Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (NO FEE REQUIRED)
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (NO FEE REQUIRED) FOR THE TRANSITION PERIOD
Commission file number 1-5571
------------------------
TANDY CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 75-1047710
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 Throckmorton Street, Suite 1800, Fort Worth, Texas 76102
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (817) 415-3700
------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Name of each exchange
Title of each class on which registered
Common Stock, par value $1 per share New York Stock Exchange
Preferred Share Purchase Rights New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ____
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
As of March 23, 1999, the aggregate market value of the voting stock held by
non-affiliates of the registrant was $5,265,940,296 based on the New York Stock
Exchange closing price.
As of March 23, 1999, there were 96,920,455 shares of the registrant's Common
Stock outstanding.
Documents Incorporated by Reference
Portions of the Proxy Statement for the 1999 Annual Meeting of Stockholders are
incorporated by reference into Part III.
The Index to Exhibits is on Sequential Page No. 59.
PART I
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. Sales derived
outside of the United States are not material. Tandy's principal retail
operations in 1998 included the RadioShack(R) and Computer City(R) store chains.
RadioShack. RadioShack is the Company's largest operating business unit. At
December 31, 1998, the RadioShack division operated 5,039 company-owned
stores located throughout the United States. These stores average
approximately 2,200 square feet in gross area and are located in major malls
and strip centers, as well as individual store fronts. RadioShack had, on
the same date, a network of 1,991 dealer/franchise stores. These stores
provide RadioShack products to smaller communities. The dealers are
generally engaged in other retail operations and augment their sales with
RadioShack products. This network included 53 international dealers at
December 31, 1998.
The company-owned RadioShack stores carry a broad assortment of mostly
private label electronic parts and accessories, cellular, PCS and
conventional telephones, audio and video equipment, digital satellite
systems, personal computers and related products, as well as specialized
products such as scanners, electronic toys and hard-to-find batteries.
RadioShack also provides consumers access to third party services such as
cellular phone, PCS, direct satellite programming and pager service.
RadioShack, through its "Sprint Store at RadioShack", provides customers
with access to wireless and residential telephones and related telephony
products and services. A second "store-within-a-store" concept was launched
in early 1998, when the Company announced its strategic alliance with Compaq
Computer Corporation ("Compaq").
Computer City. On June 22, 1998, the Company announced that it had signed a
definitive agreement to sell 100% of the outstanding common stock of its
Computer City, Inc. subsidiary ("CCI" or "Computer City") to CompUSA Inc.
("CompUSA"). The sale was completed August 31, 1998. (See "Sale of Computer
City, Inc." in Item 7 "Management's Discussion and Analysis of Results of
Operations and Financial Condition" ("MD&A")). Prior to the sale, there were
101 Computer City stores open, including seven in Canada. Operating
primarily as a supercenter format, the average store size approximated
21,050 square feet in gross area and offered approximately 4,000 products in
its merchandising assortment, including personal computer hardware and
software and related products and accessories. To complement its hardware
and software sales, Computer City also offered such services as classroom
and on-site training for widely-used software applications, as well as
repair, maintenance, custom configuration, diagnostic testing, computer
upgrades and other technical services on all major brands of computers and
related products.
Incredible Universe. In December 1996, the Company announced its intent to
exit the Incredible Universe business. All Incredible Universe stores were
closed or sold by the end of 1997. See "Provisions for Business
Restructuring and Asset Impairment" in MD&A for further discussion.
Supporting the retail operations is an extensive infrastructure that includes:
A&A International, Inc.("A&A") - This wholly-owned subsidiary of the Company
serves the wide-ranging international import/export, sourcing, evaluation,
logistics and quality control needs of the Company. A&A also provides
services for outside customers, primarily InterTAN, Inc. ("InterTAN"). Most
of A&A's activity for InterTAN involves sourcing of goods from manufacturers
in Asia.
Consumer Electronics Manufacturing - The Company operates seven
manufacturing facilities in the United States and one overseas manufacturing
operation in China, which is a joint venture. These eight manufacturing
facilities employed approximately 3,400 employees as of December 31, 1998.
The Company manufactures a variety of products, primarily sold through
RadioShack, including audio, video, telephony, antennas, wire and cable
products and a wide variety of "hard to find" parts for consumer electronic
products.
Tandy Service Centers-The Company maintains a service and support network to
service the consumer electronics and personal computer retail industry in
the U.S. At December 31, 1998, there were 53 Tandy Service Centers in the
U.S. which repaired name-brand and private label products sold through the
Company's retail distribution channels. The Company is a vendor-authorized
service provider for such leading manufacturers as Compaq, Sony, Panasonic,
Hitachi, Hewlett-Packard, RCA/Thomson and Nokia, among others, and also
performs repairs for third-party service centers and extended service plan
providers under national service agreements.
Regional Distribution Centers - The 11 distribution centers operated by the
Company ship over one million cartons each month to the Company's retail
outlets.
Tandy Transportation, Inc.-A large fleet of tractors and trailers transports
merchandise from manufacturers or ports of entry to the Company's regional
distribution centers and local distribution facilities and also delivers to
the Company's retail outlets.
Tandy Customer Support - Using state-of-the-art telephone and data networks,
Tandy Customer Support responds to more than five million calls annually for
answers to technical questions, customer service inquiries, and direct sales
related to RadioShack's catalog operations, the Internet and "hard to find"
products offered through its RadioShack Unlimited program.
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. See Note
24 of the "Notes to Consolidated Financial Statements" for quarterly data.
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, RadioShack, Optimus and
You've Got Questions. We've Got Answers. are some of the registered marks most
widely used by the Company. Tandy believes that the RadioShack name and mark is
well-recognized by consumers, and that the name and mark are associated with a
high-quality service provider. The Company's manufactured products are sold
primarily under the RadioShack and Optimus trademarks which are registered in
the U.S. and many foreign countries. Tandy also owns various patents relating to
retail and support functions and various products which Tandy has previously
designed and continues to manufacture. The Company believes that the loss of the
RadioShack name and RadioShack trademarks would be material to its business, but
does not believe that the loss of any other marks would be material.
SUPPLIERS
The Company obtains merchandise from a large number of suppliers located in
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.
Management does not believe that the loss of any one supplier would 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 remains highly competitive, driven by
technology and product cycles, as well as the overall state of 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. The Company competes in the sale
of its products and services with department stores, mail order houses, discount
stores, general merchants 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. Consumer electronics mail-order
companies also compete with the Company as do a number of competitors via
on-line commerce on the Internet. 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 many factors are important to its competitive position,
including price, quality, service and the broad selection of electronic and
telecommunications products carried at conveniently located RadioShack retail
outlets. RadioShack's strategic alliances with well-recognized partners such as
Sprint Communications Company, Compaq Computer Corporation and DirecTV, among
others, allow the Company to leverage name brand recognition and marketing
efforts and advertising campaigns as well as to create cross-revenue
opportunities such as repair service income, customer residuals and cellular
commissions. 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, in light of the ever-changing nature of the electronics retail
industry, 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.
In 1998, Tandy operated two retailing formats: RadioShack and, until August 31,
1998, Computer City. Each of the Company's retailing formats used a distinct
path to the marketplace, based on its unique customer appeal, marketing
strengths and margin structure:
RadioShack: RadioShack stores offer the shopping convenience of approximately
7,000 company-owned and dealer/franchise stores which offer high quality
branded and private label computer, telephony and electronics products and
parts, unique selection, repair services, knowledgeable personnel, convenient
credit options and excellent customer service, including its
"service-oriented" approach. In addition to providing enhanced product
explanation, specially trained sales staff assist customers with service
activation, where applicable, and selection of appropriate accessories.
RadioShack has formed strategic relationships with key vendors in computers
(Compaq), "direct-to-home" satellite (RCA, PrimeStar, DirecTV, and USSB),
telecommunications (Sprint) and wireless communications (Sprint PCS) to
augment the strong position that it has historically maintained in core
product categories such as batteries, communications equipment, telephones,
antennas and electronic components, and parts and accessories.
Computer City, Inc.: This subsidiary operated 101 stores prior to the sale to
CompUSA. Computer City stores offered approximately 4,000 different name
brand items, competitive prices and excellent customer service on personal
computer hardware and software, as well as accessories, printers and
peripherals. The stores averaged approximately 21,050 square feet. Although
retail sales were the largest component of Computer City's business, its
stores also fulfilled other functions, including direct sales to corporate,
government and education customers, as well as software training and
technical services.
See "Segment Reporting Disclosures" in MD&A for 1998, 1997 and 1996 net sales
and operating revenues, operating profit (loss) and capital assets for
RadioShack and Computer City.
EMPLOYEES
As of December 31, 1998, the Company had approximately 38,200 employees. That
number included approximately 6,500 temporary retail employees who were hired
for the Christmas selling season. None of the Company's employees are covered by
collective bargaining agreements nor are they members of labor unions.
Management of the Company considers its relationship with its employees to be
good.
ITEM 2. PROPERTIES.
Information on the Company's properties is in MD&A 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............................... 12
Property, Plant and Equipment................ 45
Leases....................................... 48
The Company leases, rather than owns, most of its retail facilities. RadioShack
stores are located primarily in major shopping malls, stand-alone buildings or
shopping centers owned by other entities. The Company owns most of the property
on which its executive offices are located in downtown Fort Worth, Texas, all
distribution centers, except for two which are leased, and most of its
manufacturing facilities located throughout the United States. A&A, the
Company's import/export subsidiary, leases eight administrative offices in the
Asia Pacific region. Existing warehouse and office facilities are deemed
adequate to meet the Company's needs in the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS.
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, 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, 1998. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal year 1998.
EXECUTIVE OFFICERS OF THE REGISTRANT (SEE ITEM 10 OF PART III).
The following is a list of the Company's executive officers and their ages,
positions and length of service with the Company as of February 28, 1999.
Position Years with
Name (Date Elected to Current Position) Age Company
---- -------------------------------- --- -------
Leonard H. Roberts President and Chief Executive Officer, 50 5 (1)
Tandy Corporation, (January 1999)
President, Tandy Corporation (December 1995)
President, RadioShack (July 1993)
David Christopher Executive Vice President, Tandy Corporation 56 32 (2)
(October 1998)
President, A&A International, Inc.
(July 1990)
David J. Edmondson Senior Vice President, Tandy Corporation 39 4 (3)
Executive Vice President and
Chief Operating Officer, RadioShack
(October 1998)
Robert M. McClure Senior Vice President, Tandy Corporation 63 26 (4)
(January 1994)
Dwain H. Hughes Senior Vice President and 51 19 (5)
Chief Financial Officer, Tandy Corporation
(January 1995)
Mark C. Hill Senior Vice President (October 1998), 47 2 (6)
Corporate Secretary and General Counsel
(July 1997), Tandy Corporation
Mark W. Barfield Vice President-Tax, Tandy Corporation 41 11 (7)
(May 1994)
Richard J. Borinstein Senior Vice President-Merchandising, 55 9 (8)
RadioShack (December 1996)
Henry G. Chiarelli Senior Vice President-New Ventures, RadioShack 44 28 (9)
(December 1997)
Evelyn V. Follit Vice President and Chief Information Officer, 52 2 (10)
Tandy Corporation (October 1997)
Loren K. Jensen Vice President and Treasurer, Tandy Corporation 38 3 (11)
(May 1995)
David P. Johnson Senior Vice President and Controller, RadioShack 46 26 (12)
(February 1998)
Martin O. Moad Vice President-Investor Relations, Tandy 42 13 (13)
Corporation (December 1996)
Louis W. Provost Senior Vice President-Retail Operations, 42 24 (14)
RadioShack (August 1998)
Richard L. Ramsey Vice President and Controller, Tandy Corporation 53 32
(January 1986)
Francesca M. Spinelli Vice President-People, Tandy Corporation 45 1 (15)
(July 1998)
John V. Roach Chairman of the Board, 60 31 (16)
Tandy Corporation (July 1982)
Chief Executive Officer, Tandy Corporation
(July 1981 - December 1998)
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. Edmondson, Hill, Jensen and Mmes. Follit and Spinelli.
(1) Mr. Roberts was elected Chief Executive Officer effective January 1999. Mr.
Roberts has been President of Tandy Corporation since December 1995 and has
been President of the RadioShack division since July 1993. Prior to joining
Tandy, he served as the Chairman and Chief Executive Officer of Shoney's,
Inc. from 1990 to 1993.
(2) Mr. Christopher served as Executive Vice President, RadioShack from January
1992 until October 1998, when he was named Executive Vice President, Tandy
Corporation. Mr. Christopher has also served as President of A&A
International, Inc. since July 1990. Mr. Christopher served as Executive
Vice President of RadioShack from January 1992 until October 1998.
(3) Mr. Edmondson was elected Senior Vice President, Tandy Corporation and
Executive Vice President and Chief Operating Officer, RadioShack effective
October 1998. Mr. Edmondson served as Senior Vice President of Marketing
and Advertising, RadioShack from November 1995 to October 1998. He served
as Vice President-Marketing, RadioShack from December 1994 until November
1995. Prior to joining Tandy Corporation, he served as National Account
Marketing Executive of Advo, Inc. where he was employed almost twelve
years.
(4) 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. Mr. McClure was named Senior
Vice President, Tandy Corporation in January 1994.
(5) Mr. Hughes was elected Senior Vice President and Chief Financial Officer,
Tandy Corporation effective January 1995. Mr. Hughes served as Vice
President and Treasurer, Tandy Corporation from June 1991 until December
1994.
(6) Mr. Hill served as Vice President, Corporate Secretary and General Counsel,
Tandy Corporation from July 1997 to October 1998, when he was named Senior
Vice President, Tandy Corporation. He continues to serve as Corporate
Secretary and General Counsel of the Company. Prior to joining Tandy, Mr.
Hill practiced law for 21 years and was a partner with the law firm of
Haynes and Boone LLP for the last 13 years.
(7) Mr. Barfield served as Director of Federal and International Taxes, Tandy
Corporation from April 1991 to May 1994, when he was named Vice
President-Tax, Tandy Corporation.
(8) Mr. Borinstein served as Vice President-Merchandise Marketing, RadioShack
from December 1993 to December 1998, when he was elected Senior Vice
President-Merchandising, RadioShack. Mr. Borinstein served as
Director-Merchandising, RadioShack from September 1991 through December
1993.
(9) Mr. Chiarelli was elected Senior Vice President-New Ventures, RadioShack
effective December 1997. He served as Senior Vice President-Merchandising
and Marketing, Computer City from January to December 1997. Mr. Chiarelli
served as Vice President and General Manager, Incredible Universe from
October 1995 to January 1997. He served as Vice President-New Venture
Group, RadioShack from September 1994 until October 1995.
(10) Ms. Follit was elected Vice President and Chief Information Officer, Tandy
Corporation effective October 1997. Prior to joining Tandy Corporation, she
was Vice President-Operations and Engineering for A.C. Nielsen Corporation
from October 1996 to March 1997. Ms. Follit held various management
positions at Dun & Bradstreet Corporation, ITT and IBM from 1970 to October
1996.
(11) Mr. Jensen has served as Vice President and Treasurer, Tandy Corporation
since May 1995. Prior to joining Tandy Corporation, he served as Senior
Vice President of Texas Commerce Bank where he was employed for almost 10
years.
(12) Mr. Johnson served as Vice President and Controller, RadioShack from June
1994 to February 1998, when he was named Senior Vice President and
Controller, RadioShack. Mr. Johnson served as Vice
President/Controller-Retail, RadioShack from August 1993 until June 1994.
(13) Mr. Moad served as Director of Investor Relations, Tandy Corporation from
February 1993 through December 1996, when he was named Vice
President-Investor Relations, Tandy Corporation.
(14) Mr. Provost was elected Senior Vice President-Retail Operations, RadioShack
effective August 1998. Mr. Provost served as Vice President and General
Manager, Tandy TechAmerica from April 1996 to August 1998. He served as
Vice President-Southeast Division, RadioShack from April 1993 to March
1996.
(15) Ms. Spinelli was elected Vice President of People, Tandy Corporation
effective July 1998. Prior to joining Tandy Corporation, she was employed
by Wal-Mart Stores, Inc. from March 1993 to July 1998. She served as
Corporate Vice President of Organizational Development of Wal-Mart Stores,
Inc. from February 1997 to July 1998.
(16) Mr. Roach has served as Chairman of the Board since July 1982 and he served
as Chief Executive Officer, Tandy Corporation from July 1981 to December
1998.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
PRICE RANGE OF COMMON STOCK (Restated for two-for-one stock split payable in
September 1997) Tandy'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
trading prices for Tandy's common stock, as reported in the composite
transactions quotations of consolidated trading for issues on the New York Stock
Exchange, for each quarter of the two years ended December 31, 1998.
Dividends
Quarter Ended High Low Declared
- ------------- ---- --- --------
December 31, 1998 $ 53 1/4 $ 37 $ 0.10
September 30, 1998 63 7/8 50 13/16 0.10
June 30, 1998 54 5/8 41 1/16 0.10
March 31, 1998 48 7/8 30 3/8 0.10
December 31, 1997 $ 46 $ 33 5/16 $ 0.10
September 30, 1997 34 25/32 26 5/16 0.10
June 30, 1997 28 7/8 24 3/8 0.10
March 31, 1997 26 7/8 20 5/16 0.10
HOLDERS OF RECORD
At March 23, 1999 there were 27,322 holders of record of Tandy's common stock.
DIVIDENDS
The Board of Directors reviews Tandy's dividend policy annually. The quarterly
dividend rate is currently $0.10 per common share.
ITEM 6. SELECTED FINANCIAL DATA.
SELECTED SUPPLEMENTAL FINANCIAL DATA (UNAUDITED)
TANDY CORPORATION AND SUBSIDIARIES
Year Ended December 31,
(Dollars and shares in millions, --------------------------------------------------------
except per share amounts and ratios) 1998(1) 1997 1996 1995 1994
================================================================================================
Operations
Net sales and operating revenues $4,787.9 $5,372.2 $6,285.5 $5,839.1 $4,943.7
======== ======== ======== ======== ========
Income (loss) before income taxes $ 99.7 $ 303.9 $ (145.6) $ 343.2 $ 359.5
Provision (benefit) for taxes 38.4 117.0 ( 54.0) 131.3 135.2
-------- -------- -------- -------- --------
Net income (loss)(2)(3) $ 61.3 $ 186.9 $ (91.6) $ 211.9 $ 224.3
======== ======== ======== ======== ========
Net income (loss) available per
common share: (2)(3)
Basic $ 0.55 $ 1.69 $ (0.82) $ 1.62 $ 1.46
Diluted $ 0.54 $ 1.63 $ (0.82) $ 1.58 $ 1.43
Shares used in computing earnings
(loss) per common share:
Basic 100.6 107.2 119.7 126.5 149.2
Diluted 105.7 112.2 119.7 131.4 153.9
Dividends declared per common share $ 0.40 $ 0.40 $ 0.40 $ 0.37 $ 0.32
Ratio of earnings to fixed charges 1.84 3.52 N/A(4) 4.22 4.56
SELECTED SUPPLEMENTAL FINANCIAL DATA (UNAUDITED) Continued
TANDY CORPORATION AND SUBSIDIARIES
(Dollars and shares in Year Ended December 31,
millions, except per ---------------------------------------------------------------------
share amounts and ratios) 1998(1) 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------
Year End Financial Position
Inventories $ 912.1 $ 1,205.2 $ 1,420.5 $ 1,512.0 $ 1,504.3
Total assets $ 1,993.6 $ 2,317.5 $ 2,583.4 $ 2,722.1 $ 3,243.8
Working capital $ 419.1 $ 739.1 $ 746.3 $ 1,088.3 $ 1,350.1
Current ratio 1.48 to 1 1.76 to 1 1.63 to 1 2.13 to 1 2.12 to 1
Capital structure:
Current debt (5) $ 233.2 $ 299.5 $ 258.0 $ 189.9 $ 229.1
Long-term debt (5) $ 235.1 $ 236.1 $ 104.3 $ 140.8 $ 153.3
Total debt $ 468.3 $ 535.6 $ 362.3 $ 330.7 $ 382.4
Total debt, net of cash and
cash equivalents $ 403.8 $ 429.7 $ 240.8 $ 187.2 $ 176.8
Stockholders' equity $ 848.2 $ 1,058.6 $ 1,264.8 $ 1,601.3 $ 1,850.2
Total capitalization $ 1,316.5 $ 1,594.2 $ 1,627.1 $ 1,932.0 $ 2,232.6
Long-term debt as a % of
total capitalization 17.9% 14.8% 6.4% 7.3% 6.9%
Total debt as a % of total
capitalization 35.6% 33.6% 22.3% 17.1% 17.1%
Stockholders' equity per
common share $ 8.25 $ 9.96 $ 10.74 $ 12.72 $ 13.01(6)
Financial Ratios
Return on average
stockholders' equity 6.4%(2) 16.1% N/A(3) 12.3% 11.8%
Percent of sales:
Income (loss) before income taxes 2.1%(2) 5.7% (2.3)%(3) 5.9% 7.3%
Net income (loss) 1.3%(2) 3.5% (1.5)%(3) 3.6% 4.5%
(1) Includes operations of Computer City, Inc. for only eight months, due to
sale to CompUSA Inc. on August 31, 1998.
(2) Excluding $183.9 million (net of taxes) for provisions related to
restricted stock awards and loss on sale of Computer City, as well as
Computer City operating losses and other business writedowns in 1998, net
income would have been $245.2 million, net income available per share
would have been $2.38 (basic) and $2.28 (diluted), return on average
stockholders' equity would have been 23.6%, income before income taxes as
a percent of sales would have been 11.1%, and net income as a percent of
sales would have been 6.8%.
(3) Excluding $230.3 million (net of taxes) in restructuring and other
charges in 1996, net income would have been $138.7 million, net income
available per share would have been $1.11 (basic) and $1.09 (diluted),
return on average stockholders' equity would have been 8.9%, income
before income taxes as a percent of sales would have been 3.5%, and net
income as a percent of sales would have been 2.2%.
(4) Pre-tax earnings were not sufficient to cover fixed charges during 1996
by approximately $145.6 million. Excluding $230.3 million (net of taxes)
in restructuring and other charges, the ratio of earnings to fixed
charges would have been 2.57.
(5) Includes capital leases and TESOP indebtedness.
(6) The year ended December 31, 1994 computed giving effect to the Series C
PERCS conversion into approximately 23.6 million shares of common stock.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION ("MD&A").
FACTORS THAT MAY AFFECT FUTURE RESULTS
With the exception of historical information, the matters discussed in MD&A
contain forward-looking statements that involve various risks and uncertainties
and are indicated by words such as "anticipates", "expects", "believes",
"plans", "could", and similar words and phrases. Factors that could cause Tandy
Corporation's ("Tandy" or the "Company") actual results to differ materially
from management's projections, forecasts, estimates and expectations include,
but are not limited to, the following:
o changes in the amount and degree of promotional intensity exerted by current
competitors and potential new competition from both retail stores and
alternative methods or channels of distribution, such as electronic and
telephone shopping services and mail order;
o changes in general U.S. or regional U.S. economic conditions including, but
not limited to, consumer credit availability, interest rates, inflation,
personal discretionary spending levels and consumer sentiment about the
economy in general;
o the presence or absence of new products or product features in the
merchandise categories the Company sells and changes in the Company's actual
merchandise sales mix;
o the inability to negotiate profitable contracts with service providers;
o the inability to collect the level of anticipated residuals and commissions
for products and services sold by the Company's RadioShack division;
o lack of availability or access to sources of supply inventory (as a large
importer of consumer electronic products from Asia, unfavorable trade
imbalances could negatively affect the Company);
o the inability to retain and grow an effective management team in a dynamic
environment or changes in the cost or availability of a suitable work force
to manage and support the Company's service-driven operating strategies;
o the potential negative impact of Year 2000 issues; or
o the imposition of new restrictions or regulations regarding the sale of
products and/or services the Company sells, changes in tax rules and
regulations applicable to the Company.
Additionally, as a result of the Telecommunications Act of 1996, the deregulated
telecommunications market will continue to present both opportunities and
increased competition for the provision of telecommunication equipment and
services to consumers.
STOCK SPLIT
On August 21, 1997, the Company's Board of Directors declared a two-for-one
split of Tandy common stock, payable on September 22, 1997. All references to
the number of shares of common stock issued or outstanding, per share prices,
cash dividends, income per common share amounts and any other reference to
shares, unless otherwise noted, have been adjusted to reflect the split on a
retroactive basis.
RETAIL OUTLETS
Average December 31,
Store Size ----------------------------------
(Sq. Ft.) 1998 1997 1996
- ---------------------------------------------------------------------------
RadioShack
Company-Owned 2,200 5,039 4,972 4,942 (1)
Dealer/Franchise N/A 1,991 1,934 1,927
-------- -------- --------
7,030 6,906 6,869
Computer City, Inc. 21,050 -- (2) 96 113 (3)
Incredible Universe(4) 184,000 -- -- 17
-------- -------- --------
7,030 7,002 6,999
======== ======== ========
(1) Includes 53 McDuff stores that were part of the store closure plan announced
in December 1996.
(2) Computer City, Inc. was sold to CompUSA Inc. on August 31, 1998.
(3) Includes 21 stores that were part of the store closure plan announced in
December 1996.
(4) The Incredible Universe division ceased operations in 1997.
Space Owned and Leased
Approximate Square Footage
at December 31,
----------------------------------------------------------------------------
1998 1997
------------------------------------ ------------------------------------
(In thousands) Owned Leased Total Owned Leased Total
- --------------------------------------------------------------------------------------------------
Retail
RadioShack -- 11,839 11,839 -- 11,655 11,655
Computer City -- -- -- 15 1,990 (1) 2,005
Other 162 -- 162 162 -- 162
-------- -------- -------- -------- -------- --------
162 11,839 12,001 177 13,645 13,822
Support Operations
Manufacturing 472 201 673 532 201 733
Warehouse and office 3,573 1,298 4,871 3,644 1,271 4,915
-------- -------- -------- -------- -------- --------
4,207 13,338 17,545 4,353 15,117 19,470
======== ======== ======== ======== ======== ========
(1 )Includes Computer City capital leases.
SEGMENT REPORTING DISCLOSURES
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 131, "Disclosures about Segments of an Enterprise and
Related Information". All references to RadioShack and Computer City in MD&A
refer to the Company's reportable segments, unless otherwise noted.
The RadioShack segment includes the RadioShack retail division and its related
retail support operations. The Computer City segment includes Computer City,
Inc. ("CCI" or "Computer City"), until its sale to CompUSA Inc. ("CompUSA") on
August 31, 1998, and, in the prior year's information, the five Computer City
Europe stores sold by the Company in the fourth quarter of 1997. Transactions
between operating segments are not common and the amounts included are not
material to the segment information. The closed units/restructuring segment
includes all Tandy stores and non-retail units which were part of the store
closure plan announced in December 1996 (see "Provisions For Business
Restructuring and Asset Impairment" below). The corporate administration and
other segment includes corporate units which serve all areas of the Company and,
also, income or expenses which are not allocated to the RadioShack and Computer
City segments.
Summarized in the table below are the net sales and operating revenues,
operating profit (loss) and assets for the Company's reportable segments for the
fiscal years ended December 31, 1998, 1997 and 1996:
Year Ended December 31,
-------------------------------------
(In millions) 1998 1997 1996
- ------------- -------- -------- --------
Net sales and operating revenues:
RadioShack (1) $3,591.2 $3,303.9 $3,160.5
Computer City 1,196.7(2) 1,903.7 1,721.6
Closed units/restructuring -- 164.6 1,403.4
-------- -------- --------
$4,787.9 $5,372.2 $6,285.5
======== ======== ========
Operating profit (loss):
RadioShack $ 377.7 (3) $ 398.4 $ 412.3
Computer City (95.6)(2) (14.9) (20.3)
Closed units/restructuring (120.8)(4) (30.1) (480.8)
Corporate administration and other (27.0) (16.6) (33.4)
-------- -------- --------
134.3 336.8 (122.2)
Interest income (5) 10.8 13.2 13.0
Interest expense (5) (45.4) (46.1) (36.4)
-------- -------- --------
Income (loss) before income taxes $ 99.7 $ 303.9 $ (145.6)
======== ======== ========
Assets:
RadioShack $1,437.1 $1,384.4
Computer City -- (6) 468.8
Closed units/restructuring -- 0.6
Corporate administration and other 556.5 463.7
-------- --------
$1,993.6 $2,317.5
======== ========
(1) Includes outside sales of $77.4 million, $88.2 million and $59.4 million for
the years ended December 31, 1998, 1997 and 1996, respectively, related to
retail support operations.
(2) Includes operations for only eight months, due to the sale to CompUSA on
August 31, 1998.
(3) Includes $82.6 million of compensation expense for store manager restricted
stock awards.
(4) Includes provision for loss on sale of Computer City of $108.2 million.
(5) The Company does not allocate interest income or expense to its operating
segments.
(6) Computer City was sold to CompUSA on August 31, 1998.
RESULTS OF OPERATIONS
CALENDAR 1998 COMPARED WITH CALENDAR 1997
- -----------------------------------------
NET SALES AND OPERATING REVENUES
Consolidated net sales and operating revenues decreased 10.9% from $5,372.2
million in 1997 to $4,787.9 million in 1998; this decrease was attributable
primarily to the sale of Computer City to CompUSA on August 31, 1998.
Consolidated comparable store sales for 1998 are not meaningful, due to the sale
of Computer City.
RadioShack Segment
- ------------------
Sales for the RadioShack segment in 1998 increased 8.7% to $3,591.2 million from
$3,303.9 million in 1997, due primarily to a 7.4% comparable store sales gain
and the opening of 67 new stores, net of store closures. RadioShack's comparable
store sales increase was driven primarily by increased sales of wireless
communication and telephony products and services. A continued healthy economy
and a strong retail consumer electronics industry are expected to result in a
comparable store sales gain for 1999. The following table summarizes
RadioShack's retail sales breakdown by class of products and each class as a
percent of total RadioShack retail sales (excluding outside sales from retail
support operations):
Percent of RadioShack Retail Sales
Year Ended December 31,
-----------------------------------------
Class of Products 1998 1997 1996
- ----------------- -------- -------- --------
Electronic parts, accessories
and specialty equipment(1) 30.0% 31.5% 32.3%
Communications 28.5 27.5 24.4
Audio and video 15.5 16.8 18.0
Personal electronics and seasonal 10.4 11.6 12.4
Personal computers and peripherals(1) 9.1 9.4 10.4
Services and other(2) 6.5 3.2 2.5
-------- -------- --------
100.0% 100.0% 100.0%
======== ======== ========
(1) Computer accessories have been reclassified in the prior years from the
personal computers category to the electronic parts and accessories
category.
(2) Includes residuals, prepaid wireless airtime, repair income and extended
service contracts.
Electronic parts, accessories and specialty equipment, the largest product
category of RadioShack's retail sales mix, decreased 1.5 percentage points in
1998 when compared to 1997, despite a 4.1% increase in dollar sales. This
decrease as a percent of retail sales was primarily due to the communications
and services categories becoming a higher percent of the product mix in 1998.
The communications category increased to 28.5% of retail sales from 27.5% in
1997. Dollar sales of the category increased 13.2% over last year. This
category, which includes wireless communications such as cellular and PCS
telephones, as well as residential telephones, answering machines, pagers and
other related telephony products, continues to benefit from the Sprint Store at
RadioShack launched in September 1997. This "store-within-a-store" concept
provides customers with access to a full service communications center that
offers, where available, Sprint local and long-distance telephone service, Spree
SM prepaid phone cards and Sprint branded residential telephones. Additionally,
RadioShack earns commissions from cellular carriers for activating customers
with cellular services. Sales of communication products are expected to continue
to grow in 1999.
Sales of audio and video products declined to 15.5% of retail sales in 1998 from
16.8% of retail sales in 1997, primarily due to the overall shift in the product
mix to communications and services. Sales dollars were flat from the prior year,
due in part to RadioShack's limited selection of name brand products. RadioShack
plans to announce a strategic alliance with a well-recognized audio and video
manufacturer in the second quarter of 1999, which management believes should
improve sales in this category. The audio and video category also includes
"direct-to-home" satellite sales, which includes digital satellite systems (DSS)
and Primestar satellite television services. Sales of these systems and services
increased significantly over the prior year.
Personal electronics and seasonal products decreased to 10.4% of RadioShack
retail sales in 1998 from 11.6% in 1997, due primarily to an overall shift in
the product mix to communications and services. The sales decreases since 1996
are also attributable to sales declines in such items as boomboxes, cassette
products and toys, other than remote control cars. This trend is indicative of
lower general consumer demand for these products. In 1999, RadioShack plans to
expand its marketing efforts in this category by advertising gift items year
round, as well as by offering a broader selection of products.
On February 25, 1998, RadioShack entered into a multi-year retail sales and
service agreement with Compaq Computer Corporation ("Compaq"). Under this
agreement, Compaq became the sole supplier of personal computers sold through
RadioShack retail outlets via a "store-within-a-store" concept similar to the
Sprint Store at RadioShack. Despite a large unit gain and a 5.8% sales gain for
this category for 1998, the personal computer category decreased to 9.1% of
RadioShack retail sales in 1998 from 9.4% in 1997. RadioShack computers
experienced a 32% decline in the average 1998 selling price of desktop computers
from the 1997 annual average selling price. Aggressive pricing strategies put
into place as RadioShack transitioned from IBM to Compaq branded computers and
products during the first six months of 1998 and general selling price declines
in the personal computer industry contributed to this decline. Management
believes that the downward trend in selling prices of personal computers will
continue in 1999, but to a lesser extent than seen in 1998. Despite this
downward trend, RadioShack believes that the higher unit sales volumes of
personal computers will contribute to increased sales of higher gross margin
products and services, such as accessories and extended service plans, as well
as to increased customer traffic to the store. Additionally, in the fourth
quarter of 1998, RadioShack launched the Compaq "Built-For-You" program which
enables consumers to custom-configure personal computers at their nearby
RadioShack store with convenient direct shipment to their home, office or nearby
RadioShack store.
Sales in the services and other category, which includes residuals, prepaid
wireless airtime, repair income and extended service contracts, increased in
1998 in dollars and as a percent of RadioShack retail sales, due to an increase
in residual income received from RadioShack's third party providers of
communication and "direct-to-home" satellite products and services, as well as
to a large increase in sales of prepaid wireless airtime. Residual income is
earned on sales of Sprint long distance and PCS services, sales of
"direct-to-home" satellite programming and sales of other wireless products and
services. Residuals vary by service provider, but are typically a portion of the
continuing service revenue throughout the ensuing months and/or years of that
customer's subscription. In 1998, RadioShack earned approximately $34.2 million
of residual income, compared to $7.9 million in 1997. Residual income is
expected to continue to increase in 1999; however, increases are dependent upon
such factors as customers' continued usage of certain services and stability of
average revenue per subscriber, among other factors. Prepaid wireless airtime
sales are expected to continue to increase in 1999.
Computer City Segment
- ---------------------
Computer City's overall sales decreased 37.1% to $1,196.7 million in 1998 from
1997, due to the sale of this subsidiary to CompUSA on August 31, 1998.
For the eight months ended August 31, 1998, sales of personal computers
decreased in dollars due to a reduction of approximately 25% in the average
selling price of desktop and notebook computers from the same period in 1997.
Additionally, both overall and comparable stores sales were negatively impacted
by the announced sale of Computer City to CompUSA on June 22, 1998, at which
time Computer City took promotional mark-downs to sell both its third-party and
private-label inventory in preparation for the sale to CompUSA.
See "Sale of Computer City, Inc." below.
GROSS PROFIT
Gross profit for the Company was $2,004.4 million or 41.9% of net sales and
operating revenues in 1998, compared with $2,014.3 million or 37.5%, in 1997.
This increase in gross profit as a percentage of net sales and operating
revenues was primarily the result of RadioShack sales accounting for a larger
portion of the Company's consolidated net sales and operating revenues in 1998,
when compared to 1997due to the sale of Computer City to CompUSA on August 31,
1998. Computer City had an inherently lower gross margin than RadioShack.
RadioShack's gross profit increased in dollars for the year ended December 31,
1998 versus 1997, but decreased as a percentage of RadioShack's total sales by
0.6 percentage points over the same period. This percentage decrease was
primarily due to a shift within RadioShack's product offerings to increased
sales of prepaid wireless airtime, which has a significantly lower gross margin
than the overall RadioShack average gross margin. This decrease was partially
offset by an increase in residual income which has close to 100% gross margin.
Gross profit for RadioShack is expected to increase in dollars in 1999 due to
expected sales volume increases in both products and services, including
residual income and sales of prepaid wireless airtime. Gross profit as a
percentage of RadioShack's sales, however, is expected to decrease in 1999,
similar to 1998, because of increased sales of prepaid wireless airtime.
Computer City's gross profit as a percent of Computer City net sales and
operating revenues decreased 2.3 percentage points for the year ended December
31, 1998 when compared to 1997. This decrease was primarily due to aggressive
marketing of inventory, especially private-label branded inventory, in
preparation for the sale of the subsidiary.
SELLING, GENERAL AND ADMINISTRATIVE ("SG&A") EXPENSE
The accompanying table below summarizes the breakdown of various components of
the Company's consolidated SG&A expense and its related percentage of total
sales and operating revenues.
Year Ended December 31,
------------------------------------------------------------------
1998 1997 1996
% of % of % of
Sales & Sales & Sales &
(In millions) Dollars Revenues Dollars Revenues Dollars Revenues
- --------------------------------------------------------------------------------------------------
Payroll and commissions $ 734.1(1) 15.3% $ 734.1 13.7% $ 758.2 12.1%
Advertising 208.7 4.4 195.4 3.6 254.6 4.1
Rent 217.4 4.5 222.6 4.1 239.8 3.8
Other taxes 96.1 2.0 102.0 1.9 107.9 1.7
Utilities and telephone 71.5 1.5 72.2 1.3 77.0 1.2
Insurance 50.6 1.1 50.5 0.9 53.3 0.8
Stock purchase and savings plans 20.4 0.4 17.8 0.3 18.5 0.3
Credit card fees 38.6 0.8 43.1 0.8 57.2 0.9
Other 142.9 3.0 142.6 2.8 194.6 3.1
------------------------------------------------------------------
$1,580.3 33.0% $1,580.3 29.4% $1,761.1 28.0%
==================================================================
(1) Does not include $82.6 million of compensation expense for store manager
restricted stock awards.
The Company's SG&A expense was flat in dollars, but increased as a percent of
net sales and operating revenues to 33.0% for the year ended December 31, 1998
versus 29.4% for the year ended December 31, 1997. The higher SG&A percentage is
due primarily to RadioShack becoming a larger percentage of Tandy's consolidated
operations during 1998 (see "Gross Profit" above). RadioShack operates at higher
relative SG&A expense levels than consolidated Tandy Corporation. Excluding
Computer City and closed units associated with the 1996 restructuring plan, SG&A
expense as a percentage of sales would have been 37.7% for the year ended
December 31, 1998 versus 38.9% for the year ended December 31, 1997.
Although payroll and commissions expense for 1998 remained flat in dollars in
comparison with 1997, this cost increased as a percentage of net sales and
operating revenues from 13.7% in 1997 to 15.3% in 1998, due in part to the
increase in RadioShack sales as a percentage of total Company sales and
operating revenues, as described above. RadioShack has inherently higher salary
expense as a percentage of sales, when compared to consolidated Tandy
Corporation. To a lesser extent, payroll expense was negatively impacted by
higher payroll costs associated with infrastructure-building at CCI, prior to
its announced sale in June 1998.
Advertising expense increased both in dollars and as a percentage of net sales
and operating revenues, in the year ended December 31, 1998 as compared to the
year ended December 31, 1997. This increase over the prior year is primarily
attributable to increased advertising expense at Computer City in 1998, compared
to 1997. Somewhat offsetting this increase was a dollar decrease in advertising
expense at RadioShack in 1998 from 1997. In 1997, however, the marketing launch
of the Sprint Store at RadioShack resulted in increased advertising expense for
that year. In 1999, advertising expense in dollars for RadioShack is expected to
be comparable to or slightly more than 1998.
Rent expense decreased in dollars in comparison with 1997 and increased slightly
as a percentage of net sales and operating revenues to 4.5% in 1998 from 4.1% in
1997. This increase is related to the sale of Computer City, which had lower
rent expense as a percentage of sales than consolidated Tandy Corporation. Rent
expense in dollars for RadioShack increased in 1998 compared to the prior year,
but decreased slightly as a percent of sales. Rent expense in dollars for
RadioShack is expected to increase slightly in 1999, due to new store openings
and lease renewals at slightly higher rates.
RESTRICTED STOCK AWARDS
On February 1, 1997, in an effort to reduce the turnover rate among its store
managers and to align the store managers' interests and goals with those of the
shareholders, the Company granted, under the 1993 Incentive Stock Plan,
approximately 2,041,200 restricted stock awards consisting of 400 shares each to
4,907 RadioShack store managers and 800 shares each to 98 Computer City store
managers. The restricted stock awards had a weighted average fair market value
of $22.59 per share when granted. This restricted stock vested at the end of
five years on February 2, 2002, if the Company employed the managers at a store
manager or higher position, at that time. However, the grants provided that the
restricted shares could vest early if the Company's common stock closed at $33
13/16 or more for any 20 consecutive trading days after February 1, 1999. At
December 31, 1998, it was probable that the 1,289,600 shares that remained
outstanding under this grant would vest under the early vesting provisions. The
resulting charge to compensation expense of $82.6 million, including related
payroll taxes, was recorded in the December 31, 1998 financial statements.
Vesting of these restricted stock awards occurred when the Company's common
stock closed above the targeted amount for the twentieth consecutive trading day
on March 1, 1999. Vesting resulted in the issuance of 1,272,000 shares of the
Company's common stock at a fair market value of $56.09 per share. The
difference between the December 31, 1998 accrual for compensation expense and
the actual expense when vested will be recorded in the first quarter of 1999.
On February 1, 1998, the Company granted, under the 1997 Incentive Stock Plan,
approximately 324,750 restricted stock awards consisting of 250 shares each to
1,299 RadioShack store managers not included in the February 1, 1997 grant
described above. The restricted stock awards had a weighted average fair market
value of $39.22 per share when granted. This restricted stock will vest at the
end of five years on February 2, 2003, if the Company employs the managers at a
store manager or higher position, at that time. However, the grants provide that
the restricted shares could vest early if the Company's common stock closes at
$58 1/8 or more for any 20 consecutive trading days after February 1, 2000.
Compensation expense, equal to the fair market value of the shares, will be
recognized over the remaining vesting period when it becomes probable that the
performance criteria will be met or upon actual vesting. At December 31, 1998,
there were 222,000 restricted stock awards outstanding and eligible for ultimate
vesting pursuant to this restricted stock award.
The Company does not plan to continue granting restricted stock awards to
RadioShack store managers. See "1999 Incentive Stock Plan" below regarding the
February 1999 grant of stock options to RadioShack store managers.
SALE OF COMPUTER CITY, INC.
On June 22, 1998, the Company announced that it had signed a definitive
agreement with CompUSA for the sale of 100% of the outstanding common stock of
the Company's Computer City, Inc. subsidiary. On August 31, 1998, the sale was
completed. The Company received approximately $36.5 million in cash and an
unsecured subordinated note for $136.0 million as consideration for the sale.
The note, which is of equal priority with CompUSA's existing subordinated debt,
bears interest at 9.48% per annum and is payable over a ten year period.
Interest is payable on June 30 and December 31 of each year, with the first
payment made on December 31, 1998. Beginning on December 31, 2001, principal
payments will be due semiannually until the note matures on June 30, 2008. The
Company recognized a loss of $108.2 million from the sale of CCI in 1998, which
included certain liabilities and contractual obligations incurred by the
Company. Although no significant additional provisions are expected in 1999
relating to the sale of CCI, unexpected contractual requirements associated with
the sale, among other factors, could result in additional charges. The
management of the Company believes that the sale of CCI will enable it to focus
exclusively on the growth potential of RadioShack.
Net sales and operating revenues, operating losses and restructuring and other
charges for Computer City for each of the three years ended December 31 are
presented below:
(In millions) 1998(1) 1997 1996
- ------------ -------- -------- --------
Net sales and operating revenues $1,196.7 $1,903.7 $1,721.6
Operating loss (95.6) (14.9) (20.3)
Restructuring and other charges -- -- (54.2)(2)
(1) Includes operations for only eight months, due to sale to CompUSA on
August 31, 1998.
(2) As described more fully in "Provisions for Business Restructuring and
Asset Impairment" below, during the fourth quarter of 1996 Tandy elected to
close 21 unprofitable stores. CCI recognized a restructuring charge
aggregating $14.8 million associated with these closings.The charges related
primarily to lease obligations and employee termination expenses. CCI also
recognized asset impairment charges aggregating $18.7 million during 1996
and lower of cost or market impairments aggregating approximately $20.7
million related to inventory liquidated at the affected stores.
NET INTEREST EXPENSE
The accompanying table below summarizes the breakdown of interest income and
interest expense:
Year Ended December 31,
----------------------------------
(In millions) 1998 1997 1996
- ------------- -------- -------- --------
Interest income:
Notes receivable $ 7.8 $ 8.7 $ 9.3
IRS settlements and other interest income 3.0 4.5 3.7
-------- -------- --------
Total interest income 10.8 13.2 13.0
Interest expense (45.4) (46.1) (36.4)
-------- -------- --------
Net interest expense $ (34.6) $ (32.9) $ (23.4)
======== ======== ========
Net interest expense was $34.6 million for 1998 versus $32.9 million for 1997.
Interest expense decreased slightly during 1998, due to a corresponding decrease
in the Company's average debt outstanding during 1998 as well as to a small
decrease in short-term interest rates for the year.
Interest income decreased in 1998 due to the repayment of the InterTAN, Inc.
("InterTAN") note receivable on December 31, 1997. On August 31, 1998, the
Company received a note from CompUSA for $136.0 million with an interest rate of
9.48% per annum. Interest income relating to the Fry's Electronics, Inc. and its
affiliates ("Fry's") notes receivables resulted from the 1997 sale of assets and
real estate of six Incredible Universe stores. At December 31, 1998, the Company
held multiple notes receivable from Fry's totaling approximately $47.6 million
(see "Provisions for Business Restructuring and Asset Impairment" below).
Assuming the existing interest rate environment remains stable, net interest
expense is expected to decrease during 1999, primarily due to anticipated
interest income of $12.9 million on the CompUSA note receivable.
PROVISION FOR INCOME TAXES
The provision for income taxes reflects an effective tax rate of 38.5% for
fiscal years 1998 and 1997. The Company expects the effective tax rate for 1999
to increase slightly to 39.0%, due primarily to an increase in the effective
state tax rate, which results from a higher percentage of income being earned in
states with higher tax rates.
CALENDAR 1997 COMPARED WITH CALENDAR 1996
- -----------------------------------------
NET SALES AND OPERATING REVENUES
Consolidated net sales and operating revenues decreased 14.5% to $5,372.2
million in 1997 from $6,285.5 million in 1996, attributable to Tandy's store
closure plan announced in December 1996. For the year ended December 31, 1997,
the Company showed a 2.0% comparable store sales increase over fiscal 1996.
RadioShack Segment
- ------------------
Sales for the RadioShack segment in 1997 increased 4.5% to $3,303.9 million from
$3,160.5 million in 1996, adjusted for stores closed under the 1996 store
closure plan, due to positive same store sales gains and the opening of 108 new
stores, net of RadioShack store closures. RadioShack's comparable store sales
increase was 1.9% for the year ended December 31, 1997, driven primarily by
increased sales of wireless communication and telephone products. Sales of
electronic parts, accessories and specialty equipment, the largest product
category of RadioShack's sales mix in 1997, remained relatively consistent with
the prior year; however, the category as a percentage of RadioShack retail sales
decreased as sales of communications products increased 16.7%. The
communications category increased to 27.5% of RadioShack retail sales from 24.4%
in 1996. This category benefited from the successful rollout of the Sprint Store
at RadioShack in September 1997. Sales of audio and video products declined to
16.8% of retail sales in 1997 from 18.0% in 1996, due to lower consumer demand
for these products and the heightened level of competition within the industry.
Offsetting the decline in audio and video sales was a 7.0% increase in 1997 of
"direct-to-home" satellite system sales, despite a substantially reduced average
selling price of digital satellite systems. Personal electronics and seasonal
products decreased to 11.6% of retail sales in 1997 from 12.4% in 1996, due
primarily to an overall shift in the product mix to communications. Personal
computer sales decreased as a percentage of total retail sales despite an
overall unit gain for 1997, due to a 17.8% decrease in the average 1997 selling
price on desktop and notebook computers from 1996. The services and other
category increased in 1997 due to residual income received from RadioShack's
third party providers of communication and "direct-to-home" satellite products,
as well as an increase in income from prepaid wireless airtime.
Computer City Segment
- ---------------------
Computer City's overall sales in 1997 increased 10.6% to $1,903.7 million from
$1,721.6 million in 1996, adjusted for the 21 stores closed pursuant to the 1996
store closure plan. Computer City's comparable store sales increased 2.2% for
the year ended December 31, 1997. The overall sales increase was primarily
attributable to positive same store sales plus revenues generated by 14 new
stores opened in 1996. In stores open at least one year, sales of personal
computers were up slightly in 1997 due to a significant increase in direct sales
to corporate, education and government customers. This increase was offset by
the decrease in the annual average selling price of retail desktop computers,
which fell approximately 15.0% from the 1996 annual average selling price. To a
lesser extent, a decrease in sales of non-DOS machines in 1997 also impacted the
personal computers sales increase. Product categories which experienced sales
and unit increases in 1997 included scanners, which benefited from both lower
selling prices and new technology, as well as notebook computers which
experienced a large increase in both sales dollars and unit sales. Sales of
software, accessories and supplies also experienced positive sales growth in
1997.
GROSS PROFIT
Gross profit for the Company was $2,014.3 million, or 37.5% of net sales and
operating revenues, in 1997, compared with $2,022.4 million, or 32.2%, in 1996.
This increase in gross profit as a percentage of net sales and operating
revenues was primarily due to RadioShack sales accounting for 61.5% of the
Company's total sales and operating revenues in fiscal year 1997, compared to
50.3% in fiscal year 1996; this occurred as a result of the closure of the
Incredible Universe stores in early 1997 and, to a lesser extent, the closure of
21 Computer City stores at December 31, 1996. Excluding stores in the 1996
closure plan and excluding the 1996 fourth quarter lower of cost or market
inventory impairment, the slight decline in the Company's gross profit margin
from 38.8% in 1996 to 38.4% in 1997 resulted primarily from the fact that
RadioShack's 1997 percentage sales increase was less than Computer City's
percentage sales increase. Computer City had inherently lower gross margins than
RadioShack.
RadioShack's gross profit as a percentage of RadioShack sales increased slightly
for the year ended December 31, 1997 versus 1996, due to a positive shift within
RadioShack's product offerings to increased cellular and telecommunication
sales, as a percent of sales, and was further enhanced by decreased sales of
lower margin personal computers.
Computer City's gross profit for continuing stores as a percent of Computer City
sales increased 0.9 percentage points in 1997 when compared to 1996, due to
improvement in inventory management, increased sales of higher margin
accessories and software and an increase in the ratio of service revenues to
total revenues. Service revenues typically have a higher gross margin than
merchandise sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
The Company's SG&A expense as a percent of net sales and operating revenues
increased for the year ended December 31, 1997 to 29.4% from 28.0% for the year
ended December 31, 1996. The higher SG&A percentage was due primarily to
RadioShack, which became a larger percentage of Tandy's consolidated operations
during 1997 (see "Gross Profit" above). RadioShack operated at higher relative
SG&A expense levels than consolidated Tandy Corporation. Excluding those stores
in the 1996 store closure plan, SG&A expense as a percentage of sales would have
approximated 29.5% for the year ended December 31, 1997. See "Provisions for
Business Restructuring and Asset Impairment" below.
Although payroll and commissions expense for 1997 decreased in dollars in
comparison with 1996, this cost increased as a percentage of sales and operating
revenues from 12.1% in 1996 to 13.7% in 1997, due to the increase in RadioShack
sales as a percentage of total sales and operating revenues described above.
RadioShack has inherently higher salary expense as a percentage of total
RadioShack sales when compared to the total Company. RadioShack payroll expense
increased in dollars and as a percentage of RadioShack sales in 1997 from 1996
due to increased staffing at the store level. Computer City payroll expense as a
percentage of Computer City sales increased from 1996 to 1997 due to the
addition of new stores in 1997, added headcount in the direct sales area and a
realignment of support staff from Tandy Corporation to Computer City.
Advertising expense decreased, both in dollars and as a percentage of sales and
operating revenues, in 1997 as compared to 1996. This decrease over the prior
year was primarily the result of reductions in Incredible Universe advertising
in 1997, due to stores closed pursuant to the 1996 restructuring plan. Computer
City had a substantial increase in vendor participation in its advertising
campaigns in 1997 compared to 1996. Somewhat offsetting these decreases was a
slight dollar increase in advertising expense at RadioShack to promote the
Sprint "store-within-a-store" concept, which was launched in September 1997.
RadioShack advertising expense as a percentage of RadioShack sales in 1997
remained constant with 1996.
Rent expense increased as a percentage of sales to 4.1% in 1997 from 3.8% in
1996. This increase was related to a decrease in the number of Computer City and
Incredible Universe stores which had lower rent expense as a percentage of sales
than the Company as a whole. Rent expense in dollars decreased in 1997 from 1996
due to Incredible Universe and Computer City store closures pursuant to the 1996
restructuring plan. Rent expense for RadioShack remained consistent with the
prior year in dollars and decreased slightly as a percentage of sales.
Credit card fees expense, which includes fees associated with third party bank
credit cards and fees paid for promotional accounts such as "zero interest for
six months", decreased as a result of the closure of the Incredible Universe
stores and decreased usage by RadioShack during 1997.
Other SG&A expense decreased both as a percentage of net sales and operating
revenues and in dollars when compared to fiscal year ended December 31, 1996.
Increases in other income were primarily attributable to the receipt of $9.0
million, pre-tax, of income from O'Sullivan Industries ("O'Sullivan") (see "Tax
Sharing and Tax Benefit Reimbursement Agreement" below) and non-recurring gains
of $4.7 million recorded on repayment of the note receivable from InterTAN and
$3.0 million on sale of certain assets. These increases were offset by
additional restructuring expense of the $11.6 million related to store closings
pursuant to the 1996 store closure plan.
NET INTEREST EXPENSE
Net interest expense was $32.9 million for 1997 versus $23.4 million in 1996.
Interest expense increased in 1997 as the Company continued purchasing treasury
stock and continued to fund store expansion. Interest expense also increased
during 1997 when the Company refinanced existing short-term indebtedness
(average maturity of 90 days or less) by issuing $150.0 million of ten-year
unsecured notes, resulting in a moderately higher interest rate when compared to
the short-term financing used in 1996.
Interest income relating to the InterTAN notes decreased in 1997 as InterTAN
made the scheduled principal payments on the note balances. The remaining note
was repaid in December 1997. In addition, the $90.0 million AST Research, Inc.
("AST") note was repaid in 1996 and, accordingly, the Company no longer received
interest income from this source in 1997. Interest income relating to the Fry's
notes receivables resulted from the 1997 sale of assets and real estate of six
Incredible Universe stores. At December 31, 1997, the Company held multiple
notes receivable from Fry's of approximately $75.3 million with varying
maturities ranging from one to five years and interest rates ranging from
approximately 5.9% to 6.7%.
PROVISION FOR INCOME TAXES
The provision for income taxes reflects an effective tax rate of 38.5% for
fiscal year 1997, compared to an effective tax rate of 37.1% for the comparable
period in fiscal year 1996. The fiscal 1997 effective tax rate differed from the
fiscal 1996 effective tax rate primarily because the fiscal 1996 tax rate
included foreign income taxes which were incurred on foreign income despite the
overall loss incurred by the Company.
PROVISIONS FOR BUSINESS RESTRUCTURING AND ASSET IMPAIRMENT
In the fourth quarter of 1996, Tandy initiated certain restructuring programs to
exit its Incredible Universe business, close 21 unprofitable Computer City
stores and close its 53 remaining McDuff stores. These restructuring programs
were undertaken as a result of the highly competitive environment in the
electronics industry. The Company recorded total pre-tax charges of $162.1
million in 1996 related to future lease obligations, real estate costs,
disposition of fixed assets, employee termination expenses and contract
cancellation costs related to this restructuring program. The Company also
recognized, in 1996, lower of cost or market impairments aggregating
approximately $91.4 million, pre-tax, primarily related to inventory that was
liquidated at the affected stores. Inventory impairment charges were recognized
in the Consolidated Statements of Income as an increase in cost of sales in
1996. The Company also recognized a non-cash impairment charge of $86.8 million
to write down the carrying values of long-term assets pursuant to SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" ("FAS 121") as part of the restructuring plan.
Upon adoption of FAS 121 in the first quarter of 1996, the Company recognized an
initial non-cash impairment loss of approximately $26.0 million to conform with
this statement, primarily as a result of grouping long-lived assets at their
lowest level of cash flows to determine impairment as required by this
statement.
In January 1997, the Company closed the respective 53 McDuff and 21 Computer
City stores. Additionally, by July 1997, all of the Incredible Universe stores
were either closed or sold. During 1997, the Company sold the assets related to
several closed stores, including the sale of the real estate, related fixed
assets and inventory of six Incredible Universe stores to Fry's. These six
stores were sold for approximately $21.5 million in cash and $97.4 million in
notes receivable with no material gain or loss recognized upon the sale. At
December 31, 1998, the notes receivable balance was $47.6 million with remaining
interest rates ranging from 6.6% to 6.7% and maturity dates in 2001 and 2002. In
1997, additional costs totaling $11.6 million related to store closings were
recorded and included in SG&A expense in the accompanying Consolidated
Statements of Income.
On January 1, 1998, five closed Incredible Universe locations remained. During
1998, three were sold for a total of $13.3 million in cash and a $3.0 million
note receivable. The balance on the note receivable was approximately $3.0
million at December 31, 1998. The lease on an additional location was terminated
during 1998, leaving one Incredible Universe location remaining at December 31,
1998. In 1998, $6.5 million was accrued and charged to SG&A expense for
additional lease obligations and real estate costs.
The components of the restructuring charge and an analysis of the reserves are
outlined in a table in Note 5 - "Provisions for Business Restructuring and Asset
Impairment" of the Notes to Consolidated Financial Statements ("Notes").
Although no significant additional provisions are expected in 1999 relating to
the 1996 restructuring, unexpected delays in the closing of real estate sales,
among other factors, could result in additional charges.
Net sales and operating revenues and operating losses of the stores closed
pursuant to the restructuring plans are shown below for each year ended December
31 (unaudited):
(In millions) 1998 1997 1996
- ------------- ---- ---- ----
Net sales and operating revenues $ -- $ 164.6 $1,403.4
Operating loss -- (30.1)(1) (114.4)(1)
(1) Excludes business restructuring and asset impairment charges discussed
above.
TAX SHARING AND TAX BENEFIT REIMBURSEMENT AGREEMENT
Under the Company's Tax Sharing and Tax Benefit Reimbursement Agreement (the
"Agreement") with O'Sullivan Industries, a former subsidiary of Tandy, the
Company 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 completed in February 1994. The higher tax
basis increases O'Sullivan's tax deductions and, accordingly, reduces income
taxes payable by O'Sullivan. For the years ended December 31, 1998, 1997 and
1996, the Company recognized income of $6.0 million, $5.8 million and $0.2
million, net of tax, respectively, under this Agreement. These payments will
continue to be made over a 15-year time period and are contingent upon
O'Sullivan's level of earnings from year to year. The income is recorded as a
reduction of SG&A expense in the accompanying Consolidated Statements of Income.
NEW PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", which is
effective for all companies for quarters beginning after June 15, 1999. This
statement requires a company to record all derivative instruments at fair value
on the balance sheet. The Company does not use derivatives for speculative
purposes. As such, its market risk was not material in 1998 and is not expected
to be material in 1999.
CASH FLOW AND LIQUIDITY
Year Ended December 31,
----------------------------------
(In millions) 1998 1997 1996
- ------------- -------- -------- --------
Operating activities $ 414.8 $ 320.3 $ 307.5
Investing activities (93.0) (63.9) (112.9)
Financing activities (363.2) (272.0) (216.6)
In 1998, cash flow provided by operating activities approximated $414.8 million,
compared to $320.3 million in 1997. Cash flow from net income, adjusted for
non-cash items including restricted stock awards, loss on sale of Computer City,
depreciation and deferred tax items, decreased $33.1 million from 1997 to 1998.
This decrease was primarily due to the increased operating losses of CCI in
1998, prior to CCI's sale to CompUSA. During 1998, changes in working capital
generated $55.2 million of cash flow compared to a use of cash of $72.4 million
in 1997. The increase was caused primarily by the liquidation of CCI's
inventories.
In 1997, cash flow from operations before working capital changes increased to
approximately $392.7 million from $258.3 million in 1996, due to improved
operating performance. For 1997, the Company used $72.4 million in cash from
operations due to changes in working capital accounts, primarily attributable to
a decrease in other current liabilities of $209.6 million, related, for the most
part, to resulting expenditures associated with the 1996 restructuring activity.
Substantially offsetting the decreased cash flow from expenditures related to
restructuring was a decrease in inventory at closed Incredible Universe stores.
In 1996, the working capital components of operations cash flow generated $49.2
million of positive cash flow from a $38.1 million increase in current
liabilities. In 1996, inventory for RadioShack and related support operations
decreased approximately $30.0 million, while during the same period, Computer
City and Incredible Universe inventories (prior to the restructuring reserves)
increased approximately $30.1 million. These year-to-year inventory fluctuations
offset one another, resulting in no material net cash effect for 1996.
Investing activities used $93.0 million in cash in 1998, compared to $63.9
million in 1997 and $112.9 million in 1996. Capital expenditures approximated
$131.5 million in 1998, compared to $118.4 million in 1997 and $174.8 million in
1996. Capital expenditures for 1998 and 1997 were used primarily for retail
expansion, upgrading information systems and infrastructure enhancements prior
to the announced sale of CCI on June 22, 1998. Capital expenditures for 1996
were primarily used for retail expansion, upgrading information systems and
headquarter building renovations. Management anticipates that capital
expenditure requirements for 1999 will approximate $100.0 million to $110.0
million, and will consist primarily of RadioShack future store expansions and
remodels, upgrades of machinery in selected distribution centers and
manufacturing plants and updated information systems. These expenditures will be
funded primarily from operating cash flow. Cash proceeds from the sale of CCI
generated $36.5 million in cash in 1998. Cash proceeds in 1997 totaled $57.4
million and related to the sale of various corporate assets and certain
Incredible Universe locations, final repayment of the note receivable from
InterTAN and the sale of the Company's remaining shares of AST common stock. The
cash portion of payments on the AST note receivable amounted to $60.0 million in
1996.
Cash used by financing activities was $363.2 million in 1998, compared to $272.0
million and $216.6 million in 1997 and 1996, respectively. Purchases of treasury
stock required cash of $337.4 million, $425.6 million and $232.9 million in
1998, 1997 and 1996, respectively. (See "Capital Structure and Financial
Condition" below for further information on the Company's stock repurchase
programs.) The 1998, 1997 and 1996 stock repurchases were partially funded by
$57.8 million, $50.7 million and $46.8 million, respectively, received from
stock option exercises and the sale of treasury stock to Tandy's employee stock
purchase plans. Dividends paid, net of tax, in 1998, 1997 and 1996 amounted to
$44.8 million, $48.2 million and $52.5 million, respectively. In 1998, the
Company used excess cash flow to decrease its short-term debt from the prior
year by $44.9 million. Medium-term notes issued by the Company under its 1997
Debt Shelf Registration Statement provided approximately $45.0 million in cash
in 1998, the majority of which was used to repay current maturities of long-term
debt. In 1997, the Company's short-term debt increased over the prior year by
$43.6 million. The Company's net change in long-term debt was an increase of
$107.5 million, due to the utilization of $150.0 million of long-term debt under
the Company's $300.0 million Debt Shelf Registration Statement and the repayment
of $42.3 million of long-term borrowings, primarily medium-term notes.
The current credit ratings for Tandy, which are generally considered investment
grade, follow:
Standard Duff &
Category Moody's and Poor's Phelps
- -------- ------- ---------- ------
Medium-Term Notes Baa1 A- A-
ESOP Senior Notes Baa1 A- N/A
Commercial Paper P-2 A-2 D-1-
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, 1998 are detailed in
Note 10 - "Indebtedness and Borrowing Facilities" of the Notes.
On March 3, 1997, the Company announced that its Board of Directors authorized
management to purchase an additional 10.0 million shares, as adjusted to reflect
the two-for-one split, of its common stock through the Company's existing share
repurchase program. The share repurchase program was initially authorized in
December 1995 and increased in October 1996 and was undertaken as a result of
management's view of the economic value of the Company's stock. The share
increase for 1997 brought the total authorization to 30.0 million shares, of
which 25.9 million shares totaling $745.8 million had been purchased as of
December 31, 1998. Approximately 4.9 million shares were repurchased in 1998 for
$216.6 million under the program. Additionally, on October 26, 1998, the Company
announced that its Board of Directors authorized the repurchase of up to 5.0
million shares of the Company's common stock for an indefinite period of time to
be used to offset the dilution of grants under Tandy's incentive stock plans
(see Note 17 - "Stock Options and Performance Awards" in Notes). These purchases
are in addition to the shares required for employee stock plans, which are
purchased throughout the year. Purchases will continue to be made in 1999 in the
open market. It is expected that funding of the program will come from excess
free cash flow.
In connection with the share repurchase program, the Board of Directors, at
their October 23, 1998 meeting, authorized management to sell up to one million
put options on the Company's common stock. During 1998, the Company sold 80,000
put options with a strike price of $40.71 to an independent third party. Such
options grant the purchaser the right to sell shares of Tandy's common stock to
the Company at specified prices upon exercise of the options. These put options
are exercisable only at maturity and can be settled in cash at the Company's
option, in lieu of repurchasing the stock. The issued put options have a
maturity of six months. At December 31, 1998, all 80,000 options remained
outstanding and the full redemption value of the options was classified as
common stock put options in the accompanying 1998 Consolidated Balance Sheet.
The related offset was recorded in common stock in treasury, net of premiums
received. Additionally, 200,000 put options have been sold in 1999 at strike
prices ranging from $45.08 to $55.20; these put options have six month maturity
dates. Put options will continue to be sold by the Company from time to time in
order to take advantage of attractive share price levels, as determined by
management. The timing and terms of the transactions, including maturities,
depend on market conditions, the Company's liquidity and other considerations.
The Company's primary source of short-term debt consists of short-term seasonal
bank debt and commercial paper, which have maturities of less than 90 days. In
the second quarter of 1998, Tandy replaced its existing $500.0 million credit
facilities with new credit facilities, also totaling $500.0 million. The new
facilities were granted by a syndicate of 17 banks, including a new agent bank,
and consist of a $200.0 million 364-day revolving credit facility maturing June
1999 and a $300.0 million five-year revolving credit facility maturing June
2003. The revolving credit facilities are used as backup for the commercial
paper program and may also be utilized for general corporate purposes. Annual
commitment fees for the facilities are 0.06% of the $200.0 million facility per
annum and 0.085% of the $300.0 million facility per annum, whether used or
unused. Tandy plans to extend the $200.0 million facility to June 2000.
The total debt-to-capitalization ratio was 35.6% at December 31, 1998, 33.6% at
December 31, 1997 and 22.3% at December 31, 1996. These increases in the
debt-to-capitalization ratios in 1998 and 1997 resulted primarily from a
reduction in Tandy's stockholders' equity due to the share repurchase program
and the impact of divested businesses.
In May 1997, the Company filed a $300.0 million Debt Shelf Registration
Statement ("Shelf Registration") with the Securities and Exchange Commission,
which was declared effective in August 1997. On August 19, 1997, the Company
issued $150.0 million of 10 year unsecured notes under the Shelf Registration.
The interest rate on the notes is 6.95% per annum with interest payable on
September 1 and March 1 of each year, commencing March 1, 1998. The notes are
due September 1, 2007.
In December 1997, the Company issued $4.0 million in medium-term notes under the
Shelf Registration. In January 1998, the Company issued an additional $45.0
million in medium-term notes under the remaining $150.0 million of the Shelf
Registration. Tandy's medium-term notes outstanding at December 31, 1998 totaled
$49.8 million, compared to $30.0 million at December 31, 1997. The interest
rates at December 31, 1998 for the outstanding $49.8 million in medium-term
notes ranged from 6.09% to 7.25%, with weighted average coupon rates of 6.2% and
8.2% at December 31, 1998 and 1997, respectively. An additional $32.0 million of
medium-term notes were issued in January 1999 yielding a 6.15% interest rate. As
of February 24, 1999, the Company had remaining availability of $69.0 million
under the Shelf Registration.
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 cash equivalents
and its available borrowing facilities are more than adequate to fund planned
store expansion, to meet debt service and dividend requirements and to fund its
share repurchase program.
1999 INCENTIVE STOCK PLAN
In February 1999, the Company, based upon the Board of Directors' authorization,
adopted the Tandy Corporation 1999 Incentive Stock Plan ("1999 ISP"), which
authorizes the grants of stock options and stock appreciation rights to broad
based employee groups and other eligible employees. Grants of restricted stock
and performance awards are not authorized under the 1999 ISP. In addition,
repricing of outstanding options is not permitted without shareholder approval.
The 1999 ISP will be administered as a broadly based plan to provide stock
option incentives primarily to the Company's 5,000 plus store managers and to
other eligible employees of the Company. A total of 4.75 million shares of the
Company's common stock was reserved for issuance under the 1999 ISP.
The Board granted approximately 1,082,000 stock options under the 1999 ISP at
fair market value on February 24, 1999 to over 5,000 RadioShack store managers
employed as of that date.
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.
YEAR 2000 READINESS DISCLOSURE
The Company's management recognizes the need to take action to reach its goal
that its operations and relationships with key vendors, service providers,
customers and other third parties will not be adversely impacted by software
processing errors arising from calculations using the Year 2000 and beyond. Like
many companies, a significant number of Tandy's computer applications and
systems require modifications in order for these systems to be ready for the
Year 2000. All statements made and referred to here are Year 2000 Readiness
Disclosures under the Year 2000 Information and Readiness Disclosure Act.
The Company's State of Readiness: Tandy is using a combination of internal and
external resources to identify, assess, remediate and test its many different
information technology ("IT") systems such as point of sale, payroll, credit,
purchase ordering, merchandise distribution, management reporting,
manufacturing, mainframe, and client/server applications, as well as its non-IT
systems (e.g. heating, ventilating and air conditioning systems, building
security systems, etc.).
Since beginning the project in 1995, the Company has completed identifying and
assessing 100% of its internal mid-range and mainframe IT applications and
approximately 80% of its data communication and telecommunication systems for
Year 2000 readiness. An inventory and assessment of the Company's workstations,
which includes desktop and notebook computers, will be completed in the second
quarter of 1999. As of December 31, 1998, remediation and unit testing was
approximately 90% complete for mid-range and mainframe applications. Unit
testing ensures the accuracy of the programming changes to the code. For data
communication and telecommunication systems, remediation and unit testing was
approximately 75% complete as of December 31, 1998 and is expected to be 100%
complete by September 30, 1999. Remediation and testing to determine if all of
the Company's mission critical systems will interface and operate effectively to
process data containing dates subsequent to January 1, 2000 for all remaining
servers, systems software and personal computers are expected to be completed by
the third quarter of 1999.
Third-party software systems, including financial systems, point-of-sale and
manufacturing have been or will be implemented during 1999. The vendors of these
third-party software packages have stated that they are Year 2000 ready;
however, the Company has and/or intends to conduct its own testing in 1999.
With respect to non-IT system issues, the Company is in the process of
identifying, assessing and remediating, if necessary, its building and process
and production control systems for any Year 2000 issues relating to the
operations of its facilities. Identification and assessment of security access,
building control systems and elevators in the buildings which serve as the
Company's corporate headquarters have been completed and remediation was
approximately 60% complete at December 31, 1998. The Company is in the process
of identifying and assessing Year 2000 issues of its remote locations, such as
its distribution centers, manufacturing plants, and administrative offices and
does not expect any significant issues to arise from this process. All of the
Company's non-IT systems are expected to be Year 2000 ready by the third quarter
of 1999.
Although unforeseen circumstances may arise, the Year 2000 remediation program
is presently on schedule. The Company will continue communicating with its key
suppliers, utilities, financial institutions, customers and others to determine
their state of Year 2000 readiness, to coordinate Year 2000 conversions where
appropriate and to determine the extent to which the Company's interface systems
are vulnerable.
Costs: In management's opinion, the financial impact of being Year 2000 ready is
not expected to be material to the Company's consolidated financial position,
results of operations or cash flows. Management anticipates that total
expenditures associated with the Year 2000 internal modifications will range
from $10.0 million to $14.0 million, which has been and will continue to be
funded from operating cash flow. As of December 1998, approximately $6.5 million
representing internal payroll and related benefits, depreciation expense,
machine time and incentive bonuses, among other costs, has been spent on these
internal modifications. An additional $0.5 million has been paid to external
parties for consulting and professional fees. As required by generally accepted
accounting principles, all these costs are expensed as incurred. Combined,
internal and external costs related to the Year 2000 project account for
approximately 7.0% of the Company's annual IT budget. Additionally, the Company
has purchased and is installing third party financial software packages and
related hardware totaling approximately $20.0 million to $25.0 million in light
of the Year 2000 issue. These purchases are in addition to other capital
investments made in the normal course of business for certain third party
software systems and applications which address the ongoing retail and
operational needs of the Company.
The Risks of the Company's Year 2000 Issues: With respect to the risks
associated with its IT and non-IT systems, the Company believes that the most
reasonably likely worst case scenario is that some of the Company's store
operating and inventory management systems could fail in one or more geographic
areas of the United States. The consequence of such failure could include the
inability of those affected RadioShack stores to electronically record sales
transactions. This could further result in a breakdown in the Company's supply
chain as the Company relies on electronic information to replenish its stores.
Such an occurrence would result in a loss of revenue; however, it is not
possible to quantify the possible range of such loss.
There can be no assurance that the systems of third parties on which the
Company's systems rely will be converted timely and that the systems will not
have an adverse effect on the Company's systems or ongoing operations. However,
concerning the risks associated with third parties, the Company believes that
the most reasonably likely worst case scenario is that some of the Company's
merchandise vendors will not be compliant and will have difficulty filling and
distributing orders. Failure of one or more third party service providers on
whom the Company relies to address Year 2000 issues could also result, in a
worst case scenario, in some business interruption. The lost revenues, if any,
resulting from such failures would depend on the time period in which the
failure goes uncorrected and on how widespread the impact was.
The Company is also in the process of assessing the implications of possible
Year 2000-related claims regarding products it has manufactured or sold, or is
currently manufacturing or selling. The outcomes of any Year 2000 claims and the
impact of such claims cannot be determined at this time; such outcomes will
depend on the facts and circumstances of each situation and an evolving state of
law as these types of claims are addressed by legal systems in the United States
and worldwide.
The Company has limited the scope of its risk assessment to those factors upon
which it can reasonably be expected to have an influence. For example, the
Company has made the assumption that financial institutions and the Federal
Reserve System as well as most utility companies and national telecommunications
providers will continue to operate. Obviously, the lack of such services could
have a material effect on the Company's ability to operate, but the Company has
little, if any, ability to influence such an outcome, or to reasonably make
alternative arrangements in advance for such services in the event they are
unavailable.
Contingency Plans: The Company has completed a prioritization of Year 2000
issues in order to develop and document Year 2000 contingency plans. The Company
has identified its critical applications to be its merchandising and inventory
systems, which include purchasing, receiving and distribution and store
replenishment, its point-of-sale store operating system as well as its financial
systems, which includes payroll, accounts payable and receivable and banking and
other financial applications. Should any or all of the critical applications
fail to perform properly subsequent to January 1, 2000, the Company will resort
to temporary manual processing for recording sales, ordering product and
replenishing the Company's stores, which is not expected to have a material
adverse impact on its operations in the short-term. Management anticipates
having a formal documented contingency plan to deal with this scenario by
November 1999. The Company's eleven distribution centers are located in various
geographic areas of the United States. Should one or more of these distribution
centers fail to operate due to regional power outages or other unforeseen
circumstances, the Company's other distribution centers which may be operating
could replenish stores typically serviced by those distribution centers for a
relatively short period of time. Management is in the process of documenting
this contingency plan. Although no single internal or third party supplier
accounts for a material portion of the Company's sales and operating revenues,
management is evaluating the need for a formal list of alternative suppliers
should some existing suppliers be unable to provide product beyond the end of
calendar year 1999. Should the decision be made that such a list and agreements
with alternate suppliers be necessary, they will be developed prior to November
1999.
All statements concerning Year 2000 issues other than historical statements,
including, without limitation, estimated costs and the projected timetable of
Year 2000 compliance, constitute "forward-looking statements", as defined in the
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements should be read in conjunction with the Company's disclosures under
the heading "Factors That May Affect Future Results".
ITEM 7a. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK.
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities", which is
effective for all companies for quarters beginning after June 15, 1999. This
statement requires a company to record all derivative instruments at fair value
on the balance sheet. The Company does not use derivatives for speculative
purposes. As such, its market risk was not material in 1998 and is not expected
to be material in 1999.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Index to Consolidated Financial Statements is found on page 59. The
Company's Financial Statements and Notes to Consolidated Financial Statements
follow the index.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
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 1999 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 1999 Annual
Meeting.
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 1999 Annual Meeting.
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 1999
Annual Meeting.
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 1999 Annual
Meeting.
PART IV
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 32. 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 59, 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.
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 29, 1999 /s/ Leonard H. Roberts
----------------------------
Leonard H. Roberts
President and Chief Executive Officer,
Tandy Corporation
President, RadioShack
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 29th day of
March, 1999.
Signature Title
/s/ Leonard H. Roberts President and Chief Executive Officer, Tandy
- ----------------------- Corporation, President, RadioShack, Director
Leonard H. Roberts (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/ John V. Roach Chairman of the Board, Director
- -----------------------
John V. Roach
/s/ Frank J. Belatti Director /s/ William G. Morton Director
- ----------------------- -----------------------
Frank J. Belatti William G. Morton
/s/ James I. Cash, Jr. Director /s/ Thomas G. Plaskett Director
- ----------------------- -----------------------
James I. Cash, Jr. Thomas G. Plaskett
/s/ Ronald E. Elmquist Director /s/ Alfred J. Stein Director
- ---------------------- -----------------------
Ronald E. Elmquist Alfred J. Stein
/s/ Lewis F. Kornfeld, Jr. Director /s/ William E. Tucker Director
- ----------------------- -----------------------
Lewis F. Kornfeld, Jr. William E. Tucker
/s/ Jack L. Messman Director /s/ Edwina D. Woodbury Director
- ----------------------- -----------------------
Jack L. Messman Edwina D. Woodbury
TANDY CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Accountants............................... 33
Consolidate