SECURITIES AND EXCHANGE COMMISSION
----------------------------------
Washington, D.C. 20549
FORM 10-Q
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(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended March 31, 1999 or
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[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _______ to ________
Commission file number 1-10062
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InterTAN, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 75-2130875
-------------------------------- --------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
3300 Highway #7, Suite 904
Concord, Ontario, Canada L4K 4M3
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (905) 760-9701
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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
----- -----
At April 30, 1999, 16,971,052 shares of the registrant's common stock, par value
$1.00 per share, were outstanding.
TABLE OF CONTENTS
PART 1
Page
----
Introductory note regarding forward-looking information 3
Item 1 - Financial Statements and Supplementary Data
Consolidated Statements of Operations 4
Consolidated Balance Sheets 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
PART II
Item 1 - Legal Proceedings 28
Item 4 - Submission of Matters to a Vote of Security Holders 28
Item 6 - Exhibits and Reports on Form 8-K 28
OTHER
Signatures 31
Introductory Note Regarding Forward-Looking Information
-------------------------------------------------------
With the exception of historical information, the matters discussed herein are
forward-looking statements about the business, financial condition and prospects
of InterTAN, Inc. (the "Company" or "InterTAN"). The actual results of the
Company could differ materially from those indicated by the forward-looking
statements because of various risks and uncertainties including, but not limited
to, international economic conditions, interest and foreign exchange rate
fluctuations, various tax issues, including possible reassessments, changes in
product demand, competitive products and pricing, availability of products,
inventory risks due to shifts in market conditions, dependence on manufacturers'
product development, the regulatory and trade environment, real estate market
fluctuations, certain aspects of Year 2000 compliance and other risks indicated
in the Company's previous filings with the Securities and Exchange Commission.
These risks and uncertainties are beyond the ability of the Company to control,
and in many cases the Company cannot predict the risks and uncertainties that
could cause its actual results to differ materially from those indicated by the
forward-looking statements.
Consolidated Statements Of Operations
InterTAN, Inc.
- - --------------------------------------------------------------------------------
(In thousands, except per share data)
Three months ended Nine months ended
March 31 March 31
----------------------------------- -----------------------------------
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
Net sales and operating revenues........... $ 88,066 $117,117 $408,289 $431,385
Other income............................... 73 66 202 417
88,139 117,183 408,491 431,802
--------------- --------------- --------------- ---------------
Operating costs and expenses:
Cost of products sold................... 49,266 68,510 230,775 246,915
Selling, general and administrative
expenses.............................. 32,817 49,425 140,971 163,486
Depreciation and amortization........... 1,388 1,789 5,008 5,581
Loss on disposal of United Kingdom
subsidiary and other restructuring
charges............................... 34,712 12,712 35,088 12,712
--------------- --------------- --------------- ---------------
118,183 132,436 411,842 428,694
--------------- --------------- --------------- ---------------
Operating income (loss).................... (30,044) (15,253) (3,351) 3,108
Foreign currency transaction (gains)
losses................................... 80 158 (375) (580)
Interest expense, net...................... 550 923 3,296 4,459
--------------- --------------- --------------- ---------------
Loss before income taxes................... (30,674) (16,334) (6,272) (771)
Provision for income taxes................. 10,548 1,438 21,481 8,563
--------------- --------------- --------------- ---------------
Net loss................................... $(41,222) $(17,772) $(27,753) $ (9,334)
=============== =============== =============== ===============
Basic and diluted net loss per
average common share.................. $(3.13) $(1.46) $(2.17) $(0.77)
Average common shares outstanding.......... 13,190 12,208 12,818 12,065
The accompanying notes are an integral part of these consolidated financial
statements.
Consolidated Balance Sheets
InterTAN, Inc.
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(In thousands, except share data)
March 31 June 30 March 31
1999 1998 1998
------------------------------------------------------------------
Assets
Current Assets:
Cash and short-term investments................... $ 44,095 $ 32,811 $ 25,990
Accounts receivable, less allowance
for............................................... 7,582 8,539 10,606
doubtful accounts
Inventories....................................... 111,081 148,198 159,820
Other current assets.............................. 3,829 6,690 7,277
Deferred income taxes............................. 378 369 -
------------------------------------------------------------------
Total current assets.............................. 166,965 196,607 203,693
Property and equipment, less accumulated
depreciation and amortization..................... 19,094 26,228 26,524
Other assets........................................... 287 712 1,078
------------------------------------------------------------------
$186,346 $223,547 $231,295
==================================================================
Liabilities and Stockholders' Equity
Current Liabilities:
Short-term bank borrowings........................ $ - $ 9,172 $ 7,521
Accounts payable.................................. 19,398 24,274 26,448
Accrued expenses.................................. 26,451 38,505 39,945
Income taxes payable.............................. 31,999 20,955 19,650
------------------------------------------------------------------
Total current liabilities......................... 77,848 92,906 93,564
9% convertible subordinated debentures................. 24,431 38,706 40,024
Other liabilities...................................... 6,371 5,945 6,150
------------------------------------------------------------------
108,650 137,557 139,738
------------------------------------------------------------------
Stockholders' Equity:
Preferred stock, no par value, 1,000,000
shares authorized, none issued or
outstanding....................................... - - -
Common stock, $1 par value, 40,000,000............ 15,250 12,474 12,296
shares authorized, 15,250,140, 12,474,077
and 12,296,059 issued and outstanding.............
Additional paid-in capital........................ 128,451 115,980 115,145
Deficit........................................... (38,003) (10,250) (6,811)
Foreign currency translation effects.............. (28,002) (32,214) (29,073)
------------------------------------------------------------------
Total stockholders' equity........................ 77,696 85,990 91,557
------------------------------------------------------------------
Commitments and contingent liabilities.................
$186,346 $223,547 $231,295
==================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
Consolidated Statements of Cash Flows
InterTAN, Inc.
- - --------------------------------------------------------------------------------
(In thousands) Nine months ended
March 31
---------------------------------------
1999 1998
---------------------------------------
Cash flows from operating activities:
Net loss......................................................... $(27,753) $ (9,334)
Adjustments to reconcile net loss to
cash provided by operating activities:
Depreciation and amortization................................. 5,008 5,581
Deferred income taxes......................................... - 584
Foreign currency transaction gains, unrealized................ (292) (1,332)
Loss on disposal of United Kingdom subsidiary................. 35,088 12,712
and other restructuring charges........
Other......................................................... 1,399 1,644
Cash provided by (used in) current assets and liabilities:
Accounts receivable........................................... (3,897) (1,315)
Inventories................................................... (13,830) 4,465
Other current assets.......................................... (2,353) (833)
Accounts payable.............................................. 14,759 (691)
Accrued expenses.............................................. 3,015 1,141
Income taxes payable.......................................... 11,462 7,328
---------------------------------------
Net cash provided by operating................................ 22,606 19,950
activities
---------------------------------------
Cash flows from investing activities:
Additions to property and equipment............................... (5,412) (4,654)
Proceeds from sales of property and equipment..................... 103 28
Effect of sale of United Kingdom subsidiary on cash............... (10,971) -
Other investing activities........................................ 1,489 2,092
---------------------------------------
Net cash used in investing activities..................... (14,791) (2,534)
---------------------------------------
Cash flows from financing activities:
Changes in short-term bank borrowings, net........................ 2,411 (2,308)
Proceeds from issuance of common stock to......................... 1,236 1,244
employee plans
Principal repayments on long-term borrowings...................... - (24,353)
---------------------------------------
Net cash provided by (used in) financing activities............. 3,647 (25,417)
---------------------------------------
Effect of exchange rate changes on cash............................. (178) (735)
---------------------------------------
Net increase (decrease) in cash and short-term investments.......... 11,284 (8,736)
Cash and short-term investments, beginning of period................ 32,811 34,726
---------------------------------------
Cash and short-term investments, end of period...................... $ 44,095 $ 25,990
=======================================
The accompanying notes are an integral part of these consolidated financial
statements. Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
Note 1 Basis of Financial Statements
The accompanying unaudited financial statements have been prepared in accordance
with Rule 10-01 of Regulation S-X, "Interim Financial Statements", and do not
include all information and footnotes required by generally accepted accounting
principles for complete financial statements. The financial statements have been
prepared in conformity with accounting principles and practices (including
consolidation practices) as reflected in InterTAN, Inc.'s ("InterTAN" or the
"Company") annual report on Form 10-K for the fiscal year ended June 30, 1998,
and, in the opinion of the Company, include all adjustments necessary for fair
presentation of the Company's financial position as of March 31, 1999 and 1998
and the results of its operations for the three and nine months ended March 31,
1999 and 1998 and its cash flows for the nine months ended March 31, 1999 and
1998. Such adjustments are of a normal and recurring nature. Operating results
for the three and nine months ended March 31, 1999 are not necessarily
indicative of the results that can be expected for the fiscal year ended June
30, 1999. For further information, refer to the consolidated financial
statements and notes thereto included in the Company's annual report on Form 10-
K for the fiscal year ended June 30, 1998.
Note 2 Loss on Sale of United Kingdom Subsidiary and Other Restructuring
Plans
For some time, the Company had been considering a variety of plans and had
undertaken a number of initiatives intended to restore its loss-making
subsidiary in the United Kingdom to profitability, including a restructuring
plan to close 69 under-performing stores implemented in the third quarter of
fiscal year 1998.
While this restructuring plan, together with other initiatives taken in the
United Kingdom, were contributing to improved operating results in that country,
an overall loss for fiscal year 1999 was still anticipated. In January, 1999 the
Company's Board of Directors approved a plan to sell the Company's investment in
InterTAN U.K. Limited for proceeds of $2,582,000, net of estimated selling
costs. The sale included all assets, liabilities and other obligations of the
United Kingdom subsidiary, including approximately $11,600,000 of bank debt
outstanding under InterTAN U.K. Limited's portion of the Company's syndicated
loan agreement, which was repaid by the purchaser on closing. Coincident with
the sale, the Company's syndicated loan facility was reduced from $75,000,000 to
$50,000,000. See Note 7, Segment Reporting, for revenue and operating income
(loss) associated with InterTAN U.K. Limited.
In addition, the purchaser assumed the rights to claim tax loss carryforwards
and deferred capital allowances having a potential tax benefit of approximately
$33,000,000. To the extent the purchaser is able to utilize all or a portion of
these loss carryforwards and deferred tax allowances, the Company is entitled to
cash payments equal to 30% of the tax savings realized by the purchaser (a
maximum of approximately $10,000,000). The Company will recognize such proceeds,
if any, as received.
Also under the terms of the sale agreement, the Company has indemnified the
purchaser for certain contingencies primarily relating to real estate matters
associated with store leases and working capital adjustments. Management
believes that adequate provision has been made for such liabilities and
allowances; however, such balances are based on estimates and the actual results
could differ from those estimates, subjecting the Company to the indemnification
provisions. Costs, if any, resulting from these contingencies will be recorded
as incurred, or become probable and estimable.
A loss of $34,712,000 on the sale of InterTAN U.K. Limited was recorded in the
third quarter when the plan to sell was approved by the Board of Directors. The
initial costs of this transaction totaling approximately $376,000 were expensed
as incurred in the three-month period ended December 31, 1998.
As previously indicated, as part of the Company's ongoing efforts to improve the
financial performance of its United Kingdom operation, in January 1998 a plan to
close 69 consistently under-performing stores was approved. In connection with
this restructuring plan, a provision of $12,712,000 was recorded during the
third quarter of fiscal year 1998, reflecting lease disposal costs, severance
costs and other closure costs, including fixture removal and contract
termination costs. The following is a summary of the activity within this
reserve during the nine-month period ended March 31, 1999 (in thousands):
Balance Adjustment on
June 30 Foreign Currency Balance Disposal of Balance
1998 Paid Rate Effects December 31 1998 InterTAN U.K. March 31 1998
------------- ------------ ---------------------- ---------------- -------------------- -------------
Lease disposal costs $8,639 $(2,995) $(33) $5,611 $(5,611) $ -
Severance costs 250 (105) (1) 144 (144) -
Other exit costs 527 (268) (2) 257 (257) -
------ ------- ---- ------ -------
$9,416 $(3,368) $(36) $6,012 $(6,012) $ -
====== ======= ==== ====== ======= =============
Note 3 9% Subordinated Convertible Debentures
During fiscal year 1994, the Company closed a private placement of
Cdn$60,000,000 of 9% subordinated convertible debentures (the "Debentures")
maturing August 30, 2000. At March 31, 1999, Cdn$36,861,000 of Debentures
($24,431,000 at March 31, 1999 exchange rates) were outstanding. The Debentures
are convertible at any time at a conversion rate of 118.7648 common shares for
each Cdn$1,000 face amount of Debentures, equivalent to a conversion price of
Cdn$8.42 per share ($5.58 per share at March 31, 1999 exchange rates).
The Debentures are redeemable upon giving at least 30 business days' notice at a
redemption price equal to the principal amount thereof, plus accrued and unpaid
interest provided that the current market price of the Company's common shares
during a specified period preceding the date of such notice is not less than
125% of the conversion price. On April 16, 1999, the Company served notice on
all remaining Debenture holders calling for the redemption of all issued and
outstanding Debentures on June 8, 1999. Debenture holders may exercise their
right of conversion until June 7, 1999, after which all outstanding Debentures
must be surrendered for cash. Should all outstanding Debenture holders as of
April 16, 1999 exercise their right of conversion, approximately 4,007,000
additional common shares would be issued. Approximately 371,000 shares had
previously been issued as a result of Debenture conversions between March 31,
1999 and April 16, 1999.
Note 4 Net Loss per Average Common Share
Basic earnings per share ("EPS") is calculated by dividing the net income or
loss for a period by the weighted average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution which would occur if
securities or other contracts to issue common stock were exercised or converted.
For the three and nine-month periods ended March 31, 1999 and 1998, basic and
diluted losses per average common share were each $3.13 and $1.46 and $2.17 and
$0.77, respectively, as the effects of the Company's potentially dilutive
instruments were anti-dilutive in all periods.
The Company's potentially dilutive instruments include the Debentures. Under
their terms of issuance, the Debentures are convertible into common stock at the
rate of 118.7648 shares for each Cdn.$1,000 face amount of Debentures held,
equivalent to 4,378,000 and 6,747,000 shares at March 31, 1999 and 1998,
respectively. However, if the Company were to redeem the Debentures after
February 28, 2000 by issuing common shares to the holders thereof in accordance
with the terms of the Debentures, the dilutive effect of the Debentures would be
increased if the fair market value of the Company's common stock at the time of
redemption were less than the conversion price, resulting in a greater number of
shares being issued on assumed conversion.
Between March 31 and April 16, 1999, Cdn.$3,124,000 of Debentures were
converted, resulting in the issuance of approximately 371,000 common shares. On
April 16, 1999, the Company called for the redemption of the remaining
Debentures on June 8, 1999. Should all remaining Debenture holders exercise
their right of conversion prior to the redemption date, approximately 4,007,000
additional common shares would be issued. In addition, at March 31, 1999 and
1998, the Company's directors and employees held options to purchase 1,221,502
and 1,015,500 common shares, respectively, at prices ranging from $3.50 to
$8.3125 and $3.50 to $8.1875 per shares, respectively.
Note 5 Comprehensive Income (Loss)
Effective July 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("FAS 130"). Comprehensive
income is defined as the change in equity (net assets) of a business enterprise
during a period from transactions and other events and circumstances from non-
owner sources. For the Company, comprehensive income includes net income and the
net change in foreign currency translation effects. The comprehensive loss for
the three-month periods ended March 31, 1999 and 1998 was $35,419,000 and
$16,736,000, respectively. For the nine-month periods ended March 31, 1999 and
1998, the comprehensive loss was $23,541,000 and $15,895,000, respectively.
Note 6 Income Taxes
The provisions for domestic and foreign income taxes for the three-month periods
ended March 31, 1999 and 1998 were $10,548,000 and $1,438,000, respectively. The
Company's income tax expense primarily represents Canadian and Australian income
tax on the profits earned by its subsidiaries in those countries. The provision
for income taxes for the three-month period ended March 31, 1999 also included a
charge of $8,039,000 related to the settlement of a dispute with the Canadian
tax authorities relating to the 1990 to 1993 taxation years which is discussed
more
fully below. For the nine-month period ended March 31, 1999, an income tax
provision of $21,481,000 was recorded, compared with $8,563,000 in the first
nine months of the prior year.
An audit of the Canadian income tax returns of the Company's Canadian subsidiary
for the 1990 to 1993 taxation years was commenced during the 1995 fiscal year.
The Company was advised that Revenue Canada was challenging certain interest
deductions relating to the Canadian subsidiary's former operations in
continental Europe and was proposing to tax certain foreign exchange gains
related to such operations. Depending on the ultimate resolution of these
issues, the Company estimated that it could potentially have an additional
liability of up to $21,000,000. In March 1999, the Company and Revenue Canada
agreed to a resolution of this matter which will result in a liability to the
Company of approximately $14,000,000 resulting in a charge of $8,039,000 during
the third quarter, reflecting a settlement which exceeded management's
expectations, but was substantially less than the maximum exposure of
$21,000,000.
The Company was advised in August, 1995 that Revenue Canada intended to extend
the scope of its 1987 to 1989 reassessments to raise certain issues flowing from
the spin-off of the Company from Tandy Corporation in fiscal year 1987. The
Company had previously disclosed that these issues represented a potential loss
in the range of $0 to $21,000,000. Management disagreed with Revenue Canada's
views on these issues and vigorously defended the Company's position. The
Company has been advised that Revenue Canada no longer intends to pursue these
matters and that no related assessment will be issued.
An audit of the Canadian income tax returns of the Canadian subsidiary for the
1987 to 1989 taxation years was completed during fiscal year 1994, resulting in
additional tax being levied against the Canadian subsidiary. The Company has
appealed these reassessments and, pending the outcome of these matters, the
Company, by Canadian law, was required to pay one-half of the tax in dispute.
The tax levied by Revenue Canada in reassessing those years was offset by
refunds arising from the carryback of losses incurred in subsequent years.
Depending on the ultimate resolution of these issues, the Company could
potentially have an additional liability in the range of $0 to $11,700,000. The
Company believes it has meritorious arguments in defense of the issues raised by
Revenue Canada and it is in the process of vigorously defending its position. It
is management's determination that no additional provision need be recorded for
these reassessments. It is not practical for management to make any reasonable
determination of when this remaining outstanding Canadian tax issue will
ultimately be resolved.
Audits of the Company's Canadian income tax return by Revenue Canada for the
1994 taxation year and of the Company's United States income tax returns by the
Internal Revenue Service for the 1990-1994 taxation years are in process.
Note 7 Segment Reporting
Effective July 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("FAS 131"). The table below summarizes net sales and operating
revenues, operating income (loss) and identifiable assets for the Company's
segments. Consolidated operating income (loss) is reconciled to the Company's
loss before income taxes (in thousands):
Three months ended Nine months ended
March 31 March 31
1999 1998 1999 1998
Net sales and operating revenues
Canada 63,613 $ 56,831 $ 232,120 $ 215,720
Australia 24,453 22,300 79,028 75,989
United Kingdom* - 37,986 97,141 139,676
---------------------------------------------------------------
$ 88,066 $ 117,117 $ 408,289 $ 431,385
===============================================================
Operating income (loss)
Canada $ 4,957 $ 3,161 $ 27,367 $ 19,447
Australia 1,422 1,017 5,750 4,726
United Kingdom* - (5,597) 3,365 (5,023)
---------------------------------------------------------------
6,379 (1,419) 36,482 19,150
Loss on sale of United Kingdom
subsidiary and other restructuring charges (34,712) (12,712) (35,088) (12,712)
General corporate expenses (1,711) (1,122) (4,745) (3,330)
---------------------------------------------------------------
Operating income (loss) (30,044) (15,253) (3,351) 3,108
Foreign currency transaction (gains) losses 80 158 (375) (580)
Interest expense, net 550 923 3,296 4,459
---------------------------------------------------------------
Loss before income taxes $ (30,674) $ (16,334) $ (6,272) $ (771)
===============================================================
March 31 June 30 March 31
1999 1998 1998
Canada $ 127,886 $ 111,496 $ 112,255
Australia 54,477 45,675 46,127
United Kingdom - 64,246 70,531
Corporate assets 3,983 2,130 2,382
---------------------------------------------------
$ 186,346 $ 223,547 $ 231,295
===================================================
*As discussed in Note 2, the Company sold its United Kingdom operations during
the three months ended March 31, 1999. Additionally 69 under-performing stores
in the United Kingdom were closed during fiscal year 1998.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
---------------------
InterTAN is engaged in the sale of consumer electronics products primarily
through company-operated retail stores and dealer outlets in Canada and
Australia. The Company's retail operations are conducted through two
wholly-owned subsidiaries: InterTAN Australia Ltd., which operates in Australia
under the trade name "Tandy Electronics"; and InterTAN Canada Ltd., which
operates in Canada under the trade name "RadioShack". The Company previously
also had retail and dealer outlets in the United Kingdom. Theses operations were
conducted through a wholly-owned subsidiary, InterTAN U.K. Limited, which
operated under the "Tandy" name. Effective January 1999, the Company's
subsidiary in the United Kingdom was sold. See Note 2 to the Consolidated
Financial Statements and "Loss on Sale of United Kingdom Subsidiary and Other
Restructuring Plans". All of these trade names are used under license from Tandy
Corporation ("Tandy") of Fort Worth, Texas. In addition, the Company has entered
into an agreement in Canada with Rogers Cantel Inc. ("Cantel") to operate
telecommunications stores ("Cantel stores") on its behalf. At March 31, 1999, 45
Cantel stores were in operation.
Effective July 1, 1998, the Company adopted Financial Accounting Standards No.
131, "Disclosure about Segments of an Enterprise and Related Information" ("FAS
131"). All references to "Canada" or "RadioShack Canada", "Australia" or "Tandy
Electronics Australia", the "United Kingdom" or "Tandy U.K." or "Corporate
Headquarters" refer to the Company's segments, unless otherwise noted. The
RadioShack Canada segment includes the results of the Cantel stores described
above.
Overview
There were a number of special factors and charges in both the current and the
prior year that significantly impacted the Company's results of operations and
affected the comparability of the reported results. As previously discussed, in
January 1999 the Company sold its under-performing subsidiary, InterTAN UK
Limited, and recorded a total charge of $35,088,000. See "Loss on Sale of Former
United Kingdom Subsidiary and Other Restructuring Plans." Also in the current
year, the Company settled one of its long-standing disputes with the Canadian
tax authorities and recorded a related tax charge of $8,039,000. See Note 6,
"Income Taxes."
During the three-month period ending March 31, 1998, the Company announced its
plan to close 69 stores in the United Kingdom and recorded a charge of
$12,712,000 plus another $2,325,000 in related inventory write downs. See "Loss
on Sale of Former United Kingdom Subsidiary and Other Restructuring Plans."
The tables below reflect the Company's sales, net income (loss), and net income
(loss) per share for the three and nine-month periods ending March 31, 1999 and
1998, adjusted to eliminate the following: sales and operating results of
InterTAN UK Limited, including the charge relating to the closure of 69 stores
in fiscal 1998; the loss on sale of InterTAN UK Limited; and the special tax
charge relating to the dispute settled with the Canadian tax authorities.
Three months ended Nine months ended
March 31 March 31
1999 1998 1999 1998
-------------------------------- ------------------------------------
Net sales and operating revenues as
reported $ 88,066 $117,117 $408,289 $ 431,385
Less sales of former United Kingdom
subsidiary - (37,986) (97,141) (139,676)
---------------- -------------- --------------- ------------------
Net sales and operating revenues as
adjusted $ 88,066 $ 79,131 $311,148 $ 291,709
================ ============== =============== ==================
Net loss as reported $(41,222) $(17,772) $(27,753) $ (9,334)
Loss on sale of former United
Kingdom subsidiary and
other restructuring charges 34,712 12,712 35,088 12,712
Net (income) loss of former
United Kingdom subsidiary
before restructuring charges * - 5,753 (2,447) 5,761
Special provision for income taxes 8,039 - 8,039 -
---------------- -------------- --------------- ------------------
Net income as adjusted $ 1,529 $ 693 $ 12,927 $ 9,139
================ ============== =============== ==================
Basic and diluted net loss per average
common share as reported $(3.13) $(1.46) $(2.17) $(0.77)
================ ============== =============== ==================
Basic net income per average common share
as adjusted $0.12 $0.06 $1.01 $0.76
================ ============== =============== ==================
Diluted net income per average common
share as adjusted $0.12 $0.06 $0.80 $0.58
================ ============== =============== ==================
*Includes inventory writedowns of $2,325,000 associated with the restructuring
which were recorded in the third quarter of fiscal year 1998.
Loss on Sale of United Kingdom Subsidiary and Other Restructuring Plans
For some time, the Company had been considering a variety of plans and had
undertaken a number of initiatives intended to restore its loss-making
subsidiary in the United Kingdom to profitability, including a restructuring
plan to close 69 under-performing stores implemented in the third quarter of
fiscal year 1998.
While this restructuring plan, together with other initiatives taken in the
United Kingdom, were contributing to improved operating results in that country,
an overall loss for fiscal year 1999 was still anticipated. The additional cash
injection needed in the United Kingdom to sustain and accelerate the pace of
recovery could only have come from diverting cash otherwise needed in the
Company's profitable Canadian and Australian subsidiaries. Consequently,
management explored the possibility of finding a suitable business partner or
buyer for its United Kingdom subsidiary. In January, 1999 the Company's Board of
Directors approved a plan to sell the Company's investment in InterTAN U.K.
Limited for proceeds of $2,582,000, net of estimated selling costs. The sale
included all assets, liabilities and other obligations of the United Kingdom
subsidiary, including approximately $11,600,000 of bank debt outstanding under
InterTAN U.K. Limited's portion of the Company's syndicated loan agreement which
was repaid by the purchaser at closing. Coincident with the sale, the Company's
syndicated loan facility was reduced from $75,000,000 to $50,000,000. See Note
7, Segment Reporting, for revenue and operating income (loss) associated with
InterTAN U.K. Limited.
In addition, the purchaser assumed the rights to claim tax loss carryforwards
and deferred capital allowances having a potential tax benefit of approximately
$33,000,000. To the extent the purchaser is able to utilize all or a portion of
these loss carryforwards and deferred tax allowances, the Company is entitled to
cash payments equal to 30% of the tax savings realized by the purchaser (a
maximum of approximately $10,000,000). The Company will recognize such proceeds,
if any, as received.
Also under the terms of the sale agreement, the Company has indemnified the
purchaser for certain contingencies, primarily relating to real estate matters
associated with store leases and working capital adjustments. Management
believes that adequate provision has been made for such liabilities and
allowances; however, such balances are based on estimates and the actual results
could differ from those estimates, subjecting the Company to the indemnification
provisions. Costs, if any, resulting from these commitments will be recorded as
incurred, or become probable and estimable.
A loss of $34,712,000 on the sale of InterTAN U.K. Limited was recorded in the
third quarter when the plan to sell was approved by the Board of Directors. The
initial costs of this transaction totaling approximately $376,000 were expensed
as incurred in the three-month period ended December 31, 1998.
As previously indicated, as part of the Company's ongoing efforts to improve the
financial performance of its United Kingdom operation, in January 1998 a plan to
close 69 consistently under-performing stores was approved. In connection with
this restructuring plan, a provision of $12,712,000 was recorded during the
third quarter of fiscal year 1998, reflecting lease disposal costs, severance
costs and other closure costs, including fixture removal and contract
termination costs.
The following is a summary of the activity within this reserve during the
nine-month period ended March 31, 1999 (in thousands):
Balance Balance Adjustment on Balance
June 30 Foreign Currency December 31 Disposal of March 31
1998 Paid Rate Effects 1998 InterTAN U.K. 1998
---- ---- ------------ ---- ------------- ----
Lease disposal costs $8,639 $(2,995) $(33) $5,611 $(5,611) $ -
Severance costs 250 (105) (1) 144 (144) -
Other exit costs 527 (268) (2) 257 (257) -
-------- ---------- ------ ------- --------- --------
$9,416 $(3,368) $(36) $6,012 $(6,012) $ -
====== ======== ===== ====== ======== ========
Foreign Exchange Effects
Profit and loss accounts, including sales, are translated from local currency
values to U.S. dollars at monthly average exchange rates. During the third
quarter of fiscal year 1999, the U.S. dollar strengthened against the Canadian
and Australian dollars relative to the comparable values during the third
quarter of the prior year. As a result, the same local currency amounts
translate into fewer U.S. dollars as compared with the prior year. For example,
if local currency sales in Australia in the third quarter of fiscal year 1999
were the same as those in the third quarter of the prior year, the fiscal year
1999 income statement would reflect a 4.7% decrease in sales when reported in
U.S. dollars.
The following table outlines, for the three-month period ending March 31, 1999,
the percentage change in the weighted average exchange rates of the currencies
of the countries in which the company operates as compared to the same
three-month period in the prior year:
-----------------------------------
Canada (5.4)%
Australia (4.7)%
-----------------------------------
Sales Outlets
The number of company-operated stores and dealers at March 31, 1999 and 1998, as
well as the number of locations opened and closed during the three-month periods
then ended, is presented in the table below:
Sales Outlets
Three months ended Three months ended
March 31, 1999 March 31, 1998
------------------------------------- ------------------------------------
Ending Opened Closed Ending Opened Closed
Canada
Company-operated 449* 1 4 458* 1 4
Dealers 332 4 4 385 2 3
------------------------------------ ------------------------------------
781 5 8 843 3 7
==================================== ====================================
Australia
Company-operated 225 3 - 217 1 1
Dealers 126 4 3 124 1 19
------------------------------------ ------------------------------------
351 7 3 341 2 20
==================================== ====================================
United Kingdom**
Company-operated 0 0 0 286 - 52
Dealers 0 0 0 109 4 25
------------------------------------ ------------------------------------
0 0 0 395 4 77
==================================== ====================================
Total
Company-operated 674 4 4 961 2 57
Dealers 458 8 7 618 7 47
------------------------------------ ------------------------------------
1,132 12 11 1,579 9 104
==================================== ====================================
*At March 31, 1999 and 1998, the Company operated 45 and 55 stores,
respectively, on behalf of Cantel. At March 31, 1999, the Company was also
testing "store in store" formats in seven locations of The Hudsons Bay Company.
Since these locations are not company-owned, they are not included in the above
table.
** The Company's United Kingdom subsidiary was sold in January, 1999. See "Loss
on Sale of United Kingdom Subsidiary and Other Restructuring Plans".
The decline in the number of dealers in Canada over the prior year results from
the closure of a number of smaller dealers whose level of purchases was not
sufficient to sustain profitability. The closure of these dealers will not have
a material effect on future sales.
Net Sales
Consolidated sales in U.S. dollars for the three-month period ended March 31,
1999 were $88,066,000, down from $117,117,000 in the same period a year ago.
This decline is more than attributable to the sale of the Company's United
Kingdom subsidiary and the effects of weaker currencies in Canada and Australia.
When these factors are eliminated, consolidated sales in Canada and Australia,
measured at the same exchange rates increased by $13,061,000 or 17.4%.
Comparable-store sales, also measured at the same exchange rates, increased by
17.8%. Year-to-date, with the sales of the former United Kingdom subsidiary
removed from both periods, sales have increased by 6.7% and 16.5% in U.S.
dollars and local currency, respectively. Comparative store sales for the
nine-month period ended March 31, 1999, also excluding the former United Kingdom
subsidiary, have increased 16.9% over the same period a year ago.
The table which follows shows the percentage changes in net sales for Canada and
Australia for the quarter and nine months ended March 31, 1999, compared to the
corresponding period in the prior year. Changes are presented in both U.S.
dollars and local currencies to illustrate the effects of exchange rate
fluctuations. The change in comparative store sales, measured at the same
exchange rates, is also shown:
Net Sales
---------
Percentage Increase
-------------------
Three Months Ended Nine Months Ended
March 31, 1999 March 31, 1999
Local Comparative Local Comparative
Currency US$ Store Currency US$ Store
Canada 18.3 % 11.9 % 20.4 % 16.5 % 7.6 % 17.6 %
Australia 15.1 % 9.7 % 12.3 % 16.4 % 4.0 % 15.3 %
----------------------------------- ------------------------------------
Combined 17.4 % 11.3 % 17.8 % 16.5 % 6.7 % 16.9 %
==================================== ====================================
The sales growth in both Canada and Australia was broadly-based, with gains
experienced in almost all core categories. In Canada, sales of wireless products
and computers were key factors leading to a comparable-store sales gain of
20.4%. The sale of direct-to-home satellite systems was also an important part
in the strong sales performance in Canada during the third quarter of fiscal
year 1999. The sale of computers was another significant factor driving overall
sales growth in Australia. Strong performances from the wireless and battery
categories also contributed to a comparable-store sales increase of 12.3% over
the same quarter in the prior year. At quarter end, the Company had eight more
stores open in Australia than a year ago. Sales from these new stores lifted the
overall sales gain in local currency to 15.1%.
In January, 1999, the Company announced the sale of its subsidiary in the United
Kingdom. This sale will have a significant effect on overall sales comparisons
for the coming year. Sales for the prior four quarters in the United Kingdom
were as follows:
Three months ended March 31, 1998 $ 37,986
==================
Three months ended June 30, 1998 $ 32,852
==================
Three months ended September 30, 1998 $ 33,425
==================
Three months ended December 31, 1998 $ 63,716
==================
Management does not believe that inflation or price changes have had a material
effect on sales during the three and nine-month periods ended March 31, 1999 and
1998.
Gross Margin and Cost of Products Sold
The gross margin percentage for the three-month period ended March 31, 1999 was
44.1% compared to 41.5% in the same period of the prior year. This increase was,
however, more than attributable to the low margins experienced in the Company's
former United Kingdom
subsidiary last year. Margins in the United Kingdom had been particularly low in
that quarter, in part as a result of the writedown of inventories associated
with a program to close 69 unprofitable stores. See "Loss on Sale of United
Kingdom Subsidiary and Other Restructuring Plans".
The combined gross margin percentage in Canada and Australia declined from 45.5%
to 44.1%, as sales growth has come primarily from product categories, such as
wireless and computers, carrying margins that are below the Company's average.
Management expects that modest reductions in the gross margin percentage will
continue as customers continue to demand these classes of products. This
downward pressure on margin continues to be partially mitigated by post sale
revenues, including residuals and volume rebates, primarily on wireless products
and direct-to-home satellite systems. It is management's objective that any
future reductions in the gross margin percentage will be offset by a lower
selling, general and administrative percentage. The following is a summary of
the gross margin percentages experienced in each of the Company's operating
units during the three and nine-month periods ended March 31, 1999 and 1998.
Three months ended Nine months ended
March 31 March 31
1999 1998 1999 1998
- - ------------------------------------------------------------------------------
Canada 42.8% 44.6% 43.4% 43.3%
Australia 47.3% 47.5% 46.4% 47.4%
- - ------------------------------------------------------------------------------
44.1% 45.5% 44.2% 44.4%
United Kingdom -- 33.3% 41.2% 39.4%
- - ------------------------------------------------------------------------------
Consolidated 44.1% 41.5% 43.5% 42.8%
==============================================================================
While gross margin dollars for the quarter declined by $9,807,000, this
reduction was more than attributable to the sale of the Company's former
subsidiary in the United Kingdom. Gross margin dollars generated in Canada and
Australia during the three-month period ended March 31, 1999 increased by
$2,826,000 as the effects of increased sales was partially offset by the impact
of a lower gross margin percentage and weaker foreign currencies. The following
table contains an analysis of the change in gross margin dollars for the
quarter.
In Canada and Australia
Increase in sales $ 5,939,000
Decrease in margin percentage (1,244,000)
Foreign exchange rate effects (1,869,000)
---------------------
$ 2,826,000
Effect of sale of United Kingdom subsidiary (12,633,000)
---------------------
$ (9,807,000)
=====================
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses for the three-month period
ended March 31, 1999 were $32,817,000 compared to $49,425,000 in the same period
a year ago. The following table illustrates that this apparent reduction is more
than attributable to the sale of the Company's former subsidiary in the United
Kingdom and weaker currencies in Canada and Australia (in thousands):
Three-Months Foreign Increase (Decrease) Three-Months Ended
Ended Currency Measured at Ended
March 31, 1998 Effects Same Exchange Rates March 31, 1999
-------------- ------- ------------------- --------------
Canada $21,051 $(1,141) $ 1,341 $21,251
Australia 9,392 (441) 930 9,881
Corporate Headquarters
1,111 - 574 1,685
------------------- ------------- --------------------------- ---------------------
31,554 (1,582) 2,845 32,817
United Kingdom 17,871 - (17,871) -
------------------- ------------- --------------------------- ---------------------
$49,425 $(1,582) $(15,026) $32,817
=================== ============= =========================== =====================
Measured at the same exchange rates, SG&A expenses for the quarter in Canada,
Australia and the Corporate Headquarters increased by $2,845,000, or 9.5%,
primarily in support of, or in response to, higher sales. Increases were seen in
rent, payroll costs, and in the sales-based royalty payable to Tandy
Corporation. SG&A expenses at the Company's corporate headquarters increased by
$574,000, primarily as a result of costs related to the relocation of that
office from Forth Worth, Texas to Toronto, Canada. Management believes that this
step will result in future savings as a result of both reductions in staff
levels and lower operating costs and will also result in more effective
management by being closer to the Company's most significant operating
subsidiary.
When the Company's former subsidiary in the United Kingdom is removed from the
previous year, combined SG&A percentage of 37.3% is indicated for the
three-month period ended March 31, 1999 compared with 39.9% a year ago. This
reduction of 2.6 percentage points was 1.2 percentage points higher than the
decline in the gross margin percentage. Management will continue to control SG&A
expense in an effort to maintain this operating leverage.
The following table compares the SG&A percentage for the quarter and
year-to-date for Canada and Australia with the corresponding amount for the
prior year. A combined percentage is also shown which includes SG&A expenses at
Corporate Headquarters.
Three months ended Nine months ended
March 31 March 31
1999 1998 1999 1998
- - -------------------------------------------------------------------------------
Canada 33.4% 37.0% 30.3% 32.7%
Australia 40.4% 42.1% 38.2% 40.2%
- - ------------------------------------------------------------------------------
Combined 37.3% 39.9% 33.8% 35.8%
- - ------------------------------------------------------------------------------
Net Interest Expense
Net interest expense for the three-month period ended March 31, 1999 was
$550,000 compared with $923,000 in the comparable quarter a year ago. This
reduction primarily relates to lower debt loads resulting from the sale of the
Company's former subsidiary in the United Kingdom. This factor will continue to
result in reduced interest costs in the fourth quarter of fiscal year 1999 and
the first two quarters of fiscal year 2000. In addition, the Company has called
for the redemption of its remaining 9% subordinated convertible debentures on
June 8, 1999. Management estimates that the redemption of this instrument will
lower net interest expense by approximately $550,000 per quarter.
Provision for Income Taxes
An income tax provision of $10,548,000 was recorded during the quarter compared
with a provision of $1,438,000 recorded in the third quarter of fiscal year
1998. This increase results primarily from a charge of $8,039,000 related to the
settlement of a dispute with the Canadian tax authorities relating to a prior
year. See Note 6 to the Consolidated Financial Statements. Higher profits in
Canada and Australia also contributed to the increase in the provision for
income taxes.
FINANCIAL CONDITION
-------------------
Most balance sheet accounts are translated from their values in local currency
to U.S. dollars at the respective month end rates. The table below outlines the
percentage change, to March 31, 1999, in exchange rates as measured against the
U.S. dollar for Canada and Australia:
Foreign Exchange Rate Fluctuations
----------------------------------
% Increase % Increase
(Decrease) (Decrease)
from March 31, 1998 from June 30, 1998
------------------- ------------------
Canada (5.9) (2.7)
Australia (4.2) 2.4
Inventories
Inventories at March 31, 1999 were $111,081,000 compared to $159,820,000 at
March 31, 1998, a reduction of $48,739,000. This decrease is more than
attributable to the sale of the Company's former subsidiary in the United
Kingdom and foreign currency effects. Measured at the same exchange rates,
inventories have increased year-on-year in Canada and Australia by about 11% in
support of higher sales.
For the same reasons, inventories have declined from $148,198,000 at June 30,
1998.
Accounts Receivable
Accounts receivable were $7,582,000 at March 31, 1999, down from $8,539,000 and
$10,606,000 at June 30, 1998 and March 31, 1998, respectively. These reductions
are primarily due to the sale of the Company's former subsidiary in the United
Kingdom and foreign currency effects. Accounts receivable balances in Canada and
Australia, measured in local currency, have not changed significantly.
Property and Equipment
Property and equipment was $19,094,000 at March 31, 1999, down from $26,228,000
and $26,524,000 at June 30, 1998 and March 31, 1998, respectively. These
reductions are attributable to the sale of the Company's former subsidiary in
the United Kingdom and in part to reductions in Canada, where depreciation
expense has exceeded spending on routine capital additions.
Accounts Payable
Accounts payable at March 31, 1999 were $19,398,000, compared to $24,274,000 and
$26,448,000 at June 30, 1998 and March 31, 1998 respectively. These reductions
are attributable to the effects of the sale of the Company's former subsidiary
in the United Kingdom, partially offset by the increase in inventory levels in
Canada and Australia.
Accrued Expenses
Accrued expenses at March 31, 1999 were $26,451,000, down from $38,505,000 and
$39,945,000 at June 30, 1998 and March 31, 1998 respectively, as the effects of
the sale of the Company's former subsidiary in the United Kingdom were partially
offset by higher accrual levels in Canada and Australia. These increases relate
to a variety of factors in response to higher sales, including salaries and
bonuses, sales taxes and the royalty payable to Tandy Corporation. Increased
deferred revenues related to the sale of extended warranty contracts was also a
contributing factor.
Income Taxes Payable
Income taxes payable were $31,999,000 at March 31, 1999 compared to balances at
June 30, 1998 and March 31, 1998 of $20,955,000 and $19,650,000, respectively,
reflecting higher profitability in Canada and Australia as well as a special
provision of $8,039,000 in Canada relating to the settlement of a dispute with
the Canadian tax authorities. See Note 6 to the Consolidated Financial
Statements.
The Company's Canadian subsidiary has a number of issues in dispute with the
Canadian tax authorities relating to reassessments arising from an audit of
RadioShack Canada's income tax returns for the 1987 to 1989 taxation years.
Depending on the ultimate outcome of these matters, the Company could have an
additional liability in the range of $0 to $11,700,000. The Company believes it
has meritorious arguments in support of its position on each of these issues
and, accordingly, no additional provision has been recorded, pending the outcome
of these reassessments. It is not possible for management to make any reasonable
determination of when the above issues will ultimately be resolved. See Note 6
to the Company's Consolidated Financial Statements which appears in Item 1 to
this Form 10-Q and is incorporated herein by reference.
An audit of the Company's United States income tax returns by the Internal
Revenue Service for the 1990-1994 taxation years is in process.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Cash flow from operating activities generated $22,606,000 in cash during the
nine-month period ended March 31, 1999, compared with $19,950,000 during the
same period a year ago. Net income, adjusted to reconcile net income to cash,
generated $13,450,000 in cash compared to $9,855,000 in the prior year. The
build-up of inventories in response to higher sales in Canada and Australia
consumed $13,830,000 in cash, which has been financed through a similar increase
in accounts payable. The deferral of the payment of income taxes preserved
$11,462,000 in cash in the nine-month period ended March 31, 1999, compared with
$7,328,000 a year ago. This year the Company recorded a special provision of
$8,039,000, reflecting the settlement of an outstanding dispute with the
Canadian tax authorities. The Company has not yet paid its liability under this
settlement. The positive impact of the deferral of the payment of this liability
was partially offset by increases in regular income tax installments.
Investing activities consumed $14,791,000 in cash during the nine-month period
ended March 31, 1999 compared with $2,534,000 a year ago. The sale of the
Company's former subsidiary in the United Kingdom consumed $10,971,000 in cash,
representing the cash balances of that subsidiary at the time of sale less the
net proceeds of disposition. However, the subsidiary also had approximately
$11,600,000 of short-term bank debt which was assumed and repaid by the
purchaser.
Financing activities generated $3,647,000 in cash during the first nine months
of fiscal year 1999 while consuming $25,417,000 in cash in the same period in
the prior year, reflecting the repayment a year ago of the Company's long-term
indebtedness to Tandy Corporation.
The Company's principal sources of liquidity during fiscal year 1999 are its
cash and short-term investments, its cash flow from operations and its banking
facilities.
In December, 1997, the Company entered into a three-year revolving credit
facility with a syndicate of three lenders (the "Syndicated Loan Agreement") in
an amount not to exceed $75,000,000 in the aggregate. With the sale of InterTAN
U.K. Limited in January, 1999, the facility has been reduced to $50,000,000. The
amount of credit actually available at any particular time is dependent on a
variety of factors, including the level of eligible inventories and accounts
receivable of InterTAN Canada Ltd. (the "Borrower"). The amount of available
credit is then reduced by the amount of trade accounts payable of the Borrower
then outstanding as well as certain other reserves.
The Syndicated Loan Agreement is used primarily to provide letters of credit in
support of purchase orders and, from time to time, to finance inventory
purchases. At March 31, 1999, there were no borrowings against the Syndicated
Loan Agreement and $1,699,000 was committed in support of letters of credit.
There was $15,250,000 of credit available for use at March 31, 1999. As part of
the transaction involving the sale of InterTAN U.K. Limited, the purchaser
repaid the amount owing under the facility at December 31, 1998 ($11,617,000)
and arranged for replacement of the letters of credit relating to the United
Kingdom ($1,430,000 at December 31, 1998). The Company's Merchandise Agreement
with Tandy permits the Company to support purchase orders with a surety bond or
bonds as well as letters of credit. The Company has entered into an agreement
with a major insurer to provide surety bond coverage (the "Bond") in an amount
not to exceed $18,000,000. Use of the Bond will give the Company greater
flexibility
in placing orders with Far Eastern suppliers by releasing a portion of the
credit available under the Syndicated Loan Agreement for other purposes.
The Company's Australian subsidiaries, InterTAN Australia Ltd. and Technotron
Sales Corp. Pty, Ltd., have entered into a credit agreement with an Australian
bank (the "Australian Facility"). This agreement established a credit facility
in the amount of A$12,000,000 ($7,612,000 at March 31, 1999 exchange rates). The
Australian Facility has no fixed term and may be terminated at any time upon
five days prior written notice by the lender. All or any part of the facility
may be used to provide letters of credit in support of purchase orders. A
maximum amount of A$5,000,000 ($3,172,000 at March 31, 1999 exchange rates) may
be used in support of short-term borrowings. At March 31, 1999, there were no
borrowings outstanding against the Australian Facility, nor was any amount
committed in support of letters of credit.
The Company's primary uses of liquidity during the balance of fiscal year 1999
will include the funding of capital expenditures, the servicing of debt and,
possibly, the payments in settlement of tax reassessments. The Company
anticipates that capital additions will approximate $3,500,000 during the
balance of fiscal year 1999, mainly related to store expansion, remodeling and
upgrading. The Company's debt servicing requirements during the same period will
consist primarily of interest payments on the Debentures. The Company has called
for the redemption of the Debentures on June 8, 1999. The amount of interest
payable on the debentures will depend on whether debenture holders exercise
their right of conversion prior to the redemption date. Management estimates
that the amount of interest payable on the Debentures should not exceed
$500,000. In addition, management expects to receive additional reassessments
during fiscal year 1999 relating to the settlement of its dispute with Revenue
Canada in respect of the 1990-1993 taxation years. See "Income Taxes Payable"
and Note 6 to the Company's Consolidated Financial Statements which is included
in Item 1 of this Report on Form 10-Q and is incorporated herein by reference.
Management estimates the amount of such reassessments will be approximately
$14,000,000.
Management believes that the Company's cash and short-term investments on hand
and its cash flow from operations combined with the Syndicated Loan Agreement,
the Australian Facility and the Bond will provide the Company with sufficient
liquidity to meet its planned requirements through the 1999 Christmas selling
season, including the tax reassessments relating to the 1990-1993 taxation
years.
YEAR 2000 ISSUES
Management recognizes that many of the Company's information systems and related
hardware were designed and developed without considering the impact of the
upcoming change in the century ("Year 2000") and that a significant number of
InterTAN's computer applications, systems and hardware are requiring
modification or replacement to make them compliant with the Year 2000.
The Company's critical systems include the following:
o Its store operating systems;
o Its so-called "back end" merchandising and inventory systems, including
purchasing, receiving and warehousing, perpetual inventories and store
replenishment; and,
o Its primary accounting systems, including general ledger, accounts
receivable, accounts payable and payroll.
The Company's information systems include both internally developed systems and
systems purchased from third-party vendors. In Canada, with the exception of the
primary accounting system, the Company employs primarily internally developed
systems. In Australia, the Company has gradually shifted from internally
developed systems to third-party systems. The primary accounting system and the
warehouse distribution system are the only significant internally developed
systems remaining in Australia.
The Company is employing a variety of internal and external resources to assess
and make changes necessitated by Year 2000 issues to its many different systems
and equipment. Many of these changes were contemplated in any event as upgrades
or replacement of outdated systems and hardware. The Company has determined that
its mainframe hardware is Year 2000 compliant.
In Canada, during fiscal years 1996 and 1997, point-of-sale hardware was
replaced with equipment that is Year 2000 compliant. The store operating system
was replaced in the third and fourth quarters of fiscal year 1998. Year
2000-related upgrades to back end inventory and warehouse systems have been
completed. The Company's third-party-sourced accounting and payroll systems in
Canada have been certified as being Year 2000 compliant. Testing of both of
these systems is now complete. The Company was recently advised that the
operating system which supports its point of sale and certain of its warehousing
systems in Canada may not be Year 2000 compliant in certain environments.
Rollout of the installation of an upgrade to remedy this situation should be
complete by the end of September, 1999.
In Australia, the store hardware and operating system were replaced with systems
that are Year 2000 compliant during the fourth quarter of fiscal year 1998. The
Company is currently implementing a fully integrated, enterprise-wide retail
solution supplied by an outside vendor to replace its existing back end
inventory and accounting systems in Australia. This new system is certified as
being Year 2000 compliant and implementation is currently on schedule. The
Company will evaluate progress towards full implementation in September. At that
time, unless there is reasonable assurance that implementation and testing can
be completed on a timely basis, work on this project will be halted and all
efforts will be directed at the immediate remediation
of the existing legacy systems. It is anticipated that this remediation could be
completed in a four to six week period, in time for the November-December
Christmas selling system. After this peak, work will resume on the enterprise-
wide solution.
The Company's current projection is that Year 2000 compliance costs will not
exceed $1,500,000.
In the most reasonably likely worst case scenario, the Company's store operating
and back end inventory management systems could fail. The consequence of such
failure could include the inability to electronically record sales transactions
in the Company's stores and a breakdown in the supply chain. Such an occurrence
would likely result in a loss of revenue; it is not possible to quantify the
possible range of such loss. This would necessitate reverting to a number of
manual systems for recording sales, ordering product and replenishing the
Company's stores. Management does not currently have a formal documented
contingency plan to deal with this scenario. Management anticipates that such a
contingency plan will be in place by September 30, 1999.
The Company has communicated with its suppliers and other organizations with
which it does business to coordinate Year 2000 issues and to ensure the
continuity of supply of product and services. While the Company is not aware
that any of its major vendors will experience difficulties in supplying product,
in a most reasonably likely worst case scenario, one or more significant
suppliers could be unable to continue to adequately supply the Company after
1999. The Company's fallback position would be to seek an alternative source of
supply. However, there can be no assurance that such alternative sources of
supply would be available. The Company does not yet have a list of alternative
suppliers should some suppliers be unable to continue to provide product or
services beyond the end of calendar year 1999. Such a contingency plan will be
in place by September 30, 1999. It is not practical for management to estimate
the range of financial loss, if any, which could result from the negative effect
that a disruption in supply would have on the Company's business.
The Company's warehouse and distribution systems are centralized in a single
location in both Canada and Australia. In a most reasonably likely worst case
scenario, service from one or both of these locations could be disrupted, caused
by a number of factors beyond the Company's control including, for example, the
failure of local power suppliers to supply electricity. Such a disruption could
result in out-of-stock situations of varying severity at some or all of the
Company's retail locations. The Company is currently evaluating alternative
means of supplying its stores and reasonably anticipates that contingency plans
will be in place by September 30, 1999. It is not practical for management to
estimate the range of financial loss, if any, which could result from a
disruption in the supply of product to the Company's stores.
The Company is currently in the process of assessing its obligations, if any,
arising from the sale of warranted product which proves not to be Year 2000
compliant in one or more aspects. It is not possible at this time to reasonably
estimate the range of loss, if any, which could arise from such obligation.
Management is closely monitoring the Company's advancements towards Year 2000
conversion and progress reports are presented periodically to the Company's
Board of Directors. Although there can be no assurance that the Company will be
able to complete all of the modifications in the required time frame, or that
the Company will be able to identify all Year 2000 issues before problems
manifest themselves, in management's opinion, the Company is taking adequate
action
to address Year 2000 issues and does not expect the financial impact of being
Year 2000 compliant to be material to the Company's consolidated financial
position, results of operations or cash flows.
CONTINGENCIES
Apart from the matters and those described under "Loss on Sale of United Kingdom
Subsidiary and Other Restructuring Plans", "Income Taxes Payable" and "Year 2000
Issues", there are no material pending proceedings or claims, other than routine
matters incidental to the Company's business, to which the Company or any of its
subsidiaries is a party, or to which any of its property is subject.
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
With the exception of "Year 2000 Issues", the various matters
discussed under the heading "Contingencies" on page 27 of this
Form 10-Q are incorporated herein by reference.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the stockholders during
the three-month period ended March 31, 1999.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits Required by Item 601 of Regulation S-K:
Exhibit No. Description
2(a) Share Sale Agreement between InterTAN, Inc. and
Beheer-En Beleggingsmaatschappij Antika B.V. dated
January 23, 1999 (filed as Exhibit No. 2.1 to
InterTAN's Current Report on Form 8-K dated January
25, 1999 and incorporated herein by reference).
3(a) Restated Certificate of Incorporation (Filed as
Exhibit 3(a) to InterTAN's Registration Statement
on Form 10 and incorporated herein by reference).
3(a)(i) Certificate of Amendment of Restated Certificate of
Incorporation (Filed as Exhibit 3(a)(i) to
InterTAN's Annual Report on Form 10-K for fiscal
year ended June 30, 1995 and incorporated herein by
reference).
3(a)(ii) Certificate of Designation, Preferences and Rights
of Series A Junior Participating Preferred Stock
(Filed as Exhibit 3(a)(i) to InterTAN's
Registration Statement on Form 10 and incorporated
herein by reference).
3(b) Bylaws (Filed as Exhibit 3(b) to InterTAN's
Registration Statement on Form 10 and incorporated
herein by reference).
3(b)(i) Amendments to Bylaws through August 3, 1990 (Filed
as Exhibit 3(b)(i) to InterTAN's Annual Report on
Form 10-K for fiscal year ended June 30, 1990 and
incorporated herein by reference).
3(b)(ii) Amendments to Bylaws through May 15, 1995 (Filed as
Exhibit 3(b)(ii) to InterTAN's Annual Report on
Form 10-K for fiscal year ended June 30, 1995 and
incorporated herein by reference).
3(b)(iii) Amended and Restated Bylaws (filed as Exhibit
3(b)(iii) to InterTAN's Annual Report on Form 10-K
for fiscal year ended June 30, 1996 and
incorporated herein by reference).
4(a) Articles Fifth and Tenth of the Restated
Certificate of Incorporation (included in Exhibit
3(a)).
4(b) Amended and Restated Rights Agreement between
InterTAN Inc. and The First National Bank of Boston
(Filed as Exhibit 4(b) to InterTAN's report on Form
8-K dated September 25, 1989 and incorporated
herein by reference).
4(c) Trust Indenture securing the issue of 9%
Convertible Subordinated Debentures due August 30,
2000 (Filed as Exhibit 4(c) to InterTAN's Annual
Report on Form 10-K for fiscal year ended June 30,
1993 and incorporated herein by reference).
*10(a) Amended and Restated InterTAN Advertising Agreement
among InterTAN, Inc., InterTAN Canada Ltd.,
InterTAN Australia Ltd. and Tandy Corporation
effective as of January 1, 1999.
*10(b) Second Amendment to Loan Agreement dated as of
January, 1999 among InterTAN, Inc., InterTAN Canada
Ltd., InterTAN UK Limited, Bank of America Canada,
Bank of America National Trust and Savings
Association, BankBoston Retail Finance Inc.,
Congress Financial Corporation, BankBoston, N.A.
and Burdale Financial Limited.
*10(c) Confidential General Release and Separation
Agreement between InterTAN, Inc. and David S.
Goldberg dated March 1, 1999.
*10(d) Employment Agreement between InterTAN, Inc. and
Jeffrey A. Losch dated February 23, 1999.
10(e) Deed of Indemnity between InterTAN, Inc., Tandy
Corporation, InterTAN Canada Ltd., The Carphone
Warehouse Limited and Worldwide Telecommunications
Ltd. dated January 23, 1999 (filed as Exhibit No.
10.1 to InterTAN's Current Report on Form 8-K dated
January 25, 1999 and Incorporated herein by
reference).
10(f) Tax Deed between InterTAN, Inc. and Beheer-En
Beleggingsmaatschappij Antika B.V. dated January
23, 1999. (filed as Exhibit No. 10.2 to InterTAN's
Current Report on Form 8-K dated January 25, 1999
and incorporated herein by reference).
*27 Article 5, Financial Data Schedule.
*99 Historical sales performance statistics
- - --------------
* Filed herewith
b) Reports on Form 8-K:
During the quarter ended March 31, 1999, the company filed one
Report on Form 8-K dated January 25, 1999 in respect of the
Company's disposition of its U.K. subsidiary.
No other Reports on Form 8-K were filed during the quarter ended
March 31, 1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
InterTAN, Inc.
(Registrant)
Date: May 14, 1999 By: /s/ Brian E. Levy
-----------------------------
Brian E. Levy
President and
Chief Executive Officer
(Authorized Officer)
By: /s/ Douglas C. Saunders
----------------------------
Douglas C. Saunders
Vice President and Corporate Controller
(Principal Accounting Officer)
Index to Exhibits
InterTAN, Inc. Form 10-Q
Exhibit No. Description
- - ----------- -----------
2(a) Share Sale Agreement between InterTAN, Inc. and Beheer-En
Beleggingsmaatschappij Antika B.V. dated January 23, 1999
[Filed as Exhibit No. 2.1 to InterTAN's Current Report on Form 8-K dated
January 25, 1999 and incorporated herein by reference].
3(a) Restated Certificate of Incorporation
[Filed as Exhibit 3(a) to InterTAN's Registration Statement on Form 10
and incorporated herein by reference].
3(a)(i) Certificate of Amendment of Restated Certificate of Incorporation
[Filed as Exhibit 3(a)(i) to InterTAN's Annual Report on Form 10K for
fiscal year ended June 30, 1995 and incorporated herein by reference].
3(a)(ii) Certificate of Designation, Preferences and Rights of Series A Junior
Participating Preferred Stock
[Filed as Exhibit 3(a)(i) to InterTAN's Registration Statement on Form
10 and incorporated herein by reference].
3(b) Bylaws
[Filed as Exhibit 3(b) to InterTAN's Registration Statement on Form 10
and incorporated herein by reference].
3(b)(i) Amendments to Bylaws through August 3, 1990
[Filed as Exhibit 3(b)(i) to InterTAN's Annual Report on Form 10K for
fiscal year ended June 30, 1990 and incorporated herein by reference].
3(b)(ii) Amendments to Bylaws through May 15, 1995
[Filed as Exhibit 3(b)(ii) to InterTAN's Annual Report on Form 10K for
fiscal year ended June 30, 1995 and incorporated herein by reference].
3(b)(iii) Amended and Restated Bylaws
[Filed as Exhibit 3(b)(iii) to InterTAN's Annual Report on Form 10K for
fiscal year ended June 30, 1996 and incorporated herein by reference].
4(a) Articles Fifth and Tenth of the Restated Certificate of Incorporation
[included in Exhibit 3(a)]
4(b) Amended and Restated Rights Agreement between InterTAN, Inc. and The
First National Bank of Boston
[Filed as Exhibit 4(b) to InterTAN's Report on Form 8-K dated September
25, 1989 and incorporated herein by reference].
4(c) Trust Indenture securing the issue of 9% Convertible Subordinated
Debentures due August 30, 2000
[Filed as Exhibit 4(c) to InterTAN's Annual Report on Form 10-K for
fiscal year ended June 30, 1993 and incorporated herein by reference].
*10(a) Amended and Restated InterTAN Advertising Agreement among InterTAN,
Inc., InterTAN Canada Ltd., InterTAN Australia Ltd. and Tandy
Corporation effective as of January 1, 1999.
*10(b) Second Amendment to Loan Agreement dated as of January, 1999 among
InterTAN, Inc., InterTAN Canada Ltd., InterTAN UK Limited, Bank of
American Canada, Bank of America National Trust and Savings Association,
BankBoston Retail Finance Inc., Congress Financial Corporation,
BankBoston, N.A. and Burdale Financial Limited.
*10(c) Confidential General Release and Separation Agreement between InterTAN,
Inc. and David S. Goldberg dated March 1, 1999.
*10(d) Employment Agreement between InterTAN, Inc. and Jeffrey A. Losch dated
February 23, 1999.
10(e) Deed of Indemnity between InterTAN, Inc., Tandy Corporation, InterTAN
Canada Ltd., The Carphone Warehouse Limited and Worldwide
Telecommunications Ltd. dated January 23, 1999.
[Filed as Exhibit No. 10.1 to InterTAN's Current Report on Form 8-K
dated January 25, 1999 and Incorporated herein by reference].
10(f) Tax Deed between InterTAN, Inc., and Beheer-En Beleggingsmaatschappij
Antika B.V. dated January 23, 1999.
[Filed as Exhibit No. 10.2 to InterTAN's Current Report on Form 8-K
dated January 25, 1999 and incorporated herein by reference].
*27 Article 5, Financial Data Schedule.
*99 Historical sales performance statistics.
*Filed herewith