily relating to warranty obligations on products sold prior to the sale. Management believes that accrued reserves, as reflected on its December 31, 1994 balance sheet, are adequate to cover estimated future warranty obligations for the products.
The losses from discontinued operations prior to the measurement date are outlined in the table below.
A loss from the sale of the Company's computer manufacturing operations to AST, inclusive of losses from operations during the phase out period, was offset by gains from the sale of Memtek Products, O'Sullivan and Lika, also inclusive of results of operations during the phase out period.
Interest expense of $4,608,000 allocated through the measurement date of June 30, 1993 and $5,170,000 for the six months ended December 31, 1992, has been allocated to discontinued operations based on the percentage of the net assets of discontinued operations to total net assets.
NOTE 22-RELATIONS WITH INTERTAN InterTAN, the former foreign retail operations of Tandy, was spun off to Tandy stockholders as a tax-free dividend in fiscal 1987. Under the merchandise purchase terms of the original distribution agreement, InterTAN could purchase on payment terms products sold or secured by Tandy. A&A International ("A&A"), a subsidiary of Tandy, was the exclusive purchasing agent for products originating in the Far East for InterTAN.
On July 16, 1993 InterTAN had an account payable to Tandy of approximately $17,000,000 of which $7,600,000 was in default. InterTAN's outstanding purchase orders for merchandise placed under the distribution agreement with Tandy, but not yet shipped, totaled approximately $44,000,000. Because InterTAN had defaulted, on July 16 Tandy terminated the merchandise purchase terms of the distribution agreement and the license agreements. Tandy offered InterTAN interim license agreements which expired July 22, 1993, unless extended. The agreements were extended on July 23, 1993.
On July 30, 1993 Trans World Electronics, Inc. ("Trans World"), a subsidiary of Tandy, reached agreement with InterTAN's banking syndicate to buy approximately $42,000,000 of InterTAN's debt at a negotiated, discounted price. The closing of this purchase occurred on August 5, 1993, at which time Tandy resumed limited shipments to InterTAN and granted a series of short-term, interim licenses pending the execution of new license and merchandise agreements. The debt purchased from the banks has been restructured into a seven-year note with interest of 8.64% due semiannually beginning February 25, 1994 and semiannual principal payments beginning February 25, 1995 (the "Series A" note). Trans World provided approximately $10,000,000 in working capital and trade credit to InterTAN. Interest on the working capital loan (the "Series B" note) of 8.11% is due semiannually beginning February 25, 1994 with the principal due in full on August 25, 1996. Trans World also has received warrants with a five-year term exercisable for approximately 1,450,000 shares of InterTAN common stock at an exercise price of $6.618 per share. As required by an agreement with Tandy, InterTAN has registered the warrants under the Securities Act of 1933. At December 31, 1994, InterTAN's common stock price, as quoted in the Wall Street ----------- Journal, was $8.125 per share. The fair market value of ------- these warrants at December 31, 1994 approximates $2,500,000.
In addition to the bank debt purchased by Trans World and the working capital loan, InterTAN's obligations to Trans World included two additional notes for approximately $23,665,000 (the "Series C" note) and $24,037,000 (the "Series D" note) with interest rates of 7.5% and 8%, respectively. The notes represented the restructuring of InterTAN accounts payable for merchandise already shipped and required monthly interest payments. All principal and interest on the Series C note was paid in full by December 31, 1993. The Series D note was paid in full during the first quarter of 1994. All of Tandy's debt from InterTAN is secured by a first priority lien on substantially all of InterTAN's assets in Canada and the U.K.
A new merchandise agreement was reached with InterTAN in October 1993 which requires future purchase orders to be backed by letters of credit posted by InterTAN. New license agreements provide for a future royalty to Tandy. InterTAN had obligations for purchase orders outstanding for merchandise ordered by A&A for InterTAN but not yet shipped totaling approximately $24,705,000 at December 31, 1994.
InterTAN has increased its bank revolving credit facility with its new banking syndicate to Canadian $60,000,000 (U.S. $42,774,000 equivalent at December 31, 1994). In the case of InterTAN's default on the bank credit line, Tandy will, at the option of InterTAN's new banking syndicate, purchase InterTAN's inventory and related accounts receivable at 50% of their net book value, up to the amount of outstanding bank loans, but not to exceed Canadian $60,000,000. In that event, Tandy could foreclose on its first priority lien on InterTAN's assets in Canada and the U.K. If Tandy fails to purchase the inventory and related accounts receivable of InterTAN from the banking syndicate, the syndicate upon notice to Tandy and expiration of time, can foreclose upon InterTAN's assets in Canada and the U.K. ahead of Tandy. The inventory repurchase agreement between InterTAN's banking syndicate and Tandy has been amended and restated to reflect the foregoing.
As of December 31, 1994 InterTAN owed Tandy an aggregate of $39,965,000, net of discount. The current portion of the obligation approximates $8,707,000 and the non-current portion approximates $31,258,000. In 1994 Tandy recognized $3,855,000 in accretion of discount on the note receivable from InterTAN which resulted from the purchase of the bank debt at a discounted price. Accretion of this discount is based on the effective interest rate method. Tandy recognized sales to and commission income from InterTAN of approximately $19,764,000 and interest income of $8,280,000 during fiscal 1994. During the year ended December 31, 1993, Tandy recognized approximately $93,315,000 of sales to InterTAN and interest income of $3,085,000. Tandy's sales to InterTAN totaled $90,130,000 during the six months ended December 31, 1992 and $171,126,000 during fiscal 1992.
A&A will continue as the exclusive purchasing agent for InterTAN in the Far East on a commission basis. Commencing in March 1994, only the purchasing agent commission and sales by Tandy manufacturing plants to InterTAN were recorded as sales and operating revenues. InterTAN purchases from third parties through A&A are no longer recorded as sales, reflecting the arrangement under the new merchandise agreement. Accordingly, sales by Tandy to InterTAN in 1994 are considerably lower than in prior years; however, the earned income relating thereto was not materially different.
Through February 1995 InterTAN has met all of its payment obligations to Tandy. In addition, its operations have improved in fiscal 1995 as evidenced by its published net income for the six months ended December 31, 1994 approximating $17,704,000 or $1.11 per fully diluted share as opposed to net income of $4,567,000 or $0.49 per fully diluted share for the same period in the prior year. As a result, nothing has come to the attention of management which would indicate that InterTAN would not be able to continue to meet its payment obligations pursuant to the debt agreements with Tandy.
Canadian tax authorities are reviewing InterTAN's Canadian subsidiary's 1987-89 tax returns. The Company cannot determine whether the ultimate resolution of that review will have an effect on InterTAN's ability to meet its obligations to Tandy, but at the present, the Company believes that the ultimate resolution of this review will not impair InterTAN's ability to meet its obligations to Tandy.
NOTE 23-QUARTERLY DATA (UNAUDITED) As the Company's operations are predominantly retail oriented, its business is subject to seasonal fluctuations with the December 31 quarter being the most significant in terms of sales and profits because of the Christmas selling season.
During the quarter ended December 31, 1994, the Company recognized a restructuring charge of $89,071,000 for business restructuring relating to the closing of certain retail stores. The Company also recognized a gain of $91,437,000 relating to the sale of Computer City and Incredible Universe private label credit card portfolios and the transfer of the Company's legal obligations pursuant to extended service contracts. See Notes 3 and 4 for further information.
During the quarter ended December 31, 1993, the Company recognized a gain, net of tax, from discontinued operations of approximately $15,822,000. This gain partially offset the after-tax charge of $70,000,000 previously taken in the June 1993 quarter and reduced the loss on disposal of discontinued operations to approximately $54,178,000. The gain resulted from the better than anticipated sales price received for O'Sullivan partially offset by additional foreign currency translation losses and below plan operating results of the divested companies during the divestment period, net of related income tax adjustments. See Note 21 for further information on discontinued operations.
During the quarter ended March 31, 1993, the Company adopted FAS 109 which changed the Company's method of accounting for income taxes from the deferred method to an asset and liability approach. The adjustments to the January 1, 1993 balance sheet to adopt FAS 109 totaled $13,014,000. This amount is reflected in 1993 net income as the cumulative effect of a change in accounting principle. See Note 12 for further information on Change in Accounting Principle - Provision for Income Taxes.
As discussed in detail in Note 2, income per share amounts and the weighted average of common and common equivalent shares outstanding for all quarters commencing with the quarter ending March 31, 1992 (quarter of issuance) through September 30, 1994 have been retroactively restated to reflect that the PERCS will convert into 11,816,000 shares of common stock.
TANDY CORPORATION INDEX TO EXHIBITS
Exhibit Sequential Number Description Page No.
2a Agreement for Purchase and Sale of Assets dated as of June 30, 1993 between AST Research, Inc., as Purchaser and Tandy Corporation, TE Electronics Inc., and GRiD Systems Corporation, as Sellers (without exhibits) (filed as Exhibit 2 to Tandy's July 13, 1993 Form 8-K filed on July 27, 1993, Accession No. 0000096289-93-000004 and incorporated herein by reference).
2b Amended and Restated Stock Exchange Agreement dated February 1, 1994 by and among O'Sullivan Industries Holdings, Inc., and TE Electronics Inc. (filed as Exhibit 2b to Tandy's Form 10-K filed on March 30, 1994, Accession No. 0000096289-94-000029 and incorporated herein by reference).
2c U.S. Purchase Agreement dated January 26, 1994 by and among O'Sullivan Industries Holdings, Inc., TE Electronics Inc. and the U.S. Underwriters which included Merrill Lynch & Co., Wheat First Butcher & Singer, The Chicago Dearborn Company and Rauscher Pierce Refsnes, Inc. (filed as Exhibit 2c to Tandy's Form 10-K filed on March 30, 1994, Accession No. 0000096289-94-000029 and incorporated herein by reference).
2d International Purchase Agreement dated January 26, 1994 by and among O'Sullivan Industries Holdings, Inc., TE Electronics Inc. and the U.S. Underwriters which included Merrill Lynch International Limited and UBS Limited (filed as Exhibit 2d to Tandy's Form 10-K filed on March 30, 1994, Accession No. 0000096289-94-000029 and incorporated herein by reference).
2e Acquisition Agreement dated January 18, 1995 between Hurley State Bank, as purchaser and Tandy Credit Corporation as seller (without exhibits) (filed as Exhibit (c) to Tandy's January 18, 1995 Form 8-K filed on February 2, 1995, Accession No. 0000096289-95-000008 and incorporated herein by reference).
3a(i) Restated Certificate of Incorporation of Tandy dated December 10, 1982 (filed as Exhibit 4A to Tandy's 1993 Form S-8 for the Tandy Corporation Incentive Stock Plan, Reg. No. 33-51603, filed on November 12, 1993, Accession No. 0000096289-93-000017 and incorporated herein by reference).
3a(ii) Certificate of Amendment of Certificate of Incorporation of Tandy Corporation dated November 13, 1986 (filed as Exhibit 4A to Tandy's 1993 Form S-8 for the Tandy Corporation Incentive Stock Plan, Reg. No. 33-51603, filed on November 12, 1993, Accession No. 0000096289-93-000017 and incorporated herein by reference).
3a(iii) Certificate of Amendment of Certificate of Incorporation, amending and restating the Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock dated June 22, 1990 (filed as Exhibit 4A to Tandy's 1993 Form S-8 for the Tandy Corporation Incentive Stock Plan, Reg. No. 33-51603, filed on November 12, 1993, Accession No. 0000096289-93-000017 and incorporated herein by reference).
3a(iv) Certificate of Designations of Series B TESOP Convertible Preferred dated June 29, 1990 (filed as Exhibit 4A to Tandy's 1993 Form S-8 for the Tandy Corporation Incentive Stock Plan, Reg. No. 33-51603, filed on November 12, 1993, Accession No. 0000096289- 93-000017 and incorporated herein by reference).
3a(v) Certificate of Designation, Series C Conversion Preferred Stock dated February 13, 1992 (filed as Exhibit 4A to Tandy's 1993 Form S-8 for the Tandy Corporation Incentive Stock Plan, Reg. No. 33-51603, filed on November 12, 1993, Accession No. 0000096289- 93-000017 and incorporated herein by reference).
3b Tandy Corporation Bylaws, restated as of August 4, 1993 (filed as Exhibit 4B to Tandy's Form S-8 for the Tandy Corporation Incentive Stock Plan, Reg. No. 33-51603, filed on November 12, 1993, Accession No. 0000096289- 93-000017 and incorporated herein by reference).
4a Amended and restated Rights Agreement with the First National Bank of Boston dated June 22, 1990 for Preferred Share Purchase Rights (filed as Exhibit 4b to Tandy's Form 10-K filed on March 30, 1994, Accession No. 0000096289-94-000029 and incorporated herein by reference).
4b Revolving Credit Agreement between Tandy Corporation and Texas Commerce Bank, individually and as Agent for sixteen other banks, dated as of May 27, 1994 (without exhibits) (filed as Exhibit 4c to Tandy's Form 10Q filed on August 15, 1994, Accession No. 0000096289-94-000039 and incorporated herein by reference).
4c Continuing Guaranty dated as of June 18, 1991 by Tandy Corporation in favor of holders of indebtedness issued by Tandy Credit Corporation that is or may be publicly traded and is rated by at least one nationally recognized rating agency (filed as Exhibit 4e to Tandy's Form 10-K filed on March 30, 1994, Accession No. 0000096289-94-000029 and incorporated herein by reference).
10a* Salary Continuation Plan for Executive Employees of Tandy Corporation and Subsidiaries including amendment dated June 14, 1984 with respect to participation by certain executive employees, as restated October 4, 1990 (filed as Exhibit 10a to Tandy's Form 10-K filed on March 30, 1994, Accession No. 0000096289-94-000029 and incorporated herein by reference).
10b* Form of Executive Pay Plan Letters. 59
10c* Post Retirement Death Benefit Plan for Selected Executive Employees of Tandy Corporation and Subsidiaries as restated June 10, 1991 (filed as Exhibit 10c to Tandy's Form 10-K filed on March 30, 1994, Accession No. 0000096289-94-000029 and incorporated herein by reference).
10d* Tandy Corporation Officers Deferred Compensation Plan as restated July 10, 1992 (filed as Exhibit 10d to Tandy's Form 10-K filed on March 30, 1994, Accession No. 0000096289-94-000029 and incorporated herein by reference).
10e* Special Compensation Plan No. 1 for Tandy Corporation Executive Officers, adopted in 1993 (filed as Exhibit 10e to Tandy's Form 10-K filed on March 30, 1994, Accession No. 0000096289-94-000029 and incorporated herein by reference).
10f* Special Compensation Plan No. 2 for Tandy Corporation Executive Officers, adopted in 1993 (filed as Exhibit 10f to Tandy's Form 10-K filed on March 30, 1994, Accession No. 0000096289-94-000029 and incorporated herein by reference).
10g* Special Compensation Plan for Directors of Tandy Corporation dated November 13, 1986 (filed as Exhibit 10g to Tandy's Form 10-K filed on March 30, 1994, Accession No. 0000096289-94-000029 and incorporated herein by reference).
10h* Director Fee Resolution (filed as Exhibit 10h to Tandy's Form 10-K filed on March 30, 1994, Accession No. 0000096289-94-000029 and incorporated herein by reference).
10i* Tandy Corporation 1985 Stock Option Plan as restated effective August 1990 (filed as Exhibit 10i to Tandy's Form 10-K filed on March 30, 1994, Accession No. 0000096289-94- 000029 and incorporated herein by reference).
10j* Tandy Corporation 1993 Incentive Stock Plan as restated October 14, 1993 (filed as Exhibit 4B to Tandy's Form S-8 for Tandy Corporation Incentive Stock Plan, Reg. No. 33-51603, filed on November 12, 1993, Accession No. 0000096289-93-000017 and incorporated herein by reference).
10k* Tandy Corporation Officers Life Insurance Plan as amended and restated effective August 22, 1990 (filed as Exhibit 10k to Tandy's Form 10-K filed on March 30, 1994, Accession No. 0000096289-94-000029 and incorporated herein by reference).
10l* Restated Trust Agreement Tandy Employees Supplemental Stock Program through Amendment No. III dated March 29, 1993 (filed as Exhibit 10H to Tandy's Form 10-K/A-4 filed on September 3, 1993, Accession No. 0000096289-93-000011 and incorporated herein by reference).
10m* Forms of Termination Protection Agreements for (i) Corporate Executives, (ii) Division Executives, and (iii) Subsidiary Executives (filed as Exhibit 10m to Tandy's Form 10-K filed on March 30, 1994, Accession No. 0000096289-94-000029 and incorporated herein by reference).
10n* Tandy Corporation Termination Protection Plans for Executive Employees of Tandy Corporation and its Subsidiaries (i) the Level I and (ii) Level II Plans (filed as Exhibit 10n to Tandy's Form 10-K filed on March 30, 1994, Accession No. 0000096289-94- 000029 and incorporated herein by reference).
10o* Forms of Bonus Guarantee Letter Agreements with certain Executive Employees of Tandy Corporation and its Subsidiaries (i) Formula, (ii) Discretionary, and (iii) Pay Plan (filed as Exhibit 10o to Tandy's Form 10-K filed on March 30, 1994, Accession No. 0000096289- 94-000029 and incorporated herein by reference).
10p* Form of Indemnity Agreement with Directors, Corporate Officers and two Division Officers of Tandy Corporation (filed as Exhibit 10p to Tandy's Form 10-K filed on March 30, 1994, Accession No. 0000096289-94-000029 and incorporated herein by reference).
11 Statement of Computation of Earnings per Share 67
12 Statement of Computation of Ratios of Earnings to Fixed Charges 69
21 Subsidiaries 70
23 Consent of Independent Accountants 71
27 Financial Data Schedule
_______________________
* Each of these exhibits is a "management contract or compensatory plan, contract, or arrangement".
EXHIBIT 10b January 1, 1995
TO:
FROM: Richard Ramsey
SUBJECT: Compensation Plan, Fiscal Year 1995
Your compensation plan for fiscal year 1995 is outlined below.
I. FY 1995 Base Salary -------
Your Base Salary for FY95 shall be $.
II. Your bonus for FY95 shall be determined by multiplying the percent determined in the following TARGET INCENTIVE GOALS times the FACTORS set forth below.
The bonus amounts payable are subject to limitations set forth in Paragraph III and IV.
TARGET INCENTIVE GOALS:
1. INCOME Each percentage point of positive change that the Tandy Corporation and subsidiaries income from operations (before income taxes) increases from the prior year.
2. Each percentage point of positive change that the Tandy Services net income (Pre-Admin) increases from the prior year. Tandy Services, for this calculation, will include TE-US, TE-Asia, Tandy Services Consolidation (P&L RS3-8200), Tandy Transportation, Consumer Mail and Express Order Marketing (P&L RS2-2200).
Your factors to be used for each of the calculations above are as follows:
1. Tandy Corporation income increase: $
2. Tandy Services Income increase: $
January 1, 1995 Compensation Plan, FY95
III. Minimum Bonus
Minimum Threshold Increase Percent for Each Target -------------------------------------------------- Incentive Goal --------------
Minimum Increase % ------------------ 1. Tandy Corporation Income 3
2. Tandy Services Income 75
Bonus amounts earned from each of the factors which exceed the minimum Increase above will be accumulated. No bonus will be paid unless the accumulated bonus exceeds 9% of your base salary.
Bonus will only be paid on each goal which exceeds the ---- Minimum Increase % set forth above.
IV. Maximum Bonus:
The bonus paid will be limited to an amount not to exceed $.
V. This compensation plan is not an employment contract, but a method of calculating your total earnings. You forfeit your rights to receive a bonus if you resign before the end of the current fiscal year. If you are terminated by the Company, you forfeit your rights to receive a bonus except at the sole discretion of the Company and in such amount as the Company might decide. If you retire at age 55 or over, provided the Company has given its consent to your early retirement, or die before the end of the then current fiscal year, your bonus for the current year-to-date will be calculated to the nearest end of the month preceding or succeeding such event, using the formula above and adjusting for the partial year. The amount will be paid to you or the legal representative of your estate.
VI. If at any time during your continued employment, your responsibility, duties or title changes, this plan is subject to revision or termination by the Company at the time of the foregoing change.
January 1, 1995
TO:
FROM: Richard Ramsey
SUBJECT: Compensation Plan, Fiscal Year 1995
Your compensation plan for fiscal year 1995 is outlined below.
I. FY 1995 Base Salary -------
Your Base Salary for FY95 shall be $.
II. Your bonus for FY95 shall be determined by multiplying the percent determined in the following TARGET INCENTIVE GOALS times the FACTORS set forth below.
The bonus amounts payable are subject to limitations set forth in Paragraph III and IV.
TARGET INCENTIVE GOALS:
TANDY CORPORATION -----------------
1. INCOME Each percentage point of positive change that the Tandy Corporation and subsidiaries income from operations (before income taxes) increases from the prior year.
2. EARNINGS PER SHARE Each percentage point of positive change that the Tandy Corporation earnings per share increases from the prior year.
3. STOCK PRICE a. Each percentage point of positive change that the Tandy Corporation stock price increases, based on the average daily closing price for 1994 and 1995.
b. If Tandy's average daily closing stock price outperforms the "Peer Group's" average daily closing stock price, you will receive an additional bonus of $.
Percentages shall be calculated to two decimal points.
Your factors to be used for each of the calculations above are as follows:
1. Income increase: $
2. Earnings per share increase: $
3. Stock price increase: $
January 1, 1995 Compensation Plan, FY95
REAL ESTATE -----------
Additional bonus will be paid based on targets set forth in Attachment 1.
III. Minimum Bonus
Minimum Threshold Increase Percent for Each Target -------------------------------------------------- Incentive Goal --------------
Minimum ------- 1. Income 3% Increase
2. Earnings per share 3% Increase
3. Stock price a. Tandy Stock Increase 5% Increase b. Peer Group N/A
4. Real Estate - Net Store Openings 75 Stores Opened Closed Store Buyouts 120 Store Buyouts
Bonus amounts earned from each of the factors which exceed the minimum Increase above will be accumulated. No bonus will be paid unless the accumulated bonus exceeds 12% of your base salary.
Bonus will only be paid on each goal which exceeds the ---- Minimum Increase % set forth above.
IV. Maximum Bonus:
The bonus paid will be limited to an amount not to exceed $.
V. This compensation plan is not an employment contract, but a method of calculating your total earnings. You forfeit your rights to receive a bonus if you resign before the end of the current fiscal year. If you are terminated by the Company, you forfeit your rights to receive a bonus except at the sole discretion of the Company and in such amount as the Company might decide. If you retire at age 55 or over, provided the Company has given its consent to your early retirement, or die before the end of the then current fiscal year, your bonus for the current year-to-date will be calculated to the nearest end of the month preceding or succeeding such event, using the formula above and adjusting for the partial year. The amount will be paid to you or the legal representative of your estate.
VI. If at any time during your continued employment, your responsibility, duties or title changes, this plan is subject to revision or termination by the Company at the time of the foregoing change.
December 31, 1994
TO:
FROM: Richard Ramsey
SUBJECT: Compensation Plan, Fiscal Year 1995
Your compensation plan for fiscal year 1995, as approved by the Organization and Compensation Committee of the Board of Directors, is outlined below.
I. FY 1995 Base Salary -------
Your Base Salary for FY95 shall be $
II. Your bonus for FY95 shall be determined by multiplying the percent determined in the following TARGET INCENTIVE GOALS times the FACTORS set forth below.
The bonus amounts payable are subject to limitations set forth in Paragraph III and IV.
TARGET INCENTIVE GOALS:
1. INCOME Each percentage point of positive change that the Tandy Corporation and subsidiaries income from operations (before income taxes) increases from the prior year.
2. EARNINGS PER SHARE Each percentage point of positive change that the Tandy Corporation earnings per share increases from the prior year.
3. STOCK PRICE a. Each percentage point of positive change that the Tandy Corporation stock price increases, based on the average daily closing price for 1994 and 1995.
b. If Tandy's average daily closing stock price outperforms the "Peer Group's" average daily closing stock price, you will receive an additional bonus of $.
Percentages shall be calculated to two decimal points.
Your factors to be used for each of the calculations above are as follows:
1. Income increase: $
2. Earnings per share increase: $
3. Stock price increase: $
December 31, 1994 Compensation Plan, FY95
III. Minimum Bonus
Minimum Threshold Increase Percent for Each Target -------------------------------------------------- Incentive Goal --------------
Minimum Increase % ------------------ 1. Income 3
2. Earnings per share 3
3. Stock price a. Tandy Stock Increase 5 b. Peer Group N/A
Bonus amounts earned from each of the factors which exceed the minimum Increase above will be accumulated. No bonus will be paid unless the accumulated bonus exceeds 12% of your base salary.
Bonus will only be paid on each goal which exceeds the ---- Minimum Increase % set forth above.
IV. Maximum Bonus:
The bonus paid will be limited to an amount not to exceed $.
V. This compensation plan is not an employment contract, but a method of calculating your total earnings. You forfeit your rights to receive a bonus if you resign before the end of the current fiscal year. If you are terminated by the Company, you forfeit your rights to receive a bonus except at the sole discretion of the Company and in such amount as the Company might decide. If you retire at age 55 or over, provided the Company has given its consent to your early retirement, or die before the end of the then current fiscal year, your bonus for the current year-to-date will be calculated to the nearest end of the month preceding or succeeding such event, using the formula above and adjusting for the partial year. The amount will be paid to you or the legal representative of your estate.
VI. If at any time during your continued employment, your responsibility, duties or title changes, this plan is subject to revision or termination by the Company at the time of the foregoing change.
January 1, 1995
TO:
FROM: Richard Ramsey
SUBJECT: Compensation Plan, Fiscal Year 1995
Your compensation plan for fiscal year 1995 is outlined below.
I. FY 1995 Base Salary -------
Your Base Salary for FY95 shall be $
II. Your bonus for FY95 shall be determined by multiplying the percent determined in the following TARGET INCENTIVE GOALS times the FACTORS set forth below.
The bonus amounts payable are subject to limitations set forth in Paragraph III and IV.
TARGET INCENTIVE GOALS:
1. INCOME Each percentage point of positive change that the Radio Shack Division net income (before income taxes) increases from the prior year.
2. SALES Each percentage point of positive change that the Radio Shack Division sales increase from the prior year.
3. GROSS PROFIT Each percentage point of positive change that the Radio Shack Division gross profit dollars increase from the prior year.
Radio Shack results will be adjusted to reflect certain Tandy Support Operations for 1994 and 1995.
Percentages shall be calculated to two decimal points.
Your factors to be used for each of the calculations above are as follows:
1. Radio Shack income increase: $
2. Radio Shack sales increase: $
3. Radio Shack gross profit dollars increase: $
January 1, 1995 Compensation Plan, FY95
III. Minimum Bonus
Minimum Threshold Increase Percent for Each Target -------------------------------------------------- Incentive Goal --------------
Minimum Increase % ------------------ 1. Income 2
2. Sales 1
3. Gross Profit 1
Bonus amounts earned from each of the factors which exceed the minimum Increase above will be accumulated. No bonus will be paid unless the accumulated bonus exceeds 12% of your base salary.
Bonus will only be paid on each goal which exceeds the ---- Minimum Increase % set forth above.
IV. Maximum Bonus:
The bonus paid will be limited to an amount not to exceed $.
V. This compensation plan is not an employment contract, but a method of calculating your total earnings. You forfeit your rights to receive a bonus if you resign before the end of the current fiscal year. If you are terminated by the Company, you forfeit your rights to receive a bonus except at the sole discretion of the Company and in such amount as the Company might decide. If you retire at age 55 or over, provided the Company has given its consent to your early retirement, or die before the end of the then current fiscal year, your bonus for the current year-to-date will be calculated to the nearest end of the month preceding or succeeding such event, using the formula above and adjusting for the partial year. The amount will be paid to you or the legal representative of your estate.
VI. If at any time during your continued employment, your responsibility, duties or title changes, this plan is subject to revision or termination by the Company at the time of the foregoing change.
TANDY CORPORATION
EXHIBIT 21
SUBSIDIARIES
The largest subsidiaries of the Company are:
State of Incorporation ---------------------- Tandy Credit Corporation Delaware
Technology Properties, Inc. Delaware
Trans World Electronics, Inc. Texas
All of the subsidiaries of Tandy Corporation are included in the Company's consolidated financial statements. All other subsidiaries, considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary.
TANDY CORPORATION
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectuses constituting part of the Registration Statements on Form S-3 (Registration No. 33-37970) of Tandy Corporation and Form S-3 (Registration No. 33-15624) of Tandy Credit Corporation and to the incorporation by reference in the Registration Statements on Form S-8 (Registration Nos. 33-23178, 33-41523, 33-51019, 33-51599 and 33-51603) of our report dated February 22, 1995, appearing on page 28 in this Annual Report on Form 10-K.
/s/ Price Waterhouse LLP ------------------------ PRICE WATERHOUSE LLP
Fort Worth, Texas March 30, 1995